Quanex Building Products Corporation (NYSE:NX) Q1 2024 Earnings Call Transcript
Quanex Building Products Corporation (NYSE:NX) Q1 2024 Earnings Call Transcript March 8, 2024
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Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2024 Quanex Building Products Corporation Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Scott Zuehlke, Senior Vice President, CFO, and Treasurer. Please go ahead.
Scott Zuehlke: Thanks for joining the call this morning. On the call with me today is George Wilson, our Chairman, President and CEO. This conference call will contain forward-looking statements and some discussion of our 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 Quanex 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 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.
George Wilson: Thanks, Scott, and good morning to everyone joining the call. Before I start my discussion on the quarter, I'd like to take a moment to publicly thank Bill Griffiths for his many years of dedicated service to Quanex. Bill began his career with Quanex as an Independent Director in 2009. When the Quanex CEO resigned in 2013, Bill was asked by the Board to take over as Chairman and CEO, and he held that role for more than six years. He retired as CEO in January of 2020 and then served as Chairman for the next four years. Bill was instrumental in transitioning Quanex from a largely commoditized metals company into a true building products manufacturing company. His focus on developing a culture of safety, continuous improvement, and profitable growth positioned us well for the success we are realizing today.
Thank you again, Bill, for your commitment, dedication, and service to Quanex and its employees, customers and shareholders. We wish you and Iris all the best in retirement. I'll now move on to my prepared remarks about our first-quarter performance and our current outlook. Overall, the quarter played out as expected. Revenues were down year-over-year as markets reverted to a more normal seasonal pattern and customer inventory levels declined as lead times and supply chains have improved. In addition, automatic index pricing mechanisms had a negative impact on revenue versus the prior year as raw material costs have declined. Even with lower demand levels, we were able to realize margin expansion on a consolidated basis, mainly due to solid operational performance, holding discretionary pricing, lower stock-based comp expense, and lower interest expense.
We were very pleased with our operating cash flow generation, which enabled us to continue to pay down debt in a quarter, where we typically draw on our revolver. With respect to the overall macroeconomic environment, we continue to believe we will see an uptick in demand in the second half of the year. In North America, new housing starts data has shown improvement and optimism is building around the prospect of lower interest rates later this year. If and when the Fed does take action to lower interest rates, we believe demand for our products will improve as customers gain confidence and choose to spend more money on housing. In Europe, we believe market improvements will occur at some point, but will lag North America due to the ongoing wars in Ukraine and Gaza and continued pressure on energy costs in these regions.
But regardless of the demand equation, we have shown over the past two years that the Quanex operating model is able to react quickly to produce favorable results. In addition, the long-term underlying fundamentals for residential housing continue to be very positive. Globally, inflationary pressures have been mixed. Starting with labor costs we have seen a slowdown in the rate of wage inflation as hiring in most markets has slowed. For the sourced materials that are most impactful to Quanex, we are seeing a stabilization in pricing and supply for aluminum, steel, and resins. We are still seeing input cost pricing pressures for our films and engineered adhesives and some of the chemical feedstocks. For our cabinet component products, we are now starting to see upward pricing movements for some of the hardwood species we purchase as lumber mills have reduced capacity in the market.
Finally, from a logistics perspective, we have seen an increase in international shipping costs due to the disrupted shipping lanes in the Middle East. As we look forward to the rest of this year and into next year, I'm still confident that we are well-positioned to meet expectations and continue our track record of positive performance. Our operations and supply chain teams are focused on servicing our customers and performing at a high level and are doing a fantastic job of generating operating cash flow. From a growth and strategy execution point of view, our balance sheet is strong and ready to support growth projects as they arise. We continue to identify areas of opportunities to execute our profitable growth plan both organically and inorganically.
Despite some short-term macro challenges and the uncertainty caused in an election year, we are on track to achieve all of our objectives. I will now turn the call over to Scott who will discuss our financial results in more detail.
Scott Zuehlke: Thanks, George. On a consolidated basis, we reported net sales of $239.2 million during the first quarter of 2024, which represents a decrease of 8.7% compared to $261.9 million during the first quarter of 2023. The decrease was mostly attributable to softer market demand and lower pricing in North America in our cabinet component segment as pricing held up in our fenestration segment. Net income increased to $6.2 million or $0.19 per diluted share for the three months ended January 31, 2024, compared to $1.9 million or $0.06 per diluted share for the three months ended January 31, 2023. After adjusting for one-time items, net income decreased slightly to $5.8 million or $0.18 per diluted share for the quarter, compared to $6.1 million or again $0.18 per diluted share for the same period of last year.
