Q1 2023 Quanex Building Products Corp Earnings Call
Speaker 2: Good day and thank you for standing by. Welcome to the first quarter of the 2020 QANEX Building Products 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 this session, you'll need to press star 1-1 on your telephone.
Speaker 2: Then you will hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Zielke, SVP, CFO , and Treasurer. Please go ahead.
Speaker 3: 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.
Speaker 3: Forward-looking statements and guidance discussed on this call and in our earnings release are based on current expectations.
Speaker 3: Actual results or events may differ materially from such statements and guidance, and QuantEx undertakes no obligation to update or revise any forward-looking statement to reflect new information or events.
Speaker 3: 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.
Speaker 3: I'll now turn the call over to George for his prepared remarks.
Speaker 4: Thanks, Scott, and good morning to everyone joining the call.
Speaker 4: As I begin my fourth year as CEO of Quantix, I look back and realize that there is yet to be a normal period during my tenure. Shortly after I stepped into this role, we were faced with the unprecedented challenge of a global pandemic.
Speaker 4: We overcame many unknown challenges in the early stages of that crisis, only to then face a rapid increase in demand, spurred on by government infusions of capital into economies around the world.
Speaker 4: coupled with a worldwide labor shortage that caused massive supply chain disruptions.
Speaker 4: Together, these factors tested the limits of every manufacturer's production capabilities and ultimately led to severe inflationary pressures over the last two years that largely continue today.
Speaker 4: In addition, longer than normal lead times during this period created strong protectionary demand amongst our customers that has resulted in inventory rebalancing and reduced demand now that our lead times have returned to normal levels.
Speaker 4: Through all this, the Quantix team has done a phenomenal job, and I'm extremely proud of what we have accomplished.
Speaker 4: I say all this as a backdrop to the following statement. I think we may have just experienced our first quote unquote normal quarter since before the pandemic.
Speaker 4: When comparing our first quarter 2023 results to the same period of 2019, we are able to see a seasonality pattern that is very similar.
Speaker 4: Most of our customers scheduled shutdown days during the holiday period of December 2022, and the startup periods in January 2023 were slow but began to pick up towards the end of the month.
Speaker 4: This scheduling pattern was the norm pre-COVID.
Speaker 4: but was not followed over the past couple of years because of the abnormally high demand that everyone was seeing in the market.
Speaker 4: From an order intake perspective, the only items that I would call out as one-offs during the most recent quarter are some weather impacts on the West Coast and the impact of some customers reducing their inventory levels due to our lead times returning to normal.
Speaker 4: Looking at the overall macroeconomic environment, we still believe that in the near term rising interest rates driven by the uncertain actions of the Fed, tight labor markets and the ongoing war in Ukraine will continue to impact consumer confidence and create some uncertainty in the markets we serve.
Speaker 4: However, we also believe that housing remains under built overall, and with the affordability of housing beginning to improve, an uptick in both the new construction and R&R markets is not out of the question.
Speaker 4: Globally, inflationary pressures have been mixed.
Speaker 4: We have realized significant price decreases in some of the commodity raw materials we consume that are tied to index pricing mechanisms.
Speaker 4: In other areas, such as PVC resin, we saw some decreases, but those costs have stabilized and have actually started to increase slightly more recently.
Speaker 4: PVC resin, we saw some decreases, but those costs have stabilized and have actually started to increase slightly more recently. On the flip side, we saw some decreases, but those costs have declined.
Speaker 4: Strong inflationary pressures still exist when it comes to labor and benefit costs.
Speaker 4: freight, energy, and other services.
Speaker 4: We will continue to aggressively work on productivity projects to help offset these pressures, but where needed we will increase price to protect margins.
Speaker 4: I will now provide some general comments on each of our reporting segments.
Speaker 4: Compared to Q1 of 2022, and excluding the contribution from the LMI mixing business we acquired in November , revenues in our North American fenestration segment declined by approximately 7%.
