Q3 2023 Quanex Building Products Corporation Earnings Call
Excluding the contribution from the LMI business, we purchased at the beginning of our fiscal year revenue would have been down approximately 15% year over year in this segment.
We estimate that volumes in this segment declined about 12% year over year with the remainder of the revenue decline versus Q3 of 2022 due to a decrease in price.
Adjusted EBITDA increased slightly to $27 $7 million in this segment compared to $27 1 million for the same period of 2022.
Which equates to margin expansion of 90 basis points year over year.
Operational and sourcing initiatives continue to result in benefits that are outpacing inflation, and giving us the ability to expand our margins the.
This group also continued to do a good job of controlling divisional SG&A, despite the lower volumes.
Our <unk> custom mixing business, formerly LMI continues to perform above expectations.
Yes.
We generated net sales of $55 4 million on our North American cabinet components segment during the quarter, which was 23, 6% lower than prior year.
This decrease was driven by lower volumes and lower index pricing for hardwoods we.
We estimate the volumes declined by approximately 16% in this segment year over year with the remainder of the revenue decline versus Q3 of 2022 due to a decrease in price mostly related to index pricing tied to the decline in hardwood costs.
Adjusted EBITDA was $5 4 million for the quarter compared to $5 6 million in the third quarter of 2020 to the time lag related to our hardwood index pricing mechanism. In this segment helped us with profitability. This quarter after hurting us on that front in Q3 of 2022, and we also did a good job of controlling costs and.
Q3 of this year.
These factors together led to adjusted EBITDA margin expansion of 200 basis points compared to the third quarter of 2022 in this segment.
Our European Fenestration segment generated revenue of $67 9 million in the third quarter, which represents a slight increase compared to $67 6 million in the third quarter of 2022.
We estimate the volumes declined approximately 6% year over year in this segment.
While pricing was up by approximately 3% and positive foreign exchange translation impact came in at about 3% as well.
Adjusted EBITDA came in at $18 6 million for the quarter compared to $12 $1 million in third quarter of 2022 pricing held up nicely during the quarter and we continue to perform well from an operational standpoint, which led to adjusted EBITDA margin expansion of 940 basis points year over year.
Market softness was offset by share gains in our U K vinyl extrusion business as well as normalized buying from our European spacer customers as inventory rebalancing projects appear to have come to an end.
Continued improvements in operational metrics combined with sourcing initiatives and pricing carryover all contributed contributed to realizing margin expansion in this segment.
Moving onto cash flow and the balance sheet cash provided by operating activities improved to $64 1 million for the third quarter of 2023, which represents an increase of 24% compared to $51 7 million for the third quarter of 2022.
We did a very good job managing working capital and the value of our inventory continued to decrease during the quarter due to easing raw material inflationary pressures, which had a positive impact on working capital.
Free cash flow was $56 7 million for the quarter, which was another record and represents an increase of 23, 3% compared to $46 million, we generated in Q3 of last year.
Our balance sheet continues to be strong our liquidity keeps improving and our leverage ratio of net debt to last 12 months. Adjusted EBITDA was <unk> three times as of July 31 2023.
Excluding real estate leases that are considered finance leases under U S. GAAP, we are essentially net debt free.
As George mentioned, we are able to repay $25 million of debt during Q3.
We will remain focused on generating cash paying down debt 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 always the goal is to create shareholder value.
Based on year to date results conversations with our customers and recent demand trends, we are updating our guidance for fiscal 2023 as follows net.
Net sales of $1 <unk> 5 billion, adjusted EBITDA of $150 million to $155 million.
<unk> tax rate of 20%, which is lower than previously indicated mainly due to a larger portion of our income being subject to a 10% preferential tax treatment in the U K and.
In addition, our guidance for free cash flow is now 90% to 95 million for fiscal 2023, which would be a record for quanex and is about 50% higher than prior guidance driven by improved results and solid working capital management.
From a cadence perspective for the fourth quarter of this year versus the fourth quarter of last year, we expect revenue to be down 3% to 4% on a consolidated basis.
By segment for the fourth quarter of this year compared to the fourth quarter of last year, we expect revenue to be up 1% to 2% in our North American Fenestration segment.
