Good day and thank you for standing by. Welcome to the Quanex Building Products Q4 and Fiscal Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operation instructions] Please be advised that today's conference is being recorded. I would now 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, and 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 discuss our financial results on a consolidated basis, followed by comments on the results for each operating segment. On a consolidated basis, we reported net sales of $307.5 million during the fourth quarter of 2022, which represents growth of 5.4% compared to $298.1 million for the same period of 2021. We reported net sales of $1.22 billion for the full-year, which represents growth of 13.9% compared to $1.07 billion for 2021. The increases were primarily attributable to higher prices related to the pass through of raw material cost inflation. Net income increased by 18% to $24.7 million or $0.75 per diluted share during the three months ended October 31 2022 compared to $20.9 million or $0.62 per diluted share during the three months ended October 31 2021. For the full-year 2022, net income increased by 55% to $88.3 million or $2.66 per diluted share, compared to $57 million or $1.70 per diluted share for full-year 2021. On an adjusted basis, EBITDA for the quarter increased by 3.8% to $38.7 million compared to $37.3 million during the same period of last year. For…

Thanks, Scott and good morning, everyone. Before I provide my prepared remarks on the operating environment, I would like to take a moment to comment on our interesting and challenging fiscal 2022. The year began with fears of new COVID variants, and that was followed by continued high demand, labor shortages and material supply challenges. As if those items weren't challenging enough, the idea of a Russia-Ukraine war became a stark reality. The resulting fears of a global energy crisis translated directly into inflationary pressure from virtually every aspect of a business. While foreign exchange translation impacted our international business units. In our fourth quarter, rising mortgage rates continued to impact demand and commodity raw material costs began to decrease rapidly, which put pressure on index pricing for the first time in over three years. Despite all these challenges, we were able to report another year of record revenue in earnings in yet another difficult year. In the face of these abnormal challenges, what has become normal is how the Quanex team continues to perform well. I'm extremely proud of the results we posted. And we'd like to highlight a few of these points. First and foremost, the Quanex team had a record year in 2022 for safety performance, despite high levels of overtime and scheduling challenges caused by material shortages throughout the first half, the team remained focused on protecting every person who entered our facilities, and we continue to systematically improve our safety performance. Above all else, this is what makes me the proudest. In addition, our focused efforts on improving return on investment capital continues to pay dividends and translate into improved performance, cash flow generation and a solid balance sheet. In conjunction with third quarter results, we introduced a refreshed look of our go forward growth…

[Operator Instructions] First question will come from line of Daniel Moore from CJS Securities, your line is open.

Thank you. Good morning, George and Scott, thanks for color and taking questions.

Dan, good morning.

To start with just piggybacking off your comments, George on LMI. Maybe dig into that a little bit more, they're co-located with their process at all around that acquisition. And you talked about many of the things that they bring to the table, is mixing compounding an area that you would like to grow and scale? Or is this more of a sort of a one-off opportunistic. And a quick follow-up there.

Yes, no it absolutely is a process and area that we expect to grow. Currently, they supply EPDM and a few other materials. And then we think by combining the two companies, not only can we invest and grow in their current product portfolio, but we'll give them now the opportunity to add our silicone and our butyl capabilities that we had within Quanex already. And a lot of that Custom Mixing, excuse me, that Custom Mixing to be able to offer multiple solutions to customers through many different channels so that we think that there's a great opportunity to continue to expand that business.

And to answer your first question Dan, there was not a process run. This is a business that we were familiar with and have been for a long time. In fact, the parent company of this LMI business was a company that we acquired Edgetech, which is our IG spacer business from way back in 2011. That's actually how George came to the company.

Indeed, absolutely. That's helpful. So, longer term, what kind of sort of growth margin profile are we looking at for LMI. And near-term, you mentioned accretive, I know you're not giving guidance, any range around kind of what EPS accretion could look like in the near-term?

From a growth standpoint, we think this business can grow at a rate that's above our legacy, our core business. So if historically, that was in the low to mid-single-digit range for our legacy business prior to COVID, we think this business can do better than that. From an EPS accretion standpoint, yes, that's just -- that's information we haven't disclosed publicly.