Speaker 4: Having said that, the comp in 2022 was tough, and seasonality was essentially non-existent over the last two years.
Speaker 4: We believe that a return to a more normal seasonality pattern, combined with customer-initiated programs to reduce their working capitals as lead times have improved, resulted in a softer year-over-year demand.
Speaker 4: Although the year-over-year comps for the next two quarters will also be challenging, we do anticipate that volumes will follow a more traditional seasonal pattern with increases into the spring and summer months.
Speaker 4: We believe this additional volume will also result in improved margin performance, as our more leveraged product lines are able to realize the volume benefits. Operational performance in this segment has been solid, and we've been able to adjust our lead times back to normal levels. We just need the seasonal demand to return as we expect it will.
Speaker 4: Looking at the LMI acquisition, and now four months into the integration, I am pleased to report that we are on track with our integration plan and fully expect to meet or exceed the synergy target of $500,000 that we announced at the time of acquisition. In our North American Cabinet components, we are looking at the LMI acquisition plan
Speaker 4: We anticipate this reduction in revenue will continue near term as the pricing of both hard and soft maple are still decreasing, triggering our raw material index mechanisms.
Speaker 4: From a margin perspective, we were able to maintain our improved operational performance levels and to capitalize on the timing of the lower cost lumber purchases. As a reminder, index pricing tends to be on a 90 day lag, so when lumber prices are dropping, we will be able to maintain our improved operational performance levels.
Speaker 4: we tend to benefit from the timing cycle as long as the prices don't drop too quickly.
Speaker 4: Finally, revenues in our European fenestration segment declined by 6.7% year over year. However, when you exclude the foreign exchange impact, revenue actually increased by approximately 4% compared to Q1 of last year.
Speaker 4: Although the macroeconomic headwinds of inflation and an energy crisis related to the Ukraine war are still present, this segment continues to perform well.
Speaker 4: share gains within our vinyl profile products, price increases to offset inflation, and the launch of new products continue to offset the headwinds.
Speaker 4: On that front, we are very excited about the recent launches of our new 090 and 090R window systems.
Speaker 4: a new vented head drip for Windows systems, and finally our new Genesis spacer system, which adds another spacer product to our already high performing super spacer product line.
Speaker 4: All three of these new products have generated much excitement in the market and will help address thermal and operating performance of insulating glass units and full window systems.
Speaker 4: In summary, we believe we are seeing a return to a more seasonal cadence of orders as global supply chains have improved and the world economy has become more accustomed to a new post-COVID normal.
Speaker 4: Near-term headwinds provide challenges and make it much more difficult to be able to provide narrow guidance ranges.
Speaker 4: However, we remain optimistic on the long-term outlook. The entire company remains focused on continuous improvement, serving our customers, and controlling the things that we can control.
Speaker 4: optimizing return on invested capital and working capital remain top priorities for improved cash flow generation, which will support our growth initiatives and align with our road to $2 billion strategy.
Speaker 4: We are well positioned to capitalize on growth opportunities as they arise, or to weather any type of prolonged macroeconomic downturn, if it's necessary. In short, the future of this company is bright despite near-term challenges.
Speaker 4: I'll now turn the call over to Scott, who will discuss our financial results in more detail and will finish up by providing some modeling assumptions and a cadence for Q2.
Speaker 3: Thanks, George. On a consolidated basis, we generated net sales of $261.9 million during the first quarter of 2023, which represents a decrease of 1.9% compared to $267 million during the first quarter of 2022. The decrease was mostly attributable to softer demand, customer inventory rebalancing initiatives,
Speaker 3: and foreign exchange translation impact. Overall, we believe that our results for the first quarter of 2023 indicate a return to what was normal seasonality prior to COVID, with Q1 being the lowest quarter of each fiscal year.
