Quanex Building Products Corporation

Good day, and thank you for to the Quantix Building Products Q4 and fiscal year 2022 earnings. 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 1-1 on your telephone. Please be advised that today's conference is being recorded. I will now hand the conference over to your speaker today, Scott Zielke, 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 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 $307.5 million during the fourth quarter of 2022. which represents growth of 5.4% compared to 298.1 million for the same period of 2021. We reported net sales of 1.22 billion for the full year, which represents growth of 13.9% compared to 1.07 billion for 2021. The increases were primarily attributable to higher prices related to the pass-through of raw material cost inflation. Net income, increased by 18% to $24.7 million, or $0.75 per diluted share, during the three months ended October 31, 2022, compared to $20.9 million, or $0.62 per diluted share, during the three months ended October 31, 2021. For the full year 2022, net income increased by 55% to $88.3 million, or $2.66 per diluted share, compared to $57 million or $1.70 per diluted share for full year 2021. On an adjusted basis, EBITDA for the quarter increased by 3.8% to $38.7 million compared to $37.3 million during the same period of last year. For the full year 2022, adjusted EBITDA increased by 20.3% to $152.5 million compared to $126.8 million in 2021. This equates to adjusted EBITDA margin expansion of approximately 70 basis points year-over-year. The increase in earnings for the three months and 12 months ended October 31, 2022, was mostly 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. In addition, we had a return-to-provision tax benefit of approximately $6 million fiscal related to updates to taxable differences for non-cash compensation, bonus depreciation, and GILTI, which is global intangible low tax income. Looking ahead, we expect our effective tax rate to return to a more normalized level of approximately 25%. Now for results by operating segment. We reported net sales of $178.2 million in our North American fenestration segment for the fourth quarter of 2022, which represents growth of 14% compared to the fourth quarter of 2021. For the full year, we reported net sales in this segment 687.5 million, or 18.9% growth compared to last year. The increase in revenue for both periods was primarily driven by an increase in price and raw material surcharges, along with increased volume throughout the year. We estimate that around 30% of the Q4 revenue growth in this segment was due to an increase in volume, and the remainder was due to an increase in price. For the full year, we estimate that around 40% 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 of 21.1 million in this segment for the fourth quarter, which was 4.9% higher than prior year. Adjusted EBITDA was 90.8 million in this segment for the full year. or 20.5% higher than 2021, which equates to margin expansion of approximately 20 basis points year over year. We reported net sales of 68 million in our North American cabinet component segment in Q4 of 2022, which was 2.1% higher than prior year. For the full year, we reported net sales of 275.7 million in this segment, which represents an increase of 12% year over year. The increases were driven solely by price as volumes declined throughout the year. Customers continued to work down their backlogs as demand softened. The increases in hardwood index pricing as well as discretionary pricing actions offset the volume decline and resulted in revenue growth for both periods. Adjusted EBITDA was $5 million for the quarter, which represents a decline of 8% versus prior year. Adjusted EBITDA for the year was 17.1 million, or 20.6% higher than 2021, and represented margin expansion of 40 basis points year over year. Price increases, better availability of green lumber, improvements in lumber yield, and labor efficiency were the main drivers of the positive results for the year. We reported revenue of 62.1 million in our European fenestration segment in the fourth quarter, which represents a decrease of 10.9% year-over-year. After adjusting for FX, revenue actually grew by 5.2% during the fourth quarter. For the full year, we reported revenue of $262.1 million, which represents an increase of 4.2% compared to 2021. However, excluding foreign exchange impact, this would equate to an increase of 14.2%. Revenue increases for both periods were driven by increased pricing as volumes declined. Adjusted EBITDA came in at $12.3 million for the quarter, which was 2.5% higher than the fourth quarter of 2021. For the full year, adjusted EBITDA was essentially flat at $50 million compared to 2021 in this segment. Moving on to cash flow in the balance sheet, cash provided by operating activities was $48.1 million for the fourth quarter of 2022 and $98 million for the full year 2022. which represents increases of 54.4% and 24.7% respectively compared to the same periods of 2021. We generated free cash flow of $34.5 million during the fourth quarter of 2022 and $64.8 million for the full year in 2022, increases of 48.9% and 18.8% respectively. We were able to repay $25 million in bank debt during the fourth quarter and we did not repurchase any common stock during the quarter since we were restricted due to the LMI acquisition that we closed on November 1st. 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 negative 0.2 times as of October 31st, 2022. Pro forma for the 92 million that we borrowed to fund the LMI acquisition, Our net leverage ratio was 0.5 times. Going forward, we will 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 on our earnings release, our long-term view continues to be optimistic as the underlying fundamentals for the residential housing market remain positive. Like last year, based on current macro indicators and recent conversations with our customers, we are taking a measured approach to 2023 guidance. As such, we believe it would be premature to give official guidance at this time. We intend to revisit the guidance when we report earnings for the first quarter. Nevertheless, to help for modeling purposes, you can use the following assumptions for now. which reflect our current view and may change by the time we give official guidance. Revenue and adjusted EBITDA may end up relatively flat in 2023 versus 2022. This accounts for the contribution from the LMI acquisition, but also includes the negative impact from FX in Europe and assumes softer demand to reduce pricing in our legacy divisions, mainly due to rolling back surcharges as raw material costs subside. From a cadence perspective for Q1 of 2023, net sales should be up approximately 2% to 3% year-over-year on a consolidated basis. Net sales in our North American fenestration segment should be up approximately 11% to 12% in Q1, driven by the contribution from the LMI acquisition. Net sales are expected to decline by approximately 12% to 13% in our North American cabinet component segment due to softening demand and lower index pricing for hardwoods. In Europe, net sales may be down by approximately 9% to 10% in Q1 due to softer demand combined with negative foreign exchange translation impact. From an EBITDA margin perspective, on a consolidated basis, we think there is opportunity for slight margin expansion in Q1 of 2023 compared to Q1 of 2022. I'll now turn the call over to George for his prepared remarks.

