Q4 2020 Quanex Building Products Corp Earnings Call
Star one on your telephone as a reminder, takes program is being recorded and now I'd like to introduce your host for today's program Scott Zaki seat.
Senior Vice President CFO and Treasurer. Please go ahead Sir.
Thanks for joining the call. This morning on the call with me today is George Wilson, our President and CEO. This.
This conference call will contain forward looking statements and some discussion of non-GAAP measures and forward looking statements and guidance discussed on this call and in our earnings release are based on current expectations actual results for events may differ materially from such statements and guidance and.
Quanex undertakes no obligation to update or revise any forward looking statements to reflect new information or events.
For a more detailed description or a forward looking statement disclaimer and a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Please see our earnings release issued yesterday and posted to our website I'll now discuss the financial results.
[music] net sales increased by 6.3% during the fourth quarter 2020, mainly due to increased demand for our products across all of our operating segments.
Conversely, net sales decreased to 851.6 million for the full year 2020, compared to 893.9 million and 2019. The decrease was largely due to lower volume related to the COVID-19 pandemic in Twoq and Threeq you.
More specifically in addition to softer demand in North America, and Cottonelle Continental Europe during the early stages of the pandemic.
Our two manufacturing facilities and the UK were closed and compliance with government orders and late March and manufacturing operations that those plants did not restart until mid to late may.
However, volume increased significantly in June across all product line and net sales in July through October exceeded prior year on a consolidated basis.
We reported net income of 22.2 million or 68 cents per diluted share for the three months ended October 31st 2020, compared to a net loss of 30.9 million or 94 cents per diluted share. During the three months ended October 31st 2019.
For fiscal 2020, we reported net income of 38.5 million or dollar 17 per diluted share compared to a net loss of $46.7 million or dollar 42 per diluted share for fiscal 2019. The reported net losses in 2019 were primarily attributable to a $44.6 million non cash.
Cash goodwill impairment and the fourth quarter of last year, and a $30 million non cash goodwill impairment and the second quarter of last year both.
Both in the North American Cabinet components segment.
Mainly due to lower volume expectations related to the shift in the market from semi custom to stock cabinet and customer specifics strategy changes.
On an adjusted basis net income was 22 million or 67 cents per diluted share during the fourth quarter of 2020 compared to 14 million or 42 cents per diluted share during the fourth quarter of 2019 and.
Adjusted net income was 40.7 million or $1.24 per diluted share for fiscal 2020 compared to $31.4 million or 95 cents per diluted share for fiscal 19.
The adjustments being made to Lps are for restructuring charges and certain executive severance charges non cash asset impairment charges accelerated DNA for.
Foreign currency and transaction impacts and transaction and advisory fees.
On an adjusted basis EBITDA increased by 14.3% to 39.4 million in the fourth quarter, and 2020 compared to 34.4 million and the fourth quarter of last year.
For the full year 2020, adjusted EBITDA increased by almost 2% to 104.5 million compared to 102.7 million and 2019.
The increase in and earnings for the three months ended October 31st 2020 were mainly due to higher volumes and improved operating leverage and lower raw material costs.
The increases and earnings for the 12 months ended October 31st 2020 for primarily driven by a decrease in EPS DNA expenses, mainly due to lower medical cost.
I'll now move on to cash flow and the balance sheet.
Cash provided by operating activities was 100.8 million for the 12 months ended October 31st 2020, which represents an increase of 4.6% when compared to 96.4 million for the 12 months ended October 30, Onest 2019.
We generated free cash flow of 75.1 million and 2020 compared to 71.5 million and 2019.
As a result of our strong free cash flow profile, we repurchased 7.2 million and stock and repaid 39.5 million of bank debt during fiscal 2020, 35 million of which was repaid and for fourth quarter alone.
Our balance sheet is healthy our liquidity position is strong and getting stronger and our leverage ratio of net debt to last 12 months adjusted EBITDA and prove to 0.6 times as of October 31st 2020, which is 50 per cent lower than where we exited fiscal 2019 and fab.
The interest rate on our revolver will drop by another 25 basis points to the lowest tier which is LIBOR plus 125 basis points.
