Quanex Building Products Corporation Stock

Thank you. Good day and thank you for standing by. Welcome to the third quarter 2026 Quanex Building Products Corporation earnings conference call. Today's conference is being recorded. [Operator Instructions] I would like to hand the conference over to your first speaker today, Scott M. Zuehlke, Senior Vice President, CFO, and Treasurer.

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 measures, please see our earnings release issued yesterday and posted to our website. I'll 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'll start with our perspective on the current macroeconomic environment, then I'll walk through our results for the quarter, and I'll 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 new residential construction report 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 in at 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 is 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'm 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 and given the normal seasonality we have been experiencing, this year should be no different. I'm 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 the 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 58 cents 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 ended 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 79 cents per diluted share, during the third quarter of 2026, compared to net income of $31.6 million, or 69 cents 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 of last year. Now results by operating segment. We generated net sales of $220.9 million in our Hardware Solution 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 Solution 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. We reported net sales of $111 million in our Custom Solution segment during the quarter, which represented growth of 8.5% compared to prior year revenue of $102.3 million. Over the quarter, we estimate that volumes were up about 3%, pricing increased by about 5.5%, and the pass-through of tariffs was a minor benefit. Adjusted EBITDA declined to $12 million from $12.9 million in this segment for the quarter, mostly due to inflationary pressures we have already discussed, partially offset by improved pricing. Moving on to cash flow in the balance sheet, cash provided by operating activities was $58.6 million for the third quarter of 2026, which compares to $60.7 million for the third quarter of 2025. Free cash flow increased by 3.5% to $47.8 million in Q3 of 2026 compared to $46.2 million in Q3 of 2025. We generated sufficient cash to repay $42.25 million of debt during the third quarter of 2026, and we also repurchased $1.7 million of our stock.

As of July 31, 2026, our liquidity, which is really just the borrowing capacity under our revolver combined with the cash on the balance sheet, was approximately $363 million, an increase of 10.5% versus Q2 of this year. We expect liquidity to improve again in the fourth quarter. As of July 31, 2026, our leverage ratio of net debt to last 12 months adjusted EBITDA decreased to 2.8 times. We continue to believe we will exit 2026 with an even lower net leverage ratio as we continue to generate cash and repay debt. Our long-term view for the residential housing market remains positive. However, due to the ongoing macroeconomic challenges, we remain cautious on the near-term outlook. We continue to monitor the situation in the Middle East, which is still having an impact on transportation costs and the price of raw materials and energy. We believe that the initial rate and magnitude of inflationary cost pressures have somewhat subsided.

For modeling purposes, please use the following cadence for the fourth quarter of 2026 versus the fourth quarter of 2025. On a consolidated basis, we expect revenue growth of 2% to 3% and adjusted EBITDA margin expansion of 50 to 75 basis points. In addition, we believe an estimated tax rate of approximately 24% should be reasonable for the fourth quarter of 2026. As always, we will stay focused on the things that we can control with near-term emphasis on generating cash to reduce debt while opportunistically repurchasing our stock and identifying further operational improvements and efficiencies that can benefit us when economic conditions improve.

Operator, we are now ready to take questions. At this time, we'll conduct a question and answer session. [Operator Instructions] Please stand by while we compile the Q&A roster. And our first question comes from the line of Julio Romero of Sidoti.

Great, thanks. Morning, George and Scott. Good morning. I wanted to start on – hey, good morning. I wanted to start on the Hardware Solutions segment. You realized year-over-year gross margin improvement about 160 basis points there. Can you speak to how much of the margin expansion reflects price realization from the increases phased in during the third quarter versus operational improvements versus 80-20 initiatives? And then also, can you speak to how much of the announced price increases were realized and how much of the benefit is there to come in the fourth quarter?

So, I don't know if I get into specifics about that, but in general, I would say that the price increases we implemented in third quarter were phased so that we do expect a bigger or more impact or full impact in the fourth quarter of this year, since we'll get the full quarter impact there. From a pricing standpoint, I would say that year over year, quarter over quarter in Hardware Solutions, I'm talking about adjusted EBITDA, price improved by about $3.1 million of the increase.

Okay. And how much was, if we're speaking about the EBITDA line, can you speak to the 80-20 benefit in the quarter for that segment?

Yes, so as it relates to the 80-20 projects that we have going on right now, I would say the benefits are minimal versus prior year because they're just now starting. I would say we've taken some actions on reducing some SG&A, but we're in the infancy stages of that, so I think you'll see those continue to pick up in the fourth quarter, and then in the next year you'll see more meaningful benefits. So pretty negligible year over year for Q3, but the momentum and progress of those projects will continue to pick up and continue to add benefit as we go forward.

Okay, great. And then last one for me is Scott, I think you called out that the tariff reimbursements to customers was a 2% headwind in the quarter. How much of a headwind remains for the fourth quarter?

A lot less than that. So magnitude really mostly in the Hardware Solution segments was roughly $9 million on the revenue side impact in the third quarter, so something significantly less than that in fourth quarter is expected.

Got it. I'll pass it on. Thanks, guys. Thank you.

Thank you. Thank you. One moment for our next question. Our next question comes from the line of Adam Thalhimer of Thompson Davis.

Hey, good morning, guys. Congrats on the solid Q3. Thank you. Hey, Scott, your margin guidance for Q4 struck me as particularly impressive, you know, at least up 50 basis points, I guess, sequentially and year over year. Is that where should we model that from a segment standpoint? Where do you think that strength comes through?

Yes, I would focus more on the Hardware Solution segment, mainly because if you think back to last year for Q, we still had a pretty big impact from the Monterrey issue.

That shouldn't be there this year. And then the other piece along with that, like we just talked about with Julio, is that you're obviously going to get the full benefit of a full quarter's worth of the pricing impact. So those two things compared on an annual year-over-year basis should, especially in the Hardware segment, stick out the most.

Okay, and you had good SG&A control in the third quarter, so I guess that continues in Q4.

It's obviously a focus of ours. As we've gotten all of the new segments stabilized, finalized, and we're operating in a really pretty efficient manner, we can identify opportunities to continue to improve. Obviously, the basis of everything that we're doing from an 80-20 perspective evaluates the amount of SG&A that you have. that we are using to support very little levels of revenue and we're trying to address those. So, appreciate the comment. I think that it's a focus of ours and you'll continue to see improvements both in fixed costs and SG&A. Great.

And then I wanted to ask about, because the revenue growth was impressive in Custom Solutions, and within Custom Solutions, it's particularly impressive within Wood Solutions. So I was curious, within Wood Solutions, how does the growth break down between kind of core volume, price, and then the outsourcing opportunity.

That you had this year and what's the outlook for that segment? So, for yeah, for Wood, I would there's a couple things playing into the improvement in revenue from a volume perspective market in general is still soft in that in that business however we were and I think we commented on this before we were able to win some new business that started hitting us earlier this year to the tune of like $10 million a year. So that is definitely helping that business this year, which is in contrast to what the market is doing.

Now on a go-forward basis, so we started picking up that business at the very end of our Q4 and really Q1 of this year, so you'll probably see one more quarter of year over year benefit, you know, and as we discuss the tariffs and obviously what's going on between the U.S. and Canada depending on where all those tariffs settle out, you know, that could be an opportunity for more insourcing of cabinet products because of the reliance on the wood and the wood tariffs between the two countries. So more to come. It's fluid as it relates to the tariffs, and it seems to change every day. So could be some upside there, but, you know, more to come.

Are you having active discussions on those, or you're just saying that the backdrop remains favorable?

What I would tell you is that the quoting activity is significantly picked up, and I think customers that are sourcing product from Canada are trying to find options to determine what it needs to be on a go-forward basis. So they're doing their due diligence by finding opportunities and we're actively quoting. So again, really fluid. Every day is different.

Okay. Sounds great. And then lastly, obviously, very good cash flow, debt pay down. I just wanted to think kind of big picture multi-year. Because before you bought Tyman, you had actually flipped to net cash. And I just wonder, as you let the model run out here, maybe we get into a better demand environment. Is getting back to net cash a goal, or do you think, would you rather get back to doing tuck-in M&A? Yes.

You know, one of the important part of our thesis in acquiring Tyman and in resegmenting is that we've identified opportunities for future growth down the road. I don't think it would be prudent for us to be in a net cash plus position. I think if we can't find opportunities to grow both organically and inorganically in adjacent markets, we're not doing our job. So I think if we can get down to one, one and a half times, I think you would see us probably looking to do more transformative type of things but again, we're a fairly conservative company in that regard and we manage our debt, I think very prudently, so I think you'll see the near-term focus continue to be on paying down debt and reducing the interest expense so we can grow organically and then once we continue to drive it down, our goal is to expand into adjacent markets both organically and inorganically. So I don't think you'll ever find us or it's not a goal to be in a net cash plus position. Okay.

Thank you. Thank you. One moment for our next question. Our next question comes from the line of Steven Ramsey of Thompson Research Group.

Good morning, everyone.

You have to start.

Yes, I wanted to start with the Spacers product within Extruded, very strong results year to date. And again, the quarter and it's a high margin product for you. Can you go into some details on the demand and the pricing in that category and can you talk about the mix impact it's bringing to the segment margins?

Yes, as we look, obviously I don't think we gave any breakdown of by product line, but that's obviously a solution segment. Yes, as we look, obviously I don't think we gave any breakdown of by product line, but that's obviously a part of the Extruded Solution segment. And that market has grown very nicely. And the warm edge spacer markets are very much tied to high-end energy efficient windows. So I think as energy costs continue to be elevated and our people are being able to justify replacing windows to get energy savings, the demand for our spacer product will continue to grow, you know, that started long ago in Europe which has always been kind of the leading indicator for what's going to happen in North America and I think we're seeing that. You know, it's been influenced in most of that product line, especially in North America, on index pricing mechanisms, and a lot of that is petroleum-based, so, you know, a lot of the price of that product we've been able to pass through and cover inflation very good. So, you know, overall, I would say our margins have done well. It's a very efficient plant, and we have pricing mechanisms in place to protect us from inflationary pressures.

Thank you.

Yes, the only thing I'll add there, Steven, is within that Extruded Solution segment, yes, you have the IG Spacers business, which everybody knows is a good profitability business for us. But you also have the linear business in the U.K., which is the vinyl extrusion business, which is also a very good, highly profitable business. The reasons for that segment being high margins is because of the product mix. Those two product lines make up, from a revenue perspective, like 65% to 70% revenue of that segment. You give me some color.

Yep, that's great color and great great performance there. Also wanted to dig into the Screen's performance. very good in the quarter and up on a, I believe, up on a year-to-date basis. Can you talk about the Screen's performance within Hardware, what the outlook is implied there in the fourth quarter, and do you see the strength sustaining beyond this fiscal year? Sure.

You know, the Screens segment and product line within the Hardware segment has been a good growing business for ours. We continue to service the customers well. It is an area that at times has outpaced market growth because the OE window makers, the ones that insource that, it's one of the first things that they can look to outsource if they're having a hard time of getting labor or taking up too much floor space in their manufacturing facilities so we've been able to grow share probably a little faster than the market has grown and we continue to like that business. I think we're working very hard on footprint optimization things to drive to drive more efficiency. So, you know, over the course of the last couple years, we closed a couple facilities in the West Coast and are able to service that area from bigger plants and get some operational performance benefits out of that. And I think we'll continue to focus on that. But in terms of our portfolio, the entry-level Screens business is probably the near commodity product that we sell, but I think we're doing some really nice things to continue to buffer that margin, and I think the future is bright for that group. Okay, that's helpful. Thanks for the color.

Thanks. Thank you. One moment for our next question. Our next question comes from a line of John McLeod on for Ruben Gardner of StoneX.

Hey, good morning, guys. This is John McLeod on for Ruben Gardner. Hey, John. So most of my questions have been asked or at least touched on to an extent. Just one quick one, just kind of based on the prepared remarks there, it sounded like the tariff refunds and pass-throughs were a detriment to Hardware Solutions, but then it sounded like you said there was a benefit in Custom. I was just wondering if you could kind of outline, you know, was that full pass-through you did to customers, was it kind of product by product or or categorized in some extent, any details there? Just, you know, we've seen a lot of companies of late kind of hold on to those refunds and kind of justify that in the sense of new tariff policies and the inflationary pressures. Just anything you could provide color-wise on the impacts there and the strategy of pass them along.

