Quanex Building Products Corporation (NX) 2024 Q3 Earnings Call Summary

Optimistic Highlights

• Exceeded Consensus Expectations

Despite a challenging demand environment, Quanex exceeded consensus expectations across all metrics for Q3 2024.

• Successful Acquisition of Tyman

The acquisition of Tyman was successfully closed on August 1, with strong shareholder support and plans for $30 million in cost synergies within 2 years.

• Solid Free Cash Flow

Quanex continued to generate solid free cash flow, enabling investments in future organic growth opportunities.

• Positive Integration Progress

The integration of Tyman is progressing well, with collaborative efforts to capture and identify additional synergies.

• Optimistic About Future Growth

The company is optimistic about achieving above-market growth and creating value for shareholders.

Pessimistic Highlights

• Revenue and EBITDA Decline

Consolidated revenue decreased by 6.4% and adjusted EBITDA fell by 13.2% in Q3 2024 compared to the same period last year.

• Lower Consumer Confidence

Consumer confidence remains low due to macroeconomic uncertainty, impacting order volumes.

• Higher Material Costs

Higher material costs in North American segments contributed to decreased adjusted earnings.

• Decreased Net Income

Net income decreased to $25.4 million or $0.77 per diluted share, down from $31.7 million or $0.96 per diluted share in the same period last year.

• Softer Market Demand

Softer market demand across all operating segments led to lower volumes and decreased operating leverage.

Company Outlook

• Revised Guidance

Quanex revised its guidance to include the contribution from the legacy Tyman business, estimating net sales of $1.275 billion to $1.285 billion and adjusted EBITDA of $171 million to $176 million for fiscal 2024.

• Focus on Integration

The company plans to unveil a new organizational structure in early 2025 and provide quarterly updates on integration progress.

• Investment in Growth

Investments in expanding mixing capacity, new product introductions, and operational improvements are expected to drive growth in 2025 and beyond.

• Potential Rate Cuts

Expected interest rate cuts by the Fed could benefit the 2025 build season, potentially improving market conditions.

• Optimistic Long-Term

Quanex remains optimistic about its long-term prospects, despite current macroeconomic challenges.

Q & A Highlights

• Q: Legacy Company Outlook Amid Lower Demand

Steven Ramsey (TRG): Why is Quanex able to maintain its outlook while other companies are reducing theirs?

A: George Wilson: We were conservative in our initial outlook and our sales teams have been proactive in securing spot business and introducing new products.

• Q: Market Share Gains

Steven Ramsey (TRG): Can you provide more detail on market share gains and how they compare to prior years?

A: George Wilson: Gains are mostly in the European fenestration business due to competitor exits. We've also leveraged our thermal performance products globally.

• Q: Tyman's Highly Engineered Products

Steven Ramsey (TRG): Are there overlaps where Tyman's products are better, and how will this evolve?

A: George Wilson: Minimal overlap exists. We aim to develop integrated systems leveraging both companies' strengths.

• Q: Reception of Tyman Acquisition

Julio Romero (Sidoti & Company): How has the reception been from employees, customers, and suppliers post-acquisition?

A: George Wilson: Positive reception with similar cultures and strong collaboration. Customers are supportive, and we are focusing on leveraging strengths.

• Q: Physical Inventory Counts

Julio Romero (Sidoti & Company): Do you lose operational days for inventory counts, and will you implement new ERP systems?

A: Scott Zuehlke: There will be some downtime, but we plan to become more efficient. ERP systems will be evaluated for streamlining.

• Q: SKU Count Comparison

Julio Romero (Sidoti & Company): How does Tyman's SKU count compare to Quanex?

A: George Wilson: Tyman has more SKUs due to a make-to-stock model, while Quanex is more make-to-order.

• Q: Customer Feedback on Cross-Selling

Reuben Garner (Benchmark): What is the customer feedback on cross-selling opportunities post-acquisition?

A: George Wilson: No initial dis-synergies identified. We see potential for revenue opportunities and are focusing on engineered solutions.

• Q: Affordability and Trade-Down Impact

Reuben Garner (Benchmark): Are there signs of trade-down due to affordability issues?

A: George Wilson: More impact on the Cabinet business than windows. Windows are less discretionary and driven by energy efficiency needs.

• Q: 2025 Growth Outlook

Reuben Garner (Benchmark): Is there potential for growth in 2025?

A: Scott Zuehlke: Optimistic about growth, especially in the second half of 2025, pending macroeconomic conditions.

• Q: Green Shoots in the EU

Adam Thalhimer (Thompson Davis): Are there any signs of recovery in the EU?

A: George Wilson: More optimism in the U.K. than Continental Europe, with the U.K. showing some positive signs.

• Q: Net Debt Post-Close

Adam Thalhimer (Thompson Davis): What is the net debt after the Tyman acquisition?

A: Scott Zuehlke: In line with expectations, not disclosed yet.

• Q: Q4 Tax Rate

Adam Thalhimer (Thompson Davis): What is the Q4 tax rate and is it a good rate to use going forward?

A: Scott Zuehlke: Roughly 24% for Q4, with 22% for the full year. Future rates will be clarified later.

• Q: Share Count for Q4

Adam Thalhimer (Thompson Davis): What share count should be used for Q4?

A: Scott Zuehlke: Approximately 47 million.

• Q: Go-Forward CapEx

Adam Thalhimer (Thompson Davis): Any sense of go-forward CapEx for the combined company?

A: George Wilson: Consistent with historical run rates, with no significant changes expected.