Quanex Building Products - Earnings Call - Q2 2025

Executive Summary

• Quanex delivered a seasonal step-up in Q2 2025 with net sales of $452.5M (+70% y/y) and adjusted EPS of $0.60, beating S&P consensus on revenue and EPS; gross margin expanded to 29.0% on Tyman contributions and synergies.
• Management raised total cost synergy target from ~$30M to ~$45M over time and reaffirmed FY2025 guidance: net sales $1.84–$1.86B and adjusted EBITDA $270–$280M.
• Q3 cadence: revenue expected up 8–10% q/q with adjusted EBITDA margin expansion of 250–300 bps; integration tracking ahead of plan with re-segmentation likely in Q3/Q4.
• Capital allocation remained active: $23.5M of buybacks (1.26M shares at $18.66) and liquidity of $289M; covenant leverage at 2.7x; net debt/LTM adj. EBITDA at 3.2x.
• Narrative catalysts: synergy target increase, EU volume growth, tariff mitigation confidence, and conservative but steady FY guidance; potential near-term upside tied to Q3 volume/margin cadence and accelerated synergy realization.

What Went Well and What Went Wrong

What Went Well

• EU Fenestration volume growth (+~9%) with modest price pressure offset by operational execution; revenue +8.3% y/y (7.9% constant currency).
• Tyman integration ahead of schedule; synergy target increased to ~$45M; confidence to achieve original $30M run-rate by early FY2026.
• Gross margin expanded to 29.0% (from 24.9% y/y) driven by Tyman contribution and synergies; adjusted EBITDA up to $61.9M.
• Quote: “We are now confident we will deliver approximately $45 million in cost synergies over time… we see a path to achieving the original $30 million… by early fiscal 2026” — George Wilson.

What Went Wrong

• North American Fenestration revenue declined 5.5% y/y; lower volumes in North America persisted despite seasonal uptick.
• Adjusted EBITDA margin dipped to 13.7% (vs 15.0% y/y), reflecting mix, integration and restructuring costs (e.g., Tyman SG&A and $0.9M restructuring).
• Free cash flow fell to $13.6M in Q2 from $25.5M y/y and was negative YTD due to integration costs and capex ($14.9M in Q2).
• Analyst concern: tariff uncertainty and consumer confidence headwinds; ~22% of COGS exposed to tariffs, though USMCA exposure (~13% of COGS) is near-zero tariff currently.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the second quarter 2025 Quanex Building Products Corporation earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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.

Scott Zuehlke (SVP, Treasurer, and CFO)

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 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.

George Wilson (Chairman, President, and CEO)

Thanks, Scott, and good morning to everyone joining the call. Overall, we are pleased with the results from our fiscal second quarter, as we did see the traditional seasonal uptick, and volumes were as expected despite ongoing global macroeconomic uncertainties. I'd like to start my commentary by providing an update on the status of the Tyman acquisition integration. We have been extremely pleased by both the depth and pace at which the integration has progressed. We have structured new operating segments, finalized and staffed our operational and commercial teams, and are in the process of finalizing the back-office support teams that will service both of those groups. As a result of these efforts, and as announced in our earnings release, we now expect to realize cost synergies of approximately $45 million over time, which equates to a 50% increase compared to the original target.

In fact, on a run-rate basis, we now expect to achieve the original $30 million of cost synergy targets by early fiscal 2026. The newly formed operating segments are functioning well, and we feel that there still is a pathway to additional cost synergies. Operationally, our strength has always been around controlling what we can control, and that cultural trait is core and foundational to what we are building. We're delighted with what the team has accomplished in the 10 months since the deal closed, and we look forward to keeping you updated on our continued operational progress. The second phase of integration is now beginning, and it will be based around four major themes: go-to-market and geographic expansion strategy, operational footprint optimization, new product and materials development, and finally, current product line portfolio analysis.