As for 2021 guidance and as noted in the outlook section of our earnings release.
Based on conversations with our customers and the latest Mac macro data and current trends, we expect mid to high single digit sales growth and our North American Fenestration segment, low single digit sales growth and our North American cabinet components segment, and mid single digit sales growth and our European and administration segment.
Overall on a consolidated basis. This would equate to net sales of approximately $900 million to $920 million and we expect to generate between 108, and 118 million and adjusted EBITDA and fiscal 2021.
This guidance assumes no adverse impact from the ongoing COVID-19 pandemic.
We intend to concentrate on executing our 2021 plan with a continued focus on creating shareholder value.
For modeling purposes, it's appropriate to make the following assumptions for 2021.
Depreciation of approximately 33 million.
Amortization of approximately 14 million.
As DNA of 95 to 100 million.
Interest expense of three and a half to for and a half million and.
And a tax rate of approximately 26%.
From a capex standpoint, we expect to spend about $30 million and 2021.
We've been very good at managing working capital and have implemented and number of successful systemic changes over the past two to three years. However, now now that all of these fundamental systemic changes are in place and will be more difficult to realize the benefit from working capital moving forward.
Our goal is to generate free cash flow of approximately $60 million in fiscal 2021.
I'll now turn the call over to George for his prepared remarks.
Thanks Scott.
We are extremely pleased with our fourth quarter and for your 2020 results.
Especially considering the uncertainty that has existed since the beginning of the pandemic.
The for your 2020 results were like a roller coaster ride for.
The year started very strong before Cove and began to impact operations during our second quarter.
The pandemic caused uncertainty at all levels of our business slow downs across all of our product lines and temporary plant closures in the UK.
And then volumes rebounded swiftly midway through the third quarter, which has continued through year end.
We ended 2020 with record order and sales levels in October.
As Scott mentioned, we generated net sales of 851.6 million and 2020, which was 4.7% lower than 2019, however, even with the lower volume and sales and 2020, we were able to increase adjusted EBITDA on a consolidated basis.
The increase was driven by our continued focus on operational improvements along with us for DNA reductions.
Also and a renewed effort to improve our return on invested capital metric over time, we have implemented various processes designed to improve capital efficiency reduce costs and really scrub the expected returns on our capital projects and.
In fact over the course of the last three years, we have significantly improved over where I see and we plan to stay the course and expect further improvement and this metric in the coming years.
Before I move on to discuss market and segment performance I really would like to take a moment to thank the entire quanex team for their continued commitment and dedication to keeping each other safe.
Maintaining a high level of supply and quality performance for our customers and for giving their time and resources to help the communities in which they live.
It has been a challenging year for everybody.
And I am very proud of what the quanex team has accomplished.
From a macro perspective the markets. We operate in are all showing robust activity. Despite the ongoing challenges presented by <unk>.
Pre pandemic, we strongly believe that for US housing market was under bill.
Fast forward to today and you can see a growing migration from urban and suburban living Ludwig.
Flow existing housing inventory low mortgage rates and what appears to be a pickup and millennial household purchases.
Given all these factors we believe the stage is set for what should translate into continued high demand for building products for the foreseeable future.
In addition, travel restrictions and quarantine requirements have impacted discretionary spending choices and funds that historically might have been used for travel and leisure appear to now be getting diverted into the repair and remodel of existing homes spaces.
And the cabinet markets, we continue to see growth and total cabinet demand as well as stabilization and the shift from semi custom the stark segments.
According to Casey I may data the semi custom cabinet market grew by 5.7 per cent in the quarter.
Which compares favorably to the 5.9% growth, we reported North America and cabinet components segment.
If you adjust for the customer that exited the cabinet business and late 2019. This operating segment grew by over 9% and for Q.
Year to date through October the semi custom market is down 3.9% versus the same period of 2019.
Primarily due to the negative demand impact from a pandemic had in Twoq and Threeq.
Revenue in our North American Cabinet components segment decreased by 8.5% year over year, but if you adjust for the customer that exited the business we were well in line with the market for the full year.
