Thank you
for standing by, and welcome to the Quanix Building Products Corporation Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Scott Zielke, Senior Vice President, Chief Financial and Treasurer.
Please go ahead, sir.
Thanks for joining the call this morning. On the call with me today is George Wilson, our President and CEO. This conference call will contain forward looking statements and some discussion of non GAAP measures. Forward looking statements and guidance discussed on this call and in our earnings release are based on current expectations. Actual results or events may differ materially from such statements and guidance, and Quanex undertakes no obligation to update or revise any forward looking statement to reflect new information or events.
For a more detailed description of our forward looking statement disclaimer and a reconciliation of non GAAP measures to the most directly comparable GAAP measures, Please see our earnings release issued yesterday and posted to our website. I'll now discuss the financial results. We generated net sales of $270,400,000 during the Q2 of 2021, which represents an increase of 44.2% compared to $187,500,000 during the Q2 of 2020. The growth was mainly the result of increased demand for our products across all product lines, coupled with increased pricing, mostly related to raw material cost inflation. More specifically, we posted net sales growth of 34.6% in our North American Fenestration segment, 25.5 percent in our North American Cabinet Components segment and 92.1% in our European Fenestration segment, excluding the foreign exchange impact.
As a reminder, both of our manufacturing facilities in the UK were shut down late March of 2020 and did not resume operations until mid to late May last year. In an effort to provide a more realistic comp, On a consolidated basis, we posted revenue growth of 20.6% in the first half of twenty twenty one compared to the first half of twenty nineteen prior to COVID. We reported net $14,600,000 or $0.43 per diluted share for the 3 months ended April 30, 2021 compared to $5,500,000 or $0.17 per diluted share for the 3 months ended April 30, 2020. The increase in net income was mostly due to higher volumes and improved operating leverage. However, this improvement was somewhat offset by $1,000,000 increase in SG and A during the quarter, dollars 9,700,000 of which was related to the valuation of our stock based comp awards and $3,100,000 of which was due to higher and more normalized medical claims.
On an adjusted basis, EBITDA for the quarter increased by 47.7 percent to $32,200,000 compared to $21,800,000 during the same period of last The improved profitability was again largely due to increased operating leverage from higher volumes. From a margin standpoint, this increase represents adjusted EBITDA margin expansion of approximately 30 basis points on a consolidated basis. However, we did realize significant adjusted EBITDA margin expansion in our North American and European Fenestration segments. Margins were pressured in our North American Cabinet Components segment, primarily due to hardwood cost inflation. Moving on to cash flow and the balance sheet.
Cash provided by operating activities was $32,400,000 for the 3 months ended April 30, 20 $21,000,000 compared to $6,100,000 for the 3 months ended April 30, 2020. Free cash flow came in at $27,800,000 for the quarter compared to essentially 0 free cash flow in Q2 of last year. Year to date, as of April 30, 2021, Cash provided by operating activities was $29,000,000 compared to $2,500,000 for the same period of last year. Free cash flow year to date as of April 30, 2021 was $19,200,000 compared to negative $12,800,000 during the same period of 2020. Our strong free cash flow generation during the quarter enabled us to repay $25,000,000 in bank debt and repurchase approximately $2,000,000 of our stock.
Our balance sheet is strong, our liquidity position continues to improve and our leverage ratio of net debt to last 12 months adjusted EBITDA improved to 0.3x as of April 30, 2021. We will remain focused on managing capital and generating cash as the year progresses. As stated in our earnings release, our outlook is positive and we remain optimistic about the economic recovery. Based on our strong first half results and ongoing conversations with our customers, We are raising our expectations for the year again and now expect approximately 20% sales growth in our North American Fenestration segment, Approximately 15% sales growth in our North American Cabinet Components segment and approximately 40% sales growth and our European Finestration segment. We're now comfortable providing the following full year 2021 guidance for modeling purposes.