Thanks, Scott, and good morning, everyone. Before I provide my prepared remarks on the operating environment, I would like to take a moment to comment on our interesting and challenging fiscal 2022. The year began with fears of new COVID variants, and that was followed by continued high demand, labor shortages, and material supply challenges. as if those items weren't challenging enough, the idea of a Russia-Ukraine war became a stark reality. The resulting fears of a global energy crisis translated directly into inflationary pressure from virtually every aspect of the business, while foreign exchange translation impacted our international business units. In our fourth quarter, rising mortgage rates continued to impact demand, and commodity raw material costs began to decrease rapidly. which put pressure on index pricing for the first time in over three years. Despite all these challenges, we were able to report another year of record revenue and earnings in yet another difficult year. In the face of these abnormal challenges, what has become normal is how the Quantix team continues to perform well. I'm extremely proud of the results we posted and would like to highlight a few of these points. First and foremost, The Quantix team had a record year in 2022 for safety performance. Despite high levels of overtime and scheduling challenges caused by material shortages throughout the first half, the team remained focused on protecting every person who entered our facilities, and we continued to systematically improve our safety performance. Above all else, this is what makes me the proudest. In addition, our focused efforts on improving return on invested capital continues to pay dividends and translate into improved performance, cash flow generation, and a solid balance sheet. In conjunction with third quarter results, we introduced a refreshed look of our go-forward growth strategy. We call it the road to $2 billion in revenue. The refreshed strategy includes a renewed focus on both organic and inorganic growth that will revolve around our core process competencies and material science. Whether we are building out our current markets or expanding into different adjacent markets, we will use the same diligence that we have demonstrated with our operational performance, and we expect the same positive results for our shareholders. The first move in executing on this refresh strategy would be acquisition of LMI Custom Mixing, which we closed and announced on November 1st. LMI, which will now be referred to as Quantix Custom Mixing, is a state-of-the-art custom polymer mixer that produces high-quality customized rubber compounds used in a variety of applications in complementary and attractive diversified industrial end markets. As our executive team evaluated this acquisition opportunity, it became clear that this was a business we wanted, that we wanted to own and grow for the following reasons. It fits squarely within Quantix's material science and process engineering expertise. It expands our product portfolio into a new, attractive category with significant growth opportunities. It allows us to vertically integrate and realize cost savings through the supply of compounds to our existing IG spacer business in North America, which is located on the same site as LMI's Cambridge, Ohio plant. It is a familiar, complimentary operation that represents low execution and integration risk. The acquisition is immediately accretive to adjusted EPS, and adding this business improves our consolidated margin profile. We are about a month and a half into integrating this business, and we are confident in our ability to realize the expected synergies and to grow this business. With all that said, I would like to thank all of my Quantix teammates for their dedication and efforts during fiscal 2022 and for delivering spectacular results in a very challenging environment. Looking ahead into 2023, we do anticipate that softer volumes, along with index and surcharge rollbacks, will pressure revenue across our legacy divisions. However, we do believe that the underlying fundamentals will favor a housing recovery sooner than later as the demand for housing remains high with inventory levels still low. Affordability will be the key, and as material cost pressures subside, demand could be spurred again. It is also worth noting that despite pressure on the residential new construction market in 2023, we derive approximately 70% of our revenue from the repair and remodel market, which should fare better than new construction in the near term. From a profitability point of view, even though pricing for commodity raw materials is trending lower, inflationary pressures remain significant in areas such as labor, medical benefits, packaging and freight, and chemical feedstocks. As such, it will be necessary for companies to continue to fight for price in these areas, and Quantix will be no different in that regard. Current levels of inflation are simply too high to be offset completely through productivity gains. In addition, as commodity prices drop and index pricing rollbacks occur, we could be in a position to benefit from a margin standpoint due to timing lags. In summary, we expect 2023 to be a year in which revenues will be challenged, but the opportunity to hold or slightly improve margin percentage is real. We plan to stay focused on safety, operational excellence, optimizing ROIC, and integrating and growing Quantix custom mixing. We will continue to invest in new product and process development, and we will also work to identify inorganic opportunities that align with our Road to 2 Billion strategy, all while making sure our balance sheet remains healthy. Despite the challenges we expect in 2023, Quantix is well positioned to continue creating shareholder value. And with that, operator, we are now ready to take questions.

As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by. We'll compile the Q&A roster.

First question will come from the line of

Daniel Moore from CJS Securities. Your line is open.

Thank you. Good morning, George. Scott, thanks for color and taking questions.

Good morning.

Start with just piggybacking off your comments, George, on LMI. Maybe dig into that a little bit more. They're co-located. Was there a process at all around that acquisition? And You talked about many of the things that they bring to the table. Is mixing compounding an area that you would like to grow and scale, or is this more of a sort of a one-off opportunistic? And a quick follow-up there.

Yeah, no, it absolutely is a process, an area that we expect to grow. Currently, they supply EPDM and a few other materials. And then we think by combining the two companies, not only can we invest and grow in their current product portfolio, but we'll give them now the opportunity to add our silicone and our butyl capabilities that we had within Quantix already and allow that custom mixing, excuse me, that custom mixing to be able to offer multiple solutions to customers through many different channels. So we think that there's a great opportunity to continue to expand that business.

And to answer your first question, Dan, There was not a process run. This is a business that we were familiar with and have been for a long time. In fact, the parent company of this LMI business was a company that we acquired, EdgeTech, which is our IG spacer business from way back in 2011. That's actually how George came to the company.

Indeed. Absolutely. That's helpful. So longer term, you know, what kind of sort of growth strategies

margin profile are we looking at for lmi and near term you mentioned accretive i know you're not giving guidance to any range around kind of what eps accretion could look like in the near term from a growth standpoint we think this business can grow at a rate that's above our legacy or core business so if historically that was in the low to mid single digit range for our legacy business prior to covid We think this business can do better than that. From an EPS accretion standpoint, yeah, that's just – that's information we haven't disclosed publicly.

Got it. And maybe just one more and I'll jump back, but the – Free cash flow conversion has been improving. Do you see that trend continuing? Do you think working capital would likely be a benefit in fiscal 23 or more neutral in any expectations for CapEx?