Each one of these themes are more medium-term focused but very much aligned to the profitable growth strategy that we outlined at our investor day in February. Our objective is to drive both above-market growth and improve margin profile. Now, turning to the markets we serve in North America and Europe. In North America, volumes increased month over month throughout the second quarter, which gives us continued confidence in the normal seasonality pattern we have historically seen. We did see volume decline year over year in the second quarter, driven by low consumer confidence related to higher interest rates and tariff implications, but this was not surprising. As it relates to tariffs, there remains much uncertainty, which continues to be a headwind to the confidence level of our ultimate end consumers.

Specifically, from a Quanex perspective, our team has done a great job of positioning us to minimize any tariff impacts by localizing supply chains where possible to mitigate both supply and cost risks. We also continue to explore alternate supply sources and are constantly evaluating and monitoring potential shifts in demand. In situations where we were unable to avoid tariff impact, we have utilized surcharge pricing mechanisms to pass on most of the cost. Overall, approximately 22% of our total cost of goods sold is exposed to tariff risk, and breaking that down further, 13% of total COGS exposure is specific to Mexico and Canada. Since we are USMCA compliant, the tariff rate is essentially zero for those countries at the moment. Overall, we are confident in our ability to minimize any potential margin impact as it relates to tariffs.

Looking at market conditions in Europe, consumer confidence continues to be negatively impacted by higher interest rates and conflicts in the Middle East and Ukraine. However, market share gains in both our vinyl extrusion and IG spacer product lines have helped offset market weakness. Pricing continues to be pressured, but the Quanex team has done a great job of using operational performance to offset any price concessions. From a capital allocation perspective, we made a decision to take advantage of our low share price, and we've repurchased approximately $23.5 million of our stock in the second quarter. We remain focused on maintaining a healthy balance sheet that continues to give us flexibility to execute on all of our strategic opportunities.

For the remainder of this year, we will continue to prioritize debt repayment and investment in organic projects that enhance our margins, while opportunistically buying back shares when it makes sense to do so. We still have approximately $35.6 million authorized on our share repurchase program. In summary, we are extremely pleased with the progress of the Tyman acquisition integration. The Quanex team continues to execute at a high level, which has resulted in excellent safety performance as well as delivering better-than-anticipated synergies. The integration now begins to shift towards growth-focused and customer-value projects, which we believe will drive margin expansion and create opportunities in new markets. The team continues to control the controllable, and we will be well-positioned to capitalize on opportunities as they arise. I'll now turn the call over to Scott, who will discuss our financial results in more detail.

Scott Zuehlke (SVP, Treasurer, and CFO)

Thanks, George. On a consolidated basis, we reported net sales of $452.2 million during the second quarter of 2025, which represents an increase of approximately 70% compared to $266.2 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 1.4% for the second quarter of 2025, largely due to lower volume in North America. We reported net income of $20.5 million, or $0.44 per diluted share, during the three months ended April 30, 2025, compared to net income of $15.4 million, or $0.46 per diluted share, during the three months ended April 30, 2024.

On an adjusted basis, net income was $27.9 million, or $0.60 per diluted share, during the second quarter of 2025, compared to $24 million, or $0.73 per diluted share, during the second quarter of 2024. The adjustments being made to EDS are as follows: transaction advisory fees and reorg costs, restructuring charges related to severance and disposal of software, amortization expense related to intangible assets and attention settlement refund, and other net adjustments related to foreign currency transaction gain or loss and effective tax rates. On an adjusted basis, EBITDA for the quarter increased by 54.7% to $61.9 million, compared to $40 million during the same period of last year. The increase in net income and EBITDA for the three months ended April 30, 2025, was mostly attributable to the contribution from the Tyman acquisition combined with the realization of cost synergies.

