Good day, and thank you for standing by. Welcome to the fourth quarter and full year 2021 Quanex Building Products Corporation earnings conference call. At this time, all participants are in listen-only mode. After the presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to Press Star, then one on your telephone. Please be advised today's conference may be recorded. If you require operator assistance during the call, please Press Star, then zero. I'd now like to hand the conference over to your host today, Scott Zuehlke, SVP, 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 statements 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 discuss the financial results. Net sales increased by 14.2% and 25.9% during the fourth quarter and full year of 2021, respectively.
Record growth for both periods. As a reminder, both of our manufacturing facilities in the U.K. were shut down in late March of 2020 and did not resume operations until mid to late May last year. The increases in revenue were mostly due to improved demand across all product lines and operating segments, combined with higher prices, primarily related to the pass-through of raw material cost inflation. More specifically, for the fourth quarter and full year, we posted net sales growth of 10.1% and 19.6%, respectively, in our North American Fenestration segment. 15.9% and 17.1%, respectively, in our North American Cabinet Components segment, and 17.6% and 45.6%, respectively, in our European Fenestration segment, excluding the foreign exchange impact.
We reported net income of $20.9 million or $0.62 per diluted share for the three months ended October 31, 2021, compared to net income of $22.2 million or $0.67 per diluted share during the three months ended October 31, 2020. For fiscal 2021, we reported net income of $57 million or $1.70 per diluted share, compared to net income of $38.5 million or $1.17 per diluted share for fiscal 2020. On an adjusted basis, net income was $20.8 million or $0.62 per diluted share during the fourth quarter of 2021, compared to $22 million or $0.67 per diluted share during the fourth quarter of 2020.
Adjusted net income was $58.6 million or $1.75 per diluted share for fiscal 2021, compared to $40.7 million or $1.24 per diluted share for fiscal 2020. The adjustments being made to EPS are for restructuring charges, certain executive severance charges, foreign currency transaction impacts, and transaction and advisory fees. On an adjusted basis, EBITDA decreased by 5.3% to $37.3 million in the fourth quarter of 2021, compared to $39.4 million in the fourth quarter of last year. For the full year 2021, adjusted EBITDA increased by 21.3% to $126.8 million, compared to $104.5 million in 2020. The decrease in earnings for the quarter was mainly due to inflationary pressures and supply chain challenges.
The increase in earnings for the twelve months ended October 31, 2021, was largely due to higher volumes, improved operating leverage, and better pricing. This increase was somewhat offset by higher raw material costs and an increase in selling, general, and administrative expenses. I'll now move on to cash flow and the balance sheet. Cash provided by operating activities was $78.6 million for the twelve months ended October 31, 2021, compared to $100.8 million for the twelve months ended October 31, 2020. We generated free cash flow of $54.6 million in 2021 compared to $75.1 million in 2020. The decrease was primarily driven by an increase in working capital, more specifically, the value of our inventory due to inflation.
We were able to repurchase $11.2 million in stock, and we repaid $65 million of bank debt during fiscal 2021, $20 million of which was repaid in fourth quarter. Our balance sheet is strong, our liquidity position is solid, and our leverage ratio of net debt to last twelve months adjusted EBITDA improved to 0.1x as of October 31, 2021, which is a half turn lower than where we exited fiscal 2020. As for 2022, and as noted in our outlook section in the earnings release, we have chosen not to issue guidance just yet. Demand remains strong, but ongoing supply chain disruptions continue to create uncertainty. With this backdrop, we believe it would be premature to give guidance at this time.
We do believe that we should be able to realize margin expansion on a consolidated basis in fiscal 2022, but we also think that margin expansion will be H2 loaded. As we sit here today and to set appropriate expectations for the first quarter of 2022, we currently expect mid-single-digit net sales growth for the first quarter, mostly due to price increases, but margins will be pressured compared to the first quarter of 2021. We hope to provide an update on full year guidance when we report earnings for the first quarter of 2022. As a reminder, there is a fair amount of seasonality to our business. The first quarter of each year is typically the low water mark, with the H2 contributing most of our earnings and free cash flow. I'll now turn the call over to George for his prepared remarks.
Thanks, Scott. We are extremely pleased to announce that 2021 was a record year for Quanex despite numerous challenges. We reported record revenue and earnings and return on invested capital continued to improve. In addition, we reported another year with solid free cash flow. In fact, cumulative free cash flow over the past five years is approximately $325 million. Also, as Scott mentioned, we were able to pay down $65 million of debt and return $11.2 million to shareholders through share repurchases during the year. While we are very pleased with these results, we're not surprised. In an environment with strong demand, the operational improvements we've made in our manufacturing facilities over the past four years, combined with the systemic and permanent changes we've made to our working capital management, continue to yield strong results.
