Ladies and gentlemen, thank you for standing by and welcome to Q3 2021 Quinex Building Products Corporation Earnings Conference Call. At this time, all participants' lines are in a listen only mode. And please be advised that today's conference is being recorded. I would now like to hand the call over to your speaker today, Mr. Scott Vielke, Senior Vice President, Chief Financial Officer 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 reported net sales of $279,900,000 during the Q3 of 2021, which represents an increase of 32 compared to $212,100,000 during the Q3 of 2020. The increase was largely due to increased demand across all product lines and operating segments combined with increased pricing mostly related to pass through of raw material cost inflation.
More specifically, We posted net sales growth of 20.8 percent in our North American Fenestration segment, 19.3% in our North American Cabinet Components segment and 85.8 percent in our European Fenestration segment, excluding the foreign exchange impact and despite the challenges presented by flooding in Germany during the quarter. As a reminder, both of our manufacturing facilities in the UK were shut down in late March of 2020 and did not resume operations until mid to late May 2020. We reported net income of 13,700,000 or $0.41 per diluted share for the 3 months ended July 31, 2021 compared to $10,800,000 or $0.33 per diluted share for the 3 months ended July 31, 2020. The increase in net income was mostly due to higher volumes and improved operating leverage. However, This improvement was somewhat offset by higher taxes, inflationary pressures and an increase in SG and A during the quarter, Which was mostly attributable to more normalized medical costs combined with an increase in stock based compensation expense.
To add more color around the higher taxes, An increase in the UK tax rate was enacted on June 10, 2021. The increase from 19% to 25 of changes in tax laws in the period in which they were enacted. Therefore, in Q3, we remeasured and deferred remeasured the deferred tax assets and liabilities that will reverse in 2023 at a new tax rate of 25%. So to account for this change, we now estimate our tax rate to be approximately 28% this year. On an adjusted basis, EBITDA for the quarter increased by 18.8 percent to $32,900,000 compared to $27,700,000 during the same period of last year.
The increase was again largely due to increased operating leverage from higher volumes. Moving on to cash flow and the balance sheet. Cash provided by operating activities was $18,500,000 for the 3 months ended July 31, 2021 compared to $45,100,000 for the 3 months ended July 31, 2020. Free cash flow came in at $12,300,000 for the quarter compared to $40,700,000 in Q3 of last year. A higher inventory balance was the driver for the lower free cash flow during the quarter.
This inventory growth is being driven by increases in raw material pricing and its related valuation along with the strategic purchasing of some critical raw materials as they become available. The first item is self explanatory And it's just the proper valuation at lower of cost or market and the nature of first in, first out accounting for inventory. The building of raw materials is needed to compensate for ongoing supply uncertainty and significant increases in demand. Despite this pressure on inventory cost, we were still able to both repay $15,000,000 in bank debt and repurchase approximately $1,800,000 of our stock during the quarter. Year to date as of July 31, 2021, cash provided by operating activities was $47,400,000 compared to $47,600,000 for the same period last year.
Free cash flow year to date as of July 31, 2021 was $31,400,000 compared to $26,900,000 during the same period of 2020. Our balance sheet is strong. Our liquidity position continues to increase and our leverage ratio of net debt to last 12 months adjusted EBITDA improved to 0.2 times as of July 31, 2021. We will remain focused on managing working capital and generating cash in the near term. As George stated in our earnings release, we remain optimistic on the demand outlook for our products.
However, we do expect inflation, labor costs and supply chain challenges to continue pressuring margins throughout the Q4 of this year. We will continue to pass these incremental costs to our customers through index pricing, surcharges and price increases. However, there are time lags in each case. In summary, on a consolidated basis, we are reaffirming net sales guidance of approximately $1,040,000,000 to $1,060,000,000 and adjusted EBITDA of $125,000,000 to $130,000,000 in fiscal 2021. I'll now turn the call over to George for his prepared remarks.
