Good day, and thank you for standing by, and welcome to the Q3 2024 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, Senior Vice President, CFO and Treasurer. Please go ahead.

Thanks for joining the call this morning. On the call with me today is George Wilson, our President, Chairman 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 joining the call. Today, I'll be providing an overview of our quarterly performance, the state of our served markets, and our perspective on the macroeconomic environment. Additionally, I'll discuss our recent acquisition of Tyman, including our integration plans and expectations moving forward. Overall, we are satisfied with our operational performance as we exceeded consensus expectations across all metrics. Despite a challenging demand environment, volumes for the third quarter of this year exceeded those of the second quarter, reinforcing our prior comments about a return to a more traditional seasonality pattern for orders. Scott will provide a more detailed analysis, but on a consolidated basis, revenue decreased by 6.4% in the third quarter compared to the same period last year, and adjusted EBITDA fell by 13.2%. Although softer than the prior year, these results align with our expectations and our previous comments on the cadence for the third quarter. In our served markets and across all geographic regions, consumer confidence remains somewhat low due to macro-related uncertainty. While we expect the Fed to cut interest rates before the end of the calendar year, these cuts are likely to be more beneficial for the 2025 build season rather than having a significant impact in the current year. Even with relatively soft orders resulting from this low consumer confidence, the Quanex team has continued to generate solid free cash flow and remains focused on operational improvements. This financial stability has enabled us to invest in future organic growth opportunities. These investments include an expansion of mixing capacity for our specialty sealants product lines, the introduction of new products in our U.K. vinyl extrusion business and the funding of several operational improvement projects for our spacer business. All these initiatives are expected to bear fruit as we…

Thanks, George. On a consolidated basis, we reported net sales of $280.3 million during the third quarter of 2024, which represents a decrease of 6.4% compared to $299.6 million during the third quarter of 2023. The decrease was mostly attributable to softer market demand across all operating segments. Net income decreased to $25.4 million or $0.77 per diluted share for the 3 months ended July 31, 2024, compared to $31.7 million or $0.96 per diluted share for the 3 months ended July 31, 2023. After adjusting for onetime items, net income decreased to $24.2 million or $0.73 per diluted share for the quarter compared to $31.9 million or $0.97 per diluted share for the same period of last year. On an adjusted basis, EBITDA for the quarter decreased to $42 million compared to $48.5 million during the same period of last year. The decrease in adjusted earnings for the 3 months ended July 31, 2024, was mostly due to decreased operating leverage because of lower volumes related to softer market demand, combined with higher material costs in both of our North American segments. Now for results by operating segment. We generated net sales of $170.3 million in our North American Fenestration segment for the third quarter of 2024, which represents a decrease of 3.9% compared to $177.1 million in the third quarter of 2023, primarily due to lower volume. We estimate the volumes in this segment decreased by approximately 5% year-over-year, offset by a slight increase in pricing. Adjusted EBITDA decreased to $24.7 million in this segment compared to $27.7 million for the same period of 2023. Our European Fenestration segment generated revenue of $59.6 million in the third quarter, which represents a decrease of approximately 11% compared to the third quarter of 2023 after adjusting for the foreign exchange…

[Operator Instructions] And our first question comes from Steven Ramsey from TRG.

Maybe I wanted to start with the legacy company full year outlook being unchanged. I wanted to think about this in the context of many building product companies in our coverage and more broadly, who reduced their outlook for fiscal or calendar '24 for lower demand you guys are keeping your legacy outlook. Can you talk about maybe why you were able to hold that outlook? And then looking within your different end markets and products, did you adjust anything up or down by market or by product in results or your outlook?

Yes. Great question, Steven. In terms of our full year guidance, I think our projections for what we've given in the past 2 quarters, I think we've always been somewhat conservative in our approach and really had built in not a lot of movement from the Fed early in the year. So I think we were probably a little more conservative than some of our peers and thus didn't have to change our outlook on a go-forward basis. I think our operating teams and the sales teams have done a good job of going out and trying to get some spot onetime business or picking up some different things that helps offset some of the softness. And in addition of some introduction of some new products that are starting to roll out. So I think it's a combination of things, but again, being relatively conservative in our full year outlook early in the year combined with just the sales teams going out and pushing hard to get the spot business has enabled us to stay fairly flat.

