Quanex Building Products Corp (NX) 2005 Q1 法說會逐字稿

Good morning. My name is Ronnie, and I will be your conference facilitator today. At this time I would like to welcome everyone to Quanex Corporations's first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. If would you like to ask a question during this time simply press star followed by the number one on your telephone keypad.

If would you like to withdraw your question, press the pound key. Thank you. Mr. Jean, you may begin your conference.

Good morning and welcome to the Quanex first quarter conference call. Thank you for joining us. With me today are Terry Murphy, and Jeff Galow, our Vice President of Investor Relations. We'll be available after my remarks to take any of your questions. Today's call will include a brief overview of first quarter results, a discussion of the current scrap market, the present state of our key market drivers, and a general outlook for the balance of our year.

The comments I'm making today include forward-looking statements about the future prospects of Quanex. Please refer to the Company's latest 10-K report filed December 21st, 2004, for our complete forward-looking disclosure statement. Our first quarter earnings release, dated February 24th, is available on our website, at Quanex.com.

During the first quarter, order entry rates in both our vehicular products and building product segments remained at very high levels. Excellent demand in the quarter produced outstanding results at both operating segments. Return on net assets for vehicular products and building products groups were 31 percent and 33 percent respectively, up from 19 percent and 16 percent in the year ago period. The return on invested capital for Quanex was 11.6 percent. Our vehicular products segment reported operating income of $44.2 million, versus $9.6 million in the year ago quarter.

This outstanding improvement was the result of our successful integration of MACSTEEL Monroe into the group, with 3 months results versus 1 month a year ago, higher selling prices effective with January shipments, excellent client utilization rates, a favorable turn in scrap costs, and gains in productivity. Our engineered steel bar products business saw a 35 percent increase in shipments over the year ago quarter. If you exclude shipments for Monroe, we were about flat for the quarter, as both the Fort Smith and Jackson facilities continue to run at close to rated capacities.

Total North American light vehicle builds for our first quarter were about 3.6 million units, up 3 percent over this time last year; although builds at the Big 3 were down some 4 percent in the quarter. This slip in builds at the Big 3, further emphasizes our ongoing work to gain share with the new American manufacturers. We continue to make excellent strides, and we take advantage of each opportunity that presents itself. Demand from our heavy duty truck customers was very strong in the first quarter, with Class 8 truck builds up 53 percent over our year ago quarter. The industry expects builds for calendar 2005 to approach 300,000 units, another double digit percentage gain over 2004 builds.

At our building products segment, housing starts and remodeling activity remained at high levels, which allowed our engineered products and component business to report a solid quarter. Housing starts for our first quarter were very high, 1.9 million units on an annualized basis. For the month of January, starts were close to 2.2 million units annualized, a 20-year high which is remarkable.

Our aluminum sheet business experienced exceptionally strong demand during the quarter, not only from their traditional building and construction customers, but also from capital equipment and transportation accounts. This increased demand for common Alloy sheet, allowed for higher selling prices and improved spreads, at a time when we are normally fighting to hold market share. So all in, this made for a great quarter, as the segment reported record operating income of $22.1 million, compared to just $5 million in the year ago quarter. An improvement of over 4 times.

Turning to the current scrap environment, the significant price of volatility of [fair row] scrap still continues, but for now at least, this volatility is in our favor. Manufacture you know that our steel margins suffered last year, as we experienced rapid scrap cost increases that were not offset until the following quarter. Today the situation has reversed itself, and we find ourselves on the good side of the scrap recovery curve. From a longer term perspective, these steel scrap swings, while unnerving shouldn't be overplayed in your evaluation of Quanex, because over a time frame exceeding a quarter, things balance out, and we do recover our costs. The future direction of scrap costs remains as difficult to predict as ever. But in the near term, we expect to see slowly falling steel scrap costs and continued relatively flat aluminum scrap prices.