Down, 23% to 24% and our North American cabinet components segment, and up 8% to 9% and our European Fenestration segment.
On a consolidated basis adjusted EBITDA margin is expected to be up 250 to 350 basis points in the fourth quarter of this year compared to the fourth quarter of last year.
Operator, we are now ready to take questions.
Certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please wait while we compile our Q&A roster.
And our first question will.
We will be coming from Steven Ramsey of Thompson Research Group. Your line is open.
Hi, good morning, maybe to start with on the customer inventory rebalancing in fenestration not being a headwind any more kind of going forward do you think customers intend to run light on inventory for a time of day discussed the factors that will govern their restocking.
Plans.
In the future.
Hey, good morning, Stephen.
In terms of the customer.
Inventory rebalancing.
Thank all of our customers now that the supply chain has noticeably improved across the board I think that they will and do feel comfortable running at lower levels of inventory. So but I think they are at that point already I think most companies haven't been very aggressive of balancing their working capital not unlike us in that.
They'll continue to run at these levels. The good thing with that is I think we are at a point that we are at that stable level now. So I don't think we'll see any impact and what we see right now and in the near future as a normal ordering pattern on a go forward basis.
Okay got you and then on the North America operational in sourcing benefits that helped this.
Our completed quarter, how much more do you have on that journey.
Going forward and when do you start lapping the benefits of that in in the P&L.
So when we look at our indexes.
Because they are time based and usually trigger on either a 30 60 or 90 day lag depending on the customers and whatever.
The index pricing mechanism.
Sure.
The point in time, where the cost curve flattens out that's when we'll start to see the bottom of that so as long as raw materials continue to trend down.
I think we'll always be ahead of it at the point in time that it flattens or starts to tick back upwards again.
When youll see.
Kind of a reconciliation or an equilibrium as it relates to pricing and the timing of purchases with raw materials.
Okay helpful. And then last quick one for me how much was mix impact to third quarter results and how much is mix.
Bedded in the fourth quarter guidance.
I think what we saw from a third a third quarter perspective is that really mix did not have much of an impact at all thats been pretty consistent.
Versus prior.
Higher quarter.
The additional space or sales I think probably plays a little part, but not meaningful and I would suspect that going into our fourth quarter, we won't see much of an impact on mix as well, it's pretty consistent with where we're at and what we've planned and where we guided.
Okay.
That's helpful. Thank you.
One moment for our next question.
Okay.
And our next question will come from Julio Romero of Sidoti <unk> Company. Your line is open.
Thanks, Hey, good morning, everybody.
Maybe just start on the European segment is really impressive.
Margin performance there.
Might've been your best margin performance in that segment and in company history.
Can you talk about a couple of drivers of that margin price operational efficiencies and the share gains in vinyl extrusion can you maybe rank order those drivers and talk about.
And how sustainable to the European margin go forward is.
Hello, Good morning.
In terms of our European margins. It was a very good quarter and a lot of it has to do with timing.
Where.
We were behind.
In pricing.
During the previous year and so as as we move forward what we're starting to see now is the timing impact of the price increases that we put through on a go forward basis, I think we will be able to hold some margin I do see that.
We will see pressure so.
I think we expect that that margin percentage may retreat, a little bit and as raw materials drop and.
No.
Discussions with customers go forward, we will be in a position I think pricing and margins will be pressure on a go forward basis.
Okay got it and then.
<unk>.
Could you maybe just talk about the LMI integration.
How much of how much revenue is expected to.
<unk> in the fourth quarter and.
Any progress update on the potential revenue synergies there.
So let me take that back.
Backwards so on the synergies we had previously.
<unk> disclosed that we had exceeded the $500000 a year synergy target I think as we continue to dig and learn more about that business.
We have we have realized more synergies and that probably between 500000 and $1 million I think theres still some some digging to doing some work to do there, but that business continues to perform very well as far as <unk>.
Revenue from that business in <unk> as you know, we don't break it out by product line Thats, just lumped into to NAF.
But it would it.
It would probably be similar to <unk>.
Okay, and then and then that's really helpful. And then the 501 million synergies achieved or are they all costs related or are there.
Revenue synergies in there as well.
