Quanex Building Products Corp

NYSE:NX

Earnings Call Analysis

Company Faces Decline in Revenue and Volumes

Net sales in the North American Fenestration segment saw a 2.9% drop to $667.5 million for the year, with a volume decline of 13%. Price reductions due to softer market demand also contributed to the decrease, but margin expansion was achieved through effective operational and sourcing initiatives. North American Cabinet Components and European Fenestration segments also experienced revenue and volume decreases, although the European segment saw a marginal increase in revenue of 3.3% for the quarter. Free cash flow for the year increased by 69.1% to $109.7 million, a record high for the company. Debt repayment was robust in fiscal 2023, totaling $90 million. For fiscal 2024, the company anticipates a low to mid-single-digit decline in net sales with some margin pressure.

North American Fenestration Segment Struggles Amid Market Softness

The North American Fenestration (NAF) segment experienced a decline in net sales by 2.9% compared to the previous year, due to reduced market demand and lower pricing. Without the gains from the LMI assets, the revenue in this segment would have plummeted roughly 14% on a year-over-year basis. Volume declined by about 13%, contributing significantly to the revenue fall-off, accompanied by a decrease in price. Despite the decline in sales, the segment demonstrated resilience with a notably higher Adjusted EBITDA, 40.2% above the prior year, leading to a margin expansion of approximately 460 basis points year-over-year.

Cabinet Components Witness Larger Sales Downturn but Margin Improvement

The Cabinet Components segment saw a more severe dip, with net sales dropping by 23.7% for the quarter and 21.9% year-over-year. Both price and volume declines contributed to this fall, the former affected by softer index pricing correlated with declining hardwood costs. The segment's volume is approximated to have descended by around 18% for the year, and prices fell by close to 4%. Nevertheless, much like the NAF segment, Cabinet Components offset these declines with increased efficiency, achieving margin expansions by roughly 250 basis points for the quarter and 130 basis points for the full year.

European Fenestration Bucks the Trend with Marginal Gains Amid Market Challenges

Presenting a slightly different narrative, the European Fenestration segment reported a small increase in revenue of 3.3% for the quarter, although the full year depicted a 4.3% reduction compared to the prior year. Volume shrinkage of around 7% year-over-year was partly mitigated by a 5% rise in pricing and favorable foreign exchange impacts. The quarterly performance was further bolstered by substantial margin expansion of approximately 630 basis points, and a full-year margin expansion of close to 480 basis points.

Record Free Cash Flow Achieved Despite Challenges, Conservative Guidance for 2024

The company ended the year with strong cash flows, generating $44.5 million in the fourth quarter and achieving a record free cash flow of $109.7 million for the full year, marking a significant increase over the previous year. With a solid balance sheet and improved leverages, the firm repaid $90 million of debt during the year. Despite their robust position, management has adopted a conservative stance with regards to the 2024 outlook, anticipating a low to mid-single-digit decline in net sales and some pressures on margins. For the first quarter of 2024 specifically, the revenue is expected to witness a considerable drop compared to the corresponding quarter of the previous year.

Operating with a Conservative Outlook but Potential Upside Exists

The company emphasized its conservative approach, particularly when forecasting the performance in the first part of the year. However, they also noted that their operations are agile enough to capitalize on any upswings in demand, positioning them well for various market scenarios. With efficient working capital management, the company has set itself up for potential benefits should favorable macroeconomic changes occur.

European Resilience Amidst Geopolitical Tensions, Continued R&D Investment

Despite the geopolitical uncertainties, particularly regarding the markets served in the United Kingdom, the company has managed to maintain resilience due to their advanced product lines which meet rising environmental standards in Europe. Investments in the international spacer business, notably from the Germany facility, have started to pay off, helping to cushion volume declines in Europe. Looking ahead, the firm plans to continue investment in the development of new compounds and products, particularly in their UPVC facilities in the U.K. and in spacer products, setting a precedence for growth through innovation.