Operating results from our acquisitions of Monroe and TruSeal played an important role in the success of our first quarter. Their combined earnings per share after interest expense contributed $0.36. You may recall that we owned both businesses for only one month in the first quarter last year, and on a combined basis they earned $0.04 a share.

The integration of our latest acquisition, Mikron Industries, which was purchased on December 9th, is progressing well. We continue to be excited by the growth opportunities we see at Mikron, both internally with the potential for improvements, and externally with the market position it has given us. Additionally, their new composite product Mikron wood, looks to have excellent market potential as well. Mikron's results came in above expectations for the stub period, but were slightly dilutive for the quarter. For the fiscal year, they will be accretive to earnings in a range of $0.20 to $0.30. Their strong presence in the vinyl window business will certainly enhance the overall success of our building products business. Taken together, Quanex reported diluted earnings per share from continuing operations of $1.31 for the quarter versus $0.27 for the year ago quarter.

Reviewing our operating cash flow, we generated about $10 million of cash in the quarter. That's no better than last year. The result of having to fund an 87 percent increase in sales. But looking at this on the basis of how long it's taking us to convert orders into cash, our so-called conversion cycle, we improved significantly on that, from 57 days in last year's first quarter, to 43 days, a 25 percent improvement. Hats off to our business leaders, who have been on a working capital diet, and are sticking to it.

Moving on to a discussion of our markets, North American light vehicle builds for calendar year 2005 are estimated to be about 16 million units, essentially in line with 2004. We will continue to increase our content per vehicle with both the Big 3 and the new American manufacturers. Add in our bullish outlook for 2005 heavy duty truck builds, which are expected to be up at least 15 percent over 2004, along with the ongoing strength we see in the construction and farm equipment, capital goods and defense markets, and you can understand why we expect to be operating our businesses in the vehicular products segment at very high utilization rates in 2005.

In the building products segment, we expect both housing starts and remodeling activity to remain at high levels. For calendar year 2005, housing starts are estimated to be about $1.8 million, slightly below 2004's record starts of 1.9 million. Taken together, we believe the sales and earnings outlook for our two segments, for both the second quarter and for the year is excellent.

Our guidance for the second quarter is in the range of $1.40 to $1.50 per diluted share. We'll of course update this estimate with our mid-quarter update in April. Giving accurate guidance for the remainder of the year is a tougher call for us to make, given the difficulty of predicting the direction, and timing of scrap price movements. However, we do remain very optimistic in our market drivers for the remainder of the year, and at this time, we are estimating a full year earnings range of $5.00 to $5.40 per diluted share.

Let me end my discussion with a few words on the strength of our balance sheet. The priorities of our cash and our ability to continue to grow the Company. Reviewing the balance sheet, our 2004 year-end total debt to capitalization stood at 21 percent, which for the most part was at 2.5 $125 million convertible debenture. On December 9th, we borrowed 200 million against our revolving credit facility at about 3.5 percent to finance the acquisition of Mikron. In the first quarter alone, we repaid 30 million of that, and ended the quarter with a total debt-to-capitalization of 37 percent, along with a cash balance of 28 million. Look for our debt-to-cap figure to fall when we report the second quarter.

As in 2004, we believe 2005 will be another superb cash generation year. Our first priority for cash is the organic growth of our two core businesses, MACSTEEL and engineered products. We like organic growth because it has a far lower risk profile. Our second priority is growth through strategic acquisitions that support our core businesses. While certainly riskier, acquisitions when bought right and integrated well, really propel you forward. Using cash to grow our common stock dividend, or to repurchase shares rounds out our options. Our reasonable debt-to-capitalization position, combined with excellent cash flow affords us great flexibility in how best to increase shareholder value.

That concludes my formal remarks for today. We will now answer your questions.

[OPERATOR INSTRUCTIONS] Management has requested that you please limit yourself to one question, and one follow-up, before being placed back into the queue. Your first question comes from John Hossalter of Robert W Baird.

