Quanex Building Products Corporation (NX) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Q1 2026 Quanex Building Products Corporation Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Scott Zuehlke, Senior Vice President, CFO and Treasurer.

Thanks for joining the call this morning. On the call with me today is George Wilson, our Chairman, President and CEO. This conference call will contain forward-looking statements and some discussion of non-GAAP measures. Forward-looking statements and guidance discussed on this call and in our earnings release, are based on current expectations. Actual results or events may differ materially from such statements and guidance, and Quanex undertakes no obligation to update or revise any forward-looking statement to reflect new information or events. For a more detailed description of our forward-looking statement disclaimer and a reconciliation of non-GAAP measures to the most directly comparable GAAP measures, please see our earnings release issued yesterday and posted to our website. I'll now turn the call over to George for his prepared remarks. .

Thanks, Scott, and good morning to everyone on the call. Before beginning my commentary on our first quarter results, I would like to take a moment to recognize and thank Susan Davis for her many years of dedicated service as a Board member to Quanex and its shareholders. . Her commitment, insight and guidance have been invaluable to our organization. Susan consistently served as a steadfast voice for shareholders during our transformation from a metals company to a pure-play building products company and through three CEO transitions and several acquisitions. Her perspective and presence in the boardroom made a meaningful impact, and she will be greatly missed. On behalf of the Board and the entire organization, we wish her all the best in her retirement. Turning now to our fiscal first quarter. Market conditions remained soft and company performance was in line with our expectations. As is typical given the seasonality of our business, the first quarter is our most challenging from a volume standpoint. The holidays, coupled with the onset of winter weather consistently create headwinds in our Q1, and this year was no exception. From a broader perspective, challenges in the global macroeconomic environment and the markets we serve continued to impact results. The most significant challenge continues to be end consumer confidence. While inflationary pressures, labor costs and certain raw material costs have started to moderate, energy prices have risen. In addition, heightened geopolitical tensions, particularly in recent days, are contributing to a more cautious consumer environment worldwide. Despite the near-term headwinds the longer-term underlying fundamentals for the residential housing sector remain constructive. In addition, inflation appears to be stabilizing, and there is an increasing expectation of additional rate cuts from the Federal Reserve this year. We continue to believe the structural drivers supporting both new construction and the repair and replacement markets remain intact. At this time, we don't anticipate a deeper downturn in the end markets we serve. In Europe, economic data from third-party sources point to early signs of stabilization and gradual recovery across most countries, which we view as an encouraging development as we look ahead. Now turning to our performance in the first quarter of 2026. In the Hardware Solutions segment, our focus is centered on two key priorities: stabilizing operational performance and strengthening our commercial organization, including the finalization of go-to-market strategies across our international markets. As previously disclosed last year, we identified an operational issue at our hardware facility in Monterrey, Mexico that required some incremental capital to remediate. We are pleased to report that our efforts have advanced to the point where we believe the plan is now stable, and we don't expect to provide updates on this matter going forward. Within the Extruded Solutions segment, our focus has been on advancing new product development initiatives, evaluating adjacent market opportunities and relaunching and repositioning our Schlegel Seals product lines. We are very encouraged by the progress being made across each of these areas as they are central to achieving our profitable growth objectives. These initiatives are expected to strengthen our competitive positioning and expand our addressable market over time. I anticipate being able to share additional details on new product launches and commercialization milestones later in the year. In the Custom Solutions segment, we continue to advance several initiatives designed to support future growth. More specifically, in our cabinet components operation, the primary focus has been on driving operational efficiencies to successfully integrate recent market share gains and ensure that we scale effectively. Within our Access Solutions operations, efforts have centered on optimizing operating methods to enhance process consistency, quality and on-time delivery. And in our mixing and compounding operations, we remain focused on new products and chemistry development. These initiatives are enabling us to expand into adjacent markets that demand highly engineered solutions supported by strong technical expertise and service. Together, these efforts position the Custom Solutions segment to deliver improved performance while building a stronger foundation for sustainable growth. Looking at our corporate functions. Our newly created commercial and operational excellence teams are now focused on new market development, the creation of global pricing strategies, logistics and sourcing projects to drive savings ongoing ERP rationalization and AI-led process improvements. We believe these efforts will produce the results needed for revenue growth, margin expansion, cash flow generation and improved return on invested capital. From a capital allocation perspective, we will continue to focus on maintaining a healthy balance sheet through disciplined debt reduction. And looking ahead from a growth standpoint, we will focus on driving organic initiatives while pursuing targeted small bolt-on acquisitions if available, that complement our existing platforms and capabilities. The outcome of these actions will be a stronger, more flexible balance sheet that is well positioned to support our long-term growth opportunities and strategic objectives. I'll now turn the call over to Scott, who will discuss our financial results in more detail.