Diverse Market Presence and Anticipation for Improvement in Repair & Remodel Spend

The company boasts a presence in a varied set of markets, ranging from automotive to consumer goods, which supports stability by not relying excessively on any single market. As for the company's anticipation regarding repair and remodel spending, they perceive a greater impact on their Cabinet segment, which has been more sensitive to COVID pull-forwards and market fluctuations. Nonetheless, there's an air of optimism that an uptick in consumer confidence, perhaps spurred by lowered interest rates, could lead to an overall improvement in their market dynamics.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and thank you for standing by. And welcome to the Q4 fiscal 2023 Quanex Building Products Corporation Earning Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Zuehlke, SVP, CFO and Treasurer. Please go ahead.

[Scott Zuehlke, executive]

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, Quanex undertakes no obligation to update or revise any forward-looking statement to reflect new information or events. For a more detailed description of our forward-looking statement disclaimer and a reconciliation of non-GAAP measures to the most directly comparable GAAP measures, please see our earnings release issued yesterday and posted to our website.

I'll now turn the call over to George for his prepared remarks.

[George Wilson, executive]

Thanks, Scott, and good morning to everyone on the call. And what turned out to be another year of operating in a macro environment with strong headwinds for the industries we serve, I am very pleased to announce that the performance of the Quanex team in our fiscal 2023 resulted in a record year for both adjusted earnings and cash flow. Our team has stayed true to our mantra of controlling what we can control. In addition, we remain committed to our long-term growth with a purpose strategy and have positioned the company well to continue to create value for our shareholders. I would like to take this moment to thank the entire Quanex team for their spectacular performance and hard work this past year while continuing to make a difference with their caring and charitable endeavors in the communities where we are located.

As I mentioned, 2023 was a year full of macro challenges that created headwinds for our top line. The devastating war in Ukraine continued to negatively impact consumer confidence in Europe, and added unknown risks to energy costs for the winter months. In addition, we now have the war in Gaza, which again has the potential to disrupt markets, energy costs and global freight channels.

In the United States, 2023 saw a return to the more normal seasonality pattern that existed pre-COVID. We also saw a housing market that slowed as a result of higher interest rates and elevated pricing and a repair and replacement market that softened throughout the year as COVID backlogs dissipated and more normal market drivers returned. Finally, our top line was impacted by the raw material index pricing mechanisms that exist in North America for many of our key raw materials, such as resin, steel, aluminum, wood and oil. As the prices for these raw materials dropped rapidly during the year, revenue dropped accordingly. Notwithstanding these revenue challenges, our team remained focused on controlling what it could control, such as non-raw material customer pricing, service and delivery performance, sourcing decisions and continuous improvement initiatives.

From a fixed cost perspective, we continuously challenge the status quo of our operating structure, worked with our employees on medical cost programs and develop preventative programs to reduce expenses. When combined, these focus areas contributed to what was another record year for adjusted earnings and cash generation. Another accomplishment that I want to highlight from the year is our successful acquisition and an integration of the LMI Custom Mixing assets.

As a reminder, we bought the LMI assets in November of 2022 as the first move under our refreshed growth strategy. While this was a relatively small acquisition, it was a familiar operation that represented low execution and integration risk. Looking at it now, 12 months later, I think it is fair to say that it achieved all of the objectives that we had hoped it would.

First, it fits squarely within our material science and process engineering expertise. Second, it expanded our product portfolio into a new and an attractive category with products that serve different and growing end markets. And finally, the acquisition was both immediately accretive to adjusted EPS and improved our consolidated margin profile. In short, the LMI acquisition has accomplished everything that we set out to do.

And I would like to thank Jim Nixon in the entire Quanex Custom Mixing team as well as the Cambridge, Ohio North American Fenestration team for their efforts in making this acquisition and integration a resounding success. As for cash flow, our management of working capital and ability to capitalize on reduced materials pricing contributed significantly to our year-over-year improvement in free cash flow. And it enabled us to repay $40 million of debt in Q4 alone.