On an adjusted basis, EBITDA for the quarter decreased to $19.3 million compared to $20.5 million during the same period of last year. However, we were able to realize a margin expansion of approximately 30 basis points on a consolidated basis. The increase in reported earnings for the three months ended January 31, 2024, was largely due to a decline in raw material cost, a decrease in stock-based compensation expense, and lower interest expense. Now for results by operating segment. We generated net sales of $148 million in our North American fenestration segment for the first quarter of 2024, a decline of 3.3% compared to $153 million in the first quarter of 2023, driven by a decrease in volumes due to softer market demand. We estimate that volumes in this segment declined by about 3% year-over-year, with pricing holding up relatively well.
Adjusted EBITDA decreased slightly to $13.7 million in this segment compared to $15 million for the same period of 2023. Our Quanex custom mixing business, formerly LMI, continues to perform well and we're looking for ways to expand this business, both organically and otherwise. Our European fenestration segment generated revenue of $49.4 million in the first quarter, which represents a decrease of about 10% compared to $55 million in the first quarter of 2023. We estimate that volumes declined by approximately 12% year-over-year in this segment, with pricing up approximately 1% and a positive foreign exchange translation impact of about 2%. Adjusted EBITDA increased and came in at $10 million for the quarter compared to $9.7 million in the first quarter of 2023.
Pricing held up nicely during the quarter and we continued to perform well from an operational standpoint, which led to an adjusted EBITDA margin expansion of 250 basis points year over year. Normalized buying from our European spacer customers supported results as the inventory rebalancing projects that impacted the business last year are no longer present. Continued improvements in operational metrics, combined with sourcing initiatives and pricing carryover, all contributed to realizing margin expansion in this segment. We generated net sales of $43.1 million in the North American cabinet component segment during the quarter, which was 21.1% lower than the prior year. This decrease was driven by lower volumes and lower index pricing for hardwood.
We estimate the volumes declined by about 12% in this segment year over year, with the remainder of the revenue decline versus Q1 of 2023 due to a decrease in price largely related to index pricing tied to the decline in hardwood costs. Adjusted EBITDA was negative for the quarter in this segment compared to $1.7 million in the first quarter of 2023. Positive operational execution is currently being masked by low volume, but we're hopeful for a rebound in this segment once consumer confidence is restored and the R&R market picks up. Moving on to cash flow in the balance sheet, cash provided by operating activities was $3.9 million for the first quarter of 2024, which represents an increase of 22.9% compared to $3.1 million for the first quarter of 2023.
However, free cash flow decreased for the quarter due to higher CapEx spend compared to the first quarter of last year. Our balance sheet continues to be strong, our liquidity keeps improving, and our leverage ratio of net debt to the last twelve months adjusted EBITDA was unchanged versus last quarter at 0.1 times as of January 31, 2024. Excluding real estate leases that are considered finance leases under US GAAP, we are net debt free. As George mentioned, we were able to repay $5 million of debt during Q1, which isn't normal since we are typically a net borrower during our first fiscal quarter due to the seasonality of our business, we will remain focused on generating cash and paying down what little debt we have outstanding on our revolver.
We will also maintain our focus on growing the company through organic, inorganic, and innovative growth opportunities as they arise, while continuing to preserve our healthy balance sheet. As always, the goal is to create shareholder value. As referenced in the earnings release, based on conversations with our customers, recent demand trends, and the latest macro data, we're now comfortable providing official guidance for fiscal 2024, which is as follows. Net sales of approximately $1.1 billion, adjusted EBITDA of $145 million to $150 million, depreciation and amortization of approximately $44 million to $46 million, SG&A of $128 million to $130 million, interest expense of $3.5 million to $4 million, a tax rate of 20% and CapEx of $40 million to $45 million.
In addition, our guidance for free cash flow is $85 million to $90 million for fiscal 2024. From a cadence perspective, for the second quarter of this year versus the second quarter of last year, we expect revenue to be flat to down 2% on a consolidated basis. By segment for the second quarter of this year compared to the second quarter of last year, we expect revenue to be up 2% to 4% in our North American fenestration segment, down 2% to 4% in our European fenestration segment, and down 11% to 13% in our North American cabinet component segment. On a consolidated basis, adjusted EBITDA margin is expected to be down 100 to 150 basis points in the second quarter of 2024, again compared to the second quarter of last year. Operator we are now ready to take questions.
Operator: [Operator Instructions] Our first question comes from the line of Julio Romero from Sidoti. Your line is open.
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