Thanks, Scott. Not unlike others in the building product space, Our fiscal Q3 was affected by significant inflationary pressures and material shortages that impacted manufacturing schedules and taxed our operations. Late in the quarter, the growth of the COVID delta variant led to a resurgence of illnesses and required quarantines, Which further impacted the already tight labor market. In addition, our plant in Heinzburg, Germany flooded in late July during the dose stating rainfall that fell over Western Europe. Despite these demanding challenges, we are pleased that we are able to announce another strong quarter of financial results and reaffirm our full year guidance for fiscal 2021.
Before discussing our results, I would like to take a moment to thank our team in Hainzburg, Germany for their amazing efforts after the flood. Within just 14 days of the storms, The facility was back up and operating at full capacity and not one customer was shut down because of this weather event. The team there worked long, hard hours to make sure our customers were supported and they did a tremendous job under unbelievably difficult circumstances. Now looking at the macro environment in North America, demand for windows and doors remains very strong. Supply chain pressures remain the constraint and have resulted in extended backlogs for our customers and longer lead times for end consumers.
Demand for cabinet components also continues to be strong. And according to KCMA, the number of average backlog days within the industry has risen to 66.9 days versus prior year levels of 37.7 days. Although the summer months in Europe usually bring a slight drop off in demand due to holiday travel, current demand for our products In the UK and Europe remains consistently strong. We mentioned on a Q2 call that the glass shortage We're beginning to limit output for window manufacturers in Europe and the UK. This trend continued into the 3rd quarter And we expect the same through the end of our fiscal year.
From a supply perspective, material shortages continue to present a major operational headwind throughout the quarter. The biggest challenges remain in most chemical feedstock products and aluminum, And we are seeing allocations and short shipments of orders on a regular basis. While it is still too soon to tell, these shortages Could be exasperated by the impact from Hurricane Ida. The rapid rate of material inflation continues to be the largest financial headwind we face. 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 lag that can generally be anywhere from 30 to 90 days long.
These pricing mechanisms are working, But will not be fully realized until we see a flattening or decrease in pricing that allows for the catch up period. We anticipate that we will begin to see prices peak and possibly begin to drop toward the end of the calendar year. At the time when index pricing does turn, there will be pressure on our revenue. However, we do expect to see improved profitability at that time. The labor market continues to be tight in every market we serve.
During the quarter, we made progress in our recruiting efforts, But in North America, we are still looking to fill over 400 open positions. To improve both retention and employee acquisition, We have increased wages in almost all of our domestic plants. On an annual basis, we have raised wages in North America by approximately $5,100,000 Which is being covered largely by price increases that have been passed on to our customers. We believe these increases will offset this structural change in the labor market and allow us to remain margin neutral. We are confident that the wage increases will continue to relieve pressure in this area.
With that said, the growth of the COVID delta variant and related spike in U. S. COVID cases has certainly added pressure, both because of ongoing positive cases and required quarantines for employees. I will now provide my comments on performance by segment for Q3. Our North American Fenestration segment generated revenue of $147,800,000 which was approximately 21% higher than prior year Q3 and compares favorably to Ducker window shipments growth of 14.2% for the calendar quarter ending June 30, 2021.
Strong demand across all product lines, share gains in our screens business, increased capacity utilization on our vinyl extrusion assets and an increase in index and surcharge pricing all contributed to the above market performance. Adjusted EBITDA of $18,300,000 in this segment was approximately 2.4% higher than prior year Q3. Volume related operating leverage, the implementation of annual pricing adjustments, operational improvements and lower G and A all contributed to the improved performance year over year. These items were offset by timing lags for index pricing and higher levels of overtime utilization. For the 1st 9 months of fiscal 2021, this segment had revenue of 4 $22,100,000 and adjusted EBITDA of $55,200,000 which represents year over year growth of 23.6% and 38.1 percent respectively.
