Julio Romero

Julio Romero inquired about the expected cadence and drivers of margin expansion in the remaining nine months of the fiscal year, particularly between the third and fourth quarters, and where across the portfolio this lift would occur. He also asked for clarification on how the legacy Tyman business extends the cash conversion cycle compared to legacy Quanex and the company's strategy for debt paydown in the back half of the year.

Answer

Scott Zuehlke explained that the primary driver for margin expansion in the second half of 2026 compared to 2025 is the resolution of operational issues at the Monterrey plant, which had impacted Hardware segment EBITDA by $13 million in the second half of last year. Regarding cash conversion, Scott Zuehlke noted that legacy Quanex had a 45-60 day cycle, while legacy Tyman was double that, with ongoing efforts to improve Tyman's cycle over the next 2-3 years by shifting towards made-to-order. George Wilson added that market softness allowed focus on integration. Scott Zuehlke reiterated that debt paydown is a key priority, aiming for a net leverage ratio closer to 2.0x or below in the coming years.

Julio Romero from Sidoti & Company asked for clarification on the expected cadence of margin expansion between Q3 and Q4, given the full-year guidance implying back-half weighting, and where across the portfolio this margin lift is anticipated. He also inquired about how much longer the legacy Tyman business extends the cash conversion cycle compared to legacy Quanex and the company's strategy for debt paydown in the back half of the year.

Answer

Scott Zuehlke, SVP, CFO, and Treasurer, stated that the primary driver for second-half 2026 margin expansion is the resolution of operational issues at the Monterrey hardware plant, which impacted EBITDA by $13 million in the second half of 2025. George Wilson, Chairman, President, and CEO, confirmed this impact was in the Hardware segment. Regarding cash conversion, Scott Zuehlke noted that legacy Quanex historically had a 45-60 day cycle, while legacy Tyman was double that, with ongoing efforts to reduce Tyman's cycle over the next 2-3 years. Debt paydown remains a key priority, with a focus on reducing the net leverage ratio closer to 2.0x or below in the coming years to create shareholder value.

Julio Romero inquired about the factors influencing the high and low ends of the 2026 guidance ranges for sales and EBITDA. He also asked for a deeper understanding of the quarter-to-quarter rail revenue cadence expected in 2026, given the unusual sales pattern in 2025. Finally, he asked about the drivers of the exceptionally strong free cash flow in the fourth quarter and its structural components.

Answer

CEO John Kasel attributed the guidance to strong backlog, fewer disruptions, and high market demand for infrastructure products. He noted the rightsizing of the U.K. business and strong performance in growth platforms like precast and rail Friction Management. For rail revenue, Mr. Kasel explained that 2026 is expected to follow a more typical seasonal bell curve with highest revenues in Q2 and Q3, unlike 2025's Q4-heavy performance due to federal funding delays. CFO Bill Thalman added that rail should see growth in Q1, stronger growth in Q2/Q3, while infrastructure might be lighter in Q1 but strong later. Regarding free cash flow, Mr. Kasel explained it's a frequent Q4 pattern due to managing working capital cycles, moving materials, and collecting bills efficiently, supported by a focus on debt management and customer satisfaction.

Julio Romero inquired about the factors influencing the high and low ends of the 2026 sales and EBITDA guidance ranges, and sought clarity on the expected quarter-to-quarter cadence of rail revenues in 2026, especially given the skewed 2025 performance. He also asked about the drivers behind the strong Q4 free cash flow.

Answer

President and CEO John Kasel attributed the guidance to strong backlog, reduced disruptions, and increased capital investment in growth platforms like precast and rail. He and CFO Bill Thalman explained that 2026 rail revenue would likely follow a more typical seasonal bell curve with stronger Q2 and Q3, unlike 2025's Q1 delays due to government funding. John Kasel also highlighted the company's consistent ability to manage working capital and debt for strong Q4 cash generation.

Julio Romero noted that the 2026 sales growth guidance implies revenue dollars above the 2027 Investor Day targets and asked about the status of other Investor Day targets, specifically gross margins (32%-35%) and SG&A (13%-14%), inquiring if these are still on track for 2027 or later. He also asked for more details on the IT systems and infrastructure upgrades, particularly the ERP upgrades.

