Quanex Building Products – Strategic Update Amid
Homebuilding Demand – 27 May 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Jack Conway (JC)
Former President, Woodcraft Division at Quanex Building Products Corp
Agenda:
1. Kitchen and bath cabinet demand
2. Quanex's (NYSE: NX) US and European operating dynamics
3. Input cost inflation and raw materials constraints
4. US home construction and residential R&R (repair and renovation) outlook
Contents
Q: Could you give an overview of the OEM [original equipment manufacturer] supplier industry across the
core categories and channels such as fenestration, kitchen and bath cabinet components? What are the key
drivers?
Q: Could you segment Quanex’s sales? What portion of the business is exposed to door, windows and
fenestration vs other areas?
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Q: How has coronavirus altered some of the industry trends you highlighted, given people stayed at home
and home sales increased? What are the implications of those trends for the end user, Quanex or the
industry more broadly? I understand that this is a designer market with certain cabinets for kitchen and bath
5
and so on.
Q: To what extent has Quanex been able to capitalise on higher demand throughout the segments it operates
in? Sales have increased significantly, but do you think that is in line with the market? Do you think it can
take more market share, given the supply chain pressures you mentioned?
6
Q: Quanex’s business model suggests the company is waiting for an opportunity. How do you assess this
wait-and-see model? Is it only competing with importers? Can it sustain itself because of favourable tariffs? 7
Q: How do you assess the consolidation of OEMs such as MasterBrand and Cabinetworks? Even Herman
Miller announced a deal recently. How does big manufacturers consolidating impact component suppliers
beneath them such as Quanex? Does it take multiple customers from Quanex and lower its customer pool,
thereby lowering its pricing ability and pricing power?
Q: Do you think the high demand will continue, noting the extent to which overall industry growth has
benefited Quanex?
Q: Quanex is doing well in cabinets but fenestration is its largest segment. Can you outline the company’s
remaining opportunities in fenestration to make its product less commoditised?
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Q: You touched on one of Quanex’s initiatives to leverage existing customer relationships in one division to
possibly cross-sell. Could you discuss the synergies across divisions such as fenestration and cabinet
components? Cabinets are highly specialised, the labour profile is a lot more intensive and it is more
difficult, as you mentioned. Some cabinet manufacturers have low synergies combining or consolidating with
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themselves.
Q: How has demand fluctuated and how has that impacted Quanex, particularly around its ability to be agile
for customers? How does Quanex tweak its production process to meet demand, considering the
implications for OEM component suppliers in R&R [repair and renovation] or new housing?
9
Q: Could you describe Quanex’s imports competition? What buffer do tariffs provide to the company’s sales
and profitability?
10
Q: How does Europe fit into Quanex’s broader business? Can you suggest the strategic rationale for entering
the region, including the timeline and some key drivers vs any other market?
10
Q: Could you outline the domestic competitive landscape, focusing on scale? How would you rate Quanex’s
ability to leverage scale to take market share? What implications does a lack of scale have for the company
staying competitive?
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Q: How would you assess Quanex’s ability to pass on price increases to customers? Is it stuck with the brunt
of price increases that other industries encounter and unable to pass those on?
11
Q: What do you think is Quanex’s appetite for M&A activity, such as acquiring another subsegment or selling
a business that is too hard to manage when it comes to making profitability? Which segment do you think
the company would be much leaner and more efficient without, given your time there?
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Q: Is there anything else that you think the investor community should know about Quanex or the broader
industry? Is there anything that you think investors commonly overlook?
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Quanex Building Products – Strategic Update Amid
Homebuilding Demand
Transcription begins at 00:00:01 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Quanex Building Products – Strategic Update Amid
Homebuilding Demand. I am Nyree Hinton and I will be facilitating today’s Interview with Mr Jack Conway,
former President, Woodcraft Division at Quanex Building Products.
Jack, before we get started with today’s Interview, please state I agree or I disagree to the following statement:
You understand the definition of material non-public information and agree not to disclose any such
information, or any other information which is confidential, during this Interview.
JC: I agree.
NH: Thanks, Jack. Could you begin with a brief introduction to your background?
JC: I started in the industry in about 1990 with a company called Intek Plastics, and the reason I go back that
far is because that’s where I started my relationship with the OEMs in the window and door business. In that
business, I rose up through the ranks and ended up as the Director of Sales and Marketing. I left Intek in 2003
and joined the Quanex organisation, and in that role, I started out again in business development, sales,
marketing, and I held that role from probably 2003 to 2007 as the VP of Sales and Marketing. The gentleman
who was running the company at the time identified me as a likely successor to him. He realised that I needed
more operational experience to eventually assume the role of president of the division, so from 2007 or 2008,
I was VP of Operations for Quanex Homeshield Division, until 2010, when I was elevated to the role of
President for Homeshield. Then, I was running the Homeshield business from 2010 through 2016, in which
case, Quanex acquired Woodcraft, more active in the cabinet space rather than the window space. The
acquisition wasn’t going as planned, and they asked me in July of 2016 to assume the presidency of that
division, and I did that for 2.5-3 years. I retired in 2019.
