Participants

Scott Zuehlke; Senior Vice President, Chief Financial Officer, Treasurer; Quanex Building Products Corp

George Wilson; Chairman of the Board, President, Chief Executive Officer; Quanex Building Products Corp

Reuben Garner; Analyst; The Benchmark Company, LLC

Steven Ramsey; Analyst; Thompson Research Group

Adam Thalhimer; Analyst; Thompson Davis & Co.

Justin Mechetti; Analyst; Sidoti & Company, LLC

Presentation

Operator

Good day, and thank you for standing by. Welcome to the first quarter 2025 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 first speaker today, Scott Zuehlke, Senior Vice President, CFO and Treasurer. Please go ahead.

Scott Zuehlke

Thanks for joining the call this morning. On the call with me today is George Wilson, our Chairman, 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.

George Wilson

Thanks, Scott, and good morning to everyone joining the call.
Before I begin my commentary, I want to take a moment to acknowledge Curt Stevens for his many years of dedicated service on the Quanex Board of Directors. Curt's expertise in the building products space, combined with his financial background, added immense value to our Board. His leadership in chairing the Audit Committee for many years has been instrumental to our business. On behalf of the entire Quanex team, I want to thank Curt for his service and wish him all the best in his retirement.
Turning to the first fiscal quarter of 2025. Our results aligned with expectations despite significant macroeconomic uncertainties and the challenging winter weather environment in the US. Year-over-year improvements in both revenue and earnings were largely driven by the contributions related to the acquisition of Tyman.
Since the acquisition closed last August, our focus has been on integrating the 2 companies. Our primary objectives are to achieve or exceed the expected financial synergies from the transaction and to establish an organizational structure that both supports our current business and provides a scalable platform for future growth.
From a synergy perspective, I'm pleased with the progress our team has made and remain confident we will meet our publicly announced target of $30 million in run rate synergies by the end of year two. We are also working diligently to identify additional synergies and explore opportunities to accelerate their realization. We look forward to providing a more detailed update during our second quarter call.
Regarding organizational design and as outlined in our recent investor presentation, we will be resegmenting our business into three new units: Hardware Solutions, Extruded Solutions and Custom Solutions. Each of these segments will have a global scope and is designed to better serve our existing customers, support new product development, explore adjacent markets and drive margin improvement through operational excellence and the sharing of best practices.
This change will involve significant work from a public reporting perspective, and our team is focused on ensuring that we can report results in these new segments as soon as practical later this year. Looking at the markets, as I mentioned earlier, our first quarter results were in line with expectations. We have returned to our typical seasonal order cadence with a relatively softer Q1 due to holidays and weather.
Outside of this normal seasonality, demand has been impacted by uncertainties surrounding future Fed interest rate movements and week-to-week changes regarding potential tariffs. We believe both factors have negatively affected consumer confidence.
Likewise, conversations with our customers reflect the general sentiment of caution regarding new projects. However, the benefit to Quanex is that we have proven our ability to respond quickly to changes in demand, both up and down.
As for tariffs, the situation remains fluid and unpredictable. However, we are confident that the efforts of our supply chain team over the past three years have positioned us to localize supply in most cases, which we believe will minimize the potential impact on Quanex and our customers. Where tariffs do apply, we are actively engaging with customers on pricing mechanisms and exploring continuous operational improvements to offset their impact.
These efforts, combined with our synergy progress gives us confidence in reaffirming our full year earnings guidance. Operationally, I'm very pleased with our performance and the improvements we've already seen as part of the integration process.
We achieved record safety performance in the first quarter, along with improvements in service and quality metrics. These gains are the results of sharing best practices between the legacy Quanex and Tyman teams as well as the benefit of migrating to our new operating segments. Moving forward, our operational focus will remain on safety culture, employee engagement, working capital improvements, and optimizing return on net assets to maximize our cash flow generation.
Regarding the use of cash flow to generate the best shareholder returns, we will focus on paying down debt and repurchasing our stock in an opportunistic manner. So in summary, while short-term market headwinds persist, the Quanex team continues to perform well and the anticipated benefits of the Tyman acquisition are coming to fruition as we expected.
We look forward to continuing our integration efforts and providing updates on our progress throughout the year. I'll now turn the call over to Scott, who will discuss our financial results in more detail.

