Quanex Building Products Corp (NX) 2003 Q1 法說會逐字稿

Good morning, ladies and gentelmen, and welcome to the Quanex second quarter earnings conference call. At this time, all participants are in a listen-only mode 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 star followed by the zero. And as a reminder, this conference is being recorded today, Friday, May 30 of 2003.

I would now like to turn the conference over though Mr. Raymond Jean, Quanex President and Chief Executive Officer. Please go ahead, sir.

Good morning, and welcome to the Quanex second quarter conference call. Thank you for joining us.

With me this morning are Terry Murphy, our Chief Financial Officer and Jeff Galow our Vice President of investor relations. We will be available after remarks to take any of your questions.

Today's call will include a review of our second quarter results, the current state of our key market drivers, the near-term demand outlook, some comments on scrap pricing and our expectations for the remainder of the year. 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 on December 20, 2002, for the company's complete forward-looking disclosure statements.

Quanex reported excellent second quarter sales, a record, in fact, reflecting a healthy demand for MACSTEEL products and Nichols Aluminum sheet products. Sales of engineered products were disappointing, off about 11% from last year due to severe winter experience in market segments with where our customers have a strong market position. Diluted earnings per share were 58 cents, down from 70 cents reported last year. During the quarter, we purchased about 221,000 shares of outstanding common stock, and in the absence of a better use for our cash, look for us to continue to purchase our shares.

MACSTEEL reported solid results for the quarter. Piper Impact, while posting a loss, showed improved results over the last two quarters. Nichols Aluminum had excellent volume and revenue but suffered at the operating income line because painted sales were off. And at engineered products, sales and profitability came in below expectations.

Let me move on to our two segments where I'll talk first about vehicular products which includes MACSTEEL, Piper, and Temroc. The two primary drivers for this segment are North American light vehicle builds and to a lesser extent, heavy-duty truck output. MACSTEEL, by far the largest business within vehicular products, reported higher volume, sales, and operating income compared to last year even though scrap and energy costs were up significantly, and overall vehicle builds were down year-over-year. It's hard to ask much more from a business. Excellent results for the quarter came from new programs, higher prices, and a significant reduction in outside processing costs. Since adding the two additional MACPLUS turning lines, we have experienced a sharp drop in outside processing costs. All six turning lines are basically full, and we expect them to stay that way as long as vehicular builds remain healthy.

As we have noted in past quarters, Piper Impact continues its struggle against the ongoing loss of its traditional product line, aluminum airbag components. Head count reductions and other aggressive cost cutting continued during the quarter and allowed Piper to again reduce the size of their operating loss from the third -- for the third sequential quarter. We expect Piper to secure about 10 million of new annualized business this year, which is significant. But unfortunately, those new sales will be more than offset by the shrinking demand of aluminum airbag components. Business development activities are achieving a good measure of success and we remain optimistic about our potential. But it's just taking longer than we expected. In the meantime, we will continue to match resources to the forecast demand. It's our expectation that Piper will report near break-even results in the fourth quarter. Results at Temroc were essentially flat to last year, the primary market for our aluminum extruded products is the snow mobile industry, now experiencing its third down year. As a result, Temroc continues to seek opportunities outside its traditional product areas.

Let me comment on the Building Products segment which includes engineered products and Nichols Aluminum. Engineered products had a disappointing second quarter due to poor weather. And while Nichols Aluminum experienced a solid-base demand, a quality problem at their Alabama facility, along with rising scrap prices, overwhelmed all the positives. Key drivers for the segment are housing starts and remodeling expense. On the first quarter conference call, I reported to you that engineered products, which serves major door and window customers, had a good quarter. And that we assumed the spring buildup in customer activity was underway. As it turns out, that was not the case. Throughout the second quarter, our customers' key market regions, namely the northeast and midwest were either covered in snow or dealing with bitter cold. As a result, our customers' business activity was off and in turn so was ours. New programs slow to ramp up in the first quarter went nowhere in the second. A result of these unusually poor business conditions.

Nichols Aluminum which produces mill-finished and painted aluminum sheet not building and construction industries, experienced good demand during the quarter. Unfortunately, results were hurt in two areas. First, scrap prices moved up quickly toward the end of the second quarter. Faster than our ability to raise prices, creating some squeeze on overall spread. Although spread for the quarter was slightly better than a year ago. Secondly, our product mix wasn't as rich as it could have been because of start-up and production problems associated with the upgrade of the coating system at the Alabama facility. Low-quality painted sheet was shipped and by the time problems were were identified and corrected, material had already reached our customers, which in turn drove up returns and credits. Most of the bad material was identified during the quarter, and the company set up a reserve to handle those expected returns. With new management in place, production has been restored and we're back to shipping excellent quality product. We expect the Alabama facility to ship higher volumes of painted material in the third quarter compared to a year ago.

