Quanex Building Products Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2021 Quonex Building Products Corporation First Quarter Earnings Conference Call. At this time, our participant lines are in a listen-only mode. After this week's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I will now hand today's conference over to your speaker, Scott Zilke, SVP, 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 QuantX 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 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 $230.1 million during the first quarter of 2021, which represents an increase of 17.1 percent compared to $196.6 million during the first quarter of 2020. The increase was primarily the result of increased demand for our products across all product lines and operating segments. We reported net income of $7.9 million, or 24 cents per diluted share, for the three months into January 31st, 2021, compared to $10,000 or zero cents per diluted share during the three months into January 31, 2020. The increase in net income was somewhat offset by a $6.7 million increase in SG&A during the quarter, $4.6 million of which was related to the valuation of our stock-based comp awards, mainly due to an increase in our stock price, and $1.6 million of which was due to higher medical claims. On an adjusted basis, net income increase to $9 million or 27 cents per diluted share during the first quarter of 2021 compared to 1.2 million or 4 cents per diluted share during the first quarter of 2020. The adjustments being made to EPS are for restructuring charges, certain executive severance charges, loss on the sale of a plant, accelerated DNA, foreign currency transaction impact, and transaction and advisory fees. On an adjusted basis, EBITDA for the quarter increased by 55.4 percent to 24.3 million, compared to 15.7 million during the same period of last year. The increase is largely due to operating leverage from higher volumes. From a margin standpoint, this increase represents adjusted EBITDA margin expansion of approximately 260 basis points. Moving on to cash flow in the balance sheet, Cash used for operating activities was $3.4 million during the three months ended January 31, 2021, compared to $3.7 million for the three months ended January 31, 2020. While our free cash flow was negative, this is typical for the first quarter of each year, and we did show improvement compared to last year. In fact, we did not need to borrow on our revolver during the quarter and still managed to both repay $5 million in bank debt and repurchase approximately $1.9 million of our stocks. Our balance sheet is strong, our liquidity position is solid, and our leverage ratio of net debt to last 12 months adjusted EBITDA is unchanged at 0.6 times as of January 31st, 2021. We will remain focused on managing working capital and generating cash as the year progresses. We will also continue to be opportunistic with respect to repurchasing our stock. As stated in our earnings release, we remain optimistic about the economic recovery. Based on our strong first quarter results and ongoing conversations with our customers, we are raising our expectations for the year and now expect approximately 12% sales growth in our North American fenestration segment, approximately 5% sales growth in our North American cabinet component segment, and approximately 22% sales growth in our European fenestration segment. We're now comfortable providing the following full year 2021 guidance. net sales of 945 to 965 million, adjusted EBITDA of 112 to 122 million, depreciation of approximately 33 million, amortization of approximately 14 million, SG&A of approximately 105 million. Note that this is higher than previously expected due to an increase in stock-based comp expense and more normalized medical costs. interest expense of 3 to 4 million, a tax rate of 26 to 27 percent, capex of about 30 million, and then free cash flow of approximately 60 million. If you adjust for the expected increase in SG&A, the implied incremental adjusted EBITDA margin is in the mid-20 percent range. As mentioned in our earnings release, we expect the typical seasonality in our business to be less pronounced this year. So we feel it would be necessary to provide some direction on a quarterly basis. From a cadence perspective for Q2, on a consolidated basis, we expect net sales to be up approximately 25% year over year. We believe the strongest revenue growth and margin expansion in Q2 will likely come from our European fenestration segment since our plants in the UK were shut down in March of last year and didn't come back online completely until May. Looking ahead on a consolidated basis, we currently expect net sales growth of approximately 12% year-over-year in Q3, and due to the tough comp, we may not see any growth in Q4. In addition, again on a consolidated basis, it could prove challenging to realize margin expansion in the second half due to inflationary pressures, increased stock-based comp expense, and a normalization of medical expenses. To summarize, On a consolidated basis for the full year, we currently expect to generate net sales growth of approximately 12% year-over-year to the midpoint of guidance, while maintaining adjusted EBITDA margin in the low 12% range. I'll now turn the call over to George for his prepared remarks.

