Quanex Building Products Corporation

Good day and thank you for standing by. Welcome to the Q3 2022 Quantix 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 the session, you will need to press star 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Zilke, Senior Vice President, 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 or a 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 financial results on a consolidated basis, followed by comments on the results for each operating segment. On a consolidated basis, we reported net sales of $324 million during the third quarter of which represents an increase of 15.8% compared to $279.9 million during the third quarter of 2021. The increase in revenue was mostly attributable to higher prices related to the pass-through of raw material cost inflation. Net income increased by 90.4% to $25.9 million or 78 cents per diluted share during the third quarter of 2022, compared to 13.6 million or 41 cents per diluted share during the third quarter of 2021. On an adjusted basis, EBITDA for the quarter increased by 34.3 percent to 44.2 million, compared to 32.9 million during the same period of last year. This equates to adjusted EBITDA margin expansion of approximately 180 basis points year over year. The increase in earnings for the three months into July 31st, 2022 was largely due to increased pricing and surcharges related to the pass-through of raw material cost inflation and higher volumes in the North American fenestration segment. Now for results by operating segment. We reported net sales of 184.7 million in our North American fenestration segment for the third quarter of 2022. which represents growth of 25 percent compared to the third quarter of 2021. The increase in revenue was primarily driven by an increase in price and raw material surcharges, along with increased volume. We estimate that around half 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 $27.1 million in this segment, or 48.7 percent higher than prior year. We realized margin expansion year over year in this segment, and we expect that to continue through Q4 as pricing continues to catch up to inflationary pressures. We reported net sales of 72.5 million in our North American Cabinet Component Segment, Q3 of 2022, which was 17% higher than prior year. The entire increase was driven by price as volumes declined. Customers are working down their backlogs as demand softens in this segment. The increases in hardwood index pricing, as well as discretionary pricing actions, offset the volume decline and resulted in revenue growth for the quarter. Adjusted EBITDA was 5.6 million for the quarter, which represents an increase of 126.6% versus prior year, and resulted in margin expansion of approximately 370 basis points. Similar to 2Q, timing of price increases Better availability of green lumber, improvements in lumber yield, and labor efficiency were the main drivers of the positive results in the quarter. Once again, as a reminder, we have material index pricing mechanisms in place in this segment, but they typically have a 90-day lag. It will be a challenge to realize margin expansion year over year in Q4 in this segment due to the fact that we have a tough comp, but also because demand continues to soften and we expect hardwood prices to reset lower come October 1st. Our European fenestration segment reported revenue of 67.6 million in the third quarter, which represents a decrease of 4.9% year-over-year. However, excluding foreign exchange impact, this would equate to an increase of 8.7%, all driven by increased pricing as volumes declined. Adjusted EBITDA came in at $12.1 million for the quarter, which was 15.8% lower than prior year. We currently expect revenue to decrease in this segment in Q4 versus the comparable quarter of 2021 due to the foreign exchange impact and the softer demand backdrop in Europe. But we anticipate that we can protect margins as price increases continue to catch up to inflationary pressures and we flex our cost structure appropriately. Moving on to cash flow in the balance sheet, cash provided by operating activities was $51.7 million for the third quarter of 2022, compared to $18.5 million for the third 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, but we were still able to generate free cash flow of $46 million for the quarter, mainly due to the significant increase in net income. We were able to repay $25 million in bank debt and repurchase $5 million of our common stock during the quarter. 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 0.1 times as of July 31, 2022. In the near term, we will remain focused on generating cash and opportunistically repurchasing our stocks. We will also maintain our focus on growing the company through organic, inorganic, and innovative growth opportunities as they arise, while continuing to preserve our healthy balance sheet. As stated in our earnings release, we are reaffirming guidance for fiscal 22, which is based on our strong results year to date, coupled with ongoing conversations with our customers. Overall, demand for our products is still relatively healthy, but in addition to the softness in Europe, we are beginning to see some signs of softness in our North American cabinet components business. From a cadence perspective, the fourth quarter of this year versus the fourth quarter of last year, we now expect about 15% revenue growth in our North American fenestration segment and low single-digit revenue growth in our North American cabinet component segment. However, due to the foreign exchange impact and the continued softness in Europe, We now expect revenue to decline by about 15% in our European fenestration segment in the fourth quarter. As a reminder, on a consolidated basis, we guided to net sales of 1.18 billion to 1.2 billion, which we expect will generate approximately 150 to 155 million in adjusted EBITDA in fiscal 2022. I'll now turn the call over to George for his prepared remarks.