Speaker 3: Net income decreased to $1.9 million, or 6 cents per diluted share, for the three months into January 31, 2023, compared to $11.2 million, or 34 cents per diluted share, for the three months into January 31, 2022. After adjusting for one-time transaction and advisory fees,
Speaker 3: Net income decreased to $6.1 million, or $0.18 per diluted share for the quarter, compared to $11.3 million, or $0.34 per diluted share for the same period of last year.
Speaker 3: On an adjusted basis, EBITDA for the quarter decreased to 20.5 million compared to 24.4 million during the same period of last year.
Speaker 3: The decrease in earnings for the first quarter of 2023 was largely due to lower volumes, one-time transaction and advisory fees, foreign exchange translation, higher interest expense, and increased stock-based compensation expense, mostly due to stock price appreciation.
Speaker 3: Now for results by operating segment.
Speaker 3: We generated net sales of $153 million in our North American fenestration segment for the first quarter of 2023, which represents growth of 4.3% compared to the first quarter of 2022. The increase in revenue was driven by the contribution from the LMI custom mixing assets we acquired in November .
Speaker 3: of 2022. Excluding the contribution from LMI, revenue would have been down approximately 7% year over year, driven by a decrease in volumes due to softer market demand and customer inventory rebalancing initiatives.
Speaker 3: Adjusted EBITDA was $15 million in this segment, or about 8% lower than prior year. We do expect margins to improve in this segment as the year progresses.
Speaker 3: We generated net sales of $54.7 million in a North American cabinet component segment in Q1 of 2023, which was 12.3% lower than prior year. Once again, the decrease was driven by lower volumes.
Speaker 3: The adjusted EBITDA was 1.7 million for the quarter, compared to 2 million in the first quarter of 2022.
Speaker 3: Margins were consistent compared to the first quarter of 2022.
Speaker 3: Hardwood pricing started to come down towards the end of fiscal 2022 and continues to decline, which will press your revenue for the remainder of the year in this segment.
Speaker 3: Our European Finestration segment generated revenue of 55 million in the first quarter, which represents a decrease of 6.7% year-over-year. However, excluding foreign exchange impact, revenue in this segment increased by 3.9%, driven by higher pricing across all products.
Speaker 3: and share gains in our vinyl extrusion business.
Speaker 3: These items were partially offset by volumes declining in our spacer product line due to some customer inventory rebalancing initiatives and softer market demand. From an operational standpoint, this segment performed well during this quarter despite additional macroeconomic headwinds, including the war in Ukraine and related increases in energy costs.
Speaker 3: Adjustity Bada came in at $9.7 million for the quarter, compared to $10.4 million in the first quarter of 2022.
Speaker 3: Margins held up nicely and we expect continued success protecting margins in Europe as we flex our cost structure and push price to cover inflationary costs where appropriate in a softer market.
Speaker 3: As a reminder, we do not have pass-through mechanisms built into our contracts in Europe .
Speaker 3: Moving on to cash flow in the balance sheet, cash provided by operating activities improved significantly to $3.1 million for the first quarter of 2023, compared to negative $21.7 million for the first quarter of 2022.
Speaker 3: The value of our inventory decreased during the quarter due to easing raw material inflationary pressures.
Speaker 3: which had a positive impact on working capital. Free cash flow was negative for the quarter, which is not uncommon for our company in Q1. However, we realized an improvement of about $25 million year over year.
Speaker 3: 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 0.8 times as of January 31, 2023.
Speaker 3: excluding real estate leases that are considered finance leases under US GAAP. Our leverage ratio of net debt to last 12 months adjusted EBITDA was 0.4 times.
Speaker 3: Previously disclosed, we did borrow $92 million to acquire substantially all of the assets of LMI on November 1, 2022.
Speaker 3: we were able to repay $5 million of that towards the end of the first quarter because of our free cash flow position.
Speaker 3: In the near term, we will remain focused on generating cash, paying down debt, and opportunistically repurchasing our stock.
Speaker 3: We will 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.
