Q1 2021 Quanex Building Products Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q1 2021 Quanex building products Corporation first quarter earnings Conference call.
At this time all participant lines are in a listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
You asked a question during the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
And you require any further assistance please press star zero.
I would not be and today's conference over to your Speaker, Scott Gilkey at V. P. C F O and treasurer. Thank you. 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 conference call will contain forward looking statements and some discussion of non-GAAP measures.
Forward looking statements and guidance discussed on this call and and our earnings release are based on current expectations.
Actual results or events may differ materially from such statements and guidance and quanex undertakes no obligation to update or revise any forward looking statement to reflect new information or events.
For a more detailed description of our forward looking statement disclaimer and a reconciliation of non-GAAP measures to most directly comparable GAAP measures.
Please see our earnings release issued yesterday and posted to our website.
And I'll discuss the financial results.
We reported revenue of $230 1 million during the first quarter of 2021, which represents an increase of 17, 1% compared to $196 6 million during the first quarter of 2020 the.
The increase was primarily the result of increased demand for our products.
Across all product lines and operating segments.
We reported net income of $7 $9 million or 24 cents per diluted share for the three months ended January 31, 2021, compared to $10000 or zero cents per diluted share. During the three months ended January 31 2020.
The increase and net income was somewhat offset by a $6 $7 million increase and SG&A during the quarter.
And $4 6 million of which was related to the valuation of our stock based comp awards, mainly due to an increase and our stock price and $1 6 million of which was due to higher medical claims.
On an adjusted basis net income increased to $9 million or 27 cents per diluted share during the first quarter of 2021 compared to $1 2 million or <unk> <unk> per diluted share during the first quarter of 2020.
The adjustments being made to EPS are for restructuring charges certain executive severance charges loss on the sale of our plant accelerated DNA for.
Foreign currency transaction impacts and transaction and advisory fees.
On an adjusted basis EBITDA for the quarter increased by 55, 4% to $24 3 million compared to $15 7 million during the same period of last year.
The increase is largely due to operating leverage from higher volumes.
From a margin standpoint. This increase represents adjusted EBITDA margin expansion of approximately 260 basis points.
Moving on to cash flow and the balance sheet.
Cash used for operating activities was $3 4 million during the three months ended January 31, 2021, compared to $3 7 million for the three months ended January 31 2020.
While our free cash flow was negative. This is typical for the first quarter of each year, and we did show improvement compared to last year and.
In fact, we did not need to borrow on our revolver during the quarter and still manage to both repaid $5 million and bank debt and repurchase approximately $1 $9 million of our stock.
Our balance sheet is strong our liquidity position is solid and our leverage ratio of net debt to last 12 months. Adjusted EBITDA is unchanged at <unk> six times as of January 31, 2021.
We will remain focused on managing working capital and generating cash as the year progresses. We will also continue to be opportunistic with respect to repurchasing our stock.
As stated in our earnings release, we remain optimistic about the economic recovery based on our strong first quarter results and ongoing conversations with our customers. We are raising our expectations for the year and now expect approximately 12% sales growth and our North American Fenestration segment.
Approximately 5% sales growth and our North American cabinet components segment and.
And approximately 22% sales growth and our European Fenestration segment.
We're now comfortable providing the following full year 2000, and 'twenty one guidance.
Net sales of $945 to 965 million <unk>.
Adjusted EBITDA of $112 million to $122 million.
Depreciation of approximately $33 million.
Amortization of approximately $14 million.
SG&A of approximately 105 million note that this is higher than previously expected due to an increase and stock based comp expense and more normalized medical cost.
Interest expense of $3 million to $4 million, a tax rate of 26% to 27%.
Capex of about 30 million and and free cash flow of approximately $60 million.
If you adjust for the expected increase in SG&A the implied incremental adjusted EBITDA margin is in the mid 20% range.
As mentioned and our earnings release, we expect the typical seasonality and our business to be less pronounced this year. So we feel it would be necessary to provide some direction on a quarterly basis.
From a cadence perspective for Q2 on a consolidated basis, we expect net sales to be up approximately 25% year over year.