This also represents adjusted EBITDA margin expansion of approximately 3.40 basis points when compared to the 1st 9 months of fiscal 2020. Our European The integration segment generated revenue of $71,100,000 in the 3rd quarter, which is $32,800,000 or approximately 86% higher than prior year. Excluding foreign exchange impact, this would equate to an increase of approximately 68%. As a reminder, our European facilities were shut down for part of last May. Robust demand for our products continues in both vinyl extrusion and spacers as the repair and remodel markets in UK and Continental Europe remain strong.
Adjusted EBITDA of $14,400,000 for the quarter was $6,700,000 better than prior year. This improvement was driven by prior year COVID impact along with volume related operating leverage and pricing actions, which helped to offset inflationary pressures. On a year to date basis, revenue of 181,900,000 and adjusted EBITDA of $38,000,000 resulted in margin expansion of approximately 5.40 basis points as compared to the 1st 9 months of last year. And our North American Cabinet Components segment reported net sales of $61,900,000 in Q3, which was $10,000,000 or approximately 19% better than prior year. Favorable index pricing and high order demand contributed to solid revenue growth in the quarter.
Adjusted EBITDA in this segment was $2,500,000 which was $600,000 less than prior year. As discussed earlier, the timing lag of our contractual pricing index has added significant pressure on margin percentage for this segment. Although we are being impacted by this timing lag on hardwood, the inflation impact versus prior year Q3 was somewhat minimized by operating leverage from higher volume along with incremental price increases on certain products. Year to date, this timing lag has impacted adjusted EBITDA by $6,400,000 But if we adjust for this inflation, We would have realized approximately 400 basis points of margin expansion in this segment on a year to date basis. Operational improvements and volume related leverage gains have helped offset the timing related material impacts.
And when hardwood prices flatten or drop, We can expect to realize margin expansion at that time. Unallocated corporate and other costs $2,200,000 for the quarter, which is $1,300,000 higher than prior year. The primary drivers of this increase were stock based compensation expense, operating incentive accruals and more normalized medical expenses as compared to 2020. As Scott discussed, our balance sheet continues to improve. Our operational teams continue to focus on metrics they can control, and our cash flow profile remains attractive.
Our management team and Board are actively engaged in evaluating our capital allocation strategy fiscal 2022. But in the short term, our top priorities are to continue paying down debt and accumulating cash. There appears to be growing confidence that the current cycle within the building products sector will extend for several years, And we are seeing more and more M and A opportunities cross our desk. Given the strength of our balance sheet, we will evaluate potential acquisitions that are both strategic and accretive to our growth and margin profile. So despite the near term supply and inflationary pressures, we continue to outpace 2020 for both quarterly and year to date revenue, net income, adjusted EBITDA and EPS.
We have executed on our plan, and we have put the company in a position to capitalize on various paths to create shareholder value. We remain very optimistic on the future. And operator, we are now ready to take questions.
Your first question comes from the line of Daniel Moore of CJS Securities. Your line is now open.
Thank you, George, Scott. Good morning. Thanks for taking the questions.
Good morning, Daniel.
Maybe talk about You gave some details in terms of key inputs and supply chain constraints. At the margin, Are you seeing those abate about the same, getting worse and any early indications as far as hurricane I is concerned?
I'll answer this in a couple of pieces by product line. In North American Fenestration, I think We see the pricing and supply issues continue to remain pretty significant in anything that is Chemical related. So anything that derives from any sort of ethylene cracker plant is seeing the continued inflationary pressures. Too early to tell on Hurricane Ida. We know our supply base has not been impacted from a facility standpoint, but still evaluating the whole logistics and the ability to get product shipped through rails, trucks and ports.
So it's still too early to tell. Hardwood pricing, we actually started are starting to see some leveling off or Slight increase, not leveling off, but the rate of inflation appears to be slowing. So we'll continue to look at that and anxiously await that time. And in Europe, things remain about the same.
Excellent. Really helpful. As we look out to fiscal 2022, based on price increases you either put in year to date or have planned At this time and kind of based on today's pricing, how much of a top line growth benefit would that translate into next year, just kind of ballpark terms?
