Q3 2022 Quanex Building Products Corp Earnings Call
Yeah.
Good day and thank you for standing by welcome to the Q3 2022 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 I would now like to hand, the conference over to your speaker today, Scott Gilkey Senior Vice President 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.
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 Paris posted to our website.
I'll now discuss our financial results on a consolidated basis, followed by comments on the results for each operating segment.
On a consolidated basis, we reported net sales of $324 million during the third quarter of 2022, which represents an increase of 15, 8% compared to $279 9 million during the third quarter of 2021 the.
The increase in revenue was mostly attributable to higher prices related to the pass through of raw.
Material cost inflation.
Net income increased by 94% to $25 9 million or <unk> 78 per diluted share during the third quarter of 2022 compared to $13 6 million or <unk> 41 per diluted share during the third quarter of 2021.
On an adjusted basis EBITDA for the quarter increased by 34, 3% to $44 2 million compared to $32 9 million during the same period of last year.
This equates to adjusted EBITDA margin expansion of approximately 180 basis points year over year.
The increase in earnings for the three months ended July 31, 2022 was largely due to increased pricing and surcharges related to the pass through of raw material cost inflation and higher volumes in the North American Fenestration segment.
Now for our results by operating segment.
We reported net sales of $184 7 million and our North American Fenestration segment for the third quarter of 2022, which represents growth of 25% compared to the third quarter of 2021.
The increase in revenue was primarily driven by an increase in price and raw material surcharges, along with increased volume.
We estimate that around half of the revenue growth in this segment was due to an increase in volume and the remainder was due to an increase in price.
Adjusted EBITDA was $27 1 million in this segment are 48, 7% higher than prior year.
We realized margin expansion year over year in this segment and we expect that to continue through Q4 as pricing continues to catch up to inflationary pressures.
We reported net sales of $72 5 million in our North American Cabinet components segment in Q3 of 2022, which was 17% higher than prior year.
The entire increase was driven by price as volumes declined.
Customers are working down their backlogs as demand softens in the segment.
The increases in hardwood index pricing as well as discretionary pricing actions offset the volume decline resulted in revenue growth for the quarter.
Adjusted EBITDA was $5 6 million for the quarter, which represents an increase of 126, 6% versus prior year and resulted in margin expansion of approximately 370 basis points.
Similar to <unk> timing of price increases better availability of green lumber.
Improvements in lumber yield and labor efficiency.
What are the main drivers of the positive results in the quarter.
Once again as a reminder, we have material index pricing mechanisms in place in this segment, but they typically have a 90 day lag.
It will be a challenge to realize margin expansion year over year in Q4 in this segment due to the fact that we have a tough comp, but also because demand continues to soften and we expect hardwood prices to reset lower come October one.
Our European Fenestration segment reported revenue of $67 6 million in the third quarter.
Which represents a decrease of four 9% year over year. However, excluding foreign exchange impact this would equate to an increase of eight 7%.
All driven by increased pricing as volumes declined.
Adjusted EBITDA came in at $12 1 million for the quarter, which was 15, 8% lower than prior year.
We currently expect revenue to decrease in this segment in Q4 versus the comparable quarter of 2021.
Due to the foreign exchange impact and a softer demand backdrop in Europe , but we anticipate that we can protect margins as price increases continue to capa catch up to inflationary pressures and we flex our cost structure appropriately.
Moving onto cash flow and our balance sheet cash provided by operating activities was $51 7 million for the third quarter of 2022 compared to $18 5 million for the third quarter 2021.
The value of our inventory continued to increase during the quarter due to inflationary pressures, which had a negative impact on working capital, but we were still able to generate free cash flow of $46 million for the quarter.
Mainly due to the significant increase in net income.
We were able to repay $25 million in bank debt and repurchased $5 million of our common stock during the quarter.
Okay.
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> one times as of July 31 2022.
In the near term, we will remain focused on generating cash and Opportunistically repurchasing our stock. We will also maintain our focus on growing the company through organic inorganic and innovative growth opportunities as they arise while continuing to preserve our healthy balance sheet.
As stated in our earnings release, we are reaffirming guidance for fiscal 'twenty, two which is based on our strong results year to date, coupled with ongoing conversations with our customers.
Overall demand for our products is still relatively healthy but in addition to the softness in Europe . We are beginning to see some signs of softness in our North American cabinet components business.