Yes, so the tariff refunds really only impacted the Hardware Solutions business during the quarter. The slight improvement or benefit in the Custom Solutions segment was just talking about passing through tariffs like we had done prior to last quarter in most of the other businesses. So there's just a nuance there.

And on your last point, I think it's important that I do note, as it relates to giving back or retaining and holding tariffs, our philosophy has been we are not trying to use tariffs as a margin-generating item, especially in a market or an environment where the consumers are pressured so hard. So our philosophy has always been that we are going to be very transparent with our customers. I think it's the way we try to do business. And so, you know, if we've passed through or pushed a tariff through and we've gotten a refund as a result about it, it's not our money to keep. And, you know, it's just the core operating philosophy of how we're going to treat our customers. So everything we've done has been a direct pass through. And if we get refunds, we'll pass it directly back through the customer.

It's not meant to be a margin grab.

All right. That's great, Culler, and I'm sure your customers appreciate that as well. Good luck in the quarter. Hi, guys. Thanks.

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

I'd like to thank everyone for joining the call today, and we look forward to providing the next update in early December. Thank you.

Thank you for your participation in today's conference. To conclude the program, you may now disconnect.

This live transcript is auto-generated without human intervention or review.

Good day, and thank you for standing by. Welcome to the Q2 2026 Quanex Building Products Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Scott Zuehlke, Senior Vice President, CFO and Treasurer.

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.

Thanks, Scott, and good morning to everyone on the call. In my commentary, I will give our perspective on the current macroeconomic environment, provide an overview of our results, highlight some inflationary challenges and the actions being taken by Quanex and then discuss go-forward priorities.

From a macroeconomic perspective, housing demand in North America and Europe is showing early signs of stabilization, but the recovery will likely proceed gradually. Progress remains constrained by persistently weak consumer confidence, which remains below historical norms. Inflation fatigue, affordability challenges and ongoing geopolitical uncertainty are outweighing an otherwise strong labor market.

In the U.S., mortgage rates above 6% further dampened activity while the lock-in effect where homeowners are reluctant to relinquish previously secured low rates continues to limit mobility, even as rising home equity reflects higher property values.

Given these ongoing challenges, we don't expect housing markets to rebound sharply in the near term. We instead anticipate a steady recovery over the medium to longer term, and this will depend on: one, an improvement in affordability; two, a decrease or stabilization of interest rates; and three, an improvement in consumer confidence influenced by a period of geopolitical stability.

I will now provide some commentary on our results for the second quarter of 2026. Despite the headwinds, I just mentioned, demand for our products came in largely as expected, and we performed well from an operational standpoint. On a consolidated basis, revenue increased modestly year-over-year, as pricing actions, tariff-related pass-throughs and favorable foreign exchange more than offset lower volumes.

Looking ahead to Q3, we expect seasonal demand patterns to continue, which should mean sequential volume growth. Notably, volumes softened following Memorial Day last year. And although we realized it's still early, we have not observed similar trends to date this year. We will remain vigilant in this regard closely monitoring order patterns to respond quickly to any changes in demand. Gross margins declined 350 basis points year-over-year in Q2, primarily due to sharp increases in raw materials and logistics costs.

Our Hardware Solutions segment was impacted the most by inflationary pressures during Q2 of this year due to the legacy nature of the make-the-stock business model for the window indoor hardware product line and the fact that the inventory levels are highest in this segment.

Although our North American index pricing mechanisms are designed to adjust for input cost fluctuations, the quarterly timing of these adjustments, varying by commodity, customer and product line can create temporary earnings pressures during periods of rapid inflation, like those we've seen in the past few months.

In our European and international markets where index pricing is less prevalent, price adjustments rely more on customer negotiations and announced increases, often with advanced notice periods that further extend timing impacts.

Cost pressures on raw materials were broad-based across segments during Q2 of this year. The Hardware Solutions segment was most affected by rapid cost increases for aluminum, zinc, stainless steel and plastic resins.

The Extruded Solutions segment was most impacted by cost increases for butyl rubber, silicon compounds, carbon black, desiccants and PVC resins. And our Custom Solutions segment was most impacted by cost increases for EPDM, carbon black, oils, aluminum, plastic resins and certain hardwoods.

Rising costs and packaging, particularly plastic and paper as well as increases in freight and logistics costs impacted margins across all segments and product lines. To mitigate these pressures, we have implemented and will continue to implement targeted price increases ranging from mid-single digit to low teens percentages to be phased in throughout Q3 and tailored by product line.

Going into Q3, our operational priorities will be on closing the price cost gap across all product lines, accelerating the transition for make-the-stock to make-the-order for the window indoor hardware business, Executing on our 80/20 initiative in the North American window and door hardware business, improving working capital and then generating more free cash flow. We believe that by executing on these actions, we will be well positioned to deliver shareholder value as market conditions improve.

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 $462.4 million during the second quarter of 2026, which represents an increase of 2.2% compared to $452.5 million for the same period of 2025. The increase was mainly due to favorable impacts from pricing, tariff pass-throughs and foreign exchange translation. We estimate that volumes were down about 3%. Pricing was up approximately 1.5%. The tariff pass-through impact was about 1%, and foreign exchange translation was a benefit of about 2.5%.

We reported net income of $3.4 million or $0.07 per diluted share during the 3 months ended April 30, 2026, compared to net income of $20.5 million or $0.44 per diluted share during the 3 months ended April 30, 2025. The effective tax rate in the second quarter of 2026, excluding discrete items, was approximately 24%, which is what was expected.

On an adjusted basis, we reported net income of $11.3 million or $0.25 per diluted share during the second quarter of 2026, compared to net income of $29.1 million or $0.63 per diluted share during the second quarter of 2025.

The adjustments being made to net income are primarily for expenses related to a plant closure or relocation, transaction and advisory fees, reorganizational costs, amortization expense related to intangible assets and foreign currency impacts.

On an adjusted basis, EBITDA for the quarter was $44.2 million compared to $63.1 million during the same period of last year. The decrease in adjusted earnings for the second quarter of 2026 compared to the second quarter of 2025 was mainly due to reduced operating leverage from lower volumes related to ongoing macroeconomic uncertainty combined with weak consumer confidence, tariff-related costs and inflationary pressures. More specifically, due to the ongoing war in the Middle East and other macroeconomic factors, we realized a significant increase in transportation and raw material costs during the quarter.

Now for results by operating segment. We generated net sales of $203 million in our Hardware Solutions segment for the second quarter of 2026, a slight increase compared to $202.9 million in the second quarter of 2025. We estimate that volumes were down approximately 5%. Pricing was marginally up by about 0.5% in this segment. The tariff pass-throughs impact was about 2.5% and foreign exchange translation was a benefit of about 2%.

Adjusted EBITDA was $5.2 million in this segment for the second quarter of 2026 compared to $27 million in the same period of 2025. This decrease was largely due to reduced operating leverage from lower volumes combined with impacts from tariff changes and inflationary pressure on materials, freight and labor costs, all of which meaningfully impacted gross margin.

Our Extruded Solutions segment generated revenue of $165 million in Q2 of this year, a slight increase compared to $164 million in Q2 of last year. We estimate that volumes were down approximately 4% year-over-year in this segment for the quarter with pricing up by approximately 1% and a positive foreign exchange translation impact of about 3.5%.

Adjusted EBITDA declined slightly to $30.4 million in this segment for the quarter versus $30.7 million during the same period of last year, mainly due to decreased operating leverage related to lower volumes and general inflationary pressure.

We reported net sales of $103.9 million in our Custom Solutions segment during the quarter, which represented growth of 6.6% compared to the prior year. For the quarter, we estimate that volumes were up by approximately 1%, pricing increased by approximately 4.5% and foreign exchange translation, coupled with the pass-through of tariffs was a benefit of approximately 1%. Adjusted EBITDA declined to $11 million from $13 million in this segment for the quarter, mostly due to inflationary pressures we have already discussed.

Moving on to cash flow and the balance sheet. Cash provided by operating activities was $18.9 million for the second quarter of 2026, which compares to $28.5 million for the second quarter of 2025.

Free cash flow was $7.9 million in Q2 of 2026 compared to $13.6 million in Q2 of 2025. We expected to be a net borrower during the second quarter due to the longer cash conversion cycle of the legacy Tyman business but continued execution on managing working capital enabled us to avoid being a net borrower for the quarter.

For context, we were a net borrower of almost $19 million in Q2 of last year.

Our liquidity was $328.6 million as of April 30, 2026, consisting of $63.7 million in cash on hand plus availability under our senior secured revolving credit facility due 2029, less letters of credit outstanding.

As of April 30, 2026, our leverage ratio of net debt to last 12 months adjusted EBITDA was 3.1x. We expected our leverage ratio to increase in Q2, but we continue to believe we will exit 2026 with a lower net leverage ratio as we generate cash and repay debt in the second half.

Our long-term view continues to be favorable as the underlying fundamentals for the residential housing market remain positive. We entered fiscal 2026 with a cautious outlook due to the ongoing macroeconomic challenges and remain cautious considering the current geopolitical events. We continue to monitor the situation in the Middle East, which is contributing to a significant impact on the price of raw materials, energy and transportation costs.

During our last earnings call in March, we mentioned that fiscal 2026 could be somewhat flat compared to fiscal 2025 with puts and takes, but that the first half of 2026 may be more challenged than the first half of 2025, implying a somewhat improved second half year-over-year. Since that time, inflationary pressures have increased and the broader uncertainty related to geopolitical developments, consumer confidence, interest rates and tariffs has reduced visibility into the balance of the year. Accordingly, we are not reaffirming our previously issued guidance for fiscal 2026 at this time. However, we will provide our expectations for the current quarter.

Please use the following cadence for the third quarter of 2026 versus the third quarter of 2025. On a consolidated basis, we expect revenue to be flat to up 1% and adjusted EBITDA margin is expected to be flat to up 25 basis points. In addition, an estimated tax rate of approximately 24% should be reasonable for the third quarter of 2026. As always, we will stay focused on the things that we can control with near-term emphasis on generating cash to reduce debt while opportunistically repurchasing our stock and identifying further operational synergies that can benefit us when the economic conditions improve.

Operator, we are now ready for questions.

[Operator Instructions] And our first question comes from Steven Ramsey with Thompson Research Group.

Maybe I wanted to start with, if you could elaborate a little bit further on the index pass-through timing in North America, how it impacts the various segments? And maybe how it is embedded in the Q3 outlook and if more of the benefits are after the third quarter?

Yes. So as we mentioned, as price increases come in, and I'm going to talk specifically about the ones that have material index -- automatic indexes, the raw materials that are on the index pricing mechanisms. We tend to review those on a quarterly basis. So you've got any inflation that occurs within that quarter will either trigger up or down, and in this case, up an index. But until those quarterly review points, we tend to either get the benefit or in this case, take the brunt of any inflation. And then when it triggers, obviously, the pricing goes through at that point in time.

So you could have anywhere from a 90 to maybe a 2-day lag depending on when in the cycle, the price increases go. That tends to be different based on the type of commodity and the customer contract. Those tend to be negotiated. As it relates to our Q3 and Q4 outlook, what we're assuming right now is that the pricing that we're at today remains somewhat stable and that those price increases that have triggered were gone in. So we're assuming no more additional inflation or decreased inflation.

And the challenge and what we tried to say in our commentary is that lack of visibility on what is happening from a macro perspective and in the geopolitical influences, we just have no visibility. So we're in a chase mode here, and that's going to continue. So -- our forecast assumes no price increases, but your forecaster at this point is probably as accurate as anyone because no one knows.

Okay. That's helpful. And then you discussed the volumes in total and by segment in the quarter. Do you feel like there was any market share shift in any of your larger product categories? Or do you feel like volumes were overall aligned with the market?

I think there's puts and takes in the hardware section, where we've gained some share and then we've had pressure on share. It depends on the product line. I think -- the area where we benefited is, we've taken some share where there's been some strategy changes amongst our customers in outsourcing additional materials on the Custom Solutions segment, specifically within the wood product lines where we've actually been a winner.

