Quanex Building Products Corporation

Q1 2023 Earnings Conference Call


spk_0: quarter two thousand and twenty three clinics building products earnings conference call at the time operatives from finalists and only mode after the speakers presentation there will be the question and answer session he'll ask a question during the session the only the press care one one on your telephone then you will hear an automated message of a voting you your hand is raised can watch your your question please press star one one again please be advised that these conferences been recorded i would now like the hammer conflicts already or speaker today scott silky as the t v or so and treasure please go ahead
spk_1: thanks for joining the call this morning on the call with me today george wilson our president 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 are events may differ materially from such statements and guidance and chronic undertake no obligation to update or revise any for looking statements to reflect new information or this prefer more detailed description of our for looking statement disclaimer and a reconciliation of non get measures to the most directly comparable go that measures ppr earnings release issued yesterday posted to our website on our turn the call over the george for his prepared remarks
spk_2: thanks scott good morning everyone joining the call as i begin my fourth year ceo of conics i look back and realize that there is yet to be a normal period during my tenure shortly after a step into this role we were faced with the unprecedented challenge of a global pandemic we overcame many unknown challenges in the early stages of that crisis only to then face a rapid increase in demand spurred on by government infusions of capital into economies around the world coupled with a worldwide labor shortage that caused massive supply chain disruptions together these factors test the limits of every every manufacturer's production capabilities and ultimately lead to severe inflationary pressures over the last two years that largely continue today in addition longer than normal lead times during this period created strong protection or a demand amongst our customers that has resulted niman tory rebalancing and reduce demand now that our lead times have returned to normal levels through all this the clinic's team has done a phenomenal job and i'm extremely proud of what we have accomplished i say all this was a backdrop to the following statement i think we may have just experienced our first quote unquote normal quarter since before the pandemic when comparing her first quarter twenty twenty three results to the same period of twenty nine teen we're able to see a seasonality pattern that is very similar most of our customers schedule shut down days during the holiday period of december twenty twenty two and the startup periods in january twenty twenty three were slow but began to pick up towards the end of the month this scheduling pattern was the norm pre covert but was not followed over the past couple years because of the abnormally high demand that everyone was seeing in the market from an order intake perspective the only items that i would call out as one offs during the most recent quarter or some whether impacts on the west coast and the impact of some customers reducing their inventory levels due to our lead times returning to normal looking at the overall macro economic environment we still believe that in the near term rising interest rates driven by the uncertain actions of the fed tight labor markets and the ongoing war in ukraine will continue to impact consumer confidence in create some uncertainty and the markets we serve however we also believe that housing remains under built over all in with the affordability of housing beginning to improve an uptick in both a new construction and or in our markets is not out of the question globally inflationary pressures have been mixed we have realized significant price decreases in some of the commodity raw materials we consume that are tied to index pricing mechanisms in other areas such as pvc resin we saw some decreases but those cost have stabilized iced and of actually started the increased slightly more recently on the flipside strong inflationary pressures still exist when it comes to labor and benefit cost free energy and other services we will continue to aggressively work on productivity projects to help offset these pressures that were needed we will increase price to protect margins i will not provide some general comments on each of our reporting segments compared to que one of twenty twenty two and excluding the contribution from the our my mixing business we acquired november revenues and our north american penetration segment declined by approximately seven percent having said that the comp and twenty twenty two was tough and seasonality was essentially nonexistent or the last two years we believe that a return to a more normal seasonality pattern combined with customer initiated programs to reduce their working capitals as lead times have improved resulted in the softer year over year demand although the year over your comps for the next two quarters will also be challenging we do anticipate that volumes will follow a more traditional seasonal pattern with crit increases into the spring and summer months we believe this additional volume also result in improve margin performance as are more leverage product lines are able to realize the volume benefits operational performance in the segment has been solid and we've been able to adjust our lead times back to normal levels we just need a seasonal the man to return as we expect it will looking at the l am i acquisition and now four months into the integration i am pleased to report that we're on track with our integration plants and fully expect to meet or exceed the synergy target of five hundred thousand dollars that we announced at the time of acquisition in our north american cabinet component segment we saw a year over year decrease in revenues of twelve point three percent which was primarily a result of lower market demands in addition most of our customers implemented additional shut down days over the holiday period to lower their working capital we anticipate this reduction in revenue will continue near term as the pricing of both hard and soft maple are still decreasing triggering or raw