Net sales of $1,040,000,000 to $1,060,000,000 adjusted EBITDA of $125,000,000 to 130,000,000 Depreciation of approximately $33,000,000 amortization of approximately $14,000,000 SG and A of approximately $115,000,000 Note this is higher than previously expected due to an increase in stock based comp and more normalized medical costs, interest expense of $2,500,000 to 3,000,000 Tax rate of approximately 27%, CapEx of $30,000,000 to $35,000,000 and free cash flow of $60,000,000 to 65,000,000 If you adjust for the expected increase in SG and A, the implied incremental adjusted EBITDA margin is in the low 20% range. The takeaway here is that we have been successful at passing through price and we are realizing operating leverage through increased volume. As previously mentioned, we expect the typical seasonality in our business to be less pronounced this year. So we feel it would be helpful to provide some direction on a quarterly basis for the remainder of the year. From a cadence perspective for Q3 and on a consolidated basis, We expect net sales to be up by 28% to 30% year over year.
However, it will be challenging to realize adjusted EBITDA margin due to a decent comp coupled with inflationary pressures. Looking ahead to Q4, we will have a very tough comp. We do expect net sales growth of approximately 10% year over year during the quarter on a consolidated basis, but we do not expect to realize margin expansion. To summarize, on a consolidated basis for the full year, we now expect to generate net sales growth of approximately 23% year over year to the midpoint of guidance, while maintaining adjusted EBITDA margin in the low 12% range. I'll now turn the call over to George for his prepared remarks.
Thanks, Scott.
We are pleased to report another quarter of solid results as demand for all our products remained strong and exceeded our Operational performance was excellent across all segments, and I'd like to take a moment to thank the entire Quanix team for their continued efforts and dedication to our customers and shareholders. Similar to most others in the building product space, we are facing inflationary pressures and labor shortages. However, we continue to stay focused on operational excellence projects and other initiatives that improve our return on invested capital and our ability to generate cash flow. We have had success in these areas and believe this focus will continue to generate value for our shareholders. Prior to discussing the detail by segment, I'm going to provide some color on the ever changing macroeconomic conditions of the markets in which we serve.
In the North American Residential Housing market, both new construction and repair and remodel remain strong. Demand for windows and doors remains solid. And according to many of our OEM customers, lead times to their consumers are being extended, While backlogs continue to increase, specific to cabinet components, we believe that the semi custom segment, which is the main segment we serve, again outperformed the stock segment. As we mentioned in our last call, there was a significant shift in market share away from the semi custom segment to the stock segment over the previous few years. So the recent KCMA data is encouraging and that it shows the semi custom segment Continuing to outpace the stock segment.
Demand for the products we manufacture in the U. K. And Germany also remains strong. Although markets are slowly beginning to reopen in the UK and Europe, continued travel restrictions coupled with an under built housing market bodes well for demand in our markets. One area that we continue to watch is a potential shortage in the supply of glass in the U.
K. And Europe. Further demand pressures and supply issues with this commodity could provide headwinds for our products in the second half of the year. As was the case in our Q1 call, we remain optimistic on macroeconomic conditions in all the markets we serve. However, we face challenges in the form of inflation and labor shortages.
With respect to inflation, I think it is accurate to say that we are seeing pressures in every raw material and freight category. The most significant pressures are in the PVC resin, Chemical feedstocks and hardwood lumber species for cabinet components. As a reminder, for the most part, we have contractual pass throughs for the Major raw materials we use in North America, but there is often a contractual lag that can generally be anywhere from 30 to 90 days. With the rapid rate of inflation today, these time lags are applying short term margin pressures. We do not have these contractual pass throughs in Europe and the U.
K, so our ability to pass on any increases Through price becomes more important and for the most part, we continue to be successful in that regard. In all regions, Our customer base is passing along increases to the end consumer and the entire supply chain is following in kind. We're not on an index. We have been successful at keeping inflation neutral so far. As also discussed on the Q1 call, labor shortages have also been a challenge for most U.
