Quanex Building Products Corp (NX) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Quanex third quarter earnings conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star followed by the 0. As a reminder, this conference is being recorded Friday, August 30th of 2002. I would now liked turn the conference over to Mr. Raymond Jean, Chairman and CEO. Please go ahead, sir.

Good morning and welcome to the Quanex third quarter conference call. Thank you for joining us. With me this morning are Terry Murphy, our Chief Financial Officer and Geoff Galow, our Vice President of Investors Relations. We will be available after my remarks to take your questions. Today's call will include a brief review of our third quarter results, the state of our markets, the outlook for the remainder of the year, and conclude with a review of corporate governance issues and an update on our strategic plans. The comments I'm making today include forward-looking statements about the future prospects of Quanex. Please refer to our latest 10-K report filed in January of this year for the Company's complete forward-looking disclosure statement.

Quarterly diluted earnings per share were up 31% over the prior year and reflect ongoing strong demand for our products. As expected, order entry has slowed somewhat from earlier in the year following some inventory replenishment, but backlogs are up nicely from year ago levels. Both MACSTEEL and Nichols Aluminum are running full. And our Engineered Products operations have been posting great results. Overall the excellent third quarter earnings we delivered came from strong demand, new customer programs, improved market share, more value added products and lean initiatives. Highlights for the quarter include best ever third quarter operating income and earnings from continuing operations. Engineered Products reported record operating income with comparable results up 13% from a year ago. MACSTEEL set new productivity records at both steel plants. And the successful conversion of our 6.88% convertible debenture.

A few financial specifics for the quarter include sales were up 8% year-over-year, cash flow from operations of $36 million up 25% from last year, operating income was $25 million, up 36% from last year. At the end of the quarter our total debt to capitalization ratio was 18%, down from 46% a year ago. And diluted earnings per share were 88 cents after excluding a 54 cent executive life insurance benefit compared to earnings of 67 cents last year. On this life insurance note, we were saddened in July by the death of our Chairman Emeritus, Carl Pfeiffer. Carl was a long time employee of the Company who also served as it's Chairman and CEO for many years. Carl was instrumental in formulating the operational planning behind the creation of MACSTEEL and was its champion over some very tumultuous years. These are efforts for which the rest of us will forever be greatful. We will miss his counsel.

Turning the discussion to the balance sheet, we are delighted with the improvements we've made on this front. At the start of the year total debt to capitalization was in the mid-40s. And today that figure is down to 18% and will likely be lower by year-end. Quanex clearly has a superior balance sheet when compared to others in the industry. And the improvement also makes us a different Company than we were last year. Our record-setting cash flow generation has allowed us to take very positive steps in reducing our debt and really sets us apart from our peers. Specifically, total debt today stands at $91 million, down $129 million from the $220 million outstanding at the end of last year. This reduction results from three significant sources. First, the conversion of our debentures. Secondly, cash generated from option exercises. And three, operating cash flow from improved earnings. As a result of these sources, stockholders' equity has increased to $405 million compared to $280 million at the end of last year. In addition, our cash position for the fourth quarter will be bolstered by the $26 million payment from the life insurance benefit received in August this year. The event was recorded as a receivable to the Company in our third quarter financials. The combination of all these events provides us with an enviable balance sheet and clearly gives us the flexibility needed to support both our internal growth opportunities and strategic acquisitions.

Now let's talk about the vehicular products segment, which includes MACSTEEL, Nitrous Steel, Piper Impact and Temroc Metals. The primary driver for this segment is North American light vehicle builds. With continued increase in this markets, along with a spike in heavy truck production, the segment experienced an excellent quarter with operating income up over 7% from last year. For the third quarter MACSTEEL's sales and operating income represented about 80% and 95% of the segment's results respectively. MAC once again set the pace with operating income up about 15% over last year's results. Volume was up 8%. And with the exception of the scheduled eight-day maintenance outage, MAC operated at six days per week for the quarter. The outlook for 2002 North American light vehicle builds continues to improve.