Now, a comment on the current state of our key market drivers, namely North American light vehicle builds, and housing starts, and how we see these drivers impacting our three major businesses. Light vehicle builds this year are expected to be about 15.8 million units, which would be down about 5% from last year, and I believe we'll continue some fits and starts through the remainder of the year. For the first calendar quarter, builds were up about 2% over a year ago, but the estimate for the second quarter -- for the second calendar quarter calls for builds to be down about 10% with April off about 12%. Near term demand for MACSTEEL looks sluggish at this time and their backlog right now is running behind year ago levels. In the event that builds soften beyond our expectations, MAC is in discussions with its nonautomotive customers gauging their demand. Housing starts which have remained at relatively healthier level this is fiscal year with some regional shifts in demand, are expected to remain strong throughout the remainder of the year. For calendar 2003, starts are expected to hit about 1.65 million, down slightly from last year. Activity has rebounded in our customers' key market regions so business at engineered products has picked up noticeably during May, and we look for them to operate at strong levels right up until the industry encounters the next winter season. At Nichols Aluminum demand for their sheet product remains at adequate levels but lately we are seeing some non-building and construction customers attempt to work down excess inventory built up during the second quarter. Like MACSTEEL, Nichols' backlog is weaker than this time last year, so we'll have to watch this closely.

Before I comment on the financial outlook for the remainder of the year, let me discuss the subject of scrap pricing as this remains an important issue for both MACSTEEL and Nichols Aluminum. As you know, steel scrap had been rising rapidly for the last year or so, to the point that scrap costs at MACSTEEL for the second quarter were up some $30 per ton over this time last year. And up about $10 per ton over the first quarter. Admittedly, MAC does have various scrap surcharges in place with their customers, which softened the below when scrap prices increased. We believe scrap pricing peaked near the end of our second quarter, and it's been dropping in May, which will benefit them later in the quarter. At Nichols, the results are also being impacted from rising scrap prices, and unfortunately, they don't have surcharge provisions with their customers. Scrap cost in the second quarter were up about 5 cents per pound over a year ago, in the first quarter. For the first six months of the fiscal year, Nichols was able to raise prices to keep up with a portion of this rise in scrap costs, and overall spread was up slightly from the first six months of '02. Near the end of the second quarter, scrap prices spiked and Nichols has been unable to match this higher cost with the higher selling price, so we expect the spread to narrow in the third quarter and trail both last quarter and year ago levels. One way we are offsetting part of this squeeze is by improving the mix with more painted sales.

Let me discuss the financial outlook for Quanex for the remainder of 2003. At this point, it's difficult to forecast what the light vehicle builds will be between now and year-end. We know builds were up a couple of percent in the first calendar quarter, yet we expect builds to be off 10% for the second quarter. We believe housing starts will continue to post strong numbers and in line with last year. MACSTEEL's near term outlook is hard to accurately gauge. Automotive demand will be down year-over-year, and if necessary, MAC will increase penetration in other markets. Scrap prices have finally flattened out and in some cases we're seeing small reductions which is favorable for our business. Additional MACPLUS business is another positive as our lower outside processing costs and the benefits being derived from lean initiatives. Second quarter performance clearly shows MAC's ability to outperform their market, and I look for them to do so again this quarter. Engineered Products is back on track, and we expect their business to be excellent for the rest of the year. However, we don't expect them to make up their slow second quarter sales in the back half of the year. Nichols Aluminum is tougher to call at this point. We expect overall demand to remain at reasonable levels, even with the near-term customer inventory reductions discussed earlier. We remain concerned about further reductions in spread. At this point, spread is getting squeezed, and we expect it to be down versus last year and last quarter. While mix improvements will help alleviate this squeeze to some extent, what's really needed is higher prices. And frankly, customer demand and industry supply simply won't support higher pricing at this time. Rising demand for aluminum scrap is negatively affecting us as both domestic and foreign demands are strong.

