Quanex Building Products Corporation

Good day, and thank you for standing by, and welcome to the Q3 2024 Quantex Building Products Corporation earnings conference call. At this time, our participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone, star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would not like to hand the conference over to your speaker today, Scott Zielke, Senior Vice President, CFO, and Treasurer. Please go ahead.

Thanks for joining the call this morning. On the call with me today is George Wilson, our President, Chairman, 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. Today, I'll be providing an overview of our quarterly performance, the state of our served markets, and our perspective on the macroeconomic environment. Additionally, I'll discuss our recent acquisition of Tymon, including our integration plans and expectations moving forward. Overall, we are satisfied with our operational performance as we exceeded consensus expectations across all metrics, despite a challenging demand environment. Volumes for the third quarter of this year exceeded those of the second quarter, reinforcing our prior comments about a return to a more traditional seasonality pattern for orders. Scott will provide a more detailed analysis But on a consolidated basis, revenue decreased by 6.4% in the third quarter compared to the same period last year, and adjusted EBITDA fell by 13.2%. Although softer than the prior year, these results align with our expectations and our previous comments on the cadence for the third quarter. In our served markets and across all geographic regions, consumer confidence remains somewhat low due to macro-related uncertainty. While we expect the Fed to cut interest rates before the end of the calendar year, these cuts are likely to be more beneficial for the 2025 build season rather than having a significant impact in the current year. Even with relatively soft orders resulting from this low consumer confidence, the Quantix team has continued to generate solid free cash flow and remains focused on operational improvements. This financial stability has enabled us to invest in future organic growth opportunities. These investments include an expansion of mixing capacity for our specialty sealants product lines, the introduction of new products in our UK vinyl extrusion business, and the funding of several operational improvement projects for our spacer business. All these initiatives are expected to bear fruit as we move into 2025 and beyond. Moving on to an update on our recent acquisition of Tymon. We were pleased to announce the successful closure of this transformational deal on August 1st. We look forward to creating a new and improved company that leverages the strengths of both organizations. Shareholder approval for the transaction was overwhelmingly positive on both sides, with a 99% for vote from the Quantic shareholders and an 86% for vote from Timon shareholders. This strong support underscores the solid financial and strategic rationale behind this acquisition. Once the deal was finalized, we hit the ground running by continuing to work closely with our integration consultants while also engaging with a legacy time and team. We set up a full-time integration management office that includes cross-functional leaders from both legacy companies. And we are working quickly to establish a new organizational structure that is scalable and will drive us successfully into the future. Our integration management teams are working collaboratively both to capture identified synergies and to identify additional achievable synergies that we may not have previously understood. The progress made to date reinforces our confidence in achieving our stated goal of $30 million in cost synergies within two years. We plan to unveil our new organizational structure publicly and early calendar 2025. And moving forward, we plan to provide quarterly updates on our progress towards achieving these synergies. Additionally, we are excited about the opportunities for new product development and system improvements. With our expanded capabilities in the window and door market, manufacturing everything except the glass, we will challenge our development and engineering teams to leverage this product breadth to create new innovative solutions that add value, and reduce costs for our customers. In summary, we are pleased with the operational foundation we've established and believe the company is well positioned to navigate any market condition, regardless of the macroeconomic dynamics. The time in acquisition has enhanced our scale and product depth. Our combined team is actively engaged in the integration process, and I'm confident that we will leverage the strengths of both legacy companies to create something greater than either company standing alone. We are optimistic about the future and confident in our ability to achieve above-market growth while creating value for our shareholders. I'll now turn the call over to Scott, who will discuss our financial results in more detail.