Today the industry expects to build some 16.8 million units, which would make this year the third best build rate ever. When we last spoke, I mentioned that MAC would likely experience a moderate squeeze in spreads during the third quarter, and they did, the result of rising steel scrap prices and flat selling prices for their products. MAC's business is heavily weighed to one year and multi-year contracts, which in turn limits their ability to raise prices meaningfully in the short-term. More than offsetting this squeeze was their continued strong operating leverage, a continuing shift to more value added products and less outsourcing. While MAC looks for a slight increase in average scrap prices this quarter over the third, higher volumes, a better mix and productivity improvements will allow them to report better operating results.

Operating results at the Jackson facility continue to benefit from the new Mac-Plus line, which today is running full. The new Mac-Plus line at Fort Smith is now also operational after undergoing a shakedown period last quarter. Give the number of new program possibilities that have been identified, management is confident the new line will be sold out by the end of the calendar year.

Turning to the building products segment, both Nichols and Engineered Products, as mentioned earlier, had solid third quarters with both divisions experiencing excellent customer demand. Key drivers are housing starts, which for this year are estimated at about $1.6 million and remodeling expenditures. With housing starts still strong and mortgage rates at 30-year lows, a compelling argument can be made that the market isn't about to fall apart any time soon. As to the strength of the remodeling market, you may have seen the operating results posted this month by Home Depot and Lowe's, each reporting excellent results along with a favorable outlook. This bodes well for our business.

For the third quarter Engineered Product sales and operating income represented about 30% and 60% of the segment's results. As they have done sequentially each quarter this year, Engineered Products again reported record operating income. In fact, this quarter the group reported their best operating income for any quarter. Key customers for the division include major door and window manufacturers. New programs at Engineered Products, strong productivity gains and the benefit of Colonial Craft will support earnings growth going forward.

Nichols Aluminum, a supplier of mill-finished and painted aluminum sheet to the building and construction industries, continues to experience an upturn in business while reporting improved operating results. Nichols had a 10% improvement in volume versus a year ago, and they basically ran at capacity for the third quarter. Order entry was excellent for the division. And when you exclude the results of the Golden facility, Nichols had better spreads not only compared to a year ago, but also versus last quarter. On our last conference call, I referenced the difficulty Nichols was having purchasing aluminum scrap at reasonable prices during the second quarter, and the resulting compression in spreads they experienced. Scrap availability improved throughout the third quarter, which also improved spreads. Combining that with higher volumes and cost reductions, much better operating results were produced. Nichols is expecting a modest spread improvement for the fourth quarter versus the third.

Let me comment on the outlook for the remainder of the fiscal year. In the vehicular products segment, North American light vehicle builds will be higher compared to last year. Fourth quarter customer activity is strong, and we therefore expect the segment to report better operating income versus a year ago. Within the building products segment we look for stronger operating results in the fourth quarter compared to last year's quarter. Nichols Aluminum has a healthy backlog, and they will benefit from an improving spread. Engineered Products has a solid book of base business, which will be bolstered by new programs. Taken together, we continue to expect fiscal 2002 diluted earnings per share to be up about 40% over fiscal 2001.

Shifting the discussion to corporate, we completed the conversion of our debentures to common stock during the third quarter, thereby adding some 1.8 million additional shares to our float. These additional shares won't impact our diluted earnings per share as we've always included those shares in our diluted calculation. But it will reduce our interest payments by $4 million annually. While reviewing our financials for the quarter, you might have noticed that our long-term debt is down to about $10 million while our current portion of debt jumped to $81 million. The bulk of the $81 million is revolving bank debt, which is related to a bank facility that expires next July. Because there is less than one year remaining on the facility, we recorded all the debt as current rather than long-term. We are currently negotiating a new credit agreement and we expect to close on it this year.

Let me share with you my thoughts on corporate governance as this has clearly become a topic of paramount importance to investors these days. I'll tell you where Quanex stands on the major issues. First, we've reviewed the Cy Baines Archley legislation, and we support what it is intended to do. It seems to us, that the principal thrust of the rules is to encourage board independence and senior management oversight. And frankly, we believe we are ahead of the curve on these issues. The Company has an independent Board of Directors, and I am the only Quanex employee serving on our board. Each year board members along with employees sign a code of ethics and the board periodically performs forms a self-evaluation. I have long believed that an independent board is critical to proper governance, as our strong, independent board committees. Our board maintains the three New York Stock Exchange recommended committees. Compensation, governance and nominating and audit. And the audit committee is chaired by the Chief Financial Officer of a Fortune 500 Company. The other two audit board members are strong operating executives, each with responsibility for enterprises exceeding a billion in revenue. They know how to ask insightful, tough questions and do so often. As we disclosed in the earnings release, our Chief Financial Officer, Terry Murphy, and I, will certify our financial statements going forward, beginning with the 10-Q filing for the third quarter. A interesting footnote to this issue is that for the last several years we've required our division presidents and their controllers to sign off on the accuracy of their operating results as reported to the corporate office.