It is important to note that we borrowed $92 million to acquire the LMI assets on November 1, 2022, and repaid $90 million of debt throughout the fiscal 2023 year. Looking ahead to fiscal 2024, we expect to continue seeing a seasonal cadence that was normal before 2020. From a demand perspective and based on conversations and forecast we have received from our customers, we expect the volumes will be pressured in the first half of the year.

We have already seen customers in both the fenestration and cabinet markets announced longer-than-normal holiday shutdown periods. However, we believe demand for our products will begin to see an uptick in the second half of 2024 as consumer confidence starts to improve with the prospect of interest rates decreasing on the horizon.

This should spur activity in the residential housing sector as we are still very underbuilt in both North America and Europe. Looking forward at our growth initiatives, we will remain steadfast in following the parameters of our growth with a purpose or set it in a different way, profitable growth strategy. This includes investment in both organic and inorganic growth projects.

From an organic growth perspective, we continue to invest in our compound development, spacer development and UPVC technologies. Continued growth in these areas will come through new product innovation and further expansion into flashing tapes, refrigeration spacer systems and solar panel sealants. We will also continue to explore opportunities for inorganic growth through acquisition.

With that said, we will remain diligent in our review and make sure any potential acquisition target either fills out an existing market channel or takes us into an adjacent market with better growth and profit potential. In either case, we would expect margin accretion either on a stand-alone basis or through derived synergies in combination with our business.

Our strong balance sheet gives us flexibility and optionality, and we look forward to continuing to deliver results through both organic and inorganic opportunities. I would like to now turn the call back over to Scott, who will discuss our financial results in greater detail.

[Scott Zuehlke, executive]

Thanks, George. On a consolidated basis, we reported net sales of $295.5 million during the fourth quarter of 2023, which represents a decrease of 3.9% compared to $307.5 million for the same period of 2022. We reported net sales of $1.13 billion for the full year, which represents a decrease of 7.4% compared to $1.22 billion for 2022.

The decreases were mostly attributable to softer market demand and lower pricing in North America. Net income increased by 11% to $27.4 million or $0.83 per diluted share during the 3 months ended October 31, 2023, compared to $24.7 million or $0.75 per diluted share during the 3 months ended October 31, 2022.

For the full year 2023, net income decreased by 6.6% to $82.5 million or $2.50 per diluted share, compared to $88.3 million or $2.66 per diluted share for the full year 2022. On an adjusted basis, net income was $31.2 million or $0.95 per diluted share during the fourth quarter of 2023, compared to $25 million or $0.75 per diluted share during the fourth quarter of 2022.

Adjusted net income was $90.9 million or $2.75 per diluted share for fiscal 2023, compared to $88.9 million or $2.68 per diluted share for fiscal 2022. The adjustments being made to EPS are primarily for foreign currency translation impacts, pension settlement expense and transaction and advisory fees.

On an adjusted basis, EBITDA for the quarter increased by 31.2% to $50.8 million, compared to $38.7 million during the same period of last year. For the full year 2023, adjusted EBITDA increased by 4.6% to $159.6 million, which is a new record for Quanex, compared to $152.5 million in 2022. This equates to adjusted EBITDA margin expansion of approximately 160 basis points year-over-year. The increase in adjusted earnings for the 3 months and 12 months ended October 31, 2023, was largely attributable to effective cost control, real price increases, a decline in raw material costs and a decrease in income tax expense.

Now for results by operating segment. We generated net sales of $180.5 million in our North American Fenestration segment for the fourth quarter of 2023, an increase of 1.3% compared to $178.2 million in the fourth quarter of 2022, driven by the contribution from the LMI Mixing assets. Excluding the contribution from the LMI assets, revenue would have been down approximately 11% year-over-year in this segment in the fourth quarter.

We estimate that volumes in this segment declined by approximately 9% year-over-year, with the remainder of the revenue decline versus Q4 of 2022 due to a decrease in price. For the full year, we reported net sales of $667.5 million in our North American Fenestration segment, a decrease of 2.9% compared to $687.5 million in 2022.

