Q4 2024 Quanex Building Products Corp Earnings Call

Scott Zuehlke

Thanks, George. On a consolidated basis, we reported net sales of $492.2 million during the fourth quarter of 2024, which represents an increase of approximately 67% compared to $295.5 million for the same period of 2023. We reported net sales of $1.28 billion for the full year, which represents an increase of approximately 13% compared to $1.13 billion for 2023. The increases were primarily driven by the contribution from the Tyman acquisition that closed on August 1, 2024.
Excluding the contribution from Tyman, net sales would have declined by 2.3% for the fourth quarter of 2024 and 5% for the full year, largely due to lower volume. We reported a net loss of $13.9 million or $0.30 per diluted share during the three months ended October 31, 2024, compared to net income of $27.4 million or $0.83 per diluted share during the three months ended October 31, 2023. For the full year 2024, we reported net income of $33.1 million or $0.90 per diluted share compared to $82.5 million or $2.50 per diluted share for the full year 2023.
On an adjusted basis, net income was $28.6 million or $0.61 per diluted share during the fourth quarter of 2024 compared to $31.2 million or $0.95 per diluted share during the fourth quarter of 2023. Adjusted net income was $80.4 million or $2.19 per diluted share for fiscal 2024 compared to $90.9 million or $2.75 per diluted share for fiscal 2023. The adjustments being made to EPS are primarily for transaction and advisory fees, amortization of the step-up for purchase price adjustments on inventory and AR related to the Tyman acquisition, expenses related to a plant closure, loss on damage to a manufacturing facility caused by weather, pension settlement expense, and foreign currency translation impacts.
On an adjusted basis, EBITDA for the quarter increased by 59.6% to $81.1 million compared to $50.8 million during the same period of last year. For the full year 2024, adjusted EBITDA increased by 14.3% to $182.4 million, which is a new record for Quanex compared to $159.6 million in 2023. This equates to adjusted EBITDA margin expansion of approximately 20 basis points year over year. The increase in adjusted earnings for the 3 months and 12 months ended October 31, 2024, was mostly attributable to the contribution from the Tyman acquisition. However, the increase in adjusted earnings was also due in part to lower cost of sales, including labor related to lower volumes and deflation in the price of raw materials.
Now for results by operating segment. We generated net sales of $172 million in our North American fenestration segment for the fourth quarter of 2024, a decrease of 4.7% compared to $180.5 million in the fourth quarter of 2023. We estimate that volumes in this segment declined by approximately 6% year over year with pricing up approximately 1% versus Q4 of 2023.
For the full year, we reported net sales of $650 million in our North American fenestration segment, a decrease of 2.6% compared to $667.5 million in 2023. The decrease was mainly due to softer market demand and lower pricing. We estimate the volumes in this segment declined by approximately 3% year over year in 2024 with pricing up slightly versus 2023. Adjusted EBITDA was $30.1 million in this segment for the fourth quarter or 1.5% higher than prior year, which equates to margin expansion of approximately 110 basis points year over year.
Adjusted EBITDA was $93.9 million in this segment for the full year or essentially flat versus 2023, but equates the margin expansion of approximately 50 basis points year over year. This group has done a good job of controlling costs despite lower volumes. Our European fenestration segment generated revenue of $65.1 million in the fourth quarter, which represents an increase of 1.4% compared to $64.2 million in the fourth quarter of 2023.
We estimate that volumes were essentially flat year over year in this segment for the quarter with pricing down approximately 1% and positive foreign exchange translation impact of about 3%. For the full year, we reported net sales of $230.7 million in our European fenestration segment, a decrease of 7.9% compared to $250.8 million in 2023. For the full year, we estimate the volumes declined by approximately 7% year over year in this segment, with pricing down by approximately 2% and positive foreign exchange translation impact of about 1%.
Adjusted EBITDA declined slightly to $16.5 million in this segment for the quarter versus $16.7 million during the same period last year. For the full year, adjusted EBITDA came in at $54.8 million in this segment, which represented a decline of 8.5%, but note that margin was essentially flat. We reported net sales of $52.8 million in our North American Cabinet Components segment during the quarter, which represented growth of 1.7% compared to prior year. We estimate that volumes declined by approximately 3% and price increased by approximately 5% in this segment for the quarter.