On the issue of expensing stock options, we are not currently expensing to the income statement what is basically a nominal amount for us. Our thinking on this issue could change. For now, we will continue to highlight the impact of options on earnings in our quarterly earnings releases. For the third quarter, for instance, option expenses would have a two cents per diluted share impact.

Let me update you on our strategic plans. We recently completed our annual strategy planning reviews with each of our business units. We require each unit to be operated in a disciplined manner, focusing on safety, quality, service and to be passionate about continuous improvement through lean initiatives. Also, each unit must be market-driven, process-based and focused on achieving organic growth. Our business units are meeting these challenges as all operating units have improved their internal disciplines. We also found an abundance of organic growth opportunities to talk about and new, viable acquisition opportunities were identified. At the corporate level our strategy to nurture and grow our core businesses and fix or sell non-core businesses remains.

The Colonial acquisition is a good example of growing Engineered Products. The ramp up of recent Mac-Plus investments in bar cutting serve as examples for MACSTEEL development. Also, we have made strides in improving our non-core businesses. Nichols Aluminum continues to improve its return. And while not up to expectations, is on the right track. A small investment we made at the Alabama facility will come online this quarter and will allow the plant to paint an additional 10 million annualized pounds of sheet material. Recall from earlier discussions that the margin Nichols makes on its painted products is quite good compared to mill finish sheet. Other businesses that are non-core have also improved.

Assuming our market drivers hold, we expect continued earnings growth in 2003 and beyond. We clearly have the firepower to support growth, both organic and acquisitions. However, we will be very selective in what we do, and how much it costs, as earning returns in excess of our weight average cost of capital remains an overarching objective. That concludes my formal remarks this morning. We will now answer your questions.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the star followed by the one on your push button phone. If you would like to remove your question, please press the star followed by the two. You will hear a three-tone prompt acknowledging your selection. Your questions will be pulled in the orders they are received. If you are using speaker equipment, you will need to lift your handset before pressing the numbers. Management has requested that you limit yourself to one question and a follow-up. If you have an additional question, please recue. One moment, please, for the first question. The first questions comes from Bob Fetch with Lord Abbott. Please go ahead.

Good morning, gentlemen. In regards to Nichols, you talked about an improving spread. Is that more on the cost side or pricing? And can you comment on pricing, as well?

Pricing -- we've had some price recovery this year. And it really started early in the year. And the pricing increases have pretty much held. What's been helping spreads most recently has been the decline in scrap prices.

And you're only using scrap. I know the primary aluminum prices have been coming down. Do they generally correlate with that pretty well?

High correlation between the two.

Okay. You mentioned the backlog in the business gives you some confidence along with the improving spreads there. What's the size of that backlog relative to a period a year ago, and how much visibility do you have out? Is it any more than a quarter?

Bob, this is Geoff Galow. If you look at the backlog at Nichols, while we don't disclose the actual numbers, that backlog versus a year ago is up better than 10% and the book looks very, very good at this time.

Okay. I'll let someone ask next.

The next question comes from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.

Good morning.

Good morning, Bill.

Ray, what is your -- in the Nichols aluminum division what would you say your current capacity is on the casting side, current capacity in your rolling mills and your current capacity on painted products out of your rolling mills? When I'm talking casting capacity, just the Davenport facility.

The Davenport facility can melt about 400 million pounds, round numbers. And painted for us right now represents about a third of our output.

And that's before the Decatur addition?

Correct.

Okay. And would rolling capacity overall be pretty much in line with your casting the capacity about 400 million pounds?

It is. It's a little less because we get some yield losses.

Right.

