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#Thanks for joining the call this morning.
On the call with me today is Bill <UNK>, our <UNK>hairman, President and <UNK>hief Executive Officer; <UNK> <UNK>, our <UNK>hief Financial Officer; and George Wilson, our <UNK>hief Operating Officer.
This conference call will contain forward-looking statements and some discussion of non-GAAP measures.
For a 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 <UNK> to discuss the financial results.
Thank you, <UNK>.
I'll begin with the income statement, followed by comments on the balance sheet and cash flow.
We generated net sales of $191.7 million during the first quarter of 2018 compared to $195.1 million for the first quarter of 2017.
We experienced solid underlying growth in our North American and European Engineered Products segments that was offset by the portfolio rationalization and divestiture actions we completed in 2017.
As you are all aware, the Tax <UNK>uts and Jobs Act was enacted on December 22, 2017.
As such, we realized a $6.5 million or $0.19 per diluted share net tax benefit during the first quarter of 2018.
The Tax <UNK>uts and Jobs Act\xa0reduces the federal corporate tax rate on U.S. earnings to 21% and moves from a global taxation regime to a modified territorial regime.
The lower tax rate will be phased in over 2 years since we have an October 31 fiscal year-end.
Including the net tax benefit realized in the first quarter of 2018, we estimate that our effective tax rate for fiscal 2018 will be approximately 9%, or approximately 24% excluding the net tax benefit.
We will continue to evaluate the impact of the tax reform through the remainder of fiscal 2018.
We reported net income of $4.9 million or $0.14 per diluted share for the 3 months ended January 31, 2018, compared to a net loss of $3.7 million or $0.11 per diluted share during the same period of 2017.
On an adjusted basis, we had a net loss of $1.5 million or $0.04 per diluted share during the first quarter of 2018 compared to a net loss of $1.4 million or $0.04 per diluted share during the first quarter of 2017.
The adjustments being made for EPS are as follows: acquisition-related transaction costs; purchase price inventory step-up recognition; restructuring charges related to the previously announced closure of several manufacturing plants; accelerated depreciation and amortization for equipment and intangible assets related to these facility consolidations; foreign currency impacts primarily related to an intercompany note with HL Plastics; and the net tax benefit related to the Tax <UNK>uts and Jobs Act.
On an adjusted basis, EBITDA increased to $13.2 million in the first quarter 2018 compared to $13 million in the first quarter of last year.
The increase in reported earnings was largely attributable to lower stock-based compensation expense and the previously referenced tax benefit related to the Tax <UNK>uts and Jobs Act.
The lower stock-based compensation expense was mostly the result of moving away from stock options into restricted stock performance units for a portion of our long-term incentive compensation.
Moving on to the balance sheet and cash flow.
<UNK>ash provided by operating activities was $8.2 million for the 3 months ended January 31, 2018, compared to $3.1 million for the 3 months ended January 31, 2017.
We generated free cash flow of $381,000 during the first quarter of 2018 versus a negative $5.1 million during the first quarter of 2017.
And we were able to repay a little more than $4 million of bank debt during the quarter of the year that we have historically been a net the borrower due to the typical seasonality of our business.
We now expect to generate approximately $50 million to $55 million of free cash flow in fiscal 2018 compared to our prior estimate of approximately $50 million.
The increase is mainly a result of tax reform.
As of January 31, 2018, our leverage ratio was unchanged at 2.3x.
We remain focused on generating cash and deleveraging the balance sheet, and our expectation to end fiscal 2018 with a leverage ratio below 2x has not changed.
We do expect to take advantage of the recent changes in the tax laws and plan to repatriate approximately $3 million to $5 million in foreign cash during the second quarter, which will be used to further reduce our bank debt balance.
I will now turn the call over to Bill.
Thanks, <UNK>.
Our first quarter revenues were right on top of our expectations, led by another strong performance in our European Engineered <UNK>omponents segment where year-over-year growth was 5.4%, excluding eliminated products and after adjusting for FX.
Similarly, the U.S. fenestration piece of our North American Engineered <UNK>omponents segment grew at 4.4%, surpassing the latest Ducker estimate for the calendar fourth quarter of 2017.
This was especially strong as it included a 5% contraction in our U.S. vinyl profiles business due to some isolated customer operational issues and inventory adjustments.
Our spacer, screens and accessories business grew at high single-digit rates throughout the quarter.