Despite a recent uptick and pandemic related restrictions, our UK and continental Europe markets remain at record levels.
The repair and replacement market and Europe is being fueled by dynamics that are similar to the U.S. Both in terms of being under building and in terms of benefiting from ongoing travel restrictions and diversion of discretionary spending.
The repair and replacement market is a clear beneficiary of these dynamics and that as the market we primarily serve.
In addition, our products for fill the governmental energy efficiency mandates that exist in these markets. So windows and doors that are replaced our products meet all specifications and requirements.
Despite Brexit and Cove and related concerns, we still anticipate mid single digit growth and our European Fenestration Fenestration segment and 2021.
I will now discuss quarterly segment results, which are highlighted by the fact that we saw margin expansion and each of our three operating segments.
Our North American Fenestration segment reported revenue of 142 million and Q4, which was down only slightly from prior year fourth quarter.
Solid demand across all product lines was offset by the loss of one vinyl profile customer that occurred on January onest of 2020 and.
Absent. This loss. This segment grew at 3.9% year over year in Q4, which compares favorably to industry shipments.
Adjusted EBITDA of 23.8 million in this segment was $1.1 million were 4.8% better than prior year fourth quarter.
Volume related impacts favorable material costs, and lower SGN day, more than offset by higher levels of overtime and startup costs associated with our new screens plant and Pennsylvania.
We generated revenue of 56.8 million and our European Fenestration segment in Q4, which was 13 million or 29.6% higher than prior year.
We're up 36.6% after excluding the foreign exchange impact.
As mentioned, our third quarter call sales rebounded quickly and June July after the Cove and related shutdowns expired.
The uptick and volumes continue throughout Q4 and resulted in record quarterly revenue levels for the segment.
Adjusted EBITDA of 13.4 million and Q4 was also a record quarter and represents margin improvement of approximately 460 basis points over prior year.
This margin expansion was driven by higher volumes and the related operating leverage plus favorable material pricing.
Our North American Cabinet components segment reported net sales of 57.5 million and Q4, which was 5.9% better than prior year.
Strong demand combined with opportunities created by supply chain disruptions and the cabinet component and import markets continued into the quarter and we have been successful and capitalizing on some of those opportunities.
Adjusted EBITDA for the segment was $4.6 million, which represents an increase of 53.8 per cent compared to prior year fourth quarter.
Volume benefits combined with favorable raw material pricing better would yields and lower than anticipated medical expenses all contributed to favorable for performance during the period.
Finally, unallocated corporate and Escreen eight costs were 2.9 million higher than prior year fourth quarter. The primary drivers of the higher expenses were higher incentive true ups combined with the decision to make a discretionary bonus payment to all of our employees that do not participate in and a for more and so.
Unemployment.
As we look ahead to 2021, we remain very optimistic on our view of market dynamics and macro fundamentals.
Like everyone else, we know we will need to continue navigating pandemic related challenges in the near term.
But we are encouraged by the recent vaccine news and excited to finally begin seeing some light at the end of this tunnel.
As Scott stated earlier, we expect to deliver net sales of 900 to 920 million and adjusted EBITDA of 108 to 180 million in 2021.
We will continue to invest and the business well ex well still expecting to generate approximately approximately 60 million of free cash flow.
We've worked very hard to position quanex to succeed and with our strong balance sheet and cash flow profile. Our focus will remain on improving returns on invested capital and generating free cash flow.
We will also have a renewed focus on revenue growth since we now have a more stable base and tailwinds in the markets that we serve.
In summary, we have continued to execute successfully on our strategy, which has put us in a strong financial position to capitalize on potential future opportunities even in this uncertain pandemic environment.
We feel the macroeconomic indicators should provide us with tailwinds that when combined with our expected operational execution will make for another solid year in 2021.
We look forward to another year of strong performance as we continue to focus on ways to create further shareholder value.
And with that operator, we're now ready to take some questions.
Certainly ladies and gentlemen, once again for you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Daniel Moore from CJS Securities. Your question. Please.
George and Scott Good morning, Thanks for taking the questions.
