Q2 2022 Quanex Building Products Corp Earnings Call
Pardon me. This is the operator today's program is scheduled to begin shortly please continue to standby and thank you for your patience.
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Yes.
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Good day, and thank you for standing by and welcome to the second quarter 2022, Quanex building products Corporation's 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 that session you will need to press star one on your telephone. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your host today Scott <unk>.
Senior Vice President Chief Financial Officer, 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.
We're looking statements and guidance discussed on this call and in 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 statements to reflect new information or events or 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 will now discuss our record financial results for the second quarter.
Net sales increased by 19, 4% to $322 9 million during the second quarter of 2022 <unk>.
Compared to $274 million during the second quarter of 2021.
The increase was mostly due to higher prices related to the pass through of raw material cost inflation and we suspect there may have been some pull forward of demand as price increases are being implemented.
More specifically, we realized net sales growth of 21, 7% in our North American Fenestration segment.
13% and our European Fenestration segment, excluding the foreign exchange impact and 14, 7% in our North American Cabinet components segment.
Net income increased by 81, 5% to $26 5 million or <unk> 80 per diluted share during the second quarter of 2022.
Compared to $14 6 million or <unk> 43 per diluted share during the second quarter of 2021.
On an adjusted basis EBITDA for the quarter increased by 44% to $45 2 million compared to $32 2 million during the same period of last year.
The increase in earnings for the three months ended April 32022 was attributable to continued strong demand and increased pricing coupled with lower SG&A expense largely due to lower stock based comp.
Moving on to cash flow and the balance sheet cash provided by operating activities was $19 8 million for the second quarter of 2022 compared to $32 4 million for the second quarter of 2021.
The value of our inventory continued to increase during the quarter 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 decreased to <unk> three times as of April 32022.
We will remain focused on generating cash paying down debt and opportunistically repurchasing our stock as the year progresses.
As stated in our earnings release demand remains healthy, but inflation and supply chain issues continue to add some pressure never.
Nevertheless, based on improvements in labor performance.
<unk> continuation of our pass through pricing strategy and conversations with our customers. We are increasing guidance for the fiscal year as follows net.
Net sales are now expected to be 1.18 billion to $1 2 billion.
Adjusted EBITDA is now expected to be $150 million to $155 million and free cash flow is forecast to be $65 million to $70 million.
Note that our current expectation is that revenue growth for the remainder of the year will likely be driven more by price as opposed to volume and we continue to expect margin expansion in the second half.
From a cadence perspective for Q3, we expect net sales to be up low double digits year over year in our North American Fenestration segment.
Low to mid single digits year over year, and our European Fenestration segment.
And mid single digits year over year in our North American cabinet components segment.
I'll now turn the call over to George for his prepared remarks.
Thanks Scott.
We achieved a record quarter on many different fronts. We're extremely pleased with these results.
We have improved our financial and operational performance over the past few years, but staying focused on what we can control that focus has been on ensuring the health and safety of our teammates optimizing asset utilization improving return on invested capital and generating free cash flow.
All while striving to outperform our customers' needs and wants even with so much noise in the market. The success of this strategy has been obvious.
In addition, the quantic team is working extremely hard to make the communities in which we live and work better places whether that is through volunteerism focusing on our ESG initiatives are working to develop themselves into better people and teammates quanex employees are embracing the opportunity to be a part of something bigger and for that I am.
Equally pleased and thankful.
I will now discuss our results.
As Scott mentioned demand remains strong across all product lines during the second quarter of 2022.
They have been some volume pulled forward as price increases were implemented.
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 19, 4% year over year.
On a year to date basis revenue growth of 17, 9% versus prior year.
The second quarter was no different than the first quarter. When it came to dealing with continued supply chain challenges for REIT of raw material cost inflation remains a challenge as we typically see a 30 to 90 day time lag in passing these increases through to our customers. However, as the results show that.
Pricing mechanisms at our disposal are effective.
I will now discuss performance by operating segment.
And I will start with North American fenestration.
Sure.
This segment generated revenue of $177 9 million in Q2, which was $31 8 million or 21, 7% higher than prior year Q2.
On a year to date basis revenue was $324 5 million, which was $50 3 million or 18, 3% higher than prior year.
Strong demand in our <unk> spacer and screens product lines volume growth in vinyl sensing components and price increases across all product lines were the main drivers of the group.
We estimate that around a third of the revenue growth in this segment was due to an increase in volume and the remainder was due to an increase in price.
EBITDA was $26 3 million or 27, 3% higher than prior year.
On a year to date basis, adjusted EBITDA was $42 5 million or 15, 1% higher than prior year.
Crude pricing.
Reworked vinyl extrusion contracts and volume gains in vinyl sensing components were the primary reasons for the improved performance.
We saw margin expansion in Q2 in this segment and we expect that to continue through the remainder of the year as pricing catches up to inflationary pressures.
Our European Fenestration segment generated revenue of $73 4 million in the first quarter, which represents.