But in answer to your question, yes.

Okay. And right now do you see that pretty much staying as is as far as your strategic focus in fiscal 2003, with the exception of the addition of the 10 million pounds at Decatur?

Strategic focus, help me, Bill.

Do you particularly -- right now do you see the casting capacity, the rolling capacity and so forth staying pretty much as is; that is, at this 400 million level?

Correct. We -- we've got some opportunities, I think, to make some very small investments to, you know, increase our yield, our first pass yield. But we're not planning to add more melting capacity per se. They're just, you know, productivity enhancements, if you will, that can be made to get our first pass yield up.

Okay. Well, good job, and thank you much.

Thank you.

The next question comes from Michael Marthrow with Bear Sterns. Please go ahead.

Ray, I just wanted to stick on the Nichols Aluminum here for a second. Could you talk a little bit further about the timetable for perhaps making a final decision on the Nichols facility as a strategic non-core asset? I mean, is it possible that you guys do have a plan that this at some point down the line will return its cost to capital, or is that just unrealistic? Just want to get some further color on kind of what you guys are thinking and maybe a more definitive time frame.

Right. Well, I'm not going to give you a precise time frame on it, Michael. You know, it's kind of a work in progress. We've certainly challenged management to develop some operating plans that can get us the 10%. And we're probably on version number four now. And there are some things that are encouraging. I think after peeling the onion back, we found that there are numerous opportunities to substantially reduce costs with very modest investments. We know that adding value added capacity has proved to be very beneficial in the past. And we're looking at that a little closer. So, you know, I just don't have a final determination. And we continue to work on the matter. You know, we're not in the position of having to sell something to generate cash. And the name of the game here is to make sure that we return shareholder value over time. And we're going to do that.

Fair enough.

Thank you. The next question comes from Barry Vogel with Barry Vogel and Associates. Please go ahead.

Good morning, gentlemen.

Barry, how are you?

Good. A couple of quick questions, Ray. Your revolver is down to $81 million, which is just tremendous. And I was wondering do you have some kind of an estimate of where the revolver will end up approximately at the end of October?

About 60, 65.

So, you might pay down another 20 to $25 million dollars in the quarter?

Yes.

That's pretty good.

We generate good cash flow.

I understand. Can you tell us as far as the options exercised, how much cash they generated for the Company the first nine months?

They generated about $30 million, Barry. And let me point out that I regard the option exercises as benign is what I like to call them in that those -- most of those, some 75%, were exercised by former executives of the Company that have retired. And the stock price had not done much and consequently they hadn't exercised options that had been earned over the years. So, I'm very happy for them that they were able to take advantage of that.

Okay. Now, can you explain -- you made a comment that $26 million in cash will be received because of the death benefit. Can you explain that a little bit clearer?

Terry, why don't you help me on that?

Let me take a shot at it, Barry. We had corporate-owned life insurance policies on a number of retired executives and the existing executives in the Company. So, these policies were created in Carl Pfeiffer's case way back in the early eighties, and were created to cover the life insurance benefit that were expect today be paid to his beneficiaries and his estate and were also created for the purpose of being able to pay any kind of a supplemental executive retirement benefit that would have been paid to Carl. So, over the years we have paid premiums on those policies and recognized in income the increase in cash value on those policies. So, to the extent that the payment from the policy will equal $26 million, we had already recognized 16 of that $26 million in income over the last 20 years. And the remaining $9 million is the amount that we had not recognized in income, so that the 54 cents in earnings this quarter from the $9 million benefit, which was a tax-free benefit, was recognized this quarter. But that translates into $25 million in cash that we received. It was accrued for as a receivable in this quarter, but we actually received that money in August.

All right. So, essentially if we look at where your balance sheet is in terms of cash, above and beyond the operating profits, you know, after taxes or the net income for the fourth quarter, you're going to have a positive cash generation in the fourth quarter from insurance policies of $26 million?

That's correct.

That's another good number.

Strong cash flow, Barry.

Thank you very much.

You're welcome, Barry.

Keep up the good work.

Thank you. The next question comes from Greg McKoskow with Lord Abbott.

