Quanex Building Products Corporation

Good day and thank you for standing by. Welcome to the fourth quarter and full year 2021 Clonix Building Products Corporation earnings conference call. At this time, all participants are in listen-only mode. After the presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star, then 1 on your telephone. Please be advised today's conference may be recorded. If you require operator assistance during the call, please press star, then 0. I'd now like to hand the conference over to your host today, Scott Zilke, SVP, CFO, and Treasurer. Please go ahead.

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. Net sales increased by 14.2% and 25.9% during the fourth quarter and full year of 2021, respectively. Record growth for both periods. As a reminder, both of our manufacturing facilities in the UK were shut down in late March of 2020 and did not resume operations until mid to late May last year. The increases in revenue were mostly due to improved demand across all product lines and operating segments, combined with higher prices primarily related to the pass-through of raw material cost inflation. More specifically, for the fourth quarter and full year, we posted net sales growth of 10.1% and 19.6% respectively in our North American fenestration segment, 15.9% and 17.1% respectively in our North American cabinet component segment, and 17.6% and 45% respectively, in our European fenestration segment, excluding the foreign exchange impact. We reported net income of $20.9 million, or $0.62 per diluted share, for the three months ended October 31, 2021, compared to net income of $22.2 million, or $0.67 per diluted share, during the three months ended October 31, 2020. For fiscal 2021, we reported net income of $57 million, or $1.70 per diluted share compared to net income of $38.5 million or $1.17 per diluted share for fiscal 2020. On an adjusted basis, net income was $20.8 million or $0.62 per diluted share during the fourth quarter of 2021 compared to $22 million or $0.67 per diluted share during the fourth quarter of 2020. Adjusted to net income was $58.6 million or $1.75 per diluted share for fiscal 2021 compared to $40.7 million, or $1.24 per diluted share for fiscal 2020. The adjustments being made to EPS are for restructuring charges, certain executive severance charges, foreign currency transaction impacts, and transaction and advisory fees. On an adjusted basis, EBITDA decreased by 5.3% to $37.3 million in the fourth quarter of 2021, compared to $39.4 million in the fourth quarter of last year. For the full year of 2021, adjusted EBITDA increased by 21.3% to $126.8 million, compared to $104.5 million in 2020. The decrease in earnings for the quarter was mainly due to inflationary pressures and supply chain challenges. The increase in earnings for the 12 months ended October 31, 2021, was largely due to higher volumes improved operating leverage, and better pricing. This increase was somewhat offset by higher raw material costs and an increase in selling general and administrative expenses. I'll now move on to cash flow in the balance sheet. Cash provided by operating activities was $78.6 million for the 12 months ended October 31, 2021, compared to $100.8 million for the 12 months ended October 31, 2020. We generated free cash flow of $54.6 million in 2021 compared to $75.1 million in 2020. The decrease was primarily driven by an increase in working capital, more specifically the value of our inventory due to inflation. We were able to repurchase $11.2 million in stock, and we repaid $65 million of bank debt during fiscal 2021, $20 million of which was repaid in fourth quarter. Our balance sheet is strong, our liquidity position is solid, and our leverage ratio of net debt to last 12 months adjusted EBITDA improved to 0.1 times as of October 31, 2021, which is a half turn lower than where we exited fiscal 2020. As for 2022, and as noted in our outlook section in the earnings release, we have chosen not to issue guidance just yet. Demand remains strong, but ongoing supply chain disruptions continue to create uncertainty. With this backdrop, we believe it would be premature to give guidance at this time. We do believe that we should be able to realize margin expansion on a consolidated basis in fiscal 2022, but we also think that margin expansion will be second half loaded. As we sit here today and to set appropriate expectations for the first quarter of 2022, We currently expect mid-single-digit net sales growth for the first quarter, mostly due to price increases, but margins will be pressured compared to the first quarter of 2021. We hope to provide an update on full-year guidance when we report earnings for the first quarter of 2022. As a reminder, there is a fair amount of seasonality to our business. The first quarter of each year is typically the low-water mark, with the second half contributing most of our earnings in free cash flow. I'll now turn the call over to George for his prepared remarks.