Scott Zuehlke

Thanks, George. On a consolidated basis, we reported net sales of $400 million during the first quarter of 2025, which represents an increase of approximately 67% compared to $239.2 million for the same period of 2024. The increase was primarily driven by the contribution from the Tyman acquisition that closed on August 1, 2024.
Excluding the Tyman contribution, net sales would have declined by 6.2% for the first quarter of 2025, largely due to lower volume. We reported a net loss of $14.9 million or $0.32 per diluted share during the three months ended January 31, 2025, compared to net income of $6.2 million or $0.19 per diluted share during the three months ended January 31, 2024.
On an adjusted basis, net income was $9 million or $0.19 per diluted share during the first quarter of 2025 compared to $8.4 million or $0.25 per diluted share during the first quarter of 2024. The adjustments being made to EPS are as follows: amortization of step-up for purchase price adjustments on inventory, transaction advisory fees and reorg costs, restructuring charges related to severance and disposal of software, amortization expense related to intangible assets and a pension settlement refund and other net adjustments related to foreign currency transaction gain loss and effective tax rates.
On an adjusted basis, EBITDA for the quarter essentially doubled to $38.5 million compared to $19.3 million during the same period of last year. This equates to adjusted EBITDA margin expansion of approximately 150 basis points year over year. The increase in adjusted earnings for the three months ended January 31, 2025, was mostly attributable to the contribution from the Tyman acquisition, combined with the realization of cost synergies.
Now for the results by operating segment. We generated net sales of $134.3 million in our North American Fenestration segment for the first quarter of 2025, a decrease of 9.2% compared to $148 million in the first quarter of 2024. We estimate that volumes in this segment declined by approximately 8% year-over-year with pricing up approximately 1% versus Q1 of 2024.
Adjusted EBITDA was $11.6 million in this segment for the first quarter compared to $13.7 million in the first quarter of 2024. Our European Fenestration segment generated revenue of $48.5 million in the first quarter, which represents a decrease of 2% compared to $49.4 million in the first quarter of 2024.
However, after adjusting for foreign currency, revenue was basically flat. We estimate that volumes were down approximately 1% year-over-year in this segment for the quarter with pricing up approximately 1% and a negative foreign exchange translation impact of about 2%.
Adjusted EBITDA declined slightly to $9.9 million in this segment for the quarter versus $10 million during the same period of last year. This means that adjusted EBITDA margin improved by 30 basis points year-over-year in this segment. We reported net sales of $43.8 million in our North American Cabinet Components segment during the quarter, which represented growth of 1.6% compared to prior year. We estimate that volumes declined by approximately 3% and price increased by approximately 5% in this segment for the quarter. This price movement was largely related to index pricing tied to hardwood costs.
Adjusted EBITDA was negative $873,000 in this segment for the quarter, which compared to negative $732,000 for the first quarter of 2024. Decreased operating leverage due to soft volume was the reason for the lower profitability in this segment. Tyman business reported net sales of $175.7 million for the first quarter of 2025.
Since we didn't own this business in the first quarter of 2024, there is no comp in the earnings release. However, revenue was down approximately 8% in this segment in the first quarter of 2025 compared to the first quarter of 2024, mostly due to soft market demand, which is consistent with what we saw in the legacy Quanex business.
Adjusted EBITDA came in at $19 million for the quarter, which yielded margin expansion compared to Q1 of 2024, driven largely by cost synergies related to closing Tyman's legacy home office in London. Moving on to the cash flow and the balance sheet. Cash used for operating activities was $12.5 million for the first quarter of 2025, which compares to cash provided by operating activities of $3.8 million for the first quarter of 2024.
The first quarter was impacted by layering in the Tyman acquisition as the legacy Tyman business is very much make to stock versus legacy Quanex business is very much make to order. Free cash flow was negative for the quarter, which isn't abnormal due to the seasonality of our business, combined with one time items related to integration costs and achieving the cost synergies we've targeted.
As a reminder, to acquire Tyman in August 2024, we borrowed a total of $770 million through a $500 million term loan A and drawing $270 million on our revolver. Since that time, we've been able to repay $65 million in debt. As of January 31, 2025, the leverage ratio for our quarterly debt compliance was 2.2x.
The debt covenant leverage ratio is defined in amendment number one to our second amended and restated credit agreement, which was filed with the SEC on June 12, 2024. This debt covenant leverage ratio excludes real estate leases that are considered finance leases under US GAAP and is calculated on a pro forma basis to include last 12 months adjusted EBITDA from the Tyman acquisition, $30 million of EBITDA for the synergy target related to the acquisition and cash only from domestic subsidiaries.
The debt covenant leverage ratio would be 2.1 times if calculated using the full cash and cash equivalents amount on the balance sheet as of January 31, 2025. As noted in our earnings release, based on year-to-date results, combined with our operational execution, conversations with our customers, recent demand trends, and the latest macro data, we are reaffirming net sales guidance of approximately $1.84 billion to $1.86 billion and adjusted EBITDA guidance of $270 million to $280 million for fiscal 2025.
From a cadence perspective, on a consolidated basis for the second quarter of this year versus the first quarter of this year, we expect revenue to be up 9% to 11%, and we expect adjusted EBITDA margin expansion of 350 to 400 basis points. Operator, we are now ready to take questions.