Thanks, Scott. Demand for our products during the first quarter of 2021 proved to be even stronger than our expectations. and I'm very pleased with the results in what is traditionally our weakest quarter. We remain steadfast in our pursuit of operational excellence, cash flow optimization, and improving return on invested capital throughout all segments of our business. Continued success on all these efforts will create further value for our shareholders and should position the company well for any opportunities that may arise in the future. Prior to discussing the segment detail, I'd like to provide some color on the macroeconomic conditions of the markets we serve. Overall, we are still experiencing high demand across all of our product lines. In North America, the new construction market remains strong and sales of existing homes, which is a key indicator for repair and remodel, also remains healthy. Specific to cabinet components, the semi-custom segment, which is the main segment we serve, is starting to show growth above that of the stock segment. As a matter of reference, there was a significant shift in market share away from the semi-custom segment to the stock segment over the past few years. So the recent KCMA data is encouraging in that it shows the semi-custom segment gaining ground over stock. Demand for the products we manufacture in the UK and Germany remains robust, despite the strict and ongoing COVID-related measures. We believe the demand is strong because many international markets remain underbuilt with an infrastructure that is aging, and regulatory requirements on energy efficiency align very well with our product offering. We also believe demand in Europe and the U.K. is being favorably impacted by the continued shift of the discretionary income away from travel and leisure activities into home improvement projects. Although we remain optimistic on macroeconomic conditions in all the markets we serve, We also see some challenging headwinds. We are seeing increased inflationary pressures on most of our major raw material input costs, as well as some large dollar expense items such as freight. These pressures were recently exasperated due to the severe winter weather in Texas and along the Gulf Coast, which caused delays and shortages of key chemicals, feedstocks, and energy supply. As a reminder, For the most part, we have contractual pass-throughs for the major raw materials we use in North America, but there is often a lag depending on the contract, anywhere from 30 to 90 days. We do not have these contractual pass-throughs in Europe and the U.K., so our ability to pass on any increases through price becomes more important. And for the most part, we've been very successful in doing just that. Another current headwind is the availability of labor. Company-wide, we have approximately 400 open positions, which equates to roughly 10% of our global workforce. This is an issue that is not unique to Quantix, and it's impacting manufacturing operations in many different markets and industries. In some of our plants, this issue has resulted in high levels of overtime, extended lead times, and even customer allocations in some limited circumstances. I will now provide my comments on performance by segment for our fiscal first quarter. And as a general statement, results were outstanding in each of these operating segments. Our North American fenestration segment generated revenue of $128.1 million in Q1, which was $17.7 million, or approximately 16% higher than prior year Q1. Strong demand across all product lines, share gains in our screens business, and increased capacity utilization on our vinyl extrusion assets all contributed to the above-market performance. Adjusted EBITDA of $16.4 million in this segment was $7.7 million, or approximately 88 percent higher than prior year Q1. Volume-related operating leverage, the implementation of annual pricing adjustments, operational improvements, and lower SG&A all contributed to the improved performance year over year. Our European fenestration segment generated revenue of $49.1 million in the first quarter, which is $12.3 million, or approximately 34% higher than prior year. Excluding foreign exchange impact, this would equate to an increase of approximately 28%. Strong demand for our products continues in both vinyl extrusions and spacers, as the repair and remodel markets in the UK and continental Europe remain strong. Adjusted EBITDA of 10.7 million resulted in margin expansion of approximately 660 basis points year-over-year. Volume-related impacts, timing of pricing actions, and operational improvements more than offset inflationary pressure towards the end of the quarter. Our North American Cabinet components segment reported net sales of 54 million in Q1, which was 4 million, or approximately 8% better than prior year. Demand for our cabinet components products was solid throughout the quarter, as the market continued to see strength in new construction and R&R. Adjusted EBITDA was 3.3 million in this segment, which represents margin expansion of approximately 330 basis points compared to prior year. Increased volume, and benefits realized from new assets put into service last year were the primary drivers of improvements in the quarter. Unallocated corporate and other costs were $6 million for the quarter, which is $5.4 million higher than prior year. As Scott mentioned, the primary drivers of this increase were stock-based compensation expense related to share price appreciation, along with higher medical expenses, as our employees have started to feel more comfortable going back to their doctors. It is also worth noting that we realized the benefit for medical costs in Q1 of last year. As I mentioned earlier, we remain focused on operational excellence, cash flow optimization, and improving return on invested capital throughout all segments of our business. Our continued progress on these fronts is driving results and has allowed us to continue to strengthen our balance sheet by paying down debt further during a quarter where we have historically been a net borrower. In summary, macro data points for our business are positive. We are executing on our plan and performing well from an operational standpoint, and our orders remain strong. As such, on a consolidated basis, we are confident in our ability to deliver low double-digit revenue growth this year while maintaining adjusted EBITDA margins in the low 12 percent range, despite the increasing inflationary pressures. And with that, operator, we are now ready to take questions.