Hi, guys, good quarter. Thank you. For nickel, could you comment on kind of the current market you are seeing there regarding end market demand, and how sustainable do you view that for the remainder of the year?

Well, right now I would characterize the end market demand as robust. All end markets that are served by common Alloy sheet seem to be strong, and the outlook for the foreseeable future, given what we have seen with housing, giving the expectation for very heavy truck/trailer market for this year. Those are obviously our two largest segments or end markets, along with capital goods. For the foreseeable future, we expect demand to remain very robust.

Okay. And then the follow-up, does kind of the robust influence there, kind of influence your strategic plans for nickel at all?

Whether the robustness influences it?

Yeah in terms of if you are going to divest it or would you consider keeping it longer now?

We are always reviewing our strategic plan. You know, we have articulated the Quanex game plan, and we have demonstrated an ability to execute that. We have been making acquisitions consistent with the game plan. We have been making divestitures consistent with the game plan and we'll continue to do that.

Okay.

Your next question comes from John Tumazos of Prudential.

Good morning.

Good morning. Congratulations in the extraordinary income in building products. And, you know, I think that it's even a winner quarter for you which makes It even more amazing. Are your markets benefiting from the insurance checks arriving and the rebuilds where the hurricanes passed last September? And how much of those building products earnings are the integration of the acquisitions, and the things other than flat rolled aluminum?

Well, we certainly benefited this year from having TruSeal in the portfolio for three months, versus one month last year. A lot of the gain -- most of the gain, in fact, building products was from aluminum sheet, and in response to your Florida question, I really don't have the market data that would suggest that, you know, the southeast did, you know, far better than other sections of the country over the last three months.

I can say, however, that we do -- in the Midwest and in the northeast, things were rather slow, despite the -- the encouraging -- the very encouraging housing build number that came out for January. So, you know, I think that we're going to see some strong numbers moving forward in the building products area, as winter goes away, and spring comes on. So we're -- we think we're going to have a very strong spring, indeed.

Thank you.

Your next question comes from [Joanie Jensen of McMahon Securities].

Hi. Just a couple of questions on your balance sheet, you had previously discussed your priority for cash use, and discussed potentially making additional acquisitions. As far as the balance sheet and your capital structure, what is your plan? Do you have a target capital structure as far as debt-to-equity? And then also with respect to your revolver, are you also looking to take out some of the debt with long-term financing or extend the revolver?

This is Terry Murphy, the CFO. Relative to the target debt-to -- long-term debt to capitalization, it really depends on the strength of the economy, but in a real good economy we might lever up to 40 or 45 percent. In a weaker economy, 35 to 40 percent relative debt-to-total capitalization.

Relative to the second question, do we plan to term out some of the floating rate. Right now we have about 300 million in debt, of which a third of it, the convertible is -- is fixed at 2.5 percent. We are currently looking at what we might do with the other two-thirds knowing that long-term rates, although the yield curve right now for long-term rates is pretty good. We are continuing to look at whether we ought to play a little bit more of the floating rate game, or whether we want to term some of that out. We haven't made that decision. That's something that we'll be looking at over a period of time.

Okay. And as far as your future acquisitions, could you maybe characterize, are you looking for larger integrated acquisitions, like some of the larger ones you've been doing, or smaller ones, or are you open to either?

We are certainly open to either. You know we've got a pretty tight strategic screen. Small acquisitions, small bolt-ons is what I like to call them. You know, are more expensive make, in a way, because, you know, you just seem to spend the same amount of effort on the legal front, and just the internal effort that goes on to do the deal, due diligence process and so forth.

But, you know, once done, usually the integration process goes easily and is relatively less risky, certainly. So, you know, we -- I say the -- even though we don't -- you know, especially like the process there, we do think it's important to make them nonetheless. The larger acquisitions certainly are a little riskier, but when they fit nicely with your core businesses, and they move your strategic plan forward, we're going to make those as well. So both are -- are on our screen.