Yeah, good question. Obviously, working capital has definitely been a hit to free cash flow in 2022, I think to the tune of close to $30 million. A lot of that had to do with the value of our inventory going higher because of inflation. Looking ahead into fiscal 2023, we're hopeful that working capital won't be a negative, but I'm not sure it'll be a positive. So I think keeping it somewhat flat when you model is probably the prudent choice at this point.

And any thoughts on CapEx?

Yeah, I would say around the same level as last year, maybe a little higher. So call it 35, maybe a little more. We'll come out with more firm guidance, hopefully, in the next quarter.

All right. I'll jump back to you with any follow-ups. Thank you.

Thank you.

One moment for our next question. Our next question comes from the line of Ruben Garner from Benchmark Company. Your line is open.

Thanks. Good morning, guys, and congrats on a strong close to the year. Thanks very much. recognizing you're not providing guidance, Scott, maybe if you could help. I mean, that seems like a pretty robust outlook with some things working against you like FX and some of the surcharges rolling off. Can you talk about what the kind of underlying organic volume assumption for the year is that gets you to that kind of, you know, flattish revenue? I think the contribution from LMI was in the range of, $80 million. So, I mean, it seems like a pretty modest volume reduction, you know, all things considered with what we're hearing, you know, or what's happening with the new housing world, at least.

Yeah, I mean, obviously, the reason we can even talk potentially about being flat next year versus 2022 is because of the LMI acquisition contribution. Outside of that, we fully expect demand volumes to come down, the FX impact could be significant. So I mean, there's that as well.

I think in addition, specifically in the North American fenestration segment, I think we're still finding opportunities to gain share in a couple of our product lines where labor outsourcing is still a big driver for our growth. And even with falling demand, in terms of volumes, the labor pressures for everyone still exist. So those opportunities still arise. So, you know, we think that there's opportunity to maybe offset some of the market volume with share gain. And then, you know, we're working on adjacent materials as well that we continue to talk about. So, you know, it will be a challenging year and we're working really hard to do everything we can to offset that.

And the only thing I'll add there is, you know, as these index pricing mechanisms kick in and raw material costs go lower and you're having to roll back price, obviously that hits revenue. But there are also a lot of other costs that George mentioned in his prepared remarks that are continuing to go up. So we're going to fight hard. We're going to try to push price where we need to. But the reality is with raw materials coming down, revenue is going to be challenged.

So last time we saw kind of the housing start run rate that we're seeing in the last few months, I mean, you guys were doing more like $800 million to $900 million in revenue. You know, $1.2 billion is a big jump up from that. I know that there's some pricing over that time period, but is the share gains kind of the biggest difference between, you know, and I recognize that's just a new housing start number, but clearly, you know, some of the rates are going to impact some R&R. spending, I think the biggest difference between what maybe you guys did in revenue a few years ago and where you kind of are pointing us to for 23?

You know, I think on a big picture level, what I would say is share gain is a piece of that, and the model of continuing to optimize our processes to solve our customers' labor issues does continue to resonate. I think we've seen in certain areas, especially during supply chain, as people are mitigating risk from Asian supply, bringing things back domestically, that's been a benefit, and we anticipate will continue to be a benefit. And although we don't talk a lot about it, because no one segment or one product line may be significant in the big picture. We have products like the vinyl fencing, our solar, our flashing tapes that all continue to grow within our product line. Again, individually, they're not significant enough to call it out. But independently, they are continuing to roll up and have been great adjacency products for us.

Great. And I'm going to sneak one more in if I can. Same kind of line of questioning on the margin front, pretty impressive outlook to be able to kind of hold where you are. What would, I guess, lead to the most pressure relative to that outlook? Is it volume worsening or is it more risk on the price-cost front? Scott, you mentioned still seeing some inflation in some areas. What's the bigger kind of item to watch for 23 on the margin side?

I think they're equally both, Ruben. You obviously, you know, have followed our business well. So, you know, volume will drop and we'll put pressure. Now, we've said all along, and you've seen it in the past, we're able to adjust to volume drops. I think fairly efficient when compared to others. But volume would be a pressure on that margin. And then continued inflation. I mean, we're still seeing it, even though our commodity raw material prices may be dropping, as I mentioned in my script. we're still seeing pretty high levels of inflation in a lot of areas of our business. And I know my individual business leaders, you know, are really working very hard to offset that. But, you know, we're going to have to go out and try to get price to offset that. Now, you know, why the positive or somewhat positive look on our margin profile? We've talked a lot about as those indexes and surcharges roll back, As we were chasing the tail and the lag on the way up, we're seeing some of the benefit on the way down. So that should help alleviate some of the pressure, and that's why we're probably a little more optimistic on the margin perspective in the year.

Great. Thanks. Congrats again, and Merry Christmas and Happy New Year.

Yeah, you too. Thanks. You too.

Thank you. One moment for our next question. Our next question comes from Julio Romero from Sudoku. Your line is open.

Hey, good morning, George and Scott. Morning, George. I guess to start on the refreshed growth strategy, you know, it sounds exciting. Obviously, you didn't put a timeline on the targets. So maybe just talk about what investors should expect from maybe the cadence of inorganic growth and if deals should be kind of tuck-in or transformational.

Great question. I think really we didn't give a lot of specific guidance there for a very specific reason. I think we've created enough opportunities and we're looking at these adjacencies. By opening it up, what we're effectively doing is we're telling people we're not a window and door company and we're not a cabinet company. We're a manufacturing company that has a very broad set of operational capabilities and material science knowledge. And we're starting to see a lot of different looks, both from internal organic product development as well as external. So I think as we evaluate inorganic opportunities in M&A, I think that they could be either transformational or bolt-ons similar to the size of an LMI. And the reason I don't give better guidance is because a lot of these markets are new. We're still evaluating them. We're looking at the favorability of each of these markets. And as this progresses, we'll try to give better clarity on markets that we may like more than others. But it's relatively new. But I think we've positioned our balance sheet very well to be able to handle both transformational and bolt-ons with... and staying within a very healthy balance sheet perspective, which has been our goal all along.

Great. I appreciate the color there. Maybe on the organic growth side, maybe a follow-on to Ruben's question a little bit. I mean, I was hoping you could expand more on the share gain opportunity, specifically the runway for maybe reshoring from some of your customers as your customers mitigate risk from overseas suppliers, if you could Talk a little bit more about that runway and the multi-year opportunity there.