In the second quarter, which represents an increase of 19, 1% year over year.
Excluding foreign exchange impact this would equate to an increase of 13%.
On a year to date basis revenue was $132 3 million, which is $21 6 million or 19, 5% better than prior year.
Alluding foreign exchange impact this would equate to an increase of 15, 6%.
For Q2, we estimate that around 20% of our revenue growth. In this segment was due to an increase in volume with price driving the remainder of the growth.
Adjusted EBITDA came in at $15 1 million for the quarter, which was $2 3 million better than prior year, but yielded margin margin compression of approximately 30 basis points.
On a year to date basis, adjusted EBITDA was $25 5 million, which was $1 9 million better than prior year.
Strong demand in both the <unk> spacers and vinyl extrusion combined with material related price increases accounted for the strong performance year over year.
The rate of margin compression was significantly lowered in the quarter and we anticipate that margins will continue to improve as the year progresses and price increases catch up to inflationary pressures.
Yes.
Our North American Cabinet components segment reported net sales of $72 9 million in Q2, which is 14, 7% higher than prior year.
On a year to date basis revenue was $135 2 million, which represents an increase of 15% versus prior year.
Again as a reminder volumes have decreased in this segment year over year, mainly because of customers reducing overtime hours worked in their plants, coupled with their supply chain issues.
Yes.
Increases in hardwood index pricing as well as discretionary pricing actions have offset the volume decline and resulted in revenue growth.
Adjusted EBITDA was $4 5 million for the quarter, which was $1 4 million better than prior year and resulted in margin expansion of approximately 140 basis points.
On a year to date basis, adjusted EBITDA of $6 5 million as 200 files and less than prior year and resulted in year to date margin compression of 50 basis points.
Timing of price increases better availability of green lumber improvements in our lumber yield and labor efficiencies were the main drivers of the positive results in the quarter.
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 fully catch up on our margin performance in this segment.
Just like the European Fenestration segment, we do anticipate that margins will improve as the year progresses and price increases catch up to inflationary pressures.
Unallocated corporate costs for the quarter were $3 $7 million less than prior year. The main drivers of the lower spending were favorable experiences for medical expenses and the organization as well as lower stock based compensation expense.
Just a reminder, that stock based comp expense is variable and it will adjust with fluctuations in our stock price.
Despite the challenging supply chain environment and ongoing inflationary pressures, we remain very optimistic on the remainder of the year customer backlogs in all segments remain line.
In North America, the housing market remains strong despite the recent interest rate hikes.
In Continental Europe , and the U K the demand environment remains healthy, although consumer confidence could be impacted if inflation continues to ramp and energy costs continue to increase.
Our balance sheet remains strong and cash flow should improve in the second half of our year.
In addition, with six months left in our year, we have enough visibility to be able to provide upward revisions on our full year guidance and to reiterate Scott's comments, we expect the following.
Net sales to be $1 8 billion to $1 2 billion.
Adjusted EBITDA to be 150 to 155 million and free cash flow to be $65 million to $70 million.
These results would equate to another record year for Quanex and I would like to thank all of my teammates for their continued hard work and execution.
With this new guidance announced our near term capital deployment focus will be on generating cash further paying down debt and getting more aggressive on our share repurchase activity, which reflects our commitment to return capital to our stockholders and increase shareholder value as well as our confidence in <unk> long term.
Prospects relative to our current trading environment.
And with that operator, we're now ready to take questions.
Thank you and as a reminder to ask a question. Please.
One on your telephone to withdraw your question press the pound or.
Keith.
Your first question is from Daniel Moore with CJS Securities. Your line is open.
Thank you. Thank you George and Scott for all the color.
Helpful and congrats on a very solid quarter.
You gave the volume growth by segment, maybe just talk to what sort of volume growth is embedded in your revised revenue expectations for the remainder of the year.
I don't have that broken out by segment, but I think George alluded to the fact that second half revenue growth year over year will be driven may.
Mainly predominantly by price versus volume.
Got it Thats helpful.
And you also talked about.
Potential for pull forward of some demand I know, it's difficult any way to quantify it.
Or maybe describe whether you suspect that occurred across.
All end markets and to what degree.
Really what we will see the only ability to really pull ahead volume.
US was primarily in the spacer business.
And that's the really the only product that we have that Powell as well. So we think we've seen some pull ahead spacers in North America and Europe .
Don't think it will be material and will impact the cadence that we've given you.
We typically see that when we announce.
Roger price increases so nothing that I think will impact guidance or is a concern to us right now.
Okay, and clearly seeing strong momentum and acceptance on pricing just wondering.
With all the inflation that we've seen if youre getting any incremental pushback from customers across any pieces of the portfolio.
We're still pretty confident in your ability to.
At least at this stage a level of inflation to push those through.
All right.
It really our ability to get prices because I think we worked very hard to trying to be transparent with the customer.
These arent margin ground.
We're truly working to just pass through inflationary pressures that we see so we're very transparent with the cost pressures that we're getting and I think our customers have been.