Looking at expected company-wide results for the third quarter, we believe diluted earnings per share will be in the range of 65 to 80 cents. Look for results at Engineered Products that come in very close to a year ago. MACSTEEL results will probably be off somewhat depending on the strength of third quarter build rates. And results at Nichols will be down because of the anticipated deterioration in spread due to scrap pricing. For the year, we expect to report diluted earnings per share in the 265 to 290 range. It's a broad range but given the uncertainty of the vehicular build rates and the volatility of scrap markets, particularly the tight aluminum market, this range best represents our current thinking. It's important to recognize that all of our operating units are short-cycled businesses. Our long-term business strategy calls for us to protect, nurture, and grow our core businesses: MACSTEEL and Engineered Products. Both businesses earned in excess of their cost of capital during the second quarter, and we see nothing on the horizon to change this. Nonetheless, we remain disappointed in the performance of several of our non-core businesses. Our ability to fix these businesses is being hampered in part by a troubled economy and we believe results would be improved if we had stronger economic wind at our back. However, our long-term strategy continues to be in a nurturing grow cores and fix or sell those businesses that are underperforming. We continue to actively look for acquisitions to complement our cores, and we have opportunities in the pipeline. However, it's well-known that the acquisition process requires tenacity and takes time if we are to make investments that fit our strategy at a price that allows us to earn returns in excess of capital costs.

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 decline from the polling process, press the star followed by the 2. You will hear a three-tone prompt acknowledging your selection. Management has requested that you please ask one question and one follow-up, and requeue for additional questions. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for the first question. Our first question comes from Mike Harris with Robert W. Baird. Please go ahead.

Good morning, gentlemen.

Good morning, Mike.

I just wanted to talk about MACSTEEL a little bit here. It looks like the filling of capacity for the Phase VI project is going according to plan. And I just wanted to get a little more color on some of the options you're looking at to increase capacity there.

We're making investments at Jackson to squeeze more off the rolling mills, and that is going on as we speak. And we'll be installing some of the vital equipment during the July shutdown. And we expect that's going to get us an incremental 10 million pounds or so before it's all settled. I'm sorry, 10,000 tons.

I'm sorry. Okay, got it. You screwed me up with the pounds.

I get mixed up sometimes between aluminum and steel.

I understand. Okay, so about 10,000 tons there. And is that like the primary project that you're thinking about at this time?

That is the primary project. In addition to that, we've got some good lean initiatives going on in the finishing area. Which is, you know, reducing setup times and incrementally increasing our output as well. I guess I'm not prepared to give you a number at this time on that, but some nice improvements are being made.

And then for the Phase VII project at MACSTEEL, how's that going?

I guess the Phase VII is what I described to you --

Oh.

-- at Jackson, and I guess I was -- you were asking specifically for MACPLUS, and I was giving you an increase in base capacity. I guess to get to your question, we're not currently making capital investments to increase MACPLUS. What we're doing is through initiatives reducing setup time, increasing our throughput and we know we're getting -- we will be getting some nice output increases. But as I said, I'm just not prepared to give you a number on that, Mike.

Okay, that's fair. And I know we're only allowed one follow-up question here, so I'll ask, regarding cash flow from OPs for the quarter, looking at the quarter, obviously you had negative 2 million in cash flow from operations. Looking at our model, the last time you had negative cash flow for a quarter, I believe, was in fiscal Q1 of 1997, if our model is correct. You know, obviously you disclosed a statement of cash flows in the press release, but just on a high level, I guess I would like a discussion as to the reasons why the cash flow was negative? And then as far as your outlook over the next couple quarters to turn that around.

Well, our working capital performance needs to be improved. Basically, we've had some large customers that have changed terms on us. I think we need to be more aggressive in some cases with our own suppliers. And an inventory built up a little bit at MAC as a result of the slowdown toward the end of the second quarter. You know, in sync with the reduction in the OEM build rates. So it's really a working capital issue more than anything. We are rededicating ourselves to doing a better job in the second half.

Do you expect positive cash flow?

Absolutely.

I mean, that would be a very reasonable expectation. All right, well I will get back into the queue, thank you.

Thank you. Our next question comes from Barry Vogel from Barry Vogel & Associates. Please go ahead.

Good morning, gentlemen.

Hi, Barry.

One question for Terry and then one question for Ray. If we look at your capital expenditures in the net of proceeds, you had about $13 million in the first half, cash out. Can you give us your estimate, Terry, of what net capital expenditures would be for the year as we speak?

We think it's going to be about 35 million for the year.

Is that including proceeds from the sale of the Utah property?

No.

So it will be net, about 33 million?

Yes.

