Good day and thank you for standing by. Welcome to the First Quarter 2023 Quanex Building Products 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 turn the call over to George for his prepared remarks.

Thanks Scott and good morning to everyone joining the call. As I begin my fourth year as CEO of Quanex, I look back and realize that there is yet to be a normal period during my tenure. Shortly after I stepped into this role, we were faced with the unprecedented challenge of a global pandemic. We overcame many unknown challenges in the early stages of that crisis only to then face a rapid increase in demand, spurred on by government infusions of capital into economies around the world, coupled with the worldwide labor shortage that caused massive supply chain disruptions. Together, these factors tested the limits of every manufacturers' production capabilities and ultimately led to severe inflationary pressures over the last two years that largely continue today. In addition, longer than normal lead-times during this period created strong protectionary demand amongst our customers that has resulted in inventory rebalancing and reduced demand now that our lead-times have returned to normal levels. Through all this, the Quanex team has done a phenomenal job and I'm extremely proud of what we have accomplished. I say all this as a backdrop to the following statement. I think we may have just experienced our first 'normal quarter' since before the pandemic. When comparing our first quarter 2023 results to the same period of 2019, we are able to see a seasonality pattern that is very similar. Most of our customers scheduled shutdown days during the holiday period of December 2022 and the start-up periods in January 2023 were slow, but began to pick up towards the end of the month. This scheduling pattern was the norm pre-COVID, but was not followed over the past couple of years because of the abnormally high demand that everyone was seeing in the market. From an order intake…

Thanks, George. On a consolidated basis, we generated net sales of $261.9 million during the first quarter of 2023, which represents a decrease of 1.9% compared to $267 million during the first quarter of 2022. The decrease was mostly attributable to softer demand, customer inventory rebalancing initiatives and foreign exchange translation impact. Overall, we believe that our results for the first quarter of 2023 indicate a return to what was normal seasonality prior to COVID, with Q1 being the lowest quarter of each fiscal year. Net income decreased to $1.9 million or $0.06 per diluted share for the three months ended January 31, 2023, compared to $11.2 million or $0.34 per diluted share for the three months ended January 31, 2022. After adjusting for one-time transaction and advisory fees, net income decreased to $6.1 million or $0.18 per diluted share for the quarter compared to $11.3 million or $0.34 per diluted share for the same period of last year. On an adjusted basis, EBITDA for the quarter decreased to $20.5 million, compared to $24.4 million during the same period of last year. The decrease in earnings for the first quarter of 2023 was largely due to lower volumes, one-time transaction and advisory fees, foreign exchange translation, higher interest expense, and increased stock-based compensation expense, mostly due to stock price appreciation. Now for results by operating segment, we generated net sales of $153 million in our North American Fenestration segment for the first quarter of 2023, which represents growth of 4.3% compared to the first quarter of 2022. The increase in revenue was driven by the contribution from the LMI Custom Mixing Assets we acquired in November of 2022. Excluding the contribution from LMI, revenue would have been down approximately 7% year-over-year driven by a decrease in volumes due to softer…

Thank you [Operator Instructions] Our first question comes from the line of Daniel Moore with CJS Securities. Your line is open. Please go ahead.

Thank you, George, Scott. Good morning. Thanks for taking the questions. Start with North American Fenestration can you give us any sense for the magnitude of the impact of customers rebalancing inventories last quarter and in the current fiscal Q2 so far and make sense for kind of where we are in that process nearing the end, likely to continue for a couple of quarters? Any color there would be great.

In terms of the magnitude, I don't think we're prepared publicly to break that out versus the volume drops. But in terms of where we're at in the process, we started seeing that destocking or inventory rebalancing initiatives really starting to take hold at the beginning of December, has gone into January and early February -- knowing where we're at within our customers and during our visits, we think that, that should start coming to an end here very soon probably within this month and going into the next. So I think we'll see an end to that in this quarter because at some point here, they're going to have to start repurchasing inventory. And we're starting to see some signs of that.

That's helpful, George. You gave good color full year and then Q2 kind of outlooks. What can you say about the expectations for the trajection of margin -- trajectory of margins across the segments embedded in your fiscal 2023 guide given some of the moving parts of index pricing. And what -- how should we think about margins year-over-year in each of the three segments for the full year?

Yes. I think for the full year, for our Fenestration segment, year-over-year EBITDA margins flattish to maybe slightly down. I mean, again, we're trying to protect margins in all segments. But I'd say for the Cabinet Components segment, there's going to be a little more pressure on margins for the full year.