We're still evaluating what the 2022 outlook looks like. It becomes a little complicated because our pricing increases are built into a couple. You've got The structural pieces that are built into selling price, you've also got anything that's surcharge related That is really dependent upon where inflation goes. So that revenue number could be impacted negatively if pricing starts to come down. So the revenue number is going to be really hard and we're not at a point to be able to give you a good forecast at this point.
But what we do anticipate is that regardless of what that does, If we start to see some softening in inflation, we do think that that will correspond to improve profitability in 2022.
Got it. Helpful. And maybe one more if I might. Leverage Back all the way down to almost basically 0 and generating more cash than you need. You mentioned M and A, Particularly at these levels, would you look to be a little bit more aggressive in terms of share repurchases as well?
I know you bought back some stock in the quarter, Any comments there would be helpful. Thanks.
I think our current strategy, as we stated, is we're going to Continue to focus short term on paying down debt and then building cash on because we do think that there could be some potential M and A opportunities. Nothing is imminent, But we are seeing opportunities and we positioned our balance sheet very well to be able to look at a lot of things that could be accretive. The great thing about where we're at today is based on our strategic plan, we don't think we need to do anything. And so we're not rushing to grow. We'll look, as I said, to things that enhance our growth profile and are accretive in terms of margin.
If those exist, then we are in a very good position to capitalize. In terms of share buyback, we still do believe that we're undervalued. However, there are challenges with the low float that we have and The impact on us on the share buyback, we just think that that's lower in our priority. If the position arises and we feel like it's best thing to do. We obviously still have enough in the Board authorization to purchase stock, but I would rank that lowest on our priority list right now.
Okay, very helpful. Thanks for the color. I'll jump back in queue with any follow ups. Thanks.
Thank you, Daniel.
Your next question is from Julio Romero of Sidoti and Company. Your line is now open.
Hey, good morning, George. Good morning, Scott.
Good morning, Julien. Good morning, Julien.
So I guess on the North American Fenestration segment, you maybe rank order some of the margin challenges there? I know you called out the timing lags for index pricing as well as overtime costs. Just looking for a sense of how impactful These two were and if one was more impactful than the other?
I think right now, The biggest challenge is on items such as resin and silicone. And again, things that are being driven by Feedstock pricing. That's a bigger challenge right now than the labor piece for us short term, at least from a financial perspective.
Got it. And I think you mentioned that you could see some potential impact from Hurricane Ida. I mean, have you do you have any other further granularity as to what you might expect coming out of the Gulf Coast?
No. Again, as we stated, we have been told that our major suppliers, their facilities were ineffective. So short term, I would say that that's very good news. Again, there's still congestion in the ports and all the logistics change. It could be a bumpy couple of week road in terms of getting material because of the logistics chain.
I don't believe it will have a significant or at least from what I know now, a significant long term impact on supply, at least with the supply base that we have.
Got it. And then just last one for me would be just generally you spoke about price increases you're working on in North America aside from index pricing. Can you just speak to your maybe ability and confidence to pass through price aside from index pricing, in other words, to offset labor costs.
We pushed through price To offset the labor costs that we identified. I mean, it's a structural change. I think every our customers as well as our suppliers We're adjusting to the world we live in. It's not going to go backwards. It's a new labor market and ultimately consumers will have To dictate their ability to support that level of labor costs.
That's not going to change, but we've been successful in getting price because We have to. It's not a margin grab. Our goal as it relates to labor is to remain margin neutral. And we've been very open and honest with our customers and are having meaningful conversations.
Great. Thanks very much.
Thanks. Thanks, Ruud.
Your next question is from Reuben Barner of The Benchmark Company. Your line is now open.
Thanks. Good morning, guys. So I guess to start, is there any way to quantify how much volume or revenue you guys have lost this year, Specifically in the North American Fenestration business just from challenges in The windows industry and getting product out the door. In other words, can you talk about the visibility that you have or the runway you have on the demand side? Because I know windows has been one of the most backed up building products over the last year.