Willing and understanding through its up to us.
We continue to work together as partners. They are never easy conversations, but I think the fact that we're being transparent as hoping in the conversations.
Got it helpful last one and I'll jump back with any follow ups.
Given the balance sheet remains still really strong.
The increased cash flow guide for the year.
Obviously, you expect or some working capital to catch up a little bit in the back half of the year.
I guess.
Any thoughts about maybe being more aggressive upfront in terms of the share buyback is that your expectations for the remainder of the year or are you being cautious if in case there are any darker clouds.
On the horizon.
Economic or business perspective. Thanks.
No great question and as I mentioned in our comments I think.
We have seen strength in our cash flow, especially as we expected going into the second half of year, It's the way it typically works.
Considering where our trading is that today, we think.
We think our long term prospects not only this year, but.
Should we expect in terms of execution on a go forward basis makes so repurchase of our stock.
<unk>.
Short by and so I would anticipate upfront that we probably will be more aggressive.
Definitely at these levels.
Got it very helpful. Appreciate it I'll follow up with any others.
Your next question comes from Ron.
<unk> with Sidoti and company your line is open.
Hey, good morning, George and Scott.
Good morning, good morning.
Could you speak to European demand what are you hearing about the impact of energy costs on on consumer confidence and have you seen any change in <unk>.
Consumer confidence in Europe over the past three months.
I think that there is absolutely.
<unk> nervousness I don't know if its completely translated into us seeing any decline in demand at this point, but youre hearing signs it will start.
More with energy cost.
Really energy disruptions because.
At least in the markets that we serve today.
Natural gas.
A huge input to making allowance. So those things are where we think it will be hit first.
From a consumer side, you hear nervousness, but the demand is still there.
To some to some extent it becomes even a positive a little bit for us at least from the energy side because most of the products that we manufacture are higher end on the change so.
I think what it does do is when someone has to replace a window or a door.
We're actually evaluating energy even more so than they ever have and then that may be offsetting are spurring. Some additional demand we think thats actually a positive movement not only in Europe , but in North America on a go forward basis.
Got it that's helpful and I guess a broader question is can you maybe speak to it.
The rate of inflation, youre, seeing and where youre seeing the greatest level of inflation across your various inputs.
I would say generally we are now starting to see some signs of the rate of inflation slowing in more areas the knot.
I would.
Continue to say some of the chemical feedstocks.
Stabilizers.
Different inputs into our both space and vinyl products continue to be the biggest challenge.
I can add a little bit to that one positive sign that we're seeing in the cabinet businesses.
The availability of Green lumber is improving towards that should help us.
Hit our numbers and execute on the margin expansion that we've laid out.
Okay got it and I guess just last one for me is.
I guess more more of a broader question again, but.
How do you think your businesses may perform in a recessionary environment.
Again, a great question I will tell you as much as we're seeing record demand. We also spend an enormous amount of time and our leadership team being prepared and ready to react on the bank side I think the best data point that I can give you is our ability to control whether even happened during COVID-19, but we know what triggers the pool.
In some segments, we're very labor driven so it becomes more of a variable cost that we can back off I think.
Our performance during that even immediate shock down period will translate well and we know how to do ups and downs.
We have plans prepared to go should we hit.
Yes.
Got it I'll hop back into queue. Thank you.
Yep.
Next question comes from Reuben Garner with Benchmark company. Your line is open.
Thank you good morning, everybody.
Good morning.
I had a little bit of connection issues earlier.
May be a repeat question, but from Dan but you.
You mentioned pull forward Scott.
I'm trying to understand you said I think you said pull forward ahead of price increases and I think I was under the understanding that the bulk of your business was kind of contractually.
On a lag tied to the to the commodities. So did you guys.
Implement separate price increases and give notice and you started to see orders pick up can you kind of just reconcile those.
Comments on me.
Yes without getting into specific details what I will tell you is.
And I think I've mentioned this on previous calls as well, there's really three avenues for us.
The pricing mechanisms that we currently use you have the index pricing, which does have the time lags and then you have.
The use of surcharges, if we can tie it to a specific input costs thats not on our contractual index or finally discretionary permanent price increases that are applied mainly.
Mainly to deal with labor inflation benefit inflation and things of those nature.
And those.
Obviously arent contractual ignore bound by the 90 day lag. However, we do have some negotiation periods, but so.
So we have put in.
The combination of all three of those.
And so I would tell you on based on the results there have been.
A few of the discretionary permanent price increases to help cover other areas that we've seen inflation.
Yes.
Got it.
Very.
I think that latter part is maybe a little bit different here.
Clearly in the results.
Step up as well.
Ken Okay.
The next thing I want to ask as you mentioned conversations with your customers and clearly you guys are feeling a little bit better about the second half of the year. Despite what's going on is there any way to gauge how much of.
Maybe that optimism about the next couple of quarters that tied to I know some of your areas.
