Quanex Building Products Corporation

Good day and thank you for standing by. Welcome to the first quarter 2022 QuantX Building Products Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this 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 then 0. I would 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. We reported revenue of $267 million during the first quarter of 2022, which represents an increase of 16% compared to $230.1 million during the first quarter of 2021. The increase was largely attributable to volume increases in our fenestration segments combined with higher prices related to the pass-through of raw material cost inflation. More specifically, We realized net sales growth of 14.5% in our North American fenestration segment, 15.5% in our North American cabinet components segment, and 18.6% in our European fenestration segment, excluding the foreign exchange impact. We reported net income of $11.2 million, or $0.34 per diluted share, for the three months into January 31, 2022, compared to $7.9 million, or $0.24 per diluted share, during the three months into January 31, 2021. On an adjusted basis, net income increased by 25.9 percent to $11.3 million, or $0.34 per diluted share, during the first quarter of 2022, compared to $9 million, or $0.27 per diluted share, during the first quarter of 2021. The adjustments being made to EPS are for restructuring charges, loss on the sale of a plant, foreign currency transaction impacts, and transaction and advisory fees. On an adjusted basis, EBITDA for the quarter was essentially flat year-over-year at $24.4 million compared to $24.3 million during the same period of last year. The increase in earnings for the three months into January 31, 2022 was attributable to continued strong demand, operational efficiency gains, and increased pricing. However, The decrease in margin percentage was driven by inflationary pressures and time lags on material index pricing mechanisms. Moving on to cash flow in the balance sheet, cash used for operating activities was $21.7 million for the quarter compared to $3.4 million for the same period of last year. Due to the typical seasonality in our business, free cash flow was negative in the first quarter of this year. In addition, the value of our inventory increased further due to inflationary pressures, which had a negative impact on working capital. As a reminder, we usually generate most of our cash in the second half of each year. Our balance sheet continues to be strong, our liquidity position is solid, and our leverage ratio of net debt to last 12 months adjusted EBITDA was at 0.4 times as of January 31st, 2022. We will remain focused on generating cash, paying down debt, and opportunistically repurchasing stock as the year progresses. As stated in our earnings release, demand remains healthy, but the rate of inflation continues to pressure margins. However, based on improvements in labor performance, the expected continuation of our pass-through pricing strategy, conversations with our customers, and the latest macro data, we're now comfortable providing the following guidance for fiscal 2022. Net sales of $1.13 billion to $1.15 billion, adjusted EBITDA of $135 million to $140 million, depreciation of approximately $31 million, amortization of approximately $15 million, SG&A of $115 million to $120 million, interest expense of $2 million to $2.5 million, tax rate of 28 percent, CapEx of $30 million to $35 million, and pre-cash flow of $55 million to $60 million. While we do expect some level of volume growth in our fenestration segments for the remainder of the year, note that our current expectation is that revenue growth for the remainder of the year should be driven more by price as opposed to volume, and we expect margin expansion to be second-half weighted. From a cadence perspective for Q2, we expect net sales to be up mid to high single digits year over year in each segment. However, due to inflation and the time lag associated with passing on price increases for most of our raw materials, we believe it will be a challenge to realize margin expansion in any segment in Q2. Looking ahead into the second half of the year, on a consolidated basis, We currently expect mid-single-digit net sales growth year-over-year in Q3 and Q4. In addition, due to easier comps and the expected benefit from our pricing strategy, coupled with some volume growth in our fenestration segments, we expect to realize some margin expansion in Q3 and Q4. I'll now turn the call over to George for his prepared remarks.