We believe the strongest revenue growth and margin expansion and Q2 will likely come from our European Fenestration segment since our plants and the UK were shut down in March of last year and didn't come back online and completely until may.
Looking ahead on a consolidated basis. We currently expect net sales growth of approximately 12% year over year, and Q3 and due to the tough comp we may not see any growth in Q4.
In addition, again on a consolidated basis it could prove challenging to realize margin expansion and the second half due to inflationary pressures increased stock based comp expense and a normalization of medical expenses.
To summarize on a consolidated basis for the full year. We currently expect to generate net sales growth of approximately 12% year over year to the midpoint of guidance, while maintaining adjusted EBITDA margin and a low 12% range.
I'll now turn the call over to George for his prepared remarks.
Thanks Scott.
Demand for our products during the first quarter of 2021 proved to be even stronger than our expectations and I'm very pleased with the results and what is traditionally our weakest quarter.
We remain steadfast in our pursuit of operational excellence cash flow optimization and improving return on invested capital throughout all segments of our business.
Continued success on all of these efforts will create further value for our shareholders and should position the company well for any opportunities that may arise and the future.
Prior to discussing the segment detail I'd like to provide some color on the macroeconomic conditions of the markets we serve.
Overall, we are still experiencing high demand across all of our product lines.
And North America, the new construction market remains strong and sales of existing homes, which is a key indicator for repair and remodel also remains healthy.
Specific to cabinet components, the semi custom segment, which is the main segment, we serve and starting to show growth above that of the stock segment.
And as a matter of reference there wasn't a significant shift and market share away from the semi custom segment to the stock segment over the past few years. So.
So the recent KC I may data is encouraging and that it shows the semi custom segment gaining ground overstock.
Demand for the products, we manufacture and the UK and Germany remains robust despite the strict and ongoing COVID-19 related measures. We believe the demand is strong because many international markets remain under built with and infrastructure that is aging and regulatory requirements on energy efficiency aligned very well with our product offer.
<unk>.
We also believe demand in Europe, and the U K is being favorably impacted by the continued shift of discretionary income and away from travel and leisure activities into home improvement projects.
Although we remain optimistic on macroeconomic conditions and all of the markets. We serve we also see some challenging headwinds.
We are seeing increased inflationary pressures on most of our major raw material input cost as well as some large lower expense items such as free.
These pressures were recently exasperated due to the severe winter weather in Texas, and along the Gulf Coast, which caused delays and shortages of key chemicals feedstocks and energy supply.
As a reminder for the most part we have contractual pass throughs for the major raw materials, we use and North America, but there is often a lag depending on the contract anywhere from 30 to 90 days.
We do not have these contractual pass throughs and Europe and the U K, so our ability to pass on any increases through price becomes more important and for the most part we've been very successful and doing just that.
Another headwind is the availability of labor companywide, we have approximately 400 open positions, which equates to roughly 10% of our global workforce.
This is an issue that is not unique to quanex, and it's impacting manufacturing operations and many different markets and industries and some of our plants. This issue has resulted and high levels of overtime extended lead times, and even customer allocations and some limited circumstances.
I will now provide my comments from performance by segment for fiscal first quarter and as a general statement results were outstanding and each of these operating segments.
Our North American Fenestration segment generated revenue of $128 1 million and Q1, which was $17 7 million for approximately 16% higher than prior year Q1 <unk>.
Strong demand across all product lines share green share gains and our screens business and increased capacity utilization on our vinyl extrusion assets all contributed to the above market performance.
Adjusted EBITDA of $16 4 million and this segment was $7 7 million for approximately 88% higher than prior year Q1.
Volume related operating leverage the implementation of annual pricing adjustments and operational improvements and lower SG&A all contributed to the improved performance year over year.
Our European Fenestration segment generated revenue of $49 1 million and the first quarter, which was $12 3 million or approximately 34% higher than prior year.
Excluding foreign exchange impact this would equate to an increase of approximately 28%.
Strong demand for our products continues and both vinyl extrusion and spacers as the repair and remodel markets and the UK and Continental Europe remains strong.
Adjusted EBITDA of $10 7 million resulted in margin expansion of approximately 660 basis points year over year.