Penetration in particular has been one of the more constrained areas.
Assuming they have a lot of backlog is that is that the cases that why you have.
Maybe increased visibility there any color on kind of what gives you the comfort that the second half in particular is going to kind of maintain.
Some strength.
Yes, so it's exactly that Ruben I think we're already one month through our third quarter.
And then when you look at our customers' backlogs that in many cases can extend out to three to six months.
Both in cabinets as well as any other fenestration products projects.
I think demand is pretty pretty solid.
Not at all concerned on the revenue number.
We don't typically get that level of guidance, but when you see those levels of backlogs exist. It gives us that confidence and so we monitor the backlogs quite heavily and if we start seeing some significant reduction in those.
We will be able to determine if demand starting to drop it should give us some visibility and time to prepare.
On the question.
What was asked earlier about as we get into a recession.
That will give us some indicators of what's going so well.
We feel pretty comfortable in our sight line at least for six months period now.
Got it.
Last one for me.
It's kind of a piggyback on.
The share repurchase question your balance sheets.
Great shape, and I know, you're you've got quite a bit of cash left to generate this year does.
How do you guys, what's the M&A landscape look like are you guys kind of.
Pulling back the reins a little bit just given the broader macro risks are you still willing to do a deal a sizeable deal. If you were to find one our people more businesses more or less likely to kind of sell in this environment.
Yes, I would answer that we're not we're not pulling back in any way on FERC I think we are aggressively looking at opportunities in the market.
With that being said, however, I will say that we're being very diligent in.
And making sure that whatever we look at fits the strategic plan that we've developed in our roadmap to go forward and grow its very defined and we will follow that.
From a pump and then we're going to make sure that we protect our shareholders by not overpaying and falling in love with something I would tell you generally valuations are still very high and.
We scrub.
These opportunities with a pretty fine tooth comb and we're going to make sure. It's done for the right reasons and the right fit.
But we are not backing away from looking at it at all.
Perfect. Congrats on the results and outlook good luck going forward.
Thanks.
And ladies and gentlemen, as a reminder to ask a question simply press star one on your telephone.
The next question is from Kenneth <unk> with Keybanc capital. Your line is open.
Good morning, everybody. This is Christian dialogue 10 sooner. Thank.
Thank you for taking my questions.
Good morning, Good morning, Les last quarter, you guys mentioned, there is still room for expansion specifically in EMEA fenestration. It's clear you guys receive some of that expansion. How do you feel about the potential left to expand those given the strong pricing and demand I know you mentioned.
Margin expansion for the back half, but I think maybe broken down by segment. If you can.
And the potential grab that thank you.
That first part of your question we Couldnt.
Understand could you repeat it.
Sure.
MBNA Fenestration section, just your ability and potential to grab or expand margins given the strong pricing and demand.
Yes, so in our North American Fenestration segment, I think Thats, what you said.
Opportunities to expand margin.
Cross the different products in that segment I would say that.
We've talked in the past about the vinyl fencing product.
And we continue to get opportunities to quote more of that business that could drive some margin expansion for that vinyl business.
Our screen business.
I think thats going to be a matter of continuing to become more more operating efficient and we are pushing price there as well so theres some opportunity I think in the screens piece in it.
Then for space.
You've talked in the past the margin profile for that product is good.
I think you probably get some some leverage there with higher volumes.
So to the extent, we can grow volumes, there I think that would benefit on the margin side as well.
Great. Thank you and then lastly in terms of the three to six months backlog for your customers as part of that is still driven by labor constraint that theyre seeing and do you guys have any visibility on the labor conditions is that improving as that stabilized I guess any color.
For those backlogs in the relation with the labor constraints.
So we don't.
Yes.
We didn't get into the details of that discussion with our customers, but what we see labor is still a challenge, although we seem to be having a little more successes.
We've talked about in previous but I.
I think thats being driven by more of things that we're doing internally.
Help retain as well as the difference in what we're trying to do to attract.
I think their backlogs are still really driven.
Two things.
Installer labor.
So.
Not only labor in their facilities, but installation labor on my house builders.
A lot of open projects, New housing may have started to slow down, but theres still a lot better in process. So.
It's just slow to get any product.
Through the chain.
And then you still got some some supply chain I mean.
Lot of our customers source things from Asia, and Shanghai Port was effectively closed for nine to 10 weeks.
Sure.
It's just really caused some issues so nothing to do with our product line.
Trying to get everything together.
For example in the cabinets they are not going to put in a cabinet they don't have.
The the.
The stove refrigerator and those types of things everything is going to go in and they time, it often though thats been very challenging for the installation guys. So I think it's a combination of both Iot and supply chain.
Yes.
Great. Thank you very much.
I appreciate it thank you.
And this ends our Q&A session I will turn the call back to George Wilson for his final remarks.
I'd like to thank you all for joining the call today, and we look forward to providing an update on our next earnings call in September . Thank you.
And with that we and our program for today. Thank you for participating and you may now disconnect.
