Scott Zuehlke: We’re seeing it in a few different areas. I think the LMI business and any sort of compound mixing, because of the long freight, the expense of the freight, excuse me, lead times. I think that that’s going to spur on opportunities. And we saw opportunities within the Cabinet segment where that one’s probably been the one that’s been most hit with both tariffs and just supply chain challenges from coming overseas. And the amount of inventory that our customers have to carry to protect on that has really pushed on the need. So I think it’s areas that require a lot rate, a lot of complexity, numerous SKUs are the ones that are going to be the most advantageous for us to identify as a potential sourcing alternative to our customers, and we’re looking for those, and then developing products within those.
Julio Romero: Great, thanks very much for taking the questions.
Scott Zuehlke: Thank you.
Operator: One moment for our next question. Our next question comes from the line of Kenneth Zener from KeyBanc. Your line is open.
Christian Zyla: Good morning, George and Scott. This is actually Christian Zyla on for Ken Zener. Thanks for taking my questions.
George Wilson: Sure, good morning.
Christian Zyla: Good morning, so I will echo the understanding that you guys aren’t giving guidance at this time. But maybe could you clarify the price piece with rollbacks versus getting price to offset some of those other rising costs. And then, separately, when we think about the North American Fenestration business, it really is three distinct businesses with the vinyl extrusion and spacers. Could you just talk about the operating leverage across the three distinct businesses amid lower flattish volume environments?
George Wilson: I’ll start with your second question. And then I’ll let Scott go back to the first. So as we look at the operating leverage of the different businesses and actually now there’s the fourth one because the Quanex Custom Mixing will roll up into that but I would say the more leveraged businesses tend to be the vinyl extrusion and the spacer extrusion business and screens and some of our other accessories tends to be very variable cost driven, more manual process in general, so any volume drops will probably impact the spacer, the vinyl extrusion a little more than the other product lines.
Scott Zuehlke: On your pricing question, the raw material surcharges or rollbacks, or index pricing rollbacks, versus anything we try to push. The only thing I can really say to that without getting too specific is raw materials are typically 50%, 55% of the costs. So that, of course, a big portion of that is the major raw materials that are indexed. So those are the ones that we really don’t have control over coming down. So that would leave us with several other areas to try to offset the rollbacks with increased price. In the additional inflation, where we have to go back out from get price, obviously, that’s going to — it’s going to take work for us and every other company because you know there’s this expectation and if raw materials are dropping, I guess everything else in the world is dropping and that’s really not the case, I mean.
So we’re going to have to be very detailed and very methodical and lining out and transparent with our customer base. We’re doing everything we can to try to offset inflation with continuous improvement and improvement internally, but at some point, that rate of inflation is still pretty high and we’re going to go — have to go out and get it. I suspect it is going to be a fight but we have the data and the detail that will support price increases.
Christian Zyla: Great, very helpful. Thank you, Scott and then if I could just add one more, could you just talk through the specifics of the European business and how you guys are able to perform I guess better than expectations, even outside of the FX headwind. Just following up from a comment from last quarters call, you just talked about the impact of elevated prices in Europe and how your products, energy efficiency proposition contributes to performance, can you maybe like quantify that or in case energy prices stay elevated, what’s the run rate? Or I guess, the runway for ’23, maybe even ’24 and what about if prices retreat? Thank you.
George Wilson: Yes specifically, in terms of quantifying those opportunities, that’s going to be relatively difficult. And we’re just not prepared to do that at this point. But from a product or macro level, what I would say is, you’re exactly right, our spacer product, and our vinyl extrusion systems that we make under the Linear brand in the U.K. are both what I would position is at the very high end in terms of thermal performance and operating performance within a window. So as energy costs continue to rise in Europe, and they have and they will, and that will also transition at some point in time to North America. Windows systems with our components in it will continue to grow. As energy costs go higher, the decision to replace windows, it makes that payback for a homeowner, when they do their internal rate of return.
And do I want to make this purchase a lot less difficult, it becomes a fairly easy payback. So in addition to the quality of the product that we serve, we feel very strong that these markets will continue to grow just because of the energy cost, and that as it relates to the spacer business specifically in Europe, I think it’s worth noting that that facility that we have in Germany that manufactures that spacer, that’s kind of our hub for international spacer shipments. So our Germany facility is supplying product to probably 60 different countries in Asia and emerging markets, in the Middle East and in Africa, that has an opportunity to continue to grow because of their elevated energy costs. So we think the product line serves itself very well to perform in the future as it relates to energy performance.
Christian Zyla: That’s right. Thank you for the color and happy holidays.
George Wilson: Yes, you too.
Operator: One moment for our next question. It looks like we have a follow-up from Daniel Moore from CJS Securities, your line is open.
Daniel Moore: Yes, just one follow-up on capital allocation. Obviously, you were blacked out, buying back stock. Given the acquisitions some year, however, the cooker should we expect that that’s picked back up, number one. Number two, maybe you talked about this previously. But if there are larger, more transformative deals that come your way, just talk about where you would be willing to take leverage up to for the right opportunities? Thanks.
Scott Zuehlke: On your second question, first, we’ve been pretty transparent and telling investors that if there were to be a bigger transformational deal out there, I don’t think that this management team and this board would ever be comfortable with doing above two and half to three times net leverage. And only if there is a clear runway to get that back down to between one and two times leverage in a relatively short periods of first year, year two. George, do you want to talk about that?
George Wilson: No, I think that that’s absolutely fair. And I think what we have done and we’ve worked on as that pathway to de-lever is we’re coming off a fourth or fifth straight year of free cash flow in excess of $50 million. So I think we’ve done a very good job of developing a cash generation machine here that gives us comfort level and what we can pay back. And so obviously, each of those situations. Now in terms of capital allocation, I think it will be no different on a go forward basis than we have in the past on if we are able to be in the market. And there’s nothing going on, then we will opportunistically buy back our stock as a priority. I think we’ll continue to focus here in this year on repaying down the debt and we’ll balance the needs of the organization. But I think we’ve been very transparent that when we can, we will be opportunistic in our buying of stock.