We're seeing it in a few different areas. I think the LMI business and any sort of compound mixing, because of the long freight, the expense of the freight, lead times, I think that that's going to spur on opportunities. we saw opportunities within the cabinet segment where that one's probably been the one that's been most hit with both tariffs and just supply chain challenges from coming overseas and the amount of inventory that our customers have to carry to protect on that has really pushed on the need. So I think it's Areas that require a lot of freight, a lot of complexity, numerous SKUs are the ones that are going to be the most advantageous for us to identify as a potential sourcing alternative to our customers. And we're looking for those, and then developing products within those.

Great. Thanks very much for taking the questions.

Thank you.

One moment for our next question.

Our next question comes from the line of Kenneth Zenner from KeyBank. Your line is open.

Good morning, George, Scott. This is actually Christian Zylon for Kenneth Zenner. Thanks for taking my questions. Sure. Good morning. Good morning. So I will echo the understanding that you guys aren't giving guidance at this time, but maybe could you clarify the price piece with rollbacks versus getting price to offset some of those other rising costs? And then... Separately, when we think about the North American fenestration business, it really is three distinct businesses with the vinyl, extrusion, and spacers. Could you just talk about the operating leverage across the three distinct businesses amid lower, flattish volume environments?

I'll start with your second question, and then I'll let Scott go back to the first. So as we look at the operating leverage of the different businesses, and actually now there's the fourth one because the Quonix custom mixing will roll up into that, but I would say that the more leveraged businesses tend to be the vinyl extrusion and the spacer extrusion business, and screens and some of our other accessories tends to be very variable cost driven, more manual process in general. Any volume drops will probably impact the spacer or the vinyl extrusion a little more than the other product lines.

On your pricing question, the raw material surcharges or rollbacks or index pricing rollbacks versus anything we try to push, the only thing I can really say to that without getting too specific is raw materials are typically 50%, 55% of the cost. So that a big portion of that is the major raw materials that are indexed. So those are the ones that we really don't have control over coming down. So that would leave us with several other areas to try to offset the rollbacks with increased price.

In the additional inflation where we have to go back out and get price, obviously, you know, that's going to – it's going to take work for us and every other company because, you know, there's this expectation that if raw materials are dropping, I guess everything else in the world is dropping. And that's really not the case. I mean, so we're going to have to be very detailed and very methodical and lining out and transparent with our customer base. You know, we're doing everything we can to try to offset inflation with – continuous improvement and improvement internally. But at some point, that rate of inflation is still pretty high, and we're going to have to go out and get it. I suspect it's going to be a fight, but we have the data and the detail that will support price increases.

Great. Very helpful. Thank you, Sid. And then, If I could just add one more, could you just talk through the specifics of the European business and how you guys were able to perform, I guess, better than expectations, even outside of the FX headwind? Just following up from a comment from last quarter's call, you talked about the impact of elevated prices in Europe and how your product's energy efficiency proposition contributes to performance. Could you maybe quantify that? Or in case energy prices stay elevated, What's the run rate or I guess the runway for 23, maybe even 24? And what about if prices retreat? Thank you.

Yes, specifically in terms of quantifying those opportunities, that's going to be relatively difficult, and we're just not prepared to do that at this point. But from a product or a macro level, what I would say – is you're exactly right. Our spacer product and our vinyl extrusion systems that we make under the linear brand in the UK are both what I would position as a very high end in terms of thermal performance and operating performance within a window. So as energy costs continue to rise in Europe, and they have and they will, and that will also transition at some point in time to North America, Windows systems with our components in it will continue to grow. As energy costs go higher, the decision to replace Windows, it makes that payback for a homeowner when they do their internal rate of return and do I want to make this purchase a lot less difficult. It becomes a fairly easy payback. In addition to the quality of the product that we serve, we feel very strong that these markets will continue to grow just because of the energy cost. And as it relates to the spacer business specifically in Europe, I think it's worth noting that that facility that we have in Germany that manufactures that spacer, that's kind of our hub for international spacer shipments. So our Germany facility is supplying product to probably 60 different countries. in Asia and emerging markets in the Middle East and in Africa that has an opportunity to continue to grow because of their elevated energy costs. So we think the product line serves itself very well to perform in the future as it relates to energy performance.

That's great. Thank you for all the color and happy holidays. You too.

One moment for our next question. And it looks like we have a follow-up from Daniel Moore from CJS Securities. Your line is open.

Yeah, just one follow-up on capital allocation. Obviously, you were blacked out buying back socket given the acquisition, assuming you don't have others in the cookers who we expect that to pick back up, number one. Number two, maybe you talked about this previously, but if there are larger, more transformative deals that come your way, Just talk about where you would be willing to take leverage up to for the right opportunities. Thanks.

So on your second question first, we've been pretty transparent in telling investors that if there were to be a bigger transformational deal out there, I don't think that this management team and this board would ever be comfortable with going above two and a half to three times net leverage. and only if there is a clear runway to get that back down to between one and two times leverage in a relatively short period, so first year or two. George, you want to talk about that?

Yeah, no, I think that that's absolutely fair, and I think what we have done and we've worked on is that pathway to delever is, you know, we're coming off a fourth or fifth straight year of of free cash flow in excess of $50 million. So I think we've done a very good job of developing a cash generation machine here that gives us comfort level and what we can pay back. And so obviously, each of those situations. Now, in terms of capital allocation, I think it will be no different on a go-forward basis than we have in the past. If we are are able to be in the market and there's nothing going on, then we will opportunistically buy back our stock as a priority. I think we'll continue to focus here in this year on repaying down the debt and we'll balance the needs of the organization. I think we've been very transparent that when we can, we'll be opportunistic in our buying of stock.

Very helpful. Thank you again. Thanks.

Thank you. Now turn the call back over to George Wilson for any closing remarks.

Thank you all for joining today. And I would like to take a moment to wish everyone a safe and joyous holiday season and a very happy new year. We look forward to providing an update on our next earnings call in March. Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 11. Thank you. Thank you. Thank you. Thank you.