So starting with Europe, such exceptional strength, obviously, and Q4 and carrying forward and how much of that and Q4 would you attribute to kind of catch up from manufacturing shutdowns earlier in the year.
And are we now through that process and other words going forward is it more sort of a one to one.
End market demand versus your production.
Oh, Dan this is George so.
To answer your question.
We feel like that it isn't that a catch up for the demand is actually there and.
The reason why we take that position is really the nature and product, especially on the vinyl profile the size of the products and how in the bulky mis other doesn't really allow for.
Building of inventories. So it is a one for one shipments to the job site and we do not see any slowdowns in the near term and we expect that this will continue throughout 2021.
Helpful and.
You gave estimates of growth for each of the segments and fiscal 21.
You know you're experiencing.
Relatively similar growth in fiscal Q1 are you doing a little bit is a little bit better perhaps to start the year in Europe, and maybe just a little bit of cadence around that guide would be really helpful.
Hey, Dan. This is this is Scott I can handle that one so.
Yes.
So far this first quarter is unlike any other in recent history to where it's much stronger already and I think from a cadence standpoint on a rest the revenue side of things.
I would be modeling around 20% and maybe a little more than that for the <unk> as a percentage of full year revenue and the first quarter.
Typically I think thats been closer to 15% prior year.
Overall, correct not just for Europe.
Correct Thats overall, so got it.
Understood Okay really helpful.
And then the guide for the full year implies a range admittedly, but relatively flat EBITDA margins, despite being up pretty significant growth.
So is it may be tougher comps and from materials higher SG and eight.
Conservatism combination of all three.
And I would say, it's a combination of all three but but really the thing that we have hedged a little bit on the margins is that we are seeing some some pressures for for the first time on some raw material.
Inflation as well as you were still dealing with the labor related Cove. It impacts so overtime tends to be a little higher and certain spots as people are still quarantining and testing positive and so until we get the vaccine and and that shows from effectiveness. We anticipate that labor will continue to be tight for.
For not only us, but our suppliers and our customers and then the way that we forecast for medical expenses and we're expecting somewhat of a reversion to we'll have been normalized prior to 2020.
Medical costs, and 2020 and were much lower than expected.
Got it Okay and then.
Capital allocation, obviously balance sheet. This is best shape, it's been and quite some time generating plenty of cash flow.
Got back a little bit more stock, maybe just update us on your.
Priorities and willingness to be a little bit more aggressive from here.
The situation is obviously fluid and as opportunities present themselves. We will continue to look at everything.
You know how I would answer that is we have a very.
Aggressive, but achievable five year strategy plan that we use as our roadmap.
That strategy plan.
In our mind creates significant volume for our shareholders. So so that gives us a good base line on where we're going to fund our growth.
And as opportunities arise from state exceed that threshold, we'll obviously take a look at them or if they present, maybe a different growth profile.
We're not going to not look at it but we have a defined plan, we will continue to pay down debt.
And that will be our priority and will often opportunistically bought by stark when when we can own but we're very comfortable.
With our strategic plan and it provides a growth and value to our shareholders and the good thing about this is our balance sheet is in a position that when opportunities do arise we're in a position to be able to jump on and very fast and so that's why I answered. The fact that it's a pretty fluid situation, but we're in a very good spot.
Indeed, lastly from me Scott My pencil and fast enough can you run through I heard D. and depreciation 33 million just the other pieces of the guide for fiscal 21.
Yeah, let me find and here.
Depreciation 33 amortization 14, SGN, a 95 to 100.
Interest expense, three and a half to for and a half and.
And then tax rate of about 26%.
Perfect and the Capex guide embedded in that 60 million is for free cash flow.
Roughly 30.
Perfect. Thank you ill jump back then and follow ups.
Thank you for.
Thank you. Our next question comes from the line of Julio Romero from Sidoti and company. Your question. Please.
Hey, good morning, George and Scott.
Okay.
Hey, I wanted to ask about pricing across the three segments.
Really appreciate your giving by segment.
Your outlook for revenue there, but can you just talk about is there any kind of.
Any pricing gains embedded any of any of the three.
You know, we're looking at pricing opportunities where they exist.