Question and Answer Session

Operator

(Operator Instructions) Reuben Garner, Benchmark.

Reuben Garner

I was hoping you could talk about the progression of margins you're expecting for the rest of the year. And specifically, Scott, on the gross line, the last two quarters kind of in the low to mid-20s range and the guide for the year is, I believe, closer to 29%. So a pretty big step-up coming. Is that just seasonality and timing? Can you just kind of walk us through the components to get there?

George Wilson

Yes, that has everything to do with the PPA step-up related to the acquisition, which hit in 4Q and ran off in 1Q. So the rest of the year, gross margin should be jumping up meaningfully to hit that full year guidance, improving each quarter.

Reuben Garner

Okay. And then can you talk about the divergence you're seeing in the kind of growth rates between the cabinets business and the fenestration business in North America kind of went opposite directions in the quarter? Does that tell us that -- how big of a role weather might be playing or any other kind of factors going on?

Scott Zuehlke

Well, I think the weather had a big piece to play in it, especially with the window and door market. A much harsher winter in most of the country, I think, did have an impact on demand in our fiscal Q1. And that's why you saw a little better performance in terms of volumes in the cabinet side of the business.
I also think what we have seen is that cabinet segment had been hit harder sooner, and that's kind of been a leading indicator. And we always see the cabinets drop faster and sooner than the window and door markets, and they tend to lead on the improvements in those segments as well. So nothing that we haven't anticipated or expected.

Reuben Garner

Okay. I'm going to sneak one more in, kind of a big picture question about your confidence level in your outlook. And I guess just maybe the change in tone now versus a month ago? Are you feeling less confident in the market? And then just remind us how much market really needs to help to get you to this kind of full year guidance type numbers because it seems like you would need an improvement in the end market, at least to get to the top line outlook.

Scott Zuehlke

Yes. I think it goes back to what we said in the fourth quarter. I think some people were surprised on our call or question maybe our conservative approach. But I think we've had a realistic view of this year from day 1 and nothing has changed to that. So for us, yes, the back half of the year shows some improvement, but that's really based off of what we currently see and the normal seasonality of our business.
So we feel really good about where we're at in terms of our projections. In addition, I feel extremely confident about the work that we're doing with synergies. So I think we feel very comfortable with both the revenue and our earnings guidance for the full year based on those items.

Operator

Steven Ramsey, Thompson Research Group.

Steven Ramsey

I wanted to maybe ask a follow on question to the guidance outlook and kind of the second half improvement that's part of that. I guess, first, you need that second half improvement to get to that full year level. Is there certain segments maybe that are greater drivers to get there? And then maybe secondly, just high level, your full year outlook maybe seems more optimistic on an order of magnitude basis maybe than the window and cabinet producers that have shared their outlook. So maybe I'm curious on those two fronts, how you think about those things.

George Wilson

Yes. I mean, in general, what I would say is the way we forecast the business from a low watermark in 1Q to high in 3Q and 4Q is just typical seasonality. There's nothing different that we're expecting this year than any other normalized seasonal -- seasonality for this year. So that's what gives us some confidence that we will see an uptick in the second half just because of seasonality. Anything above that would be in addition to what we've already forecasted.

Scott Zuehlke

And I think to reiterate my answer to Reuben as well, I think we were more conservative when we came out with guidance in the December year-end conference call than most people were. So I think our approach in December was to be very realistic about what we thought and we anticipated, and we were probably a little more conservative than others in our view of this year. And I think that that's coming to fruition. So for us, it's nothing that we didn't anticipate. And to answer your other question, Steven, I think in terms of the segments, I think we see more seasonality in the window and doors than we do in cabinets.
So I think we will tend to see more of a pickup from the [timing] piece of our business and what we would consider our NAF segment versus the European business, which is less seasonal and our cabinet business, which has a different seasonality.

George Wilson

Yes. Just one more couple of data points that we went over in the Investor Day, but it's probably important to reiterate. If you look at the five-year average for free cash flow and adjusted EBITDA, we typically generate about 10% of our free cash flow in the first half with the remaining 90% in the second half and then about 40% of adjusted EBITDA in the first half with 60% in the second half, rough numbers. I mean it just shows you how seasonal our business really is.

Steven Ramsey

Okay. That's great color. Maybe to continue the cash flow and cash flow usage topic, your debt paydown aggressive and working nicely. You repurchased some stock in the quarter as well. I'm curious how you think about putting capital to work on each of those paths through FY25.
I get you're opportunistic but maybe share some of your nuanced perspective on how you're choosing to deploy capital into those two areas.