Good day, and thank you for to the Quantix Building Products Q4 and fiscal year 2022 earnings. 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 1-1 on your telephone. Please be advised that today's conference is being recorded. I will now hand the conference over to your speaker today, Scott Zielke, 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. Hello. 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 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 $307.5 million during the fourth quarter of 2022. which represents growth of 5.4% compared to 298.1 million for the same period of 2021. We reported net sales of 1.22 billion for the full year, which represents growth of 13.9% compared to 1.07 billion for 2021. The increases were primarily attributable to higher prices related to the pass-through of raw material cost inflation. Net income, increased by 18% to $24.7 million, or $0.75 per diluted share, during the three months ended October 31, 2022, compared to $20.9 million, or $0.62 per diluted share, during the three months ended October 31, 2021. For the full year 2022, net income increased by 55% to $88.3 million, or $2.66 per diluted share, compared to $57 million or $1.70 per diluted share for full year 2021. On an adjusted basis, EBITDA for the quarter increased by 3.8% to $38.7 million compared to $37.3 million during the same period of last year. For the full year 2022, adjusted EBITDA increased by 20.3% to $152.5 million compared to $126.8 million in 2021. This equates to adjusted EBITDA margin expansion of approximately 70 basis points year-over-year. The increase in earnings for the three months and 12 months ended October 31, 2022, was mostly 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. In addition, we had a return-to-provision tax benefit of approximately $6 million fiscal related to updates to taxable differences for non-cash compensation, bonus depreciation, and GILTI, which is global intangible low tax income. Looking ahead, we expect our effective tax rate to return to a more normalized level of approximately 25%. Now for results by operating segment. We reported net sales of $178.2 million in our North American fenestration segment for the fourth quarter of 2022, which represents growth of 14% compared to the fourth quarter of 2021. For the full year, we reported net sales in this segment 687.5 million, or 18.9% growth compared to last year. The increase in revenue for both periods was primarily driven by an increase in price and raw material surcharges, along with increased volume throughout the year. We estimate that around 30% of the Q4 revenue growth in this segment was due to an increase in volume and the remainder was due to an increase in price. For the full year, we estimate that around 40% 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 of $21.1 million in this segment for the fourth quarter, which was 4.9% higher than prior year. Adjusted EBITDA was $90.8 million in this segment for the full year. or 20.5 percent higher than 2021, which equates to margin expansion of approximately 20 basis points year-over-year. We reported net sales of 68 million in our North American Cabinet component segment in Q4 of 2022, which was 2.1 percent higher than prior year. For the full year, we reported net sales of 275.7 million in this segment, which represents an increase of 12 percent year-over-year. The increases were driven solely by price as volumes declined throughout the year. Customers continued to work down their backlogs as demand softened. The increases in hardwood index pricing as well as discretionary pricing actions offset the volume decline and resulted in revenue growth for both periods. Adjusted EBITDA was $5 million for the quarter, which represents a decline of 8% versus prior year. Adjusted EBITDA for the year was 17.1 million or 20.6% higher than 2021 and represented margin expansion of 40 basis points year over year. Price increases, better availability of green lumber, improvements in lumber yield, and labor efficiency were the main drivers of the positive results for the year. We reported revenue of 62.1 million in our European fenestration segment in the fourth quarter. which represents a decrease of 10.9% year-over-year. After adjusting for FX, revenue actually grew by 5.2% during the fourth quarter. For the full year, we reported revenue of $262.1 million, which represents an increase of 4.2% compared to 2021. However, excluding foreign exchange impact, this would equate to an increase of 14.2%. Revenue increases for both periods were driven by increased pricing as volumes declined. Adjusted EBITDA came in at $12.3 million for the quarter, which was 2.5% higher than the fourth quarter of 2021. For the full year, adjusted EBITDA was essentially flat at $50 million compared to 2021 in this segment. Moving on to cash flow in the balance sheet, cash provided by operating activities was $48.1 million for the fourth quarter of 2022 and $98 million for the full year 2022. which represents increases of 54.4% and 24.7% respectively compared to the same periods of 2021. We generated free cash flow of $34.5 million during the fourth quarter of 2022 and $64.8 million for the full year in 2022, increases of 48.9% and 18.8% respectively. We were able to repay $25 million in bank debt during the fourth quarter and we did not repurchase any common stock during the quarter since we were restricted due to the LMI acquisition that we closed on November 1st. 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 negative 0.2 times as of October 31st, 2022. Pro forma for the $92 million that we borrowed to fund the LMI acquisition Our net leverage ratio was 0.5 times. Going forward, we will 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 on our earnings release, our long-term view continues to be optimistic as the underlying fundamentals for the residential housing market remain positive. Like last year, based on current macro indicators and recent conversations with our customers, we are taking a measured approach to 2023 guidance. As such, we believe it would be premature to give official guidance at this time. We intend to revisit the guidance when we report earnings for the first quarter. Nevertheless, to help for modeling purposes, you can use the following assumptions for now. which reflect our current view and may change by the time we give official guidance. Revenue and adjusted EBITDA may end up relatively flat in 2023 versus 2022. This accounts for the contribution from the LMI acquisition, but also includes the negative impact from FX in Europe and assumes softer demand to reduce pricing in our legacy divisions, mainly due to rolling back surcharges as raw material costs subside. From a cadence perspective for Q1 of 2023, net sales should be up approximately 2% to 3% year-over-year on a consolidated basis. Net sales in our North American fenestration segment should be up approximately 11% to 12% in Q1, driven by the contribution from the LMI acquisition. Net sales are expected to decline by approximately 12% to 13% in our North American cabinet component segment due to softening demand and lower index pricing for hardwoods. In Europe, net sales may be down by approximately 9% to 10% in Q1 due to softer demand combined with negative foreign exchange translation impact. From an EBITDA margin perspective, on a consolidated basis, we think there is opportunity for slight margin expansion in Q1 of 2023 compared to Q1 of 2022. I'll now turn the call over to George for his prepared remarks.