Have a great day.
Okay.
Okay.
Okay.
Sure.
Okay.
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Okay.
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Okay.
Sure.
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Good day, and thank you for standing by and welcome to the second quarter 2022, Quanex building products Corporation's 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.
Good question during that session you will need to press star one on your telephone please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to your host today Scott silky.
Senior Vice President Chief Financial Officer, 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.
We're looking statements and guidance discussed on this call and in 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 or more.
A 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 will now discuss our record financial results for the second quarter.
Net sales increased by 19, 4% to $322 9 million during the second quarter of 2022 <unk>.
Compared to $274 million during the second quarter of 2021.
The increase was mostly due to higher prices related to the pass through of raw material cost inflation and we suspect there may have been some pull forward of demand as price increases are being implemented.
More specifically, we realized net sales growth of 21, 7% in our North American Fenestration segment.
13% and our European Fenestration segment, excluding the foreign exchange impact and 14, 7% in our North American Cabinet components segment.
Net income increased by 81, 5% to $26 5 million or <unk> 80 per diluted share during the second quarter of 2022 <unk>.
Compared to $14 6 million or <unk> 43 per diluted share during the second quarter of 2021.
On an adjusted basis EBITDA for the quarter increased by 44% to $45 2 million compared to $32 2 million during the same period of last year.
The increase in earnings for the three months ended April 32022 was attributable to continued strong demand and increased pricing coupled with lower SG&A expense largely due to lower stock based comp.
Moving on to cash flow and our balance sheet cash provided by operating activities was $19 8 million for the second quarter of 2022 compared to $32 4 million for the second quarter of 2021.
The value of our inventory continued to increase during the quarter 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 decreased to <unk> three times as of April 32022.
We will remain focused on generating cash paying down debt and opportunistically repurchasing our stock as the year progresses.
As stated in our earnings release demand remains healthy, but inflation and supply chain issues continue to add some pressure never.
Nevertheless, based on improvements in labor performance.
<unk> continuation of our pass through pricing strategy and conversations with our customers. We are increasing guidance for the fiscal year as follows net.
Net sales are now expected to be 1.18 billion to $1 2 billion.
Adjusted EBITDA is now expected to be $150 million to $155 million and free cash flow is forecast to be $65 million to $70 million.
Note that our current expectation is that revenue growth for the remainder of the year will likely be driven more by price as opposed to volume and we continue to expect margin expansion in the second half.
From a cadence perspective for Q3, we expect net sales to be up low double digits year over year in our North American Fenestration segment.
Low to mid single digits year over year, and our European Fenestration segment.
And mid single digits year over year in our North American cabinet components segment.
I'll now turn the call over to George for his prepared remarks.
Thanks Scott.
We achieved a record quarter on many different fronts. We're extremely pleased with these results.
We have improved our financial and operational performance over the past few years, we're staying focused on what we can control that focus has been on ensuring the health and safety of our teammates optimizing asset utilization improving return on invested capital and generating free cash flow.
All while striving to outperform our customers' needs and wants even with so much noise in the market and the success of this strategy has been obvious.
In addition, the <unk> team is working extremely hard to make the communities in which we live and work better places whether that is through volunteerism focusing on our ESG initiatives are working to develop themselves into better people and teammates quanex employees are embracing the opportunity to be a part of something bigger and for that I am.
Equally pleased and thankful.
I will now discuss our results.
As Scott mentioned demand remains strong across all product lines. During the second quarter of 2022, though there may have been some volume pulled forward as price increases were implemented.
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 19, 4% year over year.
On a year to date basis revenue growth of 17, 9% versus prior year.
The second quarter was no different than the first quarter. When it came to dealing with continued supply chain challenges our rate of raw material cost inflation remains a challenge as we typically see a 30 to 90 day time lag in passing these increases through to our customers. However, as a result show the pricing mechanisms at our disposal.
Our effective.
I will now discuss performance by operating segment.
And I will start with North American fenestration.
This.
<unk> generated revenue of $177 9 million in Q2, which was $31 8 million or 21, 7% higher than prior year Q2.
On a year to date basis revenue was $324 5 million, which was $50 3 million or 18, 3% higher than prior year.
Strong demand in our IV spacer in screens product lines volume growth in vinyl sensing components and price increases across all product lines were the main drivers of the growth.
Yes.
We estimate that around a third of the revenue growth in this segment was due to an increase in volume and the remainder was due to an increase in price.
Sure.
Adjusted EBITDA was $26 3 million or 27, 3% higher than prior year.
On a year to date basis, adjusted EBITDA was $42 5 million or 15, 1% higher than prior year.
Pricing.
Reworked vinyl extrusion contracts and volume gains in vinyl sensing components were the primary reasons for the improved performance.
We saw margin expansion in Q2 in this segment and we expect that to continue through the remainder of the year as pricing catches up to inflationary pressures.
Our European Fenestration segment generated revenue of $73 4 million in the first quarter, which represents.