Thanks, George. On a consolidated basis, we reported net sales of $280.3 million during the third quarter of 2024. which represents a decrease of 6.4% compared to 299.6 million during the third quarter of 2023. The decrease was mostly attributable to softer market demand across all operating segments. Net income decreased to 25.4 million, or 77 cents per diluted share, for the three months into July 31st, 2024, compared to 31.7 million, or 96 cents per diluted share, for the three months into July 31st, 2023. After adjusting for one-time items, net income decreased to 24.2 million, or 73 cents per diluted share for the quarter, compared to 31.9 million, or 97 cents per diluted share for the same period of last year. On an adjusted basis, EBITDA for the quarter decreased to 42 million, compared to 48.5 million during the same period of last year. The decrease in adjusted earnings for the three months into July 31st, 2024, was mostly due to decreased operating leverage because of lower volumes related to softer market demand combined with higher material costs in both of our North American segments. Now for results by operating segment. We generated net sales of $170.3 million in our North American fenestration segment for the third quarter of 2024, which represents a decrease of 3.9% compared to $177.1 million in the third quarter of 2023. primarily due to lower volume. We estimate the volumes in this segment decreased by approximately 5% year over year, offset by a slight increase in pricing. Adjusted EBITDA decreased to 24.7 million in this segment, compared to 27.7 million for the same period of 2023. Our European fenestration segment generated revenue of 59.6 million in the third quarter, which represents a decrease of approximately 11% compared to the third quarter of 2023. after adjusting for the foreign exchange impact. We estimate that volumes declined by approximately 8% year-over-year in this segment, with pricing down by approximately 2.5% and a negative foreign exchange translation impact of about 1%. Adjusted EBITDA decreased and came in at $15.3 million for the quarter, compared to $18.6 million in the third quarter of 2023. We generated net sales of $51.5 million in our North American cabinet component segment during the quarter, which was 7.1% lower than prior year. This decrease was driven by lower volumes and lower index pricing for hardwoods. We estimate that volumes declined by approximately 8% in this segment year over year, offset slightly by an increase in pricing. Adjusted EBITDA was $3.4 million for the third quarter in this segment compared to $5.4 million in the third quarter of 2023. Moving on to cash flow on the balance sheet, cash provided by operating activities was $46.4 million for the third quarter of 2024 compared to $64.1 million for the third quarter of 2023. Free cash flow decreased for the quarter mainly driven by lower net income because of softer demand higher SG&A that included $6 million in transaction and advisory fees related to the time in acquisition, and a higher income tax expense. Our leverage ratio of net debt to last 12 months adjusted EBITDA was negative 0.3 times as of July 31, 2024, or said another way, we were net debt free. Of course, this was prior to closing on the time in acquisition on August 1. As referenced in the earnings release, Our completion of the time and acquisition means that our prior guidance for fiscal 2024 is no longer valid. Note that we still feel comfortable with our prior guidance for the legacy Quantex business and our updated guidance is simply layering in the contribution from the legacy time and business for the fourth quarter. On a consolidated basis, we now estimate net sales of 1.275 billion to 1.285 billion which should result in $171 million to $176 million in adjusted EBITDA for fiscal 2024. Please note that this revised guidance incorporates an expected cost impact of approximately $3 million related to performing a full physical inventory count at all legacy time and manufacturing plants prior to our fiscal year end on October 31st. Performing physical inventory counts following acquisitions and annually thereafter is vital to ensuring the accuracy and integrity of financial records and regulatory compliance. These counts verify that inventory records match actual stock levels, support accurate financial reporting, meet regulatory requirements, enhance operational efficiency, and safeguard against fraud and errors. It's also worth noting that we plan to report the legacy time and results for the fourth quarter of 2024 as a separate operating segment. As George said, We're in the process of establishing a new operating and segment reporting structure, which will be implemented in fiscal 2025, and which we hope to unveil at an investor day in early calendar 2025. In addition, for modeling purposes, please use the following additional guidance for the full year 2024, which incorporates the legacy time in business for Q4. depreciation and amortization of approximately $53 to $55 million, SG&A of $168 to $170 million after adjusting for one-time transaction and advisory costs, interest expense of $18 to $20 million, and a tax rate of 22%. From a cadence perspective, for the fourth quarter of this year versus the third quarter of this year, we expect revenue to be flat to up 2% for the legacy Quantex business and up approximately 75% on a consolidated basis, including the legacy Timon business. By segment for the fourth quarter of this year compared to the third quarter of this year, we expect revenue to be flat to up 2% in our North American fenestration segment, flat to down 2% in our European fenestration segment, and flat in our North American cabinet component segment. We're forecasting revenue of 210 to 215 million for the legacy time in business for the fourth quarter. Adjusted EBITDA margin is expected to be up approximately 25 basis points for the legacy Quantex business in the fourth quarter of 2024, again, compared to the third quarter of this year. On a consolidated basis, which includes the legacy time in business and the previously mentioned costs related to physical inventory counts, adjusted EBITDA margin is expected to be down 25 to 50 basis points for the fourth quarter compared to the third quarter. Operator, we will now take your questions.

And thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And one moment for our first question. And our first question comes from Stephen Ramsey from TRG. Your line is now open.

