Quanex Building Products Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Quinex Building Products Corporation earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you would need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today to Mr. Scott Zuehlke, Senior Vice President, CFO, and Treasurer. Thank you. 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 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 discuss the financial results. We reported revenue of $212.1 million during the third quarter of 2020 compared to $238.5 million during the third quarter of 2019. The decrease was primarily attributable to lower volume related to the COVID-19 pandemic. More specifically, our two manufacturing facilities in the UK were shut down in compliance with government orders on March 25, 2020, and manufacturing operation at those Manufacturing Plants did not restart until mid to late May. However, volume across all segments increased significantly in June and net sales in July exceeded prior year on a consolidated basis. We reported net income of $10.8 million or $0.33 per diluted share for the three months into July 31, 2020 compared to $11.8 million or $0.36 per diluted share during the three months into July 31, 2019. On an adjusted basis, net income was $11.1 million, or $0.34 per diluted share, during the third quarter of 2020, compared to $13.7 million, or $0.41 per diluted share, during the third quarter of 2019. The adjustments being made to EPS are for restructuring charges, impairment charges, certain executive severance charges, accelerated DNA, foreign currency transaction impacts, and transaction and advisory fees. On an adjusted basis, EBITDA for the quarter was $27.7 million compared to $32.8 million during the same period of last year. Moving on to cash flow in the balance sheet, cash provided by operating activities was $45.1 million for the three months ended July 31, 2020, which represents an increase of 50.8% compared to the three months ended July 31, 2019. Cash provided by operating activities was $47.6 million for the nine months into July 31, 2020, which represents an increase of 58.7% compared to the nine months into July 31, 2019. Free cash flow improved significantly during the third quarter to $40.7 million, which represents an increase of 57.1% compared to the third quarter of 2019. Year-to-date 2020, free cash flow more than doubled to 26.9 million compared to the same period of 2019. Our focus on managing working capital continues to provide benefit, but we realize most of the heavy lifting on this front has been accomplished. Our balance sheet is healthy, our liquidity position is strong and getting stronger, and our leverage ratio of net debt to last 12 months adjusted EBITDA improved to 1.1 times as of July 31st, 2020. which is lower than where we exited fiscal 2019. We will continue to focus on generating cash and paying down debt in the fourth quarter which should allow us to exit fiscal 2020 with a leverage ratio of net debt to last 12 months adjusted EBITDA at or below one times. We will continue to be opportunistic with respect to repurchasing our stock. As previously disclosed, Due to the uncertainty related to the ongoing pandemic, we withdrew full year guidance and reduced our capex budget for fiscal 2020. Having said that, the recovery has been more robust than expected on all fronts, and we are now comfortable providing the following full year 2020 guidance. Net sales of $832 to $837 million, adjusted EBITDA of $97 to $102 million, capex of approximately $25 million, and free cash flow of approximately $50 million. It is important to note that although free cash flow increased significantly in the third quarter in year-to-date 2020 compared to 2019, much of that improvement came from systemic improvements to our management of working capital. Looking ahead, it will be more challenging to continue this rate of improvement in working capital. In addition, we expect that a higher pension contribution and an increase in cash tax payments will make fourth quarter comps more challenging. I'll now turn the call over to George for his prepared remarks.

Thanks, Scott. Overall, we are very pleased with the results we delivered in a quarter that again presented many unprecedented challenges. As we began our third quarter, there were still many unknowns related to COVID-19 and its impact on our company and the worldwide economy. As Scott mentioned, our facilities in the UK were closed by government mandate through mid to late May, and in North America, we still had many employees on furloughed status for the first few weeks of the quarter. Fortunately, those headwinds changed directions very quickly, and demand rebounded swiftly as we entered June. All facilities are now operating at pre-pandemic run rates, and consolidated revenue in July actually exceeded prior year. As discussed on prior earnings calls, our cost structure is highly variable and allowed us to anticipate this change and effectively meet a rapid run-up in demand. I'd like to take a moment to thank my Quantix teammates for their continued hard work and dedication to meeting our customers' needs during this changing and uncertain time. I'll now spend a moment discussing results from each of our segments, beginning with the North American fenestration. Revenue in this segment was $122.4 million, down 10.2% from prior year third quarter. This shortfall was primarily driven by the pandemic's negative impact on demand, especially during the month of May. Adjusted EBITDA of $17.8 million was $4.8 million less than prior year third quarter. Volume-related impacts and higher overtime costs in June and July combined with pandemic-related delays to the upgrade project in our vinyl extrusion business in North America all negatively impacted the results. We generated revenue of $38.3 million in our European fenestration segment, which was 13.7% less than prior year, or down 12.9% after excluding the foreign exchange impact. As mentioned earlier, Our UK plants were shut down through mid to late May and effectively had very little revenue during that month. However, volumes rebounded quickly and revenue in June and July was actually stronger than prior year levels. In continental Europe, spacer volumes remained steady with strong demand continuing in Germany, Austria, Switzerland, and Scandinavia. Despite low volume in May, This segment was able to realize adjusted EBITDA of $7.7 million in the quarter, which represents margin improvement of approximately 290 basis points over prior year. This margin expansion was driven by favorable material costs, efficient ramp-up, and productivity gains. Our North American cabinet component segment reported revenue of $51.9 million, which was 11.5% less than prior year. However, revenue was only down 7.5% if you adjust for the customer that exited the cabinet manufacturing business in late 2019. We saw a significant increase in demand in June and July, driven by opportunities created by supply chain disruptions in the cabinet component import markets. Adjusted EBITDA for the segment was 3.1 million, down 1.7 million from prior year third quarter. It is important to note, though, that EBITDA was negatively impacted by a $1.7 million accrual for writing off the final amount of customer specific inventory associated with that customer that exited the cabinet business. Absent this write off, we would have realized margin expansion of approximately 90 basis points in this segment as well. Unallocated corporate and SG&A costs were $1.4 million better than prior year third quarter. The primary drivers of this improvement were lower executive compensation costs and a favorable medical cost true-up for the quarter. As Scott also mentioned in his commentary, we have focused on generating cash flow, and those efforts have allowed us to continue deleveraging our already strong balance sheet. while the potential to benefit from a further improvement in working capital will be limited on a go-forward basis. The increased demand we are seeing provides us with confidence in our ability to maintain a healthy balance sheet, generate cash, and opportunistically repurchase stock. Market fundamentals and demand for our products combined with our ongoing focus on operational efficiency gains give us further confidence in our ability to meet the full year 2020 guidance. All that said, there's still much uncertainty for the mid to long term. COVID-19 continues to be a problem around the world, and the timing and successful distribution of a potential vaccine is questionable. In addition, the US presidential election is right around the corner, and the result could have long lasting economic and societal impacts, regardless of who the winner is. With these things in mind, we feel our current strategy Thank you for joining us today.