No at this point, they're all they're all cost related.
Synergies.
<unk>.
Initiatives that we have from a revenue generating perspective, they're going to take a little longer although.
We're excited about those opportunities on a go forward basis, but.
In terms of time, it takes to qualify new customers and new materials, it's going to take a little longer than we would expect those.
Benefits to probably start impacting next years revenue probably mid year.
Yes.
Got it really helpful. And then just last one for me you upped your cash flow expectation for the year.
You paid down some debt.
How does the improved financial profile kind of.
To help you think about go forward.
Cash deployment.
Yeah.
I think we'll continue to stay on the strategy that we have I think.
With the interest costs, where they are at will continue to pay down debt because I think that.
<unk> is absolutely.
<unk> for us.
But we will continue to also invest in some new revenue generating opportunities we've invested a little more in R&D and we're doing some things on that side for organic growth. We will continue to look pretty pretty heavily.
At opportunities for inorganic growth, although again as we've talked about in the past we will make sure that if we do pursue anything that it will hit.
The metrics and the targets that we're looking to to meet our strategy objectives.
And then finally.
If we continue to be clicking along at the same cash flow generation into the fourth quarter.
We will continue to have discussions with the board on our dividend policy.
I would probably rank those.
As cash cash debt opportunistically buying back stock in the market.
And what open times as a reminder, we don't have any sort of structured buyback plan. So we have to be opportunist opportunistic in the market and then obviously the growth so I would prioritize them in that ranking right now.
Really helpful I'll pass it on thanks very much.
Thank you.
And I would now like to turn the conference to George for closing remarks.
I'd like to again, thank everyone for joining the call today, and we look forward to providing an update on our next earnings call in December . Thank you.
And this concludes today's conference call. Thank you for participating you may now disconnect.
Thanks.
Okay.
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Unnamed Speaker: including the contribution from the LMI business we purchased at the beginning of our fiscal year. Revenue would have been down approximately 15% year over year in this segment. We estimate that volumes in this segment declined about 12% year over year with the remainder of the revenue decline versus Q3 of 2022 due to a decrease in price.
Unnamed Speaker: Adjust the EBITDA increase slightly to 27.7 million in this segment compared to 27.1 million for the same period of 2022 which equates to margin expansion of 90 basis points year over year. Operational and sourcing initiatives continue to result in benefits that are outpacing inflation and giving us the ability to expand our margins. This group also continues to do a good job of controlling the visual SGNA despite the lower volumes. Our Quanex custom mixing business, formerly LMI, continues to perform above expectations.
Unnamed Speaker: We generated net sales of 55.4 million on our North American Cabinet component segment during the quarter which was 23.6% lower than prior year. This decrease was driven by lower volumes and lower index pricing for hardwoods. We estimate the volumes declined by approximately 16% in this segment year over year with the remainder of the revenue decline versus Q3 of 2022 due to a decrease in price, mostly related to index pricing tied to the decline in hardwood costs.
Unnamed Speaker: Adjust the EBITDA was 5.4 million for the quarter compared to 5.6 million in the third quarter of 2022. The time lag related to our hardwood index pricing mechanism in this segment helped us with profitability this quarter after hurting us on that front in Q3 of 2022 and we also did a good job of controlling costs in Q3 of this year. These factors together led to a justity but a margin expansion of 200 basis points compared to the third quarter of 2022 in this segment.
Unnamed Speaker: Our European Finestration segment generated revenue of 67.9 million in the third quarter which represents a slight increase compared to 67.6 million in the third quarter of 2022. We estimate the volumes declined approximately 6% year over year in this segment while pricing was up by approximately 3% and positive foreign exchange translation impact came in at about 3% as well. Adjust the EBITDA came in at 18.6 million for the quarter compared to 12.1 million in the third quarter of 2022.
Unnamed Speaker: Pricing held up nicely during the quarter and we continue to perform well from an operational standpoint which led to adjusted EBITDA margin expansion of 940 basis points year over year. Market softness was offset by share gains in our UK vinyl extrusion business as well as normalized buying from our European space or customers as inventory rebalancing projects appeared have come to an end. Continued improvements in operational metrics combined with sourcing initiatives and pricing carry over all contributed to realizing margin expansion in this segment.