From a cadence perspective, the fourth quarter of this year versus the fourth quarter of last year. We now expect about 15% revenue growth in our North American Fenestration segment and.
And low single digit revenue growth in our North American cabinet components segment.
However, due to the foreign exchange impact and a continued softness in Europe . We now expect revenue to decline by about 15% and our European Fenestration segment in the fourth quarter.
As a reminder, on a consolidated basis, we guided to net sales of $1 8 billion to $1 2 billion, which we expect will generate approximately $150 million to $135 million and adjusted EBITDA in fiscal 2022.
I'll now turn the call over to George for his prepared remarks.
Thanks Scott.
I'll begin my commentary by discussing the current macroeconomic environment and how we believe this will impact <unk> going forward.
Yes.
The North America heightened mortgage rates increased economic uncertainty inflation concerns and upcoming midterm elections will continue to provide headwinds to consumer confidence in the near term.
However, let's not lose sight of the fact that the U S housing market is significantly under built with low inventories and the demand for residential housing is still strong.
We also expect the R&R market to remain healthy due to the age of existing housing and higher level of homeowner equity.
These factors will enable the building product sector to be somewhat resilient and rebound much more quickly from any downturn or recessionary environment.
Another factor, we believe will benefit <unk> mid to long term will be continued changes to building codes and standards as they relate to energy performance of building envelope.
The recently passed inflation reduction <unk> 2022 includes provisions where households can save up to 30% with tax credits for home construction projects on windows.
Doors insulation or other weatherization measures that prevent energy from escaping homes. Our current portfolio includes components used in products that accomplish those goals.
From a supply chain perspective, we have begun and expect to see continue to use and concerns over the supply of raw materials with significant downward pressure on costs.
Steel aluminum resins, and hardwoods have all begun to see decreases in input prices for the first time in over two years.
However, labor conversion and medical benefit costs will continue to see significant pressure and we will still require price pass throughs to offset those increased costs.
In the U K and Europe economic uncertainty high levels of inflation in energy supply concerns resolving from the war in Ukraine are all negatively impacting consumer confidence and slowing residential new construction and R&R activity.
The largest concern in the region in the near term will be both the supply and cost of energy in Continental Europe .
And any further erosion, which we can't predict could change our outlook.
Even with the near term uncertainty the quanex team continues to remain focused on the areas that we can control such as service and quality to the customer.
Effectiveness of our pricing mechanisms operational performance, working capital and cash management and cultural development and strengthening.
Over the past few years, we worked hard to build a foundation of people and processes that are prepared to adjust and react rapidly to changes are.
Our continued performance improvement through Covid, and the past year and a half of supply chain challenges highlight this fact.
We have followed our playbook and stay true to our mission of improving cash flow generation return on invested capital and profitability.
All while maintaining a strong balance sheet.
We are ready to move <unk> into the next phase of our evolution.
And it is this point that I would like to spend some time on now.
Last night, we posted an updated investor presentation to our website you can find this document under the investors tab of the site and in the presentations and events section.
The presentation will give you a good overview of who we are today in terms of financial metrics product offerings in the markets. We serve more importantly, the updated presentation provides a deeper insight into our core competencies and lays out a roadmap for our growth with purpose strategy and our planned pathway to achieve too.
Of revenue.
Let me be clear, we have a very defined strategy with optionality for growth.
The goal of our strategy is profitable growth to create further value for shareholders over time, all while maintaining a healthy balance sheet.
The presentation will also serve as a checklist that we review prior to making any investment decisions, whether it would be organic growth inorganic growth or growth through innovation.
The most important takeaway is our view that we are not a window and door company nor are we a cabinet company.
We are a manufacturing company with a broad set of core competencies. We just happened to currently serve primarily the window and door and kitchen and Bath cabinet markets.
While this may seem like a simple play on words I would argue that it is a game changing way to look at our business.
We believe that focusing on our core processes of compounded sealant mixing.
Extrusion metal roll, forming and metalworking rather than narrowly focusing on only opportunities in fenestration in cabinet markets will allow us to identify additional organic and inorganic growth opportunities and over time will improve our growth and profitability profiles versus our historical averages.
From an M&A perspective, our priorities will focus on identifying margin accretive businesses that either one expand our portfolio in current markets and reinforce our sector leadership for two are synergistic with our manufacturing capabilities and provide entry points into new growth oriented markets.