Otherwise, I would say that the supply chain is relatively stabilized and there's not a lot of people out in today's world really looking to rattle their supply chain because of the risks and the ability to supply. So I think you tend to see the supply base kind of retrenched and trenched in, and that's what we've seen to this point.

Okay. Sounds good. And last quick one for me. Last year, we saw fourth quarter EBITDA margin edge up a bit over the third quarter. Is that directionally the way to think about fourth quarter EBITDA margin?

Yes. I think, right now that's a fair assumption mainly because these price increases that are stepping in during the third quarter, we should get the full benefit in the fourth quarter.

And the other thing to add to that, as I mentioned in my commentary, last year was a little bit of an aberration that the Q3 volumes actually kind of flattened out, which wasn't normal seasonality. Typically, we see Q3 ramping up and then Q4 being our strongest volume month. So Q3 last year was a little flat and then Q4 started to bounce up. We would -- if we see normal seasonality, we would expect margins to improve just because of the leverage aspect of some of our business. Volumes will drive profitability.

Our next question comes from Kevin Gainey with Thompson Davidson Company.

It's Kevin on for Adam. Maybe if you could talk on cash flow. Last year, in the back half, you generated about $100 million. Should we expect maybe that capability in this second half? Or is the inflation going to have a sizable impact to that?

We definitely expect to generate most of our cash in the second half of this year. That's no different than any other year. To the extent and the magnitude of the cash flow that will depend on several things, one of which is the rate of inflation that we've seen. And then obviously, we need to expect volumes to increase due to the seasonality of our business. But the other thing that we're doing that will help cash flow is, and we saw that in the -- at the end of the second quarter is, we are making a meaningful improvement in the inventory levels coming down, and we expect that to continue, which should help cash flow as well.

Appreciate the color there. And then you mentioned in the release paying down debt and opportunistically repurchasing shares in the second half. How do you expect the target between the 2? And then how attractive are buybacks kind of at the current levels in your model?

So I think you can assume that our priority will absolutely be to pay down debt. We'll evaluate the price. We obviously believe our stock is trading at a discount. We'll continue to look at it. But the impact -- the math and the impact for us on buying or paying down debt at this point is more influential for our investor base than repurchasing shares. So that's the prioritization of that for us. I think you can assume the paydown of debt will come first.

Our next question comes from Julio Romero with Sidoti & Company.

The release and your comments also called out the increase in transportation costs in the quarter alongside the increased material costs. Can you maybe put a little finer point on the impact of that increase in the quarter? And if that's related to higher freight rates or fuel surcharges or expedited freight, and then how does that trend in the third quarter in your view?

Yes. We haven't given clarity on breaking that out from a dollar amount, but I can generally speak, it's impacted us in 2 ways. Obviously, the fuel cost and the cost of energy, I mean, almost every company has levied surcharges, fuel surcharges to offset the ramp-up, specifically after the war in the Middle East started. So that has taken a pretty immediate and rather rapid tool. And we're doing the same to try to offset it, but it's always a catch up.

And then secondly, especially on our international, we ship products to all over the world. And whether that's from the U.S., whether it's from the U.K. or whether it's from Italy, and depending on the locations. So for the products that go to our warehouse in Dubai and service the GCC region, obviously, getting product through the Strait of Hormuz is not feasible at this point. So you have to create different logistics chains that significantly more expensive, increase the time to get and impact the ability to ensure and protect those shipments. So it's impacted us in 2 different ways.

Understood. You also recently appointed a new President of Hardware Solutions in April. Can you maybe discuss what is more immediate priorities are for the Hardware Solutions segment? Where on that priority list is that transition you mentioned from the made-to-stock product lines to the made-to-order product lines? And then where his longer-term focus for the segment is?

I appreciate the question, and it gives me the opportunity, first and foremost, to thank Bob Daniels, who will be retiring at the end of the year. Bob has been with Quanex for a long time and had announced his intention to retire even at the point when we purchased Tyman. And so this was a planned upon move. And then adding Chad Collins to that position, we felt like it continued to strengthen the areas that we felt needed to be strengthened. Not only he is a phenomenal businessman and can add value to the entire Quanex, but his background in looking at how we go to market and how we engineer products very much the focus on an 80-20 principle to streamline and really optimize the cost footprint of our organization, identifying what SKUs actually generate revenue and making sure that we're focused on doing those right things.

We were very excited to get him. He's already been able to come in and identify opportunities, which we kind of highlighted and its full systems go. So I think the future is bright for that group and look forward to being able to talk more about what he's doing in those areas going forward. So he came into Quanex and has hit the ground running.

Excellent. Last one for me here is for George. On the index pricing kind of a broader strategic question, are there longer-term opportunities or thoughts on improving or changing the terms on the contractual mechanisms over time, whether it be with the duration of the lag? Or how much the underlying material cost has to change before being triggered? Would just love to hear your high-level thoughts on that topic there, George.

Yes. It's a great question, Julio. And so I would say, every contract in today's world is being reviewed to say is that's still adequate and still doing what it's meant to do. And have things shifted to where the contract needs to change. So yes, we will evaluate each and every one of them. I think it very much depends on the product line, our competitive positioning within that segment. So rather vague answer for you, Julio, and for that, I'm sorry, but the answer is yes, but it's very dependent and situational based.

But the world is different today. And I think that, that's us and every other company in the world are looking at everything with a new set of lenses and we'll continue to evaluate ways to be -- create win-win solutions for both us and for our customers.

Our next question comes from Reuben Garner with The Benchmark Company.

This is John on for Ruben. So pretty thorough Q&A so far today. Just one quick one left for me. I know last quarter, we had talked about how you were seeing some opportunities for increased sales and volumes in Custom Solutions, especially with reshoring and nearshoring trends. Just now that we're a little bit further out from the tariff decisions and maybe a little bit more clarity on how those refunds are going. I understand a lot of it comes -- it's a long tail as far as the decisions that have to be made on how your customers are manufacturing elsewhere. But are you seeing any shift in kind of strategy or maybe the long-term decisions to even move more manufacturing back closer to the U.S. to your operations yet?

So I think the answer to that would be, it depends on the customer and their strategy. With the custom -- or the kitchen cabinet and the bathroom cabinet markets, there's continued consolidation in that area. I think there will be a pause to see where the merger of 2 of the big players, what their go-forward strategy will be looking like. But the other customers in that market -- we have seen some areas where there is in-sourcing. And as you can see in our numbers and what we called out, we had -- in what is a relatively soft or even a down market for the cabinets, we grew volumes year-over-year despite that fact.

So it's obvious we've taken some share and have been able to successfully sell our value proposition to those customers. And I think our focus will be to continue to do that. And I feel good about what that product line is doing for us. And we'll continue to push and try to optimize that in every way we can. But I feel good about what the team and the wood components is doing.

I would now like to turn the call back over to George Wilson for any closing remarks.

I'd like to thank you all for joining the call today, and we look forward to providing an update in our call in September. Thank you very much.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Q1 2026 Quanex Building Products Corporation Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Scott Zuehlke, Senior Vice President, CFO and Treasurer.

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. .

Thanks, Scott, and good morning to everyone on the call. Before beginning my commentary on our first quarter results, I would like to take a moment to recognize and thank Susan Davis for her many years of dedicated service as a Board member to Quanex and its shareholders. .

Her commitment, insight and guidance have been invaluable to our organization. Susan consistently served as a steadfast voice for shareholders during our transformation from a metals company to a pure-play building products company and through 3 CEO transitions and several acquisitions.

Her perspective and presence in the boardroom made a meaningful impact, and she will be greatly missed. On behalf of the board and the entire organization, we wish her all the best in her retirement.

Turning now to our fiscal first quarter. Market conditions remained soft and company performance was in line with our expectations. As is typical given the seasonality of our business, -- the first quarter is our most challenging from a volume standpoint. The holidays, coupled with the onset of winter weather consistently create headwinds in our Q1, and this year was no exception.

From a broader perspective, challenges in the global macroeconomic environment and the markets we serve continue to impact results. The most significant challenge continues to be end consumer confidence. While inflationary pressures, labor costs and certain raw material costs have started to moderate, energy prices have risen.

In addition, heightened geopolitical tensions, particularly in recent days, are contributing to a more cautious consumer environment worldwide. Despite the near-term headwinds the longer-term underlying fundamentals for the residential housing sector remain constructive. In addition, inflation appears to be stabilizing, and there is an increasing expectation of additional rate cuts from the Federal Reserve this year.

We continue to believe the structural drivers supporting both new construction and the repair and replacement markets remain intact. At this time, we don't anticipate a deeper downturn in the end markets we serve. In Europe, economic data from third-party sources point to early signs of stabilization and gradual recovery across most countries, which we view as an encouraging development as we look ahead.

Now turning to our performance in the first quarter of 2026. In the Hardware Solutions segment, our focus is centered on 2 key priorities: stabilizing operational performance and strengthening our commercial organization, including the finalization of go-to-market strategies across our international markets.

As previously disclosed last year, we identified an operational issue at our hardware facility in Monterrey, Mexico that required some incremental capital to remediate. We are pleased to report that our efforts have advanced to the point where we believe the plan is now stable, and we don't expect to provide updates on this matter going forward.

Within the Extruded Solutions segment, our focus has been on advancing new product development initiatives, evaluating adjacent market opportunities and relaunching and repositioning our Schlegel Seals product lines. We are very encouraged by the progress being made across each of these areas as they are central to achieving our profitable growth objectives.

These initiatives are expected to strengthen our competitive positioning and expand our addressable market over time. I anticipate being able to share additional details on new product launches and commercialization milestones later in the year. In the Custom Solutions segment, we continue to advance several initiatives designed to support future growth.

More specifically, in our cabinet components operation, the primary focus has been on driving operational efficiencies to successfully integrate recent market share gains and ensure that we scale effectively. Within our Access Solutions operations, efforts have centered on optimizing operating methods to enhance process consistency, quality and on-time delivery.

And in our mixing and compounding operations, we remain focused on new products and chemistry development. These initiatives are enabling us to expand into adjacent markets that demand highly engineered solutions supported by strong technical expertise and service.

Together, these efforts position the Custom Solutions segment to deliver improved performance while building a stronger foundation for sustainable growth. Looking at our corporate functions. Our newly created commercial and operational excellence teams are now focused on new market development, the creation of global pricing strategies, logistics and sourcing projects to drive savings ongoing ERP rationalization and AI-led process improvements.

We believe these efforts will produce the results needed for revenue growth, margin expansion, cash flow generation and improved return on invested capital. From a capital allocation perspective, we will continue to focus on maintaining a healthy balance sheet through disciplined debt reduction. And looking ahead from a growth standpoint, we will focus on driving organic initiatives while pursuing targeted small bolt-on acquisitions if available, that complement our existing platforms and capabilities.

The outcome of these actions will be a stronger, more flexible balance sheet that is well positioned to support our long-term growth opportunities and strategic objectives.

I'll 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 $409.1 million during the first quarter of 2026, which represents an increase of approximately 2.3% and compared to $400 million for the same period of 2025. The increase was mainly due to foreign exchange translation in the pass-through of tariffs.

We reported a net loss of $4.1 million or $0.09 per diluted share during the 3 months ended January 31, 2026, compared to a net loss of $14.9 million or $0.32 per diluted share during the 3 months ended January 31, 2025. On an adjusted basis, we reported a net loss of $0.3 million or $0.01 per diluted share during the first quarter of 2026 compared to net income of $9 million or $0.19 per diluted share during the first quarter of 2025.

The adjustments being made to EPS are primarily for transaction and advisory fees, amortization of the step-up for purchase price adjustments on inventory, restructuring charges amortization expense related to intangible assets and foreign currency impacts.

On an adjusted basis, EBITDA for the quarter was $27.4 million compared to $38.5 million during the same period of last year. The decrease in adjusted earnings for the first quarter of 2026 compared to the first quarter of 2025 was mainly due to reduced operating leverage from lower volumes related to ongoing macroeconomic uncertainty coupled with low consumer confidence and higher, but temporary operational costs related to our hardware plant in Monterey, Mexico.