material index mechanisms from a margin perspective we were able to maintain our improved operational performance levels and to capitalize on the timing of the lower cost lumber purchases as a reminder index pricing tends to be on a ninety day lag so and lump lumber prices are dropping we tend to benefit from the timing cycle as long as the prices don't drop to quickly finally revenues in our european finish grayson segment declined by six point seven percent year over year however when you exclude the foreign exchange impact revenue actually increased by approximately four percent compared to que one of last year although the macro economic headwinds of inflation and an energy crisis related to the ukraine war still present this segment continues to perform well share veins within our vinyl profile products price increases are set inflation and the launch of new products continued offset the headwinds on that front we are very excited about the recent launches of our new zero ninety and zero ninety our windows systems a new vented head drip for windows systems and finally our new genesis space or system which adds another space or product to are already high performing super space or product line all three of these new products have generated much excitement the market and will help address thermal and operating performance of insulating glass units and for windows systems in summary we believe we are seeing a return to a more seasonal cadence of orders as global supply chains have improved in the world economy has become more accustomed to a new post coven normal near term headwinds provide challenges and make it much more difficult to be able to provide narrow gardens ranges however we remain optimistic on the long term outlook the entire company remains focus on continuous improvement serving our customers and controlling the things that we can control optimizing return on invested capital and working capital remain top priorities for improve cash for generation which will support or growth initiatives and align with our road the two billion dollar strategy we are well positioned to capitalize on growth opportunities as they arise or to whether any type of prolong macro economic downturn if it's necessary in short the future of this company is this is bright despite near term challenges on up and call over to scott the will discuss our financial results in more detail and will finish up by providing some modeling assumptions and the cadence for cute to
spk_3: thanks george
spk_1: on a consolidated bases we generated net sales and two hundred and sixty one point nine million during the first quarter twenty twenty three of which represents a decrease of one point nine percent compared to two hundred sixty seven million during the first quarter of twenty twenty two it decreases mostly attributable to stop her demand customer and and toy rebalancing initiative and foreign exchange translation impact overall we believe that a result for the first quarter of twenty twenty three indicate a return to what was normal seasonality prior to coven with key one being the lowest quarter of each fiscal year net income decrease the one point nine million or six cents per diluted share for the three months and a january thirty first twenty twenty three compared to eleven point two million or thirty four cents per diluted share for the three months in in january thirty first twenty twenty two after adjusting for one time transaction and advisory fees net income decrease to six point one million or eighteen cents per diluted share for the quarter compared to eleven point three million or thirty four cents per diluted share for the same period of last year on an adjusted basis even da for the quarter decreased to twenty point five million compared to twenty four point four million during the same period last year the decrease in earnings for the first quarter of twenty twenty three was largely due to lower volumes one time transaction and advisory fees foreign exchange translation higher interest expense and increase stock based compensation expense mostly due to start by price appreciation now for results by operating segment we generated net sales of one hundred and fifty three million and are north american finished straight and stagnant for the first quarter twenty twenty three which represents growth of four point three percent compared to the first quarter of twenty twenty two the increase in revenue was driven by the contribution from the a my custom mixing asset we acquired in november twenty twenty two excluding the contribution from l a my revenue would have been down approximately seven percent year over year driven by decrease in volumes did a softer market demand and customer inventory rebalancing initiatives adjusted a but i was fifteen million in this segment or about eight percent lower than prior year we do expect margins to improve in this segment of the year progresses we generated net sales the city four point seven million and a north american cabinet component segment and que one of twenty twenty three which was twelve point three percent lower than prayer once again decrease was driven by lower volumes if adjusted a but i was one point seven million for the quarter compared to two million in the first quarter of twenty twenty two margins where consistent compared to the first quarter of twenty twenty two hardwood pricing started to come down towards the end of fiscal twenty twenty two and continues to decline which will pressure revenue for the remainder of the year in this segment our european cities a and segment generate revenue a fifty five million in the first quarter which represents a decrease of six point seven percent year over year however excluding foreign exchange impact revenue in this segment increased by three point nine percent driven by higher pricing across all products and share gains in are vital extrusion business these items or partially offset by volume declining and our space a product line due to some customer inventory rebalancing initiative and softer market demand from an operational standpoint this segment performed well during the quarter despite additional macro economic headwinds including the war in ukraine and related in increases in energy costs a just leave it all came in at nine point seven million for the quarter compared to ten point four million in the first quarter of twenty