Answer

President and CEO Matt Tobolski confirmed that 2026 revenue is pushing harder than implied at Investor Day. He stated that margin targets are still being driven towards 2027, though there might be some pressure towards the lower end due to growth investments. He noted more pressure on the SG&A side due to ramping facilities and investments but anticipates continued leverage. Regarding ERP upgrades, Tobolski explained that shifting go-lives in Redmond and Tulsa was a strategic decision for operational discipline, allowing teams to focus on driving volume and reducing lead times, not due to system performance issues, and that sequential go-lives are improving.

Julio Romero asked about the revenue contribution from showrooms in 2025 and expectations for 2026, distinguishing it from vinyl product sales. He also inquired about the new plant evaluation, specifically its relevance to 'Buy America' projects and quick turnaround, and whether the company's window products could participate in federally funded infrastructure projects.

Answer

CEO José Manuel Daes explained that showrooms feature new vinyl lines, the Legacy Line, and new products like garage doors, anticipating high double-digit growth. CFO Santiago Giraldo specified that residential showroom revenues were approximately $10 million in 2025, projected to reach $30 million-$35 million in 2026, contributing significantly to single-family residential growth alongside vinyl and non-Florida residential expansion. COO Christian Daes detailed that new technology is being tested in Colombia for automation to reduce labor requirements for a potential U.S. plant, which aims for faster delivery and cost savings. He noted that while current products use U.S. raw materials, they don't qualify as 'Buy American' due to manufacturing location, but a future U.S. plant would enable participation in federal building projects.

Julio Romero sought to understand the incremental revenue contribution from Tecnoglass's showrooms in 2025 and 2026, separate from vinyl sales, and requested more details on the new U.S. plant evaluation, specifically regarding 'Buy America' projects and quick turnaround capabilities.

Answer

Santiago Giraldo, Chief Financial Officer, clarified that residential showroom revenues were about $10 million in 2025, projected to grow to $30 million-$35 million in 2026, contributing significantly to single-family residential growth. Christian Daes, Chief Operating Officer, explained that the new U.S. plant aims for high automation, reduced labor, and faster delivery, with initial technology testing in Colombia. He highlighted the 'Buy American' advantage for federal buildings, noting that current products already use mostly U.S. raw materials.

Julio Romero asked if the mix of above-ground versus underground infrastructure is changing as mission-critical projects become larger and more complex, and if such a shift is margin accretive. He also questioned if this mix changes if mission-critical work skews towards semiconductor and advanced manufacturing. Finally, Mr. Romero inquired about Sterling's positioning with AI-driven tools compared to competitors and how these tools might widen their differentiation.

Answer

CEO Joseph Cutillo stated no significant shift in above-ground versus underground mix, but anticipates future projects (2027-2028) with self-power generation will increase the scope of work. He noted that the mix shifting to semiconductors or manufacturing doesn't significantly change the work or margins, as all these facilities involve extensive underground infrastructure. Regarding AI, Mr. Cutillo indicated Sterling is advanced, applying AI to estimating, bidding, and project execution. He cited 15-20% incremental capacity for project managers from initial pilots and highlighted ongoing projects improving efficiency, effectiveness, quality, and safety.

Julio Romero asked if the mix of above-ground versus underground infrastructure is changing as mission-critical projects become larger and more complex, and if this shift is margin accretive. He also questioned if the mix changes if mission-critical work skews towards semiconductor and advanced manufacturing. Finally, he inquired about Sterling's positioning with AI-driven tools and its ability to widen differentiation against competitors.

Answer

CEO Joseph Cutillo stated no significant shift in above-ground vs. below-ground mix, but anticipates future projects with self-power generation will increase development opportunities and scope. He confirmed that a mix shift towards semiconductors or advanced manufacturing would not significantly change their operations or margins, as all facilities require extensive underground infrastructure and their services are fungible. Regarding AI, Mr. Cutillo highlighted Sterling's advanced use in estimating, bidding, and project execution, citing 3 pilots last year that increased project manager capacity by 15-20%, with 6 AI projects currently underway to improve efficiency, effectiveness, quality, and safety.