[00:02:27]
Q: Could you give an overview of the OEM [original equipment manufacturer] supplier industry across the
core categories and channels such as fenestration, kitchen and bath cabinet components? What are the key
drivers?
JC: When I think of the window business, fenestration, windows and doors, frankly, I’m more experienced
with the window manufacturers than the doors, although I do have some experience with the door
manufacturers, as well, but in sticking with windows, typically, they define them in terms of the substrate used
to make the windows. Vinyl windows have come to dominate the industry, with probably a 70% share or
greater than a 70% share. Vinyl windows are very cost-effective but they do come with some issues, in terms of
long-term performance due to high heat temperatures, UV exposure due to the sun, inability to use dark
colours. Some people feel like, on the interior of the window, it’s going to be white or beige or whatever the
colour of the vinyl is and it lacks the warmth of real wood. Vinyl windows have supplanted the clad-wood
window in terms of popularity. That segment of the business has shrunk probably less than 20% now, but
they’re thought to be the more profitable segment of the business, so the national leaders like Andersen,
Marvin, Jeld-Wen, Pella, they maintain a strong clad-wood window base because, I believe, they’re a profit
driver.
Private and confidential 3
Aluminium windows once were dominant in the south and the west, but they have almost completely been
replaced in composites. You might know of composites from Andersen’s Fibrex, Marvin’s Integrity or Infinity
fibreglass windows. They tend to be growing. They better withstand heat and UV exposure, and they’re
stronger and allow the manufacturers to use more colour selections, darker colours and more colour
selections. That’s how the window business is defined. The dominant suppliers to folks who make windows
and doors would be the hardware providers, so think about locks, operating arms on casement windows,
handles for opening and closing windows and patio doors, block-and-tackle assemblies for balancing double-
hung windows. Hardware people are significant suppliers to the industry, and imports are very important for
the hardware business. The cost of tooling overseas tends to be much more attractive.
Another large segment of supplier to this industry would be the glass manufacturers, and you can purchase
glass in two different ways. One is you can purchase an insulated -glass unit, and largely, those are provided by
a company called Cardinal Glass, so they dominate the supply of an insulated -glass unit. Cardinal is very
large. The very large brands like dealing with Cardinal, due to their warranty. They warrant the insulated -
glass unit for 20 years, and they tend to have plants that are proximate to the window companies’
manufacturing sites. The other way to purchase glass would be to purchase flat glass pieces, sheets of glass,
and then cut them up in the various sizes necessary and then manufacture your own insulated- glass units in
the window manufacturer’s factory. The people who supply the sealants to do that insulation, or to
manufacture the IG unit, would be Quanex and a competitor called GED or Intercept. Those are the two
dominant suppliers in that business.
PVC extrusions are another significant supplier to the industry, so they’ll make the lineals that a vinyl window
is manufactured from. Quanex has a division called Mikron, a fairly significant competitor in the industry.
There are two or three other large competitors, but there’s also a tendency for some of the very large
customers to make their own PVC lineals. That was a trend, at least two years ago when I was in the business. I
suspect it remains. Some of the drivers in the PVC business are a high cost of tooling, so once you design an
entire window system, you’ve probably created several hundred profiles or dyes, so the cost to change once
you’ve established a design is very significant. There’s tremendous price pressure in that industry. Quanex has
disclosed this publicly in the quarterly calls, that that particular business had been somewhat troubled due to
the very aggressive price pressure in that segment of the business.
Another large segment of supply would be the screen suppliers. Again, Quanex participates in this. They
purchased a company called Aluminite in either 2012 or 2013, and coupled with the Homeshield division that
they already had, Aluminite and Homeshield make up a fairly significant percentage of the supply of screens to
the industry. RiteScreen is another third-party competitor, but again, vertical integration. Many of the window
companies make their own screens, so the customer can be thought of as a potential competitor in that
particular situation. Drivers of the screen business are very significant customisation and the demand for what
I would call world-class logistics, so very, very short lead times, sometimes as low as four hours, very rarely
more than two days. Products are shipped on a truck in a sequential manner to match up with the
manufacturer’s production lines. There’s sort of a dichotomy in the screen business, as well. Most of the
window manufacturers buy screens just to make the pain go away. They don’t want to deal with it because they
get damaged easily, but then there are a couple of window manufacturers who differentiate, and they make a
lot of money on their screens. One example of that would be Andersen’s offering of TruScene, where it’s not
invisible, but it’s very much more attractive to look through than your typical screen. That’s a product
innovation, and they make some good profits off of that.