In the second quarter, which represents an increase of 19, 1% year over year.
Excluding foreign exchange impact this would equate to an increase of 13%.
On a year to date basis revenue was $132 3 million, which was $21 6 million or 19, 5% better than prior year.
Yes.
Excluding foreign exchange impact this would equate to an increase of 15, 6%.
For Q2, we estimate that around 20% of our revenue growth. In this segment was due to an increase in volume with price driving the remainder of the growth.
Adjusted EBITDA came in at $15 1 million for the quarter, which was $2 3 million better than prior year, but yielded margin margin compression of approximately 30 basis points.
On a year to date basis, adjusted EBITDA is $25 5 million, which was $1 9 million better than prior year.
Strong demand in both the <unk> spacers and vinyl extrusion.
Bind with material related price increases accounted for the strong performance year over year.
The rate of margin compression was significantly lowered in the quarter and we anticipate that margins will continue to improve as the year progresses and price increases catch up to inflationary pressures.
Yes.
Our North American Cabinet components segment reported net sales of $72 9 million in Q2.
<unk> was $14, 7% higher than prior year.
On a year to date basis revenue was $135 2 million, which represents an increase of 15% versus prior year.
Again as a reminder volumes have decreased in this segment year over year, mainly because of customers reducing overtime hours worked in their plants, coupled with their supply chain issues.
Increases in hardwood index pricing as well as discretionary pricing actions have offset the volume decline and resulted in revenue growth.
Adjusted EBITDA was $4 5 million for the quarter, which is $1 $4 million better than prior year and resulted in margin expansion of approximately 140 basis points.
On a year to date basis, adjusted EBITDA of $6 5 million as 200 pounds less than prior year and resulted in year to date margin compression of 50 basis points.
Timing of price increases better availability of green lumber improvements in our lumber yield and labor efficiencies were the main drivers of the positive results in the quarter.
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 fully catch up on our margin performance in this segment.
Just like the European Fenestration segment, we do anticipate that margins will improve as the year progresses and price increases catch up to inflationary pressures.
Unallocated corporate costs for the quarter were $3 7 million less than prior year. The main drivers of the lower spending were favorable experiences for medical expenses and the organization as well as lower stock based compensation expense.
Just a reminder, that stock based comp expense is variable and it will adjust with fluctuations in our stock price.
Despite the challenging supply chain environment and ongoing inflationary pressures, we remain very optimistic on the remainder of the year customer backlogs in all segments remain high.
In North America, the housing market remains strong despite the recent interest rate hikes.
In Continental Europe , and the U K the demand environment remains healthy, although consumer confidence could be impacted if inflation continues to ramp and energy costs continue to increase.
Our balance sheet remains strong and cash flow should improve in the second half of our year.
In addition, with six months left in our year, we have enough visibility to be able to provide upward revisions on our full year guidance and to reiterate Scott's comments, we expect the following.
Net sales to be $1 8 billion to $1 2 billion.
Adjusted EBITDA to be 150 to 155 million and free cash flow to be $65 million to $70 million.
These results would equate to another record year for Quanex and I would like to thank all of my teammates for their continued hard work and execution.
With this new guidance announced our near term capital deployment focus will be on generating cash further paying down debt and getting more aggressive on our share repurchase activity, which reflects our commitment to return capital to our stockholders and increase shareholder value as well as our confidence in <unk> long term prospects.
Relative to our current trading environment.
And with that operator, we are now ready to take questions.
Thank you and as a reminder to ask a question. Please.
One on your telephone to withdraw your question press the pound or <unk>.
Keith.
Your first question is from Daniel Moore with CJS Securities. Your line is open.
Thank you. Thank you George and Scott for all the color really helpful and congrats on a very.
Solid quarter.
You gave the volume growth by segment, maybe just talk to what sort of volume growth is embedded in your revised revenue expectations for the remainder of the year.
I don't have that broken out by segment, but I think George alluded to the fact that second half.
<unk> growth year over year will be driven.
Mainly predominantly by price versus volume.
Got it Thats helpful.
And you also talked about.
Potential for pull forward of some demand I know, it's difficult any way to quantify it.
Or maybe describe whether you suspect that occurred across.
All end markets and to what degree.
Really what we will see the only ability to really pull ahead volume for us is primarily in the spacer business.
That's the really the only product that we have the power as well. So we think we've seen some pull ahead spacers in North America and Europe .
I think it will be material and will impact the cadence that we've given you.
We use we typically see that when we announce.
Price increases so so nothing that I think will impact guidance or is a concern to us right now.
Okay, and clearly seeing strong momentum and acceptance on pricing just wondering.
With all the inflation that we've seen if youre getting any incremental pushback from customers across any pieces of the portfolio.
We're still pretty confident in your ability to.
At least at this stage of the level of inflation to push those through.
Right.
It really our.
Our ability to get pricing because I think we worked very hard to trying to be transparent with the customer.
These arent margin ground, we are truly working to just pass through inflationary pressures that we see so we're very transparent with the cost pressures that we're getting and I think our customers have been.
