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spk02: Good day, and thank you for standing by. Welcome to the first quarter 2024 Quantix Building Products Corporation earnings conference call. At this time, all participants are in listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during a session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I will now extend the conference over to your first speaker today, Scott Zilke, Senior Vice President, CFO, and Treasurer. Please go ahead.
spk05: 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. and Quantix 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. We'll now turn the call over to George for his prepared remarks.
spk06: 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 Quantix. Bill began his career with Quantix as an independent director in 2009. When the Quantix 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. Bill was instrumental in transitioning Quantix 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 positioned us well for the success we are realizing today. Thank you again, Bill, for your commitment, dedication, and service to Quantix and its employees, customers, and shareholders. We wish you and 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 costs 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 a quarter where we typically draw on our revolver. 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 will lag North America due to the ongoing wars in Ukraine and Gaza and continued pressure on energy costs in these regions. But regardless of the demand equation, we have shown over the past two years that the Quantix 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, as hiring in most markets has slowed. For the sourced materials that are most impactful to Quantix, we are seeing a stabilization in pricing and supply for aluminum, steel, and resins. We are still seeing input cost pricing pressures for our 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. 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 in 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.
spk05: 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 8.7% 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 segment. Net income increase to $6.2 million, or 19 cents per diluted share, for the three months ended January 31, 2024, compared to $1.9 million, or $0.06 per diluted share, for the three months ended January 31, 2023. After adjusting for one-time items, net income decreased slightly to $5.8 million, or $0.18 per diluted share for the quarter, compared to $6.1 million, or again $0.18 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 into January 31st, 2024 was largely due to a decline in raw material costs, a decrease in stock-based compensation expense, and lower interest expense. Now for results by operating segment. We generated net sales of 148 million in our North American fenestration segment for the first quarter of 2024, a decline of 3.3% compared to 153 million in the first quarter of 2023, driven by a decrease in volumes due to softer market demand. We estimate that 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 Quantex 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 continued 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 supported results 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 of $43.1 million in our North American cabinet component segment during the quarter, which was 21.1% lower than prior year. This decrease was driven by lower volumes and lower index pricing for hardwoods. We estimate the volumes declined by about 12% in this segment year over year, 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 and the R&R market picks up. Moving on to cash flow in 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 of net debt to last 12 months adjusted EBITDA was unchanged versus last quarter at 0.1 times as of January 31, 2024. Excluding real estate leases that are considered finance leases under US 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 to 150 million, depreciation and amortization of approximately 44 to 46 million, SG&A of 128 to 130 million, interest expense of three and a half to four million, a tax rate of 20% and CapEx of 40 to 45 million. In addition, our guidance for free cash flow is 85 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% in our North American fenestration segment, down 2 to 4% in our European fenestration segment, and down 11 to 13% in our North American cabinet component 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.
spk02: Thank you. And as a reminder, to ask a question, you need to press star 1-1 on your telephone and wait for a name to be announced. To withdraw your question, please press star 1-1 again. Please stand by when you compile the Q&A roster. One moment for our first question. Our first question comes from Julio Romero from Sedoti. Your line is open.
spk09: Hey, good morning, guys. Good morning.
spk10: Hey, good morning. Could you speak to what you're hearing from the OEM customers in regards to repair and remodel trends and just talk about what you're hearing as to what can maybe improve demand in the second half of your fiscal year?
spk06: Yeah, you know, the international market Builders Show was last week, and 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 will see a pickup. We've already seen new construction data start to show some improvement, but everyone's convinced that the R&R demand is there, it's pent up, and that with any movement in interest rates, on the downward side, which everyone believes will happen at some point at the back half of the year, that you'll 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.
spk10: Got it. That's very helpful there. David, can you speak to the guidance and what's embedded for the full year across the segments from a margin perspective? And how do you see kind of the trajectory playing out for the full year across the three segments?
spk05: 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 it 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 2Q. We'll do the same for 3Q and 4Q as the year progresses, but as you're modeling, you can expect margin improvement throughout the year.