For the full year, we reported net sales of $198.4 million, which represents a decline of 7.9% year over year. We estimate the volumes declined by approximately 6%, with price declining approximately 2% for 2024 versus 2023. The price movements for both periods were largely related to index pricing tied to hardwood costs. Adjusted EBITDA was $3.3 million and $9.3 million in this segment for the quarter and full year, respectively. The time lag related to our hardwood index pricing mechanism in this segment negatively impacted profitability in 2024 after helping us on that front in 2023.
The Tyman business reported net sales of $203.4 million for the fourth quarter of 2024. Since we didn’t own this business in the fourth quarter of 2023, there is no comp in the earnings release. However, revenue was down approximately 11% for this segment in the fourth quarter of 2024 compared to the fourth quarter of 2023, mostly due to soft market demand in all segments, which is consistent with what we saw in the legacy Quanex business, but also due in part to the conscious decision to exit low-margin business in China.
Adjusted EBITDA came in at $34.5 million for the quarter, which yielded meaningful margin expansion compared to Q4 of 2023, driven by cost synergies related to the closing of Tyman’s legacy home office in London, exiting low-margin business in China and more efficient operations in North America.
Moving on to cash flow and the balance sheet. Cash provided by operating activities was $5.5 million for the fourth quarter of 2024, which compares to $44.5 million for the fourth quarter of 2023. Cash provided by operating activities for the full year 2024 was $88.8 million, which compares to $147.1 million for the full year 2023. We maintained focus on managing working capital throughout the year, but the fourth quarter was impacted by layering in the Tyman acquisition as the legacy Tyman business is very much a make-to-stock business and the legacy Quanex business is very much make-to-order.
We generated free cash flow of $51.7 million for the full year in 2024, a decrease of about 53% compared to 2023. The main driver for the lower free cash flow in 2024 is the one-time cash costs related to the Tyman acquisition. If you adjust for these one-time cash costs, free cash flow would have been about $89 million for the full year of 2024 on a normalized basis. As a reminder, we borrowed $770 million, $500 million for Term Loan A and $270 million on the revolver to acquire Tyman on August 1, 2024.
Since that time, we were able to repay $53.75 million in debt during the fourth quarter of 2024. As of October 31, 2024, the leverage ratio for our quarterly debt compliance was 2.3 times. The debt covenant leverage ratio calculation is defined in amendment number 1 to our second amended and restated credit agreement, which was filed with the SEC on June 12, 2024. This debt covenant leverage ratio excludes real estate leases that are considered finance leases under US GAAP and is calculated on a pro forma basis to include last 12 months adjusted EBITDA from the Tyman acquisition.
Also includes credit for $30 million of EBITDA for the synergy target related to the acquisition and cash only from domestic subsidiaries. The debt covenant leverage ratio would be 2.1 times if calculated using the full cash and cash equivalents amount on the balance sheet as of October 31, 2024. The 2.1 times leverage ratio is in line with the leverage ratio referenced in the presentation we published on our website when we announced the deal on April 22, 2024.
As George mentioned, we will host an Investor and Analyst Day at the NYSE on Thursday, February 6, 2025. At that time, we plan to unveil the new Quanex, which will include details specific to each operating segment, along with initial guidance for fiscal 2025. In addition, we will disclose more about our profitable growth strategy going forward. Since guidance for 2025 in detail related to the new operating segments won’t be rolled out until early February, please use the following cadence for the first quarter of 2025 versus the first quarter of 2024.
As a reminder, due to the typical seasonality of our business, our first quarter is usually the weakest quarter of the year, but we do expect a meaningful uptick in demand in the second half of 2025 as consumer confidence improves and pent-up demand starts to unwind. With that said, on a consolidated basis, we expect revenue to be up 50% to 52% in the first quarter of 2025 compared to the first quarter of 2024, driven by the contribution from the Tyman assets.
However, consistent with recent market dynamics, we do expect volumes to be down in the first quarter of 2025 compared to the first quarter of 2024. On a consolidated basis, adjusted EBITDA margin is expected to be up about 25 basis points in the first quarter of 2025 compared to the first quarter of 2024. In addition, a tax rate of 23.5% is reasonable with interest expense of approximately $15 million in the first quarter of 2025.
Operator, we are now ready to take questions.