The decrease was mainly due to softer market demand and lower pricing. Excluding the contribution from the LMI assets, revenue would have been down approximately 14% year-over-year in this segment for the full year. We estimate the volumes in this segment declined by approximately 13% year-over-year, with the remainder of the revenue decline versus 2022 due to a decrease in price.

Adjusted EBITDA was $29.7 million in this segment for the fourth quarter or 40.2% higher than prior year, which equates to margin expansion of approximately 460 basis points year-over-year. Adjusted EBITDA was $92.7 million in this segment for the full year or 2.1% higher than 2022, which equates to margin expansion of approximately 70 basis points year-over-year. The successful execution on our operational and sourcing initiatives resulted in benefits that outpaced inflation and gave us the ability to expand margins.

The group has also done a good job of controlling divisional SG&A despite lower volumes. In addition, our custom -- Quanex Custom Mixing business, formerly LMI, continues to perform above expectations. We reported net sales of $51.9 million in our North American Cabinet Components segment during the quarter, which was 23.7% lower than prior year. For the full year, we reported net sales of $215.4 million, which represents a decline of 21.9% year-over-year.

The decreases for both periods were driven by lower volumes and lower index pricing for hardwoods. We estimate the volumes declined by approximately 13% and price declined by approximately 12% in this segment for the quarter. For the full year, we estimate the volumes declined by approximately 18% with price declining approximately 4% versus 2022.

The price declines for both periods were largely related to index pricing tied to the decline in hardwood costs. Adjusted EBITDA was $5.1 million and $16.2 million in this segment for the quarter and full year, respectively, which yielded margin expansion of approximately 250 basis points for the quarter and 130 basis points for the full year. The time lag related to our hardwood index pricing mechanism in this segment helped us with profitability in 2023 after hurting us on that front in 2022.

We also did a good job of controlling costs throughout 2023. Our European Fenestration segment generated revenue of $64.2 million in the quarter, which represents an increase of 3.3%, compared to $62.1 million in the fourth quarter of 2022. We estimate the volumes declined by about 5% year-over-year in this segment, with pricing up approximately 1% and positive foreign exchange translation impact of about 7%.

For the full year, we reported net sales of $250.8 million in our European Fenestration segment, a decrease of 4.3% compared to $262.1 million in 2022. For the full year, we estimate that volumes declined by approximately 7% year-over-year in this segment, with pricing up by approximately 5% and a negative foreign exchange translation impact of about 2%.

Adjusted EBITDA was $16.7 million and $59.9 million in this segment for the quarter and full year, respectively, which yielded margin expansion of approximately 630 basis points for the quarter and approximately 480 basis points for the full year. Continued improvements in operational metrics, combined with sourcing initiatives and pricing carryover, all contributed to realizing margin expansion in this segment.

Moving on to cash flow and the balance sheet. Cash provided by operating activities was $44.5 million for the fourth quarter of 2023 and $147.1 million for the fourth -- for the full year 2023, which represents a decrease of 7.5% and an increase of 50.1%, respectively, compared to the same periods of 2022.

We did a very good job managing working capital and the value of our inventory continued to decrease throughout 2023 due to easing raw material inflationary pressures, which also had a positive impact on working capital. We generated free cash flow of $109.7 million for the full year in 2023, an increase of 69.1% over 2022 and a new record for Quanex.

Our balance sheet remains strong. Our liquidity keeps improving and our leverage ratio of net debt to last 12 months adjusted EBITDA was 0.1x as of October 31, 2023. Excluding real estate leases that are considered finance leases under U.S. GAAP, we are essentially net debt free.

As George mentioned, we were able to repay $90 million of debt throughout fiscal 2023, $40 million during Q4 alone. Looking forward, we will remain focused on things that we can control. We will also continue to identify organic and inorganic profitable growth opportunities as they arise, while continuing to preserve our healthy balance sheet. As always, the goal is to create shareholder value. As mentioned in the earnings release, based on current macro indicators, recent conversations with our customers, limited transparency and varying opinions on the outlook for 2024, we're taking a thoughtful approach to guidance.