[00:09:37]
Q: Could you segment Quanex’s sales? What portion of the business is exposed to door, windows and
fenestration vs other areas?
JC: You can get that from their website, which I just looked at. I can talk to Q1, which is Quanex’s worst
quarter. It’s the lowest volume that they’ll have of the year. Their Q1 is November through January. Just in
general, North American fenestration is the largest segment, and fairly strong profitability based on their Q1
earnings report. Then, the European fenestration business is relatively small in comparison, but the
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profitability is very strong. The Woodcraft division would be second to North American fenestration, but
profitability as reported in terms of EBITDA is the trailing of the three major divisions that they report.
Moving on to kitchen and bath and the market dynamics there, once again, just like North American
fenestration, the suppliers tend to sell directly to the window OEMs. The window OEMs tend to sell directly
through big-box and through dealers, and in some cases, direct to the large builders. Then, in the repair and
remodelling segment, the window manufacturers do have some capability of selling directly to the
homeowner. Andersen’s Renewal is a very good example of that. We should spend some time at some point
talking a little bit about that model, because I think that’s a very interesting model from the channel
perspective. Kitchen and bath again, suppliers, they supply directly to the OEMs in most cases. OEMs sell
products through big-box and through dealers almost exclusively. The OEMs tend to manufacture their own
box. If you think about a cabinet, the large rectangular box, they tend to manufacture that, but they outsource
the doors and the drawers and any mouldings around the cabinets, and that’s where Quanex competes in that
business.
Other big suppliers in the kitchen and bath industry would be the hardware folks, that’s a lot of differentiation
on how the hardware performs, and then paints and finishing products, so a lot of painting and a lot of
finishing on the natural wood. Drivers in that business were, as we termed it, the Ikea-isation. Think of Ikea
furniture stores. That sort of model has taken over the cabinet business, where customers are more interested
in maybe lower-cost, often prefinished, often painted white, substrates. We used to compete with, whether it
was oak or maple or cherry product. Now customers are less interested in that. They’re willing to accept
medium-density fibreboard as a substrate, painted white or painted whatever colour you want, which opens
the door to some extent to imports. Imports had become a fairly significant portion of that business, especially
in the lower-cost segments of the business. The kitchen and bath business really was segmented as custom-
custom, so a very custom product, semi-custom and then standard. The standard would be the lower-end
products. Those were the ones that were supplied largely through imports.
Trends within that industry were vertical integration of the customer, again, so a customer as a competitor to
folks like Quanex, where they outsourced what they couldn’t do or what they disliked doing or what they could
buy cheaper. It was very important for us to know our costs so that those OEMs didn’t cherry-pick based on
price. Then, the cost of quality was rising as customers demanded painted product. Interestingly to me, and it
surprised me, is that, when you painted a wood substrate, you actually saw more imperfections and cracking,
and that increased the cost of quality to a fairly significant degree. I know Quanex has disclosed that as being
one of the problems that they were dealing with in terms of that new Woodcraft business that they procured.
For that business, when processing the raw wood, it’s important to be close to where the trees are grown, and
when manufacturing the door from the raw wood, it’s to be proximate to the customer. Quanex and their
competitors have plants that rip the wood and mould it into profile close to where the trees are grown, and
then they’ll ship those products, that raw-wood product, to a plant close to the customer for further
processing, to make a specific or discrete door or drawer for that customer. That’s my summary on the market
background and trends.
[00:16:11]
Q: How has coronavirus altered some of the industry trends you highlighted, given people stayed at home and
home sales increased? What are the implications of those trends for the end user, Quanex or the industry more
broadly? I understand that this is a designer market with certain cabinets for kitchen and bath and so on.
JC: That’s what I was getting into there. For a long time, the kitchen and bath industry, the competition was
on the hardware. Quiet-glide hardware pulls it in once you get close to the closing point, or very often, we
would compete on maple. Maple and cherry were very dominant species. People wanted to have the beauty of
the raw wood. They’re also very intricate, could be very intricate profiles, where you might want to shape your
door, which is very plain Jane, or you might want intricate profiles on the door. What had been going on is a
fairly aggressive movement toward more standardised products. Again, it’s that Ikea-isation. It’s the dumbing
down, in my opinion anyway, of the product. Younger folks don’t tend to want to worry about the upkeep of
the natural-wood look. They just want to paint it and move on. It’s not as important to them, and that had a
Private and confidential 5
significant impact away from design and more toward utilitisation of the product and more commoditisation,
which opened the door to more imports. That was something that was happening in that space.