spk10: Okay, really helpful there. And then, Scott, the revenue guidance you gave for the North American fenestration segment of 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?
spk05: I mean, that's, again, typical seasonality. We start seeing a pickup towards the second part of the second quarter. Price-volume, I mean, that's Volume is improving. That's most of it. We've been able to hold on to 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, which will obviously help revenue and margins.
spk10: Okay, great. I'll pass it on and circle back with any follow-ups. Thank you.
spk02: Thank you. One moment for our next question. And our next question will come from Ruben Gardner from Benchmark. Your line is open.
spk13: Thank you. Good morning, everybody. And congrats, Bill, on your retirement. I hope you enjoy it. And, George, congrats on your move as well. So I guess to start off, It looks like a continuation of a trend that we've seen the last several quarters is what's kind of implied in your guidance where we'll see continued gross margin expansion despite some volume headwinds. And, you know, it looks like some pricing headwinds as well. But we're deleveraging on the SG&A line. Am I thinking about that the right way? One. And two, is that largely driven by kind of the mix shift that you're seeing where cabinets is a 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 to those assumptions.
spk06: So I'll give some general guidance there, Ruben, and first of all, thanks for your kind words for both Bill and I. You know, as we progress through the year, the improvement in margin is very tied to the uptick in volume, as you know. Some of our processes are continuous type of extrusion process. So volume does play a big role in the gross margins 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 again, as consumer confidence grows, That's an area that tends to be focused on kitchen and bath remodels. So we're pretty confident in the ability of all of our segments to grow in terms of margin. The one that will be most pressured is Europe, and that's because of the continued softness in that market as well as some pricing pressure that they continue to face.
spk13: And I guess on that note, George, the cabinet side, I guess the – optimistic outlook that you could see that business turn around. It's, you know, let me put it this way, the fenestration business has definitely outperformed over the last year or so. What do you think is driving that? Is it simply was there pull forward demand from COVID for cabinets and not necessarily in windows? Is there something else going on? Why do you think that the cabinet space is underperforming fenestration?
spk06: You know, I do think that there was some of the COVID pull forward, obviously. I think a lot of people focused on some remodeling in their house when you're constrained to being indoors or at least to 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 you're at a point where you have to replace a window or a door, you're effectively going to do it. It's not as much as a discretionary spend. To some extent, it is, but not as much as the cabinets. So I think you're right. There was a pull-forward effect, and there is some differences in terms of the demand fenestration versus cabinets in that regard.
spk13: And can you point to – I know you guys check the industry data pretty closely. Like, have you been outperforming in fenestration 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?
spk06: You know, in our mind, I think we worked hard to go get some share. I think performance during the COVID period, having – having insourced and having a supply chain that's, what I would say, been very structured to protect our customers from shortages and 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 groups, but generally in line.
spk02: okay great uh good luck guys i'll pass it on there thanks thank you thank you one moment for our next question our next question comes from line of stephen ramsey from thompson research group you know your line is open hi this is captain uh thompson calling in for stephen today um and build back with luck i've known you for many years and uh
spk03: Best of luck in your next chapter. Following up just on a few questions today, just within the U.S., all the components grew except for U.S. fenestration. Could you discuss why U.S. non-fenestration sales continue to show solid growth and the drivers there and overall contribution to your guidance?
spk06: So the markets that are non-fenestration, one of the larger ones, we participate in the fencing market. We also sell products into the solar market, which has had some pretty good demand and tends to be a little bit better on the profitability curve. And then in addition, our QCM, the acquisition of LMI has been you know, extremely helpful and a great addition to our group. And that continues to be focused on many industries outside of fenestration. It's a very diverse set of markets it serves, and they've performed very strong within our first quarter. So, as you know, part of our strategy has been to both bolster and build out our fenestration product portfolio. as well as expand and grow into adjacent markets. And I think what you're starting to see is the realization of that strategy, and we'll continue to build on those on a go-forward basis.