Speaker 3: As stated in our earnings release, we are now prepared to provide official guidance for fiscal 2023, albeit with wider ranges than prior years, which is based on current macro fundamentals coupled with ongoing conversations with our customers. The near-term outlook for our business is cautious. Softening market demand, lower raw material pricing, and related surcharge rates are not
it remains positive. Guidance and modeling assumptions for fiscal 2023 are as follows.
Net sales of 1.12 billion to 1.16 billion.
adjusted EBITDA of $130 to $142 million.
depreciation and amortization of approximately 42 to 43 million.
SG&A of 120 to 125 million.
interest expense of $8 to $8.5 million.
interest expense of $8 to $8.5 million, a tax rate of 25%.
CapEx of 30 to 35 million.
and free cash flow of $50 to $55 million.
Looking to the second quarter of this year.
We expect market volume to improve versus the first quarter of this year, which follows normal seasonality.
from a cadence perspective, for the second quarter of this year versus the first quarter of this year.
We expect revenue to be up 2 to 4% on a consolidated basis. By segment for the second quarter of this year compared to the first quarter of this year, we expect revenue to be up 3 to 5% in our North American Finestration segment.
down 6 to 7 percent in our North American Cabinet component segment.
and up 12 to 14 percent in our European fenestration segment.
Adjusted EBITDA margin is forecasted to improve by 350 to 450 basis points on a consolidated basis in the second quarter of 2023. Again, this is compared to the first quarter of this year.
Operator, we are now ready to take questions.
Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile the Q&A roster. Our first question comes from the line of Daniel Moore.
CJS Securities, your line is open. Please go ahead. Thank you, George Scott. Good morning. Thanks for taking questions. Start with North American fenestration.
Can it give us any sense for the magnitude of the impact of customers rebalancing inventories last quarter and in the current fiscal Q2 so far? And they sense for kind of where we are in that process nearing the end likely to continue for a couple of quarters. Any color there would be great.
In terms of the magnitude, I don't think we're prepared publicly to break that out versus the volume drops, but in terms of where we're at in the process, we started seeing that.
de-stocking or inventory rebalancing initiatives really starting to take hold at the beginning of December has gone into January and early February . Knowing where we're at within our customers and during our visits, we think that that should start coming to an end here very soon, probably within this month and going into the next. So I think we'll see an end to that in this.
the trajectory of margins across the segments embedded in your fiscal 23 guide, given some of the moving parts with index pricing and how should we think about margins year over year in each of the three segments for the full year.
Yeah, I think for the full year, for our fenestration segments, we're going to be looking at the
year over year, even a margin.
even to margins, flattish to...
Maybe slightly down.
I mean, again, we're trying to protect margins in all segments, but I'd say for the cabinet component segment, there's going to be a little more pressure on margins for the full year.
And I think as we look at margins, and I hope what came across through our comments is
You know, going even back to 2019, you would see some fluctuations just based on seasonality because we do have a couple product lines that are more highly leveraged, such as spacers in the vinyl profiles that do, the profitability is very much correlated and tied to volume because of the fixed cost structure.
what we've said all along is on the backside of index pricing, as wood prices go down, the ability to get ahead of those pricing mechanisms gives us some short-term benefit. So I think we'll be working really hard, even with the drop on revenue, to be able to hold and sustain margins as much as possible in that segment.
That's really helpful. Maybe 1 more and I'll jump out in terms of revenue at the midpoint looking at sort of a low double digit decline organically year over year. How much of an impact is pricing in that kind of low single digit headwind versus volume?
Just trying to get the breakout of those expectations. Thanks. Yeah, that's tough to answer. I'd say so far, year to date, it's mostly been volume driven only because year over year, specifically in the first quarter, pricing was actually still up year over year. Obviously, as raw material...
Costs come down, pricing is going to be impacted more going through the year. So I think it'll start balancing out between volume and price probably more in the second half of the year.
Makes sense. I will jump back with any follow-ups. Thank you.