2-3 trends before COVID were, in the fenestration business, window customers were opting for lower-priced
options, so again, vinyl windows were increasing in popularity and market share. Andersen would compete.
Their offering was the 100 Series, so not a vinyl window but a composite that was a relatively low cost of entry.
Marvin Integrity, that was their answer. Pella and Jeld-Wen were into vinyl windows. Again, there was what I
would call, brutal price competition in the vinyl lineal business, and the suppliers of the vinyl to the ultimate
window manufacturers. There was continued customer demand for world-class logistics and customisation,
whether it’s different colours, sizes, rapid delivery, short lead times. There was a lack of ability to hire labour
to address the demand, whether it was from the OEM or whether it was the suppliers to the OEMS. Then, in
the insulated-glass business, they were moving toward high-speed installation lines that required less labour,
so that was a trend.
In the cabinet business, again, movement toward lower-cost import items, prefinished items, standardisation
away from the semi-custom, and the customers were tending to insource more of their needs rather than
buying from third-party companies like Quanex. The insourcing was becoming a bit of a trend, and very
significant consolidation of OEMs in the cabinet business. Companies like Masco and Elkay were purchased by
ACProducts, MasterBrand purchased just a plethora of smaller to mid-sized companies in the space, so a
significant consolidation of the OEMs in the cabinet business. Then, you asked about trends after COVID. The
volume has significantly increased, due to the customer demand for home improvements and the available
dollars to make improvements as other options have gone away. Travel options, or some of the things that we
used to do in the pre-COVID world, we can’t spend money on, so people are spending money to improve their
homes, as they’re working in their homes more often and they want to improve that space.
Labour has become an even more difficult issue, very difficult to obtain labour and very difficult to retain the
labour once you do onboard them, and then significant inflation in the cost of all goods, PVC, aluminium, etc.
In the cabinet business, customers are doing less insourcing, as they have to compete for scarce labour and use
the labour that they have to make the cabinets instead of the cabinet components, so they tend to be
outsourcing more to people like Quanex since the COVID phenomenon. Imports are off from where they were
2-3 years ago, a combination of the Trump tariffs against China and also COVID-related issues. The labour
issue, again, in the cabinet business is growing exponentially, very, very difficult to obtain labour, and in this
space, the huge, unprecedented increase in cost for hardwoods. One thing I would point out is, when we talk
about wood for the cabinet space, we’re talking about hardwoods, maple, cherry, that kind of wood, very
different than the softwoods that you would use for framing a home. That phenomenon is very well-reported
in the Wall Street Journal and elsewhere, the cost for framing and pine and so forth is very well-known, but
the cost for hardwoods has also been increasing exponentially, as well.
[00:22:36]
Q: To what extent has Quanex been able to capitalise on higher demand throughout the segments it operates
in? Sales have increased significantly, but do you think that is in line with the market? Do you think it can take
more market share, given the supply chain pressures you mentioned?
JC: I think the answer is in the summary that I gave. In many instances, and this has been publicly disclosed
many times by the organisation, so it’s not inside information, but the vinyl business and the screen business
and the cabinet business all have customers who can also perform most tasks. A window manufacturer, Jeld-
Wen as an example, might have their own vinyl manufacturing capability, and they may have their own screen
manufacturing capability, but as labour gets tight and as demand explodes as it has, they’re going to want to
tend to make windows rather than to make screens. They’re going to want to tend to use any labour they have
to make windows rather than to extrude vinyl that they can buy from somebody else. Even as the general
market demand has increased, Quanex has been able to capitalise on those who used to outsource who are not
outsourcing as much. They’re now purchasing from Quanex and other people who can fill the gaps where they
don’t necessarily need to spend the labour, so I think that’s been good for them.
Private and confidential 6
[00:24:38]
Q: Quanex’s business model suggests the company is waiting for an opportunity. How do you assess this wait-
and-see model? Is it only competing with importers? Can it sustain itself because of favourable tariffs?
JC: I don’t think so. The Quanex organisation, they are importers. They import themselves in the cabinet
space to a significant degree and are very successful that way, but as the market changes and those
opportunities aren’t as attractive as they used to be, then that demand comes back to their cabinet division,
who, if you look at Q1 results, has had a significant improvement in both growth and in EBITDA. That suggests
to me that what I suspect is happening probably is happening. They’ve got tremendous capability to service
that industry, and I don’t mean it to sound arrogant, I’m not with Quanex anymore, but the cabinet business
would be hard-pressed to survive without a supplier of the size of Quanex. They’re a very significant supplier
of the industry, and to some extent, they’re needed. They’ve moved millions and millions and millions of board
feet, and without them, there’d be quite a hole in the supply chain.
