Quanex Constructing Merchandise Company (NYSE:NX) Q2 2024 Earnings Convention Name June 7, 2024 11:00 AM ET
Firm Individuals
Scott Zuehlke – SVP, CFO & Treasurer
George Wilson – Chairman, President & CEO
Convention Name Individuals
Steven Ramsey – Thompson Analysis Group
Julio Romero – Sidoti
Adam Thalhimer – Thompson Davis
Operator
Good day, and thanks for standing by. Welcome to the Q2 2024 Quanex Constructing Merchandise Company Earnings Convention Name. At the moment, all members are in a listen-only mode. Later, there might be a question-and-answer session. [Operator Instructions] Please be suggested that right this moment’s convention is being recorded.
I might now like to show the convention over to your speaker, Scott Zuehlke, Senior Vice President, CFO, and Treasurer. Your line is open. It’s possible you’ll start.
Scott Zuehlke
Thanks for becoming a member of the decision this morning. On the decision with me right this moment is George Wilson, our Chairman, President and CEO. This convention name will include forward-looking statements and a few dialogue of non-GAAP measures. Ahead-looking statements and steerage mentioned on this name and in our earnings launch are primarily based on present expectations.
Precise outcomes or occasions could differ materially from such statements and steerage and Quanex undertakes no obligation to replace or revise any forward-looking assertion to replicate new info or occasions. For a extra detailed description of our forward-looking assertion disclaimer, and reconciliation of non-GAAP measures to essentially the most straight comparable GAAP measures, please see our earnings launch issued yesterday and posted to our web site.
I will now flip the decision over to George for his ready remarks.
George Wilson
Thanks, Scott, and good morning to everybody becoming a member of the decision. I’m happy with our efficiency throughout our fiscal second quarter. Quanex’s operational mannequin has confirmed to be extremely resilient in each peak and gentle demand environments, as we proceed to realize worthwhile progress.
Regardless of a decrease quantity atmosphere in comparison with the prior 12 months interval and a few index pricing pressures in North America, the Quanex staff continues to carry out properly and supply best-in-class service to our clients. Moreover, we’re additionally investing in alternatives to increase our buyer base and product portfolio. Our beforehand introduced acquisition of Tyman underscores our dedication to bringing much more worth to clients all over the world.
Now, I would wish to take a second to debate the macroeconomic elements impacting our companies. Globally, we’re observing a return to a extra typical seasonal construct and demand sample throughout all of our merchandise. Quantity has elevated every quarter as anticipated, and we anticipate this quarterly ramp-up to proceed.
In North America, there’s a sense of optimism concerning enhancements in each new development and restore and substitute fashions. We anticipate that when the Federal Reserve does take motion to decrease rates of interest, demand for our merchandise will improve as shoppers achieve confidence and allocate extra funds to housing expenditures. We anticipate that this shift will happen within the latter half of the 2024 calendar 12 months with a extra pronounced impression in 2025. Nevertheless, since our full 12 months steerage doesn’t hinge on important Federal Reserve actions, any short-term adjustments would characterize an upside for Quanex.
Conversely, in Europe, market dynamics pose an excellent problem. Each the U.Ok. and continental European markets have skilled important softness. We anticipate that market enhancements in Europe will lag behind North America as a consequence of ongoing geopolitical battle, sustained strain on vitality prices, and numerous governmental elections.
Regardless of these market challenges in Europe, our efficiency over the previous two years demonstrates that the Quanex working mannequin can swiftly adapt to drive favorable outcomes. Our operational flexibility coupled with our scale and sourcing initiatives have enabled us to take care of a sturdy margin profile and constantly ship world class service and high quality merchandise to our clients.
Contemplating these elements, together with the suggestions that we’ve got obtained from our clients and our confirmed capacity to handle controllable variables, we really feel assured in reaffirming our full 12 months steerage and we proceed to count on one other 12 months of robust outcomes from Quanex’s efficiency.
Earlier than, I flip the decision over to Scott, I would like to offer a quick replace on our pending acquisition of Tyman. We proceed to work towards the completion of this value-accretive transaction, which can create a complete options supplier within the constructing merchandise business. We commenced mailing of our us proxy assertion this week and count on to publish the U.Ok. scheme doc shortly.
As well as, the regulatory companies have obtained all vital filings. So we’re assured in our path to shut and stay on monitor to shut within the second half of calendar 12 months 2024. Because of this, shareholder conferences are scheduled for July 12. As we progress our integration planning, we stay excited in regards to the transformative potential that this mix gives. We’re assured the mixture of Quanex and Tyman will speed up our journey to changing into greater and creating a number one provider of constructing merchandise with a extra various geographic footprint, product providing, and buyer base.