We intend to revisit guidance for 2024 when we report earnings for the first quarter. However, for modeling purposes, on a consolidated basis, please use the following assumptions for fiscal 2024 until we give official guidance. Low to mid-single-digit decline in net sales and some margin pressure compared to fiscal 2023, depreciation and amortization of approximately $44 million to $46 million, SG&A of $128 million to $130 million, interest expense of $5 million to $5.5 million, a tax rate of 20% and CapEx of $40 million to $45 million. From a cadence perspective, for the first quarter of 2024 versus the first quarter of 2023, we expect revenue to be down 10% to 12% on a consolidated basis.

By segment for the first quarter of 2024 compared to the first quarter of 2023, we expect revenue to be down 5% to 7% in our North American Fenestration segment, down 25% to 27% in our North American Cabinet Components segment and down 8% to 10% in our European Fenestration segment.

From a margin perspective, for the first quarter of 2024 compared to the first quarter of 2023, we expect minor adjusted EBITDA margin expansion in both Fenestration segments, but margin decline in our North American Cabinet Components segment. On a consolidated basis, we currently expect adjusted EBITDA margin to be flat to down 50 basis points in the first quarter of 2024, again, compared to the first quarter of 2023. Operator, we will now take your questions.

[Operator]

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

[Steven Ramsey, analyst]

Maybe to start with the North America Fenestration segment organically down 14%, I believe, for the year, you're looking at the first quarter decline being much better than previous organic rates. I guess maybe unpack the improvement there? How much of that is just comps and other drivers to bridge that outlook through the past?

[George Wilson, executive]

Yes, Steven, I'll take that question. Really, the major difference between this year and last year and Q1 for NAF on a revenue perspective is in our spacer segment, where, if you remember last year, we talked quite a bit about that, that product line being down heavily last year due to customers destocking or bleeding down their inventory.

It's the one product line that we manufacture that has the ability to be packaged and put into a warehouse fairly easy. So throughout the year and really in that first half of last year, our customers -- we saw quite a bit of those destocking activities. And now we're really back with our lead times back to being normal and effectively a just-in-time are made to order, which is typically our model. So what we're seeing now is normalized shipment and production rates specifically in that area.

[Steven Ramsey, analyst]

Okay. Helpful. And then on the full year outlook then bridging the past to what you said for the first quarter and the improvement expected. Is the second half outlook of growth -- what are the drivers behind that, that maybe the end markets looking at existing home sales potentially for R&R, new construction, restocking potentially? What are the key drivers to the second half being better than the first half?

[George Wilson, executive]

So I think our view on the second half is really from the conversations we continue to hear from economists as well as our customers. But we are still very underbuilt in both of our markets. And as -- and especially as we've seen over the last week with some signals that there could be some easing in interest rates that the second half of this year looks to have the potential of being fairly robust, more so than was probably anticipated 6 months ago. So I think we've seen a shift in confidence level on the back half of the year from a lot of different parties, which reinforces why we believe our second half will be strong as well.

[Scott Zuehlke, executive]

Yes, Steven, and then obviously, combine those comments with just the typical seasonality of our business, the first half is always weaker than the second half in a normal year.

[Steven Ramsey, analyst]

Okay. Helpful. And then last one for me. On the LMI deal, which you discussed some of the success and learnings from that. I guess, firstly, on LMI, the stand-alone margin there better now than it was a year ago. What are the next steps for LMI? And then kind of lastly, high level, you've successfully done that deal and debt is now paid down. Do you feel like you're ready to do more deals? Or does this environment with its uncertainty make it tougher to do deals?

[George Wilson, executive]

I'll answer the first part of the question and let Scott comment on the second half. So as it relates to LMI, I think we have seen improvement in our margins, and it has to deal with more of their customer mix. And as they continue to expand out of what was traditionally their normal joint venture partners, we've made it a priority for us to continue to grow their revenue in different markets and different segments, and we are seeing benefits from that initiative, and we'll continue to invest heavily in that mixing business both through investment in developing new compounds, investments and expanding our sales force and as well as looking at acquisitions to add on to that, we like the business very much.

