Good day and thank you for standing by. Welcome to the Second Quarter 2022 Quanex Building Products Corporation’s Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host today, Scott Zuehlke, Senior Vice President, Chief Financial Officer and Treasurer.

Please go ahead..

Net sales are now expected to be $1.18 billion to $1.2 billion; adjusted EBITDA is now expected to be $150 million to $155 million; and free cash flow is forecast to be $65 million to $70 million.

Note that our current expectation is that revenue growth for the remainder of the year will likely be driven more by price as opposed to volume, and we continue to expect margin expansion in the second half.

From a cadence perspective for Q3, we expect net sales to be up low double digits year-over-year in our North American Fenestration segment, low to mid-single digits year-over-year in our European Fenestration segment and mid-single digits year-over-year in our North American Cabinet Components segment.

I will now turn the call over to George for his prepared remarks..

net sales to be $1.18 billion to $1.2 billion; adjusted EBITDA to be $150 million to $155 million; and free cash flow to be $65 million to $70 million. These results would equate to another record year for Quanex, and I would like to thank all of my teammates for their continued hard work and execution.

With this new guidance announced, our near-term capital deployment focus will be on generating cash, further paying down the debt and getting more aggressive on our share repurchase activity, which reflects our commitment to return capital to our stockholders and increase shareholder value as well as our confidence in Quanex’s long-term prospects relative to our current trading environment.

And with that, operator, we are now ready to take questions..

Thank you. Your first question is from Daniel Moore with CJS Securities. Your line is open..

Thank you, George and Scott for all the color really helpful. And congrats on a very solid quarter. You gave the volume growth by segment.

Maybe just talk to what sort of volume growth is embedded in your revised revenue expectations for the remainder of the year?.

I don’t have that broken out by segment, but I think George alluded to the fact that second half revenue growth year-over-year will be driven mainly predominantly by price versus volume..

Got it. That’s helpful. And you also talked about potential for a pull forward of some demand. I know it’s difficult.

Any way to quantify it or maybe describe you suspect that occurred across all end markets and to what degree?.

Really, we’ll see – the only ability to really pull ahead volume for us is primarily in the spacer business. It’s the – really the only product that we have that pallets well. So we think we’ve seen some pull ahead in spacers in North America and Europe. I don’t think it will be material and will impact the cadence that we’ve given you.

We usually – we typically see that when we announce larger price increases. So nothing that I think will impact guidance or is a concern to us right now..

Okay. And clearly seeing strong momentum and acceptance on pricing. Just wondering with all the inflation that we’ve seen if you’re getting any incremental pushback from customers across any pieces of the portfolio? We’re still pretty confident in your ability to at least at this stage or level of inflation to push those through..

I think it really – our ability to get prices because I think we work very hard at trying to be transparent with the customer. These aren’t margin grabs. We are truly working to just pass through inflationary pressures that we see. So we are very transparent with the cost pressures that we’re getting.

And I think our customers have been willing and understanding to accept that, and we continue to work together as partners. They’re never easy conversations, but I think the fact that we’re being transparent is helping in the conversations..

Got it. Helpful. Last one, and I’ll jump back with any follow-ups. But given the balance sheet remains still really strong and the increased cash flow guide for the year obviously expect some working capital to catch up a little bit in the back half of the year.

I guess, any thoughts about maybe be more aggressive upfront in terms of the share buyback? Is that your expectation for the remainder of the year? Or are you being cautious in case there are any darker clouds on the horizon from an economic or business perspective? Thanks..

No, great question. And as I mentioned in our comments, I think we have seen strength in our cash flow, especially as we expect it going into the second half of the year. It’s the way it typically works.

Considering where our trading as at today, we think our long-term prospects, not only this year, but what we expect in terms of execution on a go-forward basis makes repurchase of our stock a very smart buy. And so I would anticipate upfront that we probably will be more aggressive, definitely at these levels..

Got it. Very helpful. Appreciate it. I will follow-up with any others..

Your next question comes from Julio Romero with Sidoti & Company. Your line is open..

Hey, good morning, George and Scott..

Good morning..

Good morning..