Operator

(Operator Instructions) Steven Ramsey, Thompson Research Group.

Steven Ramsey

I wanted to think high level a bit given the market remains pretty stagnant and seems pretty well known out there. I guess my first question would then be on portfolio adjustment now that you’ve got Tyman and synergies are coming in at a nice clip, how are you assessing the portfolio broadly? And basically, are you considering any moves to divest anything that maybe is less core now that you have this bigger foundation?

George Wilson

The answer is, yes, we are evaluating the entire portfolio. I think the scale of the acquisition gives us an opportunity to do that. The approach that we’ll take is we’re going to obviously look at this from a customer perspective and see what pieces of portfolio add value to our customers and can help them grow. Secondly, then we’ll look at what that means to potential growth as well as the profitability.
I think we will use it as an opportunity to potentially divest noncore assets that do not add value to our customer that can drive margin improvement through just subtraction of the revenue. So nothing to specific at this point. But I think it’s fair to say that, that will be a priority in some of our views as we go forward here in 2025.

Steven Ramsey

Okay. That’s helpful. Also wanted to think about the EU segment. You’ve had two consecutive years with margin in the 23%, 24% range, very strong. Do you view that this kind of the normalized level to operate from or even build off of?
Or would you say there are some — this is maybe a peak level for current dynamics that’s helping that?

George Wilson

Yes. No, it’s a great question. I’m extremely proud of what our teams have done over the past years on margin improvement and really operational performance. I think, as we resegmented these businesses into these new segments, we were trying to accomplish a few things. One was to really address — most of our businesses take a global approach.
And by separating or segmenting them the way we did in the legacy Tyman — excuse me, legacy Quanex business, we kind of split them up geographically, which I think made it difficult or limited the opportunities to maybe get some sharing of best practices or synergies internally.
So although we did a good job, I think it potentially put a little governor on those opportunities. I think taking more of a global approach and for example, our spacer business or some of the new businesses from Tyman and looking at it from a global perspective, it gives us the opportunity to set these things up, share best practices across the globe. So my anticipation, Steven, long answer here is that I don’t think we’re tapped out on margin improvement opportunities driven by internal projects.
I think that there’s still some runway, and that was part of the reason that we’ve established these segments the way we did: one, focused on what best delivers for our customer; and then two, how can we continue to tap into the opportunities to improve margin organically. That was the basis around our restructure.

Scott Zuehlke

The only thing I’ll add there, Steven, is as markets improve around the world and volumes tick up, at some point, you’re going to get operating efficiency gains that will help margin longer term as well.

George Wilson

So I think you can see we’re pretty excited about the potential that these new segments can drive more to come, but we’re pretty optimistic about that.

Steven Ramsey

No, that’s great perspective. Maybe something to quickly ask there, Scott, that you alluded to better volumes and the margin benefits from that. Can you maybe talk to the kind of historic incremental margins from legacy Quanex. And given, as you put these two businesses together, where could incremental margins get better as volume starts to improve?

Scott Zuehlke

That’s a very difficult question to ask only because you would have to go product line by product line to see fixed cost versus variable cost and where we could. Where the operating leverage is better, obviously, as volume ticks up in a fixed — more fixed cost, you’re going to reap the rewards better than you would have variable cost.

George Wilson

That’s a very difficult question to ask only because you would have to go product line by product line to see fixed cost versus variable cost and where we could. Where the operating leverage is better, obviously, as volume ticks up in a fixed — more fixed cost, you’re going to reap the rewards better than you would have variable cost.

Operator

Adam Thalhimer, Thompson Davis.

Adam Thalhimer

I wanted to ask first about the Tyman synergies, how comfortable are you getting to the $30 million of synergies? And do you still think it takes two years to capture those?

George Wilson

Great question. So as we’ve embarked on this, I think you’re always apprehensive about giving a number when you go into such a transformative type of deal. But as we progressed and now that we’ve launched the new segments, I think our comfort level around the stated $30 million is very strong and high. We have very strong confidence in achieving those levels. I think as the teams move through, the focus has started.
We focused on the consolidation of the corporate offices, which we’ve talked about already, and that’s gone according to plan and maybe a little quicker than anticipated.
Now that the divisions are starting to operate within the new segments, I think we’re very pleased at the results that we’re seeing these newly created teams generate and the amount of opportunities that they’re creating helps to offset any potential downsides and unknowns that you don’t know. And then finally, I think we become even more convinced that longer-term commercial types of growth synergies that are created from this combination will be there. So again, another long answer to your question, but I think we’re extremely confident in meeting and hopefully beating the guidance that we’ve given.

