Quanex Building Products Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2020 Onex Building Products Corporation earnings conference call. At this time, all participant lines are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then 1 on your telephone keypad. Please be advised that today's conference may be recorded. If you require any further assistance, please press star, then 0 to reach an operator. I'd now like to hand the conference over to your host today, Mr. Scott Zuehlke, Vice President, Chief Financial Officer, and Treasurer. Please go ahead, sir.

Thanks for joining the call this morning. On the call with me today is George Wilson, our President and CEO. This conference call will contain forward-looking statements and some discussion of non-GAAP measures. 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 or 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 discuss the financial results. We generated revenue of $187.5 million during the second quarter of 2020 compared to $218.2 million during the second quarter of 2019. The decrease was primarily attributable to softer demand in April related to the COVID-19 pandemic. Volume began to decline in late March, which is also when our two manufacturing facilities in the UK were shut down completely to comply with government orders. We reported net income of $5.5 million or $0.17 per diluted share for the three months ended April 30, 2020, compared to a net loss of $24 million or $0.73 per diluted share during the three months ended April 30, 2019. The net loss in the second quarter of 2019 was mainly due to a $30 million non-cash goodwill impairment in our North American cabinet component segment. On an adjusted basis, net income was $6.4 million or $0.19 per diluted share during the second quarter of 2020 compared to $6.3 million or $0.19 per diluted share during the second quarter of 2019. The adjustments being made to EPS are for restructuring charges, impairment charges, certain executive severance charges, accelerated DNA, foreign currency transaction impact, and transaction and advisory fees. Adjusted earnings were essentially flat with lower SG&A offsetting volume declines related to the pandemic. On an adjusted basis, EBITDA for the quarter was $21.8 million compared to $23.4 million during the same period of last year. Moving on to cash flow in the balance sheet, cash provided by operating activities was $2.5 million for the six months ended April 30, 2020. Compared to $143,000 for the six months ended April 30, 2019. Year to date as of April 30, free cash flow was slightly lower than last year, mainly due to the negative impact the pandemic had on working capital during the second quarter, as it was hard to adjust inventories quickly due to the speed at which it hit. However, we expect an improvement in working capital in the second half of the year and have reduced our capital expenditure program. We now plan to spend between $20 and $25 million this year and currently expect to generate $30 to $35 million in free cash flow in the second half of the year. As previously disclosed, we drew down our revolver by $50 million during the second quarter as a precautionary measure. We have subsequently repaid the $50 million and do not expect to have to draw on our revolver again for the rest of the year. However, we may use our swing line as necessary in the normal course of business. Our balance sheet is strong, we have ample liquidity, and our leverage ratio of net debt to last 12 months adjusted EBITDA remained unchanged at 1.4 times as of April 30, 2020. We will continue to focus on generating cash and paying down debt in the second half of the year, which should offset the decrease in forecasted EBITDA enough to keep our leverage ratio around 1.4 times for the remainder of the year. Because of our strong liquidity position and confidence in the second half, We do not foresee a change to our current dividend policy. I'll now turn the call over to George for his prepared remarks.

