Quanex Building Products Corp (NX) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcomed to the Quanex FY15 second-quarter conference call.

(Operator Instructions)

During today's conference call, Company Management may make forward-looking statements about future prospects of Quanex Building Products. Participants should refer to the Company's Form 10-K filed with the SEC for more complete forward-looking statement disclosures. Additionally, the Company may refer to non-GAAP figures throughout today's call. A reconciliation of EBITDA to the most comparable GAAP figure is included in the Company's most recent earnings release which is available, along with the Company's form 10-K and 10-Q documents at the Company's website at www.Quanex.com.

Last, participants are reminded that today's conference call is being recorded. I will now turn the conference call over to Mr. Bill Griffiths, Chairman, President and CEO of Quanex Building Products for opening comments. Please go ahead, sir.

Thank you. Good morning everyone and thank you for joining us for our FY15 second-quarter conference call. On the on the call with me this morning is Brent Korb, our Chief Financial Officer; and Marty Ketelaar, our Vice President of Treasury and Investor Relations.

Quanex posted a very solid second quarter. With net sales growth of 5% year-over-year and EBITDA nearly doubling to $11.5 million compared to last year. This result while strong, was in line with our expectations and included the drag of foreign currency translation from our European spacer operations.

On a constant currency basis, net sales increased nearly 7%. We closed the first half of our fiscal year with revenue growth of 3.3%. This includes the contraction in the vinyl business we reported last quarter, the drag of foreign currency translation and almost no sales of spacer in Russia and the Ukraine as result of the ongoing political unrest.

In the US we continue to see improved volumes from our customers in the West and Southeast, offset somewhat by declines in the South primarily in Texas. Volumes in the Midwest and Northeast were similar to last year.

In the aggregate we remain on track for our full-year guidance of 5% to 7% revenue growth. However, if the strength in the US dollar continues we will likely close the year at the lower end of this range.

With respect to the reinvestment in our vinyl operations, we've planned major overhauls of 61 extrusion lines of which 48 are now complete, and the balance will be finished by the end of this current quarter. We also plan complete or partial rebuilds of a further 35 lines, of which only 13 have been completed. The remainder will be finished by early in the fourth quarter.

We have now completed the installation of the two lines relocated from Kentucky to Greenville, Texas after being completely rebuilt. A new high output line will be installed in Greenville in the fourth quarter. This will complete the planned expansion of this facility by more than doubling its capacity since the acquisition.

Overall, we have seen signs of improvement in our vinyl profile business with key operating metrics of on-time delivery, quality, scrap rates and labor efficiency all moving in the right direction. I stated at the beginning of the year however, we will not see the full impact of these operating improvements until we exit the fourth quarter and move in to FY16.

The combination of improved operating results in our vinyl business, continued steady growth in our end markets and incremental improvements in our other product lines, give us confidence that we are on track toward our full-year guidance of $57 million to $63 million of EBITDA. With respect to the longer-term, both in the industry economic forecasters, Ducker and Hanley Wood, are now forecasting mid-single-digit growth rates for the next three years. With both projecting about 57 million window units in 2017.

This trajectory and our current year EBITDA expectations serve to reinforce our belief that four or five years from now, window shipments will recover to a point that Quanex can deliver revenues in the $825 million to $875 million range and EBITDA levels of $115 million to $130 million. After Brent covers the second-quarter results in more detail, I will talk a little about the status of our strategy.

Thank you Bill, and good morning to everyone on today's call. Consolidated second-quarter net sales increased 5% to $142 million while second-quarter EBITDA increased to $11.5 million, a $5.7 million improvement over the last year. As Bill mentioned, revenue growth was driven by higher sales of screens and accessories, offset by lower sales of spacer products.

Second-quarter consolidated gross margin of 21.9% was better than the 19.6% in the second quarter of last year and the 17.3% in the first quarter of this year. The improvement was driven primarily by top-line growth while controlling costs, thereby realizing solid operating leverage.

We ended the quarter with a cash balance of $60 million and no outstanding borrowings on our revolving credit facility. All in all, the second quarter was a solid quarter for us to build off of as we entered the busiest time of the year.

I'll now turn the call back to Bill.

Thanks Brent. Let me just touch on the status of our acquisition strategy. As you know, we laid out how we would prioritize capital deployment last year. Namely, invest in our existing business to improve operating performance, acquire businesses directly in our current space, such as competitors or vertical integration assets, and lastly, explore adjacencies in products, market channels or geographies.

Finally we said if opportunities were on the horizon within a given timeframe, we will return capital to shareholders. We did exactly that beginning last September with a $75 million share buyback plan when we encountered a lull in M&A activity. This plan was completed this past February.

Since then M&A activity has picked up. And while there is never any certainty in the acquisition arena, there's now sufficient potential activity in the pipeline that the Board recently decided we would not initiate another stock buyback at this time. We will of course reevaluate this at the end of the third quarter.