Is that something that you guys look at as a positive as you move into the next 6 to 9 months or so.
Yes. And I'll answer that in 2 phases, Ruben. First, in terms of visibility, we don't have great visibility because a lot of Our customers' ability to ship windows is dependent not only on the products that we ship, but their ability to get installation labor on their side, homebuilders labor as well as their ability to get other components, especially from Asian sources where there's a significant lack Of containers. So it's really hard to put an evaluation on what revenue could have been I'll have those all put together. In terms of our ability, I think We've done a pretty good job of being able to continue to supply what demand.
What we think that this does do For long term, and I kind of mentioned it at the end of my comments, is that it's going to extend the cycle. You're not losing revenue. It's just extending and pushing it out. And that's why we continue to be optimistic for longer than just a short term view Of our markets.
Okay, that's great. And then, have you guys maybe this is Something where you don't really have visibility into, but curious if you've noticed a major shift in mix of products sold specifically in The Fenestration business. I mean, do you guys benefit with your spacers from higher quality more, I guess, energy efficient windows being installed. Are you seeing any meaningful changes in the market?
No, it's a great question. Our spacer offering ranges from entry level up to the very high end where We have a pretty strong portfolio. I think we continue to see strong demand across all the lines. So I think what it does show is that the new build New construction still remains strong, but so does R and R. And the continuation and the extension of lead times kind of highlights the first question that you And it really is being pushed by our customers and the homebuilders' abilities to fulfill their demand from the installer side.
And then last one for me. The cabinets business, with all the supply chain issues and Particularly freight coming in from ocean freight, getting out of control recently. I mean, what are your customers Saying about the in sourcing trend. Do you guys think that that can even pick up more steam? Do you have the capacity To serve even more market share.
And then, any meaningful change in your pricing power because of What's gone on that you guys might be able to get some catch up as we move into the next year or 2?
Our ability to be able to handle more volume is really going to be dictated by the successes of our ability to go get new labor. I think we're well positioned from a machine capacity as the lumber and the hardwood supply starts to open up. So our ability to go out and get labor, which is, as I mentioned, Within the quarter, we made some adjustments. And so we're in evaluation period to see is what we've done moving the needle. Early indications is it's Starting to have some success.
So I think we're a little too early to answer that question. I think if we're able to get labor, then we could take we, by all means, can take on more in sourcing and assist in that. I think In terms of our pricing, the market is I think we have pricing power, but there is a market there and that you can't go to certain levels. And I think we continue to have conversations with our customers around that. We're going to get paid for the fair value and what we do bring to the process, But we also need our customers to be successful.
So we look at these as partnerships and we'll continue to work on it. The 3rd piece to your question, Ruben, is And I mentioned in Q2, the project continues. We are looking at adding potentially a new cabinet facility, And we're in some site selection process. So that project continues to go on. And once that is launched, then Hopefully that will again add some additional value for us to go after some incremental volume.
Great. Thanks, Georgie. If I could sneak one more in, Scott, the price cost pressure that you've got this year from kind of a steady rising commodity environment. Do we need prices to roll over In order for next year to pick up some margin or if they level off, you guys will still have a tailwind because you won't have that, I guess headwind that you had in this fiscal year.
Yes. The issue really this year has been we keep chasing price. So even as those indexes trigger, We continue to chase, so we're behind the 8 ball there. So as raw material prices at least Stabilize, that'll help. But what's really going to help is when raw material prices start going the other way, and it's anybody's guess as to when that will happen.
We do think that there's going to be some stabilization going into the end of this year and early next year. So we do feel Comfortable that profitability will be better next year and the demand very strong.
Thanks guys. Good luck to the rest of the year.
Thanks. Thanks Ruben.
Your next question is from Steven Ramsey of Thomas Research Group. Your line is now open.
