Q1 2022 Quanex Building Products Corp Earnings Call
Good day, and thank you for standing by welcome to the first quarter 2022 <unk>.
Quanex building products Corporation earnings Conference call at this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask 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 if you require any further assistance. Please press star then zero.
I would like to hand, the conference over to your host today got silky S. P. P CFO and Treasurer. Please go ahead.
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 in our earnings release are based on current expectations and 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.
For a more detailed description of our 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.
We reported revenue of $267 million during the first quarter of 2022.
Which represents an increase of 16% compared to $230 1 million during the first quarter of 2021.
The increase was largely attributable to volume increases in our fenestration segments combined with higher prices related to the pass through of raw material cost inflation.
Specifically, we realized net sales growth of 14, 5% in our North American Fenestration segment 15, 5% in our North American Cabinet components segment, and 18, 6% and our European Fenestration segment, excluding the foreign exchange impact.
We reported net income of $11 2 million or <unk> 34 per diluted share for the three months ended January 31.
2022, compared to $7 9 million or 24 per diluted share during the three months ended January 31 2021.
On an adjusted basis net income increased by 25, 9% to $11 3 million or <unk> 34 per diluted share during the first quarter of 2022 compared to $9 million or 27 cents per diluted share during the first quarter of 2021, the adjustments being made to EPS are for restructuring charges.
Loss on the sale of a plant foreign currency transaction impacts and transaction and advisory fees.
On an adjusted basis EBITDA for the quarter was essentially flat year over year at $24 4 million compared to $24 3 million during the same period of last year.
The increase in earnings for the three months ended January 31, 2022 was attributable to continued strong demand operational efficiency gains and increased pricing. However, the decrease in margin percentage was driven by inflationary pressures and time lags on material index pricing mechanisms.
Moving on to cash flow and the balance sheet cash used for operating activities was $21 7 million for the quarter compared to $3 4 million for the same period of last year.
Due to the typical seasonality in our business free cash flow was negative in the first quarter of this year and.
In addition, the value of our inventory increase further due to inflationary pressures, which had a negative impact on working capital.
As a reminder, we usually generate most of our cash in the second half of each year.
Our balance sheet continues to be strong our liquidity position is solid and our leverage ratio of net debt to last 12 months. Adjusted EBITDA was at four four times as of January 31 2022.
We will remain focused on generating cash paying down debt and opportunistically repurchasing stock as the year progresses.
As stated in our earnings release demand remains healthy, but the rate of inflation continues to pressure margins. However, based on improvements in labor performance. The expected continuation of our pass through pricing strategy conversations with our customers and the latest macro data we're now comfortable pro.
<unk> the following guidance for fiscal 2022 .
Net sales of 113 billion to one $1 5 billion adjusted EBITDA of $135 million to $140 million.
Depreciation of approximately $31 million.
Amortization of approximately $15 million.
SG&A of $115 million and $120 million.
Interest expense of 2 million to $2 5 million.
Tax rate of 28%.
Capex of 30 million to $35 million.
And free cash flow of $55 million $60 million.
While we do expect some level of volume growth in our finished straight <unk> segments for the remainder of the year note that our current expectation is that revenue growth for the remainder of the year should be driven more by price as opposed to volume and we expect margin expansion to be second half weighted.
From a cadence perspective for Q2, we.
We expect net sales to be up mid to high single digits year over year in each segment.
However, due to inflation and the time lag associated with passing on price increases for most of our raw materials. We believe it will be a challenge to realize margin expansion in any segment in Q2.
Looking ahead into the second half of the year on a consolidated basis. We currently expect mid single digit net sales growth year over year in Q3 and Q4.
In addition, due to easier comps and the expected benefit from our pricing strategy, coupled with some volume growth in our finished duration segments. We expect to realize some margin expansion in Q3 and Q4.
I'll now turn the call over to George for his prepared remarks.
Thanks Scott.