Scott Zuehlke

Yes. We obviously analyze it every day, every week as we go on. Just being very direct here that I would think where we're trading at today, we feel like directing a large portion of our cash flow to repurchasing our stock at these levels absolutely becomes a priority. So I think a lot of it depends on the market. We do not have any sort of 10b program.
So we have limited time to be in the market. But at these levels, I would say that the priority will probably be share buyback versus debt repayment and depending on cash flow, we'll evaluate that each and every week.

Steven Ramsey

All right. And then last quick one for me. Good to hear that the synergy target and time line is intact, and you said that you would have more details on the next call. But maybe just high level, thinking about the 3 new segments that you will have, is any one of those maybe an outsized beneficiary of the synergies you execute on? Or another way of asking, do any of the three segments -- new segments have better margin expansion potential over the next couple of years?

Scott Zuehlke

We broke down our synergies really into three buckets. You had the corporate costs, which really don't benefit any sort of segment. That will be applied equally over all the segments on an allocated basis. You had the headcounts in, that was primarily North American, the overlap between our North American businesses between Tyman and Quanex were very similar. So that will be probably a little more weighted towards hardware versus -- and some to the extruded solutions.
And then finally, sourcing, which will be equally applied. So maybe a little heavily -- heavier weighted towards hardware and then to extruded. Probably a pretty good summary would be broken down by how our revenue will be split, which was identified in that investor deck.

Operator

(Operator Instructions) Adam Thalhimer, Thompson, Davis.

Adam Thalhimer

If you did see an impact from tariffs, which segment would that impact mostly?

George Wilson

As we look at the commodity breakdown, what I would say in our new segments, it will probably impact the hardware business and a little more direct because of their metal buys in the aluminum. But again, we're protected with some of the index pricing mechanisms that we have here in the U.S. and surcharges. The wood, again, hardwood index. So I think it will be balanced across all 3, but maybe a little more heavily weighted to hardware.

Adam Thalhimer

Okay. And then, George, I was hoping you could give a little more color just on the conversations with customers and kind of their macro outlook.

George Wilson

Yes. All the conversations tend to focus around consumer confidence. And it goes back to the macro question. There's a lot of noise in the media, the tariff and that changes on an everyday basis. And so there's unknowns on what the future cost to the end consumers are going to be in both repair and remodel and new build type of projects.
So I think our customers are apprehensive because there's not a lot of good visibility in what's going on, and there's really no good visibility on what the Fed is going to do nor is there a strong visibility on where the tariffs will shake out. So I think customers are cautious and kind of on hold mode in terms of where they're going to go. And again, as we said in our script and has been proven over the last few years. From a Quanex perspective, our model is built to ramp up or ramp down fairly quick. So we feel good about where we're at and that we'll be able to adjust well.
But until some of the tariff items and consumer confidence rebounds a little bit, I think, again, it's going to be a bumpy year as we originally anticipated and built into our guidance back in December. So again, we're not seeing anything that we didn't anticipate, but it's coming to fruition.

Adam Thalhimer

Got it. And then when does the buyback window open?

Scott Zuehlke

Two days after -- three days after earnings, so I think Thursday this week.

Operator

(Operator Instructions) Justin Mechetti, Sidoti & Company.

Justin Mechetti

This is Justin on for Julio. So in the first quarter, the Tyman adjusted EBITDA margin of 10.8% when compared to the strong European segment margin seems a bit low. Anything notable to help us understand the difference between the 2? And can you give us a refresher on Tyman's historical seasonality?

George Wilson

Yes, very similar to our historical seasonality. You have to keep in mind that about 60% to 70% of Tyman is North American focused, which was one of the appeals of when we acquired them. So it's not a direct read-through to our European Fenestration segment.

Justin Mechetti

And then the Jackson, Georgia facility was highlighted during your Investor Day. Beyond increasing regional capacity, how does this facility strengthen your competitive position in the Southeast? And what unique advantages do you expect it to bring?

George Wilson

So the decision to open the Jackson facility was based, one, on being able to serve our regional customers. It absolutely capitalizes and protects our customers from freight costs to be able to serve that region. Two, it gives us an opportunity to add some additional capacity for our mixing and our compounding type of business, which will allow us to continue to grow in adjacent markets such as flashing tapes and solar products. So it was a strategic decision on numerous fronts, and we look forward to being able to deliver that. It was a long-term look for that project, and we're excited about what it can potentially deliver.

Operator

Thank you. I'm showing no further questions at this time. I would now like to hand it back to George Wilson for closing remarks.

George Wilson

I'd like to thank everyone for joining today, and we look forward to providing you with another update when we report our Q2 earnings in June.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.