Got it. And maybe just one more, and I'll jump back. But the free cash flow has been and conversion has been improving. Do you see that trend continuing, you see the working capital likely be a benefit in fiscal '23 or more neutral and any expectations for CapEx?

Yes, good question. Obviously, working capital has definitely been a hit to free cash flow in 2022, I think to the tune of close to $30 million. A lot of that had to do with the value of our inventory going higher because of inflation. Looking ahead into fiscal 2023, we're hopeful that working capital won't be a negative. But I'm not sure, it'll be a positive. So I think keeping it somewhat flat when you model is probably the prudent choice at this point.

And any view, thoughts on CapEx?

Yes, I would say around the same level as last year, maybe a little higher. So call it $35 million. Maybe a little more, we'll come out with more firm guidance, hopefully in the next quarter.

All right, I'll jump back in queue if any follow-up. Thank you.

Thank you.

One moment for our next question. Our next question comes from the line of Reuben Garner from The Benchmark Company. Your line is open.

Thanks, good morning, guys. And congrats on the strong close to the year.

Thanks very much, Reuben.

So recognizing and not providing guidance, Scott, maybe if you can help. I mean, that seems like a pretty robust outlook with some things working against you like FX and some of the surcharges rolling off. Can you talk about what the kind of underlying organic volume assumption for the year is that gets you to that kind of flattish revenue? I think the contribution from LMI was in the range of $80 million. So I mean, it seems like a pretty modest volume reduction, all things considered with what we're hearing or what's happening with the new housing world, at least.

Yes, I mean, obviously, the reason we can even talk potentially about being flat next year versus 2022, is because of the LMI acquisition contribution. Outside of that, we fully expect demand volumes to come down, the FX impact could be significant. So I mean, there's that as well.

I think in addition, specifically in the North American Fenestration segment, I think we're still finding opportunities to gain share in a couple of our product lines, where labor outsourcing is still a big driver for our growth, and even with falling demand, in terms of volumes, the labor pressures for everyone still exists. So those opportunities still arise. So we think that there's opportunity to maybe offset some of the market volume with share gain. And then we're working on adjacent materials as well, that we continue to talk about. So it will be a challenging year. And we're working really hard to do everything we can to offset that.

And the only thing I'll add there is, as these index pricing mechanisms kick in, and raw material costs go lower, and you're having to roll back price, obviously, that hits revenue. But there are also a lot of other costs that George mentioned in his prepared remarks that are continuing to go up. So we're going to fight hard. We're going to try to push price where we need to, but the reality is with raw materials coming down, revenue is going to be challenged.

So last time, we saw kind of the housing start run rate that we're seeing in the last few months, I mean, you guys were doing more like $800 million to $900 million in revenue, $1.2 billion is a big jump up from that. I know that there's some pricing over that time period, but is the share gains kind of the biggest difference between, I recognize that's just a new housing start number, but clearly some of the rates are going to impact some R&R spending, I think the biggest between what maybe you guys did in revenue a few years ago, and where you kind of are pointing us to for '23?

I think on a big picture level, what I would say is share gain is a piece of that and the model of continuing to optimize our processes to solve our customers labor issues does continue to resonate. I think we've seen in certain areas, especially during supply chain, as people are mitigating risk from Asian supply, bringing things back domestically, that's been a benefit, and we anticipate will continue to be a benefit. And although we don't talk a lot about it, because no one segment, or one product line is maybe significant in the big picture, we have products like the vinyl fencing, our solar, our flashing tapes, that all continue to grow within our product line, again, individually, they're not significant enough to call it out. But independently, they are continuing to roll up and have been great adjacency products for us.

Great, and I'm going to sneak one more in if I can. So same kind of line of questioning on the margin from pretty impressive outlook to be able to kind of hold where you are, what would I guess lead to the most pressure relative to that outlook? Is it volume worsening? Or is it more risk on the price costs front? Scott, you mentioned some -- still seeing some inflation in some areas, as what's the bigger kind of item to watch for '23 on the margin side?