We like the addition of new -- additional markets and again, couldn't be happier with what we've accomplished and learned through that process. As it relates to new acquisitions, I think we're in a pretty good spot to be able to be functional if we sell something we would like. And I'll let Scott expand more on that as well.

[Scott Zuehlke, executive]

Yes. I think what I would say around the acquisition front in this environment is, we have positioned ourselves with optionality. We don't have to do anything. However, if something comes across our desk that we feel like will add value to shareholders over time, we will take a hard look as long as it checks certain boxes. And we are going to be very methodical like we have in the past on any acquisitions we may do. So just because there's some uncertainty in the market, I wouldn't say that we are close to looking at acquisitions at all.

[Operator]

And our next question comes from Reuben Garner from Benchmark.

[Reuben Garner, analyst]

So Steven mentioned the word restock and you guys talked about kind of the destocking impact this year. Just curious, inventory in the channel, I know some of your products aren't really inventoried. But I know we're talking about just part of your business, but what is the inventory like relative to maybe more historically normal periods, and we've seen rates drop quite a bit here recently and some maybe excitement about what that could mean for housing kind of heading into '23? Is there the potential that your first half is sort of -- your first half outlook is maybe a little conservative just given the potential for a restock if there is a better consumer and housing environment in the early part of next year?

[George Wilson, executive]

Yes. So the first part of the question in terms of our inventory levels, I think we're in a very position right now. As you know, I think we manage our working capital very well in. Effectively, we're a just-in-time supplier. So what has changed and what we've done a very good job over the last 1.5 years to 2 years is with some of the supply chain challenges that we have that extended lead times and did different things that forced our customers into stocking, whatever they could, I think we've done a very, very good job of improving our supply chain, finding alternate sources.

We've really improved the robustness of that entire chain, which has allowed us to drive our inventory levels down and as such, give our customers confidence to drive their inventory levels down. That's what we do. So I feel very comfortable going into this year whether the markets go up or down, that we are absolutely prepared to react and react accordingly to that.

As it relates to -- are we being conservative in the first quarter? I think, traditionally, we are a more conservative forecasting company. And I think what we've shown over the -- again, over the course of the last really 3 or 4 years is that our cost model reacts very well to wrap it up and down.

So I feel very good of where we're positioned in either scenario we're in. And if interest rates come down or demand spikes as a result of that, I think we're very, very prepared to capitalize on that. But we are taking a very conservative view as it relates to the first quarter and really our first half.

[Reuben Garner, analyst]

Great. That actually helped answer my second question, so I'm going to ask another. There's been some increasing concern about Europe, and I know your business is predominantly in the U.K. I've heard that come up of late, your business has actually been pretty resilient in the face of that uncertainty. Can you just kind of talk about your outlook there for this year? Maybe just kind of dig into some of the reasons why maybe your business is more resilient than some others might be seeing in the same kind of geographies?

[George Wilson, executive]

So when you look at both of our businesses, I think it's been resilient because our product lines are designed to perform at a higher thermal performance level. And as codes and standards continue to be elevated to higher levels in Europe, it's pretty known that Europe is far ahead of U.S. and other markets in terms of the expectations for environmentally positive products within the home. And our products fulfill those expectations. So we have a product line that is relatively robust even in down areas. So that has helped.

I think that there is still so many unknowns in Europe, which has -- are impacting customer confidence that, I think, the macro fundamentals that exist are very, very similar in terms of the U.S., in terms of it being underbuilt and everything of that nature. But you've got this overlay of what's going on in the Ukraine and now in Gaza that has a fairly dark cloud on consumer confidence and these unknowns hangover, what will the impact of energy cost beyond a consumer.

And I think that, that's a little -- it's added a different type of weight to demand in our markets that we serve in Europe versus the U.S. The other thing that's helped us, though, in that region, and this is specifically with our spacer product line is that we've invested pretty large in terms of our international spacer business, which is primarily served out of our Germany facility.

So as we continue to gain new sales in other markets such as the Middle East or India, China in different areas for some of our high-end spacer product lines, that has helped offset some of the volume drops in the traditional European markets. So I think we've positioned ourselves well there.