Prior to my comments I would like to take a moment to acknowledge drove up for as long as dedicated service to <unk> as a board member and as our lead independent director.
Jos guidance was key during our transition into a pure play building products company several years ago and more recently his mentorship and support proved invaluable as I transitioned into the CEO role.
I would like to thank Joe for all he has done and I wish him all the best.
I will now discuss results for the quarter, and then conclude with a discussion on the macro environment and guidance.
Demand was healthy across all product lines during the first quarter of 2022.
Volume growth in our fenestration segments and higher prices in all segments, mostly related to the pass through of raw material cost inflation resulted in revenue growth of 16% year over year.
On a consolidated basis, we estimate that revenue growth for the quarter was weighted approximately 10% due to an increase in volume and approximately 90% due to an increase in price.
The first quarter began with continued supply chain challenges and significant labor disruption caused by Covid absenteeism, driven by the AUM of Crown variance. However, these issues started to subside towards the end of the quarter.
The rate of raw material cost inflation remains a challenge as we typically see a 30 to 90 day time lag and passing these increases through to our customers.
Looking at the individual segments I will start with the North American fenestration.
This segment generated revenue of $146 6 million in Q1, which was $18 5 million or 14, 5% higher than prior year Q1.
Strong demand in our <unk> spacer and screen product lines volume growth in vinyl fencing components and price increases across all product lines were the main drivers of the growth.
We estimate that revenue growth in this segment was weighted approximately 45% due to an increase in volume and approximately 55% due to an increase in price.
<unk> EBITDA of $16 3 million in this segment was essentially flat versus prior year Q1 <unk>.
Prove pricing volume related to the efficiency gains and productivity related improvements were more than offset by inflationary pressure on raw materials, which caused margin erosion over approximately 170 basis points for the quarter.
However, our current expectation is for margin expansion in this segment later in the year, assuming that the rate of inflation subsides.
Yes.
Our European Fenestration segment generated revenue of $58 9 million in the first quarter, which was $9 8 million or 20% higher than prior year.
Excluding foreign exchange impact this would equate to an increase of 18, 6%.
We estimate that revenue growth in this segment was weighted approximately 20% due to an increase in volume and approximately 80% due to an increase in price.
Strong demand in both RG spacers and vinyl extrusion combined with material related price increases accounted for the strong performance year over year.
These favorable volume related impacts and pricing actions were more than offset by inflationary pressure on raw material costs and by inefficiencies caused by the Covid related absenteeism early in the quarter.
As such adjusted EBITDA came in at $10 4 million for the quarter, which was 300000 less than prior year and yielded margin compression of approximately 420 basis points.
Similar to our expectations for other segments, we do anticipate that margins will improve as the Europe , Brussels again, assuming that the rate of inflation subsides.
Our North American Cabinet components segment reported net sales of $62 4 million in Q1, which was $8 4 million or 15, 5% higher than prior year.
Volumes decreased in this segment year over year, mainly as a result of customers' decisions to reduce overtime hours worked in their plants.
Increases in hardwood index pricing as well as discretionary pricing actions offset the volume and resulted in revenue growth year over year.
Adjusted EBITDA was $2 million for the quarter, which was $1 2 million less than prior year and resulted in margin compression of approximately 280 basis points.
Improvements in lumber yield and labor efficiency were more than offset by a significant increase in hardwood lumber costs during the quarter.
Weather related challenges in the Appalachian Wood region as well as increases in Maple demand were the main drivers of the increases in lumber costs.
As a reminder, we have material index pricing mechanisms in place, but they typically have a 90 day lag and we will require a period of flat or declining wood pricing before we're able to catch up on our margin performance in this segment.
As we look forward through the remainder of the year, we feel good about the demand environment across all of our product lines.
In North America, the housing market remains strong and our customers continue to have high levels of backlog.
Which we anticipate will slowly dwindle throughout the year.
The rate of inflation and the potential for further interest rate hikes could impact demand at some point in the future, but we do not expect this to occur in the near term due to the high backlog levels.