Okay. And then lastly, do you have a forecast for depreciation and amortization in '05, as well as CapEx?

We're looking at both in the range of 60 million.

60 million for D&A and 60 for CapEx?

Yes.

Okay. Thank you so much.

Your next question comes from Tim Hayes from BB&T Capital Markets.

Good morning.

Good morning.

On the aluminum sheet side, how much of your business is under one-year contracts versus spot or some other duration?

Most of that on the aluminum side is short-term contracts, is what I would characterize them. It's almost quarter to quarter. We don't have a lot of yearly contracts.

And my follow-up to that is could you talk about how convergent pricing is doing for the different -- for some of the major grades?

Major grades you said.

Alloys, 3150.

We're doing, you know, very well with our conversion costs. We have been, you know, able to increase the effective capacity at nickels, for example, and that has paid off handsomely for us in a -- in a high demand market environment.

Can I ask one follow-up then? Or should I circle back?

Go ahead.

The expansion by Jupiter, do you see any -- any worries on pressuring down converging prices for building sheet there?

Not in the near term.

Okay. Thank you.

Your next question comes from James Gentile of Sidoti & Company.

Hello. You spoke about the new American manufacturers, and how that's an interesting growth opportunity in vehicular products. Could you tell us how much in the quarterly revenue came from some of the foreign car makers in the U.S., and now big, in fact, you expect that part of the business to be?

It is currently less than 10 percent, but growing at better than 20 percent a year. And we've got some projects that I would characterize as breakthrough in nature, meaning once you qualify for these applications, that your tonnage goes up -- your tonnage opportunity goes up appreciably in quantum leaps. So we're encouraged, very encouraged by our opportunities.

Great. And then just on the nickels business, in the quarter, you know, compared to your $1.31, how much did nickels actually contribute, and, you know, compound that over the next three quarters. How much is nickels included in your guidance for $5.00 to $5.40 per share?

We don't break that up. Our forecast is on a consolidated basis.

Okay. Thank you.

Your next question comes from Gregory Macosko of Lord Abbett.

Yes, thank you. Just to follow up on the last question, do you calculate the dollars per vehicle that -- you know, for your product?

You're talking about the content per vehicle, Greg?

Yes, content. Excuse me. Content per vehicle.

Yes. We're doing some marketing work on that front. I don't have that at my fingertips. I've got some idea by some of the big brand names, if you will, but we're actually in the process of refining that work. So perhaps more on that in the future.

Okay. Good. And with regard to the -- the conversion days, the conversion cycle was nice. You got down to 43. What should we expect kind of going forward on an average basis? Obviously there's seasonality to it.

There is. And I think if you look at our performance last year on a quarterly basis, you know, I think that reflects what we can do in that area. You know, obviously we're not going to see, you know the percentage improvements that we have been able to demonstrate in the past, but, you know, I think there's still juice in that lemon.

So the 43 days should be able to come down a bit more going forward?

We're going to keep squeezing.

Okay. Okay. Well that will certainly help the debt-to-capital. And with regard -- you talked about the housing market in the release a little bit. If we were kind of -- where would you expect if there's a backoff, in terms of the drivers there, that you talk about? Just generally speaking, regarding building and construction, et cetera? Would you expect that the -- to feel a backoff first?

The answer is yes, I do expect some pullback, I just got back from a windows and door manufacturers meeting. And they have a parade of economists and certainly industry participants that were giving a forecast of, you know what they saw and they're -- you know, the end of the year expecting a pullback of, you know, 5 percent, 5 percent plus kind of. And at the meeting, they were reducing that to the 3 or 4 percent range. So those are the last data points that I have on a forecast.

Okay. And then sales to service centers, are you still seeing those continue to be pretty strong?

Yes.

That's kind of where we might see kind of swings up and down a bit, I would think.

