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

Good day, and thank you for standing by. Welcome to the Q2 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. In my commentary, I will give our perspective on the current macroeconomic environment, provide an overview of our results highlight some inflationary challenges and the actions being taken by clonic and then discuss go-forward priorities. From a macroeconomic perspective, housing demand in North America and Europe is showing early signs of stabilization, but the recovery will likely proceed gradually. Progress remains constrained by persistently weak consumer confidence, which remains below historical norms. Inflation fatigue, affordability challenges and ongoing geopolitical uncertainty are outweighing an otherwise strong labor market. In the U.S., mortgage rates above 6% further dampened activity while the lock-in effect where homeowners are reluctant to relinquish previously secured low rates continues to limit mobility. Even as rising home equity reflects higher property values. Given these ongoing challenges, we don't expect housing markets to rebound sharply in the near term. We instead anticipate a steady recovery over the medium to longer term, and this will depend on: one, an improvement in affordability; two, a decrease or stabilization of interest rates; and three, an improvement in consumer confidence influenced by a period of geopolitical stability. I will now provide some commentary on our results for the second quarter of 2026. Despite the headwinds I just mentioned, demand for our products came in largely as expected, and we performed well from an operational standpoint. On a consolidated basis, revenue increased modestly year-over-year, as pricing actions, tariff-related pass-throughs and favorable foreign exchange more than offset lower volumes. Looking ahead to Q3, we expect seasonal demand patterns to continue, which should mean sequential volume growth. Notably, volumes softened following Memorial Day last year. And although we realized it's still early, we have not observed similar trends to date this year. We will remain vigilant in this regard closely monitoring order patterns to respond quickly to any changes in demand. Gross margins declined 350 basis points year-over-year in Q2, primarily due to sharp increases in raw materials and logistics costs. Our Hardware Solutions segment was impacted the most by inflationary pressures during Q2 of this year due to the legacy nature of the make-the-stock business model for the window indoor hardware product line and the fact that the inventory levels are highest in this segment. Although our North American index pricing mechanisms are designed to adjust for input cost fluctuations, the quarterly timing of these adjustments, varying by commodity, customer and product line can create temporary earnings pressures during periods of rapid inflation, like those we've seen in the past few months. In our European and international markets where index pricing is less prevalent, price adjustments rely more on customer negotiations and announced increases, often with advanced notice periods that further extend timing impacts. Cost pressures on raw materials were broad-based across segments during Q2 of this year. The Hardware Solutions segment was most affected by rapid cost increases for aluminum, zinc, stainless steel and plastic resins. The Extruded Solutions segment was most impacted by cost increases for butyl rubber, silicon compounds, carbon black, desiccants and PVC resins. And our Custom Solutions segment was most impacted by cost increases for EPDM, carbon black, oils, aluminum, plastic resins and certain hardwoods. Rising costs and packaging, particularly plastic and paper as well as increases in freight and logistics costs impacted margins across all segments and product lines. To mitigate these pressures, we have implemented and will continue to implement targeted price increases ranging from mid-single digit to low teens percentages to be phased in throughout Q3 and tailored by product line. Going into Q3, our operational priorities will be on closing the price cost gap across all product lines, accelerating the transition for make-the-stock to make-the-order for the window indoor hardware business, Executing on our 80/20 initiative in the North American window and door hardware business, improving working capital and then generating more free cash flow. We believe that by executing on these actions, we will be well positioned to deliver shareholder value as market conditions improve. I will 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 $462.4 million during the second quarter of 2026, which represents an increase of 2.2% compared to $452.5 million for the same period of 2025. The increase was mainly due to favorable impacts from pricing, tariff pass-throughs and foreign exchange translation. We estimate that volumes were down about 3%. Pricing was up approximately 1.5%. The tariff pass-through impact was about 1%, and foreign exchange translation was a benefit of about 2.5%. We reported net income of $3.4 million or $0.07 per diluted share during the 3 months ended April 30, 2026, compared to net income of $20.5 million or $0.44 per diluted share during the 3 months ended April 30, 2025. The effective tax rate in the second quarter of 2026, excluding discrete items, was approximately 24%, which is what was expected. On an adjusted basis, we reported net income of $11.3 million or $0.25 per diluted share during the second quarter of 2026, compared to net income of $29.1 million or $0.63 per diluted share during the second quarter of 2025. The adjustments being made to net income are primarily for expenses related to a plant closure or relocation, transaction and advisory fees, reorganizational costs, amortization expense related to intangible assets and foreign currency impacts. On an adjusted basis, EBITDA for the quarter was $44.2 million compared to $63.1 million during the same period of last year. The decrease in adjusted earnings for the second quarter of 2026 compared to the second quarter of 2025 was mainly due to reduced operating leverage from lower volumes related to ongoing macroeconomic uncertainty combined with weak consumer confidence, tariff-related costs and inflationary pressures. More specifically, due to the ongoing war in the Middle East and other macroeconomic factors, we realized a significant increase in transportation and raw material costs during the quarter. Now for results by operating segment. We generated net sales of $203 million in our Hardware Solutions segment for the second quarter of 2026, a slight increase compared to $202.9 million in the second quarter of 2025. We estimate that volumes were down approximately 5%. Pricing was marginally up by about 0.5% in this segment. The tariff pass-throughs impact was about 2.5% and foreign exchange translation was a benefit of about 2%. Adjusted EBITDA was $5.2 million in this segment for the second quarter of 2026 compared to $27 million in the same period of 2025. This decrease was largely due to reduced operating leverage from lower volumes combined with impacts from tariff changes and inflationary pressure on materials, freight and labor costs, all of which meaningfully impacted gross margin. Our Extruded Solutions segment generated revenue of $165 million in Q2 of this year, a slight increase compared to $164 million in Q2 of last year. We estimate that volumes were down approximately 4% year-over-year in this segment for the quarter with pricing up by approximately 1% and a positive foreign exchange translation impact of about 3.5%. Adjusted EBITDA declined slightly to $30.4 million in this segment for the quarter versus $30.7 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 $103.9 million in our Custom Solutions segment during the quarter, which represented growth of 6.6% compared to the prior year. For the quarter, we estimate that volumes were up by approximately 1%, pricing increased by approximately 4.5% and foreign exchange translation, coupled with the pass-through of tariffs was a benefit of approximately 1%. Adjusted EBITDA declined to $11 million from $13 million in this segment for the quarter, mostly due to inflationary pressures we have already discussed. Moving on to cash flow and the balance sheet. Cash provided by operating activities was $18.9 million for the second quarter of 2026, which compares to $28.5 million for the second quarter of 2025. Free cash flow was $7.9 million in Q2 of 2026 compared to $13.6 million in Q2 of 2025. We expected to be a net borrower during the second quarter due to the longer cash conversion cycle of the legacy [ Tyman ] business but continued execution on managing working capital enabled us to avoid being a net borrower for the quarter. For context, we were a net borrower of almost $19 million in Q2 of last year. Our liquidity was $328.6 million as of April 30, 2026, consisting of $63.7 million in cash on hand plus availability under our senior secured revolving credit facility due 2029, less letters of credit outstanding. As of April 30, 2026, our leverage ratio of net debt to last 12 months adjusted EBITDA was 3.1x. We expected our leverage ratio to increase in Q2, but we continue to believe we will exit 2026 with a lower net leverage ratio as we generate cash and repay debt in the second half. Our long-term view continues to be favorable as the underlying fundamentals for the residential housing market remain positive. We entered fiscal 2026 with a cautious outlook due to the ongoing macroeconomic challenges and remain cautious considering the current geopolitical events. We continue to monitor the situation in the Middle East, which is contributing to a significant impact on the price of raw materials, energy and transportation costs. During our last earnings call in March, we mentioned that fiscal 2026 could be somewhat flat compared to fiscal 2025 with puts and takes, but that the first half of 2026 may be more challenged than the first half of 2025, implying a somewhat improved second half year-over-year. Since that time, inflationary pressures have increased and the broader uncertainty related to geopolitical developments, consumer confidence, interest rates and tariffs has reduced visibility into the balance of the year. Accordingly, we are not reaffirming our previously issued guidance for fiscal 2026 at this time. However, we will provide our expectations for the current quarter. Please use the following cadence for the third quarter of 2026 versus the third quarter of 2025. On a consolidated basis, we expect revenue to be flat to up 1% and adjusted EBITDA margin is expected to be flat to up 25 basis points. In addition, an estimated tax rate of approximately 24% should be reasonable for the third quarter of 2026. As always, we will stay focused on the things that we can control with near-term emphasis on generating cash to reduce debt while opportunistically repurchasing our stock and identifying further operational synergies that can benefit us when the economic conditions improve. Operator, we are now ready for questions.