And Ray, I know that, you know, you talked about your two core businesses being MACSTEEL and Engineered Products, for many quarters in a row now, and you talk about the poor economy holding down the results of the non-core businesses. But the bottom line is, they are not and have not returned your cost of capital since I've known you, which is at least a couple years, and so when do you stop these operations from hampering your returns on assets as a company?

We haven't put an end date on it, Barry, but, you know, we could very well be talking a different story if we had some wind to our back. And, you know, there's a right time and a wrong time to be considering selling businesses. On the positive side, you know, I do feel good about the progress we're making. We've got an aggressive management team at Piper, I think they're doing the right things. We've got some great opportunities and I've got a high confidence level that we're going to turn it around. That particular business is, you know, is a nice adjacentcy as I to what we have as a core in vehicular products, that is MACSTEEL, and we'll do the right thing for shareholders over time.

So are you saying that you're hoping that the economy gains traction to allow these results to improve which might allow you to get a better price in selling these businesses for the shareholders?

I'm not sure if I said selling, but I'm saying, you know, we're looking for performance. And I'm saying wind to our back would certainly help performance at those businesses.

Okay. Thank you, I'll get back in line for my third question.

Thank you, our next question is from Michael Morrisroe with Bear Stearns. Please go ahead with your question.

Thank you very much. I have a question on the Piper sale. Is that included in the results then? In the 58 cents?

You're talking about the Utah property, of course?

Yes.

Yes, it is, Mike.

And you would view that as operating item?

Yes. Yes, it was just the sale of a building. It was the sale of a building, the gain on the sale was about $400,000 and it included the pipeline.

Okay. And looking ahead, you are forecasting housing starts to be down slightly and remodeling to be in line. Would we imply that if both of those markets outperform, starts have been up to date and remodeling certainly looks like it's going to outperform if interest rates stay where they are, should we expect what has all along been your strategy of outperforming in markets, that would be the implication and that you guys would basically beat what you're forecasting?

Well, I think, you know, our forecast does assume housing starts to be pretty much in line with last year. As you well know, there's regional difference that is certainly influence our results. There's how well do our large customers do in those regions and so on and so forth. So it's a tough call. But I do think that we've got enough new programs, although, you know, some of those have been delayed for a multitude of reasons. But I'm confident that we'll be able to outperform the market.

Thank you.

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

Hello? Bob?

Hello? Yes, can you hear me?

I can now.

Okay. In the automotive area, the transplants traditionally have imported their engines with more facilities going up, are you seeing any change there? And the likely benefit it would be to MACSTEEL?

Yes. And we have increased our output to what we call the NAMs, and we've just a number of trials going on with Toyota, Honda, and so forth. And we're expecting some breakthroughs in the balance of this year that will have a significant impact on our tonnage to those manufacturers going forward.

And can we assume at all if that's higher valued product where you would again look at the bottom end of that food chain and replace some of those volumes to sell to them?

You know, off the top, Bob, I think it's roughly -- the mix is not particularly rich, you know, it's got a good balance to it, some value-added and some not. I'd say it's about average.

Okay. You said both businesses exceeded your cost of capital, but Nichols alone we assume was below that level?

It was.

I know a number of activities you had to try and improve that was improving your first-pass yield experience in getting more of the value-added slitting and coloring in there. Can you just touch on those items?

We continue to, through our lean initiatives, to do just that, to increase, make incremental improvements on our lines. In the second quarter, is as we said, we were certainly set back on making progress because of the Alabama problem. But I think we're back in good balance and we'll have a good quarter now with a richer mix. But as I pointed out, the offset to that is the squeeze that we're experiencing in raw material costs.

Uhm-hmm. And is off-highway business significant at all to you folks?

I would not say significant. We do sell to the likes of Catapillar, Deere, and so forth, but it's not a big percentage of our business. A good chunk, 15 to 20% is heavy-duty truck. We don't have any win there at all, as you well know, with, I think, second quarter production rates are down in 18 to 20% range from last year. They are expected to pick up in the second half, slowly, and the news I'm getting is that that will happen, but it's just a very gradual process.

And do you have any more product on the newer engines?

Not significant. What we do like about the heavy-duty truck is that that's a high MACPLUS content.

Okay. Thanks.

Thank you. Our next question comes from Mike Jeranski with Venick Asset Management. Please go ahead.

Good morning, gentlemen.

Good morning.