spk03: Okay, thanks. And then following up on an earlier conversation just on residential R&R activity, could you clarify what parts of, or at least talk to the parts of the business or total exposure that is to existing home sales
spk05: So on a consolidated basis, we're 65-70% weighted to R&R. Our European fenestration segment and our North American cabinet component segment is definitely more weighted than that in total.
spk03: Okay, perfect. And then final question, in the North American segment, put forward a 9.3% EBITDA margin, so down 50 basis points year-over-year, and all from, you know, kind of like mid-teens results in the prior three quarters. Do you, and I know you talked about it earlier, but just kind of against that backdrop, do you expect any to show similar step up 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.
spk05: Yes, and that has a lot to do with the seasonality of our business in that low water mark is typically first quarter with a decent jump in each, definitely in 2Q over 1Q and 3Q over 2Q. 4Q is typically, could be better, could be in line with 3Q just depending on weather and whether or not we hit winter earlier than expected. But yes, we expect margins to improve sequentially.
spk03: Okay, and then just one final question. We were also at the Builder Show, you know, 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 opportunities that you see from an M&A standpoint for Quantex, and how are you balancing that versus, you know, repurchasing your own shares?
spk06: 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, you know, I think both organic and inorganic expansion of existing product lines and growth into new businesses through acquisition is absolutely a priority, and we've spent 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 that I'll give today is that we continue to remain very focused on the opportunities that we look at. We'll continue to check the boxes of either building out our existing markets with products 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 revenue growth through adding products in existing or new markets that improve the profitability profile of Quantix, 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.
spk05: And with respect to stock repurchases, I mean, 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. Clearly our stock has performed pretty well versus our peers. So as we balance that with wanting to profitably grow this company, I think you can tell where the priorities lie.
spk03: Okay, great. Best of luck. Thanks.
spk02: Thank you. One moment for our next question. Our next question comes from the line of Kevin Ganey from Thompson Davis. Your line is open.
spk11: Good morning, George and Scott. Good morning. Kevin on for Adam. Maybe if we could talk a little bit about the pricing pressure that you guys noted. Was it in line with what you saw in Q4 and Do you think that it probably gets better or worse as the calendar year goes on?
spk06: 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 maybe 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 the markets are what they are right now. And we're actually seeing signs that the pricing needs to hold. So I think for a couple quarters, we'll continue to have many discussions as it relates to the pricing levels that have happened over the last few years.
spk11: Appreciate that. And then maybe we could talk about, it looks like EU sales were probably in line and margins were above. Does the margin strength that you guys saw in Q1 surprise you at all?
spk06: No, I don't think so. I think it's been exactly what we would have anticipated. You know, the growth and margin to some extent, you know, there's a little mix issue. There's obviously operational performance, and I'm extremely proud of our operational and our supply chain teams of really being ahead of the curves. So I don't think it's anything that we didn't anticipate.
spk11: And then maybe we could talk about a little, you've talked about it a couple times, but maybe in general, what's driving the overall margin outperformance with the decline in sales?
spk06: So, you know, it's a combination of a couple things. I think our price has been able to hold steady. I think our supply chains, again, are doing a very good job of of leveraging their buy across divisions, finding ways to continue to re-engineer products to enhance the margin of our products, as well as a little bit of a mix issue in the quarter, too. We 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 that our cost model flexes really quick and up 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 costs faster than many when volume goes down. And I think the flexibility of that cost model is in play here, and that's what you're seeing.
spk11: Well, it's definitely showing up. And then maybe one final one just on – this is more modeling, but NA fenestration SG&A was a little bit higher. Was there any one-time items in that maybe that just offset it?
spk05: I mean, nothing that comes to the top of my head. I'll look into it more and take it offline.
spk11: Perfect. Sounds good. Appreciate the time, guys.
spk04: All right. Thanks. Thank you.
spk02: Thank you. I'm not showing any further questions in the queue. I would now like to turn the call back over to George Wilson for any closing remarks.