We remain firmly committed to our strategy of operational improvements as the market rebounds to get us to our mid-cycle revenue and EBITDA guidance at a minimum. With incremental growth through acquisitions in the areas we have previously outlined. We will remain patient and disciplined.

And with that, we'd be happy to take your questions. Operator?

(Operator Instructions)

Daniel Moore, CJS Securities

Good morning

Good morning, Dan

You mentioned, Bill, the impact of the dollar and what, how that might impact your revenue guidance for the full year. If the dollar in fact remains strong, would it be similar for the EBITDA guidance, do you expect that to be in the lower end of the range or do you see more opportunity there?

No. I think then to be clear, it is a translation effect only but it's a pretty significant number from, compared to last year. So, it definitely will soften the EBITDA as well, clearly not to the same extent because of the numbers are smaller as the revenue line. But it will have an impact

Okay. And then as we kind of look at the various geographies, are you seeing any measurable pickup in the Northeast and Midwest as we head into the back half of the fiscal year?

Kind of interesting because the answer is, yes, but I would temper it by saying, through the month of May which is really the first month that we would expect to see an improvement, it was not as strong as I think some had anticipated. Definitely improving and of course, at the same time, offset by the unusual weather down here in Texas, as I'm sure you will have heard we've had a little rain here for the last month.

And we're still uncertain, quite frankly, whether the softness in Texas is really just due to the weather or also due to energy prices. So it's kind of wait and see at this point, but we are seeing improvements where we expect to see improvements, but not as strong as perhaps some of the forecasters anticipated at this stage

That led exactly into my next question which was Texas. Anything, any additional color as to whether, how much of it might energy-related, or did we just cover it there?

We really don't know how much was energy-related and how much was weather-related. I think clearly, we could see in the state of Texas, a pretty soft summer all round. A lot of the contractors as you will imagine, instead of doing repair and remodel work and instead of working on new construction are actually scrambling with disaster recovery projects right now.

On a personal note, I'm having some work done at a house I purchased and I can't get floor guys in to finish a project they started because they're all doing disaster recovery work here in Houston

Got it. Okay. And then shifting gears, just looking at the back half of the year and I'll turn jump back into the queue, the 5% to 7% that growth for revenue, obviously implies a pickup in H2, do you anticipate that to be fairly consistent across the quarters, or is it more likely given the softness last fiscal Q4 to see an acceleration throughout the back half of the year?

I think at this point we would expect it to be relatively consistent over the next two quarters.

Got it. I will jump back in queue, thank you

Thanks

Nick Coppola, Thompson Research

Hi guys, good morning

Good morning, Nick

Just a quick follow-up on that Texas question and I'm not sure by specific you can be, but can you help us figure out how much of your business is in Texas at this point?

A, I don't have that number off the top of my head and B, we'd be unlikely to release that level of detail publicly

Okay, understood. Just trying to think about I guess, the impact of any kind of slowdown in Texas, but I got you. And then can you just talk a little bit more about the extrusion line upgrades you've gone through? What did the benefit look like and maybe was any kind short-term drag as you change those lines over?

I think, look it's fair to say that, that program right now is where we expected it to be. It's on track from a timing standpoint, some of the manufacturers doing external work for us are a little behind so it's off the original schedule slightly, but not materially. We're spending about the right amount of money we anticipated and at this stage in the program we're getting the results that we anticipated, so we're pleased with where we are.

We clearly have said all year long, this is a big project. We're managing our way through it and really don't expect to see significant improvements show up in the bottom line until we get into next year and we're on the right trajectory. I have no concerns at this point that the outcome will not turn out to be pretty much exactly as we expected

Okay, that's helpful. And then just looking at your, I guess the revenue growth in the quarter, do you have any sense about whether or not OEMs are building or working down inventory, are your sales tracking with end market activity?

Yes, there was very little of the revenue growth in the quarter that went to inventory builds as far as we can tell. As I think we stated last quarter, our customers were not building winter inventory to the extent they did last year; everybody built some but nothing extraordinary. So I think it's tracking market more closely. However, I will say, we've said this before but just to reinforce the point, we track ourselves very, very closely by specific customer in specific regions.

And so at any given point in time, our sales revenue may not mirror the general market simply because we are shipping to a customer that's growing disproportionately either through some of their own internal marketing campaigns or because they happen to be servicing a particularly strong region at that time. Conversely, we could also find ourselves in a situation where specific customers are actually consciously shrinking business in some parts of their portfolio, or in some regions. So I will encourage you to think about our revenue growth in terms of customer specific and region specific, rather than new construction versus R&R for example

Okay, that makes sense. Thanks for answering my questions

Thank you

Scott Levine, Imperial Capital

Good morning.