S. Manufacturing companies and Quanix is no exception. This continued into Q2 and is ongoing. We are hopeful that some of the recent government decisions to roll back unemployment benefits in certain States will have a favorable impact on this front, but at this time, it's just too early to tell and margins are being pressured by overtime utilization rates. I'll now go ahead and provide my comments on performance by segment for our fiscal 2nd quarter.
Our North American Fenestration segment generated revenue of $146,100,000 in Q2, which was approximately 35% higher than prior year Q2 and compares favorably to Ducker window shipment growth of 10.8% for the calendar quarter ending March 31, 2021. Prior year COVID impact combined with strong demand across all product lines, Share gains in our screens business and increased capacity utilization on our vinyl extrusion assets all contributed to the above market performance. Adjusted EBITDA of $20,600,000 in this segment was approximately 54.1% higher than prior year Q2. Non recurring COVID impact, volume related operating leverage, the implementation of annual pricing adjustments, Operational improvements and lower SG and A all contributed to the improved performance year over year. For the 1st 6 months, This segment had revenue of $274,300,000 and adjusted EBITDA of $36,900,000 which represents growth of 25.2% and 67.9%, respectively.
This also represents adjusted EBITDA margin expansion of approximately 3.40 basis points. Our European Fenestration segment generated revenue of $61,700,000 in the 2nd quarter, which is $32,500,000 or approximately 111% higher than prior year. Excluding foreign exchange impact, This would equate to an increase of approximately 92%. Strong demand for our products continues in both vinyl extrusions and spacers as the repair and remodel markets in the UK and Continental Europe remain strong. Adjusted EBITDA of $12,900,000 for the quarter $10,000,000 better than prior year, but it is important to remember that our U.
K. Plants were shut down for part of the prior year comp period. Also contributing to the strong results were volume related operating leverage and pricing actions, which helped offset inflationary pressures. On a year to date basis, revenue of $110,700,000 and adjusted EBITDA of $23,600,000 resulted in margin expansion of approximately 840 basis points as compared to the first half of last year. Our North American Cabinet Components segment reported net sales of $63,600,000 in Q2, which was $12,900,000 or approximately 26% better than prior year.
Note that this growth rate was slightly higher when compared to the latest KCMA data for the semi custom segment, which came in at 24.2% growth over the same period. Favorable comps due to the COVID impact in Q2 of last year, higher index pricing and higher order demand all contributed to solid revenue growth in the quarter. Adjusted EBITDA was $3,000,000 in this segment, which was 21.6% higher than prior year. Although we are being impacted by the timing lag of our index pricing mechanisms on hardwood, operating leverage from higher volume and incremental pricing on certain products all contributed to holding adjusted EBITDA margin relatively flat versus prior year Q2. In fact, the rapid increase in hardwood prices has impacted adjusted EBITDA by $1,700,000 year to date.
And if we adjust for this inflation, we would have realized approximately 180 basis points of margin expansion in this segment. On a year to date basis, Expansion of approximately 150 basis points. Unallocated corporate and other costs were $4,300,000 for the quarter, which is $7,200,000 higher than prior year. As Scott mentioned earlier, the primary drivers of this increase were stock based compensation expense, operating incentive accruals and more normalized medical expenses as our employees and their families have started to feel more comfortable going back to their doctors. As I mentioned earlier, our priority has been meeting customer demand, furthering our operational excellence programs, Optimizing our cash flow and improving return on invested capital across all segments of our business.
Despite inflationary headwinds, We continue to make progress in these areas and this work has strengthened our balance sheet by enabling us to further pay down debt during the quarter, while still repurchasing approximately $2,000,000 in treasury stock. Going forward, Our capital deployment strategy will remain intact as we execute on our path to being debt free. We will opportunistically evaluate stock repurchases and continue to invest in projects that grow revenue and improve our ROIC. In addition, The Board recently approved a capacity expansion project at our spacer plant in Germany, and we're also currently evaluating additional capacity projects in our screens and Cabinet Component Business in North America. Note that due to the extended lead times of equipment, we don't expect to realize any benefits from these projects until next year at the earliest.