spk06: 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.
spk02: Thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day. Thank you. Thank you. Thank you. We'll be right back. you Thank you. Good day, and thank you for standing by. Welcome to the first quarter 2024 Quantix Building Products Corporation earnings conference call. At this time, all participants are in listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during a session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, Scott Zilke, Senior Vice President, CFO and Treasurer. Please go ahead.
spk05: 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 and Quantix 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'll now turn the call over to George for his prepared remarks.
spk06: 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 Quantix. Bill began his career with Quantix as an independent director in 2009. When the Quantix 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. Bill was instrumental in transitioning Quantix 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 positioned us well for the success we are realizing today. Thank you again, Bill, for your commitment, dedication, and service to Quantix and its employees, customers, and shareholders. We wish you and 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 costs 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 a quarter where we typically draw on our revolver. 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 will lag North America due to the ongoing wars in Ukraine and Gaza and continued pressure on energy costs in these regions. But regardless of the demand equation, we have shown over the past two years that the Quantix 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, as hiring in most markets has slowed. For the sourced materials that are most impactful to Quantix, we are seeing a stabilization in pricing and supply for aluminum, steel, and resins. We are still seeing input cost pricing pressures for our 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. 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 in 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.
spk05: 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 8.7% 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 segment. Net income increase to $6.2 million, or 19 cents per diluted share, for the three months ended January 31, 2024, compared to $1.9 million, or $0.06 per diluted share, for the three months ended January 31, 2023. After adjusting for one-time items, net income decreased slightly to $5.8 million, or $0.18 per diluted share for the quarter, compared to $6.1 million, or again $0.18 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 into 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 results by operating segment. We generated net sales of $148 million in our North American fenestration segment for the first quarter of 2024, a decline of 3.3% compared to $153 million in the first quarter of 2023, driven by a decrease in volumes due to softer market demand. We estimate that 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 Quantex 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 continued 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 customers supported results 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 of 43.1 million in our North American cabinet component segment during the quarter, which was 21.1% lower than prior year. This decrease was driven by lower volumes and lower index pricing for hardwoods. We estimate the volumes declined by about 12% in this segment year over year, 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 and the R&R market picks up. Moving on to cash flow in 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 of net debt to last 12 months adjusted EBITDA was unchanged versus last quarter at 0.1 times as of January 31, 2024. Excluding real estate leases that are considered finance leases under US 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 to 150 million, depreciation and amortization of approximately 44 to 46 million, SG&A of 128 to 130 million, interest expense of 3.5 to 4 million, a tax rate of 20%, and CapEx of 40 to 45 million. In addition, our guidance for free cash flow is 85 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% in our North American fenestration segment, down 2 to 4% in our European fenestration segment, and down 11 to 13% in our North American cabinet component 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.
spk02: Thank you. And as a reminder, to ask a question, you need to press star 1-1 on your telephone and wait for a name to be announced. To withdraw your question, please press star 1-1 again. Please stand by when you compile the Q&A roster. One moment for our first question. Our first question comes from Julio Romero from Sedoti. Your line is open.
spk09: Hey, good morning, guys.
spk06: Morning.
spk10: Hey, good morning. Could you speak to what you're hearing from the OEM customers in regards to repair and remodel trends and just talk about what you're hearing as to what can maybe improve demand in the second half of your fiscal year?
spk06: Yeah, you know, the international market Builder's Show was last week, and 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 will see a pickup. We've already seen new construction data start to show some improvement, but everyone's convinced that the R&R demand is there. It's pent up, and that with any movement in interest rates, on the downward side, which everyone believes will happen at some point at the back half of the year, that you'll 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.
spk10: Got it. That's very helpful there. David, can you speak to the guidance and what's embedded for the full year across the segments from a margin perspective? And how do you see kind of the trajectory playing out for the full year across the three segments?
spk05: 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 it 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 2Q. We'll do the same for 3Q and 4Q as the year progresses, but as you're modeling, you can expect margin improvement throughout the year.