In Continental Europe , and the U K the demand environment remains healthy, although consumer confidence could ultimately be impacted if inflation continues to ramp and energy costs continue to increase.
From a quantity perspective, we have seen enough improvements in our supply chain and stabilization in our labor force to say that the main challenge. We now face is the rate of inflation and the ability to pass through price in an expedited manner.
As Scott mentioned earlier, we have enough data points and adequate visibility into our customers' backlog to give us confidence in providing full year guidance.
Again, we expect to generate revenue of 1.13 billion to $1, one 5 billion and adjusted EBITDA of $135 million to $140 million.
If we execute the plan and are able to post results within these ranges it will mark the third straight year of record performance for the Quanex team.
Moving on to our more recent tragic subject, which is the Russian invasion of Ukraine.
It is difficult to see these events unfold in real time and watch what you believe to be unfathomable turn into reality.
We have employees and business partners with personal ties to crane and our hearts are with them their families and all the Ukrainian people being affected by this pointless and horrific war.
At this point it is too early for anyone to accurately predict or estimate the impact that this war will have on the European or global economies or what supply chain disruptions or other impacts. So this may have on our industry.
We anticipate there will be challenges, especially if the situation worsens substantially.
However at this point it is much too early to predict or forecast those impacts.
Nonetheless, our team has managed through Covid and numerous global supply chain challenges over the past two years and we are very confident in our ability to navigate this event as well.
And with that operator, we're now ready to take questions.
Thank you if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Our first question comes from the line of Daniel Mora with <unk>.
Your line is open. Please go ahead.
Thank you. Thank you George and Scott for all the color and taking the questions.
And particularly around pricing quantity, that's really helpful. Maybe tuck yeah, obviously inflation is kind of the the the.
Remaining challenge as you described just talk about looking across each of the segments the cadence.
What you're seeing whether prices are are flattening reaccelerate ing.
You know kind of in real time, and just trying to get a sense for your confidence around the trajectory of margins recovering you.
You know in the back half of the year and I've got a quick follow up thanks.
It really varies.
By product line, but in general.
If if I look at each of our raw materials segment. The ones that continue to see the most levels of inflation are primarily tied to oil or chemical based raw materials. So resins any other components like carbon black our some of our beautiful rubbers that are very.
Tied to oil still see some significant inflationary pressures.
At one point, we started to see some some leveling out in the metals, but those have ticked up again and same thing with with wood, we started to see some some leveling out of woods, but we've had a pretty tough winter and in the Appalachian region.
With snow and rain that makes it really hard to to forest some of those and harvest some of those lumber.
Yards. So those those are primarily the biggest issues right now.
And when I kind of look at let's say the midpoint of your guidance range does that imply kind of pricing, where we are today is it could leave room for some additional inflation just had how do we think about that.
Yes, I mean as you can imagine it is very hard to forecast inflation in pricing. However, we have a pretty good handle on on.
On the pricing aspect, which some of thats built into the model as well as some cushion on inflation.
Canary costs going a little higher from where we are today.
Perfect.
Helpful.
Scott I typed as fast as I could can you just repeat the SG&A as well as if their capex guidance for the year sure Capex $30 million to $35 million Yep S DNA $115 million to $120 million.
Perfect.
And no one more and I'll jump back in queue, but.
Obviously, you know seasonally this is a typically.
Typically a little bit of a use of cash and yet the balance sheet remains extremely strong you know you'll it implies youll generate $80 million plus potentially in the next three quarters.
Just talk about capital allocation.
The when you might be willing to be a little bit more aggressive or are sort of re triggered the <unk>.
Buybacks, given the authorization and you know what the M&A pipeline looks like if anything thanks again.
So as we look forward and I think your your cadence on the cash flow is correct.
You know I think.
We will stay focused on on payment repayment of debt.
Hum.
We've made it public but you know our target is to approach that.
Free.