From an innovation perspective, our investments will be driven from our desire to build on our manufacturing core competencies in materials expertise, we will identify and develop new products and markets, while using current strengths and capitalizing on synergies.
We have effectively followed our roadmap over the past few years to improve operational and financial performance and now we will work to execute our new revised strategy to achieve above market growth continued margin expansion and most importantly increased shareholder value.
And with that operator, we're now ready to take questions.
Certainly as a reminder to ask a question. Please press star one one on your telephone.
And while we compile the Q&A roster.
One moment.
And our first question will come from Daniel Moore.
<unk> Securities Daniel Your line is open.
Thank you good morning, George Good morning, Scott.
Good morning.
Start a little bit backward looking for we get into some of the changes but.
Double digit volume growth in North American fenestration pretty impressive can you kind of break that down by product and end market vinyl screens et cetera, and how much. It reflects end market growth versus maybe some share gains.
So I would tell you that out of the products that make up that segment.
Screens and spacer drove that growth.
Probably more screens and spacer.
Vinyl profile window vinyl profiles.
Did not help but I will say that we've been talking for a while now about vinyl fencing.
And we started manufacturing and producing volume there that that contributed and will probably contribute more as we go forward to the vinyl extrusion piece.
Got it very helpful.
And then maybe just talk about the year and shifting gears, a little bit too to Europe .
The cadence of demand over the past several months.
There's been kind of slowing month over month and how much of the guide for fiscal Q4 is FX driven versus.
Kind of a volume decline expectations.
So most of the <unk>.
Softness or even the FX, obviously is in our European Fenestration segment, and if you look at our sales.
Chart on the very last page of the earnings release, and if you look at the footnote.
We had about a $9 million negative impact just due to FX in the quarter and that's meaningful because you take a what looks like a decrease in revenue on the topline from the income statements and it's actually an increase in revenue if you adjust for FX. So it's had a meaningful effect. It will continue to have a meaningful effect year over year in <unk>.
He knows what FX rates are going to do through next year, but it is definitely had a very significant impact on top line.
To add to Scott's comments I would say.
The market itself has remained surprisingly strong considering everything else was going out there when you neutralize the FX piece of it so.
The one thing that we continue to adjust for and you see.
Really in all the segments as the supply chain is also used up we've peeled back and reduced our lead times to our customers. So.
We're trying to net out the volume impact as well as people readjusting with with new lead times in their ability to not carry as much inventory. So we've seen some of our customers do a little stocking but.
Rypien market has shown some surprising resilience resiliency considering everything that's going on there.
Got it and then maybe just back to North America do you have an updated kind of.
Overall window shipment projection for calendar 'twenty two.
Ducker is obviously, but your thoughts there and what does your Crystal ball tell you at this stage for 2003.
Yes, Crystal ball is pretty cloudy.
For ducker their latest estimate for 'twenty two over 'twenty, one for window shipments.
Is barely above flat, so 2% growth this year versus last year.
And then like I said, I mean, we're actually going through our budgeting process right as we speak. So we're not we don't have a firm view on volume for next year across product lines, but I can tell you that from a revenue standpoint, just based on what we're seeing in the raw materials markets in costs coming down.
Think about we've talked in the past about adding surcharges in specific situations. Those we will start to Peel back surcharges. So revenue could very well be down next year versus this year. However, we are comfortable and confident that we can continue to expand margin.
Kind of as we stated at the beginning of the macroeconomic section.
We hope to be able to give you better clarity on what we see in 'twenty three in our December meeting with the midterm elections and some of the energy concerns that are still shaking out. Our hope is by that point in time, we'll have a little better clear a clear indication of what we're seeing for that point.
Alright last for me I'll jump out but.
Really helpful. The new slide deck.
And so you kind of.
Parse through it last night.
On the M&A front can you maybe talk a little bit about what sort of adjacencies.
That would be complementary to your manufacturing capabilities and you've talked about fencing, obviously multiple times in the past, but any others that you may have your eye on now would.
It would be helpful. Thanks again.
So.
As we look at our manufacturing processes and really as we said.
We are approaching M&A in two very distinct past, one will look to fill out.
Any holes in our current portfolio and the sectors that we serve today, but from an adjacency perspective looking at things like our mixing capabilities and theres different seals and gaskets that go into numerous.
Applications in other markets not only in building products.
Across many different markets so.