Thanks, Scott, and good morning, everyone. Before I provide my prepared remarks on the operating environment, I would like to take a moment to comment on our interesting and challenging fiscal 2022. The year began with fears of new COVID variants, and that was followed by continued high demand, labor shortages, and material supply challenges. As if those items weren't challenging enough, the idea of a Russia-Ukraine war became a stark reality. The resulting fears of a global energy crisis translated directly into inflationary pressure from virtually every aspect of the business, while foreign exchange translation impacted our international business units. In our fourth quarter, rising mortgage rates continued to impact demand, and commodity raw material costs began to decrease rapidly. which put pressure on index pricing for the first time in over three years. Despite all these challenges, we were able to report another year of record revenue and earnings in yet another difficult year. In the face of these abnormal challenges, what has become normal is how the Quantix team continues to perform well. I'm extremely proud of the results we posted and would like to highlight a few of these points. First and foremost, The Quantics team had a record year in 2022 for safety performance. Despite high levels of overtime and scheduling challenges caused by material shortages throughout the first half, the team remained focused on protecting every person who entered our facilities, and we continued to systematically improve our safety performance. Above all else, this is what makes me the proudest. In addition, our focused efforts on improving return on invested capital continues to pay dividends and translate into improved performance, cash flow generation, and a solid balance sheet. In conjunction with third quarter results, we introduced a refreshed look of our go-forward growth strategy. We call it the road to $2 billion in revenue. The refreshed strategy includes a renewed focus on both organic and inorganic growth that will revolve around our core process competencies and material science. Whether we are building out our current markets or expanding into different adjacent markets, we will use the same diligence that we have demonstrated with our operational performance, and we expect the same positive results for our shareholders. The first move in executing on this refresh strategy would be acquisition of LMI Custom Mixing, which we closed and announced on November 1. LMI, which will now be referred to as Quantix Custom Mixing, is a state-of-the-art custom polymer mixer that produces high-quality customized rubber compounds used in a variety of applications in complementary and attractive diversified industrial end markets. As our executive team evaluated this acquisition opportunity, it became clear that this was a business we wanted, that we wanted to own and grow for the following reasons. It fits squarely within Quantix's material science and process engineering expertise. It expands our product portfolio into a new, attractive category with significant growth opportunities. It allows us to vertically integrate and realize cost savings through the supply of compounds to our existing IG spacer business in North America, which is located on the same site as LMI's Cambridge, Ohio plant. It is a familiar, complimentary operation that represents low execution and integration risk. The acquisition is immediately accretive to adjusted EPS, and adding this business improves our consolidated margin profile. We are about a month and a half into integrating this business, and we are confident in our ability to realize the expected synergies and to grow this business. With all that said, I would like to thank all of my Quantix teammates for their dedication and efforts during fiscal 2022 and for delivering spectacular results in a very challenging environment. Looking ahead into 2023, we do anticipate that softer volumes, along with index and surcharge rollbacks, will pressure revenue across our legacy divisions. However, we do believe that the underlying fundamentals will favor a housing recovery sooner than later as the demand for housing remains high with inventory levels still low. Affordability will be the key, and as material cost pressures subside, demand could be spurred again. It is also worth noting that despite pressure on the residential new construction market in 2023, we derive approximately 70% of our revenue from the repair and remodel market, which should fare better than new construction in the near term. From a profitability point of view, even though pricing for commodity raw materials is trending lower, inflationary pressures remain significant in areas such as labor, medical benefits, packaging and freight, and chemical feedstocks. As such, it will be necessary for companies to continue to fight for price in these areas, and Quantix will be no different in that regard. Current levels of inflation are simply too high to be offset completely through productivity gains. In addition, as commodity prices drop and index pricing rollbacks occur, we could be in a position to benefit from a margin standpoint due to timing lags. In summary, we expect 2023 to be a year in which revenues will be challenged, but the opportunity to hold or slightly improve margin percentage is real. We plan to stay focused on safety, operational excellence, optimizing ROIC, and integrating and growing Quantix custom mixing. We will continue to invest in new product and process development, and we will also work to identify inorganic opportunities that align with our Road to 2 Billion strategy, all while making sure our balance sheet remains healthy. Despite the challenges we expect in 2023, Quantix is well positioned to continue creating shareholder value. And with that, operator, we are now ready to take questions.

As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by. We'll compile the Q&A roster.

First question will come from the line of

Daniel Moore from CJS Securities. Your line is open.

Thank you. Good morning, George. Scott, thanks for color and taking questions.

Good morning.

Start with just piggybacking off your comments, George, on LMI. Maybe dig into that a little bit more. They're co-located. Was there a process at all around that acquisition? And You talked about many of the things that they bring to the table. Is mixing compounding an area that you would like to grow and scale, or is this more of a sort of a one-off opportunistic? And a quick follow-up there.

Yeah, no, it absolutely is a process, an area that we expect to grow. Currently, they supply EPDM and a few other materials. And then we think by combining the two companies, not only can we invest and grow in their current product portfolio, but we'll give them now the opportunity to add our silicone and our butyl capabilities that we had within Quantix already and allow that custom mixing, excuse me, that custom mixing to be able to offer multiple solutions to customers through many different channels. So we think that there's a great opportunity to continue to expand that business.

And to answer your first question, Dan, There was not a process run. This is a business that we were familiar with and have been for a long time. In fact, the parent company of this LMI business was a company that we acquired, EdgeTech, which is our IG spacer business from way back in 2011. That's actually how George came to the company.

Indeed. Absolutely. That's helpful. So longer term, you know, what kind of sort of growth strategies

uh margin profile um are we looking at for lmi and um near term you mentioned accretive um i know you're not giving guidance to any range around kind of what eps accretion could look like in the near term um from a growth standpoint we think this business can grow at a rate that's above our legacy or core business so if historically that was in the load of mid single digit range for our legacy business prior to covid We think this business can do better than that. From an EPS accretion standpoint, yeah, that's information we haven't disclosed publicly.

Got it. And maybe just one more and I'll jump back. But the... You know, free cash flow has been, conversion has been improving. Do you see that trend continuing? Do you think working capital would likely be a benefit in fiscal 23 or more neutral in any expectations for CapEx?