I'm interested in finding out a little bit about the MACSTEEL business with the automotive builds going on right now. At what point, going forward in the year, if I don't see kind of return to -- towards the last year's numbers in terms of the production, should I start being concerned about your sales to lower margin customers? You mentioned that you've been having discussions with them, but it sounds like you haven't really been selling to them yet.

Well, there is some that's going on. It isn't a big percentage of our total. You know, I think North American builds right now are certainly, as I said, they're down a good 10% this quarter. And the OE's are waiting to see what May results bring in. Are people flooding to the showrooms as we speak or are they holding back? That will determine the third quarter build rates. And I'm talking about calendar now, which would begin in July. I don't think all those have been set in stone yet. And, you know, if sales do return to good levels, then the build rates in the third quarter will be up and I think our business in MACSTEEL will return with a convenient intelligence. But those plans are, you know, still being formulated as we speak.

Okay, I guess at what point within this next quarter do you start making those decisions as to whether you can hold out on the automotive industry or whether you need to start unloading merchandise that you're presumably making as we go along here?

That's -- I would say in June.

Okay. All right, thank you.

Thank you. Mr. Vogel, please go ahead with your follow-up question.

Yes, Ray, I have a question on your stock buyback program. It looks to me like you're averaging about six to $7 million a quarter in --

Hello? Barry, I've lost you.

Hello?

Okay. You're back.

You averaged about 22,000 share as quarter and about six to $7 million each quarter, which is nice, because it's consistent with your confidence that that's a good use of your money. In looking at your excess cash generation needs, absent any acquisitions and assuming the economy does not go down from here and gain some traction, was your plan to just buy a million shares a year approximately and do it consistently, or could you get more aggressive?

Well, the board has authorized the repurchase of a million shares, and we're on track to do that. If conditions remain strong and we have not made a large acquisition or a lot of small ones, I guess, you know, I would go back to the board.

All right. So is it safe to assume unless something dramatic changes from today, you'll do the million shares approximately this year and maybe you go back to the board and get another million shares?

Correct.

Okay, great. Thanks, because that's the best acquisition you can possibly make, in my opinion.

We like it.

Okay. Thanks.

Thank you. Our next question comes from Bill Baldwin with Baldwin Anthony Securities, please go ahead.

Good morning, gentlemen.

Good morning, Bill.

A couple of questions on Nichols, Ray. First question: Looking here at the third quarter, can you indicate roughly what you think the painted volumes will be at Nichols either in pounds or percent of production and compare that to a year ago? And then if you want to look in the crystal ball, Ray, what do you think that painted production could be as a percent of totals, say, a year from now?

Bill, I don't have those percentages off the top of my head. I can tell you that we expect them to be up some in the third quarter. You know, we know -- or I know, for example, that at one of our facilities that we're more than sold out, we're shifting it to the other facility. So things have come back nicely for painted product. And -- but I don't have those percentages off the top of my head.

Okay. Secondly, on the aluminum scrap price situation, can you give us some color at least in your own mind what you all think is going on there? And what you think the permanency of this situation might be, you know, looking out?

I think it's too early to say that there's been a permanent shift of the supply-demand curves, having to do with this commodity. Bit, you know, in the near term, you know, supplies are tight, the -- there's a considerable amount going to Asia, the Chinese I know have purchased a lot of aluminum scrap. And more has been going to secondary smelters to feed the automotive needs. So it's tight supplies that are leaving that price at high levels.

Is there less scrap than there was a year ago? Is that one of the issues, do you think? Or is it just demand has picked up?

Well, there was a supply issue in the second quarter for example, I think typically in the winter months there's less for foridging for scrap, it appears. But now the supply, I think is a little more plentiful, but the demand has picked up some. So you know, it depends which guru you read, there seems to be different opinions as to which way this is going to drift.

Okay. Thank you.

Thank you. Mr. Harris, please go ahead with your follow-up question.

Thank you. For Piper and Temroc, just to explore this real quickly here, can you quantify for us the current break-even levels in terms of sales for both of these divisions? On an operating income basis?

I guess I don't choose to discuss this on a conference call, Mike.

Okay. All right. Because you did make a comment that you believe that Piper could return to break-even in fiscal Q4.

Correct.

Okay. All right, well enough. Fair enough. The other thing is are you able to give us capacity utilization for MACSTEEL and Nichols during the quarter?

Our best estimates there at MACSTEEL, our utilization is down from this time a year ago. We -- if you go back a year ago, we were basically running full, and we are not doing that at this time. So we're off from a year ago. And the backlog is down a bit as well. At Nichols, they tend to be running fairly full. Now, last year at this time we were basically sold out so we're off of that a little bit, but the backlog there is a bit soft. But certainly at Nichols running higher than 90%.