Now for results by operating segment. We generated net sales of $189.1 million in our Hardware Solutions segment for the first quarter of 2026, an increase of 2.4% compared to $184.7 million in the first quarter of 2025. We estimate that volumes were down 3.6%, pricing was up 0.5%.

The tariff impact was about 3.2% and foreign exchange translation was a benefit of about 2.3%. Adjusted EBITDA was $4.5 million in this segment for the first quarter compared to $8.2 million in the same period of last year, mainly due to decreased operating leverage related to lower volume, general inflation and approximately $3 million of incremental costs related to our hardware plant in Monterrey, Mexico.

As George mentioned, we believe this plant is now stable. Our Extruded Solutions segment generated revenue of $139.8 million in the first quarter, essentially flat compared to $139.6 million in the first quarter of 2025. We estimate that volumes were down 2.6% year-over-year in this segment for the quarter with pricing up slightly by 0.3% and a positive foreign exchange translation impact of about 2.4%. Adjusted EBITDA declined to $20.9 million in this segment for the quarter versus $24 million during the same period of last year, mainly due to decreased operating leverage related to lower volumes and general inflationary pressure.

We reported net sales of $89.1 million in our Custom Solutions segment during the quarter, which represented growth of 4.8% compared to prior year. We estimate that volumes were up 2.4% pricing decreased by 2% in this segment for the quarter, and foreign exchange translation, coupled with the pass-through of tariffs was a benefit of approximately 0.5%.

Adjusted EBITDA declined to $4.6 million from $6.3 million in this segment for the quarter, mostly due to general inflation and higher SG&A. Moving on to the cash flow and the balance sheet. Cash used by operating activities was $20.2 million for the first quarter of 2026, which compares to $12.5 million for the first quarter of 2025.

Free cash flow was negative $31.5 million in the first quarter of 2026 compared to negative $24.1 million in the first quarter of 2025. Keep in mind that the first quarter of our fiscal year is usually the low watermark for the year. due to the seasonality of our business.

On a related note, we have historically been a net borrower in the first quarter of our fiscal year. But with the addition of time and their longer cash conversion cycle, we now expect to be a net borrower during the first half of each fiscal year, with the majority of our cash flow generated in the second half.

Our liquidity was $331.6 million as of January 31, 2026 consisting of $62.3 million in cash on hand plus availability under our senior secured revolving credit facility due 2029, less letters of credit outstanding. As of January 31, 2026, our leverage ratio of net debt to last 12 months adjusted EBITDA was 2.8x.

We do expect our leverage ratio to increase slightly in Q2 but we also believe we will exit 2026 with a net leverage ratio closer to 2.0x as we generate cash and repay debt in the second half. As George mentioned in our earnings release, our long-term view continues to be favorable as the underlying fundamentals for the residential housing market remain positive.

While we entered fiscal 2026 with a cost outlook due to the ongoing macroeconomic challenges, and remain somewhat cautious in light of the geopolitical events now occurring. We are optimistic that demand for our products will improve as consumer confidence is restored over time.

We're monitoring the situation in the Middle East, which could have an impact on customer demand, raw materials pricing and shipping rates for our international hardware business. But as of now, we're comfortable with providing guidance for fiscal 2026.

During our last earnings call in December, we mentioned that fiscal 2026 could be somewhat flat compared to fiscal 2025 with puts and takes. But that first half -- but that's the first half of 2026 may be more challenged than the first half of 2025, implying a somewhat improved second half year-over-year.

Our current views remain consistent with that message. Overall, on a consolidated basis for fiscal 2026, we estimate that we will generate net sales of $1.84 billion to $1.87 billion, which we expect will yield approximately $240 million to $245 million in adjusted EBITDA.

In addition, the following modeling assumptions should be reasonable for the full year 2026. Gross margin of 28% to 28.5%. SG&A of $295 million to $300 million, which reflects bonus accrual at Target, D&A of $105 million to $110 million, adjusted D&A, excluding intangible amortization, of $65 million to $70 million, which should be used to calculate adjusted EPS.

Interest expense of $50 million, a tax rate of about 24%, and CapEx of $70 million to $75 million and free cash flow of approximately $100 million.

As always, we will stay focused throughout the year on the things that we can control. with an emphasis on generating cash to continue paying down debt. Please use the following cadence for the second quarter of 2026 versus the first quarter of 2026.

On a consolidated basis, we expect revenue to be up 12% to 14% in the second quarter of 2026 compared to the first quarter of 2026. Adjusted EBITDA margin, again, on a consolidated basis, is expected to be up 500 to 550 basis points in the second quarter of 2026 compared to the first quarter of 2026. Operator, we are now ready to take questions.

[Operator Instructions] And our first question comes from Kevin Gainey with Thompson Davidson Company.

George, Scott, it's Kevin on for Adam. Yes. Maybe to start, if you could break out how Extruded Solutions segment did. The margins in that segment were much higher than what we expected. Maybe you can talk about what drove the margin improvement there.

Well, I mean, in general, I would say that the Extruded Solutions segment, the products that are included in that segment have historically our most profitable products. So you have things like the IG space are -- you have our vinyl profile business in the U.K., which is called Linear. Those have historically been a very profitable business for us and continue to be. .

Yes. I think you would see the operating model within that segment, too, tends to revolve around larger, more levered plants. So less sites tends to be less fixed cost, which drives margin in that product line. Again, I think part of the reasoning for the resegmenting too, is to give our investor base a little more clear look into each of these different segments and what product lines are actually contributing what.

So we know that this is new a new perspective for you and others, but this has been very consistent for us throughout our whole period of having these products.

Sounds good. I appreciate the color on that. And then maybe if you could talk on Custom Solutions segment as well. And maybe what drove the strongest year-over-year revenue growth in that .

Yes. One of the bright spots with tariffs and just some of the macroeconomic environment has been in our -- the cabinet components in our wood components business. We've been able to secure some new market share as people have in-sourced product from overseas, consolidated their facilities and have outsourced that product, and our team has done a very good job of of being able to show the value that we can create for our customer base and providing a wide array of products just in time as they need it, minimize their working capital needs and allow us to do what we do well.

So that really drove some revenue growth in what has really been a soft market, but that's been a great spot for us on revenue. And our focus in that segment now is actually we're kind of in higher moat in some of those plants to be able to make sure that we have the capacity and the ability to satisfy demand once the seasonal uptick does occur. But we've been very happy with the performance and what our team is doing there to show our value to our customers. .

And then maybe -- I know you guys I know recently the builder show was done recently. Is there any takeaways that you guys could have from that? What maybe the sentiment was an optimism going into the year? .

The show was well attended, which I think everyone would agree on. I think that there's guarded optimism. There's a lot of moving pieces in everything in the world right now. You've got -- now with the geopolitical issues in Iran and what's going on there, the potential push on inflation. You've got the political climate in the U.S. just a lot of moving pieces.

So I think everything what we've heard is that without a fault, everyone believes in the long-term view and the optimism that exists in the housing market, like we mentioned in this earnings call that the the indicators are there that housing is in demand and it will -- there is pent-up demand that will be released at some point. It just -- I think the feel at the show is when is that going to happen and what needs to make it happen to give some of that -- the end consumer some confidence, whether it's -- it's a relief on some energy pricing, whether it's Fed movement, whether it's a couple more data points on inflation or all of the above. So long answer to what should have been guarded optimism.

Our next question comes from Julio Romero with Sidoti & Company. .

Your guidance implies the remaining 9 months of the year is going to see flattish sales year-over-year, but we'll see some year-over-year margin expansion about 70 to 80 basis points across the remaining 9 months. And based on that 2Q cadence, you stated earlier that definitely implies it will be back half weighted. If you could just talk about the cadence of that margin expansion between the third and fourth quarters that's expected? And then secondly, maybe just where across the portfolio, would you see that margin lift?

Yes. Good question. And I think the main driver for the second half '26 versus the second half '25 is, if you recall, the issues we had in Monterey impacted EBITDA by, I think, $13 million in the second half of last year. Well, now that we consider that plant stable, we should not see that impact in the second half of this year. So that alone is going to drive most of the margin expansion. .

And that's obviously in our Hardware segment. .

Yes. Yes. Good reminder. And congrats on completing that Monterey issue. My second question is just on -- just trying to better understand how much longer time in legacy Time and extends the cash conversion cycle versus legacy Quanex -- and then related to that, you mentioned capital allocation remains -- debt repurchase remains our key priority there? Just how you're thinking about debt paydown in the back half? .

Yes. So from a cash conversion standpoint, historically, Quantix was 45 to 60 days cash conversion time -- legacy timing was double that. So while we have made some progress in getting timing more towards the made to order versus a May to stock. That takes time. And there are certain pieces of that business that will never move to a made-to-order because this is more distribution. But I think what you'll see from us really over the next probably 2 to 3 years is a significant improvement in getting that cash conversion cycle for the legacy time of business down, which will obviously impact cash flow positively.

And there's obviously multiple projects that we've identified to make that change, and I feel very comfortable where we are at in that progress and more to come. But I think the softness in the market has allowed us to focus on the things that we need to do integration-wise and that we knew we needed to do, and I'm very pleased with where we're at at that point. .

And then as far as the debt pay down. Clearly, that is our priority, especially given the macro backdrop here, we do feel like there is shareholder value creation, if we can get that leverage -- net leverage ratio down closer to 2% and even below 2% over the next couple of years, for sure. So that is our focus. .

[Operator Instructions] Our next question comes from Steven Ramsey with Thompson Research Group.

I wanted to look at space. Yes, I wanted to look at spaces within the extruded segment. solid double-digit growth in the quarter in a good product category for quite some time. A couple of questions there. what were the drivers of growth within the quarter? And do you think spacers is a growth product in FY '26 -- and then can you talk about the margin profile of that product relative to the segment in 2026?

So I'll split my answers into. I think the driver in the growth of all spacer markets, but especially our product lines that Quanex offers is definitely being driven by the demand and some of it code related on the performance -- the thermal performance of Windows.

So as as energy costs go up, you're able to justify the replacement of new windows with higher-performing thermal windows, whether it's keeping warm air in the northern climates or if it's better keeping the cold air in on where we are conditioning as we see migration from single pane to double pane windows, double paying to triple pain in some areas, that's driving an increased volume demand, which lends itself well.

And as codes and standards change to demand higher performing, thermal performing windows, that falls right in line with the products that we offer at Quanex. So we do believe it has the potential to be a growth driver in 2026. And to be honest, further, in further years as that continues to take hold. Consumers are changing. Energy costs are becoming a bigger part of the world and these types of products are going to take -- be demanded more, and we feel very good about that as a leading product in our portfolio.

In terms of the breakout of profitability within the segment or even getting into any more granularity, we have not and cannot for, obviously, reasons provide any breakout there. We just haven't provided that publicly.

Okay. Fair enough and good color. You've talked about bundling being an opportunity for you over time with the time and integration going to market. In a tough backdrop, can you talk about if this is happening in any product product sets or segments right now? Or do you need a better demand backdrop to really see bundling become an opportunity? .

No, it's a great question. And I think we're seeing it -- we've started the development of that. it's been slow to take hold for 2 reasons. One is the macro backdrop. Obviously, volume helps any sort of bundling or incentive package regardless of what you're doing. The second 1 is, listen, it's really hard to go to your customers and try to offer advantages of bundling when you have a product line that was not performing because of some operational issues.

And so it's just a core fundamental for us that I've got to have my house in order before I can offer those types of incentives as a valuable supplier. So I'm not going to insult my customer base but try to push incentives when I need to better improve operational performance. And we're at that point. I mean I feel really good at what we've done to protect our customers and something that was unforeseen. And there will be a time and a place in the near future where we can have this conversations and give our customers opportunity to share in the benefits of what we provide. We weren't there a year ago, and we're just getting to that point now.

That's helpful to hear. Last 1 for me, Cabinet wood components being a good story right now. And this was a segment that I pondered would potentially be a strategic value to someone else and maybe not core to Quanex. With the recent success, does this change the potential of this segment staying within the company and being a profit driver in the next couple of years? .

I mean we're happy with what the segment is doing. We operate under a philosophy that -- and as a public company, I think everyone is this way. We're going to drive our product lines in our segments to perform the best they can to create as much shareholder value as we can, whether they're in the portfolio. The reality is every segment is potentially for sale every day. I mean so you never say never, but we are extremely happy with what that group has done. I think that they're driving value for us, and I'm pleased with their performance. So I would -- I can't give you any more of a clear answer because, again, everything every day is always a negotiation. .