I will now flip the decision over to Scott, who will focus on our monetary leads to extra element.
Scott Zuehlke
Thanks, George. On a consolidated foundation, we reported internet gross sales of $266.2 million in the course of the second quarter of 2024, which represents a lower of two.7% in comparison with $273.5 million in the course of the second quarter of 2023. The lower was principally attributable to softer market demand in our European fenestration and North American cupboard elements segments.
Internet revenue decreased to $15.Four million, or $0.46 per diluted share for the three months ended April 30, 2024, in comparison with $21.5 million, or $0.65 per diluted share for the three months ended April 30, 2023. After adjusting for one-time objects, internet revenue elevated barely to $21.Eight million or $0.66 per diluted share for the quarter, in comparison with $21.7 million, or $0.66 per diluted share for a similar interval of final 12 months.
On an adjusted foundation, EBITDA for the quarter elevated modestly to $40 million in comparison with $39.9 million throughout the identical interval of final 12 months. Nevertheless, we had been in a position to notice margin enlargement of roughly 40 foundation factors on a consolidated foundation. The rise in adjusted earnings for the three months ended April 30, 2024 was largely as a consequence of a decline in uncooked materials prices, decrease revenue tax expense and decrease curiosity expense.
Now for outcomes by working section. We generated internet gross sales of $159.Eight million in our North American fenestration section for the second quarter of 2024, which represents a rise of 1.8% in comparison with $157 million within the second quarter of 2023, primarily as a consequence of improved quantity. We estimate that volumes on this section elevated by roughly 2% year-over-year with comparatively flat pricing. Adjusted EBITDA elevated by 16.7% to $23.Eight million on this section in comparison with $20.Four million for a similar interval of 2023.
Our European fenestration section generated income of $56.6 million within the second quarter, which represents a lower of roughly 10.4% in comparison with the second quarter of 2023 after adjusting for the international alternate impression. We estimate that volumes declined by about 10% year-over-year on this section with pricing down about 3% and constructive international alternate translation impression of 1%.
Adjusted EBITDA decreased and got here in at $13 million for the quarter in comparison with $14.9 million within the second quarter of 2023. We generated internet gross sales of $51.1 million in our North American Cupboard Elements section in the course of the quarter, which was 4.6% decrease than prior 12 months. This lower was pushed by decrease volumes and decrease index pricing for hardwoods.
We estimate that volumes declined by roughly 1% on this section year-over-year with the rest of the income decline versus Q2 of 2023, as a consequence of a lower in value largely associated to index pricing tied to the decline in hardwood prices. Adjusted EBITDA elevated by 24% to $5 million for the second quarter in comparison with $Four million within the second quarter of 2023. Optimistic operational execution and price management had been the drivers for the 240 foundation factors of margin enlargement on this section.
Transferring on to money move within the stability sheet. Money offered by working actions was $36.9 million for the second quarter of 2024 in comparison with $38.5 million for the second quarter of 2023. Free money move decreased barely for the quarter, primarily as a consequence of larger CapEx spend in comparison with the second quarter of final 12 months. Our stability sheet continues to be robust, our liquidity retains bettering, and our leverage ratio of internet debt to final 12 months adjusted EBITDA was zero instances as of April 30, 2024 or stated one other method, we’re internet debt free.
We had been in a position to repay $10 million of debt throughout Q2 and we’ve got no excellent attracts on our revolver. As referenced within the earnings launch primarily based on year-to-date outcomes, conversations with our clients, current demand traits, and the most recent macro information, we’re reaffirming internet gross sales steerage of roughly $1.1 billion and adjusted EBITDA steerage of $145 million to $150 million for fiscal 2024.
From a cadence perspective, for the third quarter of this 12 months versus the second quarter of this 12 months, we count on income to be up 4% to six% on a consolidated foundation. By section for the third quarter of this 12 months in comparison with the second quarter of this 12 months, we count on income to be up 6% to eight% in our North American fenestration section, up 4% to six% in our European fenestration section, and down 1% to three% in our North American cupboard element section. On a consolidated foundation, the adjusted EBITDA margin is predicted to be flat to down 25 foundation factors within the third quarter of 2024, once more in comparison with the second quarter of this 12 months.
Operator, we are actually able to take questions. Operator?
Query-and-Reply Session
Operator
[Operator Instructions] And our first query might be coming from Steven Ramsey of the Thompson Analysis Group. Your line is open.
Steven Ramsey
Hello. Good morning. Possibly to begin with U.S. non-fenestration gross sales confirmed strong progress. So perhaps two questions on that. 2H gross sales had been higher than 1H for seasonality, it seems. However would you count on that to be the case once more in FY ’24 because it was in FY ’23? After which secondly, larger stage, what’s driving the energy in U.S. non-fenestration gross sales and do you’ve gotten a line of sight for that to proceed over the long run?