As you know and North America, most of our products are on index for for raw material pass throughs. So.
The opportunities will be obviously evaluated on a case by case basis for for non material related increases.
We're seeing inflationary pressures. So we'll obviously try to pass along those where we can for parlay, those and the growth opportunities to pare back.
And Europe, because things are not on and index will be a little more aggressive with price and oil.
And that will be dictated by the market.
Got it so I guess right now.
The top line guidance no real price embedded in it at the moment.
I would say limited price other than what we expect for index and more rifle shot approach.
Got it.
[music].
And I guess.
On the Capex can you just talk about 30 million, you're deploying and 21 and is there any cash.
And where your balance sheet is in the cash flow you're expecting is there any opportunity to maybe deploy above 30 million internal initiatives. This year.
Well I know my business leaders would love to have more than 30 million the problem becomes.
You only have so many engineers and in the group too so theres only so many projects and bandwidth that an organization can handle so were going to be smart about.
You know launching and implementing Capex and we are focused on the return generation make sure.
And puts and emphasis on completing projects and completing them to its expectations. So.
Not just spending money for.
For the sake so.
We're very methodical and our approach so if we're able to integrate the projects for the fast enough rate there may be and opportunity.
To invest more than $30 million, especially for projects that add that our margin.
Margin or or benefit the companys profile and exceed the working cost of capital so.
But really we're being very diligent and our our drive to get the expected results out of the projects that we do too.
Got it and then I guess just leads and my last one you reiterated your first priority for cash is to pay down debt.
Followed by opportunistic share repurchases I guess so.
Given the free cash flow guidance sales.
You'll get to net to net cash position.
Pretty pretty soon.
Should be and by 2023.
Excellent thanks for taking the questions.
Sure. Thank you everyone.
Thank you. Our next question comes from the line of Rueben Garner from Benchmark Company. Your question. Please.
Thank you good morning, guys and congrats on the quarter.
Thanks ex room.
I guess to start.
The fenestration North American fenestration growth versus the cabinet growth here in the near term it was nice to see a cabinet.
Cabinet growth return and.
As the the kind of.
Boost and new housing from this summer not started to flow through yet at least for the full quarter and is that maybe Scott you mentioned how strong your Q1.
Is looking is that where you're starting to kind of see the benefits and north American fenestration chicken.
Yes, and no I mean I think.
We're seeing strength across all product line cabinets include and right now.
What we're still challenged with and the cabinet business is just the shift from semi custom to stock and weve been pretty successful and and navigating that shipped over the past probably six to nine months and we expect to continue to be successful there, but we're still battling that and we expect to continue battling net for the foreseeable future.
Lease this year, however, what I can say on that front as if you follow Casey and they data that shift has slowed significantly which will benefit us and has benefited us moving.
Moving forward, but a lot of the growth.
As indicated in the release will be coming from the North America finished duration segment screens is still doing really well.
Got it okay.
And then.
You discussed kind of the guidance for the margins are.
The puts and takes this coming year, what about you know if we continue to see this kind of growth for the next few years, which I think is not an unreasonable you know ex.
Vacation at this point, what what kind of margin bogeys for either consolidating or by segment.
Are you guys thinking are reasonable.
Three years from now.
Yes, Thats a little tougher question I think from a from a consolidated standpoint, let's just take it segment by segment and just to give our bogey that the opportunity. There. So total if there would be our cabinet business other north American cabinet components.
And we still think that the margin expansion opportunity is real and could exceed probably a couple of hundred basis points over the next two to three years.
There is still some left in the North American finished duration segment. So you should expect some margin expansion there, albeit smaller than cabinet and in Europe quite frankly, the margins are so good there and so healthy that we were just trying to protect and maintain margin there.
And I think.
I think as you heard and the flavor of the transcript and and.
For a TARP.
We are so focused on renewal and return on invested capital and looking at past projects.
I think that focus.
I think we prove that we are operational execution has been.
Pretty diligent and the.
Exceeded expectations over the course of the last few years.
There's plenty of projects on on the plate on on a what I would say short to mid term go forward and.