Okay. That's helpful. And then maybe to get you to build more on the potential share gains you've gotten in winning business. And can you go into more detail on maybe where that has come from? And then maybe put this business that you've won, put it in the context in the prior years and maybe comparable or even superior to prior years in winning business at this point in a calendar year.

Yes. I think the markets themselves, especially coming out of some pretty challenging supply chain 1 year, 1.5, there hasn't been an enormous amount of shifts in terms of market share through -- with our competitors or in the market. So I think we've seen the most market share gain probably over in our European fenestration business. And that's really because of some competitors had filed for administration. So there's fewer competitors. And I think all of the people that still exist in that market have picked up some market share, but that's been some nice wins for us on volume. We've continued to utilize our thermal performance as a selling point to get new business as for our spacer products. As around the world, the thermal performance and thermal efficiency of windows continues to grow. I think we continue to find opportunities to build off of that sustainability platform and have had some nice wins globally there. But outside of that, really the markets have kind of been stable. I think what we see when we do pick up business is that it's usually short term. And I'll use, for example, our cabinet business there, it's pretty trenched in, but we've been able to pick up some spot business and with some smaller customers. Those are the types of wins we see. So not a lot of shift in long contractual wins on that side of our business, but some nice spot wins.

Okay. That's helpful. And then one more for me. One of the positive aspects of the Tyman deal was the limited product overlap between the 2 companies and another positive feature was Tyman's greater mix of highly engineered products that carry better pricing. Can you talk about if there is any overlap on products where Tyman's mix of highly engineered products is better than yours and maybe where you see that evolving strategically over the next year as you put the companies together and go to market?

Yes, another great question. I think, again, we're one month into this, but what we anticipated through our due diligence and what we've seen in this first 30 days, 45 days, is exactly that. There's very little overlap in the products and little channel conflict in what we do. So for us, being able to effectively, as I mentioned in my script, doing everything but the glass. We're pretty excited about the opportunities, one, to sell a full basket of goods you become more of a distributor type approach to all of our customers. But on new product development, I think you'll see a stronger focus for us to migrate even more into systems development, effectively doing everything, but the glass trying to find ways to create systems that integrate multiple components to create something new and different. And it's too early to tell those types of engineered and development projects take time. But I will tell you, we're extremely excited about the potential opportunity of doing exactly that.

And our next question comes from Julio Romero from Sidoti & Company.

Wanted to stay on Tyman for a little bit. Can you maybe just talk about how the reception has been from employees, customers, suppliers, et cetera, given the first month of integration post-close?

Yes. We've been very busy in trying to get out to visit the plants, meet as many people. A lot of work to do, especially when you're at quarter end. So it's been a balance. But we have been extremely pleased with the level of talent of people that we see in the organization, the excitement. One of the things that we identified fairly early, the cultures are very similar on things that are extremely important to us, how we serve our customers. The focus -- most importantly, the focus on safety, our willingness and anxiousness to develop people. All of those things are extremely similar. So we're very excited. I think once the deal closed, the level of sharing of data and obviously starting to build together, I mentioned in my script that we have an integration management office that has folks from pre-acquisition both sides of the table. And these folks are working as though they've been colleagues for 30 years and it's been great to see. And I'm excited to see what sort of energy and opportunities that they're going to create. I think our customers have been very supportive. We spent time talking to many of them about learning in their eyes, what are the strengths and the weaknesses of each. And it's our job to build on the strengths of those companies and minimize what would be a perceived weakness. And I think we overlay very, very well. I mean I think Quanex has been very strong manufacturing-based company, and I think the Tyman team was probably a little more commercial-driven and engineered types of solutions. And I think when you overlay those 2, it's going to create something very, very special.