George Wilson
Yeah. We have been very, very happy with the expansion in our non-fenestration, and it has been an initiative that we have been engaged on for a protracted time period. You have acquired actually three or 4 predominant items which have actually contributed to that. You have acquired our photo voltaic sealant merchandise that we proceed to develop and work on, and that market continues to develop. The fencing — the vinyl fencing enterprise, which has been a pleasant segue for us to proceed to make the most of our vinyl extrusion property.
We do a whole lot of flashing tapes, butyl lamination of home wraps, and flashing tapes. After which lastly a few of the markets of our mixing enterprise, the QCM goes into for companies and segments which might be outdoors of the fenestration. So we really feel very optimistic in regards to the continued progress in that. And we have spent a whole lot of time and sources and that’s clearly in our acknowledged technique, a giant piece of our progress on a go-forward foundation. We’re investing a whole lot of sources and we’re proud of the progress.
Steven Ramsey
Glorious. After which wished to carry in on cupboard margin very robust. Are you able to discuss in regards to the plant closure, what that ought to do strategically and financially for you within the coming 12 months?
George Wilson
Properly, when it comes to the plant closure, simply actual fast. It has nothing to do with our cupboard section, that was a plant that we’re closing in our vinyl extrusion enterprise. That was extra of a rightsizing of our capability. So we have not introduced any closings. Now, because it pertains to margins throughout the cupboard enterprise, extraordinarily happy once more, this has been a whole lot of exhausting work and buildup.
Our operational groups proceed to work tirelessly for locating alternatives to push on our steady enchancment efforts and dealing with our sourcing groups to remain forward of the index pricing mechanisms that we’ve got. Pay attention, it is as anticipated and we’re actually happy with what the operational groups in our cupboard section have finished and see no purpose why any of that may go away. We’re very happy with the work that they’ve finished.
Steven Ramsey
Glorious. Then final fast one for me, your outlook is unchanged, and also you stated buyer conversations. As all the time, we’re a contributor to your outlook. Are you able to share some colour on what they’re telling you? Evidently the broader housing outlook could have downshifted a bit in current months for price expectations pressuring second-half sentiment. So curious what your clients are telling you and the way that aligns or doesn’t align with to make that step broad sentiment?
George Wilson
I feel it is blended and there is clearly regional play that comes into impact. I feel you see a whole lot of the bigger nationals nonetheless are very optimistic on the outlook and are very aligned. I feel you will proceed to see consolidation in our buyer base and you’ve got seen a few of that over the previous couple of quarters. I would not use the time period cautiously optimistic once more. I feel everyone seems to be absolutely aligned on the truth that the macro indicators counsel that the housing market and the restore and substitute market is because of increase.
Simply wants that a bit bit extra client — constructive client confidence. And in some unspecified time in the future, we’ll see the Fed make a transfer. Clearly, the roles report right this moment, there might be those that have totally different opinions on that, however most of our clients that we have talked to are nonetheless fairly optimistic that issues are going to begin to enhance in the direction of the top of this 12 months and into subsequent 12 months, and that hasn’t wavered.
Steven Ramsey
That is nice. Thanks.
George Wilson
Thanks.
Operator
And one second for our subsequent query. And our subsequent query might be coming from Julio Romero of Sidoti and Firm. Your line is open, Julio.
Julio Romero
Thanks. Hey, good morning. My first query is on Europe. Are you able to perhaps increase on what’s the key issue for this European softness? I feel you named a pair within the ready remarks. After which secondly, how extended do you assume the softness in Europe extends to?
George Wilson
Yeah. It has been a way more difficult market. I feel the important thing drivers are clearly client confidence. You have had longer pressures on vitality prices. I feel that if you take a look at the fenestration markets in Europe, they’re extra tied to financial and governmental incentives than in all probability what we see within the U.S. So, with a whole lot of — this being an election 12 months in most corporations, a whole lot of shoppers are sort of on maintain to say, why would I spend money on shopping for one thing once I do not know what the top end result might be for any kind of financial incentives or passive housing laws?
So I feel the buyer in Europe has been just a bit extra on maintain and rather more conservative with their spending than we have seen within the U.S. And that has positively pushed softness. And you then couple that with a few of the larger inflation, you clearly acquired a warfare that is of their yard. And in order that’s driving some strain on vitality prices nonetheless. And there is simply much more uncertainty than we see than in — than we see right here within the U.S. By way of once I assume we’ll see enchancment, I feel it is going to lag. And it is in all probability early to mid-2025.