Just to follow up on Barry's question, sort of a net debt position at this point if we net out the 26 is 65. So that if we look to the end of fiscal '03, given the strong cash generation, is it conceivable that debt could be gone by next year?

Short of doing acquisitions, the debt will be gone in the second quarter.

Yeah. We'd be out of debt by the second quarter if we didn't make any acquisitions or any large capital expenditures. That's a true statement.

Another good thing to hear.

That isn't necessarily our objective, though. I think that we believe and I believe as a financial manager that our target debt to equity ratio is obviously much higher than zero. And we think we will be significantly underlevered at that point. So, it is true that if we didn't make any acquisitions, we would be out of debt by the second quarter.

Okay. Good. Then looking at the truck business, the North American truck market that you mention in the release, what are your expectations looking at the December quarter relative to the heavy duty market? My sense is that's probably pretty strong this past quarter and the current quarter. What are your expectations looking forward and how do you see that impacting MAC next year?

Well, I see a dip in fourth quarter production rates. And I think the first quarter is going to be slow as well. And we will be impacted at MAC as a result of that, but we feel confident that we're going to be able to backfill for the shortage through new programs that we're workings on. So, we expect to keep going full at MAC for a while. And we know we'll be operating full through -- well into November at least.

So, the expectation, then, if we just kind of look out sort of the first half of fiscal '03 in the MAC area, do you feel that you can still grow the top line in that business?

Yes. You know, that assumes that light vehicle build rates would remain at current high levels.

Okay. Good. And then, also, with regard to MAC again, I think you said that it was 95% of operating profit. That implies, I assume, that Piper is currently profitable at the operating line.

Correct.

Okay. Good. And also, you mention Colonial there. It looks as if, you know, that you're saying that the operating income was up 13% without Colonial. So, I'm assuming that Colonial had larger operating margins than the existing business. Does that sound right?

It's the margin rates are comparable, actually.

The large operating profit growth of 64% in the building products here, I just wondered -- that was quite strong growth. Is that pricing or how would you explain that?

Well, certainly Colonial Craft helped immensely. The volume on the comparable businesses was up only marginally, if I remember correctly. The volume growth was more Colonial.

Keeping in mind we didn't have Colonial Craft last year, and we did have it this year, I think that the percentages for the Engineered Products group were about 30% improvement in operating income in total, and it was about 15% on what we call same store sales without Colonial. That doesn't suggest that the margins were any different. The margins were pretty close to the same. What it just suggests is that we had Colonial this year and didn't have it last year.

Okay. Thank you very much.

The nest question comes from Rick Lawson with Weiss and Company.

Good morning, Rick.

I wonder if you could take a longer term view of Quanex going forward? From a financial standpoint, what kinds of trend line financial performance would you expect for the Company over the next five or ten years, and do you consider current performance to be above or below trend line?

That's a good question, Rick. You know, certainly this year our earnings growth over last year is clearly over trend line.

Not quite what I asked, though. I know this year is better than last. But does that get you up to trend line, or was that --

Well, where are you setting the trend?

That's what I mean. Obviously this year you've grown better, but were you below the -- sort of below a trend line and got up to average, or did you get above what you think would be a normal level?

Yeah, we're certainly looking to growing at, you know, 8 to 10% a year. But are you asking is this year's performance the base?

Yeah, in effect. I mean, you answered half the question right there. And then the other half would be, is, would you expect to see a growth from here of 8 to 10% or would it be considered normal to have, you know, a cyclical downturn that, you know, you'd have to build back up from?

Well, there's no denying that we're serving cyclical markets and, you know, we would be -- it would be impacted by a decline in those market drivers. Looking at this year and assuming that the drivers remained the same going into next year, I think, you know, assuming growth and profitability of some 8 to 10%, as I mentioned, would be a good assumption.

Great. That's helpful. Thanks.

Thank you. The next question comes from Bob Fetch with Lord Abbott. Please go ahead.

Thanks again. In regards to that growth forecast of 8 to 10%, what do you think the mix would likely be organically and external through acquisitions or otherwise? And are we talking revenue or EPS growth? Because you also with some of your liquidity have the capacity to make use of the cash in other ways than just acquisitions.

Right. I was talking about organic growth more than anything.

8 to 10% a year.

