Quanex Building Products Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Quonex Building Products Corporation earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you need to press star 1 on your telephone. As a reminder, today's conference is being recorded. If you require further assistance, please press star 1 and 0. I would now like to give special thanks to Mr. Scott Zuehlke, Senior Vice President, Chief Financial Officer, and Treasurer. You may begin.

Thanks for joining the call this morning. On the call with me today is George Wilson, our President and Chief Executive Officer. This conference call will contain forward-looking statements and some discussion of non-GAAP measures. Forward-looking statements and guidance discussed on this call and in our earnings release are based on current expectations. Actual results or events may differ materially from such statements and guidance, and QuantX undertakes no obligation to update or revise any forward-looking statements. For 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 reliefs issued yesterday and posted to our website. I'll now discuss the financial results. On a consolidated basis, revenue was essentially flat year-over-year in a quarter where we expected to see mid- to high-single-digit declines Thank you for joining us. Spot orders were strong during the quarter, and we are seeing early signs that the market shift from semi-custom to stock cabinets may be stabilizing. In fact, the latest KCMA data market showed that semi-custom cabinet sales were only down by 0.7% year-over-year. This is the lowest rate of decline we have seen in over a year. Revenue losses in our North American cabinet component segment were offset by above-market growth and our European fenestration segment and growth in the low single digits in our North American fenestration segment. We reported net income of $10,000 or 0 cents per diluted share for the three months into January 31, 2020 compared to a net loss of $3.6 million or 11 cents per diluted share during the three months into January 31, 2019. We are pleased to say that this is the first time since the company's 2008 spinoff from Quantix Corporation that we have reported net income in the first quarter of our fiscal year. On an adjusted basis, net income was $1.2 million or 4 cents per diluted share during the first quarter of 2020 compared to a net loss of 2.3 million or 7 cents per diluted share during the first quarter of 2019. The adjustments being made to EPS are for restructuring charges, certain executive severance charges, accelerated DNA, Foreign Currency Transaction Impacts, Transaction and Advisory Fees, and adjustments related to the Tax Cuts and Jobs Act. On an adjusted basis, EBITDA increased by 30% to $15.7 million in the first quarter of 2020. The increase in adjusted earnings was driven by an ongoing, concentrated focus on controlling costs, improved operating leverage, operational efficiency gains, and lower medical expenses. Moving on to cash flow and the balance sheet. Due to the seasonality of our business, we are typically a net borrower in the first quarter of each year. Having said that, we borrowed 50% less cash in the first quarter of 2020 than we did in the first quarter of 2019. As a result, free cash flow improved significantly during the quarter and we repurchased 4.6 million of our stock at an average price of $17.19 per share. Our balance sheet remains strong and we exited the quarter with a leverage ratio of 1.4 times net debt to last 12 months adjusted EBITDA, which is a full turn better than where we were a year ago. I'll now turn the call over to George for his prepared remarks.

Thanks, Scott. We are off to a solid start in fiscal 2020 as first quarter results continued to reflect our ongoing focus on operational excellence and cash flow generation. I will now provide some additional comments on each of our operating segments. Starting with our North American fenestration segment, where revenues were 1.3% higher than prior year. On a more granular basis within this segment, revenues specific to fenestration in the U.S. grew by 3.2% year over year, which compares favorably to Ducker's latest window shipment estimate of 2.5% growth for the three months ended December 31st, 2019. On an adjusted basis, EBITDA in our North American fenestration segment decreased by approximately 20 basis points versus prior year. Labor inefficiencies were the primary driver of this slight margin decrease as we built inventory ahead of a significant capital project. Our European fenestration business delivered another good quarter as a result of solid demand in the UK market that was partially offset by the timing of spacer sales to Asia. Excluding the foreign exchange impact, this segment generated above market revenue growth of 3.7% versus prior year, which was better than we expected. Adjusted EBITDA margin for our European fenestration segment was approximately 100 basis points better than prior year, Timing of price increases, stabilization of raw material costs, and productivity initiatives all contributed to these favorable results. Revenue in our North American cabinet component segment decreased by 3.8 million or 7.1% year over year. As we mentioned in our fourth quarter earnings call, we had a customer who made a strategic decision to exit the manufacturing of cabinets. Scott Michael Zuehlke, Sales in the semi-custom cabinet market declined 0.7% year-over-year during our fiscal first quarter, which was the slowest rate of decline in more than a year. There appear to be signs that the cabinet market is beginning to stabilize. We will continue to monitor the market closely, but we can certainly say that the volume of quoting activity for spot buys has increased significantly, which we believe is a result of the tariffs and supply chain disruptions caused by the coronavirus. Despite the decrease in revenue for the North American Cabinet component segment, we realized an improvement in adjusted EBITDA margin of approximately 70 basis points. This margin expansion is being driven by lower material costs, continued operational improvements, and our own efforts to reduce SG&A within this segment. Finally, when looking at unallocated corporate and other costs, we realized a year-over-year improvement of 2.8 million, which was primarily driven by lower medical costs as we have experienced a significantly larger number of high dollar cranes in 2019 than we've realized so far in 2020. Overall, we are very pleased with how our fiscal year started and we are optimistic looking ahead into the spring selling season. It is too early to increase our annual guidance at this time, but there is potential to do so later in the year If the results continue to exceed our expectations. As such, at this time we are confident in reaffirming our guidance of between 865 and 885 million in revenue with adjusted EBITDA between 102 and 110 million. Going forward, our plan is to continue to use our strong cash flow to invest in high return internal capital projects while maintaining a strong balance sheet and opportunistically repurchasing our stock We firmly believe that this strategy puts us in a strong position regardless of what the economy may do. And with that, operator, we are now ready to take questions.