I am very proud of the entire Quanex team for the energy, effort, and performance they continue to deliver to our customers, communities, and shareholders. Before providing comments on segment results, I will give some additional color on review of the events of 2021, the markets we serve, and the macroeconomic environment we currently face. As we entered 2021, there was optimism and hope that the COVID pandemic would soon be under control and that operating environments would return to some level of normalcy. As different variants spread and vaccine uptake proved lower than expected, the optimism was soon replaced by the reality that the battle against COVID is far from over, and that measures to contain or minimize the spread of the virus will continue around the world. The year also ushered in a new and in some respects, more significant challenge, supply chain stress and disruption.
With the infusion of COVID relief payments into our economy, demand for goods in the building product segment increased at record rates. At the same time, the supply chain's ability to ramp up was continually impeded by labor constraints, plant shutdowns or slowdowns, freight issues, and significant weather events. As a result, backlogs for finished goods dramatically increased over the year to record levels, and suppliers have been unable to close the gap. All these factors have worked together to add an unprecedented amount of stress to the entire chain. As a result, everyone around the world is now seeing high levels of inflation, sporadic deliveries, and unexpected back orders or stock outs with little or no notice. This last piece, limited or no visibility on the delivery of goods, is currently our biggest challenge.
All told, the planning and operational environment we see today is significantly more challenging than in 2020, when our primary concern was the labor disruption caused by the pandemic. When looking at the markets we serve, demand continues to be strong across all segments. Low existing housing inventory and low mortgage rates continue to support strong housing demand, and R&R remains healthy due to high levels of back orders and continued strong consumer confidence. Although we continue to watch for a pullback in demand due to inflationary pressures, we are not seeing signs of this at this time. I will now discuss segment results. Our North American Fenestration segment reported revenue of $156.3 million in the fourth quarter, which was 10.1% better than prior year fourth quarter.
Solid demand across all product lines combined with higher index pricing, additional surcharges, and permanent price increases accounted for the stronger revenue performance. Adjusted EBITDA of $20.2 million in this segment was 15% less than prior year fourth quarter. Volume-related benefits were more than offset by increases in material costs, normalized medical costs, and higher SG&A, driven by incentive compensation. As a reminder, approximately 80% of our North American Fenestration business has contractual raw material pricing index mechanisms. The timing lag of these indices are typically 60 and 90 days, and therefore, we are in arrears and chasing price until the rate of inflation flattens or reverses. At such time, we would expect to see a period of margin improvement or catch up.
For the full year, this segment had revenue of $578.3 million and adjusted EBITDA of $75.4 million, which represents a 20 basis point margin decrease from prior year in a very challenging inflationary environment. We generated revenue of $69.7 million in our European Fenestration segment in Q4, which was $12.9 million or 22.7% higher than prior year or up 17.6% after excluding the foreign exchange impact. Strong demand in the UK and continental Europe, combined with price increases, resulted in record revenue levels for the segment. Adjusted EBITDA of $12 million in the quarter was 10.1% less than prior year Q4. The drop in margin percentage for the quarter was driven by material inflation, normalization of SG&A expenses, and increases for incentives.
On a full year basis, this segment had revenue of $251.6 million and adjusted EBITDA of $50 million, which equates to margin expansion of 160 basis points versus prior year. Our North American Cabinet Components segment reported net sales of $66.6 million in Q4, which was 15.9% better than prior year. Strong demand, combined with higher index pricing and additional permanent price increases, were the drivers for higher performance. Adjusted EBITDA for the segment was $5.4 million, which represents an increase of 16.3% compared to prior year fourth quarter. Volume benefits combined with pricing actions, improved wood yields, and normalized expenses all contributed to the favorable performance by largely neutralizing inflationary pressures during the quarter.
For the full year, this segment had revenue of $246.1 million and adjusted EBITDA of $14.2 million, which was an improvement of 17.1% and 22.5% respectively. We were able to realize margin expansion of approximately 30 basis points in this segment, even though we chased price all year. As a reminder, 100% of our cabinet business has contractual raw material pricing index mechanisms. Finally, unallocated corporate and SG&A costs were $2.1 million lower than prior year fourth quarter. The primary drivers of the lower expenses were true ups for stock-based compensation expense and lower than planned medical expenses in the quarter. For the full year, unallocated corporate and SG&A costs were $12.8 million, which returned to normalized levels versus 2020, which was a year impacted by COVID.