twenty two margins held up nicely and respect continued success protecting margins in europe as reflects our cost structure and push price to cover inflationary costs were appropriate and a softer market as a reminder we do not have passed her mechanisms built into our contracts in europe moving on to cash flow in a balance sheet kickass provided by operating activities improved significantly to three point one million for the first quarter twenty twenty three compared to negative twenty one point seven million for the first quarter of twenty twenty two the value of our inventory decrease during the quarter due to eating or all material eisner pressures which had a positive impact on working capital free cash flow was negative for the quarter which is not uncommon for a company key one however we realize an improvement of about twenty five million dollars every year or balance she continues to be strong or liquidity position a solid and our leverage ratio of net debt to last twelve months adjusted ebitda with point eight times as of january thirty first twenty twenty three including real estate leases that are considered finance leases under us gap or leverage ratio of net that to last twelve months adjusted ebitda was point four times previously disclosed we did borrow ninety two million to acquire substantially all of the assets of l am i on november first twenty twenty two we were able to repay five million of that towards the end of the first quarter because of our free cash flow position and the near term we will remain focused on generating cast paying down debt and opportunistically repurchasing are stop we will maintain our focus on growing the company through organic in organic an innovative growth opportunities as they arise while continuing to preserve our healthy balance sheet as stated in earnings release we are now prepared to provide official guidance for fiscal twenty twenty three albeit with wider ranges and prior years which is based on current macro fundamentals coupled with ongoing conversations with our customers the near term out outlet for business is cautious softening market demand lower raw material pricing related surcharge rollbacks off that in some ways by inflationary pressure in other areas and we her consumer confidence in part due to rising interest rates are all causing near term uncertainty however we are cautiously optimistic about the second half of our fiscal year and our long term the of the residential housing market remains positive guidance and mauling assumptions for fiscal twenty twenty three are as follows net sales of one point one two billion to one point one six million adjusted ebitda of one hundred and thirty to one hundred and forty two million depreciation and amortization of approximately forty to forty three million sg and i have one hundred and twenty to one hundred and twenty five million interest expense of eight eight and a half million a tax rate of twenty five percent cap acts of thirty to thirty five million and free cash flow of fifty to fifty five million looking to the second quarter of this year we expect market volume to improve versus the first quarter of this year which follows normal seasonality from a cadence perspective for the second quarter of this year versus the first quarter of this year we expect revenue to be up to to four percent on a consolidated basis by segment for the second quarter of this year compared to the first quarter of this year we expect revenue to the up three to five percent and are north american finished race and segment down six to seven percent and are north american cabinet components segment and up twelve to fourteen percent in our europeans and station segment adjusted ebitda margin is forecast to improve five three hundred and fifty to four hundred and fifty basis points on a consolidated basis in the second quarter of twenty twenty three again this is compared to the first quarter of this year operator we are now ready to take questions
spk_4: thank you as a reminder to ask a question please press star one one on your telephone and wait for your name to the announced to withdraw your question please post taiwan one again one moment while we compile the and a roster
spk_0: i first question cause an online as daniel more weight cj as security line is often please go ahead
spk_5: thank you george got the morning skate me questions on palmer start with north american penetration in any given sunday sense for the magnitude of the impact of customers rebalancing inventories last quarter and and the current fiscal que tu so far in a sense for kind of where we are in that process nearing the end likely to continue for a couple of quarters any color there would be great
spk_6: in terms of the magnitude
spk_2: in i don't think we're we're prepared publicly to have to break that out versus the volume drops but in terms of where we're at in the process will we started seeing that oh the stockinger inventory rebalancing on initiatives really starting to take hold at the beginning of december ah and has gone into january in early february knowing where we're at within our customers and during er visits we we think that that should start coming to an end here have very soon probably within this month i'm going into the next so i think we'll see an end to that in this quarter on it because at some point you're hung they're going to have to start read repurchasing inventory we're starting to see some signs of them
spk_5: that's helpful george the aegypti color full year and and key to on outlooks what key say about the expectations for the suggestion of margin trajectory of margins cross segments embedded in your fiscal twenty three guide i'm given some of the moving parts index pricing yeah what to passerby think about margins year over year in any to the three segments for the full year
spk_1: yeah i think for the full year for are finished ration segments year over year even a margins flattish the maybe slightly down i'm i'm a again we're trying to protect margins and all segments but i say for for the cabinet components segment there's gonna be a lot more pressure on margins for the four year