Thanks, George. On a consolidated basis, we reported net sales of $409.1 million during the first quarter of 2026, which represents an increase of approximately 2.3% compared to $400 million for the same period of 2025. The increase was mainly due to foreign exchange translation in the pass-through of tariffs. We reported a net loss of $4.1 million or $0.09 per diluted share during the three months ended January 31, 2026, compared to a net loss of $14.9 million or $0.32 per diluted share during the three months ended January 31, 2025. On an adjusted basis, we reported a net loss of $0.3 million or $0.01 per diluted share during the first quarter of 2026 compared to net income of $9 million or $0.19 per diluted share during the first quarter of 2025. The adjustments being made to EPS are primarily for transaction and advisory fees, amortization of the step-up for purchase price adjustments on inventory, restructuring charges, amortization expense related to intangible assets and foreign currency impacts. On an adjusted basis, EBITDA for the quarter was $27.4 million compared to $38.5 million during the same period of last year. The decrease in adjusted earnings for the first quarter of 2026 compared to the first quarter of 2025 was mainly due to reduced operating leverage from lower volumes related to ongoing macroeconomic uncertainty coupled with low consumer confidence and higher, but temporary operational costs related to our hardware plant in Monterrey, Mexico. Now for results by operating segment. We generated net sales of $189.1 million in our Hardware Solutions segment for the first quarter of 2026, an increase of 2.4% compared to $184.7 million in the first quarter of 2025. We estimate that volumes were down 3.6%, pricing was up 0.5%. The tariff impact was about 3.2% and foreign exchange translation was a benefit of about 2.3%. Adjusted EBITDA was $4.5 million in this segment for the first quarter compared to $8.2 million in the same period of last year, mainly due to decreased operating leverage related to lower volume, general inflation and approximately $3 million of incremental costs related to our hardware plant in Monterrey, Mexico. As George mentioned, we believe this plant is now stable. Our Extruded Solutions segment generated revenue of $139.8 million in the first quarter, essentially flat compared to $139.6 million in the first quarter of 2025. We estimate that volumes were down 2.6% year-over-year in this segment for the quarter with pricing up slightly by 0.3% and a positive foreign exchange translation impact of about 2.4%. Adjusted EBITDA declined to $20.9 million in this segment for the quarter versus $24 million during the same period of last year, mainly due to decreased operating leverage related to lower volumes and general inflationary pressure. We reported net sales of $89.1 million in our Custom Solutions segment during the quarter, which represented growth of 4.8% compared to prior year. We estimate that volumes were up 2.4% pricing decreased by 2% in this segment for the quarter, and foreign exchange translation, coupled with the pass-through of tariffs was a benefit of approximately 0.5%. Adjusted EBITDA declined to $4.6 million from $6.3 million in this segment for the quarter, mostly due to general inflation and higher SG&A. Moving on to the cash flow and the balance sheet. Cash used by operating activities was $20.2 million for the first quarter of 2026, which compares to $12.5 million for the first quarter of 2025. Free cash flow was negative $31.5 million in the first quarter of 2026 compared to negative $24.1 million in the first quarter of 2025. Keep in mind that the first quarter of our fiscal year is usually the low watermark for the year due to the seasonality of our business. On a related note, we have historically been a net borrower in the first quarter of our fiscal year. But with the addition of time and their longer cash conversion cycle, we now expect to be a net borrower during the first half of each fiscal year, with the majority of our cash flow generated in the second half. Our liquidity was $331.6 million as of January 31, 2026 consisting of $62.3 million in cash on hand plus availability under our senior secured revolving credit facility due 2029, less letters of credit outstanding. As of January 31, 2026, our leverage ratio of net debt to last 12 months adjusted EBITDA was 2.8x. We do expect our leverage ratio to increase slightly in Q2 but we also believe we will exit 2026 with a net leverage ratio closer to 2.0x as we generate cash and repay debt in the second half. As George mentioned in our earnings release, our long-term view continues to be favorable as the underlying fundamentals for the residential housing market remain positive. While we entered fiscal 2026 with a cautious outlook due to the ongoing macroeconomic challenges, and remain somewhat cautious in light of the geopolitical events now occurring. We are optimistic that demand for our products will improve as consumer confidence is restored over time. We're monitoring the situation in the Middle East, which could have an impact on customer demand, raw materials pricing and shipping rates for our international hardware business. But as of now, we're comfortable with providing guidance for fiscal 2026. During our last earnings call in December, we mentioned that fiscal 2026 could be somewhat flat compared to fiscal 2025 with puts and takes. But that first half -- but that's the first half of 2026 may be more challenged than the first half of 2025, implying a somewhat improved second half year-over-year. Our current views remain consistent with that message. Overall, on a consolidated basis for fiscal 2026, we estimate that we will generate net sales of $1.84 billion to $1.87 billion, which we expect will yield approximately $240 million to $245 million in adjusted EBITDA. In addition, the following modeling assumptions should be reasonable for the full year 2026. Gross margin of 28% to 28.5%. SG&A of $295 million to $300 million, which reflects bonus accrual at Target, D&A of $105 million to $110 million, adjusted D&A, excluding intangible amortization, of $65 million to $70 million, which should be used to calculate adjusted EPS. Interest expense of $50 million, a tax rate of about 24%. CapEx of $70 million to $75 million and free cash flow of approximately $100 million. As always, we will stay focused throughout the year on the things that we can control with an emphasis on generating cash to continue paying down debt. Please use the following cadence for the second quarter of 2026 versus the first quarter of 2026. On a consolidated basis, we expect revenue to be up 12% to 14% in the second quarter of 2026 compared to the first quarter of 2026. Adjusted EBITDA margin, again, on a consolidated basis, is expected to be up 500 to 550 basis points in the second quarter of 2026 compared to the first quarter of 2026. Operator, we are now ready to take questions.