Thank you. I would now like to turn the call back over to George Wilson for any closing remarks. .

Thanks for joining the call today, and we look forward to providing our next update in June. Thank you very much. .

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Good day, and thank you for standing by, and welcome to the Fourth Quarter and Full Year 2025 Quanex Building Products Corporation Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded.

I would now like to hand it over to your first speaker today, Scott Zuehlke, Senior Vice President, CFO and Treasurer. Please go ahead.

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.

Thanks, Scott, and good morning to everyone joining the call. I'm encouraged by what we were able to achieve in 2025 despite a challenging macroeconomic environment. Throughout the year, we executed on a disciplined strategy centered on operational rigor, cost efficiency and long-term value creation.

We successfully resegmented our business to better align with market opportunities. We established new commercial and operational excellence teams to drive improved performance, and we delivered synergy realization above our original $30 million commitment.

In addition, we intensified our focus on working capital efficiency and free cash flow generation while further strengthening our balance sheet. Most importantly, we also continued to improve our safety performance positioning the company at a world-class standard, which is a critical foundation for sustainable operational reliability and future growth. These achievements collectively reinforce our confidence in the company's future.

I'll now provide a brief commentary on the broader macro environment, followed by a summary of our quarterly performance before turning the call back over to Scott for a more detailed financial review.

From a macro perspective, the market continues to face demand headwinds. Globally, affordability remains a significant challenge as inflationary cost pressures and ongoing housing inventory shortages continue to drive pricing higher. In the U.S., these factors, combined with a wait-and-see approach ahead of anticipated federal reserve rate cuts have kept many consumers on the sidelines.

We expect this dynamic to persist into 2026, which we believe could result in a generally flattish demand environment overall.

Looking ahead, further interest rate movements, broader economic conditions and regional supply/demand imbalances will ultimately determine whether demand strengthens or remain subdued. That said, we continue to believe the long-term underlying fundamentals of the residential housing market are positive.

Demographic trends, household formation and the persistent structural housing shortage all point to substantial latent demand, even if near-term conditions are causing consumers to delay purchasing decisions. These same long-term indicators form the basis of the profitable growth strategy that we presented at our Investor Day last February.

Our thesis remains intact, and the strategic initiatives we outlined are still progressing as planned. While near-term macro pressures have impacted recent results, we remain confident in our long-term outlook and our ability to capitalize on the opportunities ahead.

Now for a brief summary of Q4. Market conditions and order demand tracked in line with our expectations during the fourth quarter of 2025. Volumes in our Hardware Solutions segment were up approximately 1% and volumes in our Custom Solutions segment were essentially flat compared to the prior year. However, volumes were pressured in our Extruded Solutions segment mainly driven by weaker demand across our European international markets where macroeconomic conditions remain more challenging.

Operationally, adjusted EBITDA was impacted by lower volumes in the Extruded Solutions segment as well as costs associated with addressing the operational issue at our window and door hardware facility in Monterrey, Mexico. As discussed on our prior call, the manufacturing issue was identified in Q3, and we quickly determined the root cause and then proceeded to implement a comprehensive remediation plan to correct the issue and stabilize the plant.

We noted then that the plan would take time to fully implement, and we continue to work closely with all affected customers to minimize disruption. I'm pleased to report that we are slightly ahead of our initial time line and now expect to return to normal operating conditions early in calendar year 2026.

Turning to the balance sheet and cash flows. We are extremely pleased with the progress we are making, as we continue to advance our initiatives around working capital optimization and return on net assets, we are seeing consistent free cash flow generation. This strong cash performance has enabled us to further reduce debt while also being opportunistic in repurchasing shares in the open market.

Our current capital allocation priorities remain unchanged. We will continue to focus on debt repayment while opportunistically repurchasing shares when open trading windows allow. Despite the current market headwinds, we believe the resegmentation of our business, combined with synergy realization and operational improvements under our way across our facilities position us to deliver value to our customers and support our long-term profitable growth strategy.

I'll 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 $489.8 million during the fourth quarter of 2025, which represents a decrease of approximately 0.5% compared to $492.2 million for the same period of 2024.

We reported net sales of $1.84 billion for the full year, which represents an increase of approximately 43.8% compared to $1.28 billion for 2024. The increase for the full year was primarily driven by the contribution from the Tyman acquisition that closed on August 1, 2024. We reported net income of $19.6 million or $0.43 per diluted share during the 3 months ended October 31, 2025, compared to a net loss of $13.9 million or $0.30 per diluted share during the 3 months ended October 31, 2024.

For the full year 2025, we reported a net loss of $250.8 million or $5.43 per diluted share mainly due to the noncash goodwill impairment reported in the third quarter compared to net income of $33.1 million or $0.90 per diluted share for the full year 2024. On an adjusted basis, net income was $38 million or $0.83 per diluted share during the fourth quarter of 2025 compared to $38.5 million or $0.82 per diluted share during the fourth quarter of 2024.

Adjusted net income was $106.4 million or $2.30 per diluted share for fiscal 2025 compared to $97.5 million or $2.66 per diluted share for fiscal 2024. The adjustments being made to EPS are primarily for transaction and advisory fees, amortization of the step-up for purchase price adjustments on inventory and AR related to the Tyman acquisition, restructuring charges goodwill impairment, amortization expense related to intangible assets, a onetime depreciation adjustment, a pension settlement refund and foreign currency translation impact.

Note that our full year effective tax rate decreased from 24.3% at Q3 to 22.6% at year-end. Q4 delivered lower pretax income, excluding discrete and the level of unfavorable permanent tax adjustments decreased relative to our Q3 estimates. With a smaller income base and lower unfavorable permanent items, the overall blended tax rate was reduced for the full year.

On an adjusted basis, EBITDA for the quarter decreased by 12.6% to $70.9 million compared to $81.1 million during the same period of last year. For the full year 2025, adjusted EBITDA increased by 33.2% to $242.9 million, which reflects the contribution from the Tyman acquisition and is a new record for Quanex compared to $182.4 million in 2024.

On a consolidated basis, the decrease in adjusted earnings for the fourth quarter of 2025 was mainly due to lower volumes related to ongoing macroeconomic uncertainty, coupled with low consumer confidence in the operational challenges at our plant in Monterrey, Mexico, that were previously mentioned.

The increase in adjusted earnings for the full year 2025 were primarily attributable to the contribution from the Tyman acquisition, combined with the realization of cost synergies.

Now results by operating segment. We generated net sales of $226.9 million in our Hardware Solutions segment for the fourth quarter of 2025. And an increase of 1.4% compared to $223.6 million in the fourth quarter of 2024. We estimate that volumes were up about 1%, reflecting low growth in the international hardware and North American screens product lines. Pricing was flat in this segment. The tariff impact was about 1%. Foreign exchange was about a 1% benefit offset by a negative impact of approximately 2% for Monterrey versus Q4 of 2024.

For the full year, we reported net sales of $841.7 million in our Hardware Solutions segment, an increase of 96.7% compared to $427.8 million in 2024. The increase was mainly due to the contribution from the Tyman acquisition. Adjusted EBITDA was $29 million in this segment for the fourth quarter or 9.3% lower than prior year, mainly due to an approximately $8 million negative impact related to the operational challenges at our hardware plant in Monterrey, Mexico, partially offset by a favorable cost role. We made the decision to move to a 24/7 operation in Monterrey in September, which increased labor and expedited freight costs for the quarter, above our initial estimate but had the positive impact of enabling us to reduce the backlog in a more efficient manner.

Adjusted EBITDA increased by 72.7% to $88.8 million in this segment for the full year. driven by the contribution from the Tyman acquisition.

Our Extruded Solutions segment generated revenue of $168.6 million in the fourth quarter, which represents a decrease of 6.4% and compared to $180.1 million in the fourth quarter of 2024. We estimate that volumes were down approximately 8% year-over-year in this segment for the quarter. with pricing flat and a positive foreign exchange translation impact of about 1.5%. For the full year, we reported net sales of $646.6 million in our Extruded Solutions segment an increase of 15.5% compared to $560 million in 2024. Again, the increase was driven by the contribution from the Tyman acquisition.

Adjusted EBITDA declined to $31.7 million in this segment for the quarter versus $37.9 million during the same period of last year. mainly due to decreased operating leverage related to lower volumes in addition to an unfavorable sales mix. For the full year, adjusted EBITDA came in at $123.4 million in this segment, which represented an increase of 10%.

We reported net sales of $103.4 million in our Custom Solutions segment during the quarter, which represented growth of 2.1% compared to prior year. we estimate that volumes were flat and price increased by approximately 2% in this segment for the quarter. For the full year, we reported net sales of $388.2 million, which represents an increase of 25.5% year-over-year.

Adjusted EBITDA declined to $10.7 million from $15.6 million in this segment for the quarter, mostly due to higher raw material costs and index pricing. Adjusted EBITDA increased by 43.2% to $42.9 million from $30 million in this segment for the year, which was driven by the contribution from the Tyman acquisition.

Moving on to cash flow and the balance sheet. Cash provided by operating activities increased significantly to $88.3 million for the fourth quarter of 2025, which compares to $5.5 million for the fourth quarter of 2024. Cash provided by operating activities for the full year 2025 increased by about 86% to $164.9 million compared to $88.8 million for the full year 2024. We maintained focus on managing working capital throughout the year and made progress moving some of the legacy [ Tyman ] and businesses towards more of a make-to-order model, which decreased inventory and improved cash conversion cycle days.

We generated free cash flow of $102.3 million for the full year 2025, an increase of about 98% compared to 2024. As a result, we were able to repay $75 million of the debt in 2025. In addition, our liquidity increased by 10% to $372.2 million in the fourth quarter of 2025 compared to the third quarter of 2025, consisting of $76 million in cash on hand plus availability under our senior secured revolving credit facility due 2029, less letters of credit outstanding.

As of October 31, 2025, our leverage ratio of net debt to last 12-month adjusted EBITDA was unchanged at 2.6x as compared to the prior quarter. The debt covenant leverage ratio calculation used for quarterly compliance with our lenders is defined an amendment #1 to our second amended and restated credit agreement. This ratio was 2.5x and as of October 31, 2025, and 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 synergy target related to the acquisition and cash only from domestic subsidiaries.

Since we now have 4 full quarters of owning timing, and have realized the full $30 million of synergies that our lenders gave us credit for, we don't intend to reference the debt covenant leverage ratio going forward.

As George mentioned in our earnings release, our long-term view continues to be favorable as the underlying fundamentals for the residential housing market remain positive. However, while we enter fiscal 2026 with a cautious outlook, due to the ongoing macroeconomic challenges, we are optimistic that demand for our products will improve as consumer confidence is restored over time.

Our current view is that fiscal 2026 could be flat compared to fiscal 2025, from a revenue and adjusted EBITDA perspective with puts and takes. But the first half of 2026 may be more challenged than the first half of 2025, which would imply a somewhat improved second half year-over-year.

Having said that, and consistent with the last few years, based on current macro indicators, recent conversations with our customers, limited transparency and varying opinions on the macroeconomic outlook for 2026, we are again taking a measured approach to guidance. We intend to revisit guidance for 2026 when we report earnings for the first quarter.

We will stay focused on the things that we can control with an emphasis on generating cash to continue paying down debt and opportunistically repurchasing our stock. In the meantime, please use the following cadence for the first quarter of 2026 versus the fourth quarter of 2025.

As a reminder, due to the typical seasonality of our business, our first quarter is usually the weakest quarter of the year. With that said, on a consolidated basis, we expect revenue to be down 16% to 18% in the first quarter of 2026 compared to the fourth quarter of 2025. Adjusted EBITDA margin, again, on a consolidated basis is expected to be down 800 to 825 basis points in the first quarter of 2026 compared to the fourth quarter of 2025 as lower volumes impact operating leverage.