Thanks, Scott. We are extremely pleased to announce that 2021 was a record year for Quantix, despite numerous challenges. We reported record revenue and earnings, and return on invested capital continued to improve. In addition, we reported another year with solid free cash flow. In fact, cumulative free cash flow over the past five years is approximately $325 million, Also, as Scott mentioned, we were able to pay down $65 million of debt and return $11.2 million to shareholders through share repurchases during the year. While we are very pleased with these results, we're not surprised. In an environment with strong demand, the operational improvements we've made in our manufacturing facilities over the past four years, combined with the systemic and permanent changes we've made to our working capital management, continue to yield strong results. I am very proud of the entire Quantix team for the energy, effort, and performance they continue to deliver to our customers, communities, and shareholders. Before providing comments on segment results, I will give some additional color on our view of the events of 2021, the markets we serve, and the macroeconomic environment we currently face. As we enter 2021, There was optimism and hope that the COVID pandemic would soon be under control and that operating environments would return to some level of normalcy. As different variants spread and vaccine uptake proved lower than expected, the optimism was soon replaced by the reality that the battle against COVID is far from over and that measures to contain or minimize the spread of the virus will continue around the world. The year also ushered in a new and in some respects more significant challenge, supply chain stress and disruption. With the infusion of COVID relief payments into our economy, demand for goods in the building product segment increased at record rates. At the same time, the supply chain's ability to ramp up was continually impeded by labor constraints, plant shutdowns or slowdowns, freight issues, and significant weather events. As a result, Backlogs for finished goods dramatically increased over the year to record levels, and suppliers have been unable to close the gap. All these factors have worked together to add an unprecedented amount of stress to the entire chain, and as a result, everyone around the world is now seeing high levels of inflation, sporadic deliveries, and unexpected back orders or stockouts with little or no notice. This last piece, limited to no visibility on the delivery of goods, is currently our biggest challenge. All told, the planning and operational environment we see today is significantly more challenging than in 2020, when our primary concern was the labor disruption caused by the pandemic. When looking at the markets we serve, demand continues to be strong across all segments. Low existing housing inventory and low mortgage rates continue to support strong housing demand and R&R remains healthy due to high levels of back orders and continued strong consumer confidence. Although we continue to watch for a pullback in demand due to inflationary pressures, we are not seeing signs of this at this time. I will now discuss segment results. Our North American fenestration segment reported revenue of $156.3 million in the fourth quarter, which was 10.1% better than prior year fourth quarter. Solid demand across all product lines, combined with higher index pricing, additional surcharges, and permanent price increases accounted for this stronger revenue performance. Adjusted EBITDA of $20.2 million in this segment was 15% less than prior year fourth quarter. Volume-related benefits were more than offset by increases in material costs, normalized medical costs, and higher SG&A driven by incentive compensations. As a reminder, approximately 80% of our North American fenestration business has contractual raw material pricing index mechanisms. The timing lag of these indices are typically 60 and 90 days, and therefore, we are in arrears and chasing price until the rate of inflation flattens or reverses. At such time, we would expect to see a period of margin improvement or catch-up. For the full year, this segment had revenue of $578.3 million. and adjusted EBITDA of 75.4 million, which represents a 20 basis point margin decrease from prior year in a very challenging inflationary environment. We generated revenue of 69.7 million in our European fenestration segment in Q4, which was 12.9 million, or 22.7% higher than prior year, or up 17.6% after excluding the foreign exchange impact. Strong demand in the U.K. and continental Europe, combined with price increases, resulted in record revenue levels for the segment. Adjusted EBITDA of $12 million in the quarter was 10.1% less than prior year Q4. The drop in margin percentage for the quarter was driven by material inflation, normalization of SG&A expenses, and increases for incentives. On a full year basis, this segment had revenue of 251.6 million and adjusted EBITDA of 50 million, which equates to margin expansion of 160 basis points versus prior year. Our North American cabinet component segment reported net sales of 66.6 million in Q4, which was 15.9% better than prior year. Strong demand combined with higher index pricing and additional permanent price increases were the drivers for higher performance. Adjusted EBITDA for the segment was $5.4 million, which represents an increase of 16.3% compared to prior year fourth quarter. Volume benefits combined with pricing actions, improved wood yields, and normalized expenses all contributed to the favorable performance by largely neutralizing inflationary pressures during the quarter. For the full year, this segment had revenue of $246.1 million and adjusted EBITDA of $14.2 million, which was an improvement of 17.1% and 22.5% respectively. We were able to realize margin expansion of approximately 30 basis points in this segment, even though we chased prices all year. And as a reminder, 100% of our cabinet business has contractual raw material pricing index mechanisms. Finally, unallocated corporate and SG&A costs were $2.1 million lower than the prior year fourth quarter. The primary drivers of the lower expenses were true-ups for stock-based compensation expense and lower than planned medical expenses in the quarter. For the full year, unallocated corporate and SG&A costs were $12.8 million, which returned to normalized levels versus 2020, which was a year impacted by COVID-19. As Scott mentioned in his financial commentary, cash flow generation remains solid despite a significant increase in the value of our inventory due to inflation, and our balance sheet is strong. Our board of directors recently authorized a new $75 million share repurchase program, and we will continue to utilize this authority in the open market and on an opportunistic basis. We have positioned ourselves well. and we will continue to evaluate all opportunities to create value for our shareholders. As we look forward into 2022, we remain very optimistic on the demand environment. Our customers are reporting record levels of backlogs, and this, combined with current favorable housing and R&R markets, should translate into continued strong demand. Operationally, we feel we have made progress on our hiring needs, by raising starting wages by an average of $1.80 per hour in our manufacturing facilities. Outside of the index pricing and the associated time lags, we have been able to implement surcharges and permanent price increases to help offset inflation. The major challenge we currently face is supply chain and trade uncertainty, and it is for this reason alone that we have decided not to provide specific financial guidance for 2022 at this time. Due to continuing supply chain disruptions, we have very little, if any, visibility into our short-term delivery schedules. In this environment, it is extremely difficult to predict the cadence for shipments over the next few months or the potential costs associated with sudden changes in schedules. And therefore, we think it is prudent to not provide guidance until such time as we can gain some forward visibility. In summary, We continue to execute on our strategy and are proud to have delivered a record year in a very challenging environment. Demand remains strong, and if the global supply chain stabilizes and our businesses continue their excellent operational performance, then we believe it will translate into revenue and earnings growth in another solid year in 2022. We will continue to stay focused on executing on our strategic plan, and we look forward to reaching a point where we can give more definitive guidance. And with that, operator, we are now ready to take questions.