[Operator Instructions] And our first question comes from Steven Ramsey with Thompson Research Group.

Maybe I wanted to start with, if you could elaborate a little bit further on the index pass-through timing in North America, how it impacts the various segments? And maybe how it is embedded in the Q3 outlook and if more of the benefits are after the third quarter?

Yes. So as we mentioned, as price increases come in, and I'm going to talk specifically about the ones that have material index -- automatic indexes, the raw materials that are on the index pricing mechanisms. We tend to review those on a quarterly basis. So you've got any inflation that occurs within that quarter will either trigger up or down, and in this case, up an index. But until those quarterly review points, we tend to either get the benefit or in this case, take the brunt of any inflation. And then when it triggers, obviously, the pricing goes through at that point in time. So you could have anywhere from a 90 to maybe a 2-day lag depending on when in the cycle, the price increases go. That tends to be different based on the type of commodity and the customer contract. Those tend to be negotiated. As it relates to our Q3 and Q4 outlook, what we're assuming right now is that the pricing that we're at today remains somewhat stable and that those price increases that have triggered were going in. So we're assuming no more additional inflation or decrease inflation. And the challenge and what we tried to say in our commentary is lack of visibility on what is happening from a macro perspective and in the geopolitical influences we just have no visibility. So we're in a chase mode here, and that's going to continue. So -- our forecast assumes no price increases, but your forecaster at this point is probably as accurate as anyone because no one knows.

Okay. That's helpful. And then you discussed the volumes in total and by segment in the quarter. Do you feel like there was any market share shift in any of your larger product categories? Or do you feel like volumes were overall aligned with the market?

I think there's puts and takes in the hardware section, where we've gained some share and then we've had pressure on share. It depends on the product line. I think -- the area where we benefited is, we've taken some share where there's been some strategy changes amongst our customers in outsourcing additional materials on the Custom Solutions segment, specifically within the wood product lines where we've actually been a winner. Otherwise, I would say that the supply chain is relatively stabilized and there's not a lot of people out in today's world. Really looking to rattle their supply chain because of the risks and the ability to supply. So I think you tend to see the supply base kind of retrenched and trenched in, and that's what we've seen to this point.

Okay. Sounds good. And last quick one for me. Last year, we saw fourth quarter EBITDA margin edge up a bit over the third quarter. Is that directionally the way to think about fourth quarter EBITDA margin?

Yes. I think, right now that's a fair assumption mainly because these price increases that are stepping in during the third quarter, we should get the full benefit in the fourth quarter.

And the other thing to add to that, as I mentioned in my commentary, last year was a little bit of an aberration that the Q3 volumes actually kind of flattened out, which wasn't normal seasonality. Typically, we see Q3 ramping up and then Q4 being our strongest volume month. So Q3 last year was a little flat and then Q4 started to bounce up. We would -- if we see normal seasonality, we would expect margins to improve just because of the leverage aspect of some of our business volumes will drive profitability.

Our next question comes from Kevin Gainey with Thompson Davidson Company.

It's Kevin on for Adam. Maybe if we could talk on as per last year, in the back half, you generated about $100 million. Should we expect maybe that capability in the second half? Or is the inflation going to have a sizable impact to that?

We definitely expect to generate most of our cash in the second half of this year. That's no different than any other year. To the extent and the magnitude of the cash flow that will depend on several things, one of which is the rate of inflation that we've seen. And then obviously, we need to expect volumes to increase due to the seasonality of our business. But the other thing that we're doing that will help cash flow is, and we saw that in the -- at the end of the second quarter is, we are making a meaningful improvement in the inventory levels coming down, and we expect that to continue, which should help cash flow as well.

Appreciate the color there. And then you mentioned in the release paying down debt and opportunistically repurchasing shares in the second half. How do you expect the target between the 2? And then how attractive are buybacks kind of at the current levels in your model?

So I think you can assume that our priority will absolutely be to pay down debt. We'll evaluate the price. We obviously believe our stock is trading at a discount. We'll continue to look at it. But the impact -- the math and the impact for us on buying or paying down debt at this point is more influential for our investor base than repurchasing shares. So that's the prioritization of that for us. I think you can assume the paydown of debt will come first.

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

The release and your comments also called out the increase in transportation costs in the quarter alongside the increased material costs. Can you maybe put a little finer point on the impact of that increase in the quarter? And if that's related to higher freight rates or fuel surcharges or expedited freight? And then how does that trend in the third quarter in your view?