The fencing will continue to look at different types of PVC types of extrusion opportunities.
The whole intent is really.
<unk>.
Looking at that complete.
Core competency of manufacturing processes, and then going into different markets based on that so the opportunities where we can vertically integrate and then identify new markets I think.
Something.
We'll continue to look at Bill.
Building off of mixing extrusion metal forming roll forming.
And millwork those will be the key.
Very good thanks for the color.
Yes. Thanks.
Matt.
And our next question will come from Steven Ramsey Thompson Research Group Steven.
Your line is open.
Excellent.
To start with on.
The pressure North America Cabinetry volume coming down maybe some of this seems to be in conflict with some of the recent K CMA data in large producers recent results and outlook, maybe kind of talk to you.
Just any more details on the cabinetry volume outlook over the next two to three quarters.
So first thing to note is a further K CMA data.
Be cognizant of those are cabinet sales, so it doesn't really break out volume versus pricing obviously.
Prices driving any of those sales growth numbers same with our results, even though volume is down.
Yes in terms of complete volume I think youre seeing a couple of things.
Some of our customers, who recently announced earnings highlighted the same thing.
Greg continue to reduce their backlogs because of the availability of lumber becoming more abundant.
Starting to drop leaf.
Lead times are going back so we're really trying to identify is it truly.
A drop in revenue.
Units produced or is it really.
Customers.
Adjusting with.
The lead times and carrying less inventory, we know backlogs for our customers are starting to drop which would indicate that there is some softness in opening orders, but it also could indicate that I don't need to place orders eight months in advance now so there's still a lot of noise in the system we anticipate.
Continued softness in volume as well as pressure as Scott said on the index pricing.
But still a lot of noise to be able to determine exactly what sort of trends exist.
Okay helpful and then to make sure I understand on the financing opportunity.
Maybe you can kind of talk to how that is scaling up in the past couple of quarters just for some context, and then going forward in financing do you need to acquire or invest in <unk>.
<unk> that up or are you in a position to serve that market effectively with what you have as you increase your internal production.
So as we look at the fencing market.
We were evaluating it very heavy to begin with and where we felt like we added the most value I think.
Now it is a very segmented market.
<unk>.
Driven regionally hum by designs channels to market.
But when all of a sudden done the components that are manufactured and shipped to the installers and the wholesalers and the distributors are very common. So I think what we see is we're settling very nicely.
OE model again, I don't think at this point in time, you would ever see us getting into some high level of distribution.
But from a manufacturing and an OEM perspective to continue to serve.
All of those regions I think we're very well scaled up I don't think it would need significant investment and really at this point.
Its just getting our components I'll call the distributors in all of the different regions and showing our capabilities as a.
A very good OE supplier of PVC components.
We've acquired a couple of new customers and that continues to scale up so I think we're well along the paraffin and hopefully within them within the next year, we'll be able to start giving some.
Some references of size of that market for us, we're not ready to break that out at this point.
Soon.
Okay helpful. And then last question for me.
A shift in M&A and.
This execution plan, maybe first how soon do you see this playing out.
Especially in the context of <unk>.
<unk> outlook for housing in General and then this idea of taking your current capabilities and expanding them to different product set I guess why is now the time for this.
So first answer to your question on the timing of it.
There is really no specific timing.
We've done is we've built a business and we focus on our playbook as I mentioned to get the balance sheet and the fundamental processes and people and.
The processes in place within the organization. So that when we were ready to make this next step we could execute and Thats where were at today. So as we look forward there is no specific timeline.
We're going to look at opportunities.
By expanding our view outside of the fenestration in the continent markets on what I will tell you is we're seeing more opportunities or things that are adjacent and fit our core competencies. So I think we're getting better looks but we have no specific target on a timeline to make anything happen, we're going to continue to be diligent.
And making sure that whatever we do fits within our somewhat conservative operational view of leverage.
If it fits we put ourselves in a position we are pretty happy with the FERC.
By taking a more broader look in trying to build off of our core competencies.
We are seeing more opportunities and different looks at businesses that we really like.
Excellent. Thank you.
Thanks.
One moment.
And our next question will come from Julio Romero Sidoti.
One moment.
Yes.
And.
Julia Your line is open.
Alright.
Hey, good Hello.
Alright.
I'm Dr Audio Romero.
Question.
Basically there is a lot of concern on the macro level energy prices in Europe .