spk10: Okay, really helpful there. And then, Scott, the revenue guidance you gave for the North American fenestration segment of 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?
spk05: I mean, that's, again, typical seasonality. We start seeing a pickup towards the second part of the second quarter. Price-volume, I mean, that's Volume is improving. That's most of it. We've been able to hold on to 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, which will obviously help revenue and margins.
spk10: Okay, great. I'll pass it on and circle back with any follow-ups. Thank you.
spk02: Thank you. One moment for our next question. And our next question will come from Ruben Gardner from Benchmark. Your line is open.
spk13: Thank you. Good morning, everybody. And congrats, Bill, on your retirement. I hope you enjoy it. And, George, congrats on your move as well. So I guess to start off, 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'll see continued gross margin expansion despite some volume headwinds. And, you know, it looks like some pricing headwinds as well. But we're deleveraging on the SG&A line. Am I thinking about that the right way? One. And two, is that largely driven by kind of the mix shift that you're seeing where cabinets is a 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 to those assumptions.
spk06: So I'll give some general guidance there, Ruben. And first of all, thanks for your kind words for both Bill and I. You know, as we progress through the year, the improvement in margin is very tied to the uptick in volume, as you know. Some of our processes are continuous type of extrusion process. So volume does play a big role in the gross margins 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 again, as consumer confidence grows, That's an area that tends to be focused on kitchen and bath remodels. So we're pretty confident in the ability of all of our segments to grow in terms of margin. The one that will be most pressured is Europe, and that's because of the continued softness in that market as well as some pricing pressure that they continue to face.
spk13: And I guess on that note, George, the cabinet side, I guess the – optimistic outlook that you could see that business turn around. It's, you know, let me put it this way. The fenestration business has definitely outperformed over the last year or so. What do you think is driving that? Is it simply, was there pull forward demand from COVID for cabinets and not necessarily in windows? Is there something else going on? Why do you think that the cabinet space is underperforming fenestrations?
spk06: You know, I do think that there was some of the COVID pull forward, obviously. I think a lot of people focused on some remodeling in their house when you're constrained to being indoors or at least to 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 you're at a point where you have to replace a window or a door, you're effectively going to do it. It's not as much as a discretionary spend. To some extent, it is, but not as much as the cabinets. So I think you're right. There was a pull-forward effect, and there is some differences in terms of the demand fenestration versus cabinets in that regard.
spk13: And can you point to – I know you guys check the industry data pretty closely. Like, have you been outperforming in fenestration 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?
spk06: You know, in our mind, I think we worked hard to go get some share. I think performance during the COVID period, having – having insourced and having a supply chain that's, what I would say, been very structured to protect our customers from shortages and 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 groups, but generally in line.
spk13: Okay, great. Good luck, guys. I'll pass it on there.
spk00: Thanks. Thank you.
spk02: Thank you. One moment for our next question. Our next question will come from the line of Steven Ramsey from Thomson Research Group. Your line is open.
spk03: Hi. This is Katherine Thomson calling in for Steven today. And Bill, best of luck. I've known you for many years. Best of luck in your next chapter. Following up just on a few questions today, just within the U.S., all the components grew except for U.S. administration. Could you discuss why U.S. non-administration sales continue to show solid growth and the drivers there and overall contribution to your guidance?
spk06: So the markets that are non-fenestration, one of the larger ones, we participate in the fencing market. We also sell products into the solar market, which has had some pretty good demand and tends to be a little bit better on the profitability curve. And then in addition, our QCM, the acquisition of LMI has been you know, extremely helpful and a great addition to our group. And that continues to be focused on many industries outside of fenestration. It's a very diverse set of markets it serves, and they've performed very strong within our first quarter. So, as you know, part of our strategy has been to both bolster and build out our fenestration product portfolio. as well as expand and grow into adjacent markets. And I think what you're starting to see is the realization of that strategy, and we'll continue to build on those on a go-forward basis.