Now for results by operating segment. We generated net sales of $151 million in our North American fenestration segment for the second quarter of 2025, a decrease of 5.5% compared to $159.8 million in the second quarter of 2024. We estimate that volumes in this segment declined by approximately 7% year over year, with pricing up approximately 1% versus Q2 of 2024. Adjusted EBITDA was $21.3 million in this segment for the second quarter, compared to $25.4 million in the second quarter of 2024. Our European fenestration segment generated revenue of $61.3 million in the second quarter of 2025, which represents an increase of 8.3% compared to $56.5 million in the second quarter of 2024. After adjusting for foreign currency, revenue increased 7.9%. We estimate that volumes for the quarter were up approximately 9% year over year in this segment, with pricing down by approximately 1%.

Adjusted EBITDA increased slightly to $13.2 million in this segment for the quarter versus $13 million during the same period last year. We reported net sales of $51.2 million in our North American cabinet components segment during the second quarter of 2025, compared to $51.1 million for the same period of 2024. We estimate that volumes declined by approximately 3% and price increased by approximately 3% in this segment for the quarter. This price movement was largely related to index pricing tied to hardwood costs. Adjusted EBITDA was $3.1 million in this segment for the quarter, which compared to $3.4 million for the second quarter of 2024. The Tyman business reported net sales of $190.1 million for the second quarter of 2025. Since we did not own this business in the second quarter of 2024, there is no comp in the earnings release.

However, we believe revenue was down approximately 2% in this segment in the second quarter of 2025 compared to the second quarter of 2024, mostly due to soft market demand in North America, which is consistent with what we saw in the legacy Quanex business. Adjusted EBITDA came in at $26.8 million for the quarter in this segment. Moving on to cash flow and the balance sheet, cash provided by operating activities was $28.5 million for the second quarter of 2025, which compares to cash provided by operating activities of $33.1 million for the second quarter of 2024. Similar to Q1 of this year, Q2 was impacted by layering in the Tyman acquisition, as the legacy Tyman business is very much a make-to-stock business, and the legacy Quanex business is very much make-to-order.

Free cash flow was $13.6 million for the quarter, but keep in mind that one-time items related to integration costs and achieving the cost synergies impact free cash flow. As a reminder, to acquire Tyman in August of 2024, we borrowed a total of $770 million through a $500 million term loan A and drawing $270 million on our revolver. As of April 30, 2025, our leverage ratio of net debt to last 12 months adjusted EBITDA decreased 3.2 times. The leverage ratio for our quarterly debt covenant compliance was 2.7 times.

This debt covenant leverage ratio excludes real estate leases that are considered finance leases under U.S. 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 original cost synergy target related to the acquisition, less cost synergies achieved, and cash only from domestic subsidiaries. The debt covenant leverage ratio would be 2.4 times if calculated using the full cash and cash equivalents amount on the balance sheet as of April 30, 2025, and adjusting for the cash used to repurchase our stock during the quarter.

As noted in our earnings release, based on year-to-date results combined with our operational execution, cost synergy realization, conversations with our customers, and recent demand trends, we are reaffirming net sales guidance of approximately $1.84 billion-$1.86 billion and adjusted EBITDA guidance of $270 million-$280 million for fiscal 2025. From a cadence perspective, on a consolidated basis for the third quarter of this year versus the second quarter of this year, we expect revenue to be up 8%-10%, and we expect adjusted EBITDA margin expansion of 250-300 basis points. Lastly, the finance and accounting teams continue to work with our external auditors on resegmenting the business, and our goal is to report in the new operating segments this year, either Q3 or Q4. Operator, we are now ready to take questions.

Operator (participant)

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Adam Alzheimer with Thompson Davis. Your line is open.

Adam Thalhimer (Director of Research)

Hey, good morning, guys. Nice quarter.

Scott Zuehlke (SVP, Treasurer, and CFO)

Yeah, thanks.

George Wilson (Chairman, President, and CEO)

Thanks, Adam.

Adam Thalhimer (Director of Research)

Can you give a little more color on raising the synergy target from $30 million to $45 million? I think you even said there was potential beyond that.