Unnamed Speaker: Moving on to cash flow and the balance sheet cash provided by operating activities improved to 64.1 million for the third quarter of 2023 which represents an increase of 24% compared to 51.7 million for the third quarter of 2022. We did a very good job managing working capital and the value of our inventory continued to decrease during the quarter due to easing raw material and inflationary pressure, with a positive impact on working capital.
Unnamed Speaker: Free cashflow was $56.7 million for the quarter, which was another record and represents an increase of 23.3% compared to $46 million we generated in Q3 of last year. Our balance sheet continues to be strong, our liquidity keeps improving and our leverage ratio of net debt to last 12 months adjusted EBITDA was 0.3 times as of July 31st, 2023. Excluding real estate leases that are considered finance leases under US gap, we are essentially net debt free.
Unnamed Speaker: As George mentioned, we are able to repay 25 million of debt during Q3. We will remain focused on generating cash, paying down debt, and opportunistically repurchasing our spot. We will also maintain our focus on growing the company through organic and organic and innovative growth opportunities as they arise while continuing to preserve our healthy balance sheet. As always, the goal is to create shareholder value.
Unnamed Speaker: Based on year-to-date results, conversations with our customers and recent demand trends, we are updating our guidance for fiscal 2023 as follows. Net 155 million, tax rate of 20%, which is lower than previously indicated, mainly due to a larger portion of our income being subject to a 10% preferential tax treatment in the UK. In addition, our guidance for free cash flow is now 90 to 95 million for fiscal 2023, which would be a record for Q1X and is about 50% higher than prior guidance, driven by improved results and solid working capital management.
Unnamed Speaker: From a cadence perspective, for the fourth quarter of this year versus the fourth quarter of last year, we expect revenue to be down 3% to 4% on a consolidated basis. By segment for the fourth quarter of this year, compared to the fourth quarter of last year, we expect revenue to be up 1% to 2% in our North American component segment, and up 8 to 9% in our European administration segment. On a consolidated basis, adjusted EBITDA margin is expected to be up 250 to 350 basis points in the fourth quarter of this year compared to the fourth quarter of last year.
Operator: Operator, we are now ready to take questions. Certainly, as a reminder to ask the 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. Please wait while we compile our Q&A roster.
Steven Ramsey: And our first question will be coming from Stephen Ramsey at the Thompson Research Group.
Unnamed Speaker: Your line is open.
Steven Ramsey: Hi, good morning. Maybe you start with on the customer inventory rebalancing in registration, not being a headwind anymore. Kind of going forward. Do you think customers intend to run light on inventory for a time? Have they discussed the factors that will govern their restocking plans in the future?
Unnamed Speaker: Good morning, Steven. In terms of the customer inventory rebalancing, I think all of our customers now that the supply chain has noticeably improved across the board, I think that they will and do feel comfortable running at lower levels of inventory. But I think they're at that point already. I think most companies have been very aggressive of balancing their working capital, not unlike us, and that they'll continue to run at these levels.
Unnamed Speaker: The good thing with that is I think we are at a point that we are at that stable level now, so I don't think we'll see any impact. And what we see right now and in the near future is a normal ordering pattern on a go-forward basis.
Unnamed Speaker: Okay, that's it.
Unnamed Speaker: And then on the North America operational and sourcing benefits that help this completed quarter, how much more do you have on that journey going forward and when do you start lapping the benefits of that in the PNL? So when we look at our indexes, you know, because they are time-based and usually trigger on either a 30, 60, or 90-day lag, depending on the customers and whatever the index-pricing mechanism is, the point in time where the cost curve flattens out, that's when we'll start to see the bottom of that.
Unnamed Speaker: So as long as raw materials continue to trend down, I think we'll always be ahead of it. At the point in time that it flattens or starts to tick back upwards again, that's when you'll see kind of a reconciliation or an equilibrium as it relates to pricing and the timing of purchases with raw materials.