I think they're equally both, Reuben. You obviously followed our business well, volume will drop, and we'll put pressure now. Now, we've said all along, and you've seen it in the past, we're able to adjust the volume drops, I think fairly efficient when compared to others. But volume would be a pressure on that margin. And then continued inflation, I mean we're still seeing it, even though our commodity raw material prices may be dropping, as I mentioned in my script, we're still seeing pretty high levels of inflation in a lot of areas of our business. And I know, my individual business leaders are really working very hard to offset that. But we're going to have to go out and try to get price to offset that. Now, why the positive or somewhat positive look on our margin profile, we've talked a lot about as those indexes and surcharges roll back. As we were chasing the tail and the lag on the way up, we're seeing some of the benefit on the way down. So that should help alleviate some of the pressure. And that's why we're probably a little more optimistic on the margin perspective in the year.

Great, thanks, congrats again, and Merry Christmas and Happy New Year.

Hey, you too.

Thanks, you too.

Thank you. One moment for our next question. Our next question will come from the line of Julio Romero from Sidoti. Your line is open.

Hey, good morning, George and Scott.

Good morning, Julio.

I guess to start on the refreshed growth strategy. It sounds exciting. Obviously, you didn't put a timeline on the targets. So maybe just talk about what investors should expect from maybe the cadence of inorganic growth? And if deals should be kind of tuck-in or transformational?

Great question. I think really, we didn't give a lot of specific guidance there for a very specific reason, I think we've created enough opportunities. And we're looking at these adjacencies by opening it up, what we're effectively doing, as we're telling people, we're not a Window and Door Company, and we're not a Cabinet company. We're a manufacturing company that has a very broad set of operational capabilities and material science knowledge. And we're starting to see a lot of different looks both from internal organic product development as well as external. So I think as we evaluate inorganic opportunities and M&A, I think that they could be either transformational or bolt-ons similar to the size of like an LMI. And the reason I don't give better guidance is because a lot of these markets are new, we're still evaluating them. We're looking at it, the favorability of each of these markets and as this progresses, we'll try to give better clarity on markets that we may like more than others. But it's relatively new. But I think we've positioned our balance sheet very well to be able to handle both transformational and bolt-ons with and staying within a very healthy balance sheet perspective, which has been our goal all along.

Great. I appreciate the color there. Maybe on the organic growth side, maybe a follow-on to Reuben's question a little bit. I mean, I was hoping you could expand more on the share gain opportunity, specifically the runway for maybe reshoring from some of your customers as your customers mitigate risk from overseas suppliers. If you could talk a little bit more about that runway and the multi-year opportunity there?

We're seeing it in a few different areas. I think the LMI business and any sort of compound mixing, because of the long freight, the expense of the freight, excuse me, lead times. I think that that's going to spur on opportunities. And we saw opportunities within the Cabinet segment where that one's probably been the one that's been most hit with both tariffs and just supply chain challenges from coming overseas. And the amount of inventory that our customers have to carry to protect on that has really pushed on the need. So I think it's areas that require a lot rate, a lot of complexity, numerous SKUs are the ones that are going to be the most advantageous for us to identify as a potential sourcing alternative to our customers, and we're looking for those, and then developing products within those.

Great, thanks very much for taking the questions.

Thank you.

One moment for our next question. Our next question comes from the line of Kenneth Zener from KeyBanc. Your line is open.

Good morning, George and Scott. This is actually Christian Zyla on for Ken Zener. Thanks for taking my questions.

Sure, good morning.

Good morning, so I will echo the understanding that you guys aren't giving guidance at this time. But maybe could you clarify the price piece with rollbacks versus getting price to offset some of those other rising costs. And then, separately, when we think about the North American Fenestration business, it really is three distinct businesses with the vinyl extrusion and spacers. Could you just talk about the operating leverage across the three distinct businesses amid lower flattish volume environments?

I'll start with your second question. And then I'll let Scott go back to the first. So as we look at the operating leverage of the different businesses and actually now there's the fourth one because the Quanex Custom Mixing will roll up into that but I would say the more leveraged businesses tend to be the vinyl extrusion and the spacer extrusion business and screens and some of our other accessories tends to be very variable cost driven, more manual process in general, so any volume drops will probably impact the spacer, the vinyl extrusion a little more than the other product lines.