Yes. We haven't given clarity on breaking that out from a dollar amount, but I can generally speak, it's impacted us in 2 ways. Obviously, the fuel cost and the cost of energy, I mean, almost every company has levied surcharges, fuel surcharges to offset the ramp-up specifically after the war in the Middle East started. So that has taken a pretty immediate and rather rapid tool. And we're doing the same to try to offset it, but it's always a catch up. And then secondly, especially on our international, we ship products to all over the world. And whether that's from the U.S., whether it's from the U.K. or whether it's from Italy, and depending on the locations. So for the products that go to our warehouse in Dubai and service the GCC region, obviously, getting product through the Strait of Hormuz is not feasible at this point. So you have to create different logistics chains significantly more expensive, increase the time to get and impact the ability to ensure and protect those shipments. So it's impacted us in 2 different ways.

Understood. You also recently appointed a new President of Hardware Solutions in April. Can you maybe discuss what is more immediate priorities are for the Hardware Solutions segment? Where on that priority list is that transition you mentioned from the made-to-stock product lines to the made-to-order product lines? And then where his longer-term focus for the segment is?

I appreciate the question, and it gives me the opportunity, first and foremost, to thank Bob Daniels, who will be retiring at the end of the year. Bob has been with Quanex for a long time and had announced his intention to retire even at the point when we purchased time. And so this was a planned upon move. And then adding Chad Collins to that position, we felt like it continued to strengthen the areas that we felt needed to be strengthened, not only he is a phenomenal businessman and can add value to the entire Quanex. But background in looking at how we go to market and how we engineer products very much the focus on an 80-20 principle to streamline and really optimize the cost footprint of our organization, identifying what SKUs actually generate revenue and making sure that we're focused on doing those right things. We were very excited to get him. He's already been able to come in and identify opportunities, which we kind of highlighted and its full systems go. So I think the future is bright for that group and look forward to being able to talk more about what he's doing in those areas going forward. So he came into Quanex and has hit the ground running.

Excellent. Last one for me here is for George. On the index pricing kind of a broader strategic question, are there longer-term opportunities or thoughts on improving or changing the terms on the contractual mechanisms over time, whether it be with the duration of the lag? Or how much the underlying material cost has to change before being triggered? Would just love to hear your high-level thoughts on that topic there, George.

Yes. It's a great question, Julio. And so I would say, every contract in today's world is being reviewed to say is that's still adequate and still doing what it's meant to do. And have things shifted to where the contract needs to change. So yes, we will evaluate each and every one of them. I think it very much depends on the product line, our competitive positioning within that segment. So rather vague answer for you, Julio, and for that, I'm sorry, but the answer is yes, but it's very dependent and situational based. But the world is different today. And I think that, that's us and every other company in the world are looking at everything with a new set of lenses and we'll continue to evaluate ways to to be -- create win-win solutions for both us and for our customers.

Our next question comes from Reuben Garner with the Benchmark Company.

This is John on for Ruben. So pretty thorough Q&A so far today. Just one quick one left for me. I know last quarter, we had talked about how you were seeing some opportunities for increased sales and volumes in Custom Solutions, especially with reshoring and nearshoring trends. Just now that we're a little bit further out from the tariff decisions and maybe a little bit more clarity on how those refunds are going. I understand a lot of it comes -- it's a long tail as far as the decisions that have to be made on how your customers are manufacturing elsewhere. But are you seeing any shift in kind of strategy or maybe the long-term decisions to even move more manufacturing back closer to the U.S. to your operations yet?

So I think the answer to that would be, it depends on the customer and their strategy. With the custom -- or the kitchen cabinet and the bathroom cabinet markets, there's continued consolidation in that area. I think there will be a pause to see where the merger of 2 of the big players, what their go-forward strategy will be looking like. But the other customers in that market -- we have seen some areas where there is in-sourcing. And as you can see in our numbers and what we called out, we had in what is a relatively soft or even a down market for the cabinets. We grew volumes year-over-year despite that fact. So it's obvious we've taken some share and have been able to successfully sell our value proposition to those customers. And I think our focus will be to continue to do that. And I feel good about what that product line is doing for us. And we'll continue to push and try to optimize that in every way we can. But I feel good about what the team and the wood components is doing.

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

I'd like to thank you all for joining the call today, and we look forward to providing an update in our call in September. Thank you very much.

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