Could you speak to European demand? What are you hearing about the impact of energy costs on consumer confidence? And have you seen any change in consumer confidence in Europe over the past 3 months?.

I think that there is absolutely some nervousness. I don’t know if it’s completely translated into us seeing any decline in demand at this point, but you’re hearing signs. It will start more with energy costs and really energy disruptions because at least in the markets that we serve today, natural gas is a huge input to making glass.

So those things are where we think it will be hit first. From a consumer side, you hear nervousness, but the demand is still there. And to some extent, it becomes even a positive a little bit for us, at least from the energy side because most of the products that we manufacture are higher end on the chain.

So I think what it does do is when someone has to replace a window or a door, they’re actually evaluating energy even more so than they ever have. And then that may be offsetting or spurring some additional demand. We think that’s actually a positive movement, not only in Europe, but in North America on a go-forward basis..

Got it. That’s helpful.

And I guess a broader question is, can you maybe speak to the rate of inflation you’re seeing? And where are you seeing the greatest levels of inflation across your various inputs?.

I would say, generally, we are now starting to see some signs of the rate of inflation slowing in more areas than not. I would continue to say some of the chemical feedstocks, stabilizers, different inputs into our – both spacer and vinyl products continue to be the biggest challenge..

I can add a little bit to that. One positive sign that we’re seeing in the cabinet business is the availability of green lumber is improving to where that should help us hit our numbers and execute on the margin expansion that we’ve laid out..

Okay. Got it. And I guess just last one for me is I guess, more of a broader question again.

But how do you think your businesses may perform in a recessionary environment?.

Again, a great question. I will tell you as much as we’re seeing record demand, we also spent an enormous amount of time in our leadership team being prepared and ready to react on the backside. I think the best data point that I can give you is our ability to control what even happened during COVID. We know what triggers the pull in some segments.

We are very labor-driven. So, it becomes more of a variable cost that we can back off. I think our performance during that even immediate sharp-down period will translate well. And we know how to do ups and downs, and we have plans prepared to go should we hit..

Got it. And I will hop back in the queue. Thank you..

And your next question comes from Reuben Garner with The Benchmark Company. Your line is open..

Thank you. Good morning everybody. I had a little bit of connection issues earlier and this may be a repeat question, but from Dan. But you mentioned pull forward, Scott. I am trying to understand, you said – I think you said pull forward ahead of price increases.

And I think I was under the understanding that the bulk of your business was kind of contractually on a lag tied to the commodities.

So, did you guys implement separate price increases and give notice and you started to see orders pick up? Can you kind of just reconcile those comments for me?.

Yes. Without getting into specific details, what I will tell you is – and I think I have mentioned this on previous calls as well, there is really three avenues for us in the pricing mechanisms that we currently use, you have the index pricing, which does have the time lags. And then you have the use of surcharges.

If we can tie it to a specific input cost that’s not on a contractual index or finally, discretionary permanent price increases that are applied mainly to deal with labor inflation, benefit inflation and things of those nature. And those obviously aren’t contractual, more bound by the 90-day lags. However, we do have some negotiation periods.

But – so we have put in a combination of all three of those. And so I would tell you and based on the results, there have been quite a few of the discretionary permanent price increases to help cover other areas that we have seen inflation..

Got it. No, that’s very helpful. I think that latter part is maybe looks a little bit different here, clearly, in the results, a nice step up as well. Can – okay.

The next thing I want to ask you is you mentioned conversations with your customers and clearly, you guys are feeling a little bit better about the second half of the year despite what’s going on.

Is there any way to gauge how much of maybe that optimism about the next couple of quarters is tied to – I know some of your areas fenestration in particular, has been one of the more constrained areas, so I am assuming they have a lot of backlog.

Is that the case? Is that why you have maybe increased visibility there? Any color on kind of what gives you the comfort that the second half, in particular, is going to kind of maintain some strength?.

Yes. So, it’s exactly that, Reuben. I think we are already one month through our third quarter. And then when you look at our customers’ backlogs that in many cases, can extend out to three months to six months, both in cabinets as well as any of the fenestration product – projects. I think demand is pretty solid.

