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#Thank you.
Good morning, and thank you for joining us for our 2015 fiscal first-quarter conference call.
On the call with me this morning is <UNK> <UNK>, our Chief Financial Officer; and Marty Ketelaar, our Vice President of Treasury and Investor Relations.
Revenue grew in the first quarter by 1.2%, slightly better than our expectations.
When we guided toward a flat first quarter, it was with the expectation that we would see normal market growth in our spacer, screens, and accessory product lines, offset by a contraction in vinyl extrusion sales.
In fact, the screens and accessory product lines performed better than anticipated, driven mainly by continued strength in the South and West.
The contraction in the vinyl business was expected, as a customer utilized a competitor's extrusions for two of their new window designs.
We continue to provide extrusions for the balance of their product portfolio.
In addition, most customers had a reduced inventory build heading into the spring compared to last year.
Going forward, this lost business has already been replaced by new business from other customers, however, because of the timing of the overlap, overall growth rate in our vinyl business, while still positive, will be below industry levels for the balance of the year.
Net-net, though, we're on track for our full-year guidance of 5% to 7%, which is in line with current industry forecasts.
One caveat to our revenue forecast is the translation effect of foreign currency impacting our international spacer business.
If the dollar maintains its current strength against the pound and euro, our revenue growth forecast for FY15 could be negatively impacted by as much as 1.5 percentage points.
Operationally, our vinyl business performed as expected in the first quarter, as the refurbishment project started to gain traction.
We completed the rebuild or refurbishment of 17 lines and began work on a further 36 during the quarter.
Two lines are being relocated from <UNK>tucky to Texas, to support further expansion of that facility, as our southern business continues to grow.
As of January 1, all major customers have contracts that include a resin adjustor tied to CDI.
This will essentially make us neutral on any future price fluctuations in resin and is consistent with our contracts with other raw materials such as [butyl] and aluminum.
While there is still much work to be done in our vinyl operation, the rest of our businesses are performing well, and there is enough early evidence to give us continued confidence that our full-year EBITDA guidance of $57 million to $63 million.
With respect for capital disappointments strategy, we recently completed a $75 million share buyback program, and we will evaluate the merits of a second tranche as the year unfolds.
We continue to look at acquisitions within the fenestration space on an opportunistic basis, but consciously did no further work on adjacencies this quarter.
Progress on how and when we deploy further capital is being carefully weighed against the timing of the recovery in our vinyl business, which remains our number one priority.
I'll now asked <UNK> to cover our first quarter results in more detail.
<UNK>.
Thank you, <UNK>, and good morning to everyone on today's call.
Consolidated first quarter net sales increased slightly more than 1% to $128 million, while first quarter EBITDA decreased $5.1 million to $2.6 million compared to the year-ago quarterly results.
Revenue growth was driven by higher sales in our spacer, screens, and accessory products offset by lower sales in vinyl.
The quarterly comparison of EBITDA was negatively impacted by the one-time $2.8 million warranty reserve credit from the first quarter of 2014.
We also experienced margin compression on our vinyl products due to increased labor associated with the heavy investment being undertaken, and from the lingering compression associated with the price freeze and resin increases experienced in 2014.
As of January 1, 2015, there are no price freezes in place, so any future increases or decreases in resin prices will be passed through.
Quanex's North American fenestration sales for the last 12 months increased 3%, lower than the 6.1% growth rate reported by Ducker for the period ended December 31, as a result of the contraction in vinyl business <UNK> mentioned earlier.
Excluding vinyl products, our other product sales increased by 8% over the past 12 months, outpacing Ducker's growth rate.
We ended the quarter with a cash balance of $64 million and no outstanding borrowings on our revolving credit facility.
The $75 million share repurchase program was completed in mid February, resulting in the repurchase of nearly 4 million shares at an average price of $18.77.
Lastly, we had an unusually high tax rate this quarter.
During the quarter, we reassessed an uncertain tax position that dates back to our 2008 spin resulting in an additional tax benefit generated from our first quarter loss.
Absent any additional adjustments, we would expect our full-year tax rate to remain closer to 34%.
I'll now turn the call back to <UNK>.
Thanks, <UNK>.
As I said, our number one priority continues to be restoring the operating performance of our vinyl business, and I am confident that this is on track.