We're pretty excited about the opportunities that we have on some margin expansion across others again, just being diligent on that metric.
Okay and then.
As far as.
New and New administration goes risks and opportunities or are there any risks associated with the maybe tariffs getting eliminated or.
Opportunities in terms of maybe.
Maybe code changes that that is.
Here and the U.S. for more.
Energy.
Fish and C and the home does that if that were to happen do you guys have an advantage over your peers, there or would that just kind of lift all boats.
Yes, our run without one I think we have identified both risks and opportunities associated with the new ministration and we've talked about that for a period of time on the on the risk side.
We have benefited by some of the tariffs on the cabinet side and as well as our customers.
Im not sure that those will be repealed to a level, where its just completely open and I think there's been a net changes in the supply base for that.
It's not a catastrophic risk, but it's a risk on the wells that could put pressure on margins down the road.
And.
But we feel pretty good about our plans to whether that risk.
It is an opportunity in terms of energy efficiency codes as you can see and Europe, where those codes and standards are very much in place and <unk>.
They are probably 10 years ahead of the U.S. and in terms of their requirements for passive harralson electrical usage.
And you're right our product lines absolutely.
Meet those standards and add to better performing products from the fenestration industry, so that would be and.
And opportunity for US Energy Star was there one point Knott's why we saw some of the driving some of our products something like that we reinstituted. Our we believe would have a benefit for us.
Great. Congrats again on the quarter and and you guys have a Merry Christmas happy new year.
No flow room and thank you.
Thank you. Our next question comes from the line and Steven Ramsey from Thompson Research. Your question. Please.
Hey, good morning, guys.
Hey.
I wanted to start and little more on Capex outlook stepping up from the 25 billion spent the past two years.
What is what kind of projects are driving net increase maybe how much of that is of the capex. This year is growth oriented versus margin enhancing and if you're able to share any any flavor by segment.
Sure and I will give you a general overview.
We would have probably if we could have spent more and 2020, we would have from some of our products that we have in this in the hopper were actually restricted because of some of the equipment that we are trying to implement comes from overseas or across country borders. So we could not get people to install because of the travel and warranty.
Restrictions.
So really that was the limitation on 2020 it wasn't as though we were trying to limit projects or reduce cash flow. It was really just for logistics and the ability to get equipment into the pipeline in terms of of how it's going to be deployed on a go forward basis, I think you're going to see.
Jewelry, EBIT start going towards growth and and capacity expansion in certain areas, obviously fueling the growth in Europe as we continue to take share. So you will see some some investments and our mixing capabilities.
Some of our space for capacity and things there, we will get a heavy.
Weighting in terms of of North America, I think you'll see some continued investment and technology improvements and the cabinets as we continue to do some different things on how we process would that is margin improvement and that's why you know Scott mentioned that theres larger runway for margin improvement and the cabinet segment.
Because there are some things that we can do technology wise and.
And then.
In North American Fenestration, I think you'll see more growth oriented.
We made a fairly large investment and the vinyl profile upgrading technology. It's been short term very successful and we're starting to see some nice results sooner than anticipated.
Pans out we may go to step through on that and in terms of you know we continue to grow our screen business and bill.
We'll look at adding capacity were volume and sales opportunities dictate. So I think that's the way we will see flavor in terms of how we spend our capex over the next one to three years.
Excellent and and thinking about the guidance for.
North America Fenestration mid single to high single digit can you talk about some of the factors there that might swing you can look at the low end or the high end.
And how much of this is impacted by longer lead times, maybe and in certain end markets.
Maybe driving strength early and Keller 21 or mid calendar 2001.
And any factors on the North American fenestration sales range.
The factors that may weighted towards the low end of the range would really be a market dynamics and if our customers cannot get labor to install windows and that limitation stifles demand and not just for quanex for for everyone that would probably push us down for the lower end of the range.
On the the upside piece of that is.
And it may also be if they can divert their labor to installing windows or doors and then they continue to choose to outsource. Some other components that gives us an opportunity to capitalize on that so.
A company that may be making their own screens internally decides to outsource to and supplier to.