Right. And we're in the process of formulating or finalizing is what I should say, our planning process here as we approach the end of the year. And, you know, we will be trying to factor in acquisitions and so forth, which we really haven't done.

Okay. So acquisitions would be hopefully additive, then, to that number.

Right.

In that regard, obviously you haven't done too many acquisitions yet, Colonial being an exception. If you can talk about maybe some of the criteria as well as elaborating on the performance of Piper currently and, say, in the next period, meaning the next 12, 18 months, and what it is that you think you'll be able to do consistently better in terms of getting a commensurate attractive return on any acquisitions in the future.

Well, we've laid out a criteria for acquisitions. And you know, one of them is that we want to focus on developing or growing our core businesses. And that is MACSTEEL and our Engineered Products business. And what we're looking for are acquisition targets that, you know, leverage the competitive advantages that we have in those businesses or can somehow -- the acquisitions, that is, enhance the competitive advantages that we already have. And that's what we're looking for. And the other one is a return objective. And we've clearly stated that we're looking for acquisitions that can return their cost to capital. We're very, very return-focused.

Addressing the Piper question, Piper's going through a little bit of a rough patch right now. They're doing a nice job of bringing in business, but the aluminum business from one of their large customers has been declining, which we had anticipated. But the decline is a little bit more than had been forecast. And consequently, you know, sales have dropped below our trend line. So, that's what we're working hard at fixing. So, a bit of a rough patch, but I think the outlook remains solid. I think they've got the skills and the mindset, management mindset is to turn that business around and live up to expectations, which again is for them to return their cost of capital.

Just intertwining these two points in regards to Piper and acquisitions, and granted, you weren't involved in that acquisition, but if you spent any time kind of looking at the criteria that was used and why, clearly at the time, and this seems to be true of many businesses companies buy, their business was humming and the expectation was it would likely continue so, but it was still kind of single product, single market focused in terms of the high growth in airbags that was taking place at the time. But it was clear that once penetration of that end market was reached, that, you know, the financial performance was likely to be much different on a going forward basis. And as we know, not only didn't we get there as profitably as we would have liked, things were more difficult for a variety of reasons. Obviously we're just talking speculation here, but what do you think can be done by managers in your positions to inhibit those sorts of outcomes on a going forward basis?

By sticking to your knitting, by having a very disciplined strategic process. We're well aware that, you know, a very high percentage, some have said as high as 75 to 80% of acquisitions that companies make fail to return their cost of capitals. And you know, there are no guarantees that we're not going to commit some of those same mistakes. But we think we've got a process in place that will minimize that by again focusing on our core businesses where we believe we've got some distinct competitive advantages. And we believe that if we make acquisitions that are adjacent to those core businesses having identifiable advantages, then we will minimize the risk of the acquisitions. So, it takes a little longer sometimes to make acquisitions having those type constraints. But the probability of success is much higher.

Does that suggest you'd put a premium on companies that have a larger diversified customer base and possibly product portfolio?

Not necessarily because our mindset is such that you should focus on markets, you should focus on customers, and when you do that, you're in a better position to understand the needs of those customers and through that you identify the paths to growth that yield higher returns.

Thank you.

Thank you. The next question comes from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.

Ray, on MACSTEEL, Republic has got some new owners now. As you look out over the next year, do you see their competitive posturing changing at all going forward? I know in the past they've been pretty heavy discounters and so forth to try to keep the plants running and generate cash flow. Now that they're a little bit healthier, do you see them, among other things, getting back to a more rational price, do you think?

Bill, I would hope so.

But you're not seeing any signs of that at this point?

I think it's a little early to comment on that, Bill.

Okay. Can you talk at all about what kind of price talk, if any, there is regarding SBQ and so forth going into at the time calendar 2003 year?

Yeah. People are looking for -- you know, I hear 3 to 6% range on that. There's no question that scrap pricing has increased. And, you know, we're looking for some price relief.

Will those kind of price increases return MACSTEEL margins to where they were in the second quarter?

Bill, I think, you know, the third quarter was impacted by an eight-day shutdown.

Oh, okay.

So, I think you have to consider that. I think MAC as a result of changing mix and strong operating leverage and so forth has really held up pretty well if you were to do the analysis on a comparable basis.