Julio Romero asked for clarification on the 2026 same-store sales growth expectation of mid- to high-teens, weighted to the first half, specifically how much is weighted and if H1 growth would be similar to Q1 2023/Q2 2024. He also questioned how increasing data center density and project complexity improve Comfort Systems' project economics, given the scarcity of skilled contractors.

Answer

CFO Bill George clarified that the weighting to the first half is due to steeper comparables in the second half of 2025, not necessarily heavier growth. He stated that project economics have improved, allowing them to be rewarded for risk and scarce resources, prioritizing workforce well-being. CEO Brian Lane added that larger projects, while more work, are still the same type, aiding productivity and planning.

Julio Romero asked for clarification on the mid- to high-teens same-store sales growth expectation for 2026, weighted to the first half, and whether H1 growth would resemble the 30% range seen in Q1 2023 and Q2 2024. He also questioned how increasing data center density and project complexity improve Comfort Systems' project economics, given the scarcity of skilled contractors.

Answer

Bill George, Chief Financial Officer, explained that the H1 weighting is due to steeper comparables in H2 2025, not necessarily higher growth in H1 2026, with consistent growth expected throughout the year. He confirmed improving project economics, driven by the opportunity to be rewarded for risk and scarce resources, emphasizing workforce well-being. Brian Lane, Chief Executive Officer, added that larger projects, while more numerous, streamline productivity and planning, further aiding economics.

Julio Romero from Sidoti & Company asked for examples of past collaboration between Hunter Fan and the Home and Building Products (HBP) segment, and potential cross-selling opportunities for the combined entity. He also inquired about the expected cash conversion cycle of the 'RemainCo' and whether its cash flow generation rate would be faster or slower than the historical portfolio.

Answer

Brian Harris, CFO, provided examples of collaboration, including cross-selling commercial fans in industrial facilities and Hunter's innovative garage fan product for residential use. He stated that the 'RemainCo' will remain a highly cash flow generative company, with the first half of the year expected to be more positive than in the past under the new structure, though still weaker than the second half.

Julio Romero asked for examples of past collaboration between Hunter Fan and Home and Building Products (HBP) and potential cross-selling opportunities for the combined entity. He also inquired about the expected cash conversion cycle of the RemainCo relative to the historical portfolio and its future cash flow generation rate.

Answer

Brian Harris, CFO, provided examples of collaboration, including commercial fan sales in industrial facilities alongside rolling steel products and Hunter's garage fan product for residential garages. He stated that the RemainCo will remain a highly cash flow generative company, with the first half of the year expected to be more positive than in the past under the new structure, though still weaker than the second half.

Julio Romero inquired about the expected flow of Solar-Included Homes into orders and closings, their anticipated accretion to sales or profitability, and the drivers behind the favorable trend in to-be-built orders relative to closings.

Answer

Allan Merrill, Chairman and CEO, stated that Solar-Included Homes are currently a small percentage of closings but are trending towards 20% of the business by year-end, with higher margins. He noted that adoption depends on utility providers' posture, which is becoming more receptive due to surging electricity demand. Merrill attributed the positive to-be-built mix trend to the appeal of newer communities and buyers' increased willingness to wait due to decreasing inventory.

Julio Romero inquired about the contingency of the share repurchase plan on land sales timing, the gross margin spread between build-to-order and spec homes, the drivers behind improved traffic and buyer engagement observed in late December and January, the expected flow-through of Solar-Included Homes into orders and closings, their expected accretion to sales or profitability, and the drivers behind the favorable trend in the to-be-built mix in Q1 orders compared to closings.

Answer

Allan Merrill, Chairman and CEO, clarified that the repurchase plan is not strictly contingent on the timing of land sales. He estimated the gross margin spread between build-to-order and spec homes to be in the 4%-5% range, potentially wider recently. Merrill attributed improved traffic to a combination of slowly improving affordability (lower rates, stable home prices, rising incomes) and the strong traction of Beazer's newest, highly efficient, and solar-included communities. He stated that Solar-Included Homes are already in sales and closings, with a target of 20% of business by year-end, noting they have higher margins. Merrill attributed the positive to-be-built mix trend to newer communities attracting attention and decreasing inventory levels making buyers more willing to wait.