Yeah, good question. Obviously, working capital has definitely been a hit to free cash flow in 2022, I think to the tune of close to $30 million. A lot of that had to do with the value of our inventory going higher because of inflation. Looking ahead into fiscal 2023, we're hopeful that working capital won't be a negative, but I'm not sure it'll be a positive. So I think keeping it somewhat flat when you mull is probably the prudent choice at this point.

And any thoughts on CapEx?

Yeah, I would say around the same level as last year, maybe a little higher. So call it 35, maybe a little more. We'll come out with more firm guidance, hopefully, in the next quarter.

All right. I'll jump back to you with any follow-ups. Thank you.

Thank you.

One moment for our next question. Our next question comes from the line of Ruben Garner from Benchmark Company. Your line is open.

Thanks. Good morning, guys, and congrats on a strong close to the year. Thanks very much, Rudy. recognizing you're not providing guidance, Scott, maybe if you could help. I mean, that seems like a pretty robust outlook with some things working against you like FX and some of the surcharges rolling off. Can you talk about what the kind of underlying organic volume assumption for the year is that gets you to that kind of, you know, flattish revenue? I think the contribution from LMI was in the range of

80 million so i mean it seems like a pretty modest volume reduction you know all things considered with what we're hearing you know or what's happening with the the new housing world at least yeah i mean obviously the reason we can even talk potentially about being flat next year versus 2022 is because of the lmi acquisition contribution outside of that we fully expect demand volumes to come down, the FX impact could be significant. I mean, there's that as well.

I think in addition, you know, specifically in the North American fenestration segment, I think we're still finding opportunities to gain share in a couple of our product lines where labor outsourcing is still a big driver for our growth. And, you know, even with falling demand, in terms of volumes, the labor pressures for everyone still exist. So those opportunities still arise. So, you know, we think that there's opportunity to maybe offset some of the market volume with share gain. And then, you know, we're working on adjacent materials as well that we continue to talk about. So, you know, it will be a challenging year and we're working really hard to do everything we can to offset that.

And the only thing I'll add there is, you know, as these index pricing mechanisms kick in and raw material costs go lower and you're having to roll back price, obviously that hits revenue. But there are also a lot of other costs that George mentioned in his prepared remarks that are continuing to go up. So we're going to fight hard. We're going to try to push price where we need to. But the reality is with raw materials coming down, revenue is going to be challenged.

So last time we saw kind of the housing start run rate that we're seeing in the last few months, I mean, you guys were doing more like $800 million to $900 million in revenue. You know, $1.2 billion is a big jump up from that. I know that there's some pricing over that time period, but is the share gains kind of the biggest difference between, you know, and I recognize that's just a new housing start number, but clearly, you know, some of the rates are going to impact some R&R spending. think the biggest difference between what maybe you guys did in revenue a few years ago and where you kind of are pointing us to for 23?

You know, I think on a big picture level, what I would say is share gain is a piece of that, and the model of continuing to optimize our processes to solve our customers' labor issues does continue to resonate. I think we've seen in certain areas, especially during supply chain, as people are mitigating risk from Asian supply, bringing things back domestically. That's been a benefit, and we anticipate will continue to be a benefit. And although we don't talk a lot about it, because no one segment or one product line is maybe significant in the big picture, we have products like the vinyl fencing, our solar, are flashing tapes that all continue to grow within our product line. Again, individually, they're not significant enough to call it out. But independently, they are continuing to roll up and have been great adjacency products for us.

Great. And I'm going to sneak one more in if I can. So same kind of line of questioning on the margin front. impressive uh outlook to be able to kind of hold where you are what would what would uh i guess lead to the most pressure relative to that that outlook is it volume worsening or is it is it more risk on the the price cost front scott you mentioned some some still seeing some inflation in some areas is it you know what's the bigger kind of item to watch for for 23 on the martian side i i think they're equally both you obviously you know have followed our business well so um

volume will drop and we'll put pressure. Now, we've said all along and you've seen it in the past, we're able to adjust the volume drops, I think fairly efficient when compared to others. But volume would be a pressure on that margin. And then continued inflation. I mean, we're still seeing it, even though our commodity raw material prices may be dropping, as I mentioned in my script. we're still seeing pretty high levels of inflation in a lot of areas of our business. And I know my individual business leaders, you know, are really working very hard to offset that. But, you know, we're going to have to go out and try to get price to offset that. Now, you know, why the positive or somewhat positive look on our margin profile? We've talked a lot about as those indexes and surcharges roll back, As we were chasing the tail and the lag on the way up, we're seeing some of the benefit on the way down. So that should help alleviate some of the pressure, and that's why we're probably a little more optimistic on the margin perspective in the year.

Great. Thanks. Congrats again, and Merry Christmas and Happy New Year.

Yeah, you too. Thanks. You too.

Thank you. One moment for our next question. Our next question comes from Julio Romero from Sudoku. Your line is open.

Hey, good morning, George and Scott. Morning. I guess to start on the refreshed growth strategy, you know, it sounds exciting. Obviously, you didn't put a timeline on the targets. So maybe just talk about what investors should expect from maybe the cadence of inorganic growth and if deals should be kind of tuck-in or transformational.

Great question. I think really we didn't give a lot of specific guidance there for a very specific reason. I think we've created enough opportunities and we're looking at these adjacencies. By opening it up, what we're effectively doing is we're telling people we're not a window and door company and we're not a cabinet company. We're a manufacturing company that has a very broad set of operational capabilities and material science knowledge. And we're starting to see a lot of different looks, both from internal organic product development as well as external. So I think as we evaluate inorganic opportunities in M&A, I think that they could be either transformational or bolt-ons similar to the size of an LMI. And the reason I don't give better guidance is because a lot of these markets are new. We're still evaluating them. We're looking at the favorability of each of these markets. And as this progresses, we'll try to give better clarity on markets that we may like more than others. But it's relatively new. But I think we've positioned our balance sheet very well to be able to handle both transformational and bolt-ons with and staying within a very healthy balance sheet perspective, which has been our goal all along.