In summary, our outlook on demand for our products remains strong for the remainder of the year. We are executing on our plan and performing well from an operational standpoint. With these points in mind, on a consolidated basis, We are confident in our ability to deliver revenue growth in the low 20% range this year, while maintaining adjusted EBITDA margin in the low 12% range despite the increasing inflationary pressures. And with that, operator, we are now ready to take questions.
Our first question comes from the line of Daniel Moore from CJS Securities. Your question please.
Good morning, Derek. Good morning, Scott. Thanks for taking the questions. Hoping you can break down or at least directionally give a little bit more detail in terms of price versus quantity as far as the growth is concerned for each of the 3 segments?
Yes. That's a tough one to answer. I don't have the data Right here in front of me. Volume is definitely the main driver. Pricing in North America It is really pushed through via contractual pass throughs for our major raw materials, as you know.
And then in Europe, it's the opposite. We don't have contractual Pass through is there, so it's all priced, that we push through to customers. Give me a little time to gather more detail and we can talk offline.
Fair enough. Obviously, Europe remains exceptionally strong. Is it the lack of new of housing stock that Sort of causing a boom in R and R and qualitatively any commentary and how
I would say right now the under built housing market is the main driver. You couple that with still some restrictions on travel and the increase in discretionary Spending income that people have, that has continued to bode well. And I don't think that that's going to subside in the short term. So Those two factors are the main driver. And in terms of visibility, outside of the first two or the next two quarters, It is limited, but I would say depending on raw material availability and supply issues, The next two quarters look extremely strong, and we're very confident on what we see over the next two quarters.
Got it. And similarly in North America, backlogs for new homes rising to all time highs, Are you benefiting from people choosing to refurbish instead of purchasing a new home to the extent that you have intel there?
I think what we're seeing is exactly that. The availability of new housing starts, I mean, there's just no builders Or lack of builders and the existing home inventory is an all time low. Homes are turning over So people that want to do something are being forced into the R and R market and we absolutely see that and our customers are seeing it as well.
I think just to clarify, I think you meant it's a challenge getting labor.
In terms of the labor, It's a challenge across the board for every industry and that's not letting up. I mean, Every aspect of our supply chain is having a hard time getting labor. Our customers are having a hard time getting labor as It's a challenge for us as well. Now I will tell you that we are cautiously optimistic that, as I mentioned, some of the changes in some of the state Unemployment funding levels appear to be repealing and In certain areas, we're starting to see some signs of maybe some relief, but still too early to tell, Dan.
You actually answered my next one as well. So I got 2 birds with 1 stone. Lastly, Maybe just talk about the you added glass to the list, Growing list for everybody of supply chain challenges, any incremental color there and sort of I assume that that's baked into are there challenges baked into the guidance? Or are you just sort of seeing incremental pressures build? Any detail any color
would help.
Sure. So for the glass, it's a relatively New issue and it's primarily in UK and Continental Europe. So the glass suppliers, there's 2 suppliers that have Float lines that manufacture the glass that have gone down and they're on force majeure with customers on allocation. Obviously, we don't buy that, but any of our window and door customers that use glass, it will impact their ability to manufacture. So there's Restricted capacity in both UK and Europe for glass, it's mainly a European issue.
As it is being relatively new, There's very little of that impact baked into our guidance. What's baked into our guidance is what we're being told now. So The only comment being is that, that situation worsens and something else were to happen unexpectedly, that could have an impact. And that is not baked into our guidance.
Understood. Very helpful. Thank you. I'll follow-up later with any follow ups. Thank you.
Thanks, Dan.
Thank you. Our next question comes from the line of Steven Ramsey from Thompson Research. Your question please.
Hey, good morning. Good morning. Maybe can you talk to share gain or share shift in any of your segments if it was a contributor to Q2 results or in the guidance?
