Quanex Building Products Corp (NX) 2006 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Quanex fiscal 2006 first quarter conference call. (OPERATOR INSTRUCTIONS). Thank you. It is now my pleasure to turn the floor over to your host, Chairman, President and CEO, Raymond Jean. Sir, you may begin your conference.

Good morning, and welcome to the Quanex fiscal first quarter conference call. Thank you for joining us. With me today are Brent Korb, our Corporate Controller, and Jeff Galow, our Vice President of Investor Relations. We will be available after my remarks to take your questions.

Today's is call will include a brief overview of first quarter results, the present state of our key market drivers and an outlook for 2006. The comments I am making today include forward-looking statements about the future prospects of Quanex. Please refer to the Company's latest 10-K report filed December 21, 2005 for our complete forward-looking disclosure statement. Our first quarter earnings release is available on our website at Quanex.com.

I would describe general business conditions in our first quarter as seasonally healthy, with the early part of the quarter slower than normal, offset by strengthening activity in the back half of the quarter, with January sales rebounding nicely across all businesses. As you may recall, overall demand at this time last year was unusually high, and as a result both of our building products and Vehicular Products process businesses were in allocation mode and running at unsustainably high operating rates.

For this first quarter the Vehicular Products segment reported operating income of 33 million versus 45 million in the year ago quarter, on 12% lower bar shipments. Shipments did however continue to improve through the quarter with our January shipments trailing a year ago by some 7%.

Total North American light vehicle builds for all of first quarter were up about 3% over this time last year, with builds of the Big Three down 5%, and builds of the new American manufacturers, or NAMs, up 20%. The domestics continue to face very significant challenges, but there are hopeful signs as well. Chrysler has made meaningful progress and they are holding their own against competitors thanks in large part to exciting new vehicles in their line up. Ford and GM are certainly facing tough issues, but they are taking the difficult and necessary corrective actions to turn themselves around. At GM they have an extensive line of new vehicles hitting the showrooms anchored by the so-called GMT-900 platform. I do expect their prospects to improve, and initial customer reaction to their new SUV design has been favorable.

Challenges of the domestics clearly underscore the importance of our ongoing work to increase our content with the NAMs, who continue to expand their capacity to produce additional powertrain components in North America. Our largest product opportunities remain in the areas of transmission and chassis components. Additional transmission content will come from more domestic sourcing of parts. We will further penetrate the chassis business by increasing our participation with both established and startup domestic producers of wheel hub, constant velocity joints and stabilizer bars that specifically serve the NAMs. We continue to make solid progress here, and we expect some 20% of our light vehicle tons this year will be sold directly or indirectly to support NAM vehicle production.

Turning to Class A truck activity both build and sales levels remain strong. Builds in 2005 were 335,000 units, up some 25% over 2004 levels. Builds for 2006 are estimated to be robust at some 340,000 units, as producers attempt to sell ahead of new thousand 2007 EPA mandated engine emission requirements.

Value-added bar sales continue to be an important part of our long-term marketing strategy, and during the quarter they represented some 70% of all bar shipments. Our high margin MACPLUS turned and polished product alone accounted for some 35% of all shipments in the quarter.

Consistent with our value-added strategy, we announce the Phase 9 project for MACSTEEL in March 2005, which is a $38 million capital project scheduled for completion in October. The project will add 50,000 tons of value-added capacity to our MAC Monroe facility which today has these services performed by others. Most of the equipment will be coming online during our fourth quarter. And we do expect to begin accruing some financial benefit in that period.

Steel scrap prices continue to exhibit their usual pattern of one month -- and down the next. And for now we are not expecting any dramatic changes in prices. Our scrap surcharge remains in place at MACSTEEL, and historically the surcharge is adjusted on a quarterly basis. However as a byproduct of this year's contract negotiations we have now moved some 80% of our accounts, representing about 50% of shipments, to a thirty-day cycle. Reducing the number of days in the adjustment period from 90 to 30 will reduce our margin volatility on a go forward basis. While we have always recovered our steel scrap cost, this new thirty-day mechanism will allow for a much closer matching of costs to revenues. Our financial team is elated and our MACSTEEL sales team certainly deserves a well done.

Turning to the Building Products segment we experienced record first quarter sales and operating income, in part due to a full quarter of Mikron results compared to a subperiod a year ago, as well as a noteworthy bounce in spreads at our aluminum sheet business. At Nichols shipments were off 19%, as customers continue to work down inventories, and spiking LME ingot prices caused a delay in customer purchases in the hopes the LME would correct. Our overall aluminum spread however increased compared to the year ago quarter as a result of higher selling prices, relatively low scrap cost, and a bit of mix of value-added products.

Excluding the results of Mikron Industries, sales at our Window and Door Components division were up slightly compared to the year ago quarter, while earnings were essentially flat. High input cost, primarily for metal, energy and oil-based raw materials, adversely impacted us. We have initiated pricing action in calendar 2006 to help offset the margin compression.