For better utilize their labor.
If that kind of dynamic continues to play out and we may see growth rates, a little higher on the higher end of that range.
Got you and then last quick one from me.
Maybe thinking for Q4 results and then what's embedded in the outlook for expenses how much has the expenses that were pulled back.
Tightly as it's called it.
Hit in the spring how much of those could come back to date, how much of those are coming back and.
In 2021, teeny being one of those items, but whatever whatever other cost items.
Mark are coming back or are seeing reduced.
Well, the t. and pieces really well.
For one item that I would say is still being held back really just based on restricted travel restrictions and quarantine and the uptake and cases here recently, but we we suspect that as the year progresses, and 21 that we'll get back to a more normalized TD level, probably not back to where we were.
In 2019, but slowly progressing for the service and for that item will go up over time.
I think the one item that there are a couple of areas.
When you look industry and I have for example, but we're going to evaluate what have we learned during this and virtual time for and things such as trade shows that can add up to an enormous amount of money is there a different way to do it do we get the value.
So I suspect that there will be sales you know accrete back to some level of normalcy, but I think that we've learned and weve involved and some things may be different so I'm not necessarily convinced it will it will go back to the way it was home.
The pandemic own regardless.
Great. Thanks for the color.
Sure.
Thank you. Our next question comes from the line of Ken's items from Keybanc. Your question. Please.
Good morning, everybody.
Okay.
Impressive corridor, a lot of details I wonder because.
I just looked at the press release George.
About a year for you being CEO correct.
That is correct were per year in January one.
Good day I, it's been a long here, so I had to double check that.
This year, given your success and I do you.
Individual questions, but I wonder if you could just give us a little perspective here because.
Bill faced a lot of headwinds and I know you were the spacers business and and caved operations, but despite good efforts there were a lot of industry Curveballs that you guys GAAP.
Scott.
Ironically, you got arguably one of the biggest curveballs coated.
Yet you've delivered very solid results. So I guess my first question is if we could just take a step back what is different about the company.
That you have now.
It's basically following a year of you being the CEO.
Realizing cobot App and what's kind of changed about your view of the company versus a year ago.
And opportunities as you've always been involved but I just want to understand because this has been a very strong quarter and I just wonder if it's actually indicative.
Much better things to come.
Okay.
Well.
It's for if that's a good question because I do you know when you do get a breadth and it is a good opportunity to take take a step back to reflect and I have.
You know I think.
I would love to sit here and say that the results were the result of me being CEO, but that would be a complete and.
Why in that respect.
And what I would say is the.
The fact that I was the internal successor.
That made the transition easier because prior to me taking this role I was very involved with strategy and we really havent changed the strategy focus over this time and.
Under Bill's guidance, we really built a solid operational footprint.
Footprint on what we wanted to do and how we wanted to accomplish and we haven't diverted from that at all.
I think in terms of.
I think we've got a new team across the board and me being new to this I think it's allowed us to put to work together and different ways and Covance has forced us to look at things and different ways, which is always good.
So you know what I've learned about this company over time as what our five year strip strategic plan is extremely solid and now on the.
The focus on operational excellence that is been there has put us in a great position and.
And so I, probably have learned about the opportunities more than and then anything during this course from here I know, that's a pretty generic answer.
You know.
I thought Cove it would.
Completely change everything, but it really hasn't and and I think Thats a testament to what we have and place right. Now we have a plan we follow the plan we have a very solid.
Oh risk management process. So it's not like Oh, My God, what are we going to do it's like Okay. Here is the plan you execute it and much growth and.
It's really been that simple home, so and taking a a guess from diverting a little bit of a credit away from me, but thats for true.
Right No I think thats understood.
Well I appreciate that look I guess and questions. I do think you guys are thinking about hosting an analyst day as well just to Reacquaint. It's been a while since you guys have done that that's something I would suggest just to add more to your plate alright. Some specific questions. Your margin improvement was pronounced it was greatest in Europe fenestration from a margin and EBIT contribution per se.
Correct, yes.
And your gross margins went up substantially is that really the gross margin lift and the EBIT expansion, we saw and.