Volume related impacts timing of pricing actions and operational improvements more than offset inflationary pressure towards the end of the quarter.
Our North American Cabinet components segment reported net sales of 54 million, and Q1, which was $4 million or approximately 8% better than prior year.
Demand for our cabinet components products was solid throughout the quarter as the market continued to see strength and new construction and R&R.
Adjusted EBITDA was $3 3 million and this segment, which represents margin expansion of approximately 330 basis points compared to prior year.
Increased volume and benefits realized from new assets put into service last year were the primary drivers of improvements and the quarter.
Unallocated corporate and other costs were $6 million for the quarter, which was five 4 million higher than prior year.
Scott mentioned the primary drivers of this increase were stock based compensation expense related to share price appreciation along with higher medical expenses as our employees, who have started to feel more comfortable going back to their doctors. It is also worth noting that we realize the benefit for medical cost and Q1 of last year.
As I mentioned earlier, we remain focused on operational excellence cash flow optimization and improving return on invested capital through our all segments of our business.
Our continued progress on these fronts is driving results and has allowed us to continue to strengthen our balance sheet by paying down debt further during the quarter, where we have historically been a net borrower.
In summary, macro data points for our business for positive we are executing on our plan and performing well from an operational standpoint, and our orders remained strong as such on a consolidated basis.
We are confident and our ability to deliver low double digit revenue growth this year, while maintaining adjusted EBITDA margins and the low 12% range, despite the increasing inflationary pressures.
And with that operator, we are now ready to take questions.
Thank you as a reminder, in order to asking audio question. Please press star followed by the number one.
And your first question is from the line of Daniel Moore with CJS Securities.
And George Scott Good good morning, Thanks for taking the questions.
Yes, good morning.
Let's start with <unk> and <unk>.
Really solid results, obviously start with the 17% jump and revenue for Q1.
And just how much of that was pricing, reflecting pass through raw materials and kind of a similar question for the increase in revenue guide for the year.
I'd say as a general statement most of the.
Increase in revenue was really related to increased demand and volume.
Pricing started to play a role towards the end of the quarter and will likely play a role along with the raw material increases going forward through the year, but and Q1 it was mostly volume.
Got it that's helpful. Scott.
Scott I think you said a number for the increase and medical claims for the quarter I missed it. If you said it can you repeat it and what are the expectations kind of on a full year basis.
Medical first quarter year over year is a $1 6 million higher.
Uh huh.
What we're forecasting is kind of.
A return to what we would call somewhat normalized so if you take 2019.
And average that with 2020, obviously 2020 was a lot lower due to the COVID-19 restrictions, we're expecting somewhere in the middle there.
Got it okay.
And George gave a lot of great color just in terms of EU demand, obviously remarkably strong and continues to be.
Just if you had to rank order those factors that you described in terms of what's driving the underlying growth.
As the Covid restrictions.
And as interest rates remaining low.
And the efficiency standards.
It just a combination of all of those just any more color on what's driving that stock strong demand would be helpful.
I think Andrew what we're seeing is really a balance between the two main items won the infrastructure is old and the need to replace windows from the R&R side.
Continues to be there and the fact that across all of Europe. There are.
And some very strict.
<unk> as to energy efficiency requirements, when you replace or anything on the home and our products fit very well into that application better than most.
That is a significant benefit and and is unrelated to COVID-19.
The COVID-19 piece as it relates to the restriction on travel and I do think that that's playing a significant piece and will and the near term because I don't see the travel opening up so so across the board youre seeing people with the discretionary income with the inability to travel and go places are putting money back into their homes and.
We absolutely are seeing.
For months.
Those are the two main factors very helpful. Okay.
I will jump back in queue with any follow ups. Thank you.
Thank you.
Your next question is from the line of Julio Romero with Sidoti.
Hey, good morning, good morning.
Good morning.
Hey, I just wanted to ask a follow up to that last question about the demand drivers and Europe.
And you called out kind of improved consumer demand for renovation, because theres less kind of less spend on travel and.
Economic recovery, increasing vaccination rates, but.
Just trying to help me think about the differences between.