Let me comment on our progress at Mikron which was acquired in December of 2004. We continue to make progress on the integration process, and we remain excited by the opportunities we see, both for internal improvements and external growth. Our current initiatives are directed at intensifying the implementation of lean manufacturing practices throughout the business, with an initial focus on the manufacturing operations. We see the potential for increasing the effective capacity of the business in order to reduce capital needs going forward, and to stabilize margins.

Vinyl windows represent the fastest growing segment of the window business. And we believe the overall value proposition of vinyl windows for price, performance and product aesthetics is hard to beat. In fact a recent independent report noted vinyl windows will grow from the mid 50% range of total window units into the low 60% range by 2010. Mikron is now adding capacity to its Kentucky facility in order to handle new programs coming online during 2006. For the first quarter Mikron contributed $0.07 per diluted share after interest expense.

Turning to some financial highlights, Quanex generated excellent cash flow during the quarter, totaling some 39 million, a significant increase to the 10.5 million we reported a year ago. Our strong cash generation will allow us to continue to grow our core businesses, both organically and through strategic acquisitions. We ended the quarter with a total debt less cash to capitalization ratio of 10%. We take management of our working capital very seriously. And for the quarter our conversion cycle, which is a measure of how long it takes us to convert customer orders to cash, remained at 45 days, similar to a year ago.

Moving the discussion to the market outlook, we expect North American light vehicle builds for calendar year 2006 to be about 15.6 million units, down slightly from 2005's 15.7 million units. Breaking that down further, the Big Three light vehicle builds are expected to be down some 2% for the year, roughly offset by an increase in builds of the NAMs of 8%.

Our response to any fall off in builds is to continue to increase our content per vehicle with all the automotive companies. Starting in the second half of this year we expect new programs to add some 90,000 tons of annualized demand. These new programs will be with both the Big Three and the NAMs. Some of this penetration is related to the opportunity to sell additional steel for crank shaft consumption, which continues to move away from cast-iron products. In 2005 we shipped some 10,000 tons of bars for crank shaft applications. And for 2006 we expect that tonnage to reach some 40,000 tons.

For the remainder of fiscal 2006 we believe the industrywide steel inventory draw downs we experienced in the second half of 2005 are behind us. And we look for our bar production to be more in line with normalized demand. For instance the recent uptick in customer activity at MACSTEEL has our three plants collectively running at about 90% of capacity. And we expect bar shipments in the second quarter to approach shipment levels in the year ago quarter.

In the Building Products segment we expect both housing starts and remodeling activity to remain at historically high levels. For 2005 housing starts came in just above 2 million units, certainly a best year ever. For 2006 we are expecting a modest slowdown with starts coming in closer to 1.9 million units, a great year by any measure.

Interestingly the recent door and window market study referenced earlier, is forecasting total window unit demand to be off less than 1% in 2006 because of very strong restoration spending. These healthy fundamentals, along with new programs at the Window and Door Components business, whose 2006 top-line growth is expected to be some 15% over 2005 due to our participation in the rapidly growing vinyl windows market, should result in another excellent year for the division.

The outlook for Nichols Aluminum remains favorable as well. Supply and demand fundamentals have shifted considerably over the last couple of years as the industry experienced capacity rationalization and demand has risen with a strengthening economy. Combining expected operating results of the two operating segments, we would expect to report diluted earnings per share from continuing operations for the second quarter in a range of $1.30 to $1.40. The earnings guidance is below results from a year ago. And I will attempt to explain the major differences between the two.

As we have discussed in the past, the first half of 2005 had both MACSTEEL and Nichols in relatively sold out positions with record order backlogs and customers being placed on allocation. That is certainly not the case this quarter as these businesses are not sold out. Although I would characterize order rates to be in an accelerating cycle.

MACSTEEL spread was also very high in the year ago quarter, the results of a sizable surcharge adjustment on January 1, followed by rapid declines in our cost of scrap in the ensuing months. It was catch-up time for us in the scrap cycle. We're not looking for this to repeat in the current quarter, as scrap costs have traded in a narrower band of late. So the 2005 spike in earnings cannot reasonably be duplicated in what looks to be a much more normalized spread and demand environment for our second quarter. For the full year we would expect to earn some $5.40 to $5.80 fully diluted earnings per share. That concludes by formal remarks and we are now ready to answer to your questions.

(OPERATOR INSTRUCTIONS). Peter Lisnic from Robert Baird.

Congrats on a good quarter. The first question, if I could ask about the stock buyback and the increased dividend that you also released yesterday with your earnings release. Should we think about that as any sort of indication as to what you might be doing in terms of cash use? You have got a very nice cash position. You are generating a lot of cash. How should we think about priority of cash used, and whether or not you will be doing more buyback activity or increasing the dividend yet again?

Well we have said that our priorities are to certainly fund organic growth and make appropriate acquisitions on a going forward basis. And that we do want to pay a dividend, a good dividend, and we have increased the dividend four times in the last two years as testimony of that. And we've also said that we would use cash to make buyback at appropriate times, and we did do that at the end of '05. So you can certainly expect cash to be used for all four of the above applications.