Thanks, Scott. Prior to my comments, I would like to take a moment to acknowledge Joe Rupp for his long and dedicated service to Quantix as a board member and as our lead independent director. Joe's guidance was key during our transition into a pure play building products company several years ago, and more recently, his mentorship and support proved invaluable as I transitioned into the CEO role. I would like to thank Joe for all he has done, and I wish him all the best. I will now discuss results for the quarter and then conclude with a discussion on the macro environment and guidance. Demand was healthy across all product lines during the first quarter of 2022. Volume growth in our fenestration segments and higher prices in all segments, mostly related to the pass-through of raw material cost inflation, resulted in revenue growth of 16% year-over-year. On a consolidated basis, we estimate that revenue growth for the quarter was weighted approximately 10% due to an increase in volume and approximately 90% due to an increase in price. The first quarter began with continued supply chain challenges and significant labor disruption caused by COVID absenteeism driven by the Omicron variant. However, these issues started to subside towards the end of the quarter. The rate of raw material cost inflation remains a challenge, as we typically see a 30- to 90-day time lag in passing these increases through to our customers. Looking at the individual segments, I will start with the North American fenestration. This segment generated revenue of $146.6 million in Q1, which was $18.5 million, or 14.5% higher than prior year Q1. strong demand in our IG spacer and screen product lines, volume growth in vinyl fencing components, and price increases across all product lines were the main drivers of the growth. We estimate that revenue growth in this segment was weighted approximately 45% due to an increase in volume and approximately 55% due to an increase in price. Adjusted EBITDA of $16.3 million in this segment was essentially flat versus prior year Q1 Improved pricing, volume-related efficiency gains, and productivity-related improvements were more than offset by inflationary pressures on raw materials, which caused margin erosion of approximately 170 basis points for the quarter. However, our current expectation is for margin expansion in this segment later in the year, assuming that the rate of inflation subsides. Our European fenestration segment generated revenue of $58.9 million in the first quarter, which was $9.8 million, or 20% higher than prior year. Excluding foreign exchange impact, this would equate to an increase of 18.6%. We estimate that revenue growth in this segment was weighted approximately 20% due to an increase in volume and approximately 80% due to an increase in price. Strong demand in both IG spacers and vinyl extrusions, combined with material-related price increases, accounted for the strong performance year-over-year. These favorable volume-related impacts in pricing actions were more than offset by inflationary pressure on raw material costs and by inefficiencies caused by the COVID-related absenteeism early in the quarter. As such, adjusted EBITDA came in at $10.4 million for the quarter, which was 300,000 less than prior year and yielded margin compression of approximately 420 basis points. Similar to our expectations for other segments, we do anticipate that margins will improve as the year progresses, again, assuming that the rate of inflation subsides. Our North American Cabinet Components segment reported net sales of 62.4 million in Q1, which was 8.4 million or 15.5% higher than prior year. Volumes decreased in this segment year over year, mainly as a result of customers' decisions to reduce overtime hours worked in their plants. Increases in hardwood index pricing, as well as discretionary pricing actions, offset the volume and resulted in revenue growth year over year. Adjusted EBITDA was $2 million for the quarter, which was $1.2 million less than prior year, and resulted in margin compression of approximately 280 basis points. Improvements in lumber yield and labor efficiency were more than offset by a significant increase in hardwood lumber costs during the quarter. Weather-related challenges in the Appalachian Wood region, as well as increases in maple demand, were the main drivers of the increases in lumber costs. As a reminder, we have material index pricing mechanisms in place, but they typically have a 90-day lag, and we will require a period of flat or declining wood pricing before we're able to catch up on our margin performance in this segment. As we look forward through the remainder of the year, we feel good about the demand environment across all of our product lines. In North America, the housing market remains strong, and our customers continue to have high levels of backlog which we anticipate will slowly dwindle throughout the year. The rate of inflation and the potential for further interest rate hikes could impact demand at some point in the future, but we do not expect this to occur in the near term due to the high backlog levels. In continental Europe and the U.K., the demand environment remains healthy, although consumer confidence could ultimately be impacted if inflation continues to ramp and energy costs continue to increase. From Aquanix's perspective, we have seen enough improvements in our supply chain and stabilization in our labor force to say that the main challenge we now face is the rate of inflation and the ability to pass through price in an expedited manner. As Scott mentioned earlier, we have enough data points and adequate visibility into our customers' backlog to give us confidence in providing full year guidance. Again, we expect to generate revenue of $1.13 billion to $1.15 billion and adjusted EBITDA of $135 million to $140 million. If we execute the plan and are able to post results within these ranges, it will mark the third straight year of record performance for the Quantix team. Moving on to a more recent and tragic subject, which is the Russian invasion of Ukraine. It is difficult to see these events unfold in real time and watch what you believe to be unfathomable turn into reality. We have employees and business partners with personal ties to Ukraine, and our hearts are with them, their families, and all the Ukrainian people being affected by this pointless and horrific war. At this point, it is too early for anyone to accurately predict or estimate the impact that this war will have on the European or global economies of or what supply chain disruptions or other impacts this may have on our industry. We anticipate there will be challenges, especially if the situation worsens substantially. However, at this point, it is much too early to predict or forecast those impacts. Nonetheless, our team has managed through COVID and numerous global supply chain challenges over the past two years, and we are very confident in our ability to navigate this event as well. And with that, operator, we are now ready to take questions.