So as we see and I won't give you Specific numbers I will give you anecdotally what we see is happening and what has been our selling point in terms of what we bring to the table. As labor continues to be a challenge, in many of our product lines, we have external customers, But some of our customers also have are vertically integrated and have the ability to manufacture the same products. As they are looking to find ways to better increase their output. They're looking at potentially outsourcing non critical components. And so where we say share gain, in many cases, it's Customers deciding to outsource some product.
And that's primarily in screens and cabinets Is where we'll see the biggest impact of those types of share gains. You can also see that in vinyl, although that's a little more complicated.
You still there, Steven? Sounds like we may have lost Steven.
His line is still connected. Hope we're not hearing your There
he is.
Hey guys. Okay, sorry, sorry. Quick question too. If under a scenario of multi year Strength in the housing market, do you foresee a stronger shift Kind of beyond the current supply chain challenges to outsourcing that would drive results in a pretty strong way over the next 2 to 3 years?
I think what we would see and we've stated all along that we've seen that trend even before COVID. As people look to optimize their output, minimize capacity expansion in terms of their footprint And then also the labor, that trend will continue to challenge. We think it is a big upside, yes.
Great. Thank you.
Thanks.
Thank you. Our next question comes from the line of Ruman Gardner from Benchmark. Your question please.
Thank you. Good morning, everybody, and congrats on the quarter, guys. Thanks very much. Maybe just to Start on the North American Fenestration strength that you saw. You mentioned the Ducker Numbers and obviously you guys have the screens business, to I think help you grow above and beyond the market.
Is it, how do we think about your customers Building inventory, does that happen at all? In other words, if they haven't been able to keep up with demand, is there any risk that they've Built inventory of your products to be ready for what they expect to see over the next 6 months or so? Or does it not work like that with most of your products?
I think what we're seeing right now, there is really no ability for anyone to build inventory, Ruben, right now Because of supply chain pressures, even if you wanted to build some excess inventory and finished goods or anything, there's just not enough supply Or labor to be able to do that. So I'm really doubtful that there's anyone being able to build up significant levels of inventory.
Okay. And then sort of in a related vein, if there's been a lot of talk about maybe that this level of housing starts, the 1 5 to 1.6 or even 1.7 is sort of the best the market can do in terms of materials And labor, in an environment where the starts level is kind of flattish in 2022 or even in your fiscal 22, do you guys think because of your exposure to R and R, because Windows in particular has been such a tight Product category that you'd still be able to grow in that kind of setup because you're still all the backlog that you've talked about and other initiatives that You have and maybe just touch on initiatives you have to grow above and beyond the market, maybe if there's anything else other than screens that you could elaborate on?
Sure. To answer that, I will answer it in 2 segments. In terms of our growth on a go forward basis and we'll obviously try to give further guidance in future meetings on that. We are very confident in the macroeconomic Data points that we see that this cycle does have an extended length of time. And Even if the new construction side of it were to drop, again, the same fundamentals in R and R that you just mentioned, so we're pretty confident In the outlook in the near to mid term and through our strategic planning period.
The other things that we're doing in terms of initiatives, We've been so focused and we talk about it on return on invested capital is also finding ways to optimize existing Assets that we have and we're pursuing other markets with some adjacency products. For example, If you were to look at either our rubber extrusion in our spacer business where we're pursuing other markets for Extrusions as well as vinyl extrusion where the need for capacity and other people that extrude vinyl It's very much out there. So we're becoming a supplier to OEMs in different markets. We're just planting those seeds. So the impact of that on today's numbers are not meaningful, but we believe that there's opportunity to grow Potentially different markets organically and we're working very hard on that.
Great. That's very helpful. And last one For me is, this will probably be a question for Scott. You mentioned some whether it's price cost or difficult Comps or what have you reasons why margin expansion might be tough in the back half. As we move out into the next year, I know it's a little bit early, but just for modeling purposes, do you think that we kind of get past those pressures based on what we know today and you can get back into
Yes, I think there's some confidence that we'll be able to do that specifically in the North American Cabinet Components segment where we've been chasing hardwood costs higher and at some point as those stabilize or perhaps Come down, we should benefit from a margin perspective. So I think you're right, we should expect that.