Now, I’ll let you know, and we have no of this baked into our steerage, however there was a bit extra optimism, or no less than indicators of our first indicators of optimism within the U.Ok. market than we have seen in a very long time. And there is truly been some dialogue of perhaps the Financial institution of England beginning to ramp down a few of the rates of interest, perhaps even prior to the Federal Reserve. So, that might probably be some upside. However I feel we have nonetheless acquired a option to go right here.
Julio Romero
Acquired it. That is very useful. After which, turning to a few of your third quarter outlook, you count on EU gross sales to be up within the third quarter sequentially, 4% to six%, I imagine you stated, versus the second quarter. And whereas I do know you gave us the consolidated margin outlook of flat to down, how do you count on — are you able to perhaps discuss to the way you count on the European margins to pattern within the third quarter relative to 2Q?
Scott Zuehlke
I would say primarily based on the seasonality of our enterprise, truly, that — these margins in Europe ought to maintain up properly, if not enhance quarter-over-quarter.
Julio Romero
Okay, useful. After which, simply the final one for me is, thanks for the nice colour on the outlook. Are you able to perhaps converse to the free money move outlook for the 12 months? And if that is nonetheless sort of unchanged out of your earlier outlook?
Scott Zuehlke
I would say for essentially the most half it is unchanged. I imply, clearly, there are some transaction and advisory charges that we’re paying all through this course of with timing that’ll impression some free money move, however we’re nonetheless comfy.
Julio Romero
And that will be with 85 to 90, or am I fallacious about that?
Scott Zuehlke
I feel that was proper.
George Wilson
Yeah.
Julio Romero
Okay. Thanks very a lot, guys. Admire it.
Scott Zuehlke
Yeah. Thanks.
Operator
Thanks. And our subsequent query might be coming from Adam Thalhimer of Thompson Davis. Your line is open.
Adam Thalhimer
Scott, are you able to decide up there on the transaction charges, how ought to we mannequin these going ahead? After which additionally SG&A, you had actually good management there. Ex the transaction charges in Q2, how do you count on these to pattern?
Scott Zuehlke
Yeah. I imply, what you are going to see is we’ll proceed to regulate the transaction charges out. There is a section information desk that has that info. So — after which outdoors of that SG&A, we guided to earlier this 12 months. I will have to seek out it. Give me a second. $128 million to $130 million is what we guided to for SG&A. That is the identical. I imply, once more, we’ll simply — we’ll regulate out the transaction price. So it is exhausting to offer you an estimate on what they will be all year long, however we’ll regulate them out.
Adam Thalhimer
Okay. I will not even attempt. After which, George, I used to be a bit curious, you stated indicators of optimism for each R&R and new development. I might say in our store, we’re in all probability a bit bit extra bullish on new development than R&R. Simply hoping you possibly can parse the outlook there a bit bit?
George Wilson
Yeah. I feel if you would need to evaluate the 2, I feel new development will lead, however due to a few of the — simply the timing of latest development, I feel you will notice lots of people that will not go all in on new development and that the kitchen and the lavatory areas will turn out to be, once more a constructive pattern. And that is the place you see a majority of the leases if you get it.
And as current properties begin to churn with the decrease rate of interest drops, that may spur on R&R. We all know that that may occur. So once more, that is in all probability a bit extra predicated on the Fed dropping charges than new development. So, I might agree along with your remark that we might be, when evaluating the 2, extra bullish on new development, however assume R&R might be there as properly, particularly when the Fed makes a transfer downward.
Adam Thalhimer
Okay. And lastly, I wished to comply with up on Steven’s first query, sort of alongside these traces. Is there something attention-grabbing on the R&D facet or new product growth that might drive a bit little bit of margin enchancment ex-macro?
George Wilson
Clearly, any natural R&D initiative takes a bit time, however we’re actively working. And I’ll let you know there’s some — we have been actually happy on the blending facet of our enterprise and a few new compounds the place they had been creating together with our spacer enterprise. I feel we proceed to work and take a look at — there is a new display product that we’re trying to convey probably to market right here on a safety display.
So, it is too early to offer a whole lot of particulars and predict, however we’re fairly excited. Once more, these are seeds that we planted just a few years in the past as a part of our acquisition of the LMI. And people issues are beginning to come to fruition, and we’re actually happy about it. And I feel that is why you are beginning to see a bit extra spend for us in R&D and on the CapEx facet of our enterprise.
Adam Thalhimer
Nice. Thanks, guys.
George Wilson
Thanks.
Operator
And I am exhibiting no additional questions. I might now like handy the decision again to George Wilson for closing remarks.
George Wilson
I would wish to thank everybody for becoming a member of right this moment and we sit up for persevering with to ship worth for our shareholders and are very enthusiastic about the way forward for Quanex. Thanks.
Operator
This concludes right this moment’s convention. Thanks for collaborating. It’s possible you’ll now disconnect.