Q1 2024 Quanex Building Products Corp Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the first quarter 2020 for Quanex building products Corporation earnings Conference call. At this time, all participants are in listen only mode.
The speaker's presentation, there will be a question and answer session to ask a question during recession, you will need to press star one on your telephone.
He an automated message advising your hands race to withdraw your question. Please press star one again. Please be advised today's conference is being recorded I would now like turn the conference over to your first speaker today, Scott Jokey 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 chairman President and CEO.
This conference call will contain forward looking statements and some discussion of our 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.
Quanex undertakes no obligation to update or revise any forward looking statement to reflect new information or events.
For a more detailed description of our forward looking statement disclaimer and a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Please see our earnings release issued yesterday and posted to our website I will now turn the call over to George for his prepared remarks.
Thanks, Scott and good morning to everyone joining the call.
Before I start my discussion on the quarter I'd like to take a moment to publicly thank bill Griffiths for his many years of dedicated service to quanex.
Bill began his career with quanex as an independent director in 2009.
When the Quanex CEO resigned in 2013 Bill was asked by the board to take over as chairman and CEO and he held that role for more than six years.
He retired as CEO in January of 2020, and then served as chairman for the next four years.
He was instrumental in transitioning quanex from a largely commoditized metals company into a true building products manufacturing company.
His focus on developing a culture of safety continuous improvement and profitable growth positions us well for the success we are realizing today.
Thank you again bill for your commitment dedication and service to quanex and its employees customers and shareholders.
We wish you an iris all the best in retirement.
I'll now move on to my prepared remarks about our first quarter performance and our current outlook.
Overall, the quarter played out as expected.
Revenues were down year over year as markets reverted to a more normal seasonal pattern and customer inventory levels declined as lead times and supply chains have improved.
In addition, automatic index pricing mechanisms had a negative impact on revenue versus the prior year as raw material cost have declined.
Even with lower demand levels, we were able to realize margin expansion on a consolidated basis, mainly due to solid operational performance holding discretionary pricing lower stock based comp expense and lower interest expense.
We were very pleased with our operating cash flow generation, which enabled us to continue to pay down debt in the quarter, where we are typically.
We typically draw on our revolver.
Yes.
With respect to the overall macroeconomic environment. We continue to believe we will see an uptick in demand in the second half of the year.
In North America, New housing starts data has shown improvement and optimism is building around the prospect of lower interest rates later this year.
If and when the fed does take action to lower interest rates, we believe demand for our products will improve as customers gain confidence and choose to spend more money on housing.
In Europe, we believe market improvements will occur at some point, but well wired in North America due to the ongoing wars in Ukraine in Gaza and continued pressure on energy cost in these regions.
But regardless of the demand equation, we have shown over the past two years that the <unk> operating model is able to react quickly to produce favorable results.
In addition, the long term underlying fundamentals for residential housing continue to be very positive.
Globally inflationary pressures have been mixed.
Starting with labor costs, we have seen a slowdown in the rate of wage inflation is hiring in most markets have slowed.
For the sourced materials that are most impactful to quanex, we're seeing a stabilization in pricing and supply for aluminum steel and resins.
We are still seeing input cost pricing pressures for films and engineered adhesives and some of the chemical feedstocks.
For our cabinet component products, we are now starting to see upward pricing movements for some of the hardwood species, we purchase as lumber mills have reduced capacity in the market.
Finally from a logistics perspective, we have seen an increase in international shipping costs due to the disrupted shipping lanes in the middle East.
Yeah.
As we look forward to the rest of this year and into next year I'm still confident that we are well positioned to meet expectations and continue our track record of positive performance.
Our operations and supply chain teams are focused on servicing our customers and performing at a high level and are doing a fantastic job of generating operating cash flow.
From a growth and strategy execution point of view, our balance sheet is strong and ready to support growth projects as they arise.
We continue to identify areas of opportunities to execute on our profitable growth plan, both organically and inorganically.
Despite some short term macro challenges and the uncertainty caused in an election year. We are on track to achieve all of our objectives.
I will now turn the call over to Scott, who will discuss our financial results in more detail.
Thanks George.
On a consolidated basis, we reported net sales of $239 $2 million during the first quarter of 2024, which represents a decrease of eight 7% compared to $261 9 million during the first quarter of 2023.