Hey, good morning, guys. Wanted to follow-up on The capacity and labor utilization topic to make sure I understand your previous commentary, George, was it The ability to take on more volume, is that in all segments or were you talking just the CADNIC segment? And I guess to connect the dots, does CapEx need to increase from this $30,000,000 ish level for you to be able to take on more volumes over the next year or so.
So the first part of your question, my answer was generally directed towards cabinets. Our ability to take on additional revenue in the North American Fenestration segment. Screens, it would be partly labor and going after a new geographic segment of the country that's not served. But for the most part, The North American Fenestration growth would be dictated on our ability to get raw materials. Cabinets is going to be more labor driven.
As it relates to your CapEx question, early insight is we anticipate 2022 might have a higher level of CapEx for growth initiatives. And we're comfortable with that and feel like our cash flows in terms of all of our objectives supports that and Would position us well for good growth.
Okay, great. And then on the inventory investment you've made that makes dollars so far. I guess, how do you think about incremental investment in inventory from here? Do you think Inventory will take up more capital early on in 2023 or 2022 Or will that investment moderate as you move forward?
I would anticipate probably a growth in inventory. Listen, right now, if we can get raw materials, we're going to get them. That's kind of the mode we're in right now. Us and probably every other business, if there are critical components, you buy what you can get. So Ultimately, what we want to get to was to a point where we can start building some levels of finished goods to improve our fill rates and start getting the backlog down.
But that's going Take some time, but long answer to yes, I think that will be part of our cash usage in 2022 and probably into 2023.
Okay, great. And lastly, just to maybe make sure I understand something, this elevated backlog you have, it seems to be common thread in all the building products in construction world. For you, this backlog burn off to more normalized backlogs, Do you expect that to happen in the next couple of quarters? Or do you really not have as much visibility into that as you would like?
I wish I had better visibility. I think over the course of the last year and a half, that's the one thing that has changes the level of visibility through all of our customer change. I anticipate that it's going to take a solid 12 months to 18 months for the whole industry to start bleeding that down. It is A large backlog that's being driven by multiple things. You got the labor challenges, you've got raw material, you've got freight issues.
So there's not one silver bullet that if this clears up. So I think it's going to be a 12 to 18 month. And again, that's what We keep saying that why we think that the cycle is going to be extended by multiple years because of that phenomenon.
Great. Thanks for the color.
Thanks, Stephen.
Your next question is from Ken Zener of KeyBanc. Your line is now open.
George, Scott, good morning.
Good morning. Good morning, Ken.
So I want to touch on a couple of issues here. And it kind of goes George, Scott, if you could give it in context, perhaps the past, So we can see how Quanix is different. When we're talking about extrusion, I'm stretching, I think it was 2012, 2013 when you guys When pricing really costs left out on you guys and you didn't have these contracts in place, but You probably remember it a little better than I do. Could you put it in context how especially on the extrusion side, the price contracts, Which I think you guys have to the PIPE index. If you could just kind of give us clarity about what those indexes are tied to, and how it's different than the last cycle when you guys didn't have, I think, fixed price contracts, just in terms of Right.
Like what the underlying index is, how much of your business is tied to that and kind of a lag, if you would, just to explain that a little better.
So, this is just in North America, remember, because in Europe, we don't have internal pathogens. So, on the vinyl extrusion business, The index is really based on CDI. And that's purely the mechanism to determine the index pricing. And then Depending on the customer, there's a level that's shared. So in most cases, like 80% of that index or the increase or drop Is pushback for the customer and then we absorb a certain piece of it.
Each contract is a little different, but that generally gives you the feel. As it relates around your question to 2012, I just don't have the detail in front of me, Ken. I joined the company in 2011, so and was obviously with Spacer Business at that time. So I would be remiss to be able to give you an answer with the sale.
Okay. Fair, fair. Scott, you want to take a stab at it or Jade, move on.
I joined in 2016.