Thank you and one moment for our next question. Our next question comes from the line of Steven Ramsey with TRG. Your line is open. Please go ahead.
Hey, good morning. This is actually Brian Biroson for Stephen. Thank you for taking my questions. I want to start on cash generation. A lot of companies this year are taking
to highlight their cash generation abilities, especially compared to last year, which is a tough year. I think I've clicked on that a little bit in the prepared remarks and in the guidance. Can you just expand on how you're thinking about the free cash flow for the year, maybe cadence through the year, and items to keep in mind that are different from last year? Can you just expand on how you think about the free cash flow for the year?
Yeah, I mean, I think if you look at last year, there was a pretty large hit to working capital, mainly because of what was going on with the inventories and the inflationary pressures there. Obviously, that subsided, so we do expect that to benefit us this year. Historically, we generate most all of our cash in the second half of each fiscal year, but there's no reason to be firm.
I don't think this year is going to be any different. Thank you and follow up I guess would be just on the labor front. How are you guys thinking about labor through this kind of, call it a tough period here? It's easy to fire and protect margins, tough to hire then.
How are you guys thinking about the labor dynamic of protecting margins versus keeping that labor for the long term given the second half when things are expected to pick back up?
Yeah, you know, as we look at labor, and I think your point is spot on, it is difficult to get labor back when you lose it. So I think we've been very cautious on...
you know, reducing our labor workforce and our teammates at any of the facilities and we worked very hard to offset.
any sort of inflationary or margin pressures in other areas through continuous improvement and other other activities. We've deployed them in terms of really getting caught up in some of those activities that we've done in preparing for the...
increase in volumes that we do anticipate. If we get to a point where we feel...
that a permanent reduction in workforce is needed. We'll obviously pull that trigger, but our confidence level on where the market can go has really pushed us to look to find ways to offset costs in other areas before going to labor.
Thank you. I'll pass it on. Thanks. Thank you. And one moment for our next question.
And our next question comes from the line of Julia Romero with Fidoti. Your line is open. Please go ahead.
Thanks. Hey, good morning. George and Scott.
Thanks. Hey, good morning George and Scott. Um, yeah.
You know, how do you feel about the prospects to achieve price gains index rollbacks across the portfolio compared to say three months ago?
I think we continue to have success and that's because we're being very open and transparent with our customer base.
areas such as we notated in our script that are still very, very real. Labor and benefit costs, you're not seeing rollbacks in those areas. Freight is very much in everyone's face and continues. So I think, you know.
There's obviously pushback, but we go with data that's justified and being able to justify it in all means. So I think we've had continued success and we'll continue to work and keep the dialogue open with our customers. The other thing, it helps when we're showing that we are focused on...
productivity and finding ways to offset. We're also doing a very good job of trying to minimize what price increases we have to go and working with our customers to get the best value possible.
To this point, we've been successful. It's not just a gimme, but I think our performance and our continued transparency gives us confidence that we'll continue to be successful in pricing.
Okay, that's very helpful.
George, I think you touched on it earlier. Just trying to think about product lines in the North American fenestration segment from a leverage standpoint. I think our spacers and vinyl profile on kind of equal footing from a leverage standpoint, if you could just dig into that at all if you could.
Yeah, I think they're very, very similar in the fact that they're both extrusion processes, although they extrude different materials. So it's one of those things where—
the machines like to be run and taking things down for changeovers or even shut down during delays. Startups are expensive, scrap levels are high, so they're profitable when those extruders are running. So I would say the impact on leverage is very, very similar when comparing those two product lines versus media ranching.
a screen product which tends to be much more labor-paced. Thanks.
Thank you, and I'm showing no further questions, and I'd like to turn the conference back over to George Wilson for any further 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 early June . Thank you. Thank you everyone.
This concludes today's conference call. Thank you for participating. You may now disconnect.
conference call. Thank you for participating. You may now disconnect.
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