Quanex Building Products Corporation

Good day and thank you for standing by. Welcome to the second quarter 2022 Quantex Building Products Corporation's 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 that session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Scott Sulke, Senior Vice President, Chief Financial Officer, 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 our record financial results for the second quarter. Net sales increased by 19.4 percent to $322.9 million during the second quarter of 2022, compared to $270.4 million during the second quarter of 2021. The increase was mostly due to higher prices related to the pass-through of raw material cost inflation, and we suspect there may have been some pull forward of demand as price increases were being implemented. More specifically, we realized net sales growth of 21.7 percent in our North American fenestration segment, 13 percent in our European fenestration segment, excluding the foreign exchange impact, and 14.7 percent in our North America cabinet components segment. Net income increased by 81.5 percent to 26.5 million, or 80 cents per diluted share during the second quarter of 2022. compared to 14.6 million or 43 cents per diluted share during the second quarter of 2021. On an adjusted basis, EBITDA for the quarter increased by 40.4 percent to 45.2 million compared to 32.2 million during the same period of last year. The increase in earnings for the three months ended April 30th, 2022 was attributable to continued strong demand and increased pricing. coupled with lower SG&A expense largely due to lower stock-based comp. Moving on to cash flow in the balance sheet, cash provided by operating activities was $19.8 million for the second quarter of 2022, compared to $32.4 million for the second quarter of 2021. The value of our inventory continued to increase during the quarter 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 decreased to 0.3 times as of April 30th, 2022. We will remain focused on generating cash, paying down debt, and opportunistically repurchasing our stock as the year progresses. As stated in our earnings release, Demand remains healthy, but inflation and supply chain issues continue to add some pressure. Nevertheless, based on improvements in labor performance, the expected continuation of our pass-through pricing strategy, and conversations with our customers, we are increasing guidance for the fiscal year as follows. Net sales are now expected to be 1.18 billion to 1.2 billion. Adjusted EBITDA is now expected to be $150 to $155 million, and free cash flow is forecast to be $65 to $70 million. Note that our current expectation is that revenue growth for the remainder of the year will likely be driven more by price as opposed to volume, and we continue to expect margin expansion in the second half. From a cadence perspective for Q3, We expect net sales to be up low double digits year over year in our North American fenestration segment, low to mid single digits year over year in our European fenestration segment, and mid single digits year over year in our North American cabinet component segment. I'll now turn the call over to George for his prepared remarks.

Thanks, Scott. We achieved a record quarter on many different fronts, and we are extremely pleased with these results. We have improved our financial and operational performance over the past few years by staying focused on what we can control. That focus has been in ensuring the health and safety of our teammates, optimizing asset utilization, improving return on invested capital, and generating free cash flow, all while striving to outperform our customers' needs and wants. Even with so much noise in the market, the success of this strategy has been obvious. In addition, the Quantix team is working extremely hard to make the communities in which we live and work better places, whether that is through volunteerism, focusing on our ESG initiatives, or working to develop themselves into better people and teammates. Quantix employees are embracing the opportunity to be a part of something bigger, and for that I am equally pleased and thankful. I will now discuss our results. As Scott mentioned, demand remained strong across all product lines during the second quarter of 2022, though there may have been some volume pulled forward as price increases were implemented. 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 19.4% year over year. On a year-to-date basis, revenue growth was 17.9% versus prior year. The second quarter was no different than the first quarter when it came to dealing with continued supply chain challenges. 