We are also encouraged that third-party window shipment forecast expectation for 2015 are in a realistic range of 6% to 8%.
As you know, we have long said that this recovery will most likely take the form of four or five years of steady growth in the high-single digit range.
We still believe this and still consider this as a positive and not a negative.
Based on those forecasts and our first quarter performance, we continue to expect our FY15 to have 5% to 7% revenue growth and EBITDA of $57 million to $63 million.
Four or five years from now as window shipments recover to the mid-$60 million range, EBITDA levels will grow to $115 million to $130 million on revenues of $825 million to $875 million, even without any acquisitions.
The first quarter was a small step but nonetheless an important one as it reaffirms that we're on the right track to a much brighter future.
We'll now be happy to take your questions.
Operator.
In reality, there's been no material effect to any of our input costs as a result of the drop in oil prices.
The resin is tied more directly to natural gas prices than it is to oil.
Having said that, resin dropped from its peak level last year by $0.03.
There was a price increase put through by the resin producers, which did not stick, but prices also did not fall any further.
So, they're flat now and are predicted to remain flat for the balance of this quarter and then, in fact, the forecast is they're likely to increase as demand picks up in midsummer.
Yes.
We have had modest price increases, I would say, pretty much across the board on all product lines, not significant, but certainly a step in the right direction.
For the most part, we have not had price increases for a couple of years now.
Towards the back end of last year, we put some increases through successfully.
As I say, they were modest and I think in line with what's happening throughout the building products industry.
I think most people are generally getting some form of price realization, including our customers.
Clearly, February has been slower than we had originally anticipated, not to the point that we are concerned about it.
It is clearly tied to weather.
As you know, particularly in the Northeast, and to a certain extent the Midwest, weather really impacted, for the first time I think this winter, in reality.
So, we've seen some softness, particularly in those regions.
Absent the recent ice storms in the Southeast, the South and West have still been pretty robust, generally speaking.
I think it's fair to say that, as we sit here today, we would say four months into our year, it's turning out to be pretty much as we expected, both from a demand standpoint and from an operational standpoint.
We completed work on 17 in the first quarter.
We started work on a further 36.
Two lines are in the process of moving from <UNK>tucky to Texas to support a continued expansion of that operation.
We are about where we expected to be.
The intent was to get as much of this completed as we possibly could during the slow period through the winter here.
And, we're on track with the original plan, pretty much across the board, A, in terms of progress and, B, in terms of some of the early results.
<UNK>'s going to cover some details on this, but generally speaking, it's the comparison that hurt more than anything else.
Because of the way our fiscal year overlaps the calendar year, we had two months in the prior quarter where we didn't have the resin freeze issue, and two months in this quarter where it was still in place.
So, that comparison clearly hurt us.
On the SG&A side, it was a positive because, during that period, we still had the residual SG&A cost of the ERP program and its associated restructuring costs.
Yes, in looking at the remaining balance, we did have the $2.8 million warranty benefit that took place last year.
Absent that, then, it's about, when we're looking at the vinyl products, I call it half and half between what is the resin increase freeze issue and then half with some higher labor cost as we go through and touch all these lines, that we expect to come down to more normal levels as we progress through the year.
We bought ---+ it was just under 4 million shares ---+ 3,992,000 shares at $75 million.
We haven't talked about it from an actual percentage level, but clearly, where we sit here in the first quarter, this would be a more difficult.
When you look at how this quarter unfolded versus last quarter, last first quarter was a very strong winter quarter.
It was one of our best ever, quite frankly.
As we progress and we finish the projects that <UNK> talked about on the vinyl line, our labor cost should come back into line.
And, we will see some improvements from some of the price increases that <UNK> talked about.
So, we would expect to see some margin improvement quarter over quarter as we progress through the year.
<UNK>, let me just reiterate.
There were no surprises in the first quarter, operationally.
We're where we expected to be ---+ in fact, actually, volumes were a little better than we anticipated ---+ and all of this has been factored into our guidance.
Exactly.
I think that's fair.
It has the benefit on both labor costs, and repair and maintenance, as we move forward.
Yes.
There's a couple of reasons.
One is, as you know, historically, because of the way our fiscal year unfolds, at this point in the year, it's always very difficult to predict how the year is going to unfold.
By the time we get through our second quarter, at the end of May, the picture is much, much clearer.