Willing and understanding to accept.
We continue to work together as partners. They are never easy conversations, but I think the fact that we're being transparent as hoping in the conversations.
Got it helpful last one and I'll jump back with any follow ups, but.
Given the balance sheet remains still really strong.
The increased cash flow guide for the year.
Do you expect or some working capital to catch up a little bit in the back half of the year.
Yes.
Yes.
Any thoughts about maybe being more aggressive upfront in terms of the share buyback is that your expectations for the remainder of the year or are you being cautious if in case there are any darker clouds on the horizon.
Economic or business perspective. Thanks.
No great question.
As I mentioned in our comments I think.
We have seen and strengthen our cash flow, especially as we expected going into the second half of the year. It's the way it typically works.
Considering where our trading is that today, we think.
We think our long term prospects not only this year, but.
We expect in terms of execution on a go forward basis.
The repurchase of our stock a very.
Smart by and so I would anticipate upfront that we probably will be more aggressive.
Definitely at these levels.
Got it very helpful. I appreciate it I'll follow up with any others.
Your next question comes from.
<unk> with Sidoti and company your line is open.
Hey, good morning, George and Scott.
Good morning, good morning.
Could you just speak to European demand what are you hearing about the impact of energy costs on on consumer confidence and have you seen any change in consumer confidence in Europe over the past three months.
I think that there is absolutely.
So nervous nervousness I don't know if its completely translated into us seeing any decline in demand at this point, but.
Youre hearing signs it will start.
More with energy cost.
And really energy disruptions because.
Just in the markets that we serve today.
Natural gas is a huge.
Two making glass so those things are where we think it will be hit first from.
From a consumer side, you hear nervousness, but the demand is still there.
To some to some extent it becomes even a positive a little bit for us at least from the energy side because most of the products that we manufacture are higher end on the change so.
I think what it does do is when someone has to replace a window or a door.
We're actually evaluating energy even more so than they ever have and then that may be offsetting are spurring. Some additional demand we think thats actually a positive movement not only in Europe , but in North America on a go forward basis.
Got it that's helpful and I guess a broader question is just can you maybe speak to it.
The rate of inflation, youre, seeing and where youre seeing the greatest level of inflation across your various inputs.
I would say generally we are now starting to see some signs of the rate of inflation slowing in more areas than not.
I would.
Continue to say some of the chemical feedstocks.
Stabilizers.
Different inputs into our both space and vinyl products continue to be the biggest challenge.
Yeah, I can add a little bit to that one positive sign that we're seeing in the cabinet businesses.
The availability of Green lumber is improving towards that should help us.
Hit our numbers and execute on the margin expansion that we've laid out.
Okay got it and I guess just last one for me is.
I guess more more of a product question again, but.
How do you think your businesses may perform in a recessionary environment.
Again, a great question I will tell you as much as we're seeing record demand. We also spend an enormous amount of time and our leadership team being prepared and ready to react on the bank side I think the best data point that I can give you is our ability to control even happened during COVID-19, we know what triggers to pull.
And some estimates were very labor driven so it becomes more of a variable cost that we can back off I think.
Our performance during that even immediate sharp down period will translate well and we know how to do ups and downs.
We have plans prepared to go should we hit.
Got it I'll hop back into queue. Thank you.
Yes.
Next question comes from Reuben Garner with Benchmark company. Your line is open.
Thank you good morning, everybody.
Good morning.
I had a little bit of connection issues earlier.
It may be a repeat question, but from Dan but.
You mentioned pull forward Scott.
I'm trying to understand you said I think you said pull forward ahead of price increases and I think I was under the understanding that the bulk of your business was kind of contractually.
On a lag tied to the to the commodities. So did you guys.
Implement separate price increases and give notice it and you're starting to see orders pick up can you kind of just reconcile those.
Comments on me.
Yes without getting into specific details what I will tell you is.
And I think I've mentioned this on previous calls as well, there's really three avenues for us.
The pricing mechanisms that we currently use you have the index pricing, which does have the time lags and then you have.
The use of surcharges, if we can tie it to a specific input costs thats not one in a contractual index or finally discretionary.
Imminent price increases that are applied mainly.
Mainly to deal with labor inflation benefit inflation and things of those nature.
And those are.
Obviously arent contractual ignore bound by the 90 day lag.
However, we do have some negotiation periods, but so.
So we have put in.
The combination of all three of those.
And so I would tell you on based on the results there have been quite a few of the discretionary permanent price increases to help cover other areas that we've seen inflation.
Yes.
Got it.
Very.
I think that latter part is maybe less a little bit different here.
Clearly in the results.
Step up as well.
Okay.
The next thing I want to ask as you mentioned conversations with your customers and clearly you guys are feeling a little bit better about the second half of the year. Despite what's going on is there any way to gauge how much of.
Maybe that optimism about the next couple of quarters is tied to I know some of your areas.