Notwithstanding the significant progress we have made towards stabilizing the operation in Monterrey, we also expect a negative impact of about $3 million during the first quarter of 2026 related to that plan. In addition, the following modeling assumptions should be reasonable for the first quarter of 2026. SG&A of about $73 million, D&A of about $26 million, adjusted D&A, excluding intangible amortization of about $16 million, which should be used to calculate adjusted EPS. Interest expense of approximately $12.75 million and a tax rate of 23.5%.

Operator, we are now ready to take questions.

[Operator Instructions]. Our first question will come from the line of Julio Romero from Sidoti.

Scott, did I hear you correctly that the negative EBITDA impact in the fourth quarter from the Monterrey challenges was $8 million? And if so, your EBITDA margins for the Hardware Solutions segment would have been in the 16% range in the quarter.

Yes. So if you recall on the last quarterly call, we talked about Monterrey being about a $5 million negative impact in Q3. We estimated at the time that 4Q impact would be about the same at $5 million, but the reality was, since we went to a 24/7 operation and higher labor costs, higher expedited freight costs, that ended up being around $8 million. And then we alluded to about a $3 million hit we expect in the first quarter. But to your point, yes, it would have been better, but we also had a favorable cost roll impact in the fourth quarter that impacted the -- or helped the Hardware Solutions segment.

Understood. And the $3 million drag expected in the first quarter, does that -- does your current kind of informal outlook assume that goes to 0 beyond the first quarter?

Yes, that's our expectation.

Yes. Our decision to add the 24/7 and do some different things in the plant to speed up that recovery plan. That was really the intent to drive the back order levels down faster than we anticipated, and we're having some very good success at making progress towards that goal.

Well, it sounds prudent that you're able to get your arms around it for sure. Maybe thinking about the the informal outlook, does your current informal outlook assume -- what does that assume from a market volume perspective in terms of the volume you'll get in the first half and the amount of procurement synergies you'll be able to realize as a result.

Yes. The way I would -- I mean, obviously, somewhat premature until we come out with official guidance, but the way we're looking at it right now, for next year from a revenue standpoint, if we say flattish, maybe flat to down volumes with flat to up, pricing is how I would look at that. But then on the EBITDA side, the positives would be obviously less Mexico cost next year plus some additional synergies, offset by higher SG&A due to inflation, higher benefits and then bonus accrued at Target. That's kind of how I would look at it.

Understood. Last one for me is you were able to pay down debt pretty aggressively here in the fiscal year. You also repurchased roughly $3 million of stock here in the fourth quarter. But the shares have been pretty depressed here. Can you just talk about if you were limited by the open repurchase window timing at all during the fourth quarter? And then also if you could comment on whether you've been active on the buyback kind of post quarter end.

Yes. So we were active somewhat in 4Q. I think we made a conscious decision in the second half of last year to really focus more on paying down debt because the number -- pretty much every investor call we had since last 2 quarters. There was a real focus on net leverage. Even though our balance sheet is in good shape, we think it's very healthy. There is this sentiment out there amongst investors that anything above 2x net leverage is a concern. So with that in mind, we chose to pay down debt, even though our shares we still feel are very cheap.

Looking ahead, going forward, clearly, we will be opportunistic. We don't have big windows in between quarters, in which we can be in the market. So keep that in mind as well. The other thing to think about is the first quarter and really the second quarter are low watermarks for the year. So we're trying to balance cash flow generation, stock repurchases with also with debt paydown. We've typically been a net borrower in the first quarter in the past. So we just try to balance all of that. I hope that helps.

Our next question will come from the line of Steven Ramsey from Thompson Research Group.

I wanted to think about for 2026 with the persistently challenging demand backdrop, more recently and looking forward, are you seeing any irrational competitive response in certain geographies or certain product categories?

Steven, we really haven't seen a lot of what I would call our rational pricing where people are going to the market to try to fill up volume. We just haven't seen that. And I think there's still a mentality in the marketplace that supply chain risk for all people is of great priority and importance.

So I think our customers evaluate those type of pricing decisions and have the balance, is it the right move to just move to another supplier based on price. There's much more involved in those types of decisions right now. And I would say that that's the truth globally. So things like being able to supply facilities from multiple ship-to points in a lot of cases, offset price.

Now with that being said, I think as commodity prices stabilize or come down, I think we will see pricing pressure, but we're really not seeing anything that I would call irrational at this point.

Okay. That's great to hear. And then also looking at 2026 and the various product components within each segment, are there any certain products that you expect to be better than the flattish level for the year?

I think the one area that is being potentially impacted by tariffs and everything that's going on in the macro drop, would be the wood components part of our business that falls under the yes, the Custom Solutions group. As those tariffs continue to hang out there and be uncertain, I think that there's an unknown. But if the tariffs stick at a higher level, there could be some opportunity to in-source that demand back into the U.S. to mitigate tariff risk around the globe. So that could be an area of upside. Everything else, I think, right now, it's a wait and see, but that's the one area where there could be some potential opportunity.

Okay. And then on the benefits of the resegmentation, this was a talking point from the Investor Day, you mentioned it again, are there any early positive takeaways and results with the resegmentation so far, is there any benefit embedded in the 2026 EBITDA outlook. And then maybe any of the nuances by segment on the sales or margin side with this resegmentation?

Yes. It's still a little early. We're only now 2 quarters into this. But what I would tell you, I think we're already seeing operational improvements by the sharing of best practices. For example, in the Extruded Solutions group, where you had silicone extrusion, butyl extrusion and then you layer in the Schlegel piece of the business that we acquired from Tyman and that have a completely different type of material that they extrude, but it's an extrusion process. And so the sharing of best practices in that division is already paying some operational dividends.

I think we're starting to see and put together a plan on what our global footprint will look like. That's long term in nature. But I think we've got a really good feel and good opportunities for what I would say are mid- and longer-term opportunities to continue to grow to better serve our customers, provide new products and new services. And so my biggest excitement right now relies around the process improvements as well as some of the innovation that's being driven through that. So we probably exceeded my expectations from those points already.

Our next question will come from the line of Reuben Garner from Benchmark.

So the Mexico issue seems to be on track, cleared up faster than you expected, which is great to hear. George, just curious, it's been a few months since that came about. Can you go into a little detail about the efforts you guys have made internally to make sure that there weren't risk of similar or other issues at different facilities from Timon?

Yes. So obviously, being a manufacturing company, things happen in plants. And we identified the issue fairly quick. And when we did, we put a plan into remediate. And as you mentioned, I'm very happy and pleased with the efforts to get to there. I think we did a great job of mitigating the issue in a relatively quick period of time. Obviously, as a part of that, and I wouldn't just frame it around the time in acquisition, but we looked at every 1 of our facilities and said, these types of scenarios exist anywhere.

So we did a deep dive on that. That's part of what we did deem our problem-solving philosophy where we go in and we try to identify any like situations. And we have not found that anywhere, and we spend enormous amount of time and effort making sure that the issues that we identified were not going to be replicated or have a risk of being replicated at any other facility.

So I feel pretty good about the controls we have in place. that we won't see it anywhere else. And I feel really good about the issues to fix the situation in a relatively short period of time to eliminate this on a go-forward basis in Monterrey.

Great. And then a clarification on the comments for Q1. Scott, did you say SG&A of $73 million? And if so, maybe I've got it wrong in my model, but that's a big change from where it was a year ago. I think $20 million, almost higher on a similar revenue number and also higher than what you just did in the third and fourth quarter. So can you just talk about what's going on there? Is there anything onetime? Is that a good run rate for the full year on a quarterly basis?

Yes, I think that's a pretty decent run rate on our full year. I mean when you compare it to the later part of last year, one of the main things that sticks out is accruing at Target now this year versus last year when we knew halfway through the year, we weren't going to hit those targets. So SG&A came down.

There was a couple of onetime benefits last year first quarter, just related to some issues from the legacy Tyman business. And then clearly, when you go into a new year, there's you budget for higher benefit cost higher inflationary measures, merit increases, things of that nature that just increased SG&A.

Now clearly, with that in mind, -- our job, though, as managers is to the extent we can operationally become more efficient to offset increased costs as we move through the year.

Great. And then I'm going to sneak one more in. You talked about potentially a little bit of price. I assume some of that is carryover from actions throughout this year maybe related to tariffs and that sort of thing. What are you seeing on the cost side in terms of cost of goods? Is that pretty stable? What is -- I guess, ultimately, what does price cost look like in your outlook for '26.

Yes, I'll take this one, Ruben. Really, from a cost basis, things have -- I would say, generally stabilized. There's a couple of areas across the different product lines, especially around oil type of base products, anything that's going through a cracked chemical type of process. I think we anticipate we'll see continued inflationary pressure there. But overall, materials have stabilized and the supply of those materials have stabilized.

So to be determined, tariffs do have a big impact right now, but that seems to have softened a little bit or at least not changing on a daily basis.

Next question will come from the line of Kevin Gainey from Thompson, Davis & Company.

Congrats on another quarter. Maybe we could talk about the synergies to start first and how you guys are thinking how quickly you might be able to achieve the $15 million to get to the ultimate $45 million? And then maybe if you could break down how you're approaching the synergies from like a cost procurement footprint perspective?

Yes. I think to get at the remaining really, it's a little less than 15% because we did realize some in the fourth quarter of 2024. But the way we're looking at fiscal 2026 and I mentioned it earlier about we do expect some additional synergies, probably in the $5 million to $10 million range in the range is really because of volumes. If volumes are better than we could be towards the higher end of that range because of procurement synergies, volumes are worse, it could be on the lower end. So there is a range there.

And then going into 2027, there's still some more synergies that we could get at. Outside of that, there are some specific timing of when synergies may hit in 2026, really more on the SG&A side, and I'll leave it at that.

Sounds good. And then as you guys think about the pricing gains that you got in 2025. How much of that was really inflation linked versus kind of structurally? And do you think you have any concerns around givebacks in '26?

As I look at pricing, I think we've been very focused on how to best serve our customers. And I think that's always been our sales philosophy. So our price increases that we pass on in the market really do revolve around inflationary pressures. And so our job and our philosophy with our customers is any sort of margin improvement on our part shouldn't come at the detriment of our customers.

Our job is to pass along cost as is true cost, and then us to improve our margins, that's all driven by operational performance. I think that that's our philosophy and how to be a good supplier, and we are not predatory in any way, shape or form in terms of how we price to our customers. So in that respect, I think our ability to hold on to price should be pretty strong because I don't think we're out there and we have all the data in the world to support the inflationary costs that we're passing along.

I think we're proud of the fact that, that is the approach we take to pricing because I think long term, and that's what builds relationships with our customers and we'll continue to do that on a go-forward basis. So again, long answer to your question, but I think the ability to hold on to price should be pretty strong because it's supported by what we've eaten in terms of cost increases.

Might be a long answer, but I think it was a great answer. Maybe if you guys could talk about demand as well from kind of parse between new residential versus repair and remodel and whether one feels stronger than the other and how you're thinking about it for '26.

Yes. I think for us, our products are fairly agnostic to either of the market. So that -- we determined that really by our customer mix. I think right now, we're seeing really similar type of impacts on both R&R and new construction. I do believe that the R&R piece will be -- we see that leads at least for us because we're weighted more to R&R.

I think as we see new construction start to improve. The interesting metric that we'll keep our eye on is the size of homes and multifamily versus single-family and what does that mix look like? the number of window openings in a house impacts the volume impact of new construction for us. So I think R&R will be the leader on any sort of recovery, and that the new construction will be, again, more driven by interest rates and the movements of the Fed as well as availability and affordability of the new housing market. So they're both impacted pretty equal though, right now, from what we see.

Appreciate the color. And then one final one just on cash flow. You guys typically burn cash in the January quarter. Is there any reason to expect you wouldn't have slightly negative free cash flow in Q1?

I mean, it's possible. I think it just depends on how December and January play out. I mean, as we sit here today, November came in pretty much as expected. So no surprises yet.

The one thing on cash flow that -- again, a lot of it will depend on volume.

And the timing of CapEx.

Yes, CapEx. The other thing that happened this year, I mean it wasn't a banner 2025. So as we've stated in incentive payouts to the executive team and the organization wasn't as high as it typically would be, so it was pretty much under target. So the cash flow outlay to any sort of incentive payment is going to be lowered. Lower in Q1 than we have typically seen. So this is one of the lower incentive payouts that we've seen in the past future. So that should help cash flow in Q1.