Absolutely. Really helpful color there. And then, Scott, you talked about some physical inventory counts and the cost impact related to that. Do you also lose any days of operations to do that? And if so, how many days? And then secondly, do you expect maybe to implement a new ERP, you have some data tracking and maybe reduce that physical inventory count impact over time?

Yes, absolutely. We're going to get much more efficient on it the second time around. I mean, this was something that they weren't expecting to have to get done by October 31 is something that we feel is very necessary. There will be a financial impact. I quantified the cost side. There will be some downtime that will affect a little of the revenue side, which is also reflected in the guidance that we gave. So it's a learning process on their end. It's something we're used to here at legacy Quanex, but we're partners now. We're going to work with them to make sure that going forward, this is a more efficient process.

And from an ERP perspective, your questionnaire, I think once we finalize the new reporting structures, we'll obviously do an in-depth look at what ERPs exist within the legacy organizations and how they match up with the new reporting structure, and we'll do everything that we can to streamline. I think that's one of the things in terms of trying to optimize margin, take out costs, while not impacting our customer. That's always been a focus for the Quanex team, and we'll make sure that, that continues to exist on a go-forward basis.

Got it. How does the SKU count for Tyman compared to legacy Quanex? Is it meaningfully different or how would you describe that?

I would say that there tends to be more SKUs on the legacy Tyman business. It is a different type of business model. Quanex has typically been made to order, I would say Tyman is more make to stock. So they typically have higher levels of inventory. They're engineered into specific window systems. So for example, when customer, engineers in a product into a window system, even if the window system goes out of manufacturing build kind of like an OE for an automotive. When a car your expires, you still have to have the ability to make that product through the aftermarket life, it's very similar with their organization in that regard. So a little more SKUs, a little more inventory. We'll work to kind of drive that as much as we can do and make the order versus make the stock, but a little different of a business model.

And our next question comes from Reuben Garner from Benchmark.

So just a follow-up on Julio's question about the Tyman deal and customer conversations. I think revenue potential synergies or cross-selling opportunities with something mentioned around the initial announcement of the deal. I was just curious what your kind of feedback was from customers on that front. Are there any dis-synergy risks, any customers that maybe don't want to get overly exposed to one supplier? Any other kind of thoughts there would be helpful.

I don't see any initial dis-synergy. It's too early into the process to identify the revenue opportunities. We obviously think that they're there, and I'm not only by selling a basket of goods, but also the future development of new systems, utilizing the whole breadth of our portfolio. Again, I want to remind people in our projections and preannouncement, we have never baked in any sort of revenue upside. So we feel good about that. I think any sort of protection from customers isn't necessarily based on the size of the supplier, it will be product line by product line that everyone will look to evaluate the risk profile. And I feel very, very good about our position. I think -- I actually think the scale that Quanex has become actually protects our customers from the smaller type of customer base that has more financial risk. I mean, we become a pretty large OE supplier and with that scale, comes from security in terms of our financial wherewithal. So it's our job to make sure that they understand that we have a supply chain that is able to support every one of our product lines and that they don't have risk in terms of a supply chain side of it. So I feel pretty good at where we're at, and we'll continue to have these discussions and build the relationships with our customer on a go-forward basis. I'm really excited. I think the combination will be able to -- you hear it a lot, but I do think that this can be a win-win for us and our customers as we learn and work with each one of these customers to develop engineered solutions on a go-forward basis. And that's where our focus is going to be.

Got it. And then switching gears. Any signs -- it's been a few years since we've had really a ton of focus on affordability, but just wanted to hear what you're kind of seeing from a trade down standpoint, whether it's in windows or the cabinet side. Any -- has that picked up at all? And can you just remind us how that kind of impacts you on both the spacers front and then in the cabinet's business?

I think on the affordability front, I really think it impacts our cabinet side of the business more than the window side of our business. If you're going to get to the point where you need to replace a window, it's either because it's broken or it's failed or you're trying to reduce your energy cost. I mean the one thing that we are still seeing across the globe is energy cost are not getting cheaper. So there's an opportunity to get a payback by upselling your window and becoming more thermally performant. The cabinet piece of our business, we're very happy with what our team has done operationally. But at the end of the day, it is a little more of a discretionary spend. And as consumer confidence still lags and they tend to be kind of a higher-level purchase that may require some borrowing to redo cabinets. So it's going to be impacted more, in our opinion than the windows. And I think we're seeing that right now.