European Fenestration isn't isn't that the same thing that high growth.
Growth a lot of that margin or is there something else like.
Lower input costs that we should be aware of.
For for for last year, I mean, it's a combination of those the majority of it was volume driven and because their extrusion operations. When you can lever up and effectively run efficient high for full capacity.
You should you should see margin expansion. So there was no surprise there when when Europe for volume, we're going to do very very well and that was the case and both spacers.
And the vinyl extrusion we.
We did see a period of time early in the quarter, where we.
Have some some lower than anticipated raw material costs, which has since started to creep back home and as you know the European products are not on index. So a win win raw material inputs are a little bit lower we're going to see higher gross margin.
And that's exactly what we saw.
Now.
Switching to us windows and.
Which is the category.
New construction, our and our that's actually been called out by many industry participants is having bottlenecks could.
Could you from your perspective as a supplier for both.
The extrusion.
From the edge spacers.
And and screens can you talk to what is different based upon what you are seeing right now as opposed to the history is it. The fact that accrues can't be so close together is it that they can't scale up why is that industry and.
And such a bottle neck right now given your perspective.
I think it's truly labor.
And and it's really hard and get your head around because you here.
10%, 12%.
Higher unemployment levels across the country, but we cannot get people to work and the plants and we know from talking with our customers that installer labor I mean, if you were to go out and try to build a new house right now or do any sort of project you're looking to one zone for lead times and match that standard on it in my mind its.
And what I'm hearing is purely a labor bottlenecks.
Could you describe and you're saying both in factories as well as in the field correct George.
Yes.
Now as that relates to your warm edge spacer, which last time I think publicly you guys talked about and a lot at your analyst day.
Warm edge spacers.
Reflect lower volume customers historically, because they have to do it manually however.
There are some new machines that some of the larger.
Window manufacturers, the higher volume machines gets closer to 1500 units and shifts.
And actually use less labor can you talk to how market share has gone for you in that category.
Ral like related to customers buying those million and a half dollar machines to cut their production.
For labor and surety down by half.
Yes no.
Continues to progress.
At a slow steady pace and the only reason that is slow it was really the limited number of equipment manufacturers that exists across the globe, there's for Farc suppliers of that equipment.
If you think and the U.S. for example, there's really only one or two.
That manufacturer here in the U.S. So so during a cove and your when you really can't get anyone when two of the major suppliers are in Europe, and they can send people over to install equipment.
That delayed some of the implementations last year.
Uh huh.
That demand to reduce labor through automation, absolutely exist and that will there is a strong pipeline of equipment orders that will continue to benefit us. So you.
The equipment guys are sold out for probably the next two years so losses matches.
Moving to the field.
And can you just publicly state that equipment I mean it reduces.
People.
Per line shift and production from what to what my recollection is seven or eight people for about 1500 units and a shift down to two or three.
Is that part for more Mitch.
Eight eight or nine people down to three people.
Right Thats eight or nine on a manual okay, Yes Emmanuel line last.
Question cabinets, improving markets doing better you have a tailwind could you quantify first you did and fourth quarter the lost customer exposure for fiscal.
20, and total and then second.
And what things are getting better it's not exactly.
Stellar margin right.
EBITDA, its obviously better but can you talk to you talked about a couple of hundred basis point, Scott in terms of potential margin I mean.
You know when you guys acquired the business. It was certainly about two or 300 basis points on an EBIT level is that really.
I guess, that's what I heard you say I'm, just kind of surprised by that the target a couple of hundred basis points off.
Zero EBIT is that accurate or could you clarify that.
A couple of hundred basis points on EBITDA margin expansion over the next two to three years, yes, that's what I said on the.
Customer that exited the cabinet business.
On an annualized basis that was roughly $11 million to $12 million.
Thank you very much gentlemen.
Thanks.
All right. Thanks.
This does conclude the question and answer session I'd like to now hand, the program back to George Wilson CEO for any further remarks.
Yes, I'd like to thank you all for joining and we look forward to providing you all and update on our next earnings call I'd like to take this opportunity to wish you all a very happy holiday be safe. Thank you.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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