No questions in the queue, I would like to hand back over to George Wilson for the closing remarks.

I'd like to thank everyone for joining. I want to take a moment to wish everyone a very safe and happy holiday. And we look forward to providing the next update to everyone in March. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

Good day, and thank you for standing by. Welcome to the Q3 2025 Quanex Building Products Corporation Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Scott Zuehlke, Senior Vice President, CFO and Treasurer. Please go ahead.

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.

Thanks, Scott, and good morning to everyone joining the call. Although macro headwinds persisted this quarter, I'm pleased with the resilience of our business in the current environment.

Following a significant amount of work by our team, new operating segments are in place, synergy realization remains compelling and the cash flow generation of the combined entity has been strong. We are confident we are on the right path. We remain focused on achieving our financial and operational objectives, and our team continues to prioritize driving both above-market growth and an improved margin profile over time.

Our third quarter results were largely shaped by 3 key factors: first, the macroeconomic environment and the resulting demand and order patterns. Second, the resegmentation of our business units and a resulting goodwill impairment; and third, the integration of Tyman and the synergies we're beginning to realize from the combination.

Let me start with comments on the macroeconomic environment in the markets we serve. In North America, for the third quarter of 2025, volumes increased compared to the prior quarter, but not at the rate normal seasonality would have suggested. U.S. customers took extended downtime around the July 4 holiday and volumes remained relatively soft for the remainder of the month.

While tariffs continue to add uncertainty, there is also a sentiment that delays to both R&R and new construction projects are a result of consumers waiting for the Federal Reserve to cut interest rates. Altogether, this has led to increased pressure on discretionary spending, resulting in a headwind to consumer -- end consumer confidence.

While volumes are expected to remain soft through the end of the year, we are confident that mid- and long-term indicators favor a strong recovery when rates drop and consumer confidence is restored.

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 insulating glass spacer product lines have helped offset market weakness. Despite ongoing pricing pressure, the Quanex team continues to deliver quality products with excellent operational performance.

Now turning to the resegmentation of our business. As we have discussed on prior earnings calls as well as at our Investor Day earlier in the year, completing the resegmentation of our business was important for our future success. With this work complete, we are better able to achieve expected synergies, drive innovation and organic growth and expand into adjacencies. I would like to thank the entire Quanex team for working so hard and efficiently to get us where we are today.

From an accounting perspective, one of the impacts of any business resegmentation is a goodwill impairment review. And as you saw in our earnings release, this review resulted in a noncash goodwill impairment. I want to be clear that this impairment is not related to any performance indicators or changes to the long-term profitability expectations for our business. In fact, the new reporting segments continue to create new opportunities for cost takeout inefficiencies, which will allow for improved performance. However, per accounting rules, we performed goodwill impairment testing on all new reporting units before publicly reporting in the new operating segments, which resulted in a noncash goodwill impairment.

Regardless of the impairment, our business prospects are unchanged. Quanex has strong growth potential and as macroeconomic uncertainty subsides and customer confidence improves, we believe we are well positioned to capitalize on pent-up demand.

Finally, I'd like to discuss the ongoing Tyman integration process. We continue to make substantial strides on the integration and have finalized and staffed our operational and commercial teams. We have also made significant progress toward building the back-office support teams.

As we move ahead, our team is capturing meaningful synergies unlocked by the transaction, and we also continue to identify and pursue additional synergies on an ongoing basis. After factoring in these additional synergies, mainly related to headcount, adjusting for lower volumes and pushing out the timing of when we should realize procurement savings, we still see a path to realizing approximately $45 million in cost synergies related to the Tyman acquisition over time.

As a reminder, $45 million in cost synergies is above our initial projection of $30 million at the time of the transaction announcement. We expect to see further synergies, particularly those related to revenue in the second phase of integration, which is underway.

This second phase is rooted in 4 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 is more medium-term focused and directly aligned to the profitable growth strategy that we discussed at our Investor Day in February.

Operationally, we are pleased with what we have accomplished in the first year since the deal closed. We are well positioned due to our healthy balance sheet, flexible financial foundation and advantaged strategic positioning. Despite the macro challenges, our strong cash flow enabled us to repay over $51 million of bank debt during the quarter. This demonstrates the potential ahead for Quanex as we continue to progress toward our goals, and we remain extremely optimistic moving forward.

I want to also take a moment to detail some operational issues we inherited that are specific to our window and door hardware business in Mexico, which impacted results in the third quarter more than expected.

Specifically, we identified tooling and equipment issues at our Monterrey, Mexico facility, which, among other things, impacts backlog and leads to inefficiencies and increased costs for items such as expedited freight. These operational challenges negatively impacted EBITDA in the Hardware Solutions segment by almost $5 million in the third quarter alone.

As soon as we identified the extent of these issues, we took action. We made leadership changes and are dedicating additional resources and capital to the facility to address and resolve these issues in an expedited manner. We are upgrading the facility's capabilities, processes and equipment to Quanex standards, laying a stronger foundation for years to come.

We are confident in our recovery plan, although we want to note we expect continued pressure on results in the Hardware Solutions segment in the fourth quarter. Looking ahead, we anticipate gradual progress as we execute on the recovery plan with tangible benefits early in fiscal 2026.

Before I conclude my prepared remarks, I want to note that we are updating our guidance for fiscal 2025 due to recent demand trends and updated cost synergy realization and timing model, conversations with customers and a realistic time line to address the operational issues in Mexico.

Scott will take you through the details, but we remain confident in the strong Quanex team. We have a proven track record and a breadth of products that are unmatched in the industry. We look forward to capitalizing on the opportunities ahead of us and we will be positioned to benefit when the macro environment begins to improve.

I'll 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 $495.3 million during the third quarter of 2025, which represents an increase of approximately 77% compared to $280.3 million for the same period of 2024.

The increase was mainly driven by the contribution from the Tyman acquisition that closed on August 1, 2024. Excluding the Tyman contribution, net sales would have increased by 1.4% for the third quarter of 2025, mainly due to increased pricing, which includes any tariff impact, offset by lower volumes.

We reported a net loss of $276 million or $6.04 per diluted share during the 3 months ended July 31, 2025, compared to net income of $25.4 million or $0.77 per diluted share during the 3 months ended July 31, 2024. The decrease was primarily the result of a $302.3 million noncash goodwill impairment related to the resegmentation of our business at a point in time when consumer confidence is low and equity values for building products companies are challenged.

As George mentioned, the noncash goodwill impairment is not related to any performance indicators or changes to the long-term profitability expectations of the business. The resegmentation constituted a triggering event under ASC 350, requiring a quantitative comparison of each reporting unit's carrying value to its estimated fair value.

At the May 1, 2025, trigger date, our stock price was at $16.59 per share, which is less than the agreed valuation for the Tyman acquisition. Because market capitalization is a key input in determining fair value, the lower share price on the trigger date reduced our market-based valuation, despite management forecast reflecting higher long-term cash flows. As a result, the fair value derived from the market evidence fell below our internal forecast and the carrying value of goodwill, leading to the noncash impairment.

On an adjusted basis, net income was $31.6 million or $0.69 per diluted share during the third quarter of 2025 compared to $26.9 million or $0.81 per diluted share during the third quarter of 2024.

The adjustments being made to EPS are as follows: Transaction advisory fees and reorganization costs, restructuring charges related to severance and disposal of software, noncash goodwill impairment, expenses related to the plant closure or relocation, amortization expense related to intangible assets and a pension settlement refund, onetime depreciation adjustment and then other net adjustments related to foreign currency transaction gain/loss and effective tax rate.

On an adjusted basis, EBITDA for the quarter increased by 67.2% to $70.3 million compared to $42 million during the same period of last year. The increase in adjusted earnings for the 3 months ended July 31, 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 $227.1 million in our Hardware Solutions segment for the third quarter of 2025, an increase of 201% compared to $75.5 million in the third quarter of 2024. We estimate that volumes for the legacy Quanex product lines in this segment declined by 2.4% year-over-year with pricing up 1.9% and a tariff impact of 7.9% versus Q3 of 2024.

The legacy Tyman product lines included in this segment, which we didn't own in the same period of last year, made up the remaining 193.5% increase in net sales in the third quarter of 2025.

Adjusted EBITDA was $24.7 million in this segment for the third quarter compared to $9.5 million in the third quarter of 2024. As previously mentioned, the operational issues specific to the window and door business in Mexico negatively impacted EBITDA in this segment by approximately $5 million during the third quarter of 2025.

Our Extruded Solutions segment generated revenue of $174.4 million in the third quarter of 2025, which represents an increase of 29.6% compared to $134.6 million in the third quarter of 2024. We estimate that volumes for the legacy Quanex product lines in this segment were down by 2.6% year-over-year, with pricing up 0.6%, a 1.9% FX benefit and no real tariff impact.

The legacy Tyman product lines included in this segment, again, which we didn't own in the same period of last year, made up the remaining 29.7% increase in net sales in the third quarter of 2025.

Adjusted EBITDA increased to $37.1 million in this segment for the quarter versus $27.7 million during the same period of last year. We reported net sales of $102.3 million in our Custom Solutions segment during the third quarter of 2025, compared to $72.7 million for the same period of 2024. We estimate the volumes for the legacy product lines in this segment increased by 0.8%, driven by increased spot business in the Wood Solutions Group with price increasing by 2.2% and a minimal tariff impact of 0.3%.

The legacy Tyman product lines included in this segment made up the remaining 37.5% increase in net sales in the third quarter of 2025. Adjusted EBITDA was $12.9 million in this segment for the quarter, which compared to $6.1 million for the third quarter of 2024.

Moving on to cash flow and the balance sheet. Cash provided by operating activities was $60.7 million for the third quarter of 2025, which compares to cash provided by operating activities of $46.4 million for the third quarter of 2024. Free cash flow increased by 15.1% to $46.2 million for the quarter, and we were able to repay $51.25 million of bank debt.

As of July 31, our leverage ratio of net debt to last 12 months adjusted EBITDA decreased to 2.6x. The leverage ratio for our quarterly debt covenant compliance was 2.4x versus the current leverage covenant ratio of 3.75x, so we have plenty of cushion.

During the quarter, we remained disciplined in our capital allocation strategy. In addition to paying back over $51 million of bank debt as part of our efforts to maintain a healthy balance sheet and improve liquidity, we continue to return capital to shareholders by opportunistically buying back shares. We repurchased 100,000 shares of common stock for approximately $2.1 million during the third quarter of 2025. We still have approximately $33.6 million remaining under our existing share repurchase program.

Before I open it up to Q&A, I want to discuss our updated guidance for fiscal 2025. As George mentioned, the update is based on our results year-to-date, recent demand trends, and updated cost synergy realization and timing model, conversations with our customers and a realistic time line to address the operational issues in the window and door hardware business in Mexico.

On a consolidated basis for fiscal 2025, we now estimate that we will generate net sales of approximately $1.82 billion, which we expect will yield adjusted EBITDA of approximately $235 million.

For modeling purposes, please use the following assumptions for the full year 2025 to back into what Q4 should look like. Gross margin of approximately 27%, which reflects the operational issues in Mexico, SG&A of approximately $264 million, adjusted D&A of approximately $58 million, interest expense of approximately $53 million, an adjusted tax rate of 24.5%. This tax rate is slightly higher than the previous guidance of 23.5% because of some nondeductible interest. CapEx of approximately $75 million and free cash flow of approximately $80 million.

Operator, we are now ready to take questions.

[Operator Instructions]. Our first question will be coming from Steven Ramsey of Thompson Research Group.

Maybe to start out with the big picture on demand, understand that it remains subdued out there broadly. I heard that from many companies and from channel checks. But wanted to parse out if you feel like if in any segment, there is a change in the competitive landscape or just even in the near term as competitors react to this market, if that's also changing the volume picture.

Thanks for the question, Steven. The way I see it right now and the detail that we have coming flowing in, it is more macro related than competitive. I think we've been able to do a very good job on the competitive front across regions and across product lines. So really, the softness that we see is more specifically related to the softness in both R&R and new construction.

Okay. That's helpful. And then I wanted to hone in a little bit in Europe, the pockets of strength that you called out there. Maybe can you go into a little more detail on why that strength is there, why it's sustaining? How much of it is consumer demand for it versus internal moves you're making?

