Good day, and thank you for standing by. Welcome to the Q2 2024 Quanex Building Products Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker, Scott Zuehlke, Senior Vice President, CFO, and Treasurer. Your line is open. You may begin.

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 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 joining the call. I am pleased with our performance during our fiscal second quarter. Quanex's operational model has proven to be highly resilient in both peak and soft demand environments, as we continue to achieve profitable growth. Despite a lower volume environment compared to the prior year period and some index pricing pressures in North America, the Quanex team continues to perform well and offer best-in-class service to our customers. Additionally, we are also investing in opportunities to expand our customer base and product portfolio. Our previously announced acquisition of Tyman underscores our commitment to bringing even more value to customers around the world. Now, I'd like to take a moment to discuss the macroeconomic factors impacting our businesses. Globally, we are observing a return to a more typical seasonal build and demand pattern across all of our products. Volume has increased each quarter as expected, and we anticipate this quarterly ramp-up to continue. In North America, there is a sense of optimism regarding improvements in both new construction and repair and replacement models. We anticipate that when the Federal Reserve does take action to lower interest rates, demand for our products will increase as consumers gain confidence and allocate more funds to housing expenditures. We anticipate that this shift will occur in the latter half of the 2024 calendar year with a more pronounced impact in 2025. However, since our full year guidance does not hinge on significant Federal Reserve movements, any short-term changes would represent an upside for Quanex. Conversely, in Europe, market dynamics pose a very good challenge. Both the U.K. and continental European markets have experienced significant softness. We anticipate that market improvements in Europe will lag behind North America due to ongoing geopolitical conflict, sustained pressure on energy…

Thanks, George. On a consolidated basis, we reported net sales of $266.2 million during the second quarter of 2024, which represents a decrease of 2.7% compared to $273.5 million during the second quarter of 2023. The decrease was mostly attributable to softer market demand in our European fenestration and North American cabinet components segments. Net income decreased to $15.4 million, or $0.46 per diluted share for the three months ended April 30, 2024, compared to $21.5 million, or $0.65 per diluted share for the three months ended April 30, 2023. After adjusting for one-time items, net income increased slightly to $21.8 million or $0.66 per diluted share for the quarter, compared to $21.7 million, or $0.66 per diluted share for the same period of last year. On an adjusted basis, EBITDA for the quarter increased modestly to $40 million compared to $39.9 million during the same period of last year. However, we were able to realize margin expansion of approximately 40 basis points on a consolidated basis. The increase in adjusted earnings for the three months ended April 30, 2024 was largely due to a decline in raw material costs, lower income tax expense and lower interest expense. Now for results by operating segment. We generated net sales of $159.8 million in our North American fenestration segment for the second quarter of 2024, which represents an increase of 1.8% compared to $157 million in the second quarter of 2023, primarily due to improved volume. We estimate that volumes in this segment increased by approximately 2% year-over-year with relatively flat pricing. Adjusted EBITDA increased by 16.7% to $23.8 million in this segment compared to $20.4 million for the same period of 2023. Our European fenestration segment generated revenue of $56.6 million in the second quarter, which represents a decrease of approximately…

[Operator Instructions] And our first question will be coming from Steven Ramsey of the Thompson Research Group. Your line is open.

Hi. Good morning. Maybe to start with U.S. non-fenestration sales showed solid growth. So maybe two questions on that. 2H sales were better than 1H for seasonality, it appears. But would you expect that to be the case again in FY '24 as it was in FY '23? And then secondly, higher level, what is driving the strength in U.S. non-fenestration sales and do you have a line of sight for that to continue over the long term?

Yeah. We've been very, very pleased with the growth in our non-fenestration, and it's been an initiative that we've been working on for a long period of time. You've got really three or four main pieces that have really contributed to that. You've got our solar sealant products that we continue to develop and work on, and that market continues to grow. The fencing -- the vinyl fencing business, which has been a nice segue for us to continue to utilize our vinyl extrusion assets. We do a lot of flashing tapes, butyl lamination of house wraps, and flashing tapes. And then finally some of the markets of our mixing business, the QCM goes into for businesses and segments that are outside of the fenestration. So we feel very optimistic about the continued growth in that. And we've spent a lot of time and resources and that is obviously in our stated strategy, a big piece of our growth on a go-forward basis. We're investing a lot of resources and we're happy with the progress.

Excellent. And then wanted to hold in on cabinet margin very strong. Can you talk about the plant closure, what that should do strategically and financially for you in the coming 12 months?

Well, in terms of the plant closure, just real quick. It has nothing to do with our cabinet segment, that was a plant that we are closing in our vinyl extrusion business. That was more of a rightsizing of our capacity. So we haven't announced any closings. Now, as it relates to margins within the cabinet business, extremely pleased again, this has been a lot of hard work and buildup. Our operational teams continue to work tirelessly for finding opportunities to push on our continuous improvement efforts and working with our sourcing teams to stay ahead of the index pricing mechanisms that we have. Listen, it's as expected and we're really proud of what the operational teams in our cabinet segment have done and see no reason why any of that will go away. We're very pleased with the work that they've done.

Excellent. Then last quick one for me, your outlook is unchanged, and you said customer conversations. As always, we're a contributor to your outlook. Can you share some color on what they're telling you? It seems that the broader housing outlook may have downshifted a bit in recent months for rate expectations pressuring second-half sentiment. So curious what your customers are telling you and how that aligns or does not align with to make that step broad sentiment?