Good morning, Scott

So you know, looking for a little bit of color with regard to the level of improvement. I'm guessing we should maybe think about it in margins or dollar terms, however you want to think about it. You are clear that with regards to the work being done on the lines that, that's more of a 2016 story, the type of improvement you're talking about. But is there any more color or specifics you can provide around that and is it something where we should expect to acceleration in margin improvements starting early 2016? Or any more detail you can offer regarding the timing and magnitude of any earnings improvements you expect from those investments

Yes, we're clearly seeing margin improvement right now. Obviously a part of that comes from the vinyl operation, part of it for other reasons. But I think if you look to last year's actual performance, and the guidance we have given for this year, it clearly implies that margins are going to improve steadily through the year, particularly in the second half as they typically do. And then we would expect that to continue into 2016.

Little early at this point, I think, to sort of think to granularly about what margin expansion might look like in 2016. As you know our second half is a big step up from the first half. And so as we get deeper into that, we'll have a much better read about next year's expectations. But we have said that we expect as volumes improve and as we continue our operating improvements inside the business, our objective is to get this to be a 15% EBITDA total Company margin business and we feel we're on the pathway we laid out to get there

Got it, fair enough. A couple of quick follow-ups. Firstly on mix, I think you gave some regional color which I'm guessing speaks more to the housing side than repair and remodel maybe it doesn't. If you could elaborate just on trends in repair and remodel or higher end component business, you seeing improvement there, is it tracking according to your expectation, more detail if you have it?

Yes, again so back my previous comment, we really don't and can't track specifically as to what is going into R&R versus new construction. It's really, all of our revenue monitoring is around specific customers in specific regions. And even they in most cases don't know where their products ended up, other than through their own distribution channels they can have an educated guess. So we really don't have a view at this point as to whether R&R is picking up or remaining static. I guess if you'd tortured me I would say we haven't really noticed a material change.

Got it. Fair enough. And then maybe as a follow-up on M&A, so it sounds like there's as a pickup in the pipeline in general, I think previously you'd indicated maybe less of an appetite for adjacent market. Could you give a bit more color on, is it larger or smaller prospects? Are you willing to revisit adjacent markets as a serious target, any additional thoughts you can offer there?

Yes. I think at a 50,000 foot level I think you're close enough to understand that as we go deeper into 2015, M&A activity in general and even more specifically in the building products base, has picked up pretty significantly. You've seen some pretty big transactions announced, I think much of that is driven by the potential end of a low interest rate environment and some these transactions are getting done so the people can add leverage at an affordable rate. So we've sort of seen that, even at the lower end of the market where we would operate.

And we definitely are seeing more discussions around potential divestitures, some of which we mentioned over a year ago. Again, it's in its early stages, I think the main take away is the pipeline is filling up, we have activity, there is no certainty at all, and as such we are not going to initiate another share buyback at least for the next quarter anyway; we'll reevaluate as we go along. And there are opportunities out there in every one of the segments we have talked about. Some vertical integration, some direct space, some in adjacencies that make sense, some in adjacencies that don't make any sense, but there's just a lot more activity than there was three months ago.

Understood thanks

(Operator Instructions)

Daniel Moore, CJS Securities.

Thank you again. Just want to follow-up on that thought. The one is, maybe just a little bit more on the thought process of why not re-up the share repurchase, if only to have flexibility to be opportunistic. And two, you talked about the increased M&A activity is, are you seeing a willingness of buyers to pay up? Are you seeing sellers maybe be a little bit more realistic if you will on multiples? Just what you're seeing in terms of your confidence that there is more activity for -- potential activity for you, for Quanex at a reasonable multiple, given you've been so disciplined to date

Yes, clearly I think valuations are settling into a much more realistic range, we are not seeing some of the crazy multiples we saw last year. And I think there's a greater willingness between buyers and sellers to get to a point. I think from a seller standpoint, we're at a good point in the cycle to divest assets, there's been enough of a recovery that earnings levels are reasonable and therefore valuations are reasonable and there's enough of the recovery left that the buyer can have some runway as well. So I think that's one of the reasons we're seeing a pickup in activity.

The sort of former question on why not another buyback; obviously we're not going to get too specific, but part of that revolves around the magnitude of the opportunities that are potentially in the pipeline. And therefore the ability to conserve cash and conserve our debt firepower, if you like, to be able to fully explore those opportunities. And again, with no level of certainty which is why we said three months from now we'll come back revisit it as maybe it will be all for nought and nothing will come of it. But all the time that there is enough opportunity out there to be able to really grow this business in a profitable, sustainable manner, we're going to continue to look at those opportunities and really don't want to preclude having to walk away because we have -- we're no longer able to fund the transaction

Very helpful and I look forward to seeing you at the conference next month

Looking forward to it ourselves

(Operator Instructions)

This does conclude the question-and-answer session of today's program. I like to hand the program back for any further remarks.

Thanks everyone for joining us again today. We look forward to updating you on our third-quarter results in early September. Hopefully by then the building and construction season will be in full swing. Thanks for joining us, goodbye.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.