Right. And there's been talk of inventory levels being somewhat high. You know that's not a big portion of our market. We -- but we do play some, and so far, the demand has -- has been good. No complaints.

Okay good. Well, thank you, Ray.

Your next question comes from Bill Baldwin of Baldwin Anthony.

Hey, good morning.

Good morning. Outstanding. Unbelievable numbers.

Thank you.

Just a follow-on to that question there, Ray, the best you can give us color. I know when you acquired Monroe a year or so ago, they had a pretty good amount of service center business, more than you guys do. Could you give us an indication of what has happened to that over the past year, and what that is kind of down to as a percent of their shipments, or however you want to describe it? I mean I assume it's down quite a bit from where it was, as you kind after rationalize their customer base and upgrade it, and so forth.

Yes, it is down quite a bit. And, you know, right now it's in the -- you know, the 10 percent range is what I would say, Bill.

Right, 10 percent for Monroe's production?

Right and it's less than 5 percent at the other mills. We have been able to -- particularly at Monroe, just, you know, change out the mix, if you will, along the lines that we had described, you know, it's what I call mix enrichment. And we have done that.

Do you think there's more to go at Monroe in that regards, as far as continuing to reduce the service center percentages?

You know, we like a little participation there. Some of that work is -- is good. There's a lot of [coins in timber] for example, that is good product for us, and so we'll -- we'll continue -- we don't want to forget about the service centers.

Okay. Okay. Last question, I guess, for you Terry, in that other income that was a negative million 920, was included in there these calculations that you have to make for your dilution out of your converts now?

You're talking about the --

On the income statement, below the operating income line, you had a -- other income, except it was other expense this time, a net negative million 920.

The biggest thing --

That was a positive last year, almost 800,000, I just wondered if --

The biggest single piece of that, Bill, relates to the deferred compensation. We have to mark-to-market the shares that are in the deferred compensation, we have to mark to market the shares that are in the deferred compensation plan, and to the extent that the stock increased substantially during the first quarter, we had the mark-to-market that increase in the stock price, and the liability for the deferred compensation. So a think about 1.7 million, in fact, is specifically related to that issue.

Do you know offhand, Terry where these calculations end for the $0.04 a share dilution, now that your convertible calculation, where that would show up? Is that in your share count?

That shows up ultimately in the share count.

Is that where that is?

Yes.

Okay. Thank you much.

Okay.

Your next question comes from Gregory Macosko of Lord Abbett .

Yes, I missed one, thank you for taking me again. With regard -- I see the corporate expense was up a fair amount and I just wondered, I assume that is relative to the acquisitions. Could you go through that a little bit?

It isn't really related to the acquisitions. It's more specifically related to -- to the increased costs associated with SOX implementation. That's a big piece of it. There's also an increased piece for incentives in that as well.

And what would we expect is SOX going to go down or stay the same?

It will be stay the same or, in fact, be a little bit higher.

I see. And then with regard to the intangibles line there, I assume that it went from 29 to 88 million. Could you give a sense of how that breaks down? I assume it's the two acquisitions?

Well, it's the one -- let's see you're looking January over January?

Yes, mm-hmm.

That's really the one acquisition, TruSeal and NorthStar were already in the '04 numbers. The '05 numbers increase in intangibles is associated specifically with Mikron.

So order of magnitude 62 million of --

Yes. Mikron there will be about 60 million in goodwill, and about 60 million in intangibles.

I see. Okay. Thank you.

Okay.

Again if you would like to ask a question, press star one on your telephone keypad. There are no further questions.

As wrap-up, we remain optimistic that our consumer durable driven markets will remain relatively strong, and that our secondary capital equipment markets will continue to be robust. We also believe we will continue to outperform our markets. Our strong balance sheet and excellent cash generation capability will continue to support the growth of our core businesses. We like our prospects going forward. That concludes our first quarter conference call. Thank you for joining us.

This concludes today's conference. You may now disconnect.