When we look at the strength, the product lines in Europe continue to perform very well and have taken some share. And that's really built on the operational foundation that we have in both of those product lines being extrusions in the framing systems as well as our spacer business.

We continue to provide excellent service, quality products that are high level in terms of energy efficiency and thermal performance. So I think that constant delivery of quality products has helped us continue to perform. So that remains a strength. And that's exactly what we're trying to duplicate in the hardware product lines that we acquired through Tyman. So that has been a strength.

In the U.S., I think we continue to see strength in our ability, and I would say, in the legacy Quanex lines of converting our demand into cash flow at a very good rate, and that remains a strength. We're making some progress, as we've talked about on previous calls, starting to transition the Tyman products from a make-to-stock to a make-to-order. That continues to be a really big opportunity for us.

We're starting to show the beginnings of that transition, which has translated into positive cash flow, which is why we -- even despite the softness in the market, the cash flow generation continued to be really strong, and we were very happy with the performance there, which allowed us to pay down debt and buy back shares.

For sure. Okay. And then last one for me. Tyman Mexico, maybe to clarify, you called out a $5 million EBITDA headwind in the third quarter. Do you expect the fourth quarter to be a similar dollar amount headwind-wise or that to moderate a bit? And then to make sure I understand, do you think this EBITDA headwind is gone to start 2026? Or do you think it starts to balance out and then go positive later in that fiscal year?

Yes. So I think we do expect an impact in the fourth quarter. It may be similar to 3Q, depending on the progress that we show during the quarter. But we are expecting some progress towards the end of the fourth fiscal quarter and then into early 2026. It's hard to say when it will be completely resolved, but we are working quickly, and we realize this is a top priority.

Our focus right now, Steven, is really on doing everything we can to protect our customers and get our delivery levels back to where they need to be. It's -- our complete focus has been on our customers. So we're not sparing any expense and trying to be cute. We're fixing the solution. We're putting systems in place, and we're spending money on assets, as I mentioned, to bring both the equipment and the tooling up to what our standards are, which has always been a strength of Quanex, and we'll make it a strength of the time and products that we purchased as well.

Our next question will be coming from Reuben Garner of Benchmark.

I guess can you walk through what the balance of the, I guess, lower-than-expected results in the third quarter was? I think $5 million accounts for roughly half of it, if my math is right, top line was mostly in line with what you were looking for last quarter. Was it just a split between volume and price? Was there higher costs from tariffs or other pressures that led to the profitability pressure that you saw?

Yes. I mean outside of the market and the volume, which you just -- outside of the Mexico impact, it's really split between market and then procurement synergies specifically. As we looked hard at that and kind of updated our model for the lower volumes and the timing at which we expect to realize those synergies, some of those were just pushed to the right. So I think those 3 things, Mexico market and then procurement synergies.

So is -- was all of that pressure in the final month of the quarter and basically, the guide in the fourth quarter now implies that you have 3 consistent months of that kind of pressure? Like was it $5 million in 1 month and now that's going to be $5 million a quarter in the fourth quarter? Or talk to me about how to think about that. Okay.

No, it wasn't all in July, if that's what you're implying. It definitely started earlier in the quarter and kind of ramped up through the quarter. Now that we have a really good handle on what's going on, we do expect some progress towards the end of the fourth quarter.

Sorry, one more, if I could sneak one in. I was on mute. I guess what are your customers saying? There's been a bit of a resurgence in refinance activity of late as rates have come in. It sounds like you're not expecting volume to bounce back anytime soon. Was there any element of destocking that took place? I know a lot of your products are kind of made to order, but some of them, maybe the spacers can be stocked. Was there any destocking that's taking place that's kind of onetime in nature? What's the expectation, I guess, as you get into your next fiscal year from a demand perspective?

No. We didn't see any signs of anything in terms of destocking or anything specific because that usually indicates 1 or 2 specific customers. And it was pretty consistent in terms of the slowdown across all of the customers that we serve. So we don't anticipate any levels of destocking.

What I would say is our expectation of things continuing to be soft into the fourth quarter, really falls a little bit into what we've always seen in terms of weather and the build season. Now even though you've got some refinancing activity that kind of is starting to ignite and maybe showing signs. And I know that there's some hope and optimism that there will be a rate cut in September by the Fed and maybe another even in this year.

Effectively, in half of the U.S., the build season is coming to a conclusion. So that's not going to flow through until our 2026 fiscal year.

And I said last one, but I do want to sneak one more in. You're a little over a year into this deal now. I think you mentioned like potential for more synergies that you found. Any more color there, like what -- in terms of facility count, location, how you're running the business, like what these could look like from a numbers perspective? Or is it still too early to tell?

I think it's still too early to tell from a numbers perspective. Obviously, we put some of our expectations and thoughts on a waterfall chart that showed our pathway to growth at our Investor Day, back in February. Those goals and objectives are still absolutely valid, and that's exactly what we're driving to.

I think we're excited as we build out our commercial teams and we start to look at what that looks like. So I do think that there's some opportunities that will present themselves from a commercial cross-selling, bundling of products, development of new systems that will absolutely pay benefits.

I think now that we're operating in the new segments, each one of the groups will evaluate hard what their new consolidated footprint looks like. And it's our job as a manufacturing company to be as efficient and cost effective for our customers as we can be. So I think the groups are also looking at where are the best plants to manufacture products, how do we optimize the logistics of our shipments to both our customers and raw materials and then they start developing operational plans and develop synergies based on that.

So I think my expectation is not changed at all from what we presented in terms of that waterfall chart back in February and probably more confidence now that we're actually operating in the new groups.

And our next question will be coming from Adam Thalhimer of Thompson, Davis.

Scott, I'm still trying to understand the top line for Q4. So that's -- so Q4 top line down about $20 million to $25 million sequentially. What's driving that? Was there some tariff-related prebuys in Q2 and Q3? Or is that all just -- that's how bad the demand environment is now?

No. I mean I think it's more reflective of just the current market and what we're seeing sitting here today.

Okay. And then maybe it's unfair to ask, but I mean, do you have any insight into Q1, Q2 of next year and where that -- where the demand might be?

We've just started our budgeting process. So I think it's a little too early for us to kind of go out with guidance. A lot is going to probably depend on what the Fed does here over the next course of 2 to 3 months and what sort of reaction in terms of consumer confidence and some stability on inflation and tariffs. So I think we're not quite ready. I think our expectation is next year will be better than what we're seeing here in the second half, but still a little too early to come out with any specific guidance.

Okay. And then cash flow was a good story in Q3. Congrats on that. Also good Q4 cash flow guidance. Just curious what you guys are going to prioritize with the Q4 cash flow.

Yes. I think as always, we're going to balance debt repayment and potentially some opportunistic stock repurchases through the quarter. But clearly, continuing to strengthen our balance sheet in this environment is a top priority, and you should expect that to continue.

Yes, I would reinforce that. I mean I think that there's always -- we've always believed our leverage was at a level that was absolutely manageable, but I think that there were some that were -- you approach 3x concerned about that. And so even in a soft environment, we're able to continue to drive cash flow into this business.

We'll continue to strengthen the balance sheet, as Scott said. And a lot of it is situational. When the market opens back up, as a reminder, we are opportunistic buyers. We don't have any sort of 10b plan established for the company. So we have limited time to be in the market, but we'll evaluate where our share price is, and we'll continue to prioritize our shareholders in what we feel is the best return for them.

And our next question will be coming from Julio Romero at Sidoti & Company, LLC.

Going back to Tyman Mexico for a bit. If I recall, that manufacturing business in Mexico is largely labor-intensive and very manual in nature. And I know you mentioned it was a tooling and equipment issue. So I was hoping you could kind of talk to the issues a little bit there? And does the labor-intensive and manual process of that business kind of affect your ability to implement the remediation plan at all?

Actually, the Monterrey facility is a mix between manual assembly as well as a significant presence for injection molding and metal die casting. So there is a lot of injection molders and die casters and tooling in that facility.

What we identified is really the systems underneath how do you methodically anticipate and plan for tooling repairs. I don't want to say it was nonexistent, but again, not up to the standards. And you get to a point where if you're not maintaining tools and equipment, but you continue to try to run and you block off cavities, then it creates quality problems and other issues, and it will eventually catch up to you.

And I think what we identified midyear here as we get deeper and deeper into the integration and we start understanding the processes and kind of put Quanex procedures and policies into place is that we were underinvested and that the tooling condition and the equipment condition was not where we wanted to be, and it was not going to be healthy to support our customers. So we had to make some changes and fix some things before it was catastrophic.

Good color there. Very helpful. And how is the remainder of the Tyman integration aside from Mexico performing from an operational perspective?

Yes. As I said in my statements, we've been very pleased with the progress to date. We've got commercial teams developed. And I've said in other calls, I think our job throughout the integration was try to combine the best of both companies and make it into something new and stronger.

And -- although we have a short-term issue in one plant, when you look at overall throughout the rest of the integration, I think Tyman was probably more aligned to be a commercial type of business. And so the marketing, the product management and the sales teams and the sales leadership from Tyman have a bigger play within the role of Quanex. And the Quanex strength of being a manufacturing company is being integrated into the Tyman facilities.

And I think we're making some very, very good progress. And as we mentioned, I think when the market does recover, we will have the systems in place, and we'll continue to fix the issues in Monterrey, but we'll be ready to grow. So I'm very excited about the progress that we made, and I think it's going to -- there's a lot more to be done, but we're well on track and right where we thought we would be minus the impact of Monterrey, which we identified and our systems are what caught that. So we'll fix it and we'll move forward, and we'll be ready to go. But very pleased with the progress.

Understood. Understood there. And sorry if I missed it, but did you guys provide a new time line for the $30 million in synergies, kind of that first tranche of synergies? Is that still expected by the end of 1Q fiscal '26?

I think we said early 2026. I think that's still pretty accurate.

Okay. Got you. So there's no push out announced from the time line there?

No.

I mean some of it will be market dependent. I mean if the market were to go worse, that impacts the procurement synergies, but we're not anticipating a significant degradation from where we're at today. So...

Got you. And then one more, if I could. On the Custom Solutions business, there's been some announcements of industry consolidation from some larger OEMs, and it also wouldn't be the first time that you guys have seen industry consolidation. So can you maybe talk to any expected impact to Quanex from that and some historical context you could provide as to how you've worked through industry consolidation of customers in the past?

So what we're seeing in the Custom Solutions, it was announced. It's too early in the combination of those companies, which is more on the wood products side. I'm assuming that's what you're referring to. It's too early to tell. We've seen significant customer consolidation there. So I think we're not anticipating any major impact as a result of that. We have relationships with all of the OEs, and we anticipate that will continue on a go-forward basis. As they go through the integration or even the approval of that consolidation, we'll get more information, and we'll develop our plans from there.

In other markets, I think mainly in the window and door segment, I think we'll continue to see some consolidation. The national players will continue to, I think, grow. And -- we sell something to almost everyone. So it's -- it may have some mix issues from the different product lines that we sell. But for us, the consolidation is expected.

And I think the fact that we have exposure to almost every window company, I think we're well positioned to be able to capitalize on that as long as we're continuing to provide the basket of goods and servicing our customers the way we need to. And for us, again, the priority is fixing Monterrey and getting that solved.

Got it. I just wanted to say congratulations on completing the resegmentation. Nice job there.

And our next question will be coming from Ruben Garner of Benchmark.

Just a quick follow-up on the Mexico facility. What percentage of your business or how much revenue comes from that facility?

We don't -- we haven't given that level of disclosure. It is a cost center. So the revenue actually flows through other facilities. So they're doing some extrusion and then it's dispersed. We'll have to get back to you, but we haven't publicly disclosed what that amount is through the hardware business.

And I would now like to turn the conference back to George for closing remarks.

Thank you. As we head into the fourth quarter, we are encouraged by the completion of our resegmentation and the overall resilience of the business in the current environment. Our team is focused on advancing our integration and capturing the synergy opportunities available.

We remain optimistic about our prospects for profitable growth and value creation moving forward. We look forward to providing you with another update when we report Q4 and our full year 2025 earnings in December. Thank you.

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