As Scott mentioned in his financial commentary, cash flow generation remains solid despite a significant increase in the value of our inventory due to inflation, and our balance sheet is strong. Our board of directors recently authorized a new $75 million share repurchase program, and we will continue to utilize this authority in the open market and on an opportunistic basis. We have positioned ourselves well, and we will continue to evaluate all opportunities to create value for our shareholders. As we look forward into 2022, we remain very optimistic on the demand environment. Our customers are reporting record levels of backlogs, and this, combined with current favorable housing and R&R markets, should translate into continued strong demand. Operationally, we feel we have made progress on our hiring needs by raising starting wages by an average of $1.80 per hour in our manufacturing facilities.
Outside of the index pricing and the associated time lags, we have been able to implement surcharges and permanent price increases to help offset inflation. The major challenge we currently face is supply chain and freight uncertainty, and it is for this reason alone that we have decided not to provide specific financial guidance for 2022 at this time. Due to continuing supply chain disruptions, we have very little, if any, visibility into our short-term delivery schedules. In this environment, it is extremely difficult to predict the cadence for shipments over the next few months or the potential costs associated with sudden changes in schedules. Therefore, we think it is prudent to not provide guidance until such time as we can gain some forward visibility. In summary, we continue to execute on our strategy and are proud to have delivered a record year in a very challenging environment.
Demand remains strong, and if the global supply chain stabilizes and our businesses continue their excellent operational performance, then we believe it will translate into revenue and earnings growth in another solid year in 2022. We will continue to stay focused on executing on our strategic plan, and we look forward to reaching a point where we can give more definitive guidance. With that, operator, we are now ready to take questions.
If you'd like to ask a question at this time, please press the star then the number one key on your touch-tone telephone. To withdraw your question, press the pound key. Our first question comes from Daniel Moore with CJS Securities.
Morning, George. Morning, Scott. Thanks for all the color and taking questions.
Good morning.
wanted to start with maybe just kind of price versus quantity in Q4. Is it possible to give us a sense of how much of the revenue growth and in the case of Europe ex you know currency revenue growth came from price adjustments versus quantity?
I don't have a specific breakdown, but unlike prior quarters, I can say that price slash surcharges was really the driver, more so than volume. Although volume was up as well.
Across all three, for the most part, at least?
Yeah, that's correct.
That's helpful. You know, very, even more difficult question, but if you had to guesstimate kind of true underlying demand for each segment relative to quantity, in other words, you know, how much faster revenue could have grown in the quarter had that not been for supply chain and logistics, any color or sense there and maybe order of magnitude for, you know, rank order each one where the biggest challenges are, if you will?
Dan, you're right. It is a very difficult question and for the reason that what we're seeing in our order pattern right now in our current orders is demand remains extremely strong across all product lines. In some areas, we actually have our customers deciding to pull back on their schedules to give their workforce some breaks in as many hours as they're working. It's really hard to determine how much more volume could have went through the chain because, you know, again, our customer bases are making decisions to pull back. I don't wanna give you a number of what that would be if everybody was full out.
All these things are intertwined, and I think right now you have a combination of uncertain deliveries impacting it, but you also have our, again, our customer base deciding that they have to give their labor force some relief to the amount of time that they're working. It's really hard to determine and give you an accurate answer.
Understood. Just trying to get a flavor of the you know, the relative size of kinda underlying demand, but appreciate that.
What I can tell you, Dan, is in almost every case, our customers are seeing significant growth in their back orders. You know, as you go out and look at other companies that report publicly, you'll be able to get a good feel for what they're seeing. You know, there's still significant pent-up demand.
Yep. No, that's very consistent, certainly. Maybe another one. Based on the price increases that we've put through in fiscal 2021, if we didn't raise prices, you know, again, from here and volumes were flat, what type of revenue growth would that ballpark roughly translate to in fiscal 2022?
Yeah. I mean, if you're talking about flat volume, just from a price standpoint, you're probably low single-digit growth.
Got it. Just on what's gone through already, not additional price increases.
Yeah. Timing impact of the price increases, because obviously they've been staggered throughout the year.
Exactly. Okay, that's helpful. It's probably part and parcel with the comments you've made, but do you have an outlook for the overall windows market, either in North America and/or Europe, as we think about, you know, fiscal or calendar 2022?