Okay. All right. Great, that's helpful. Oh, just one more question. The amount of shares left on your share repurchase authorization is that about 560,000?

It is.

It is.

Great, thank you.

Thank you. Our next question comes from Greg McCosco with Lord Abbott. Please go ahead.

Yes, thank you. Could you talk a little bit about the inventory? I think you spoke earlier in one of the questions there, it's up pretty strongly year-over-year. Is that primarily MACSTEEL or --

Yes. Good deal of it is MAC. And again, some of that has to do with the slowdown in second quarter build rates. We've had just customers pushing out the delivery. I mean, they had the orders on the books and they're going to need it but they've pushed it out. You know, remember that build rates in the second quarter are down to -- I read one of the month, it's a five-year low. So from first quarter build rates to the second quarter has been a sharp drop.

Uhm-hmm. And with regard to Piper, would it be fair to say that kind of the break-even has been pushed out a little bit because of the problems there but also because the squeeze -- expected spread squeeze?

Not at Piper. At Piper, it's really been a sharper drop in component demand than we had expected. It is solely related to that.

Okay. So that's -- I guess it's taken a little longer than we thought?

The back-filling process is clearly taking longer than we expected.

Is there any time frame for Temroc in terms of break-even?

Temroc is, you know, was near break-even actually last quarter. Or very near. But -- and they'll make money this quarter. They normally operate well above break-even. But it is a seasonal business and their season is upon us. The winter months are always difficult for them.

Okay. Okay. Very good, thank you.

Thank you. Mr. Morrisoe, please go ahead with your follow-up question.

Thank you. I wanted to touch on Engineered Products again. You're forecasting I guess essentially flattish results for the rest of the year. Kind of surprising the lack of pent-up demand given all the cancellations or pushouts from the early on in the year. Just if you could comment on that. And then also, you alluded to some programs being slower to develop at Engineered Products than you had envisioned. Can you talk about what's on awry there and how you're fixing that and just some more specifics?

Okay. You know, the pushout, time will tell whether we recover from that. I mean, our big customers are really coming on strong. I know that our May results are going to be stronger than we had expected. And I do expect good results moving forward. It's just difficult to say whether or not they can recover that. I think these things just sometimes, you know, slip away. On the new products, that's -- it really has to do with our customers. I mean, they -- they're in the process of introducing new lines and where we have good content, and they have been delayed for technical reasons. And those programs have been pushed back, and we haven't -- they haven't had the need for our content. So that's just a timing issue. We're confident that we're going to get that business, but it may not be as quickly as we had expected.

Okay. And finally, on the Piper, you indicated that this potential for about 10 million in sales. What type of income are we looking at on that number?

I don't want to go on the income side to that, but it is -- we're getting that business at margin rates that exceed, you know, the average margin rates that we've enjoyed in that business, I can tell you that.

Okay. Thank you.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star followed by the 1 at this time. As a reminder, if you're using speaker equipment, you will need to lift the handset before pressing numbers. Our next question is from Leo Larkin with Standard & Poor's. Please go ahead.

Good morning. Could you talk about the rise in the accounts receivable? That bumped up a bit.

Yeah, we've had, particularly on the vehicular side is where that has happened. We've had a couple of large accounts, one in particular that I'm thinking of, that did change their payment terms. And it has had an impact on our receivables. It's not an aging problem, we have looked at that and, you know, it's strictly a matter of a customer choosing to pay in 45 days versus taking a discount in the past. So that's that's affecting this.

Thank you.

Thank you, sir. It appears there are no further questions at this time. Please continue.

As a wrap-up, in this global economy, I believe that you have to dedicate yourself at being the best of what you do or you will not get the returns you expect. Quanex is a management team that's making this commitment as has the resources to support it. We're also blessed with excellent core businesses that will outperform competition in the underlying performance matrix of our market drivers. I'm confident these attributes will continue to drive shareholder returns. This concludes the Quanex second quarter conference call. Thank you.

Ladies and gentlemen, this concludes the Quanex second quarter conference call. If you would like to listen to a replay of this conference call, you may do so by dialing 1(800)405-2236 followed by the pass code 539794. Once again, if you would like to listen to a replay of today's conference, please call 1(800)405-2236, pass code 539794. You may now disconnect and thank you for using AT&T teleconferencing.