And, I think, as we look at margins, and I hope what came across through our comments is, going even back to 2019, you would see some fluctuations, just based on seasonality, because we do have a couple of product lines that are more highly leveraged, such as spacers and the vinyl profiles that, the profitability is very much correlated inside the volume because of the fixed cost structure. So, as we start seeing that seasonality volume ramp up, we would expect, as in the past, to see the profitability improve. In the Cabinet segment, I think what we saw in the first quarter and what we said all along is, on the backside of index pricing, as wood prices go down, the ability to get ahead of those pricing mechanisms gives us some short-term benefit. So, I think, we'll be working really hard, even with the drop on revenue to be able to hold and sustain margins as much as possible in that segment.

That's really helpful. Maybe one more and I'll jump out. In terms of revenue at the midpoint, looking at sort of a low double-digit decline organically year-over-year, how much of an impact is pricing in that? Is that kind of low single-digit headwind versus volume? Just trying to get the breakout of those expectations. Thanks.

Yes, that's tough to answer. I'd say, so far year-to-date, it's mostly been volume-driven, only because year-over-year, specifically in the first quarter, pricing was actually still up year-over-year. Obviously, as raw material costs come down, pricing is going to be impacted more going through the year. So, I think, it will start balancing out between volume and price, probably more in the second half of the year.

Makes sense. I will jump back with any follow-ups. Thank you.

Thank you. And one moment for our next question. Our next question comes from the line of Steven Ramsey with TRG. Your line is open. Please, go ahead.

Hey, good morning. This is actually Brian Biros on for Steven. Thank you for taking my questions. I want to start on cash generation. A lot of companies that you've taken time to highlight there, cash generation abilities, especially compared to last year, which was a tough year. And, I guess, touched on that a little bit in the prepared remarks and in the guidance. Can you just expand on how you're thinking about the free cash flow for the year, maybe cadence through the year and items to keep in mind that are different from last year?

Yes. I mean, I think, if you look at last year, there was a pretty large hit to working capital, mainly because of what was going on with the inventories and the inflationary pressures there. Obviously, that's subsided. So we do expect that to benefit us this year. Historically, we generate most all of our cash in the second half of each fiscal year, and I don't think this year is going to be any different.

Got it. Thank you. And follow up, I guess, would be, just on the labor front, I guess, how are you guys thinking about labor through this kind of, call it, a tough period here? It's easy to fire and protect margins, tough to hire then. How are you thinking about the labor dynamic of protecting margins versus keeping that labor for the long-term, given the second half when things are expected to pick back up?

Yeah. As we look at labor, and I think your point is spot on. It is difficult to get labor back when you lose it. So I think we've been very cautious on reducing our labor workforce in our teammates at any of the facilities. And we've worked very hard to offset any sort of inflationary or margin pressures in other areas through continuous improvement and other activities. We've deployed them in terms of really getting caught up on some of those activities that we've done in preparing for the increase in volumes that we do anticipate. If we get to a point where we feel that a permanent reduction in workforce is needed, we'll obviously pull that trigger. But our confidence level on where the market can go has really pushed us to look to find ways to offset costs in other areas before going to labor.

Thank you. I'll pass it on.

Thanks.

Thank you. And one well for our next question. And our next question comes from the line of Julio Romero with Sidoti. Your line is open. Please go ahead.

Thanks. Hey, good morning, George and Scott.

Good morning.

Yeah. How do you feel about the prospects to achieve price gains index rollbacks across the portfolio compared to, say, three months ago?

I think we continue to have success, and that's because we're being very open and transparent with our customer base. Areas such as we notated in our script, that are still very, very real labor and benefit costs. You're not seeing rollbacks in those areas. Freight is very much in everyone's face and will continue. So I think -- there's obviously pushback, but we go with data that's justified and being able to justify it in all means. So I think we've had continued success, and we'll continue to work and keep the dialogue open with our customers. The other thing it helps when we're showing that we are focused on productivity and finding ways to offset. So -- we're also, I think, doing a very good job of trying to minimize what price increases we have to go and working with our customers to get the best value possible. So -- to this point, we've been successful. It's not just a game, but I think our performance and our continued transparency gives us confidence that we'll continue to be successful in pricing.

Okay. That's very helpful. And then George, I think you touched on it earlier, just trying to think about product lines in the North American Fenestration segment from a leverage standpoint. I think are spacers and vinyl profile on kind of equal footing from a leverage standpoint, if you could just dig into that at all, if you could?

Yeah. I think they're very, very similar and the fact that they're both extrusion processes, although they extrude different materials. So it's one of those things where the machines like to be run and taking things down for changeovers or even shut down during delays. Startups are expensive, scrap levels are high. So they're profitable when those extruders are running. So I would say the impact on leverage is very, very similar when comparing those two product lines versus a screen product, which tends to be much more labor paced.

Really appreciate the color there. I'll hop back in the queue. Thanks.

Thank you. And I'm showing no further questions, and I'd like to turn the conference back over to George Wilson for any further remarks.

I'd like to thank you all for joining the call today. And we look forward to providing an update on our next earnings call in early June. Thank you.

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