Good day, and thank you for standing by. And welcome to the Q4 and Fiscal 2023 Quanex Building Products Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Zuehlke, SVP, CFO, and Treasurer. Please go ahead.

Thanks for joining the call this morning. On the call with me today is George Wilson, our 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. Quanex undertakes no obligation to update or revise any forward-looking statements 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. And what turned out to be another year of operating in a macro environment with strong headwinds for the industries we serve. I am very pleased to announce that the performance of the Quanex team in our fiscal 2023 resulted in a record year for both adjusted earnings and cash flow. Our team has stayed true to our mantra of controlling what we can control. In addition, we remain committed to our long-term growth with a purpose strategy and have positioned the company well to continue to create value for our shareholders. I would like to take this moment to thank the entire Quanex team for their spectacular performance and hard work this past year while continuing to make a difference with their caring and charitable endeavors in the communities where we are located. As I mentioned, 2023 was a year full of macro challenges that created headwinds for our topline. The devastating war in Ukraine continued to negatively impact consumer confidence in Europe and added unknown risks to energy costs for the winter months. In addition, we now have the war in Gaza, which again has the potential to disrupt markets, energy costs and global freight channels. In the United States, 2023 saw a return to the more normal seasonality pattern that existed pre-COVID. We also saw a housing market that slowed as a result of higher interest rates and elevated pricing in a repair and replacement market that softened throughout the year as COVID backlogs dissipated and more normal market drivers returned. Finally, our top line was impacted by the raw material index pricing mechanisms that exist in North America for many of our key raw materials such as resin, steel, aluminum, wood and oil. As the prices…

Thanks, George. On a consolidated basis, we reported net sales of $295.5 million during the fourth quarter of 2023 which represents a decrease of 3.9% compared to $307.5 million for the same period of 2022. We reported net sales of $1.13 billion for the full year, which represents a decrease of 7.4% compared to $1.22 billion for 2022. The decreases were mostly attributable to softer market demand and lower pricing in North America. Net income increased by 11% to $27.4 million or $0.83 per diluted share during the three months ended October 31st, 2023, compared to $24.7 million or $0.75 per diluted share during the three months ended October 31st, 2022. For the full year 2023, net income decreased by 6.6% to $82.5 million or $2.50 per diluted share compared to $88.3 million or $2.66 per diluted share for the full year 2022. On an adjusted basis, net income was $31.2 million or $0.95 per diluted share during the fourth quarter of 2023 compared to $25 million or $0.75 per diluted share during the fourth quarter of 2022. Adjusted net income was $90.9 million or $2.75 per diluted share for fiscal 2023 compared to $88.9 million or $2.68 per diluted share for fiscal 2022. The adjustments being made to EPS are primarily for foreign currency translation impacts, pension settlement expense and transaction and advisory fees. On an adjusted basis, EBITDA for the quarter increased by 31.2% to $50.8 million compared to $38.7 million during the same period of last year. For the full year 2023, adjusted EBITDA increased by 4.6% to $159.6 million, which is a new record for Quanex compared to $152.5 million in 2022. This equates to adjusted EBITDA margin expansion of approximately 160 basis points year-over-year. The increase in adjusted earnings for the three months and 12…

[Operator Instructions] And our first question comes from Steven Ramsey from Thompson Research Group. Your line is now open.

Hi, good morning. Maybe to start with -

Good morning.

Good morning. Maybe to start with the North America Fenestration segment organically down 14%. I believe, for the year, you're looking at the first quarter decline being much better than previous organic rates. I guess maybe unpack the improvement there, how much of that is just comps and other drivers to bridge that outlook to the past.

Yes, Stephen, I'll take that question. Really the major difference between this year and last year in Q1 for NAF, on a revenue perspective, is in our spacer segment where if you remember last year we talked quite a bit about that product line being down heavily last year due to customers destocking or bleeding down their inventory. It's the one product line that we manufacture, that has the ability to be packaged and put into a warehouse fairly easy. So throughout the year and really in that first half of last year, our customers, we saw quite a bit of those destocking activities and now we're really back with our lead times back to being normal and effectively a just-in-time or make-to-order, which is typically our model. So what we're seeing now is normalized shipment production rates, specifically in that area.

Okay, helpful. And then on the full-year outlook then bridging the past to what you said for the first quarter and the improvement expected. If the second half outlook of growth, what are the drivers behind that, maybe the end markets looking at existing home sales potentially for R&R, new construction restocking potentially what are the key drivers to the second half being better than the first half?