What's driving demand in Europe, and what's driving day back North America, because all of those things fit the north American profile as well right. So I don't know if you could help us think about what the key difference between book.
What geographies.
I think I think they do I think the big difference between Europe, and North America, North America, and new construction activity is competes with R&R in terms of installation labor.
Whereas in the U K and Europe, it's much more focused on R&R. So you know the.
European growth model is building into that fact, we tend to be heavily weighted to R&R, So and North America and any resources that go to new construction I guess comparatively.
And that's where you'll see the difference.
Okay.
I guess on your Cabinet segment, you saw some good margin improvement there I think 330 basis points.
Can you maybe try to quantify the benefits of the new assets and how much that benefited the margin versus volume leverage and also when do you anniversary those new assets.
In terms of.
The asset.
It's hard to break it down because of the plant by plant.
And it gets rolled into general operational improvements.
And.
There are three or four assets that we put it into a rough mills that are showing a yield improvements. So we havent split that kind of detail out.
I think it would be and inappropriate and I don't have the proper numbers in front of me to give you that information Hulu.
Could you repeat the second part of your question photos.
Sure. If you benefited from not just volume leverage and this quarter, but also.
Improvement on your manufacturing capabilities.
When did you put that in place last year I would just try and think about when you anniversary that.
That was those assets were more back half. So we'll see a full year of benefit probably end of third and into our fourth quarter. They were they were end of your assets installations.
Okay.
And I guess just my last one is a little more broad just you called out some some labor constraints.
In terms of your company, but I've.
And I've always thought about labor constraints as also.
Helping your company right from your customer base.
Because I would think increased.
Tightness drives additional demand for your type of products. So if you could speak to that and maybe what youre seeing there no youre absolutely.
Correct.
No.
The labor constraints are also a driver of increased share and demand for all so.
A balance that we're trying to fight and create as I said, it's not a problem unique to a chronic so it is creating opportunities but at the same time.
We're fighting a availability of labor.
We continue to.
Approved for extended unemployment benefits and it is difficult to get labor and almost every market that we're in and it's the same thing so so not not a O.
A simple problem to solve but you are correctly, stating that it is an opportunity for us and as well and we're trying to capitalize them and we're working hard with our human resources department to put in different programs to be more from a.
Forward thinking in terms of attracting labor.
Okay. That's it for me thanks very much.
Thank you.
Your next question is from the line of Steven Ramsey of Thompson Research.
Hey, good morning.
Good morning.
I guess I wanted to continue on the labor constraints and maybe more how it impacts.
And how it impacts you guys.
But.
And as labor constraint, maybe reduced sales.
Phil even though demand was higher.
For you guys in Q1.
And if that was the case what segments or products is the late Arthur labor constraints impacting us the most.
So I think where you would see the biggest impact for US was really on our labor cost and significant increases and overtime usage.
I don't think and very rare circumstances has impacted.
Uh huh.
A reduction and shipments.
The area that.
Currently as most impacted would probably be our.
Cabinet components plants, primarily up and the Minnesota, Wisconsin areas, the toughest market right now.
Okay, Great and then maybe I missed this in the prepared remarks, but.
How much then is our automation investments our focus right now for Capex.
Maybe it is.
There are automation investments are being stepped up and is that in North America cabinets or other segment.
And then maybe.
A meaningful portion of the Capex guide.
Capex is at.
Automation has been a focus for ours for multiple years and it will continue to be so are we.
We have active projects in place to try to reduce labor and ease that burden of our labor demand. The problem that we have and everyone will have and Capex is the <unk>.
Most of the equipment suppliers for automation have long lead times because their demand has increased and they are having the same issues. So.
And we're actively working to implement processes that improve our our existing process, but I.
I will tell you the all capex projects are being extended in terms of their timing based on a lack of supply and equipment across the globe.
Okay that does it for me thanks.
Thank you.
Your next question is from the line of Reuben Garner of the benchmark company.
Thank you and good morning, everybody.
Hey, Rob.
Maybe.
If we could talk about the sow herd ocean freight and transportation and general.
I guess globally has become increasingly an issue are you guys finding.