Okay, good. Now I remember that was I have to go and relook at the transcript, but it seems as though, obviously, your guys' confidence is there and the catch up. So I think you talked, George, about 6,400,000 Of costs and you were referring to the cabinet business that was net cost inflation that you would You do expect to recover. And you talked about that being about 400 basis points or 3.60 basis points of costs that you still expect to recover that you've incurred and you expect to recover. Is that accurate when you gave that figure?
That is correct. So yes, and that would be it's just the timing of the index. So you would add it to the revenue as well as the income base and then net it out. Yes. At some point, we anticipate recovering that.
Again, it's going to be time based.
And would you say that number, Is that 100% year? I mean, is that how much cost inflation you guys have had in that segment? Because I just think you're giving such clarity there. Or is that like what hasn't been recovered? I'm just trying to sense how much of your business is running price versus volume, I guess, because inflation notwithstanding the 10 year not moving is clearly out there.
Is there a sense that you could break down volume versus price, I guess, generally for
your business? That's going to be purely price. And obviously, the volume dictates The piece of that. I mean, the reason why there's so much clarity in the hardwood pricing is because it's a very clear and simple index Based on the different species. So we track it, we monitor it and we know the number very close.
Got it. Okay. Do appreciate that. The last question, kind of taking a step back because it seems like you're kind of You have a good problem with your leverage. As you noted earlier, if you buy back stock, you're thinning out what's already a thin float.
You're doing organic investments. You talked about some of that stuff in Europe. You're talking about a cabinet facility right now. Could you just this is a bigger question, but could you talk about how you're thinking about Deploying capital relative to your cost of capital and the return on that. Because cabinets, It's been about 5 years since you've owned the company.
The margins, you're improving, but it's not, I don't know, it doesn't peer that it would be hitting your returns on capital. So how are you guys making those decisions to keep investing money there as opposed to something else with that business?
Yes. No, it's a very fair question. I think we look at it holistically. And what I would say without getting into any level of granularity here, Ken, is if you look at Our return on invested capital over the last 4 or 5 years, we've obviously made it a priority in terms Of improving that metric and how we choose to invest all of our incremental cash. And over the last couple of years, Our return on invested capital has grown to a level that it's meaningfully above now our working average cost of capital.
So without getting into the details of what we do by each segment, I think in general philosophy, I think the track record has shown that we've executed on that. And I think that it's a focus and we'll continue to evaluate all opportunities based on that those metrics. And I'm going to look at this generic and Yes,
no, no, that's fine, George. That's fine. I mean, because it is you're getting to the point where your leverage is so low, your options For capital deployment and then inhibitors to your current returns on capital. It's a good problem, But I think it's one of the things that I've had conversations that do focus on that element. So thank you very much gentlemen.
Thank you.
Your next question is from Daniel Moore of CJS Securities. Your line is now open.
Yes, just a quick follow-up. In terms of the impact of the flood in Germany, Is there a quantifiable dollar impact on revenue or were you able to service out of inventory and or other locations?
We were able to service inventory. There was a week or 2 lag before we were able to do that. And then on the cost side, We're estimating about $300,000 expense impact. No real loss revenue because it's just pushed to the right.
Perfect. Very helpful. And then lastly, the guidance, it feels like revenue should be trending toward The higher end of the guidance range given price increases. Is that a fair thought process? And on EBITDA, maybe, I don't know, Lower to the midpoint of the range relative to the pricing pressures that you're seeing or any comment that you'd be willing to share there?
Thank you. Sorry, go ahead, Scott.
I think for the most part, Dan, that is correct. We're still comfortable with the ranges higher on the revenue side, lower on EBITDA Based on everything we're talking about with respect to inflation and labor, etcetera. So yes, I would say you're accurate.
Very helpful. Thanks again.
No questions at this time. And I would like to turn the conference back to George Wilson for further comments.
I'd like to thank everyone for joining, and we look forward to providing an update on our next earnings call in December with our full year results. Thank you all very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.