Great. I appreciate the color there. Maybe on the organic growth side, maybe a follow-on to Ruben's question a little bit. I mean, I was hoping you could expand more on the share gain opportunity, specifically the runway for maybe reshoring from some of your customers as your customers mitigate risk from overseas suppliers, if you could Talk a little bit more about that runway and the multi-year opportunity there.

We're seeing it in a few different areas. I think the LMI business and any sort of compound mixing, because of the long freight, the expense of the freight, lead times, I think that that's going to spur on opportunities. we saw opportunities within the cabinet segment where that one's probably been the one that's been most hit with both tariffs and just supply chain challenges from coming overseas and the amount of inventory that our customers have to carry to protect on that has really pushed on the need. So I think it's Areas that require a lot of freight, a lot of complexity, numerous SKUs are the ones that are going to be the most advantageous for us to identify as a potential sourcing alternative to our customers. And we're looking for those, and then developing products within those.

Great. Thanks very much for taking the questions.

Thank you.

One moment for our next question. Our next question comes from the line of Kenneth Zenner from KeyBank. Your line is open.

Good morning, George, Scott. This is actually Christian Zylon for Kenneth Zenner. Thanks for taking my questions. Sure. Good morning. Good morning. So I will echo the understanding that you guys aren't giving guidance at this time, but maybe could you clarify the price piece with rollbacks versus getting price to offset some of those other rising costs? And then... Separately, when we think about the North American fenestration business, it really is three distinct businesses with the vinyl, extrusion, and spacers. Could you just talk about the operating leverage across the three distinct businesses amid lower, flattish volume environments?

I'll start with your second question, and then I'll let Scott go back to the first. So as we look at the operating leverage of the different businesses, and actually now there's the fourth one because the Quonix custom mixing will roll up into that, but I would say that the more leveraged businesses tend to be the vinyl extrusion and the spacer extrusion business, and screens and some of our other accessories tends to be very variable cost driven, more manual process in general. Any volume drops will probably impact the spacer or the vinyl extrusion a little more than the other product lines.

On your pricing question, the raw material surcharges or rollbacks or index pricing rollbacks versus anything we try to push, the only thing I can really say to that without getting too specific is raw materials are typically 50%, 55% of the cost. a big portion of that is the major raw materials that are indexed. So those are the ones that we really don't have control over coming down. So that would leave us with several other areas to try to offset the rollbacks with increased price.

In the additional inflation where we have to go back out and get price, obviously, you know, that's going to – it's going to take work for us and every other company because, you know, there's this expectation that if raw materials are dropping, I guess everything else in the world is dropping. And that's really not the case. I mean, so we're going to have to be very detailed and very methodical in lining out and transparent with our customer base. You know, we're doing everything we can to try to offset inflation with – continuous improvement and improvement internally. But at some point, that rate of inflation is still pretty high, and we're going to have to go out and get it. I suspect it's going to be a fight, but we have the data and the detail that will support price increases.

Great. Very helpful. Thank you, Sid. And then, If I could just add one more, could you just talk through the specifics of the European business and how you guys were able to perform, I guess, better than expectations, even outside of the FX headwind? Just following up from a comment from last quarter's call, you talked about the impact of elevated prices in Europe and how your product's energy efficiency proposition contributes to performance. Could you maybe quantify that? Or in case energy prices stay elevated, What's the run rate or I guess the runway for 23, maybe even 24? And what about if prices retreat? Thank you.

Yes, specifically in terms of quantifying those opportunities, that's going to be relatively difficult, and we're just not prepared to do that at this point. But from a product or a macro level, what I would say – is you're exactly right. Our spacer product and our vinyl extrusion systems that we make under the linear brand in the UK are both what I would position as a very high end in terms of thermal performance and operating performance within a window. So as energy costs continue to rise in Europe, and they have and they will, and that will also transition at some point in time to North America, Windows systems with our components in it will continue to grow. As energy costs go higher, the decision to replace Windows, it makes that payback for a homeowner when they do their internal rate of return and do I want to make this purchase a lot less difficult. It becomes a fairly easy payback. In addition to the quality of the product that we serve, we feel very strong that these markets will continue to grow just because of the energy cost. And as it relates to the spacer business specifically in Europe, I think it's worth noting that that facility that we have in Germany that manufactures that spacer, that's kind of our hub for international spacer shipments. So our Germany facility is supplying product to probably 60 different countries in Asia and emerging markets in the Middle East and in Africa that has an opportunity to continue to grow because of their elevated energy costs. We think the product line serves itself very well to perform in the future as it relates to energy performance.

That's great. Thank you for all the color and happy holidays. You too.

One moment for our next question. And it looks like we have a follow-up from Daniel Moore from CJS Securities. Your line is open.

Yeah, just one follow-up on capital allocation. Obviously, you were blacked out buying back stock given the acquisition. Assuming you don't have others in the cookers, should we expect that to pick back up, number one? Number two, maybe you talked about this previously, but if there are larger, more transformative deals that come your way, Just talk about where you would be willing to take leverage up to for the right opportunities. Thanks.

So on your second question first, we've been pretty transparent in telling investors that if there were to be a bigger transformational deal out there, I don't think that this management team and this board would ever be comfortable with going above two and a half to three times net leverage. and only if there is a clear runway to get that back down to between one and two times leverage in a relatively short period, so first year or two. George, you want to talk about that?

Yeah, no, I think that that's absolutely fair, and I think what we have done and we've worked on is that pathway to delever is, you know, we're coming off a fourth or fifth straight year of of free cash flow in excess of $50 million. So I think we've done a very good job of developing a cash generation machine here that gives us comfort level and what we can pay back. And so obviously, each of those situations. Now, in terms of capital allocation, I think it will be no different on a go-forward basis than we have in the past. are able to be in the market and there's nothing going on, then we will opportunistically buy back our stock as a priority. I think we'll continue to focus here in this year on repaying down the debt and we'll balance the needs of the organization. I think we've been very transparent that when we can, we'll be opportunistic in our buying of stock.

Very helpful. Thank you again.

Thanks. Thank you. Now turn the call back over to George Wilson for any closing remarks.

Thank you all for joining today. And I would like to take a moment to wish everyone a safe and joyous holiday season and a very happy new year. We look forward to providing an update on our next earnings call in March. Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.