That's part of the uncertainty here, but what we have referenced in the past is, for North America anyway, Ducker is a third party we use, and last update they showed for 2022 versus 2021 on window shipments was low single digit growth around the 2%+ range.
In Europe, I would say what our customers are predicting, again, with very little and limited visibility, is relatively flat year-over-year on volume.
Coming from a high base.
Yeah, from a-
Right.
From an extremely high base.
It's been a heck of a run, no question. Maybe shifting gears one more, just CapEx expectations for fiscal 2022. You know, in terms of buybacks, you know, the prior repurchase authorization, executed over 2 to 3 years, do you anticipate a similar timeline or, you know, maybe being more accelerating that given where we are with the balance sheet? Thanks for all the color.
On the CapEx front, if you recall, our guidance for 2021 for CapEx was, I think, $30 million-$35 million. I think we're comfortable staying around the same amount for 2022 guidance for CapEx. We underspent that budget last year, and it wasn't because we were pulling back on any projects. It's just lead times for equipment are such that everything's moving to the right.
Yep.
On the buyback question, really there's not an answer I can give or clarity there. It's on an opportunistic basis. If we continue to feel that our stock is undervalued versus our peers, which obviously we feel that way today, we could ramp that up over the next several years. I mean, $75 million is actually considerably more in the open market than we had last time, because if you recall, the $60 million, half of that was purchased by one firm. Essentially, we sold $30 million in the open market over a three-year period. I would think that we could ramp that up.
All right. Very good. Thanks for the color again.
Sure.
Our next question comes from Reuben Garner with Benchmark Company.
Thanks. Good morning, everybody.
Good morning, Reuben.
Let's see. I think Dan asked about the price versus volume in the fourth quarter. Scott, what about the full year in your fiscal 2021? Can you give us like a ballpark, you know, how much of the 26% revenue growth was price versus volume?
For the full year, it was more volume than price on a full year basis. Out of that 26% growth, I would say 15%-20% is probably volume.
Okay, that's helpful. Let's see. The supply chain issues you're having, I mean, do you guys, from what you gather from competition, are you guys doing better than your peers in being able to get product out the door? Are you seeing any different behavior from anyone on the pricing front, does anyone have any advantages or disadvantages relative to you that you're dealing with?
I'll answer that one, Reuben. In terms of our competition, you know, I think a lot of it is based on your size and scale and, you know, we're unique in the space that we serve that we're larger. I think we're doing equal to or better than any of our competitors in acquiring raw materials that we purchase. You know, what we see in the market, there's no one that's getting crazy with price or doing anything that is putting pressure on any sort of volumes. I think everyone right now is facing significant inflationary and supply challenges. Really where we're at in the market today is everyone's kind of protecting their base of customers and doing everything they can to fulfill those needs. There's not a lot of.
We're not at a point where people are aggressively trying to take share. We're all trenched in because of the limits in what you can acquire. It's kind of a trench warfare right now is really how I would characterize it.
Okay. A couple questions on capacity. Two sides of the question here. The first is, do you have any plans for increases in areas where you're either low or looking to expand, like the screens operation or in cabinets? On the flip side, any updates on maybe the areas where you are, you know, underutilising your assets and you guys have been working on trying to offer other products or services? Any progress there that you can talk about?
On the first question, in terms of capacity expansion, I think we continue to go forward. We talked about adding some mixing and blending capacity in the U.K. for our vinyl extrusion business. That will continue. That project's in process. Again, as Scott mentioned, the timing of such is impacted because of just the lead times to get equipment. It's extended, but we're looking to add capacity there. We continue to evaluate the screen markets and in areas where we're underserved. We will look to expand our geographical footprint, but that's also going to be predicated on being able to get enough raw materials to be able to support it.
We also have a project in our spacer business in Germany that we're adding additional capacity for our rubber extrusion for those spacers in Germany, and that continues. In certain pockets, we are going forward and investing and spending in the business. The second piece of your question-
On any parts of our business that we have a lot of spare capacity.
You know, the best ex-
The vinyl-
Yeah, the best example of that is Reuben Garner on our vinyl extrusion business in North America. We talked a lot about focusing on return on net assets, return on invested capital. We continue to expand our capabilities in producing light parts, primarily in fence posts and fencing, vinyl fencing components. I think we've proven that we're a very reliable supplier in supporting that industry, and that continues. It's had a positive impact on our vinyl extrusion business in North America.
Any comments on how big of an industry or opportunity that is?