That and I know this last year, you've got some benefit from from some of the cabinet manufacturers looking to do.
And in source.
Production are you guys finding that to be an increasingly a trend and in this environment or is there some other offset that.
And the gate that factor.
No.
We still see it is that is a tailwind for us home.
And <unk>.
Internationally sourced freight.
The ability to find containers and the surcharges being applied to containers is a significant cost to those that heavily rely on importing of products. So you know.
That is a and opportunity for us.
Our challenge will be as you know as we do a very good job of trying to source and supply locally. So it's the inner inner and freight between our plants and trying to minimize the freight costs between us and our customers.
And we're focused on right now we don't have a huge.
Impact on the cost side of us from from international for so that piece was an opportunity.
Okay and then.
In North America and demonstration.
And a big quarter, there and the outlook is very strong I mean is there any way to gauge I think you guys have been you know.
Doing well and the on the top line with some of your initiatives.
Like screens for example, but is there any way to gauge what the.
I guess the market is growing versus how fast you guys are expecting to grow and then.
Also I guess.
Windows is one of the things that we've heard is the most constrained product and the industry as it is.
Is there.
Is that leading to an increased backlog for you guys and the coming quarters that in other words, maybe you would've had stronger results in Q1 had the industry and been able to keep up with the demand.
Let me take the first part of that.
Us versus market and North America finished traits and so as you know we track a few different sources and ducker is one that we check track for window shipments and I think their latest forecast showed and.
And expectation of about 6% growth this year, obviously with the revised guidance that we just.
Provided that would indicate that we're growing meaningfully above market.
To your point screens is definitely.
Our main one of the main drivers there and all.
I'll turn it over to George for the other comment.
In terms of the backlog with the Windows and.
Windows of our customers I think that this again the room and goes to the pace setter being installation labor versus new build from what we're hearing from our customers demand is strong backlogs are there and it's really the installation of windows into the opening holes lips.
The pace setter for for.
And the flow through our industry. So.
I'm not sure.
We could have provided any more windows and I don't think my customers can make anymore, it's really being paced on the installer and.
Okay, and then if I could sneak one more in any.
Updates or anything new on the.
Energy efficiency front, I know that you guys Youre spacers.
Our efficient and would benefit from any kind of new regulation from the administration of you've heard.
Or have any updates there.
No I think it's too early and integral New administration I mean, we anticipate over everything that we're seeing that.
It'll be at some point and I have a renewed focus on.
And we tend to be behind the Europeans and in that room and.
And.
We anticipate it will be addressed but it hasn't at this point and we haven't heard anything on the near term horizon.
Thanks, Robin and thanks for.
Your next question is from the line of Ken Zenner Keybanc.
Good morning, gentlemen.
Good morning, Ken.
Oh.
For the quarter.
Let's see here.
And just looking at your January presentation 55 per se.
Thereabouts and North American Fenestration can you just update us on the mix of your three business is there is it about a third a third a third still would you say for Iga screens and profiles.
Uh huh.
I think really based on some of the comments we made on screens.
And accessories that piece is probably growing to a little bit more than a third.
Yes, <unk> is doing well too and I would say vinyl is probably on the lower end of the three.
Now is that I appreciate that and it's getting tax law questions about the quarter and the year, but.
I asked that because it seems like you're obviously if the industry is up six and what was Dr. Saying FY 'twenty was up and for the industry. Scott If you have that for.
'twenty one they were.
And expecting 6% growth.
Versus what and FY 'twenty. Please.
Oh.
I'm just trying to see if was this share gain net got where I.
And yes about to little over 2% in 'twenty.
Right. So would you say the share gains youre seeing and screens is really a function of.
Yep.
Sure.
Strategy to help manufacturers improve their businesses is that is that a new function that we're seeing in 'twenty, one or was that kind of evidence in the back half of 'twenty and we're 19 is this a new event is what I'm getting at because it's real success Youre, having obviously.
I would say the <unk>.
Except for on the screen side is really working with our customers to show the benefit of outsourcing.
And that processed and allowing them to focus on using their labor.
Manufacturer and saw Windows.
The other thing that are starting to see.