Adam Thalhimer

Okay. And George, you talked about sluggish demand over the holiday season and in the winter. I’m curious what — is that a continuation of the trends you’ve seen in fiscal year ’24? Or are you contemplating incremental weakness?

George Wilson

I’ll start off and then I can let Scott add any color, too. One, I think what we’ve said, this is not an abnormal type of thing that we see every year in terms of softness in our fiscal Q1. I think in certain markets, for example, the cabinet market that we serve, I think you see our customers using it as an opportunity to adjust their inventory levels and using the holidays as an opportunity to reconcile volumes before the build.
So I think that has had a little bit of an incremental impact. I think it’s a continuation on — for the most part, it’s a continuation of what we’ve seen this year, just — and being emphasized on our normal seasonality pattern. It’s nothing that we’ve not anticipated. And I think it’s playing out exactly as what we’ve modeled and anticipated previous. Scott?

Scott Zuehlke

Yes. I mean, I would agree with everything George just said, and we are expecting volumes to be down year-over-year in 1Q ’25 versus ’24, but not by a significant amount. And we do expect markets to tick up starting in the spring selling season once we feel like consumer confidence improves.

George Wilson

I’m not sure we’ve talked to one customer at this point that doesn’t have that same. I think that there is a fairly strong optimism that the back half of the year we’ll see it. Again, the market indicators and the need for housing as the Fed continues or anticipated that they’ll continue to cut rates. As inflation starts flattening a little bit and hopefully turning the other way, I think we will see consumer confidence grow in the market, both R&R and new build, there’s pent-up demand that’s ready to be released. And I think we’re hearing that optimism from almost every customer that we talk to.

Operator

Reuben Garner, Benchmark.

Reuben Garner

To start, tariffs has been a big question of late. I think last go around, you guys might have saw some benefit in your cabinets business from kind of reshoring opportunities. With the Tyman acquisition coming along, can you just talk about any exposure that they have to imports and whether or not maybe any competitors that they have would be at risk, I guess, from bringing products in overseas?

George Wilson

I think as we look at the Tyman organization, we spend a lot of time talking about the risks from tariffs as well as the opportunities. The Tyman team has done a phenomenal job of building a supply chain organization that is built to capitalize on those opportunities as well as provide opportunities to source locally, should there become any sort of retaliatory or any sort of tariff war. So I think we feel very good about the steps that the Tyman team have taken and feel that we’ve got a pretty good balance to really address situations should it become a trade war or should any of the tariffs provide opportunities. I think we’re ready to capitalize on that and are well protected for any of the negatives.
Obviously, Reuben, you know our business well. And I think from the cabinet side of the business, specifically in the North America, tariffs have tended to help that market, and I don’t see anything changing that should that — so that would be a potential opportunity for our business should there be any additional tariffs on wood type of products.

Reuben Garner

Got it. And then from just a big picture pricing perspective for you guys, Scott, I know you gave some pieces about this quarter and this year and you had a couple of things working against you. Like when we think about the full year going forward, and I know you’re not ready to give guidance yet, but would you expect at this point that pricing would be like neutral to up even? Or is there more kind of headwinds on the way?

Scott Zuehlke

I mean, there’s potential for pricing to be neutral to up. And the way we usually model is we don’t bake in a lot of expectation that pricing is going to go up or down. It’s more driven by volume expectations. But it’s really going to depend on what’s going on with the macro and raw material by raw material.

George Wilson

Yes. I think this goes right back to your first question. We’re being pretty cautious on any sort of pricing guidance because the impact of tariffs, anything there, what that does to any sort of inflationary pressure and the impacts that potentially have on labor wages and anything there, there’s so many moving pieces. I think we’re being very cautious in terms of our guidance around price.
I think over the past few years, I think we’ve — and it’s proved out in the legacy Quanex numbers where we have been able to get price, we’ve done it. We’re not abusing our ability, and I think we’ll be focus on being a fair supplier in the world, but it will be dictated by the input prices of what we see.

Operator

Julio Romero, Sidoti and Company.

Julio Romero

I wanted to ask about the macro a little bit here. Some of your peers have called out affordability constraints. You talked about winning consumer confidence and kind of mortgage rates kind of persisting higher. Can you guys just talk about what you’re seeing on that front? And maybe help us think about why your viewpoint might be a little nuanced compared to some peers?