Hi, good morning. Maybe you wanted to start with the legacy company for your outlook being unchanged. Wanted to think about this in the context of many building product companies in our coverage and more broadly who reduced their outlook for fiscal, for calendar 24, for lower demand. You guys are keeping your legacy outlook. Can you talk about maybe why you were able to hold that outlook and then looking within your different end markets and products, did you adjust anything anything up or down by market or by product in results or your outlook? Thanks.

Yeah, great question, Stephen. You know, in terms of our full year guidance, I think, you know, our projections for what we've given in the past two quarters, I think we've always been somewhat conservative in our approach and really had built in not a lot of movement from the Fed early in the year. So I think we were probably a little more conservative than some of our peers and thus didn't have to change our outlook on a go-forward basis. You know, I think our operating teams and the sales teams have done a good job of going out and trying to get some spot one-time business or picking up some different things that helps offset some of the softness. And, you know, in addition, some introduction of some new products that are starting to roll out. So I think it's a combination of things. But, again, being relatively conservative in our full-year outlook early in the year combined with just the sales teams going out and pushing hard to get SWAT business has enabled us to stay fairly flat.

Okay, that's helpful. And then maybe to... uh get you to build more on the the potential share gains you've gotten in winning business and can you go into more detail on uh maybe where that has come from and then maybe put these uh this business that you've won put it in the context in the prior years and and maybe if it's comparable or even superior to prior years in winning business at this point in a calendar year

I think the markets themselves, especially coming out of some pretty challenging supply chain year, year and a half, there hasn't been an enormous amount of shifts in terms of market share with our competitors or in the market. I think we've seen the most market share gain probably over in our European fenestration business, and that's really because some competitors have had filed for administration, so there's fewer competitors, and I think all of the people that still exist in that market have picked up some market share, but that's been some nice wins for us on volume. We've continued to utilize our thermal performance as a selling point to get new business for our spacer products. As Around the world, the thermal performance and thermal efficiency of windows continues to grow. I think we continue to find opportunities to build off of that sustainability platform, and I've had some nice wins globally there. But outside of that, really, the markets have kind of been stable, I think, What we see when we do pick up business is that it's usually short terms. And I'll use, for example, our cabinet business there. It's pretty trenched in, but we've been able to pick up some spot business with some smaller customers. Those are the types of wins we see. So not a lot of shift and long contractual wins on that side of our business, but some nice spot wins.

Okay, that's helpful. And then one more for me, one of the positives aspects of the Tymon deal was the limited product overlap between the two companies. And another positive feature was Tymon's greater mix of highly engineered products that carried better pricing. Can you talk about if there is any overlap on products where Tymon's mix of highly engineered products is better than yours and maybe where you see that evolving strategically over the next year as you put the companies together and go to market?

Yeah, another great question. You know, I think, again, we're one month into this, but what we anticipated through our due diligence and what we've seen in this first 30 days, 45 days, is exactly that. There's very little overlap in the products and little channel conflict in what we do. So for us, being able to effectively, as I mentioned in my script, doing everything but the glass. We're pretty excited about the opportunities, one, to sell a full basket of goods. You become more of a distributor type approach to all of our customers. But on new product development, I think you'll see a stronger focus for us to migrate even more into systems development, effectively doing everything but the glass, trying to find ways to create systems that integrate multiple components to create something new and different. And it's too early to tell. Those types of engineered and development projects take time, but I will tell you we're extremely excited about the potential opportunity of doing exactly that.

Excellent. Thank you. Thanks.

And thank you. And one moment for our next question. And our next question comes from Julio Romero from Sedodian Company. Your line is now open.

Thanks. Hey, good morning, guys. I wanted to stay on time and for a little bit. Good morning. You know, can you maybe just talk about how the reception has been from, you know, employees, customers, suppliers, et cetera, you know, given the first month of, integration post-close?

Yeah, you know, we've been very busy trying to get out to visit the plants, meet as many people, a lot of work to do, especially when you're at a quarter end. So it's been a balance. But we have been extremely pleased with the level of talent of people that we see in the organization, the excitement. One of the things that we identified fairly early You know, the cultures are very similar on things that are extremely important to us. How we serve our customers, the focus, most importantly, the focus on safety, our willingness and anxiousness to develop people, all of those things are extremely similar. So, you know, we're very excited. Once the deal closed, the level of sharing of data and obviously starting to build together, I mentioned in my script that we have an integration management office that has folks from pre-acquisition, both sides of the table, and these folks are working as though they've been colleagues for 30 years. It's been great to see, and I'm excited to see what sort of energy and opportunities that they're going to create. I think our customers have been very supportive. We spent time talking to many of them about learning, you know, in their eyes what are the strengths and the weaknesses of each, and it's our job to build on the strengths of those companies and minimize, you know, what would be a perceived weakness. And I think we overlay very, very well. I mean, I think Quantix has been a very strong manufacturing-based company. And, you know, I think the time and team was probably a little more commercial-driven and engineered types of solutions. And I think when you overlay those two, it's going to create something very, very special.