spk_2: in i think as we look at margins in in i hope what came across through through her comments as you know going even back to twenty nine teen you would see some fluctuations just based on seasonality because we do have a couple product lines on that are more highly leveraged with such as spacers of in the in the vinyl profiles that do the probability that is very much correlated and the volume own because of a fixed costs structure so as we start seeing that season i've a volume ramp up on we would expect on as in the past to see that that the profitability improve on in the cabinet segment you know i think what we saw in the first quarter what what we said all along is in on the backside of the index pricing i'm as would prices go down the ability to get ahead of of those pricing mechanisms gives us some short term benefit so you know i think what will be working really hard even with the drop on revenue to be able to have to hold and sustained margins as much as possible not segment
spk_5: that's really helpful than one moyle jump out in terms of revenue he has at the midpoint looking can answer that low double digit decline organically your year at how much of an impact is pricing and that is that countless single digit headwind ah vs volume just trying to get the break out at those expectations thanks
spk_1: yeah that's tough to answer i'd say help our years day it's it's mostly then volume driven only because year over year specifically in the first were pricing was actually still up year over year obviously is raw material costs come down pricing and be impacted more going through the yourself i think it'll start balancing out between volume and price probably more in a second half year
spk_7: make sense
spk_5: i will jump back when of like you
spk_0: thank you and one moment find next question next question cousin line of stephen ramsey with trg your line as up and please go ahead
spk_8: edgar martinez actually brand our sunfish to them everyday my questions i want to fight on cash generation allow companies appear taken on the highlight their passengers and abilities at the last year which is past here and i got hooked on a little bit in a prepared remarks and and the guidance of gif expand on i think about the fifth free cash flow for the year he caters to the year and items to keep in mind that are different from last year
spk_1: yeah i mean i think if you look at last year there is a pretty large hit to working capital big mainly because of what was going on and amateur isn't the inflationary pressures there are so that subsided so we do expect that a benefit us this year historically we generate most all of our cash in the second half of each fiscal year and i don't think this year's going to be any different
spk_9: i guess and anna
spk_8: ah yes the on earth the labour area thinking about labour kid is kenneth the top period air as he had a fire protect margins have to hire then i a thinking about the labour dynamic of the margin vs keep it that labour for in the long term live in second half when when things are expected a backup
spk_2: yet you know of as as we look at labour in i think your point is is spot on it it is difficult to get labour back when you when you lose it so i think we've been very cautious on in on reducing our labor work for saw a in our teammates it any other it any other facilities and we worked very hard to offset arm any sort of inflationary or margin pressures and other areas through continuous improvement mother other activities we've deployed them in terms of really getting caught up in some of those activities that we've done and preparing for for the or increase in volume that we do anticipate if we get to a point where we feel that you know what a permanent reduction workforce is needed will obviously pull that pull that trigger boat you know our confidence level on where the market can go has as really are pushed us to look for find ways does it cost know others before going to labor
spk_10: if i can apply for them
spk_0: thanks thank you and one moment fine next question
spk_11: next question has no line until they are now let's set out here line up and please go ahead
spk_5: thanks hey good morning georgians got
spk_2: harding yeah you know how do you feel about the prospect to achieve price gains x index rollbacks across the portfolio compared to say three months ago i think we're we're we're lucky to have success and that that that's because will be very open and transparent with our customer base you know it areas such as we noted in our script to that are still very very real home labor and benefit cost you're not seeing rollbacks in the various freight is very much in everyone's face and continue so i think you know
spk_11: there's obviously push back but we we go with data that justify the being able to to justify it no mean so i think we've had continued success and will continue to work on and keep the dialogue open with our customers
spk_5: the other thing you know it helps when were showing that were we are focused on on productivity and finding ways offset so you know we're also i think doing a very good job of trying to minimize what price increases we have to go and working with our customers to have to get the best value possible so
spk_2: so this point we've we've been successful home it's not just a gimme but i think our performance on our continued transparency on gives us confidence that will continue to be successful in pricing okay that very helpful and then on georgia think he touched on it earlier ah i'm just trying to think about product lines in the north american penetration segment back from a language standpoint i think he are are spacers and vinyl profile on kind of equal footing from a leverage standpoint if you could just pick into that at all if he could
spk_5: yeah i think are very very similar in the fact that they're both extrusion processes although the exterior different materials so you know it's one of those things were you
spk_0: the machines like to be run and and and taking things down for changeovers or even if shut down during the late start ups are expensive scrap levels are hi i'm so that they're profitable when those extruders are running so i would say the impact on leverage is very very similar ah when when comparing those two product lines vs you know
spk_2: ask a screen product which tends to be much more labor paste
spk_0: really appreciate the go there are our back to give thanks
spk_12: thank you and i'm showing no further questions and i like the coughing second phase to torch most unfriendly friend or a max

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