So I think, our view on the second half is really from the conversations we continue to hear from economists as well as our customers that we are still very underbuilt in both of our markets and as - and especially as we've seen over the last week with some signals that, you know, there could be some easing in interest rates that the second half of this year looks to have the potential of being a fairly robust more so than was probably anticipated six months ago. So I think we've seen a shift in confidence level on the back half of the year from a lot of different parties which reinforces why we believe our second half will be strong as well.

Yes, Steven. And then obviously combine those comments with just the typical seasonality of our business. The first half is always weaker than the second half in a normal year.

Okay, helpful. And then last one for me. On the LMI deal which you discussed some of the success and learnings from that. I guess firstly, on LMI as the standalone margin there better now than it was a year ago, what are the next steps for LMI? And then kind of lastly, high level, you've successfully done that deal and debt is now paid down, do you feel like you're ready to do more deals or does this environment with its uncertainty make it tougher to do deals?

I'll answer the first part of the question and turn - and let Scott comment on the second half. So as it relates to LMI, I think we have seen improvement in our margins. It has to deal with more of their customer mix. And as they continue to expand out of what was traditionally their normal joint venture partners. We've made it a priority for us to continue to grow their revenue in different markets in different segments and we are seeing benefits from that initiative and we'll continue to invest heavily in that mixing business both through investment in developing new compounds, investments in expanding our sales force, as well as looking at acquisitions to add on to that. We like the business very much. We like the addition of new additional markets. And again, couldn't be happier with what we've accomplished and learned through that process. As it relates to new acquisitions, you know, I think we're in a pretty good spot to be able to be functional. If we saw something, we would like. And I'll let Scott expand more on that as well.

Yes. I think what I would say around the acquisition front in this environment is we have positioned ourselves with optionality. We don't have to do anything. However, if something comes across our desk that we feel like will add value to shareholders over time, we will take a hard look as long as the checks certain boxes and we are going to be very methodical like we have in the past on any acquisitions we may do. So just because there are some uncertainty in the market, I wouldn't say that we are close to looking at acquisitions at all.

Okay. That's helpful. Thank you.

And thank you. And one moment for our next question. And our next question comes from Reuben Garner from Benchmark. Your line is now open.

Thank you. Good morning, everybody.

Hi, Reuben.

Hi, Reuben.

So Stephen mentioned the word restock, and you guys talked about kind of the destocking impact this year. Just curious, you know, inventory in the channel. I know some of your products aren't really inventory, but I know we're talking about just part of your business. But what is the inventory like relative to maybe more historically normal periods? And you know, we've seen rates dropped quite a bit here recently and some maybe excitement about what that could mean for housing kind of heading into '23. Is there the potential that your first half is sort of - your first half outlook is maybe, you know, a little conservative just given the potential for restock if there is a better consumer and housing environment in the early part of next year?

Yes. So the first part of the question in terms of our inventory levels, I think we're in a very good position right now. As you know, I think we manage our working capital very well and effectively we're just in time supplier. So what has changed and what we've done a very good job over the last year and a half to two years is with some of the supply chain challenges that we had that extended lead times and did different things that forced our customers into stocking whatever they could. I think we've done a very, very good job of improving our supply chain, finding alternate sources, we've really improved the robustness of that entire chain, which has allowed us to drive our inventory levels down. And as such give our customers confidence to drive their inventory levels down, that's what we do. So I feel very comfortable going into this year whether the markets go up or down, that we are absolutely prepared to react and react accordingly to that. As it relates to, you know - are we being conservative in the first quarter? You know, I think traditionally, we are a more conservative forecasting company. And you know, I think what we've shown over the - again over the course of the last, really three or four years is that our cost model reacts very well to wrap that ups and downs. So I feel very good of where we're positioned in either scenario. And if the - if interest rates come down or demand spikes as a result of that, I think we're very, very prepared to capitalize on that. But you know, we are taking a very conservative view as it relates to the first quarter and really our first half.

Great. That actually helped answer my second question. So I'm going to ask another. There has been some increasing concern about Europe, and I know your business is predominantly in the U.K. I've heard that come up of late, your business has actually been, you know, pretty resilient in the face of that uncertainty. Can you just kind of talk about your outlook there for this year, you know, maybe just kind of dig into some of the reasons why maybe your business is more resilient than some others might be seeing in the same kind of geographies?