[00:26:20]
Q: How do you assess the consolidation of OEMs such as MasterBrand and Cabinetworks? Even Herman
Miller announced a deal recently. How does big manufacturers consolidating impact component suppliers
beneath them such as Quanex? Does it take multiple customers from Quanex and lower its customer pool,
thereby lowering its pricing ability and pricing power?
JC: Again, no secret, Quanex purchased Woodcraft, and a year ago or two years ago, they wrote down some
goodwill, I think, in acknowledgement of paying too much for the acquisition. A big part of that was what used
to be a pretty stable customer base was gobbled up by people like MasterBrand. What they used to have as
individual relationships with all those individual customers now was trying to be managed under the umbrella
of MasterBrand. MasterBrand tried to leverage up their purchasing power, but at the same time, they didn’t
consolidate the products that they were buying. They still operated each one of those entities as their own, so
the SKUs didn’t go down. There was inefficiency in the economic order size because they purchased them, so
there was some mismatch in what they thought their purchasing power was vs what they continued to buy,
and Quanex lost some of those relationships.
As you deal with larger OEMs, you often are dealing with more professional and more aggressive purchasing
people, so there was some angst there, and I think it showed in the financials from what they purchased to
how they were operating. The other side of the coin is the Quanex larger organisation and the North American
fenestration folks, very, very experienced in working with the largest OEMs and very experienced in creating
value. Whether it’s through logistics or through design or through lead times, whatever, quality, they’re very
experienced in doing that and very good at it. I think, over time, that’s going to show with how they deal with
these cabinet folks, as well, and probably my guess is, looking at the financials, we’re seeing some of that now
as their profitability is improving.
[00:29:22]
Q: Do you think the high demand will continue, noting the extent to which overall industry growth has
benefited Quanex?
JC: It’s a good question, and I wish I had the answer to that. The market crashed in 2008-09, and for most of
those intervening years, we were all waiting for the volume to pick up. I don’t know if it’s gen X or gen Y or
whatever, but the folks 25-35 years old, they weren’t buying houses and the demand just withered and died. It
was very muted. That demand has obviously accelerated, so I don’t know if the gen X, gen Y folks are starting
to buy homes, or whether or not this focus on repair and remodelling has driven demand due to COVID, but
Private and confidential 7
the cost of materials increasing has certainly got to have an impact on the future demand. As well, I think one
thing that’s been holding up the demand is the low cost of money. The interest rates are still historically very,
very low, and if and when those go up and the material costs continue up, it’s got to have a detrimental effect
on demand going forward.
[00:31:01]
Q: Quanex is doing well in cabinets but fenestration is its largest segment. Can you outline the company’s
remaining opportunities in fenestration to make its product less commoditised?
JC: I’ll maybe just go over the business segments and the different categories that they operate in. In the
North American fenestration, there’s the insulated-glass unit. They typically service the small- to medium-
sized manufacturers, but they have had some success with the larger manufacturers due to cross-selling
initiatives, which again, the management has talked about openly on the quarterly calls. The insulated-glass
products, they tend to be standard, non-customised, easy to ship, and they do have some not-insignificant
sales into the solar industry, so they’ve got some opportunity there, as well. The Mikron business typically
services the larger OEMs. Products tend to be highly customised for an individual customer, tooling is very
expensive. They’re fighting the cost of setting up extrusions, and the complexity and the multitude of SKUs
that each individual customer requires has had a negative impact on Mikron, and that’s, again, something
that’s been disclosed in the quarterly calls.
Then, in the screens and accessories, they service all the customers from the very largest to the very smallest
and everybody in-between, and they really compete on logistics. They’re critical and a competitive advantage
for them, highly customised products delivered daily, sometimes by shift, multiple colours, abundance of
options, sizes, colours, profiles, and it’s important to have the plant proximity to the customer. Even though
they talk about North American fenestration as one division, there are three very distinct market segments in
there that they have to operate independently. The cabinet business is a little bit different. We talked about
custom semi [sic] in stock. Quanex is most active in the semi-custom, which is a fairly profitable section to be
in, but had been eroding toward the stock business until recently. Products that they’re very experienced in,
they’re very expert in processing wood, high, complex profiles, but the market is moving toward more
standard sizes and products, and that has had a detrimental effect on the cabinet business. I think that may be
coming back.