By the end of the year, we have some pretty large.
Large capex projects that you know we're going to be focused on throughout those years. So those two will remain a priority we will opportunistically, our balance our cash flow incoming and where the stock prices and we will be active as.
We told you you know the board authorized a 75 million repurchase plan. So you know.
As our projects aligned we will repurchase stock and then finally, the M&A pipeline.
You know there are.
Things will continue to look at and be interested and I would I would say that the amount of deals crossing our desk seems to have slowed and I think that that's been.
Reinforced by some of the feedback that we get from our banks that the deal pipeline in general has slowed down a little but you know we're going to continue to remain diligent on our checklist of things that meet our requirements for an M&A and if something is there we're in great position to.
To capitalize on it but at this point nothing imminent.
Alright, very helpful I'll jump back with any follow ups. Thanks.
Thank you and our next question comes from the line of Steven Ramsey with Thompson Research Group. Your line is open. Please go ahead.
Hey, good morning, maybe just start with the <unk>.
Expectations that inflation subside in the second half is that the main.
One reason for margin expansion at that time or what other factors help is that pricing flowing through better volume output, maybe just talk to the drivers and what ranks in order of magnitude to drive that margin.
Yes, I think if you looked back at last year's second half, we started to see inflation really kick up in the third and especially in the fourth quarter. So from a from a comp perspective, the comps get a little easier from margin perspective in the second half so what should drive that margin expansion year over year, obviously volume is going to help but I think.
Even more so there's going to be pricing as.
As we enter the second half like I said, there is a little bit of.
An assumption that inflation ticks up a little higher from where we are today.
But we do expect it to subside at least we're forecasting for that.
It's more of the rate of inflation, you know and at some point, even if inflation continues to tick up at least it gives us the ability to catch up.
So I think that's the major assumption, we see in the second half at least at this point.
Okay makes sense and then is it kind of all segments with margin expansion in the second half or do certain segments.
In expand more in other skilled flattish to down.
The expectation is definitely in North America for margin expansion in both of those segments.
Europe , we're hopeful that will happen in <unk>, but probably more likely in <unk>.
The margin profile in Europe continues to be strong.
Okay Fair and then one more thinking about inflation with the SG&A guidance.
The low end of that SG&A range.
Flattish year over year kind of surprised given inflation.
Inflation in the U S normalizing or peony, maybe you can talk to you, how you're thinking about SG&A and budgeting for that.
And I think we've done a good job of continuing to find ways to optimize.
<unk> is our whole SG&A structure so.
We have internal projects, where we've been able to to reduce SG&A in some areas.
Stock based comp has obviously had a big benefit to that as well as you know we've aggressively managed our medical costs.
I think performed relatively well.
And although we see inflation.
I think we've done better than the market and managing our medical costs. So those are the three big areas that I think has allowed us to remain flat in SG&A, even with the inflationary pressures that we see.
Alright, and then last quick one for me if I think about.
The high end of the guidance range on sales and EBITDA.
It implies lower incremental margin.
On the high side of both numbers than it does on the low end curious if there are certain drivers to drive that result.
A math problem.
Yeah, I wouldn't there's nothing really to point to to explain either one I think it's more the math in the ranges there I will say that.
Sitting here today, probably more comfortable with the.
Higher end of the revenue guidance range than we are on the EBITDA range, just because of the inflationary environment.
Makes sense. Thank you.
Thank you.
Thank you and our next question comes from the line of Charlie over Mono with Sidoti <unk> Company. Your line is open. Please go ahead.
Hey, good morning, Jordon Scott.
Good morning.
Hey, so really appreciate you guys providing guidance.
A couple of contributing factors to that decision the improvements in labor performance continued pricing and speaking of customers et cetera.
Is it fair to say the biggest kind of swing factor is labor improvement I know you were having some issues last quarter in terms of short term delivery schedules and truckers kind of showing.
Showing up for the day are you seeing better visibility on that and if so could you expand on that.