The decrease was mostly attributable to softer market demand and lower pricing in North America, mostly in our cabinet component segment as pricing held up in our fenestration segments.
Net income increased to $6 2 million or <unk> 19 per diluted share for the three months ended January 31, 2024, compared to $1 9 million or <unk> <unk> per diluted share for the three months ended January 31 2023.
After adjusting for onetime items net income decreased slightly to $5 8 million or <unk> 18 per diluted share for the quarter compared to $6 1 million or again 18 per diluted share for the same period of last year.
On an adjusted basis EBITDA for the quarter decreased to $19 3 million compared to $20 5 million. During the same period of last year. However, we were able to realize margin expansion of approximately 30 basis points on a consolidated basis.
The increase in reported earnings for the three months ended January 31, 2024 was largely due to a decline in raw material costs, a decrease in stock based compensation expense and lower interest expense.
Now for our results by operating segment.
We generated net sales of $148 million and our North American Fenestration segment for the first quarter of 2024, a decline of three 3% compared to $153 million in the first quarter of 2023, driven by a decrease in volumes due to softer market demand.
We estimate the volumes in this segment declined by about 3% year over year with pricing holding up relatively well.
Adjusted EBITDA decreased slightly to $13 $7 million in this segment compared to 15 million for the same period of 2023.
Our quanex custom mixing business, formerly LMI continues to perform well and we're looking for ways to expand this business both organically and otherwise.
Our European Fenestration segment generated revenue of $49 4 million in the first quarter, which represents a decrease of about 10% compared to $55 million in the first quarter of 2023.
We estimate that volumes declined by approximately 12% year over year in this segment with pricing up approximately 1% and positive foreign exchange translation impact of about 2%.
Adjusted EBITDA increased and came in at $10 million for the quarter compared to $9 7 million in the first quarter of 2023.
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 250 basis points year over year.
Normalized buying from our European spacer customer support our result, as the inventory rebalancing projects that impacted the business last year are no longer present.
Continued improvements in operational metrics combined with sourcing initiatives and pricing carryover all contributed to realizing margin expansion in this segment.
We generated net sales were $43 1 million and our North American cabinet components segment during the quarter, which was 21, 1% lower than prior year. This decrease was driven by lower volumes and lower index pricing for hardwood we estimate the volumes declined by about 12% in this segment year over year.
<unk> with the remainder of the revenue decline versus Q1 of 2023 due to a decrease in price largely related to index pricing tied to the decline in hardwood costs.
Adjusted EBITDA was negative for the quarter in this segment compared to $1 7 million in the first quarter of 2023.
Positive operational execution is currently being masked by low volume, but we're hopeful for a rebound in this segment once consumer confidence is restored in the R&R market picks up.
Moving on to cash flow and the balance sheet cash provided by operating activities was $3 9 million for the first quarter of 2024.
Which represents an increase of 22, 9% compared to $3 1 million for the first quarter of 2023.
However, free cash flow decreased for the quarter due to higher capex spend compared to the first quarter of last year.
Our balance sheet continues to be strong our liquidity keeps improving and our leverage ratio net debt to last 12 months adjusted EBITDA was unchanged versus last quarter at <unk>, One times as of January 31, 2024.
Excluding real estate leases that are considered finance leases under U S. GAAP, we are net debt free.
As George mentioned, we were able to repay $5 million of debt during Q1, which isn't normal since we are typically a net borrower during our first fiscal quarter due to the seasonality of our business.
We will remain focused on generating cash and paying down what little debt. We have outstanding on our revolver. 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.
As referenced in the earnings release based on conversations with our customers recent demand trends and the latest macro data. We're now comfortable providing official guidance for fiscal 2024, which is as follows.
Net sales of approximately $1 1 billion.
Adjusted EBITDA of $145 million to $150 million.
Depreciation and amortization of approximately 44% to $46 million.
SG&A of $128 million to $130 million.
Interest expense of three $5 million to $4 million.
A tax rate of 20%.
And capex of $40 million to $45 million.
In addition, our guidance for free cash flow is $85 million to $90 million for fiscal 2024.