George Wilson (Chairman, President, and CEO)

Yeah, it's a combination of things that we've seen. Obviously, I'm very pleased about the new segments, and I think even as highlighted in previous calls that we felt once the new segments would be kind of running from an operational perspective that new opportunities for cost takeout and just being more efficient would bubble up and be able to be realized. That's exactly what we've seen. They've been split between just more efficient and taking out headcount, being more streamlined in how we've built the organization, as well as some additional sourcing and purchasing synergies. As I mentioned in my script, we're still a little early on new revenue synergies that will come as a result of the go-to and geographical strategy refinement.

Kind of in summary, Adam, it's really just the new segments identifying and becoming very efficient in creating what we knew was going to be there. I think that there is still some pathway going forward. Too early to tell because, again, we're fairly new into this, but again, it's just confidence on how well the teams are performing.

Adam Thalhimer (Director of Research)

Okay. I wanted to flip the tariff issue and ask if that's actually, given your domestic manufacturing footprint, if that's actually an opportunity for you guys and if you're seeing bids related to customers looking to increase domestic sourcing.

George Wilson (Chairman, President, and CEO)

We have. I do think it is. I think how we've structured our supply chain and all of the work that we've done that really started kind of coming out of COVID and into some of the global supply chain challenges has really benefited us. I think that that footprint that we have that really capitalizes on serving our customers being geographically diverse is starting to show some benefits as it relates to, I guess, supply chain risk mitigation for our customers. We have seen some increases in quoting opportunities and have converted and been able to execute some spot purchases, more so on the cabinet segment. That is where we've seen it first because some of the cabinet market has relied a little heavier on international and Asian sourcing. We have seen some opportunities, and I think that will continue to present itself.

Adam Thalhimer (Director of Research)

Perfect. I'll turn it over. Thanks, guys.

Scott Zuehlke (SVP, Treasurer, and CFO)

Thanks.

George Wilson (Chairman, President, and CEO)

Thanks, Adam.

Operator (participant)

Thank you. Our next question comes from Julio Romero with Sidoti & Company. Your line is open.

Justin Mechetti (Equity Research Associate)

Good morning. This is Justin On for Julio.

Scott Zuehlke (SVP, Treasurer, and CFO)

Morning.

George Wilson (Chairman, President, and CEO)

Good morning.

Justin Mechetti (Equity Research Associate)

Can you give us a little more meat on the bone as to where in the Tyman portfolio have you been able to realize cost synergies faster than originally expected?

Scott Zuehlke (SVP, Treasurer, and CFO)

I think the main bucket for the increase versus the original expectation George mentioned is really on the procurement side. Once you get those two teams together and really start scrubbing all of that data, there just ended up being more opportunity than originally estimated. Across what we consider the corporate bucket, which is things like finance, internal audit, HR, IT, legal, all of the above, we're seeing higher realized and potentially realized synergies out of those groups than we did originally.

Justin Mechetti (Equity Research Associate)

Great. Thanks for the color there. On guidance for D&A, is the $6.5 million in intangible asset amortization that was realized in 2Q a good go-forward quarterly run rate? What do you expect for the full year D&A, both on a GAAP basis and an adjusted basis?

Scott Zuehlke (SVP, Treasurer, and CFO)

Yeah, I think so what happened was for intangible amortization, I think 2Q is a pretty decent run rate. I think we originally guided to around $60 million for adjusted D&A for the year, which excludes intangible amortization. That's still a good number.

Justin Mechetti (Equity Research Associate)

Great. Thanks. I'll turn it back now.

Scott Zuehlke (SVP, Treasurer, and CFO)

All right.

Operator (participant)

Thank you. I'm showing no further questions at this time. Oh, now I'd like to turn it back to George Wilson for closing remarks.

George Wilson (Chairman, President, and CEO)

Thank you for joining the call today. We look forward to providing you with another update when we report our Q3 earnings in September. Thank you.

Operator (participant)

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