Mm-hmm. But those were improvements in some product shift changes and improved productivity. If you just look purely at the sales price versus the cost of scrap, I think, as you indicated, there was a little bit of a squeeze in the third quarter. I guess what I'm asking is if you get a 3 to 6% price hike, does that kind of get you back to where you were before the squeeze occurred, purely looking at sales price and cost of scrap tonage?

Yeah, it would help a great deal. Let me put it that way.

Okay. Okay. Thank you much.

Thank you. The next question comes from Barry Vogel with Barry Vogel and Associates. Please go ahead.

I've got a couple of quick follow-ups. First of all, to follow up on Bob's comments about acquisitions, you know, historically, Ray, one of your predecessor, I'm not going to mention which one, always thought you had to have another leg, and that's how they got into the Piper acquisition. In your answer to Bob it seems to me that you're looking more at adding to your core two legs and not adding a third leg. Is that the right -- am I assuming right?

You are assuming correct, Barry.

All right. That's very good. I have a couple of little questions on that score. If we take some of the comments you made about how much of the vehicular sales in the quarter were MACSTEEL and how much the operating income was as we just reduce -- we just deduct that, the balance would be Piper, Impact, Temroc.

Right.

And the number I get is a small operating profit of about $735,000 on about $23.5 million in sales for those two entities. Long-term where is Piper, Impact, Temroc long-term in your plans right now? Given they're not earning the cost of capital, I don't believe?

Right. And that's where we want them to get to.

Well, let's say they don't get there.

We have said that we're going to fix or we're going to sell.

Okay. So, they're candidates for sale.

Any business is a candidate for sale if they don't meet certain criteria over some periods of time.

Okay. Can you give us your current estimates of CAPEX and depreciation and amortization this year and next year?

This year, we're going to be spending about $40 million, 38, $40 million. And our depreciation is about 40 , 45, $45 million. And next year, it's a first cut, so, some 28, $30 million.

Of CAPEX?

CAPEX. But that's a rough number, Barry. We have not finished the planning process.

I know that. And D&A, will that be next year approximately?

It's going to be close to the same.

45?

Yeah.

So, you're going to be swimming in cash?

We are strong cash generators.

Thanks very much. Great quarter.

Thank you.

Thank you. The next question comes from Barry Haynes with Sage Asset Management. Please go ahead.

Hi. Great quarter.

Thank you.

Quick question. You mentioned in your opening remarks that you've seen a couple pockets of slower order entry. Could you just describe which end markets you're seeing, you know, maybe a little -- you know, deceleration or what have you? Thanks.

Well, I think my comment was meant to indicate that certainly earlier in the year, you know, people were refilling the inventory pipelines in my opinion. So, there was a surge, if you will. And things have ebbed from that point. And the other one would be the -- on the -- in the housing market. You know, things typically slow down a little bit at this time of the year. But generally they're stronger than they were last year. I can say that much. But not quite as strong as it was, say, in the second quarter.

Right. Okay.

It's a seasonal thing.

Okay. Great. Thanks so much.

Thank you. The next question comes from Nicholas Schuler with Wells Fargo. Please go ahead.

Good morning, gentlemen.

Good morning.

I was wanted to know what you all felt about -- there's been a lot of press lately about the effects of tariffs. And I was calling to get your input on how you thought Quanex would be affected, if at all.

You'd have to name an act first. Do you have something specific in mind?

Well, I mean, you know, the tariffs enacted on steel. There's been a lot of play back and forth. Some products have been taken off. Some countries have been taken off. What is your general feel on any effect that Quanex would see?

I misunderstood your question. I thought you had said terrorists.

No, tariffs.

You've got a southern accent and I've got a Maine accent.

I have a little cold, too.

We're not communicating. Tariffs, yes. Well, let me make a few comments on that. One, you know, we were not proponents of the tariffs. Two, I've said that a rising tide is going to lift all boats and that we would benefit from tariffs. And I still believe that we will.

Okay. Thank you.

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Thanks for your interest today. Our commitment is to remain customer-driven, return-focused, and passionate about lean manufacturing. I am confident we will continue to improve shareholder returns because of this. This concludes the Quanex third quarter conference call. Thank you.

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