From a cadence perspective for the second quarter of this year versus the second quarter of last year, we expect revenue to be flat to down 2% on a consolidated basis.
By segment for the second quarter of this year compared to the second quarter of last year.
We expect revenue to be up 2% to 4% and our North American Fenestration segment.
Down, 2% to 4% and our European Fenestration segment, and down 11% to 13% and our North American cabinet components segment.
On a consolidated basis adjusted EBITDA margin is expected to be down 100 to 150 basis points in the second quarter of 2024 again compared to the second quarter of last year.
Operator, we are now ready to take questions.
Thank you and as a reminder to ask a question you will need to press star one one on your telephone and wait for them to be announce towards really a question. Please press star one again.
Please turn violent compile the Q&A roster one moment for your first question.
Okay.
Our first question comes from the line of Julio Romero from Sidoti Your line is open.
Hey, good morning, guys.
Good morning could you speak to Hey, good morning could you speak to what Youre hearing from the OEM customers in regards to repair and remodel trends and just talk about what you're hearing as to what Ken maybe improve demand in the second half of your fiscal year.
Yes.
The international.
Builder show was last week, we spent a lot of time talking to many of our different customers and others throughout the segment and I think.
The sentiment right now is that the.
Back half of the year, we'll see a pickup.
We are already seeing new construction data start to show some improvement.
But.
Everyone is convinced that the R&R demand is there it's pan out and that with any movement in interest rates.
On the downward side, which everyone believes will happen at some point in the back half of the year.
Youll see both new construction and R&R see an uptick R&R will probably lag a little bit.
To the new construction data, but everyone was extremely optimistic on what they see at the end of this year and going into next year.
Got it that's very helpful. There and then maybe can you speak to the guidance and what's embedded for the full year across the segments from a margin perspective.
How do you see kind of the trajectory playing out.
For the full year across the three segments.
I mean, we've mentioned a couple times now that on a consolidated basis margins will be pressured a little bit year over year 2024 versus 2023, but as a cadence through the year, we expect margins to improve as the year progresses, which is typical seasonality in our business.
Volume leverage operating leverage improves throughout the year and we expect the same this year, depending on the quarter. I mean, we gave some cadence for for <unk> will do the same for <unk> and <unk> as the year progresses, but as you are modeling you can expect margin improvement throughout the year.
Okay really helpful. There and then Scott the revenue guidance you gave for the North American Fenestration segment of up 2% to 4% year over year in the second quarter is a pretty nice step up.
Sequentially from Q1 can you maybe just talk about what's embedded there from a price volume perspective.
Yes.
Again typical seasonality, we start seeing a pickup towards the second part of the second quarter.
Price volume.
Volume is improving that's most of it we've been able to hold onto price for the most part we do expect some pricing pressure in the fenestration segments, both here and in Europe, However, volume should start to improve.
Improve which will obviously help <unk>.
Revenue and margins.
Okay, Great I'll pass it on and circle back with any follow ups. Thank you.
Thank you one moment our next question.
Yes.
And our next question comes from the line of Reuben Garner from benchmark. Your line is open.
Thank you good morning, everybody and congrats to bill on your retirement, if you enjoy it and George Congrats on your.
Move as well.
So I guess.
To start it looks like a continuation of a trend that we've seen in the last several quarters is what's kind of implied in your guidance, where we will see continued gross margin expansion. Despite some volume headwinds and.
It looks like some pricing headwinds as well or deleveraging on the SG&A line am I thinking about that the right way.
One and two is that is that largely driven by kind of the mix shift that youre seeing where cabinets.
Lower gross margin business and underperforming at the moment or are you still price cost positive just kind of walk me through how you get the assumption.
Okay.
So I'll give some general guidance that Ruben and first of all thanks for your kind words.
Hi.
<unk>.
As we progress through the year.
<unk> margin is very tied to the uptick in volume as you know.
Some of our processes are continuing to continuous type of extrusion process. So volume does play a big role in the gross margin of our business.
I think we'll continue to see that and feel very comfortable I think we're confident that we'll start to see some improvement in the volumes as well on the.
Cabinet side of our business, we're starting to see a little bit of that.
And as consumer confidence grows and Thats an area that tends to be focused on kitchen, and bath remodels. So so we're pretty confident in the ability of all of our segments.