Absolutely. Really helpful call there. And then, Scott, you talked about some physical inventory counts and the cost impact related to that. Do you also lose any any days of operations to do that, and if so, how many days? And then secondly, do you expect maybe to implement a new ERP, some data tracking, and maybe reduce that physical inventory count impact over time?

Yeah, absolutely. We're going to get much more efficient on it the second time around. I mean, this was something that they weren't expecting to have to get done by October 31st. It's something that we feel is very necessary. There will be a financial impact. I quantified the cost side. There will be some downtime that will affect a little of the revenue side, which is also reflected in the guidance that we gave. So it's a learning process on their end. It's something we're used to here at Legacy Quantics, but we're partners now. We're going to work with them to make sure that going forward, this is a more efficient process.

And from an ERP perspective, your question there, I think once we finalize the new reporting structures, we'll obviously do an in-depth look at what ERPs exist within the legacy organizations and how they match up with the new reporting structure, and we'll do everything that we can to streamline. I think that's one of the things in terms of trying to to optimize margin takeout costs while not impacting our customer. That's always been a focus for the Quonix team, and we'll make sure that that continues to exist on a go-forward basis.

Got it. How does the SKU count for time compared to legacy Quonix? Is it meaningfully different, or how would you describe that?

I would say that there tends to be more SKUs on the legacy time in business. It is a different type of business model. You know, Quantix has typically been make to order. I would say Timon is more make to stock. So, you know, they've typically had higher levels of inventory. You know, they're engineered into specific window systems. So, for example, when a customer engineers a product into a window system, even if the window system goes out of manufacturing to go kind of like an OE for an automotive. When a car year expires, you still have to have the ability to make that product through the aftermarket life. It's very similar with their organization in that regard. So a little more SKUs, a little more inventory. We'll work to kind of drive that as much as we can to a make-to-make make the order versus make the stock, but a little different of a business model.

Okay. I'll pass it along. Thanks very much, guys.

And thank you. And one moment for our next question. And our next question comes from Ruben Gardner from Benchmark. Your line is now open. Thanks.

Good morning, everybody. Good morning, Ruben. So just to follow up on Julio's question about the time and deal and customer conversations, I think revenue potential synergies or cross-selling opportunities was something mentioned around the initial announcement of the deal. I was just curious what your kind of feedback was from customers on that front. Are there any dis-synergy risks, any customers that maybe don't want to get overly exposed to one

supplier any other kind of thoughts there would be helpful I don't see any any initial this energy you know it's too early into the process to identify you know the the revenue opportunities we obviously think that they're there and I'm not only by selling a basket of goods but also you know the future development of new systems utilizing the whole breadth of our portfolio Again, I want to remind people in our projections and pre-announcement, we have never baked in any sort of revenue upside, so we feel good about that. I think any sort of protection from customers isn't necessarily based on the size of the supplier. It'll be product line by product line that everyone will look to evaluate the risk profile. I feel very good about our position. I think I actually think the scale that Quantix has become actually protects our customers from the smaller type of customer base that has more financial risk. I mean, we become a pretty large OE supplier, and with that scale comes some security in terms of our financial wherewithal. So, you know, it's our job to make sure that they understand that we have a a supply chain that is able to support every one of our product lines and that they don't have risk in terms of a supply chain side of it. So I feel pretty good of where we're at and we'll continue to have these discussions and build the relationships with our customer on a go-forward basis. I'm really excited. I think the combination will be able to, you know, you hear it a lot, but I do think that this can be a win-win for us and our customers as we learn and work with each one of these customers to develop engineer engineered solutions on a go forward basis. And that, that's where our focus is going to be.

Got it. And then switching gears, um, any, uh, signs, you know, it's been a few years since we've had really a ton of focus on affordability, but just wanted to hear what you're kind of seeing from a trade down standpoint, whether it's in windows or, um, the cabinet side, any – has that picked up at all? And can you just remind us how that kind of impacts you on both the spacer's front and then in the cabinet's business?