Thanks, Scott. Prior to giving my commentary on the quarter, I would like to take a moment to thank all of my Quantix teammates for their dedication and efforts during this global pandemic. As a group, they accepted the challenge of being an essential business and maintain production so that we could provide uninterrupted service and products to our customers. They did this in an environment where the rules and regulations seemed to change daily. In addition, we witnessed countless examples of our employees giving their time, talents, and resources to help others in their communities. I am humbled and thankful to be on a team with so many amazing people. Thank you. Similar to our first quarter, the second quarter started strong and our results were trending better than projections. However, The COVID-19 pandemic and related regulations began to impact our business toward the end of March. As such, our focus shifted to the following priorities. First, the health, safety and welfare of our employees. Second, supporting our customers. And third, liquidity and cash flow management. Company-wide, we have a very robust Thank you for joining us today. and operated throughout the entire quarter. Revenue declined 5.9% from prior year Q2, but we were seeing revenue growth prior to the impact from the pandemic. In fact, revenue was trending 3.1% above prior year levels for the first five months of our fiscal year. However, revenue in April declined by approximately 25% year over year due to the impact from COVID-19. As we have stated in the past, Our cost structure is highly variable in nature, and as such, when our volumes dropped, we acted quickly with furloughs, reduced work hours, and reductions in discretionary spending, which enabled us to protect our margins. In addition, SG&A reductions, lower medical expenses, and lower incentive accruals all favorably impacted results and we were able to realize a margin expansion of approximately 100 basis points in this segment during the quarter. Revenue in our European fenestration segment decreased by 27.2% from prior year to $29.2 million excluding foreign exchange impact. Similar to our North American fenestration segment, revenue was trending 2.4% above prior year levels for the first five months of our fiscal year. However, largely due to the fact that the UK was shut down completely, revenue in April was down approximately 85% year over year. As Scott mentioned in his comments, our UK manufacturing facilities were mandated to close on March 25th and just recently restarted operations. Our German manufacturing facility remained operational, but on reduced shifts and work hours. Our North American cabinet component segment generated revenue of $50.7 million during the quarter, which was 19.4% less than prior year. This volume drop was driven by COVID-19 related impacts and the previously announced loss of one customer who exited cabinet manufacturing in late 2019. Revenue in April decreased by approximately 37% year over year. After adjusting for the lost customer, revenue was down 14.6% for the quarter and 34% in April. The decrease in revenue in this segment was intensified due to the fact that some of our customers are located in states where cabinet manufacturing was not deemed essential. As a result, they were forced to close for some period. While each of our cabinet component plants was deemed essential and continued to operate throughout the quarter, The rapid pace of the customer closures in other states made it challenging to manage our fixed costs while balancing the needs and delivery requirements of our operating customers. We aggressively managed our variable cost structure by quickly implementing temporary furloughs and shortened work weeks, but the closure of some customers nevertheless had a negative impact on the segment's EBITDA and margins. EBITDA was also impacted by a $1.8 million accrual for writing off a portion of the inventory associated with Chinese source product for the customer that exited the cabinet business. Absent this write-off, we would have realized margin expansion in this segment as well. As I mentioned earlier, managing liquidity and focusing on cash flow has been a top priority. As such, we are actively managing the line items that we can control. We are proactively working with our suppliers on extended terms and payments. We are also making progress in adjusting our inventory levels to match volumes, though this process does take some time given the rapid drop in shipments. CapEx has been reduced in an effort to optimize cash flow. However, because of our strong liquidity position, we will continue to spend capital on safety related projects and growth related strategic projects. Such as the vinyl extrusion technology upgrade project that we have in Kent, Washington. We continue to be confident in our ability to generate cash and manage working capital during the second half of this year. These moves, combined with the normal seasonality of our business, should allow us to generate 30 to 35 million of free cash flow for the full year, basically all of which will be generated in the second half. Like most other companies, We withdrew our guidance for 2020 as soon as the negative impacts from the pandemic started to become apparent. As mentioned, results for the first five months of our fiscal year through March were solid. Revenue fell quickly though in April. But we were prepared and we took the appropriate actions to minimize the impact to our business and margins. We are beginning to see signs of recovery and optimism across the building products industry. We currently anticipate Q3 revenue will be down by 20-25% year-over-year in North America and adjusted EBITDA margin will be down 350-400 basis points. For the third quarter in Europe, we currently expect revenue to decrease by 40-45% year-over-year with adjusted EBITDA margin contracting by 550-600 basis points. This forecast assumes a slow recovery in Europe No second wave of COVID-19 and no further shutdowns or restrictions on our facilities. While we have very little visibility into our fourth quarter, we anticipate volumes will improve over Q3, but will not recover to prior year levels. We will provide an updated view on the full year when we report third quarter earnings in early September, but we are very encouraged by what we are seeing and hearing from our customers. In summary, although we expect negative impacts from the COVID-19 pandemic to continue throughout this year, we are optimistic that we are seeing signs of a recovery. We will stay focused on managing all items under our control with a continued emphasis on generating cash and maintaining a strong balance sheet. With that being said, operator, we are now ready to take questions.