And if you remember we opened up a new plant at the very end of our fiscal 2020 and so we're.
And we're gaining some growth on an area that was underserved and prior years thoughts for through impactful and the screen size.
Okay. So and you are saying under served just to explore this because I think about these businesses all different.
Under served I mean, so you opened up a new plant and I could Google that I guess, but you're opening up a plant next to.
And existing customer or new customer basically so it's actually a greater share of that person screen business is what I'm, assuming you're saying to me.
Yes, as we said in the past the screen product line and if you look on our investor presentation and to our footprint.
And the screens are.
In terms of weight very light and there.
They can be easily damaged so the location of our plant is really based upon a freight radio radius we know.
And our optimal radius to be able to ship a screen and so when we locate a new plant and it tends to be around a cluster of customers that we think we have an opportunity to get new business and that's why we chose Allentown PX.
Excellent and really appreciate that.
So going back to the other piece if you guys don't combined.
And this question 'cause it penetration for fascinating industry.
Our profiles would you say your profile shipments have been in line with.
The industry.
Growth rate or are there kind of share gains that we're seeing and your guidance.
And.
Related to that.
Obviously the price.
Pass through.
Or are you seeing any disruption there relative to your ability to capture price on the underlying.
Input because all that stuff under contract right I mean, it's not a lot of spot.
Is it on the extrusion side for price.
Yes.
And is correct.
And I would say in general our growth has been in line with what we're seeing in terms of the market.
As we've said in the past we've been very focused on understanding what we do and do well so as we've quoted and gone after and retain specific pieces of the business. It's based on Skus that we feel that we can run.
Effectively and the other piece that we're doing and as we're looking at areas and <unk>.
Non fenestration and it's just starting but being able to look at other things that use extruded vinyl profiles and utilizing the assets. So we're really our focus right now is on OE, keeping the equipment up and running and optimize all runs to be able to oh.
Effectively improve profitability and so that's what we're working on in that area.
And where would you say your capacity is pre you having that big shut down you know two or three years ago.
Are you running at about 60% of the capacity you did at the peak for three or four years ago.
I would say roughly that's that's correct.
Excellent and then last question sorry, but the.
And the comments from you and consistent with K CMA.
Data <unk>.
And cabinet sales at 10% in January but you know.
And that might cost them up 17% and that's that's one month and I'd have to look at the comps and Scotch but.
Wow.
What a turn and can you comment.
As to the 5% growth if you think thats.
Reasonable obviously, you think it's reasonable to your guidance, but I mean, do you think theres upside there or do you have installation constraints like you do and windows or do.
Do you think there could be something bigger there and semi custom homeowners equities at a record level.
Do you think that that's a really favorable turn for you. That's my last question. Thank you very much gentlemen.
Oh, Thanks for him to answer that question I think really the biggest pacesetter for US was the labor availability and which I talked about so home. If there is any upside and it will be on any loosening of available labor and the areas, where we have our door and our components plants.
Thank you.
Your next question is from the line of Daniel Moore with CJS Securities.
Yes. Thanks again most of the follow up most of my follow ups are covered but just a.
A quick one maybe comment on your proclivity to be more aggressive in terms of buybacks with the remaining $9 million authorization, just given rising EBITDA and strong expected free cash flow and obviously all the.
And for gains that you've made on the balance sheet.
Yeah. Good question I think that.
To your point, we are operating well and putting up good numbers, we did repurchase about $1 $9 million and first quarter I think the average price was right around $25 or so which sends a message that we still continue to believe our stock is undervalued even at these level.
So we will be opportunistic with repurchasing stock going forward.
That is helpful. Thanks again.
Yes. Thank you.
Thank you and at this time, we have no further questions I will turn it back over to our CEO George Wilson for any closing remarks.
Thank you.
Before we sign off I'd, just like to take a brief moment and thank Bob for his service on our board and took quanex bobs contributions over the years were invaluable and his guidance will be missed as he enters his retirement.
I'd like to thank you all for joining the call. When we look forward to providing an update on our next earnings call and June. Thank you.
Thank you. This does conclude today's conference call you may now disconnect.