The other thing that the management has talked about is they have invested capital to better compete in that
lower-end segment, in the standard segment that uses the medium-density fibreboard as a substrate rather
than wood, sort of prefinished products. They’ve invested in that capability. It’ll be interesting to see how
that’s going. I know they’ve been open about working harder to be more competitive in that industry. That’s
where they compete. The opportunities for growth within that, they’ve talked openly in the past about the IG
business working in the small- to medium-sized customers, but they’ve had cross-selling initiatives with some
of the other divisions, whether it’s screens or the vinyl business, that have customer relationships with some of
the larger manufacturers. They’ve had opportunities there to service those businesses. I have not heard
recently an update on how that’s progressing, but that was a very significant initiative for them, which they’ve
also talked about being muted to some degree due to the lack of the high-speed equipment that’s needed to
process the insulated-glass units within their customer’s facility.
That equipment is built both domestically and internationally in Europe, and they’ve talked in the past about
it, they have enough demand but they can’t get this equipment to their customers to apply their products in
their factories. That’s been the bottleneck, and I’d be interested in an update from management as to how
that’s going, if that maybe has broken loose and now that equipment is more readily available and they can
take advantage of latent demand, or if that initiative has, for some reason, cooled. I don’t know the answer to
it, but it’s a pretty critical issue for them. Quanex always had a screen division within the Homeshield
capability, but when they bought Aluminite, I don’t know, five years ago or so, that’s when they started to
compete in that mid- to small-customer arena, and they now have significant capability in that entire industry.
I think, as they continue to spend capital to be closer to individual customers, that’s how they can grow that
business. Screens don’t travel well. You need to have a plant next to your customer, and they’re very willing
Private and confidential 8
and able to invest to locate their factories in areas next to customers. In fact, in one of the recent calls I’ve
heard, I believe they’d done that now in Pennsylvania, so that would be a strategy to look for in the screen
business.
[00:37:01]
Q: You touched on one of Quanex’s initiatives to leverage existing customer relationships in one division to
possibly cross-sell. Could you discuss the synergies across divisions such as fenestration and cabinet
components? Cabinets are highly specialised, the labour profile is a lot more intensive and it is more difficult,
as you mentioned. Some cabinet manufacturers have low synergies combining or consolidating with
themselves.
JC: If you think about screens and insulated glass and sealants and then the vinyl, not a lot of synergies there,
but what Quanex did a good job of is, when the market crashed in 2008 and 2009, Quanex spent a lot of
money in training their manufacturing professionals in lean manufacturing and lean six sigma. They’ve got
some very strong leaders in that area, and they tend to send the manufacturing leaders around on visits to
individual sites that might have nothing to do with their business. The screen business might have 13
locations, and those folks travel frequently to help each other out to leverage best practices, but they also take
those folks and bring them over to the insulated-glass division and audit their processes, and see how they do
things and recommend ways to do things better, and likewise to the Mikron business. That happened in
spades with the purchase of Woodcraft. Again, not insider information here, but the Woodcraft division came
with some fairly significant safety issues. Their safety record was not great. Quanex is very focused on safety as
an initiative, and we took leaders in the entire Quanex organisation to help improve safety at Woodcraft and
had some very significant success. From a profitability perspective, that improves your profitability as well as
the welfare of the individual employees.
Same thing was done to improve efficiencies, so moving processes closer together, using the lean experts to
help people who were maybe not as far down the road in their journey to get there faster. They do a significant
amount of cross-pollinisation of the operation, and then, for years and years and years, there was a project
where they tried to do cross-selling in a very specific, formal, bureaucratic way. That did not work very well,
but most recently, just through informal relationships where a leader of one division may have a relationship
with a significant customer, and can introduce that customer to one of the other divisions, that has gotten
some traction recently, as they’ve talked about on their calls. That was just in the initial stages as I was with
the company. I don’t know how that’s progressed, but that would be an interesting question to ask leadership
in the next conference call.
[00:40:57]
Q: How has demand fluctuated and how has that impacted Quanex, particularly around its ability to be agile
for customers? How does Quanex tweak its production process to meet demand, considering the implications
for OEM component suppliers in R&R [repair and renovation] or new housing?
JC: Again, different capabilities by the different divisions, but some of the divisions are world-class at meeting
customer demand. A customer might order 10,000 units one day and they might order 100 units the next day,
and they have to level out that production line. They have to be efficient, and they have to be very good at
delivering on time, every time. A lot of thought, a lot of work has gone into that, and so I think, as demand
ramps up or it ramps down, they’re uniquely capable of dealing with that. The IG business comes on rails,
pretty standard. That’s not as big of an issue, but with screens, it’s a very big issue, and with the Mikron vinyl,
it’s a big issue. Some divisions have done better with it than others. With respect to R&R vs new-home
construction, new-home construction tends to be more standard sizes, not quite as much colour variation, but
when working with customers who are active in the R&R space, they want their products delivered very
quickly in infinite customisation. That’s where, if you’re very good at what you do, you can take advantage of
that and be a little bit more profitable, but you have to spend the money in the manufacturing process to
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develop those capabilities, and that’s something that they have done.