The Kitchen <UNK>abinet Manufacturers Association indicated that growth rates for the semi-custom segment of the market for our fiscal quarter was a tepid 3.9% and flat for the stock segment.
Excluding eliminated products, revenues in our North American <UNK>abinet <UNK>omponents segment were flat year-over-year, mainly due to a product mix shift to entry-level, lower price point and lower-margin cabinets.
This mix shift plus inflationary cost pressures impacted margins in this segment by approximately $3 million.
Of this amount, $800,000 was related to mix and $1.5 million was labor, benefits and material inflation not covered by contractual pass-throughs.
A further $700,000 was a timing issue related to a policy change on vacation accruals that will balance out as we move through the year.
It's unfortunate that these inflationary headwinds masked productivity improvements of close to $1 million as we begin to see traction on many of the initiatives underway in this business.
We have completed a re-layout at one of our smaller plants, 2 other re-layouts are in the process, and we have just begun one in one of our larger plants.
We still expect significant margin expansion in the second half of this year in this segment.
Our longer-term expectation of achieving 15% EBITDA margins in this business before corporate allocations is unchanged.
Our fenestration businesses both in the U.S. and in Europe also faced significant material cost pressure during the quarter, mostly in chemicals and mostly as a result of supply constraints after Hurricane Harvey.
The inflationary costs not covered by contractual pass-throughs amounted to $1 million in North America and $900,000 in Europe.
Silicon and TiO2 continued to be the biggest challenges as both are in short supply and both are experiencing double-digit price increases.
Actions are already underway across all of our business units to offset these inflationary costs, but realistically, we will continue to play catch-up in Q2 and then see the full benefits in the second half of the year.
<UNK>overing these costs, combined with solid revenue growth across most of our businesses, plus underlying productivity improvements in our <UNK>abinet <UNK>omponents segment, give us confidence in reaffirming our original guidance for the year of $890 million to $900 million in revenues and adjusted EBITDA of $103 million to $108 million.
Free cash flow in the quarter was positive, as <UNK> said earlier, allowing us to repay a small amount of bank debt at a time when we typically have to borrow.
Full year free cash flow is now expected to be in the range of $50 million to $55 million, which should allow us to comfortably exit the year below 2x leverage and perhaps even as early as Q3.
There is no change to our stated strategy of improving operating margins, generating free cash flow and deleveraging.
Operator, we're now ready to take questions.
So I think with respect to the Ply Gem/Atrium deal, both are customers.
We don't sell extrusions to Ply Gem.
We do sell extrusions to Atrium.
At this point, we've been told by both organizations, it's business as usual.
At this point, I'm not sure I would expect to see any changes as it relates to our supply to them.
Of course, after that deal actually gets consummated and they get their arms around it, that could change as we get into the latter part of the year.
But at this point, I would say it's business as usual.
We don't expect to see any changes, neither good nor bad, frankly, with any of our products sold to those 2 companies.
Yes, I think as we've said before, new construction, which clearly is slowing down in the U.K., is not a big part of our business.
It is mostly R&R.
And up until recent times, it has not been as price-sensitive as other segments of the market.
I think clearly, in Europe, capital goods are slowing down.
But if you've got to replace a window, you've got to replace a window.
Now having said that, because there have been significant increases in resin costs in Europe, more so than even in North America, and as we stated, some of the other chemicals that go into that mix, we've passed on price increases, the rest of the industry has passed on price increases and we are getting to the point where we're not going to see sustained high growth rates.
I don't think it's going to go negative, but I think we'll see growth rates slow down somewhat, and it is going to be more difficult to pass some of these increases through, particularly in Europe where price points are so high.
I think generally speaking, without being too specific, it will be a challenge to get margin expansion in Europe this year, but I would not expect to see significant contraction.
In North American Engineered <UNK>omponents, again, significant margin expansion could be a challenge, but I would expect them to be closer to flat.
We do expect margin expansion in the <UNK>abinet <UNK>omponents segment.
It'll be a challenge to get expansion in Q2 but definitely in Q3 and Q4.
Yes, I think ---+ well, in Europe, it's going to be tough because we've had a number of price increases in the past year in Europe.
That's not been the case in North America.
And as we've said before, it's definitely a challenge with our customer base here in North America, but becomes somewhat easier when you're trying to cover highly publicized inflationary costs.
And that's what this is about, hence, our confidence level is much higher.