Perfect. Thanks guys. Congrats again and have a nice weekend.
Thank you.
Thank you. Our next question comes from the line of Julio Romero from Sidoti and Company. Your question please.
Hey, good morning, George. Good morning, Scott. Good morning.
Good morning.
So I wanted to start on the European segment. You saw very strong sales growth in Europe. I know you had shutdowns in the Q2 of last year, what kind of exit sales growth rate did Europe do in April?
Year over year, I mean, it was stronger than the it was about the average of the quarter. We're still doing very well in Europe. If you think about it, April May of last year, we were shut down some in Europe. So the year over year comp is pretty easy.
That's right. Yes. Okay. Makes sense. Okay.
And maybe can you speak to pricing in Europe? I know you don't have contractual pass through there, but what's your confidence level there that you can continue to kind of pass through any price in Europe?
The market is so different. And I think the understanding of the OEMs about the cost structure Of the products has made it pricing is never an easy discussion, but when you go with data and transparent in your raw material cost, It's a much more rational type of discussion with the customer. So I think we're very confident We continue to get price when needed and with the understanding that when price comes back, we also share at that point too. I think we're confident in being able to keep up with inflation and as long as you show it's not necessarily a margin.
Yes. Maybe switching over to the Cabinets segment, Can you maybe remind us what the lag is with price increases contractually effective? And when you see that price, is it For hardwood, is it closer to 30 days or 90 days for hardwood and cabinets?
So the pricing index, the way it works For cabinets, it's typically a 90 day lag before it triggers. And there's a certain percentage. So the price has to go A certain percentage and then it triggers and that's usually on a 90 day lag. The part that gets to be an issue is because we're buying from the mills Which tend to have a very short time period for us and everyone else that buys lumber is you're typically paying in 5 to 10 days. So a net 80 day A gap between when you're paying the new price and when you're getting to pass it along to the customer and then you take into account Further escalation of price during that timeframe, we're chasing it right now.
At some point when that flattens and goes back down, there'll be a benefit to us With the same time periods, but until that happens, we're chasing and it's pretty significant with the rate of inflation that we see today.
That makes sense. But since they're contractual, I mean, they're automatically triggered. It's just a matter of The time lag at the moment, the 90 day time lag before they catch up? That is correct. Is that fair?
Okay. And I guess maybe just my last one here, Sticking with cabinets is, obviously demand is strong. Is there any strategic kind of Initiative or components to taking orders even with maybe the overtime you might have to pay out. So the incremental there You saw this quarter aren't great, right? So I don't know if there's anything strategic to you maybe taking orders at those Incremental margins or is it just pricing catching up or is it ramping up labor and Banking on lower overtime costs
once you secure that labor?
I think right now, For us to minimize some of the overtime and that's the biggest challenge from a margin perspective that's non index related. We are evaluating capacity expansion and have the potential to add Some different capacity in a different region that not only will grow our revenue, but also take pressure off of both interplant freight cost As well as the amount of labor time utilized and we're working very hard at this point to assess our options on that. But I would think that that's an opportunity in the very near future for us to announce something there.
Understood. Thanks for taking the questions.
Thank you.
Thank you. Our next question comes from the line of Ken Zener from KeyBanc. Your question please.
Good morning, gentlemen.
Good morning. Good morning. So
Things are coming back, lots of demand. In Fenestration business, you're actually All these price indexes, I was trying to look back to see which year you guys didn't have those locked in and it wasn't good. But obviously, Spacers and screens, I think, are doing quite well. I just want to touch on, as we think about next year, which is getting closer and closer. There's an earlier question about can you have margin expansion?
Scott, I think you said Probably cabinets, is where you would do that. And you guys kind of have a 2% margin EBIT target, I think, It's my recollection for that industry, so that's going to be helpful. As I look at next year, the corporate expense, you're calling out the stock comp and stuff. Can you Give us what you think, it was kind of a normalized corporate expense rate for the company either annually or How should we think about that realizing 2020 was low, 2021 is higher because the stock comps, like what's in your normalized rate as we think about kind of
Are you talking about SG and A?