To grow in terms of margin the one that'll be most pressured as Europe and Thats because of the continued.
Softness in that market as well as some pricing pressure that they continue to face.
And I guess on that note George the cabinet side.
Yes.
The optimistic outlook that you could see that business turn around.
Yes.
That's why the fenestration business are definitely outperformed over the last year.
So what do you think is driving that is it simply was there a pull forward demand from COVID-19 for cabinets and not necessarily in windows or something else.
Why do you think that the cabinet space is underperforming penetration.
Okay.
Do you think that there was some of the Covid pull forward, obviously I think a lot of people focused on some some remodeling in their house when when you are.
Constrained to being indoors or at least the work from home I think we did see a lot of that.
I think that that type of product tends to be a little more discretionary on the R&R side versus the fenestration.
If youre at a point, where you have to replace a window, where dori, you're effectively going to do it it's not as much as.
Our discretionary spend to some extent it is but not as much as the cabinet. So I think youre right. There was a pull forward effect and there is some some differences in terms of the demand.
Penetration versus cabinets in that regard.
And can you point to I know you guys check the industry data pretty closely like have you been outperforming in penetration because of some of your internal initiatives and maybe there's less of that in cabinets to be able to kind of outperform the underlying market at this point.
And Ben.
In our mind I think we've worked hard to go get some share I think performance during the Covid period.
Having.
Having used sourced.
Having a supply chain that's.
What I would say.
Been very structured to protect our customers from shortages in outages have helped the duplicity of processes across multiple facilities continues to help.
So I think we've been able to take advantage of that aspect.
Overall, though we may be a little ahead of some of the peer group.
Generally in line.
Okay, Great. Good luck guys I'll pass it on there.
Thank you.
Thank you one moment our next question.
Yes.
Our next question comes from the line of Steven Ramsey from Thompson Research Group your.
Your line is open.
Hi, This is Katherine Thompson, calling in for Stephen today.
And Bill best of luck.
For many years.
Best of luck in your next chapter.
Following up just on a few questions today, just within the U S.
Our components group.
Penetration could you discuss why you listen.
Non fenestration sales continued to show solid growth.
And the drivers there.
And overall contribution in your guidance.
So the markets that are non fenestration.
One of the larger ones, we participate in the <unk> market.
We also sell products into the solar market.
<unk> had some pretty good demand and tends to be.
A little bit.
Better on the profitability curve and then in addition, our QC.
The acquisition of LMI has been.
Extremely helpful and a Great addition to our group and that continues to be focused on many industries outside of penetration. It's a very diverse set of markets. It serves and they performed very strong within our first quarter. So.
As you know part of our strategy has been to.
So both bolster and build out our fenestration product portfolio as well as expand.
Grow into adjacent markets and I think what you're starting to see is the realization.
<unk> of that strategy and we will continue to build on those on a go forward basis.
<unk>.
Okay. Thanks, and then following up on the earlier.
Conversation just on residential R&R activity.
Could you clarify what parts.
Or at least talk to the parts of the business.
That is to existing home sales.
Versus new.
So on a consolidated basis were $65, 70% weighted to R&R.
Our European Fenestration segment, and our North American Cabinet components segment is definitely more weighted than that in total.
Okay perfect.
And then final question in the North American segment.
But toward a nine point we.
EBITDA margins were down 70 basis points year over year in our firm.
Yes, it kind of like mid teens results in the prior three quarters.
And then you talked about it earlier, but just kind of against that backdrop do you expect any tissue Sundar.
Sure.
Prior like you did in the previous year over the next quarters and getting back more specifically to that.
Low to mid teen range. Thank you.
Yes, and that has a lot to do with the seasonality of our business and that lower low watermark is typically first quarter with a decent jump in each.
Definitely in <unk> over <unk> and <unk> <unk> is typically could be better it could be in line with <unk>, depending on whether and whether or not we.
Hit winter earlier than expected, but yes, we expect margins to improve sequentially.
Okay, and then just one final question.
We were also at the builder show.
Best attendance I think in history.
A lot of M&A chatter.
The most that I've heard in many years.
What do you what are the how does the opportunity that you see from M&A standpoint for quanex.
