Quanex Building Products Corporation

First quarter 2023 Quantix Building Products Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. Then you will hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Zilke, SVP, CFO, and Treasurer. Please go ahead.

Thanks for joining the call this morning. On the call with me today is George Wilson, our President and CEO. This conference call will contain forward-looking statements and some discussion of non-GAAP measures. Forward-looking statements and guidance discussed on this call and in our earnings release are based on current expectations. Actual results or events may differ materially from such statements and guidance, and Quantix undertakes no obligation to update or revise any forward-looking statement to reflect new information or events. For a more detailed description of our forward-looking statement disclaimer and a reconciliation of non-GAAP measures to the most directly comparable GAAP measures, please see our earnings release issued yesterday and posted to our website. I'll now turn the call over to George for his prepared remarks.

Thanks, Scott, and good morning to everyone joining the call. As I begin my fourth year as CEO of Quonix, I look back and realize that there is yet to be a normal period during my tenure. Shortly after I stepped 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 tested the limits of every manufacturer's production capabilities and ultimately led 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 protectionary demand amongst our customers that has resulted in inventory rebalancing and reduce demand now that our lead times have returned to normal levels. Through all this, the Quantix team has done a phenomenal job, and I'm extremely proud of what we have accomplished. I say all this as 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 our first quarter 2023 results to the same period of 2019, we are able to see a seasonality pattern that is very similar. Most of our customers scheduled shutdown days during the holiday period of December 2022, and the startup periods in January 2023 were slow, but began to pick up towards the end of the month. This scheduling pattern was the norm pre-COVID, but was not followed over the past couple of 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 are some weather 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 macroeconomic 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 and create some uncertainty in the markets we serve. However, we also believe that housing remains underbuilt overall, and with the affordability of housing beginning to improve, an uptick in both the new construction and R&R markets is not out of the question. Globally, inflationary pressures have been mixed. We have realized significant price decreases and 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 costs have stabilized and have actually started to increase slightly more recently. On the flip side, strong inflationary pressures still exist when it comes to labor and benefit costs, freight, energy, and other services. We will continue to aggressively work on productivity projects to help offset these pressures, but where needed, we will increase price to protect margins. I will now provide some general comments on each of our reporting segments. Compared to Q1 of 2022, and excluding the contribution from the LMI mixing business we acquired in November, revenues in our North American fenestration segment declined by approximately 7%. Having said that, The comp in 2022 was tough, and seasonality was essentially nonexistent over 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-year comps for the next two quarters will also be challenging, we do anticipate that volumes will follow a more traditional seasonal pattern with increases into the spring and summer months. We believe this additional volume will also result in improved margin performance as our more leveraged product lines are able to realize the volume benefits. Operational performance in this segment has been solid, and we've been able to adjust our lead times back to normal levels. We just need the seasonal demand to return as we expect it will. Looking at the LMI acquisition, And now, four months into the integration, I am pleased to report that we are on track with our integration plan and fully expect to meet or exceed the synergy target of $500,000 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 12.3%, which was primarily a result of lower market demand. In addition, most of our customers implemented additional shutdown 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 our 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 90-day lag, so when lumber prices are dropping, we tend to benefit from the timing cycle as long as the prices don't drop too quickly. Finally, revenues in our European fenestration segment declined by 6.7% year over year. However, when you exclude the foreign exchange impact, revenue actually increased by approximately 4% compared to Q1 of last year. Although the macroeconomic headwinds of inflation and an energy crisis related to the Ukraine war are still present, this segment continues to perform well. Share gains within our vinyl profile products, price increases to offset inflation, and the launch of new products continue to offset the headwinds. On that front, we are very excited about the recent launches of our new 090 and 090R window systems, a new vented head drip for window systems, And finally, our new Genesis spacer system, which adds another spacer product to our already high-performing super spacer product line. All three of these new products have generated much excitement in the market and will help address thermal and operating performance of insulating glass units and full window systems. In summary, we believe we are seeing a return to a more seasonal cadence of orders as global supply chains have improved and the world economy has become more accustomed to a new post-COVID normal. Near-term headwinds provide challenges and make it much more difficult to be able to provide narrow guidance ranges. However, we remain optimistic on the long-term outlook. The entire company remains focused 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 improved cash flow generation. which will support our growth initiatives and align with our road to $2 billion strategy. We are well positioned to capitalize on growth opportunities as they arise or to weather any type of prolonged macroeconomic downturn if it's necessary. In short, the future of this company is bright despite near-term challenges. I'll now turn the call over to Scott, who will discuss our financial results in more detail and we'll finish up by providing some modeling assumptions and a cadence for Q2.