I am not at all concerned on the revenue number. We don’t typically get that level of guidance, but when you see those levels of backlogs exist, it gives us that confidence. And so we monitor the backlogs quite heavily. And if we start seeing some significant reduction in those, we will be able to determine if demand is starting to drop.

It should give us some visibility and time to prepare. On the question was asked earlier about as we get into a recession, I mean that will give us some indicators of what’s going. So, we feel pretty comfortable in our sideline at least for a six-month period, no..

Got it. Last one for me. It’s kind of a piggyback on the share repurchase question. Your balance sheet is in great shape, and I know you have got quite a bit of cash left to generate this year.

Does – how do you guys – what’s the M&A landscape look like? Are you guys kind of pulling back the reins a little bit, just given the broader macro risks? Are you still willing to do a deal – a sizable deal if you were to find one? Are people more – businesses more or less likely to kind of sell in this environment?.

Yes. I would answer that. We are not pulling back in any way. In fact, I think we are aggressively looking at opportunities in the market. With that being said, however, I will say that we are being very diligent in making sure that whatever we look at fits the strategic plan that we have developed and our roadmap to go forward and grow.

It’s very defined, and we will follow that and not deviate from that path, and that we are going to make sure that we protect our shareholders by not over-paying and falling in love with something. I would tell you, generally, valuations are still very high.

And we scrub these opportunities with a pretty fine tooth comb, and we are going to make sure it’s done for the right reasons and the right fit. But we are not backing away from looking at it at all..

Perfect. Congrats on the results and outlook, guys. Good luck going forward..

Thanks..

Next question is from Kenneth Zener with KeyBanc Capital. Your line is open..

Good morning everybody. This is Christian Zyla on for Zener. Thank you for taking my questions..

Good morning..

Last quarter, you guys mentioned there is still room for expansion, specifically in NA Fenestration. Just clear you guys received some of that expansion.

How do you feel about the potential left to expand those given the strong pricing and demand? I know you mentioned margin expansion for the back half, but I think maybe broken down by segment, if you can and the potential grab left. Thank you..

Yes, that first part of your question, we couldn’t understand.

Could you repeat it?.

Sure.

In the NA Fenestration section, just your ability and potential left to grab or expand margins given the strong pricing and demand?.

Yes. So, in our North American Fenestration segment, I think that’s what you said, opportunities to expand margin across the different products in that segment. I would say that we have talked in the past about the vinyl fencing product, and we continue to get opportunities to quote more of that business.

That could drive some more of an expansion for that vinyl business. Our screen business, I think that’s going to be a matter of continuing to become more operating efficient and we are pushing price there as well. So, there is some opportunity, I think in the screens piece.

And then for spacer, we have talked in the past, the margin profile for that product is good. I think you probably get some leverage there with higher volumes. So, to the extent we can grow volumes there, I think that would benefit on the margin side as well..

Great. Thank you.

And then lastly, in terms of the three-month to six-month backlog for your customers, is part of that still driven by labor constraints that they are seeing? And do you guys have any visibility on the labor conditions? Is that improving? Has that stabilized? I guess any color for those backlogs and the relation with the labor constraints?.

installer labor. So, not only labor in their facilities, but installation labor on the house build, there is a lot of open projects. New housing may have started to slowdown, but there is still a lot that are in process. So, it’s just slow to get any product through the chain. And then you still got some supply chain.

I mean a lot of our customers source things from Asia and Shanghai Port was effectively closed for nine weeks to ten weeks, which has really caused some issues. So, nothing to do with our product line, but trying to get everything together.

For example, in the cabinets, they are not going to put in a cabinet if they don’t have the stove, the refrigerator and those types of things, everything is going to go in and they time it up, and that’s been very challenging for the installation guys. So, I think it’s the combination of both labor and supply chain..

Great. Thank you very much..

I appreciate it..

Thank you..

Thank you. And this ends our Q&A session. I will turn the call back to George Wilson for his final remarks..

I would like to thank you all for joining the call today. And we look forward to providing an update on our next earnings call in September. Thank you..

And with that, we end our program for today. Thank you for participating, and you may now disconnect. Everyone, have a great day..