Yes.
Well, for SG and A, just on the income statement, we guided to about $115,000,000 this year. Our guidance was, I think, $100,000,000 to $105,000,000 The main driver of the increase now is when we gave the prior guidance, our stock was trading at Not even $22 and now we're up closer to $27,000 $28,000 So that was a big delta there along with the more normalized medical expenses that we're seeing now. Also incentives are also combined in there. So we're obviously having a good year. So the incentive accruals are higher.
So On a more normalized basis going forward at target, I mean, I would assume somewhere between $90,000,000 and $100,000,000 On an annual basis for SG and A.
Okay. Appreciate that. And then because you just called out Cabinets are responding, I guess, when the question was about margin expansion. Obviously, are there issues or ceilings that you're seeing in the Fenestration business, Europe, North America, Next year, obviously, you talked about glass in Europe and I understand that. But is there something in Screens, U.
S. Spacers, extrusion that we should be aware of that's kind of like sealing. I mean, you obviously just had really good margin expansion This year, well, it's not over, but it's implied, I guess. Is there something that would keep this year's Margin from not going higher in North America Fenestrations structurally, that you Would want to call out or talk about these different businesses because it seems like if demand is there, you should still be getting favorable incrementals as well.
Yes, I mean that's definitely a possibility. The transparency in this business as you know is pretty limited. We're in an inflationary environment right now. If and when that subsides or trends the other way, I mean, we should benefit from a margin perspective as long as volumes stay up because our operating leverage as we've demonstrated It's pretty good, and we would expect that to continue.
And we think the opportunities for continued volume with the product lines that we have, when you Ken, as you know, with our spacer business, very high efficient. As we continue to identify ways to Improve energy efficiency throughout our whole nation. The U. S. Tends to be significantly behind Europe.
Yes. We think that there's also growth opportunities just on the product line itself because of where we think that the U. S. Market Ultimately go in terms of pushing energy efficient products.
You're right, understood. And I guess, Pricing is kind of funny, right? So you got the indexes running through the extrusion stuff and the other businesses, cabinets, you're on this hardwood. So given those lags, I guess, is it reasonable to assume your business in Sorry about. You don't grow 20% organic incrementals, except for the fact that when you get price, Right, if it covers cost, it's actually margin dilutive, which we know.
But is there anything besides that component? Because it seems like your prices, your Your cost inflation is covered on, let's say, a 2 quarter forward basis, right? Your guidance is what it is. But that means we're entering FY 2022 With your prices covered and volume set to go up and for that you cover your price, it's a little margin headwind. Is that really the only thing that causes you guys issues when you think about where next year could go?
Because your leverage is low, you're obviously expanding your business, which is great to have Capital deployment opportunities, it just seems like it's a pretty constructive base that you're exiting the year at if you've covered your costs.
I think we've been and by design, we've been very methodical in terms of staying on our roadmap for the last 2 to 3 years. And we put into place the operational improvements. We've focused on trying to add technology and capacity in certain areas and we'll continue to do that. I think right now inflation It is the biggest issue that we're the headwind that we're fighting and it's the one thing that's the challenge. Without that piece, I think although we still have opportunities and there's a lot of projects that we're working on, we feel we're positioned Fairly well and we've done a good job of preparing our balance sheet for that point and capitalizing on any opportunity that does come on rise.
The inflation has been a it's tough for us and everyone else to deal with because it consumes so much energy. But I think What we've done over the course of the last couple of years, I think has positioned us extremely well. And We're very excited about the opportunities that lie ahead of us.
Understood. Thank you very much, gentlemen.
Thank you.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to George Wilson, CEO, for any further remarks.
We'd like to thank everyone for taking time out and joining us today, and we look forward to providing you all with an update on our next earnings call in early September. Thank you.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.