spk03: Okay, thanks. And then following up on an earlier conversation just on residential R&R activity, could you clarify what parts of, or at least talk to the parts of the business or total exposure that is to existing home sales versus new?
spk05: So on a consolidated basis, we're 65-70% weighted to R&R. Our European fenestration segment and our North American cabinet component segment is definitely more weighted than that in total.
spk03: Okay, perfect. And then final question, in the North American segment, put forward a 9.3 percent EBITDA margin, so down 50 basis points year-over-year and all from, you know, kind of like mid-teens results in the prior three quarters. Do you, and I know you talked about it earlier, but just kind of against that backdrop, do you expect any to show similar step up prior like you did in the previous year over the next quarters in getting back more specifically to that low to mid-teen range? Thank you.
spk05: Yes, and that has a lot to do with the seasonality of our business in that low water mark is typically first quarter with a decent jump in each, definitely in 2Q over 1Q and 3Q over 2Q. 4Q is typically, could be better, could be in line with 3Q just depending on weather and whether or not we hit winter earlier than expected. But yes, we expect margins to improve sequentially.
spk03: Okay, and then just one final question. We were also at the Builder Show, you know, 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 opportunities that you see from an M&A standpoint for Quantex, and how are you balancing that versus, repurchasing your own shares?
spk06: 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, you know, I think both organic and inorganic expansion of existing product lines and growth in the new businesses through acquisition is absolutely a priority, and we've spent 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 that I'll give today is that we continue to remain very focused on the opportunities that we look at. We'll continue to check the boxes of either building out our existing markets with products 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 revenue growth through adding products in existing or new markets that improve the profitability profile of Quantix, 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.
spk05: And with respect to stock repurchases, I mean, 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. Clearly, our stock has performed pretty well versus our peers. So as we balance that with wanting to profitably grow this company, I think you can tell where the priorities lie.
spk03: OK, great. Best of luck. Thanks.
spk02: Thank you. One moment for our next question. Our next question comes from the line of Kevin Ganey from Thompson Davis. Your line is open.
spk11: Good morning, George and Scott. Good morning. Kevin on for Adam. Maybe if we could talk a little bit about the pricing pressure that you guys noted. Was it in line with what you saw in Q4 and Do you think that it probably gets better or worse as the calendar year goes on?
spk06: 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 maybe 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 the markets are what they are right now, and we're actually seeing signs that the pricing needs to hold. So I think for a couple quarters, we'll continue to have many discussions as it relates to the pricing levels that have happened over the last few years.
spk11: Appreciate that. And then maybe we could talk about, it looks like EU sales were probably in line and margins were above. Does the margin strength that you guys saw in Q1 surprise you at all?
spk06: No, I don't think so. I think it's been exactly what we would have anticipated. The growth in margin, to some extent, there's a little mix issue. There's obviously operational performance, and I'm extremely proud of. of our operational and our supply chain teams of really being ahead of the curves. So I don't think it's anything that we didn't anticipate.
spk11: And then maybe we could talk about a little, you've talked about it a couple times, but maybe in general, what's driving the overall margin outperformance with the decline in sales?
spk06: 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 to continue to re-engineer products to enhance the margin of our products. as well as a little bit of a mix issue in the quarter, too. We 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 that our cost model flexes really quick and up 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 costs faster than many when volume goes down. And I think the flexibility of that cost model is in play here, and that's what you're seeing.
spk11: Well, it's definitely showing up. And then maybe one final one just on... This is more modeling, but... NA fenestration SG&A was a little bit higher. Was there any one-time items in that maybe that just offset it?
spk05: I mean, nothing that comes to the top of my head. I'll look into it more and take it offline.
spk11: Perfect. Sounds good. Appreciate the time, guys.
spk04: All right. Thanks. Thank you.
spk02: Thank you. I'm not showing any further questions in the queue. I would now like to turn the call back over to George Wilson for any closing remarks.
spk06: 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.
spk02: Thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
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