One great example or anecdote I can share with you is the CEO of one of the larger customers, we were having
an interaction with him, and we were pushing back and saying, “You guys are asking for increments of an
eighth of an inch in sizing,” and we thought, “That just seems like it’s excessive, and it’s hurting our
efficiencies. Is there something we can compromise on here and reduce that complexity?” He came back and
made a very interesting comment and said, “You could import white windows in 10 different sizes from China
and we would never be able to compete with that, but if the Chinese have to compete with dozens of colours in
infinite sizes, there’s no way they can compete with us, so rather than to fight this complexity, you should
embrace it. You should invest in your manufacturing processes to make it as efficient for you as you possibly
can, so as to make us as competitive as we possibly can.” We had that conversation years and years ago, and
really took it to heart and transformed the manufacturing process to deal with that complexity in an efficient
way. I think they’re uniquely set up to deal with exactly what you’re talking about.
[00:44:44]
Q: Could you describe Quanex’s imports competition? What buffer do tariffs provide to the company’s sales
and profitability?
JC: I can speak to the fact that they have import capability and they were active in China, and before the
tariffs came up, they started to move some products to other countries, as well, in order to reduce the reliance
on just one source. They’re in pretty good shape from what they import. From how the tariffs have impacted
them and where that situation sits today, I really don’t have any knowledge of that.
[00:45:42]
Q: How does Europe fit into Quanex’s broader business? Can you suggest the strategic rationale for entering
the region, including the timeline and some key drivers vs any other market?
JC: The European market is really, in my mind, two different businesses. One is the IG business based in
Germany, and Quanex got involved in that because the Europeans are really more into thermally efficient
windows. U-values and so forth are a big deal in Europe, more so than in North America. The spacers that
Quanex produces are warm-edge spacers, so they happen to be very efficient in people who want to make
thermally efficient windows, so they saw that space, and they decided to invest and develop that capability in
Germany. It’s been a very good decision for them. The manufacturing process is very, very similar to what’s
done in the US, so pretty much the same. I really can’t speak to the market dynamics, but what I can say is,
looking at their Q1 income statements and over the last two and three years, Europe profitability has exploded
almost to the level of a boutique niche market.
The vinyl business in Europe is a little bit different. That’s based in the UK, also a very good acquisition for
Quanex. It’s different than the North American vinyl, in that, in North America, the vinyl lineal business is
customised. They have to make profiles based on the customer’s design in the number of SKUs that the
customer demands, and delivered in the quantities that the customer demands. In Europe, it’s different. They
have their own unique proprietary profiles that they design, they manufacture end market, and so they can
control the number of SKUs. Much more beneficial for the extrusion business, much more controlled, much
less complex, and as a result, much more profitable, or I will say the European business is very profitable and
Quanex has disclosed that the North American business has been hampered by significant price competition.
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[00:48:39]
Q: Could you outline the domestic competitive landscape, focusing on scale? How would you rate Quanex’s
ability to leverage scale to take market share? What implications does a lack of scale have for the company
staying competitive?
JC: When I think about the scale question, a lot of it has to do with the bigger customers that have brand
recognition and want to protect their brand. They want to make sure that there’s absolutely no interruption in
the supply of their product to their customers, so they want to make sure that they’re working with somebody
who’s financially stable, and that has worked to Quanex’s benefit. Some of the people in the industry are less
capitalised than Quanex, and that can sometimes, again, work to their advantage. The cabinet business, the
scale of that business and the size of that operation and the geogra ph ic footprint that they have, it’s a
significant advantage to them. There are instances where they’ll locate a factory right next to the customer,
literally in their parking lot, and the financial resources allow them to invest the capital to do that, so it gives
them a competitive advantage.
Same situation with the screen business. Oftentimes, when their customers wanted to expand into a new
geogra ph y, because it’s better for them to ship windows a shorter distance, of course, they’ll want their
suppliers to go along geogra ph ically with them, and Quanex is very willing and able to do that and has done
that in several instances. From a scale perspective, that’s how I see where they leverage up their advantage,
rather than just massive manufacturing going through a plant. Most of what they do is customised, so they
don’t necessarily get scale through tremendous volume, because even though the volume increases, the SKUs
tend to increase and the complexity increases. As I mentioned before, they’ve made their plants very, very
efficient in working in, for lack of a better term, a lot size level one.