Great. I'm going to sneak one more in. I know it's a little early for an initial '25 outlook, but just kind of big picture, your revenue guide for the fourth quarter implies some improvement on a year-over-year basis, maybe kind of starting to flatten out? Is it too early to expect that maybe we've turned a corner and growth can resume in '25?

Yes. I mean good question. I'm sure a lot of people are thinking the same thing. And it is too early for us to get in any sort of early look at next year. But I will say that there is -- we feel like there is prospect to return to growth next year. I think that the second half is more -- we're more optimistic about the second half of next year than we are in the first half just because of near-term uncertainty. But yes, I think there's an opportunity for growth.

And the timing of those, I think we saw today that the jobs report came out. It's nothing spectacular, and there's more points starting to lead that the Fed will probably cut rates. So I think here over the next 30 to 60 days, when we see how large of a cut that, that potentially could be and the impact that has on consumer confidence, will give us a better feel kind of December and into the beginning of the calendar year of how strong we're going to believe 2025 is. We think there's an opportunity for it to be a pretty decent year. But there's still noise between the interest rates and the election. Tough year to model.

And our next question comes from Adam Thalhimer from Thompson, Davis.

Congrats on the quarter and closing Tyman early. And given us a full quarter of Tyman, that's pretty cool.

Yes, we plan it perfectly.

Nice and clean. Kind of in line with Reuben's last question. I was wondering if you guys are seeing any green shoots in the EU?

I think consumer confidence has started to show a little more of a bounce back in the U.K. and a little -- not as much yet in Europe. U.K. has been a little more positive than what we've seen in Continental Europe. I think that the Bank of England has been a little more ahead, but their economy has lagged a little longer than the U.S. has. So I think that the U.K. market has suffered a little bit. So I think that there is some -- there's probably more optimism for us in the U.K. than we do see in Continental Europe on a short-term basis.

Got it. Okay. Scott, what was the net debt after the close?

Yes, we haven't -- since it's during our fourth quarter, we haven't disclosed that but it's not -- it's pretty much in line with what we thought it would be.

Okay. And then if I'm doing this correctly, the Q4 tax rate jumps up a little bit to, call it, 24%. Is that right?

Roughly, yes. So yes, 22% for the whole year, so a little higher in Q4.

And is that like a good tax rate to you as going forward?

Pretty close. We'll give more clarity there as we look into next year. But the reason for the uptick a little bit is mainly related to the U.K. patent box, which is for a lower rate that we enjoy as legacy Quanex, which legacy Tyman did not enjoy. So we're trying to do a little work there to help us.

Got it. And then what share count are you using for Q4, not that you gave EPS guidance, but...

Yes, it's roughly $47 million.

Okay. And then do you have any sense for go-forward CapEx for the combined company or thoughts on Q4?

Probably a little too early for that. We've come in and I don't think it will -- if you were to go back and look at the standard run rates of both companies, it will probably be pretty consistent. We're in the process of evaluating all of the current projects that we have in place. So I don't think that there will be anything significantly out of line and as of -- we don't have any plans for any like plant consolidation types of projects that would chew up CapEx. So I think it will be a pretty standard year in terms of spending.

Yes, outside of the 1 project that I think we mentioned in the past is we're expanding in the Southeast. We're opening a new plant in Jackson, Georgia, help follow some of our bigger customers. So that will take a little bit of CapEx next year.

Yes. And that was already [ building doors. ]

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

I would like to thank everyone for joining today. But before we go, I do want to take this opportunity to again welcome all of our new teammates who have joined us as part of the Tyman transaction. And to thank the entire team for all of their hard work during the transaction and now as we move forward together with the integration. We're really excited about the future for Quanex and look forward to updating you all again on our progress. Thank you.

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