I think I think the improvement in labor comes from a couple of areas.
One is the supply chain started to stabilize that obviously helps the scheduling of our plants and the ability to schedule production in the most efficient manner. So that had a big impact I think our human resource teams across the company have done a very good job of filling in.
And filling the open positions across all of our plants.
We made some labor adjustments so in terms of our wage rates throughout last year and so as you bring new people on and get them acclimated to our processes. The learning curve around that has improved versus prior year and that's been a big deal and then just finding continued different ways.
To operate.
We operate in this environment, we're getting better at it.
In our North American Cabinet components segment, where we talked about you know our customers reducing labor hours that you know that.
It's mainly attributable to them.
Losing labor. So you know the reduction of overtime and in scaling back to a five day or a 40 hour 48 hour work week has been a big help in that in that area as well, especially for that segment.
Got it so the labor improvement sounds a little more broad based than just kind of drive it drivers.
Are you seeing.
Are you seeing better retention rates.
I would say in general, yes, I mean, it's that tends to be more plant specific but I think as we try to do different things internally, we have some very.
Active retention projects in place across the company.
It has begun to improve.
So we're pretty happy with the internal actions that we have going on right now.
Focusing on training and those types of projects on a go forward basis, we'll continue to hope that as we look ahead.
Okay understood and then just.
Last one for me and I appreciate the commentary on Russia, Ukraine, and very early to kind of understand all the impacts there but if.
If I could try to zero in on just you know any aluminum and patents that kind of sticks out to me as a potential.
Impact from from IC, how are you thinking about any.
Potential availability constraints or.
In terms of aluminum.
In Europe , yes.
So.
I think as I look at it as it relates to quanex.
The main areas that I'm going to be focused on as it relates to our impact.
First and foremost will be you know the European economy.
What will it do to the window and.
Demand and what we'll do demand to demand in general and what will it do to some of the components that go into a window for example glass.
More as it takes a lot of energy a lot of that energy in Europe as it is provided by Russia as we know.
So a rapid inflation of heating and an energy cost will drive.
Could drive the cost of glass in the components up to pretty significant levels that may impact. So obviously, the price of a window and negatively impact demand.
So keep I keep an eye on that in terms of our components aluminum pricing, which we're already starting to see on the horizon.
As worried about supply, but you know people are trying to capitalize on this to drive price up.
We'll obviously be able to recover it but then it goes into the timeline.
And then the other areas tend to be things like carbon black in butyl rubbers, which ought to have a lot of components that have micro ingredients that come from from Russia. So those are the areas that I'm going to stay focused on as it relates to quanex.
Really helpful. Definitely appreciate the detail you provided there thanks very much.
Thanks.
Thank you and our next question comes from the line of Ken <unk> with Keybanc. Your line is open. Please go ahead.
Good morning, gentlemen.
Morning, Ken.
So I wonder if you can.
Comment on.
Just you're right supply cost challenges, but also you know as.
As a supplier in the window business you've had.
Our REIT, Northern Europe , where the spacers U K actual the windows versus the U S. Can you just talk about how demand trends might be a little different in COVID-19 using the U K.
And the U S.
As counterpoints just are not not even extended answer, but just how different those markets a bit in terms of demand.
You know when I look out and demand has been extremely strong in both of those markets because a lot of a lot of the fundamental economics.
Indicators are the same I mean, both both companies have tightly our tight housing markets.
Hum.
Discretionary spending has been high in both markets. So you know we've seen strong demand in both areas I think where I contrast.
On a go forward basis.
In the U K and Europe , I think discretionary impact will be.
Impacted more by increases in energy cost, even more so than what we complain about here in the U S.
Fuel and heating fuel and energy costs going up it's significantly higher in Europe . So I think it'll it'll have an ability or the.
Potential to impact the U K and Europe much faster than we'll see here in the U S.
And then.
Towards Scott I'm not sure.
Which one of you made the comment or which region.