Basically just wondering like how daylight affecting operations in Europe .
Great question. So at this point.
We have not been impacted on supply.
And we've had a fixed contract in place.
<unk> has protected us from the cost side.
Up until this point that will expire in the near future.
We anticipate the impact to be.
Uh huh.
What I would call significant but one that we fully anticipate the path forward and through to our customers as everyone else in that region.
It will impact our operating performance and it is a significant level.
But we expect it to be margin neutral because we are at we anticipate passing those prices through.
Again at this point there.
And our manufacturing facility remind everyones in Germany.
No.
We continue to watch the situation.
Have not gone before rationing of any sort of natural gas at this point where were located.
But we'll continue to look at it but our intent is to pass along price.
It is incurred.
Thank you for the color.
My next question.
Basically how should we think about inventory levels, maybe stay at the same level of an hour or maybe come down on supply chain.
So I'm going to use.
It's different by segment I think value wise I would anticipate just as our inventory ramped up because of valuation of raw materials and input cost that youll see the same sort of downward pressure. So.
I don't see significant changes in terms of the volume of inventory, we carry but I think youll see some easing easing of the valuation of that inventory on a go forward basis.
We're fairly just in time so.
As long as there is availability of raw materials, we don't typically have a need to stock or over abundantly hold any certain specific inventory. So we monitor and measure our days of inventory very very closely and I don't expect a significant adjustment from.
From days, Bob value of inventory should come down.
Thank you so much for taking my questions.
Thank you. Thanks. Thank you.
Yes.
And our next question will come from Kenneth Zenner at Keybanc capital markets. Kennedy Your line is open.
Good morning, everyone. This is actually Krishna dialogue.
Container.
Okay. Good morning.
First question I have is just in regards to the European.
Talking in European penetration I guess, two part question just in regards to what happened in the quarter did you see that demand kind of slow as the months when buyer or did that kind of calm.
Yeah.
Kind of a more abrupt.
And then is that a function of maybe customers getting priced out with all the price increases or does that tie into some of the commentary you guys had on the pull forward last quarter.
So in terms of the timing I think what we've seen is a very slow.
Sure.
Not even really that noticeable as Scott mentioned I mean, when you neutralize for the exchange rate.
Revenue was actually up although volumes have come down slightly.
As I said, we've been very surprised that the resiliency of those markets.
Dropping faster than maybe we would have anticipated.
So.
I think it's been very general.
To this point.
Yes, I think a lot of it has to do with just discretionary income and the uncertainty over in Europe , mainly centered around energy costs going higher and just taken a safer approach from a consumer standpoint.
As we've talked about in the past the one thing that we noticed was energy cost.
Get more expensive globally.
That tends to be to some extent a little bit of.
A positive for us because the products that we serve from tend to be significantly more energy efficient than some of our competition or basic program. So when people are replacing things.
Energy payback to go to systems that use our components now were affordable so.
It's not all gloom and doom as it relates to that.
Lends itself to our products very nicely.
Alright, thanks for that that was actually my follow up question.
And then in regards to capital allocation.
Last quarter, you talked about the compelling view of share buybacks and you followed up that commentary with about $5 million in share buybacks. It sounds like with the slides I can say in the commentary from today that M&A, maybe it's kind of creeping up and that priority list can you just talk about is.
Buybacks still number one and kind of ranking of that order. Thank you.
I think at this point, we're not really prioritizing any you were looking at each opportunity.
<unk> opportunity is exist when we are in open periods.
We're very restricted because we don't have a <unk> program. So when we do buy stock where offer participate opportunistically in the market.
As you know there is.
<unk> on how many shares we can buy per day and with the low flow and it's a pretty low number so the.
And the impact that we can have on share buyback it can be relatively minimal home because we're not able to buy large amounts.
I would tell you I think we are looking at M&A, a little differently now.
Again, everything is project or data specific so I think we holistically look at our capital allocation strategy on a daily and weekly basis and determine what we want to do on a go forward basis.
We've put ourselves in a very good position to be able to utilize any of the tools that are available to us and capitalize on opportunities.
We feel like we're in a very good spot right now.
Great. Thank you for taking my questions.
Thanks.
I would now like to turn the conference back to George Wilson.
I'd like to thank everyone for joining us today, and we look forward to providing you an update on our full year results in our next earnings call. In December . Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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