Penetration in particular has been one of the more constrained areas.
Assuming they have a lot of backlog is that is that the case is that why you have.
Maybe increased visibility there any color on kind of what gives you the comfort that the second half in particular is going to kind of maintain.
Some strength.
Yes. So it is exactly that Ruben I think we're already one month through our third quarter.
And then when you look at our customers' backlogs that in many cases can extend up to three to six months.
Both in cabinets as well as any of the fenestration products.
<unk>.
I think demand is pretty pretty solid.
Not at all concerned on the revenue number, whom we don't typically get that level of guidance, but when you see those levels of backlogs exist. It gives us that confidence and so we monitor the backlogs quite heavily and if we start seeing some significant reduction in those.
We will be able to determine if demand starting to grow it should give us some visibility and time to prepare.
On the question.
What was asked earlier about as we get into a recession.
That will give us some indicators of what's going so well.
We feel pretty comfortable in our sight line at least for six months period now.
Got it.
Last one for me.
It's kind of a piggyback on.
The share repurchase question your balance sheets.
Great shape, and I know, you're you've got quite a bit of cash left to generate this year does.
How do you guys, what's the M&A landscape look like are you guys kind of.
Pulling back the reins a little bit just given the broader macro risks are you still willing to do a deal a sizeable deal. If you were to to find one our people more businesses more or less likely to kind of sell in this environment.
Yes, I would answer that we're not we're not pulling back in any way on FERC I think we are aggressively looking at opportunities in the market.
With that being said, however, I will say that we're being very diligent and.
And making sure that whatever we look at fixed the strategic plan that we've developed in our roadmap to go forward and grow its very defined and we will follow that.
From a pump and then we're going to make sure that we protect our shareholders by not overpaying and falling in love with something I would tell you generally valuations are still very high in both.
We scrub.
These opportunities with a pretty fine tooth comb and we're going to make sure. It's done for the right reasons and the right fit.
But we are not backing away from looking at it at all.
Perfect. Congrats on the results and outlook is good luck going forward.
Thanks.
And ladies and gentlemen, as a reminder to ask a question simply press star one on your telephone.
The next question is from Kenneth Zenner with Keybanc capital. Your line is open.
Good morning, everybody. This is Christian dialogue <unk>. Thank.
Thank you for taking my question.
Good morning, Good morning, Les last quarter, you guys mentioned, there is still room for expansion specifically in EMEA fenestration. It's clear you guys received some of that expansion. How do you feel about the potential left to expand those given the strong pricing and demand I know you mentioned margin expansion for the back half, but I think.
Broken down by segment, if you can.
And the potential grab that thank you.
That first part of your question we can.
Understand could you repeat it.
Sure.
In the MAA Fenestration section, just your ability and potential left to grab or expand margins given the strong pricing and demand.
Yes, so in our North American Fenestration segment, I think that's what she said.
Opportunities to expand margin.
Cross the different products in that segment I would say that.
We've talked in the past about the vinyl sensing product.
And we continue to get opportunities to quote more of that business that could drive some margin expansion for that vinyl business.
Our screen business.
I think that's going to be a matter of continuing to become more more operating efficient and we are pushing price there as well so theres some opportunity I think in the screens piece.
And then for space.
We've talked in the past the margin profile for that product is good.
I think you'd probably get some some leverage there with higher volumes. So.
So to the extent, we can grow volumes, there I think that would benefit on the margin side as well.
Great. Thank you and then lastly in terms of the three to six months backlog for your customers as part of that is still driven by labor constraints that they are seeing and do you guys have any visibility on the labor conditions is that improving as that stabilized I guess any color.
For those backlogs in the relation with the labor constraints.
So we don't.
Yes.
We don't get into the details of that discussion with our customers, but what we see labor is still a challenge, although we seem to be having a little more successes.
We've talked about in previous but I think that's being driven by more of things that we're doing internally.
To help retain as well as a difference in what we're trying to do to attract.
I think their backlogs are still really driven by.
Two things.
Installer labor.
So.
Not only labor in their facilities, but installation labor on the house builders.
A lot of open projects, New housing may have started to slow down, but theres still a lot that are in process. So.
It's just slow to get any product.
Through the chain.
And then you still got some some supply chain I mean.
A lot of our customers source things from Asia, and Shanghai Port was effectively closed for nine to 10 weeks.
Sure.
It's just really cost initiatives, so nothing to do with our product line.
Trying to get everything together.
For example in the cabinets they are not going to put in a cabinet I don't have.
The stove refrigerator and those types of things everything is going to go in and they time it often though that's been very challenging for the installation guys. So I think it's a combination of both Iot and supply chain.
Yes.
Great. Thank you very much.
I appreciate it thank you.
And this ends our Q&A session I will turn the call back to George Wilson for his final remarks.
I'd like to thank you all for joining the call today, and we look forward to providing an update on our next earnings call in September . Thank you.
And with that we and our program for today. Thank you for participating and you may now disconnect everyone have a great day.