Unnamed Speaker: Okay, helpful. And then last quick one for me, how much was mixed and impact to third quarter results and how much is mixed embedded in the fourth quarter guidance? I think what we saw from a third quarter perspective is that really mixed did not have much of an impact at all home. It's been pretty consistent. You know, versus prior quarter, you know, the additional space or sales, I think probably plays a little part but not meaningful. And I would suspect that going into our fourth quarter, we won't see much of an impact on mix as well. It's pretty consistent with where we're at and what we've planned and where we've guided.
Unnamed Speaker: That's helpful.
Unnamed Speaker: Thank you.
Unnamed Speaker: Thanks.
Operator: One moment for our next question.
Julia Romero: And our next question, we'll come in from Julia Romero of the Dodian Company. Your line is open. Thanks.
Julia Romero: Hey, good morning, everybody. Maybe to start on the European segment, you know, it was really impressive. Margin performance there might have been your best margin performance in that segment in company history. You talked about a couple of the drivers of that margin, price, operational efficiencies, and the share gains in vinyl extrusion. Can you maybe rank order those drivers and talk about the confidence and how sustainable the European margin go forward is?
Unnamed Speaker: Good morning, Julio. In terms of our European margin, it was a very good quarter, and a lot of it has to do with timing. We were behind in pricing during the previous year, and so as we move forward, what we're starting to see now is the timing impact of the price increases that we put through. On a go-forward basis, I think we will be able to hold some margin. I do see that we will cease pressure, so I think we expect that that margin percentage may retreat a little bit, and that as raw materials drop, and discussions with customers go forward, we will be in a position that I think pricing and margins will be pressured on a go-forward basis. Okay, you got it.
Unnamed Speaker: And then, could you maybe just talk about the LMI integration? How much revenue was expected from LMI in the fourth quarter and any progress update on the potential revenue synergies there? Let me take that backward. So on the center, we had previously disclosed that we had exceeded the $500,000 a year synergy target. I think as we continue to dig and learn more about that business, we have realized more synergies than that, probably between 500,000 and a million.
Unnamed Speaker: I think there's still some digging to do and some work to do there, but that business continues to perform very well. As far as revenue from that business and 4Q, as you know, we don't break it out by product line, that's just lumped into to NAF, but it would probably be similar to 3Q. Okay, and then that's really helpful, and then the 500 to 1 million synergies achieved, are they all cost-related?
Unnamed Speaker: Are there revenue synergies in there as well? Now, at this point, they're all cost-related synergies. The initiatives that we have from a revenue generating perspective, they're going to take a little longer, although we're excited about those opportunities on a go-forward basis, but in terms of time it takes to qualify new customers and new materials, it's going to take a little longer. We would expect those benefits to probably start impacting next year's revenue, probably mid-year. Got it, really helpful.
Unnamed Speaker: And then just the last one for me is you up to your cash flow expectation for the year. You've paid down some debt. How does the improved financial profile help you think about go-forward cash deployment? I think we'll continue to stay on the strategy that we have. You know, I think with the interest cost where they're at, we'll continue to pay down debt, because I think that that is absolutely a smart move for us.
Unnamed Speaker: But we'll continue to also invest in some new revenue generating opportunities. We've invested a little more in R&D and we're doing some things on that side for organic growth. We'll continue to look pretty heavily at opportunities for inorganic growth. Although, you know, again, as we've talked about in the past, we'll make sure that if we do pursue anything that it will hit, you know, the metrics and the targets that we're looking to meet our strategy objectives.
Unnamed Speaker: And then finally, you know, if we continue to be clicking along at the same cash flow generation into the fourth quarter, you know, we'll continue to have discussions with the board on our dividend policy. But I would probably rank those as cash debt opportunistically buying back stock in the market. In what open times is a reminder, we don't have any sort of structure buyback plan. So we have to be offered to miss opportunistic in the market and then obviously the growth. So I would prioritize them in that ranking right now. Really helpful.
Unnamed Speaker: I'll pass it on. Thanks very much.
George Wilson: And I would now like to turn the conference to George for closing remarks. I'd like to again, thank everyone for joining the call today and we look forward to providing an update on our next earnings call in December. Thank you. And this concludes today's conference call. Thank you for participating. You may now disconnect. Thank you very much. Thank you.
Unnamed Speaker: Thank you for your time, and I'll see you in the next video. [inaudible] Thank you for your time, and I'll see you in the next video.