[Reuben Garner, analyst]

Great. Congrats on the year. And Marry Christmas and Happy New Year to you both.

[Operator]

And our next question comes from Julio Romero from Sidoti & Company.

[Julio Romero, analyst]

Can you guys maybe talk about repair & remodel spend in the near term, you talked about your customers have announced longer-than-normal holiday shutdowns. So I understand the choppy kind of first half outlook, but maybe if you can help us think about maybe a range of outcomes for volumes in the first half?

[George Wilson, executive]

We've seen a bigger impact in our Cabinet segment. Obviously, you can see the volumes there, what we're projecting being down more so than others. That's a combination of COVID pull forward, some of the seasonality backlogs dropping. I think that impact -- and that's mainly R&R there. Those markets will be hit a little harder in the first half than anything else that we see. The opportunity for an improvement more so than what we're forecasting, I suspect it's there. A lot of it is dependent upon some of the macro things. I mean if the Fed comes out and lowers interest rates, and you start to see some of that consumer confidence build, I think that there still is a lot of pent-up demand in all the product lines that we serve and that there is a possibility. As I mentioned to Reuben, we traditionally do take a little conservative view. So I think the opportunity for upside is greater than not.

But I think dependent upon the Fed and the weather building season because, again, as we go back to a more seasonal pattern, if you remember, as Scott said, our first half tends to be significantly slower that's dealt, and a lot of that has to do with the building season. So hopefully, we have a mild winter, and the builders can keep doing their things to help fulfill that upside that we think is probably there.

[Julio Romero, analyst]

Got it. I appreciate the color there. Maybe going back to LMI a little bit. Can you maybe give us some flavor for the primary end markets that are currently driving LMI sales? I know you had talked about, I think, about 8 different end markets when you did the deal. But maybe just highlight for us what are the top 1 or 2 end markets that LMI currently sells into?

[George Wilson, executive]

So they sell into a wide variety. It's pretty diverse market set. We have a piece of business that goes into automotive. We have a piece of the business that goes into windows and doors, some other types of building products. We have some of the products that go into electronics and consumer goods. And we actually have some products that go like into pet toys, so a wide range of markets that continues to expand and grow. No one market really dominates anything.

[Julio Romero, analyst]

Okay. Got it. And maybe thinking about the preliminary assumptions for fiscal '24. How do you guys think about free cash shaping out, especially after you just had a really strong fiscal '23? And does working capital become a benefit, a use of cash or kind of neutral?

[Scott Zuehlke, executive]

So clearly, working capital was a benefit in 2023. It took a big hit actually in 2022. So as we forecasted this year, roughly flat. I mean, there may be a little benefit. There may be a little hit depending on how the year transpires. But we're not expecting huge swings in working capital this year. Now I mean, obviously, free cash flow, we had a record year at $110 million. I think there is probably going to hit somewhere lower than that this year, plus we expect to spend a little more on the CapEx side. And we'll get more concrete numbers around that when we give official guidance.

[Julio Romero, analyst]

Got you. That dovetails into my very last one, which is the CapEx range of $40 million to $45 million. Kind of nice to see that step up there. Just maybe talk about the key organic growth initiatives that are targeted with that CapEx step-up?

[George Wilson, executive]

Yes. So as mentioned a little bit in my section of the script, we have just up the R&D and development of new products. So I think you'll see investment -- continued investment in our UPVC facilities, specifically in the U.K. market as we continue to do things both from a product line and a facility perspective there, continued development of new compounds and adhesives and sealants within our spacer business and the mixing compounds, those will be the priorities. But really starting to invest more heavily in new product development and that has been traditionally seen from us.

[Operator]

And I'm showing no further questions. I would now like to turn the call back over to George Wilson for closing remarks.

[George Wilson, executive]

Yes. I'd like to thank everyone for joining us today, and I'd like to take this opportunity to wish everyone a very, very safe and joyous holiday season, and we look forward to providing an update on our next earnings call, our first quarter call in early March. Thank you.

[Operator]

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