Quanex Building Products Corporation 2026 Q3 Earnings Call

Please go ahead. Thanks for joining the call this morning.

On the call with me today is George Wilson, our 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 will now turn the call over to George for his prepared remarks.

Thanks, Scott, and good morning to everyone on the call. Similar to prior calls, I will start with our perspective on the current macroeconomic environment, then I will walk through our results for the quarter, and I will close my prepared remarks with our priorities for the balance of the fiscal year. Three months ago, I described housing demand in North America and Europe as showing early signs of stabilization with a recovery that would proceed gradually. Since then, the data has been mixed. On the new construction side of the market, activity has been weaker than we anticipated. The July Monthly New Residential Construction put single family starts at an annual rate of 808,000, which is down roughly 16% from a year ago and the lowest monthly reading since late 2022.

Single family completions, the more direct driver of demand for our products, came into 878,000, which represents a decrease of about 13% year-over-year and down about 10% year-to-date. Units under construction were down roughly 7% from a year ago. That said, there is a moderately positive signal underneath these numbers. Permits have held up nicely. Total permits in July were up 3% year-over-year. Single family permits were modestly higher, and the number of homes authorized but not yet started is up about 10% from a year ago. This means that builders are keeping their entitlement pipelines intact but are choosing not to break ground.

That is a decision that can reverse relatively quickly when affordability and consumer confidence improve, and it's why we continue to view the current market as being demand deferred rather than demand destroyed. in the U.K. and Europe, we see the same general dynamics as in North America, though the impact varies significantly by region. We believe recovery is underway in the new build glazing and fenestration markets in both Iberia and Scandinavia while softness persists in the U.K., Germany, France, and Italy. We expect that future recovery in these segments will be driven by consumer confidence improvements and government sponsored social housing initiatives across the continent. Turning to the ongoing inflationary pressures around input costs, the picture remains highly variable. The inflation we described on our last call in June has not stopped, but it does appear that the pace has diminished.

Raw material energy, freight, and logistic costs all remain elevated, and the disruption to international shipping routes continues to add both cost and lead time. Our response has not changed since we last discussed this issue in June. We said then that we would implement targeted price increases in the mid single digit to low teens range phased in through the third quarter and tailored by product line, and we have executed on that plan. Scott will provide more color in his comments, but we believe we have meaningfully narrowed the cost price gap. That said, we also recognize that any further change in this dynamic will require additional discussions with our customers or additional surcharges to protect margins. Moving on to operational performance for the quarter. Despite the macro headwinds the market continues to face, volumes were in line with our expectations, and our operational teams performed well.

As you know, shortly after we acquired Tyman a little over two years ago, we initiated a project to resegment our business units to better support our customers, enable organic growth, and improve both operational and financial performance. A great deal of heavy lifting and integration work goes into this type of project, and I am pleased with the progress to date. Since the acquisition, the plan has always been to execute our strategy in three stages: Stabilization, optimization, and growth. I am extremely pleased with the progress made across all our reporting segments as we have worked to steady the combined business over the past two years. As we now move into the optimization stage, we continue to advance strategic projects built around the 80/20 principle and are completing several value stream mapping exercises.

These projects are designed to improve our customer performance, optimize our footprint and cost structure, and strengthen our margins. We will continue focusing on serving our customers while improving our footprint and cost structure so that when the markets do improve, we are ready to capitalize on those opportunities. Finally, I'd like to comment on free cash flow generation and capital allocation priorities. As we have said previously, most of our free cash flow is generated in our final two fiscal quarters. Given the normal seasonality we have been experiencing, this year should be no different. I am very pleased with the work of our team in managing working capital, which enabled us to pay down debt and repurchase shares during the quarter. Going forward, our focus on reducing inventory through 80/20 projects, simplifying our footprint, and reducing intercompany transfers should translate into stronger cash flow generation.

For the current quarter, our cash priorities will be to continue paying down debt and to fund organic projects that drive financial returns. I will now turn the call over to Scott, who will discuss our financial results in more detail.

Thanks, George. On a consolidated basis, we reported net sales of $501.8 million during the third quarter of 2026, which represents an increase of 1.3% compared to $495.3 million for the same period of 2025. The increase was mainly due to favorable impacts from pricing, partially offset by the impact of IEEPA tariff reimbursements to customers. We estimate that volumes were flat, pricing was up about 3%, and the negative tariff refund impact was approximately 2%. Foreign exchange didn't really influence the quarter. We reported net income of $26.5 million or $0.58 per diluted share during the three months ended July 31, 2026, compared to a net loss of $276 million or $6.04 per diluted share during the three months ending July 31, 2025.

The reported net loss during the third quarter of 2025 was primarily the result of a $302.3 million non-cash goodwill impairment related to the resegmentation of our business. The effective tax rate in the third quarter of 2026, excluding discrete items, was approximately 23%, which matched our expectation. On an adjusted basis, we reported net income of $36 million or $0.79 per diluted share during the third quarter of 2026, compared to net income of $31.6 million or $0.69 per diluted share during the third quarter of 2025. The adjustments being made to net income are primarily related to severance and other expenses associated with manufacturing footprint and operational performance optimization, including reorganizational and restructuring charges, transaction and advisory fees, amortization expense related to intangible assets, foreign currency impacts, and goodwill impairment.

On a consolidated basis, the increase in reported earnings for the third quarter of 2026 compared to the third quarter of 2025 was mainly due to improved pricing, lower depreciation and amortization expense, and lower interest expense. On an adjusted basis, EBITDA for the quarter was $72.7 million, compared to $70.3 million during the same period last year. Now results by operating segment. We generated net sales of $220.9 million in our Hardware Solutions segment for the third quarter of 2026, a slight decrease compared to $227.1 million in the third quarter of 2025. We estimate that volumes were down about 0.5%. Pricing was up by about 1.5% in this segment. The negative tariff impact due to customer reimbursements was roughly 4%. The absence of the operational issues we had in Monterrey, Mexico last year had a positive impact of about 0.5%, and foreign exchange translation had a negligible impact.

Adjusted EBITDA was $27.1 million in this segment for the third quarter of 2026, compared to $24.7 million in the same period of 2025. The increase was largely due to improved pricing and the absence of operational issues in Monterrey, Mexico that impacted Q3 of last year. Our Extruded Solutions segment generated revenue of $179.3 million in Q3 of this year, an increase of 2.8% compared to $174.4 million in Q3 of last year. We estimate that volumes for the quarter were down about 0.5% year-over-year in this segment, with pricing up almost 3.5% and a very minor negative foreign exchange translation impact. Adjusted EBITDA declined slightly to $35.6 million in this segment for the quarter versus $37.1 million during the same period of last year, mainly due to general inflationary pressures partially offset by improved pricing.