Hi, how are you balancing that versus.
We purchased senior and shares.
So I think right now the way I would answer I think growth is.
A major focus for us on a go forward basis. So.
I think both organic and inorganic.
The expansion of existing product lines and growth into new businesses through acquisition is absolutely a priority and we've.
<unk> resources and time pursuing both sides of that.
I agree with you I think.
We have seen.
More activity in M&A opportunities start to arise.
I think the answer.
Ill give today is that we continue to remain very focused on.
The opportunities that we look at will continue to check the boxes.
Either building out our existing.
Markets.
Product support that add to the portfolio or expand into new things and those opportunities have also got to improve the margin profile of the business. So we're focused on on revenue growth through.
Adding.
Products in existing or new markets.
Improve the profitability profile of Quanex, and we will stay true to that mantra.
We have a solid business plan.
With or without M&A, and so we will be very diligent on what we do on a go forward basis.
And with respect to Bangkok.
Doc repurchases.
We have a healthy conversation with our board every quarter it seems on capital allocation priorities.
The stock repurchase authorization, we have in place I think we have about $68 million left on that.
Authorization, it's opportunistic.
Our stock has performed.
Pretty well versus our peers, so as we balanced that with wanting to profitably grow. This company I think you can tell where the priorities lie.
Okay, Great best of luck.
Yes.
Thank you.
One moment for your next question.
Our next question comes from the line of Kevin <unk> from Thompson Davis Your line is open.
Good morning, George and Scott.
Kevin on for Adam.
Maybe if we could talk a little bit about the pricing pressure that you guys noted.
In line with what you saw in Q4.
And do you think that it probably gets better or worse.
Calendar year goes on.
I think the tenor of those conversations are very very similar to what we saw at the back end of Q4.
And obviously the pressure is still there.
I think we're starting to see signs of raw materials flattening out or in some cases may be starting to tick back up again.
So I think.
Although the discussions will probably continue to be robust I think the data behind it will give continued ammunition to say.
Uh huh.
The markets are what they are right now and we're actually seeing signs.
The pricing needs to hold so.
I think for a couple of quarters, we will continue to have.
Many discussions as it relates to the pricing levels that have happened over the last two years.
I appreciate that and then maybe we could talk about.
It looks like you used sales were probably in line and margins were above does the margin strength that you guys saw any in Q1 surprise you at all.
No I don't think so I think it's been exactly what we would have anticipated.
The growth in margin and to some extent.
A little mix issue there is obviously operational performance on <unk>.
Screamingly proud of.
Our operational and our supply chain teams.
Really being ahead of the curves. So I don't think it's anything that we didn't anticipate.
And then maybe you could talk about.
Yes.
A little.
You talked about it a couple times, but maybe in general what's driving the overall margin outperformance with the.
Klein in sales.
So it's a combination of a couple of things I think our price has been able to hold steady I think our supply chains again are doing a very good job of leveraging their buy across divisions finding ways too.
Continue to own.
<unk> engineered products.
To enhance the margin of our products as well as they're a little bit of a mix.
Mix issue in the quarter or two.
Obviously, no different than any other company with a broad set of portfolio.
Up and down on the markets.
I would say the other thing that adds to the profitability piece here is.
And we mentioned in my comments at the beginning.
I think we've established pretty well over the last couple of years, but our cost model flexes really quick in.
Or down and we've done a very good job of staying ahead of demand when it goes up and being able to take out cost faster than many when volume goes down and I think the flexibility of that cost model is in play here and Thats what youre seeing.
Well that's.
Whats showing up and then maybe one final one just on M. This is more.
Modeling, but.
And administration SG&A was a little bit higher was there any onetime items in that maybe that just offset it.
I mean, nothing that comes to the top of my head I will look into it more and take it offline.
Perfect sounds good I appreciate the time guys.
Alright, thanks, Thank you.
Thank you.
Showing no further questions in the queue.
I'd like to turn the call back over to George Wilson for any closing remarks.
Thanks for joining today, we really appreciate your time and we look forward to providing an update on our next earnings call in May. Thank you.
Yes.
Thank you for participating in today's conference. This does conclude the program you may now disconnect everyone have a great day.
Okay.
[music].
Yeah.
Yes.