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. However, as results show, the pricing mechanisms at our disposal are effective. I will now discuss performance by operating segment, and I will start with North American fenestration. This segment generated revenue of $177.9 million in Q2, which is $31.8 million, or 21.7 percent higher than prior year Q2. On a year-to-date basis, revenue is $324.5 million, which is $50.3 million, or 18.3 percent higher than prior year. Strong demand in our IG spacer and screens product lines, volume growth and vinyl fencing components, and price increases across all product lines were the main drivers of the growth. We estimate that around a third of the revenue growth in this segment was due to an increase in volume, and the remainder was due to an increase in price. Adjusted EBITDA was $26.3 million, or 27.3% higher than prior year. On a year-to-date basis, adjusted EBITDA was $42.5 million, or 15.1 percent higher than prior year. Improved pricing, reworked vinyl extrusion contracts, and volume gains in vinyl fencing components were the primary reasons for the improved performance. We saw margin expansion in Q2 in this segment, and we expect that to continue through the remainder of the year as pricing catches up to inflationary pressures. Our European fenestration segment generated revenue of $73.4 million in the first quarter, which represents an increase of 19.1% year-over-year. Excluding foreign exchange impact, this would equate to an increase of 13%. On a year-to-date basis, revenue is $132.3 million, which is $21.6 million, or 19.5% better than prior year, Excluding foreign exchange impact, this would equate to an increase of 15.6 percent. For Q2, we estimate that around 20 percent of the revenue growth in this segment was due to an increase in volume, with price driving the remainder of the growth. Adjusted EBITDA came in at 15.1 million for the quarter, which was 2.3 million better than prior year, but yielded margin compression of approximately 30 basis points. On a year-to-date basis, adjusted EBITDA is $25.5 million, which is $1.9 million better than prior year. Strong demand in both the IG spacers and vinyl extrusions, combined with material-related price increases, accounted for the strong performance year over year. The rate of margin compression was significantly lowered in the quarter, and we anticipate that margins will continue to improve as the year progresses and price increases catch up to inflationary pressures. Our North American Cabinet components segment reported net sales of $72.9 million in Q2, which is 14.7 percent higher than prior year. On a year-to-date basis, revenue is $135.2 million, which represents an increase of 15 percent versus prior year. Again, as a reminder, volumes have decreased in this segment year over year. mainly because of customers reducing overtime hours worked in their plants coupled with their supply chain issues. Increases in hardwood index pricing, as well as discretionary pricing actions, have offset the volume decline and resulted in revenue growth. Adjusted EBITDA was $4.5 million for the quarter, which is $1.4 million better than prior year, and resulted in margin expansion of approximately 140 basis points. On a year-to-date basis, adjusted EBITDA of $6.5 million is $200,000 less than prior year and results in year-to-date margin compression of 50 basis points. Timing of price increases, better availability of green lumber, improvements in our lumber yield, and labor efficiencies were the main drivers of the positive results in the quarter. 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 fully catch up on our margin performance in this segment. Just like the European fenestration segment, we do anticipate that margins will improve as the year progresses and price increases catch up to inflationary pressures. Unallocated in corporate costs for the quarter were 3.7 million less than prior year. The main drivers of the lower spending were favorable experiences for medical expenses in the organization, as well as lower stock-based compensation expense. Just a reminder that stock-based comp expense is variable, and it will adjust with fluctuations in our stock price. Despite the challenging supply chain environment, and ongoing inflationary pressures, we remain very optimistic on the remainder of the year. Customer backlogs in all segments remain high. In North America, the housing market remains strong, despite the recent interest rate hikes. In continental Europe and the U.K., the demand environment remains healthy, although consumer confidence could be impacted if inflation continues to ramp and energy costs continue to increase. Our balance sheet remains strong, and cash flow should improve in the second half of our year. In addition, with six months left in our year, we have enough visibility to be able to provide upward revisions on our full-year guidance. And to reiterate Scott's comments, we expect the following. Net sales to be $1.18 billion to $1.2 billion, adjusted EBITDA to be $150 to $155 million, and free cash flow to be $65 to $70 million. These results would equate to another record year for Quantix, and I would like to thank all of my teammates for their continued hard work and execution. With this new guidance announced, our near-term capital deployment focus will be on generating cash, further paying down debt, and getting more aggressive on our share repurchase activity, which reflects our commitment to return capital to our stockholders and increase shareholder value. as well as our confidence in Quantix's long-term prospects relative to our current trading environment. And with that, operator, we are now ready to take questions.