[00:51:21]
Q: How would you assess Quanex’s ability to pass on price increases to customers? Is it stuck with the brunt of
price increases that other industries encounter and unable to pass those on?
JC: In all cases, again, and I know that the management has spoken to this, as well, they have contractual
arrangements. The main commodity for the screen business, you’re talking about aluminium, and they have
contractual arrangements in place that, as aluminium goes up, prices go up to the customer based on the
increase or decrease in the price of the commodity. Same thing with vinyl resin, same thing with the
hardwoods. I don’t know about the IG business, but I suspect that surcharges would be imposed as butyral or
the price of petroleum goes up. That’s the good news. The bad news is these tend to be backward-loaded, so if
the commodity goes up in the previous quarter, then the prices go up in the following quarter. It can tend to be
delayed, but they do have contracts in place to deal with increases in commodity prices.
[00:53:01]
Q: What do you think is Quanex’s appetite for M&A activity, such as acquiring another subsegment or selling a
business that is too hard to manage when it comes to making profitability? Which segment do you think the
company would be much leaner and more efficient without, given your time there?
JC: Willingness to cut price to compete in the business, is that the question?
NH: More the business model of Quanex itself. It has the cabinets business and different lines within
fenestration, so divesting one of these businesses due to lack of synergies or buying more businesses to
diversify that portfolio.
JC: I don’t know what their appetite is for deals at this point. I know that they have significantly paid down
debt that they incurred to purchase the Woodcraft acquisition. I can just speak to what they’ve done in the
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past. The purchase of the Edgetech and Aluminite were very, very good acquisitions. They were synergistic in
the fenestration business. The purchase of Woodcraft, as is well-acknowledged, they declared a write-down of
goodwill assets. That business is very similar in terms of who they’re working with, large OEMs. Logistics are
very important. It seemed like a business that was maybe countercyclical, but the acquisition proved to be a
little bit more difficult than I think they had anticipated. Again, acknowledgement through the write-down
that they made on it. It was a big acquisition and may have, just my opinion, dampened an appetite for further
non-incremental acquisitions.
NH: Do you think that makes the Woodcraft business a likely target, given consolidation among some OEMs?
JC: I don’t really know the answer to that. My opinion would be, in just looking at the financials, they seem to
be going in the right direction. I know that they’ve declared that they’ve invested in more that standard
segment of the market, and that’s where the volume had been moving. They’re extremely well-positioned if the
market moves back to semi-custom. I know they’ve spent a lot of money in capital, in making the processes
more efficient and safer, so I don’t think they’re in any hurry to divest. My guess would be that they think
they’ve made the investments that are necessary. They’ve tended to be a pretty patient company in the past,
and my guess would be that they’re willing to ride through it. I think they believe they have it going in the right
direction. That’s what the financials would indicate, and that’s really their MO. They improve operations
consistently and effectively, and I think they’ve got a real good chance to do that with the Woodcraft business.
[00:57:02]
Q: Is there anything else that you think the investor community should know about Quanex or the broader
industry? Is there anything that you think investors commonly overlook?
JC: I think people don’t understand how good they are logistically, and I think logistics are becoming a bigger
and bigger issue, whether you manage the importation of goods from around the world, they’ve got a pretty
significant capability in that, or whether you manage extremely high customer expectations around complexity
domestically and the efficient operation of doing that. The anecdote that I told you that happened several
years ago, where we were challenged to become more efficient in very, very small lot sizes delivered very
rapidly with no mistakes, they invested millions of dollars to do that and have really mastered that. The ability
to take that and replicate that in the Woodcraft business bodes very well for improvement in profitability in
that business. I think that’s one thing that’s maybe less understood about Quanex than it probably should be.
Another thing would be, as they’ve disclosed, they’re not about growth for growth’s sake. They’re for profitable
growth, and along with the Mikron business that they acknowledged in the past, they’ve walked away from
very large customers because they thought that the price expectations were unreasonable for the value they
were delivering. In some cases, those customers come back, in some cases they don’t, but I think it’s important
for the investment community to know that they’re based on profitable growth rather than growth for growth’s
sake.
[00:59:06]
NH: We will now end the Interview. Let me close by saying, thank you, Jack, for your input. Excellent
Interview, a lot to unpack. Clients, thank you for joining Third Bridge Forum's Interview today. If anyone
would like to speak with Jack in a private call or meeting, please let your relationship manager know. Jack,
thanks again. Goodbye.
Transcription ends at 00:59:17 of the recorded material
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