George Wilson

Yes. I think we see the same things and in talking to our customers. I think the R&R market has been hit hard, especially in certain segments like for us, our cabinet business, which tends to be much more of a discretionary item than a window or a door. With that being said, as interest rates start dropping, I think and potentially the overall affordability of housing, if the price flattens and the interest rates drop, that type of movement does tend to spur on R&R and then people buying new homes, we’ll do more of the discretionary projects, the kitchens or the bath remodel some.
So yes, I think to answer your question, Julio, we are seeing it. I think that there are — it has been sluggish in all of 2024. I think that, that’s built into our forecast and why we’re saying that we think volumes will be sluggish over the next few months. But I think most of the macro indicators are when that affordability comes down a little bit and the interest rates drop, it will spur on some pretty pent-up demand. We see it, and we’re pretty confident in it.

Julio Romero

Got it. That’s very helpful there. And then can you maybe just compare where consumer confidence is right now in North America versus Europe maybe compared to like three months ago?

George Wilson

I think what we’ve started to see is that there’s a little more confidence coming back in certain parts of Europe. I think we’ve seen signs that the UK, which led the downfall, to be honest, they started seeing a slowdown much earlier than North America did. I think we’ve seen maybe slight signs of improvement there. The hard part there is that, that will always be tempered by some of the geopolitical things going on in Eastern Europe with Russia and Ukraine.
If for whatever reason that conflict were to come to an end, I think you’re going to see probably the European markets improve fundamentally faster. But again, I quantify — I just qualify that based on — there are things happening over there that are out of normal market controls. I think that the European markets are a little further along in potential recovery.
But North America, the market is so large and the consumer mentality here is a little quicker to take risks and be a little more open with spending. So any sign of improvement, I think, could spur on a faster recovery in North America than you would in Europe.

Julio Romero

Very helpful there. Maybe turning to your resegmentation. You’ve obviously been very thoughtful about the new segment structure. Can you maybe peel back the onion a little bit about the strategic rationale for the three new segments? And then secondly, in the prepared remarks, I believe you called out maximizing synergy ops and positioning for growth as two key items there.
Are those two the North Star for the new segments and the new leaders?

George Wilson

So as I peel us back a little bit, one, we do try to — our strategy all along is trying to let people know, yes, we serve the window and door markets. And yes, we serve the cabinet markets, and they’re a big part of what we do, but we make not one window or door or one finished cabinet. That’s not who we are. We are a manufacturing company that has a broad set of core competencies. And so our segmentation is really based on that.
We don’t even want our internal organization to sit here and look and view ourselves as a window and door company or a cabinet company. It limits our potential to go after new markets, new systems, new opportunities.
So I think for us, segmenting in this way: one, I think it opens our development teams to think much bigger than we currently are; two, it gives us the opportunity to really build off of what is a strength of Quanex and that’s our manufacturing capabilities. And I think we’ve proved that over the last five to seven to eight years that we’re pretty good operators. So it gives us an opportunity to capitalize on that, which when done that way, then it fuels the inorganic opportunities much faster.
So I think that’s the way we approach this, Julio is really, one, what’s going to drive the fastest growth; and then two, how do we use that those new segments to really optimize what we do. And I feel really good about the new segments. Each one of these then combines some of the legacy Tyman and some of the legacy Quanex. So when you’ve got people from both organizations working together, you’re able to see and create new things rather than being so blindfolded into what you’ve always done.
So each of these segments include a little bit from both organizations. And we think that, that was really important. And we’re extremely excited about the potential that that’s going to drive.

Julio Romero

And if I could sneak one more in maybe for Scott here is, I appreciate the first quarter kind of outlook of interest expense of $15 million. Is that kind of a fair quarterly run rate to maybe assume for now for fiscal ’25. And then are you kind of assuming any debt paydown at this point for fiscal ’25?

Scott Zuehlke

We absolutely assume we are going to pay down debt throughout the year. I mean that’s a clear priority for us. So $15 million for the first quarter, trending down a little bit thereafter, and we’ll give more detail at the Investor Day. But I think $15 million will be the high watermark for interest expense this year.

Operator

And with that, I would now like to turn it back over to George Wilson for any closing remarks.

George Wilson

Thanks, everyone, for joining. We’re extremely excited about the future of Quanex and look forward to providing more detail about the combined company at our Investor and Analyst Day at the NYSE on February 6, 2025. I’d like to wish you all a safe and happy holiday. Thank you.

Operator

Thank you for participating in today’s conference. This does conclude the program. You may now disconnect. Everyone, have a great day.