[Operator Instructions] And our first question comes from Kevin Gainey with Thompson Davis & Company.

George, Scott, it's Kevin on for Adam. Maybe to start, if you could break out how Extruded Solutions segment did. The margins in that segment were much higher than what we expected. Maybe you can talk about what drove the margin improvement there.

Well, I mean, in general, I would say that the Extruded Solutions segment, the products that are included in that segment have historically our most profitable products. So you have things like the IG spacer -- you have our vinyl profile business in the U.K., which is called Liniar. Those have historically been a very profitable business for us and continue to be. .

Yes. I think you would see the operating model within that segment, too, tends to revolve around larger, more levered plants. So less sites tends to be less fixed cost, which drives margin in that product line. Again, I think part of the reasoning for the resegmenting too, is to give our investor base a little more clear look into each of these different segments and what product lines are actually contributing what. So we know that this is new, a new perspective for you and others, but this has been very consistent for us throughout our whole period of having these products.

Sounds good. I appreciate the color on that. And then maybe if you could talk on Custom Solutions segment as well. And maybe what drove the strongest year-over-year revenue growth in that .

Yes. One of the bright spots with tariffs and just some of the macroeconomic environment has been in our -- the cabinet components in our wood components business. We've been able to secure some new market share as people have in-sourced product from overseas, consolidated their facilities and have outsourced that product, and our team has done a very good job of of being able to show the value that we can create for our customer base and providing a wide array of products just in time as they need it, minimize their working capital needs and allow us to do what we do well. So that really drove some revenue growth in what has really been a soft market, but that's been a great spot for us on revenue. And our focus in that segment now is actually we're kind of in higher moat in some of those plants to be able to make sure that we have the capacity and the ability to satisfy demand once the seasonal uptick does occur. But we've been very happy with the performance and what our team is doing there to show our value to our customers.

And then maybe -- I know you guys, I know recently the builder show was done recently. Is there any takeaways that you guys could have from that? What maybe the sentiment was an optimism going into the year?

The show was well attended, which I think everyone would agree on. I think that there's guarded optimism. There's a lot of moving pieces in everything in the world right now. You've got -- now with the geopolitical issues in Iran and what's going on there, the potential push on inflation. You've got the political climate in the U.S. just a lot of moving pieces. So I think everything what we've heard is that without a fault, everyone believes in the long-term view and the optimism that exists in the housing market, like we mentioned in this earnings call that the indicators are there that housing is in demand and it will -- there is pent-up demand that will be released at some point. It just -- I think the feel at the show is when is that going to happen and what needs to make it happen to give some of that -- the end consumer some confidence, whether it's -- it's a relief on some energy pricing, whether it's Fed movement, whether it's a couple more data points on inflation or all of the above. So long answer to what should have been guarded optimism.

Our next question comes from Julio Romero with Sidoti & Company. .

Your guidance implies the remaining nine months of the year is going to see flattish sales year-over-year, but we'll see some year-over-year margin expansion about 70 to 80 basis points across the remaining nine months. And based on that 2Q cadence, you stated earlier that definitely implies it will be back half weighted. If you could just talk about the cadence of that margin expansion between the third and fourth quarters that's expected? And then secondly, maybe just where across the portfolio, would you see that margin lift?

Yes. Good question. And I think the main driver for the second half '26 versus the second half '25 is, if you recall, the issues we had in Monterrey impacted EBITDA by, I think, $13 million in the second half of last year. Well, now that we consider that plant stable, we should not see that impact in the second half of this year. So that alone is going to drive most of the margin expansion.