Thanks, Scott. I will begin my commentary by discussing the current macroeconomic environment and how we believe this will impact Quantix going forward. In North America, heightened mortgage rates, increased economic uncertainty, inflation concerns, and upcoming midterm elections will continue to provide headwinds to consumer confidence in the near term. However, let's not lose sight of the fact that the US housing market is significantly underbuilt with low inventories and the demand for residential housing is still strong. We also expect the R&R market to remain healthy due to the age of existing housing and higher level of homeowner equity. These factors will enable the building product sector to be somewhat resilient and rebound much more quickly from any downturn or recessionary environment. Another factor we believe will benefit quantics mid to long-term will be continued changes to building codes and standards as they relate to energy performance of building envelopes. The recently passed Inflation Reduction Act of 2022 includes provisions where households can save up to 30% with tax credits for home construction projects on windows, doors, insulation, or other weatherization measures that prevent energy from escaping homes. Our current portfolio includes components used in products that accomplish those goals. From a supply chain perspective, we have begun and expect to see continued ease and concerns over the supply of raw materials, with significant downward pressure on costs. Steel, aluminum, resins, and hardwoods have all begun to see decreases in input prices for the first time in over two years. Labor conversion and medical benefit costs will continue to see significant pressure, and we will still require price pass-throughs to offset those increased costs. In the UK and Europe, economic uncertainty, high levels of inflation, and energy supply concerns resulting from the war in Ukraine are all negatively impacting consumer confidence and slowing residential new construction and R&R activity. The largest concern in the region in the near term will be both the supply and cost of energy in continental Europe. And any further erosion, which we can't predict, could change our outlook. Even with the near-term uncertainty, the Quantix team continues to remain focused on the areas that we can control, such as service and quality to the customer, effectiveness of our pricing mechanisms, operational performance, working capital and cash management, and culture development and strengthening. Over the past few years, we've worked hard to build a foundation of people and processes that are prepared to adjust and react rapidly to changes. Our continued performance improvement through COVID and the past year and a half of supply chain challenges highlight this fact. We have followed our playbook and stayed true to our mission of improving cash flow generation, return on invested capital, and profitability, all while maintaining a strong balance sheet. We are ready to move Quantix into the next phase of our evolution, and it is this point that I would like to spend some time on now. Last night, we posted an updated investor presentation to our website. You can find this document under the Investors tab of the site and in the Presentations and Events section. The presentation will give you a good overview of who we are today in terms of financial metrics, product offerings, and the markets we serve. More importantly, The updated presentation provides a deeper insight into our core competencies and lays out a roadmap for our growth with purpose strategy and our planned pathway to achieve $2 billion of revenue. Let me be clear. We have a very defined strategy with optionality for growth. The goal of the strategy is profitable growth to create further value for shareholders over time, all while maintaining a healthy balance sheet. The presentation will also serve as a checklist that we review prior to making any investment decisions, whether it be organic growth, inorganic growth, or growth through innovation. The most important takeaway is our view that we are not a window and door company, nor are we a cabinet company. We are a manufacturing company with a broad set of core competencies. We just happen to currently serve primarily the window and door and kitchen and bath cabinet markets. While this may seem like a simple play on words, I would argue that it is a game-changing way to look at our business. We believe that focusing on our core processes of compound and sealant mixing, extrusion, metal roll forming, and mill working, rather than narrowly focusing on only opportunities in fenestration and cabinet markets, will allow us to identify additional organic and inorganic growth opportunities. And over time, we'll improve our growth and profitability profiles versus our historical averages. From an M&A perspective, our priorities will focus on identifying margin-accretive businesses that either, one, expand our portfolio in current markets and reinforce our sector leadership, or two, are synergistic with our manufacturing capabilities and provide entry points into new growth-oriented markets. From an innovation perspective, our investments will be driven from our desire to build on our manufacturing core competencies and materials expertise. We will identify and develop new products and markets while using current strengths and capitalizing on synergies. We have effectively followed our roadmap over the past two years to improve operational and financial performance, and now we will work to execute our new revised strategy to achieve above-market growth, continued margin expansion, and most importantly, increase shareholder value. And with that, operator, we are now ready to take questions.