So the first part of the question, because of the way hardwood prices have increased and because of the way some of our customer contracts are structured, we did find ourselves in a position this quarter where there were a few hundred thousand dollars of material costs that did not get passed through, and it's kind of that inflection point issue and a color issue with some of our contracts.
That ---+ if prices stabilize and start to fall, that'll correct itself.
If they continue to increase at a steady rate, that may not correct itself without some further discussions with said customers.
So that was part of it.
Part of the increase is we transferred the Woodcraft employees to the Quanex benefit plan and the Quanex 401(k) plan, which is something we had to do this year, knew it was coming, and that increased their labor costs by a material amount that we still expect to recover as we go through the year here.
But that was the bulk of it.
Yes, I mean, the full year impact of ---+ the move from options to RSUs is kind of in the $1.5 million range.
And in terms of overall corporate, some inflationary increases offset by that benefit moving from the options to the performance restricted stock units.
That's a safe assumption, yes.
That's how we tried to present it, is think of it as a 24% run rate.
Actually, that's not quite the case.
It wasn't Woodcraft.
That ---+ the cross-selling initiatives really relate to North American fenestration.
And frankly, that's one of the reasons why the screens, spacer and accessories business is growing at a faster rate than market as those cross-selling initiatives start paying off.
We're obviously utilizing our strong contacts at some customers to get increased outsourced screen business, which is the easiest product for a customer to outsource, particularly in light of tight labor markets.
It's easy for them to outsource that product line to someone like us and then utilize that labor for other things.
And then the spacer business, the cross-selling initiative there was the development of the high-speed lines, which are going in steadily across the board, limited somewhat by the ability of equipment manufacturers to supply those lines.
There's nothing baked into 2018, and we continue to make progress.
There's a very slow sell-in cycle.
And because of the sensitivity of some of those discussions, we're not going to comment specifically.
But at this point, there is nothing baked into '18's numbers.
Yes.
There were 4 big projects underway that effectively re-layout 4 separate facilities such that we can reduce the number of touch points.
So the product literally will start at one end of the factory and flow with some semblance of order through various machine cells and come out the back end without a lot of material handling, a reduction in work-in-process inventory and a much more efficient and balanced flow.
That was completed in Q1 in 1 facility.
We have 2 other small facilities where the work is still in progress and will be completed in Q2.
And then our largest facility is really just starting, and will take all of the second quarter and into the early part of Q3 before that is completed.
And that's a pretty significant project in and of itself.
We're seeing benefits already from that.
That's where a lot of the productivity gains came from, even though it was disguised by inflationary costs.
So ---+ and that's one of the biggest reasons we have a high degree of confidence in the second half of the year picking up some significant margin improvement.
We were ---+ we got everything done that we had planned to do.
It's unfortunate that we couldn't kick off the big project sooner, so that's actually going to run through a busy period for us, which is not ideal, but it was held up because we needed some new equipment for a separate facility that needed to be installed before we could move some from 1 factory to another.
And then it was just a domino effect.
So the whole program got delayed for that reason, but we will manage through it in the quarter here.
Yes.
We do see that as a continuing market trend, and we're evaluating margins and evaluating how those product lines are manufactured and balanced in the factory.
At this point, we do not expect it to change our expectation of our 15% EBITDA margins in that business before corporate allocations.
We don't expect that to change going forward.
No.
I mean, really, we have about $10 million of cash.
So not a huge number that's outside of the U.S. So our intent is to keep the safety net of cash there so we're not constantly moving back and forth and creating a lot of administration there.
So we'll bring back what we feel is a safe amount here in the second quarter.
And then under the new Tax Act, we can begin to take cash on a regular basis instead of accumulating.
The good news is our tax strategy with HL, our most recent acquisition, unwinds itself in 2018 naturally with this intercompany note, so the timing was good for us.
The first question I had, just thinking about the business rationalization last year and the comps as we go forward this year.
When should we have fully lapped that and when should especially North America you think maybe the sales comps turn positive.
Yes, we should see more direct comps in Q2 for sure in the second half of the year.
There was still a fair amount of overlap in Q1, though.
And then the second question I had, just kind of building on what was asked earlier.
If oil prices ---+ oil and other inputs continue to move higher, are there some other businesses that you guys might be thinking about exiting or walking away from just because you can't raise prices fast enough to make up for the material cost inflation.
No.
I don\
Thanks, everyone, for joining us today, particularly as some of you, I think, are suffered from some inclement weather.
And we look forward to talking to you next quarter.
Thank you.