So, from a cash standpoint, we'll have much greater clarity on where the recovery in our vinyl business stands.
We'll have much greater clarity on the early stages of the construction season ---+ is it going to be as predicted, stronger or weaker.
And, as I said in my comments, we continue to work on some opportunities within our fenestration space.
So, there's a lot of moving parts.
We did not work on adjacencies primarily because that's a bigger step and there was no point in advancing that too far until we're more certain of where the vinyl business will end up and until we exhaust some other possibilities.
So, a long-winded answer, I realize, but there are good reasons for us to wait, at least for another quarter, before we decide on whether there's a potential deal to be had in the fenestration space, whether there's another tranche of share buybacks, or whether we just stand pat.
But, all of those are being actively discussed with our Board.
So, it's not as though it's been forgotten.
Yes.
What was encouraging to us, is both Ducker and Hanley Wood ---+ first of all, their data points are beginning to converge.
They're both in the same ZIP Code now, in terms of R&R, new construction, and both of them have, for them, conservative forecasts for 2015 ---+ one's at 6.6%; the other is at 8.1%, in terms of year-over-year growth in window shipments.
Now, if you look at housing starts in some of the predictions for R&R, you would expect a much higher growth rate in window shipments.
So, our belief is they're closer to the truth than some of the early prognostications, and that's in line with our thinking as well.
Now, if housing starts really are going to approach 20% this year, which I know some of the early forecasts call for, and there are some people talking about a significant uplift in R&R this year, which I know they've seen in cabinets and appliances and so on.
Depot and Lowe's had very strong early indications.
We're still not really seeing that in windows yet.
But, if that happens, we could see a stronger second half of the year than we're expecting.
But, I think right now, we are confident that the prudent level of 6% to 8% for window shipments, 5% to 7% all-in for our revenue, that's where we're comfortable right now.
I think the only thing we can say definitively is that we have certain customers that clearly are outperforming the market in the R&R space.
We have not seen a general positive significant increase in R&R, but the reality is, as we've tried to articulate before, we truly do not know where our product ends up.
We can make some educated guesses, and the very high end of our product range accounts for about 25% of our total shipments.
Our view is, that primarily goes to R&R, but I also believe ---+ and this may be reflected somewhat in Home Depot's and Lowe's numbers ---+ I think the days of a complete replacement of a house full of windows, which I think historically utilized home equity loans to finance that, those days and those opportunities may be somewhat limited.
We believe more and more we're going to see replacement of windows on a room-by-room basis, on a window-by-window basis, and potentially at a lower price point window, such that you would buy it in Home Depot and Lowe's, and have them maybe install it, rather than what we saw in the last boom which was this complete replacement.
So, I think the market's changed, and it becomes more difficult to be able to ascertain does any component go into a window that's going to end up in R&R.
Does it end up in new construction.
Much more difficult to track now.
It's about a third.
Order of magnitude.
We don't disclose or track ---+ we don't disclose, publicly, the profitability on each of our product lines for obvious reasons.
No, that's correct.
We expect the full year in the range of 34%.
Generally, yes.
First of all, let me be clear.
We have never disclosed the profitability of our product lines, and we did not say, at any point in time, that our spacer business is more profitable than any other lines.
Now, that said, the strategic fit of the products is simply this.
Our customer base are the window assemblers and manufacturers.
And, those three are three of the major components that go into window assembly.
The two other major components that we do not manufacture are hardware for windows and, obviously, the glass.
There is still a continued opportunity to cross-sell those products to existing customers.
So, while we sell almost every single window manufacturer in the United States one component, at least, we don't necessarily sell all of them all components.
So, there is a continued opportunity there that we are working on very hard with some success.
It is actually easier to take our existing customer base and potentially sell them screens and accessories.
And we've had some early success in that arena.
Harder to convert vinyl and spacer because of the capital investment required.
It is a continued opportunity for us to cross-sell, and that's why they all fit together.
And, from an acquisition standpoint, we've talked in the past, a hardware business would make an awful lot of sense for us because same customer buys that hardware, just buys it from a different vendor.
Thank you, everyone, for joining us today on today's call.
We look forward to updating you on our second-quarter results in early June, when, as I said earlier, we'll have a much clearer picture of how the year is shaping up.
I look forward to seeing many of you in person as the conference season kicks off.
Thank you, and goodbye.