So when you look at both of our businesses, I think it's been resilient because our product lines are designed to perform at a higher thermal performance level. And as codes and standards continue to be elevated to higher levels in Europe, it's pretty known that Europe is far ahead of U.S. and other markets in terms of the expectations for environmentally positive products within the home and our products fulfill those expectations. So we have a product line that is relatively robust even in down areas. So that has helped. I think that there is still so many unknowns in Europe which has - are impacting customer confidence that I think the macro fundamentals that exist are very, very similar in terms of the U.S. in terms of it being underbuilt and everything of that nature, but you've got this this overlay of what's going on in the Ukraine, and now in Gaza that has a fairly dark cloud on, you know, the consumer confidence and these unknowns hangover, you know, what will the impact of energy costs be on a consumer. And I think that that's a little - it's added a different type of weight to demand in our markets that we serve in Europe versus the U.S. The other thing that's helped both - helped us though in that region, and this is specifically with our spacer product line is that, you know, we've invested pretty large in terms of our international spacer business, which is primarily served out of our Germany facility. So as we continue to gain new sales in other markets such as the Middle East or India, China in different areas for some of our high-end space or product lines that has helped offset some of the volume drops in the traditional European market. So I think we've positioned ourselves well there.

Great. Thanks for the detail, guys. Congrats on the year. And Merry Christmas and Happy New Year to you both.

Thanks. You too.

Thanks. You too.

And thank you. And one moment for our next question. And our next question comes from Julio Romero from Sidoti and Company. Your line is now open.

Thanks. Hi, good morning George and Scott.

Good morning.

Good morning.

Hi. Can you guys maybe talk about, you know, repair and remodel spending in the near term? You talked about your customers have announced longer than normal holiday shutdowns. I understand the choppy kind of first-half outlook, but maybe if you can help us think about maybe a range of outcomes for volumes in the first half.

You know, we've seen a bigger impact in our cabinet segment. Obviously, you can see the volumes there, what we're projecting being down more so than others. You know, that's a combination of, you know, the COVID pull forward, some of the seasonality backlogs dropping. You know, I think that impact, and that mainly R&R there, those markets will be hit a little harder in the first half than anything else that we see. The opportunity for a - an improvement, more so than what we're forecasting, you know, I suspect it's there. A lot of it is dependent upon some of the macro things. I mean, if the fed comes out and lowers interest rates and you'd start to see some of that consumer confidence build. I think that there still is a lot of pent-up demand in all the product lines that we serve and that there is a possibility. As I mentioned to Reuben, you know, we traditionally do take a little conservative view. So I think the opportunity for upside is greater than not but I think dependent upon the Fed and whether - the weather building season because again as we go back to a more seasonal pattern, if you remember, as Scott said, our first half tends to be significantly slower that's dealt and a lot of that has to do with the building season. So you know, hopefully, we have a mild winter, and the builders can keep doing their things to help fulfill that upside that we think is probably there.

Got it. I appreciate the color there. Maybe just going back to LMI a little bit, can you maybe give us some flavor for the primary end markets that are currently driving LMI sales? I know you had talked about I think about eight different end markets when you did the deal, but maybe just highlight for us what are the top one or two end markets that LMI currently sells into.

So they sell into a wide variety that's - it's a pretty diverse market set. They have a piece of business that goes into automotive. We have a piece of the business that goes into, you know, windows and doors, some other types of building products. We have some of the products that go into electronics and consumer goods. And we actually have, you know, some products that go like into, you know, pet toys. So a wide range of markets that continues to expand and grow. No one market really dominates anything.

Okay. Got it. And maybe thinking about the preliminary assumptions for fiscal '24, how do you guys think about free cash shaking out especially after, you know, you just had a really strong fiscal '23, and does working capital become a benefit, a use of cash or kind of neutral?

So clearly working capital was a benefit in 2023. It took a big hit actually in 2022. So as we forecast this year, roughly flat. I mean, there may be a little benefit, there may be a little hit depending on how the year transpires but we're not expecting huge swings in working capital this year. Now, I mean obviously, free cash flow we had a record year at $110 million. I think there's probably going to hit somewhere lower than that this year, plus we expect to spend a little more on the CapEx side, and we'll give more concrete numbers around that when we give official guidance.

Got you. That dovetails into my very last one, which is the CapEx range of $40 million to $45 million, kind of nice to see that step up there. Just maybe talk about the key organic growth initiatives that are targeted with that CapEx.

So as mentioned a little bit in my section of the script, we have juiced up the R&D and development of new products. So I think you'll see investment - continued investment in our UPVC facilities specifically in the U.K. market as we continue to do things both from a product line and a facility perspective there, continued development of new compounds and adhesives and sealants within our space of business in the mixing compounds, those would be the priorities. But really starting to invest more heavily in new product development and - than traditionally seen from us.

Got it. Thanks very much for taking the questions.

Thanks.

And thank you. And I'm showing no further questions. I would now like to turn the call back over to George Wilson for closing remarks.

Yes, I'd like to thank everyone for joining us today. And I'd like to take this opportunity to wish everyone a very safe and joyous holiday season. And we look forward to providing an update on our next earnings call, our first quarter call in early March. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.