On your pricing question, the raw material surcharges or rollbacks, or index pricing rollbacks, versus anything we try to push. The only thing I can really say to that without getting too specific is raw materials are typically 50%, 55% of the costs. So that, of course, a big portion of that is the major raw materials that are indexed. So those are the ones that we really don't have control over coming down. So that would leave us with several other areas to try to offset the rollbacks with increased price. In the additional inflation, where we have to go back out from get price, obviously, that's going to -- it's going to take work for us and every other company because you know there's this expectation and if raw materials are dropping, I guess everything else in the world is dropping and that's really not the case, I mean. So we're going to have to be very detailed and very methodical and lining out and transparent with our customer base. We're doing everything we can to try to offset inflation with continuous improvement and improvement internally, but at some point, that rate of inflation is still pretty high and we're going to go -- have to go out and get it. I suspect it is going to be a fight but we have the data and the detail that will support price increases.

Great, very helpful. Thank you, Scott and then if I could just add one more, could you just talk through the specifics of the European business and how you guys are able to perform I guess better than expectations, even outside of the FX headwind. Just following up from a comment from last quarters call, you just talked about the impact of elevated prices in Europe and how your products, energy efficiency proposition contributes to performance, can you maybe like quantify that or in case energy prices stay elevated, what's the run rate? Or I guess, the runway for '23, maybe even '24 and what about if prices retreat? Thank you.

Yes specifically, in terms of quantifying those opportunities, that's going to be relatively difficult. And we're just not prepared to do that at this point. But from a product or macro level, what I would say is, you're exactly right, our spacer product, and our vinyl extrusion systems that we make under the Linear brand in the U.K. are both what I would position is at the very high end in terms of thermal performance and operating performance within a window. So as energy costs continue to rise in Europe, and they have and they will, and that will also transition at some point in time to North America. Windows systems with our components in it will continue to grow. As energy costs go higher, the decision to replace windows, it makes that payback for a homeowner, when they do their internal rate of return. And do I want to make this purchase a lot less difficult, it becomes a fairly easy payback. So in addition to the quality of the product that we serve, we feel very strong that these markets will continue to grow just because of the energy cost, and that as it relates to the spacer business specifically in Europe, I think it's worth noting that that facility that we have in Germany that manufactures that spacer, that's kind of our hub for international spacer shipments. So our Germany facility is supplying product to probably 60 different countries in Asia and emerging markets, in the Middle East and in Africa, that has an opportunity to continue to grow because of their elevated energy costs. So we think the product line serves itself very well to perform in the future as it relates to energy performance.

That's right. Thank you for the color and happy holidays.

Yes, you too.

One moment for our next question. It looks like we have a follow-up from Daniel Moore from CJS Securities, your line is open.

Yes, just one follow-up on capital allocation. Obviously, you were blacked out, buying back stock. Given the acquisitions some year, however, [ph] the cooker should we expect that that's picked back up, number one. Number two, maybe you talked about this previously. But if there are larger, more transformative deals that come your way, just talk about where you would be willing to take leverage up to for the right opportunities? Thanks.

On your second question, first, we've been pretty transparent and telling investors that if there were to be a bigger transformational deal out there, I don't think that this management team and this board would ever be comfortable with doing above two and half to three times net leverage. And only if there is a clear runway to get that back down to between one and two times leverage in a relatively short periods of first year, year two. George, do you want to talk about that?

No, I think that that's absolutely fair. And I think what we have done and we've worked on as that pathway to de-lever is we're coming off a fourth or fifth straight year of free cash flow in excess of $50 million. So I think we've done a very good job of developing a cash generation machine here that gives us comfort level and what we can pay back. And so obviously, each of those situations. Now in terms of capital allocation, I think it will be no different on a go forward basis than we have in the past on if we are able to be in the market. And there's nothing going on, then we will opportunistically buy back our stock as a priority. I think we'll continue to focus here in this year on repaying down the debt and we'll balance the needs of the organization. But I think we've been very transparent that when we can, we will be opportunistic in our buying of stock.

Very helpful. Thank you again.

Thanks.

Thank you. Now I will turn back the call back over to George Wilson for any closing remarks.

Thank you all for joining today. And I would like to take a moment to wish everyone a safe and joyous holiday season and a very Happy New Year. We look forward to providing an update on our next earnings call in March. Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.