But I believe you said something about customers or somebody not doing overtime as much could you talk about that in.
In the U S.
What that means in terms of the.
The backlogs that you are.
Feeding in terms of backlogs going down I know, there's been some public company that I've talked about four months backlogs falling down to half that or more can you just talk about your customers ability to handle or work through backlog.
Yeah, So I made that comment as it related to the cabinet components segment.
You know in those markets.
The labor piece of it, especially in 2021 when it was so difficult you have wages going up and so many job openings across the entire country you know people.
You know when you have companies that are working.
50 to 60, and sometimes more than on hours a week.
The significant loss of employees you cannot continue to work at that level someone will grow across the street make the same amount of money.
And so they realized in that segment are customers or that they're working too many hours. So they they they physically made the decision we're going to back off and let the backlogs grow and that's what we saw during the course of last year and it's remained now they've also as they start to retain their employees because of the reduction in working hours.
We're seeing.
Better performance, because they are able to retain their life their labor. So you know.
I don't think we'll see the continued growth in that backlog, but that's what happened.
And then in Windows.
Since you called out cabinets could you talk to the cadence perhaps of your customers.
There and.
The glass I mean, you talked to one of the things people focus on is does.
Do when does price increases create demand destruction, which.
Hugh.
You mentioned it I don't know if you just were being very holistic and your comments.
But if you are we seeing that labor issue and the window category at all and then since you brought up pricing.
Just some comments there thank you very much.
So the two pieces I'll start with the <unk>.
Your second question first I was being a little holistic in terms of my discussion on the impact of.
The impact of additional costs will have an on demand we have not seen that yet.
Could it be a possibility sure, but we haven't seen it at this point and that was more related to Europe than it is to use now in terms of the backlogs with my window customers. They seem to be handling that more I don't think the backlogs have been growing and we anticipate that their continued improvement in operations.
We will continue to drive that down.
Not to the level, where it will disappear home. So that's what gives us so much confidence as we look at our demand going forward because it's such high backlogs they've done a very good job of being able to control their labor in the.
And fulfill demand as much as possible.
Thank you.
I appreciate it.
Thank you. Our next question is a follow up question from the line of Daniel Moore with CJS Ross. Your line is open. Please go ahead.
Oh, sorry, I, just kind of get off mute. Thank you again.
You know this has been and obviously you know multiple years of an unprecedented operating environment with everything that's gone on.
If we ever get back to normalization one thing we haven't talked about as much in recent calls as you know what kind of opportunity is left to drive margins higher longer term.
And realize Europe as you know.
That pretty significant margins right now, but specifically in North America fenestration endure the cabinets.
Be it with automation or other internal initiatives. Thanks.
So we've touched on this in the past and I don't think it's changed much I think.
Going forward in a more normalized environment.
It's anybody's guess, what normal means going forward, but I think youre right in Europe the.
The margin profile is strong and it's really more about protecting margins. There then growing margins. There we've done a lot of work in North America, I still think and we still think that the biggest opportunity for margin expansion is in the cabinet components business, we've gone through quite a long period here of chasing price in the 90 day.
Lag hurting us and it's really masked all the things we've done on the shop floor.
To improve efficiencies.
Efficiencies and things of that nature, and I think once pricing does stabilize and come down on the wood side youre going to see that margin expansion at some point just don't know when that's going to be and then in the North American Fenestration segment, we still think Theres. Some meat left on that bone to and it's probably more related to.
Our screens business in the vinyl business and not so much the vinyl windows business.
As you know we've been ramping up production and manufacturing of the vinyl fencing business and I think going forward that should start to move the needle at some point.
Very helpful. Thank you again.
Alright.
Thank you and I'm showing no further questions at this time I would like to hand, the conference back over to George Wilson for any further remarks.
We appreciate everyone's time today and thanks for joining and we look forward to providing an update on our next earnings call in June .
This does conclude today's conference call. Thank you for participating everyone have a great day.
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