And that's obviously in our Hardware segment. .

Yes. Yes. Good reminder. And congrats on completing that Monterrey issue. My second question is just on -- just trying to better understand how much longer time in legacy time and extends the cash conversion cycle versus legacy Quanex -- and then related to that, you mentioned capital allocation remains -- debt repurchase remains our key priority there? Just how you're thinking about debt paydown in the back half? .

Yes. So from a cash conversion standpoint, historically, Quanex was 45 to 60 days cash conversion time -- legacy timing was double that. So while we have made some progress in getting timing more towards the made to order versus a made to stock. That takes time. And there are certain pieces of that business that will never move to a made-to-order because this is more distribution. But I think what you'll see from us really over the next probably two to three years is a significant improvement in getting that cash conversion cycle for the legacy time of business down, which will obviously impact cash flow positively.

And there's obviously multiple projects that we've identified to make that change, and I feel very comfortable where we are at in that progress and more to come. But I think the softness in the market has allowed us to focus on the things that we need to do integration-wise and that we knew we needed to do, and I'm very pleased with where we're at at that point.

And then as far as the debt pay down. Clearly, that is our priority, especially given the macro backdrop here, we do feel like there is shareholder value creation, if we can get that leverage -- net leverage ratio down closer to 2% and even below 2% over the next couple of years, for sure. So that is our focus. .

[Operator Instructions] Our next question comes from Steven Ramsey with Thompson Research Group.

I wanted to look at spacer. Yes, I wanted to look at spacer within the extruded segment. solid double-digit growth in the quarter in a good product category for quite some time. A couple of questions there, what were the drivers of growth within the quarter? And do you think spacers is a growth product in FY '26 -- and then can you talk about the margin profile of that product relative to the segment in 2026?

So I'll split my answers into. I think the driver in the growth of all spacer markets, but especially our product lines that Quanex offers is definitely being driven by the demand and some of it code related on the performance -- the thermal performance of Windows. So as as energy costs go up, you're able to justify the replacement of new windows with higher-performing thermal windows, whether it's keeping warm air in the northern climates or if it's better keeping the cold air in on where we are conditioning as we see migration from single pane to double pane windows, double pane to triple pane in some areas, that's driving an increased volume demand, which lends itself well. And as codes and standards change to demand higher performing, thermal performing windows, that falls right in line with the products that we offer at Quanex. So we do believe it has the potential to be a growth driver in 2026. And to be honest, further, in further years as that continues to take hold. Consumers are changing. Energy costs are becoming a bigger part of the world and these types of products are going to take -- be demanded more, and we feel very good about that as a leading product in our portfolio. In terms of the breakout of profitability within the segment or even getting into any more granularity, we have not and cannot for, obviously, reasons provide any breakout there. We just haven't provided that publicly.

Okay. Fair enough and good color. You've talked about bundling being an opportunity for you over time with the time and integration going to market. In a tough backdrop, can you talk about if this is happening in any product product sets or segments right now? Or do you need a better demand backdrop to really see bundling become an opportunity?

No, it's a great question. And I think we're seeing it -- we've started the development of that. It's been slow to take hold for two reasons. One is the macro backdrop. Obviously, volume helps any sort of bundling or incentive package regardless of what you're doing. The second one is, listen, it's really hard to go to your customers and try to offer advantages of bundling when you have a product line that was not performing because of some operational issues. And so it's just a core fundamental for us that I've got to have my house in order before I can offer those types of incentives as a valuable supplier. So I'm not going to insult my customer base, but try to push incentives when I need to better improve operational performance. And we're at that point. I mean I feel really good at what we've done to protect our customers and something that was unforeseen. And there will be a time and a place in the near future where we can have this conversations and give our customers opportunity to share in the benefits of what we provide. We weren't there a year ago, and we're just getting to that point now.

That's helpful to hear. Last one for me, Cabinet wood components being a good story right now. And this was a segment that I pondered would potentially be a strategic value to someone else and maybe not core to Quanex. With the recent success, does this change the potential of this segment staying within the company and being a profit driver in the next couple of years? .

I mean we're happy with what the segment is doing. We operate under a philosophy that -- and as a public company, I think everyone is this way. We're going to drive our product lines in our segments to perform the best they can to create as much shareholder value as we can, whether they're in the portfolio. The reality is every segment is potentially for sale every day. I mean so you never say never, but we are extremely happy with what that group has done. I think that they're driving value for us, and I'm pleased with their performance. So I would -- I can't give you any more of a clear answer because, again, everything every day is always a negotiation. .

Thank you. I would now like to turn the call back over to George Wilson for any closing remarks. .

Thanks for joining the call today, and we look forward to providing our next update in June. Thank you very much. .

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.