You know, I think on the affordability front, you know, I really think it impacts our cabinet side of the business more than the window side of our business – If you're going to get to the point where you need to replace a window, it's either because it's broken or it's failed or you're trying to reduce your energy cost. I mean, the one thing that we are still seeing across the globe is energy costs are not getting cheaper. So there's an opportunity to get a payback by upselling your window and becoming more thermally performant. The cabinet piece of our business, you know, we're very happy with what our team has done operationally, but at the end of the day, it is a little more of a discretionary spend. And as consumer confidence still lags, and they tend to be kind of a higher-level purchase that may require some borrowing to redo cabinets, it's going to be impacted more, in our opinion, than the windows. And I think we're seeing that right now.

Great. I'm going to sneak one more in. I know it's a little early for an initial 25 outlook, but just kind of big picture, your revenue guide for the fourth quarter implies some improvement on a year-over-year basis, maybe kind of starting to flatten out. Is it too early to expect that maybe we've turned a corner and growth can resume in 25?

Yeah, I mean, good question. I'm sure a lot of people are thinking the same thing, and it is too early for us to get any sort of early look at next year, but I will say that there is, we feel like there is prospect to return to growth next year. I think that the second half is more, we're more optimistic about the second half next year than we are in the first half, just because near-term uncertainty, but yeah, I think there's an opportunity for growth.

And the timing of those, you know, I think we saw today that the jobs report came out. It's nothing spectacular, and there's more points starting to lead that the Fed will probably cut rates. I think here over the next 30 to 60 days when we see how large of a cut that that potentially could be and the impact that has on consumer confidence will give us a better feel kind of December and into the beginning of the calendar year of how strong we're going to believe 2025 is. We think there's an opportunity for it to be a pretty decent year, but there's still a lot of noise between the interest rates and the election.

Tough year to model.

Thank you.

Congrats, guys.

And thank you. One moment for our next question. And our next question comes from Adam Thalema from Thompson Davis. Your line is now open.

Hey, good morning, guys. Congrats on the quarter and closing time in early. Thanks. And giving us a full quarter of time in. That's pretty cool. Yeah, we planned it perfectly. Nice and clean. Kind of in line with Ruben's last question, I was wondering if you guys are seeing any green shoots in the EU.

You know... I think consumer confidence has started to show a little more of a bounce back in the UK. And not as much yet in Europe. The UK has been a little more positive than what we've seen in continental Europe. I think that the Bank of England has been a little more positive. ahead, but their economy has lagged a little longer than the U.S. has. So I think that the U.K. market has suffered a little bit. So I think that there's probably more optimism for us in the U.K. than we do see in continental Europe on a short-term basis. Got it.

Okay. Scott, what was the net debt after the close?

Yeah, we haven't, since it's during our fourth quarter, we haven't disclosed that, but It's pretty much in line with what we thought it would be.

Okay. And then if I'm doing this correctly, the Q4 tax rate jumps up a little bit to call it 24%. Is that right?

Roughly, yeah. So, yeah, 22 for the whole year, so a little higher in Q4.

And is that like a good tax rate to use going forward?

Pretty close. We'll get more clarity there as we look into next year. But the reason for the uptick a little bit is mainly related to the UK patent box, which is for a lower rate that we enjoy as Legacy Quantex, which Legacy Timon did not enjoy. So we're trying to do a little work there to help us.

Got it. What share count are you using for Q4? Not that you gave EPS guidance, but... Yeah, it's roughly $47 million. Okay, and then do you have any sense for go forward CapEx for the combined company or thoughts on Q4? Sure.

Probably a little too early for that. We've come in and I don't think it'll... If you were to go back and look at the standard run rates of both companies, it'll probably be pretty consistent. We're in the process of evaluating all of the current projects that we have in place. I don't think that there will be anything significantly out of line. We don't have any plans for any... plant consolidation types of projects that would chew up CapEx. So I think it'll be a pretty standard year in terms of spending.

Outside of the one project I think we mentioned in the past is we're expanding in the southeast. We're opening a new plant in Jackson, Georgia. Help follow some of our bigger customers. So that'll take a little bit of CapEx next year.

Yeah, and that was already built into ours. Yeah.

Okay.

Got it. Great. Thank you, guys. All right. Appreciate it. Thank you.

And thank you. And I'm showing no further questions. I would now like to turn the call back over to George Wilson for a closing remark.

I would like to thank everyone for joining today. But before we go, I do want to take this opportunity to again welcome all of our new teammates who have joined us as part of the time in transaction and to thank the entire team for all of their hard work during the transaction and now as we move forward together with the integration. We're really excited about the future for Quonix and look forward to updating you all again on our progress. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.