I think it's mixed and there's obviously regional play that comes into effect. I think you see a lot of the larger nationals still are very optimistic on the outlook and are very aligned. I think you'll continue to see consolidation in our customer base and you've seen some of that over the last few quarters. I wouldn't use the term cautiously optimistic again. I think everyone is fully aligned on the fact that the macro indicators suggest that the housing market and the repair and replacement market is due to expand. Just needs that a little bit more consumer -- positive consumer confidence. And at some point, we will see the Fed make a move. Obviously, the jobs report today, there will be people that have different opinions on that, but most of our customers that we've talked to are still pretty optimistic that things are going to start to improve towards the end of this year and into next year, and that hasn't wavered.

That's great. Thank you.

Thank you.

And one moment for our next question. And our next question will be coming from Julio Romero of Sidoti and Company. Your line is open, Julio.

Thanks. Hey, good morning. My first question is on Europe. Can you maybe expand on what is the key factor for this European softness? I think you named a couple in the prepared remarks. And then secondly, how prolonged do you think the softness in Europe extends to?

Yeah. It's been a much more challenging market. I think the key drivers are obviously consumer confidence. You've had longer pressures on energy costs. I think that when you look at the fenestration markets in Europe, they're more tied to economic and governmental incentives than probably what we see in the U.S. So, with a lot of -- this being an election year in most companies, a lot of consumers are kind of on hold to say, why would I invest in buying something when I don't know what the end result will be for any sort of economic incentives or passive housing regulations? So I think the consumer in Europe has been just a little more on hold and much more conservative with their spending than we've seen in the U.S. And that has definitely driven softness. And then you couple that with some of the higher inflation, you obviously got a war that's in their backyard. And so that's driving some pressure on energy costs still. And there's just a lot more uncertainty than we see than in -- than we see here in the U.S. In terms of when I think we'll see improvement, I think it will lag. And it's probably early to mid-2025. Now, I will tell you, and we don't have any of this baked into our guidance, but there has been a little more optimism, or at least signs of our first signs of optimism in the U.K. market than we've seen in a long time. And there's actually been some discussion of maybe the Bank of England starting to ramp down some of the interest rates, maybe even sooner than the Federal Reserve. So, that could potentially be some upside. But I think we've still got a way to go here.

Got it. That's very helpful. And then, turning to some of your third quarter outlook, you expect EU sales to be up in the third quarter sequentially, 4% to 6%, I believe you said, versus the second quarter. And while I know you gave us the consolidated margin outlook of flat to down, how do you expect -- can you maybe talk to how you expect the European margins to trend in the third quarter relative to 2Q?

I'd say based on the seasonality of our business, actually, that -- those margins in Europe should hold up nicely, if not improve quarter-over-quarter.

Okay, helpful. And then, just the last one for me is, thanks for the good color on the outlook. Can you maybe speak to the free cash flow outlook for the year? And if that's still kind of unchanged from your previous outlook?

I'd say for the most part it's unchanged. I mean, obviously, there are some transaction and advisory fees that we're paying throughout this process with timing that'll impact some free cash flow, but we're still comfortable.

And that would be with 85 to 90, or am I wrong about that?

I think that was right.

Yeah.

Okay. Thanks very much, guys. Appreciate it.

Yeah. Thank you.

Thank you. And our next question will be coming from Adam Thalhimer of Thompson Davis. Your line is open.

Scott, can you pick up there on the transaction fees, how should we model those going forward? And then also SG&A, you had really good control there. Ex the transaction fees in Q2, how do you expect those to trend?

Yeah. I mean, what you're going to see is we'll continue to adjust the transaction fees out. There's a segment data table that has that information. So -- and then outside of that SG&A, we guided to earlier this year. I'll have to find it. Give me a second. $128 million to $130 million is what we guided to for SG&A. That's the same. I mean, again, we'll just -- we'll adjust out the transaction fee. So it's hard to give you an estimate on what they're going to be throughout the year, but we'll adjust them out.

Okay. I won't even try. And then, George, I was a little curious, you said signs of optimism for both R&R and new construction. I would say in our shop, we're probably a little bit more bullish on new construction than R&R. Just hoping you could parse the outlook there a little bit?

Yeah. I think if you would have to compare the two, I think new construction will lead, but because of some of the -- just the timing of new construction, I think you will see a lot of people that won't go all in on new construction and that the kitchen and the bathroom spaces will become, again a positive trend. And that's where you see a majority of the rentals when you get it. And as existing homes start to churn with the lower interest rate drops, that will spur on R&R. We know that that will happen. So again, that's probably a little more predicated on the Fed dropping rates than new construction. So, I would agree with your comment that we would be, when comparing the two, more bullish on new construction, but think R&R will be there as well, especially when the Fed makes a move downward.

Okay. And lastly, I wanted to follow up on Steven's first question, kind of along those lines. Is there anything interesting on the R&D side or new product development that could drive a little bit of margin improvement ex-macro?

Obviously, any organic R&D initiative takes a little time, but we are actively working. And I will tell you there's some -- we've been really pleased on the mixing side of our business and some new compounds where they were developing in conjunction with our spacer business. I think we continue to work and look at -- there's a new screen product that we're looking to bring potentially to market here on a security screen. So, it's too early to give a lot of details and predict, but we're pretty excited. Again, these are seeds that we planted a few years ago as part of our acquisition of the LMI. And those things are starting to come to fruition, and we're really pleased about it. And I think that's why you're starting to see a little more spend for us in R&D and on the CapEx side of our business.

Great. Thanks, guys.

Thank you.

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

I'd like to thank everyone for joining today and we look forward to continuing to deliver value for our shareholders and are very excited about the future of Quanex. Thank you.

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