Okay. And relative to the buyback, the buyback that did, we could probably classify as more of a strategic response to the stock being down, not necessarily an indicator that you're willing to go forward and continue to buy back shares?

It was just kind of an open window for us, Peter. We got in there and then stopped when we did not feel we could stay -- the window closed on us kind of.

All right. And then my totally unrelated follow-up question, in terms of the growth that you are looking for in the engineered products business of 15% plus, can you maybe give us some insight or some help into want margins might be doing there specifically with, as you mentioned, metals costs increasing and oil and resin cost going up, kind of what you're thinking of in terms of profitability in that business for '06?

We have suffered some margin compression in the last, I would have to say last six months of 05 in particular with the rapid increases we saw with butyl and resin prices. So we are in a little bit of a catch-up mode right now at our door and window business. And we -- right now the order of the day is to restore margin rates to where they were. So that is where we find ourselves today.

So you're putting through price increases. Are those sticking? Is my interpretation right?

We are having some successes. Absolutely.

James Gentile with Sidoti & Co.

I was just wondering if you could give us more insight into the profitability of the Mikron piece of the business? Obviously you are experiencing significant organic growth with regard to its vinyl products. Upon closing the acquisition the apparent contribution was going to be in the range of $215 million annually. Are we to expect this 15% organic growth -- well, engineered products growth piece of the business to be driven primarily by Mikron?

When you blend all the engineered product pieces together, will we see perhaps 20% top-line at Mikron and perhaps some lower growth rates at the TruSeals and the Home Shields of the world?

Yes. The growth engine that I do in the window business is clearly Mikron. They are seeing real growth of course in the use of their product. As I mentioned the growth of vinyl windows has been tremendous in the past and it continues to be somewhat robust. So there you are riding a real growth curve, if you will. And Mikron's position in the industry is just outstanding. And we want to capitalize on that reputation that has been built up. So that is the real growth side.

In terms of the profitability Mikron's margins are lower than the other product lines that we have in that division. We are working to beef those up over time, and I think we have got some good opportunities to do so through the execution of lean manufacturing practices. And that is what we are focused on doing.

Could you give us an idea of kind of a timeframe for Mikron to hit a double-digit operating margin type of sustainable environment?

We expect to be there this year.

Okay. Is it true to assume that Mikron did not attain that level in Q1?

It did did not. To some extent that is a seasonal factor because of the holidays and the slower construction season, of course.

Barry Vogel of Barry Vogel and Associates.

Congratulations. Okay, on the stock buyback I'm glad that you realized finally that your shares were incredibly undervalued. And I commend you for buying back some shares. Could you give us the rationale as to -- your rationale as to why you bought the shares at that price versus other times in the last six or nine months you did not buy any shares?

Well back to our uses and sources of cash, we are working on different possibilities for acquisitions and so fourth. So we're always thinking about how will we deploy our cash going forward. This quarter for example our CapEx was some $20 million. Our CapEx this year's going to be approaching 80 million, round numbers. So it is not that we don't have other uses for cash to support our growth and again for acquisitions. So and at times when we would want to, the windows closed on us because of insider knowledge. So there is something we are forever struggling with, but I think at appropriate times we will be buying back cash. You know, I agree with you. Looking at the multiple enterprise value to cash flow, we are a steal.

You are a steal. A very good pun. As far as -- let me ask you about it another way. I know you have your windows and that creates a problem. Given your current debt to capital ratio, given your earnings estimate for this year that you gave out publicly of 5.40, to 5.80 a share, you are going to generate an incredible amount of cash this year before working capital changes and before acquisitions. If the stock were to go back to the low 50s tomorrow and the window was opened, would you be much more aggressive than you when you bought the 300 some odd thousand shares, given all these factors?

Yes.

That is good. Could you give me the tax rate for this year and the D&A for this year, or somebody?

The tax rate is estimated to be 37%

And the depreciation and amortization?

About 72 million.

Okay, now as far as Nichols Aluminum I know you don't breakout these numbers. And that is a shame because with the increasing transparency that we are being blessed with here, you would think that you would breakout more of your segment. I'm giving that as a constructive criticism actually and a constructive suggestion. Was Nichols Aluminum profitability as an entity higher in the first quarter of this year versus last year?

Pretty much in line.

Thanks very much. Keep up the good work.

Dan Whelan of Bear Stearns.

If you could speak a little bit about your risk management controls that you have in place to protect yourself against the struggling auto parts company?

Yes. Well we do manage our working capital very aggressively, as I think our conversion cycle indicates. And we certainly have a number of Tier 1s that we sell to under CreditWatch. And we take appropriate actions as we see fit, and tighten the credit upon them when we think that there may be -- or when the danger signals are really high. So there are a number of outfits that are in that condition now.

I think we have done a pretty good job if you look at our write-offs that we have experienced to date. You know last year was, what, a couple of millions I think is probably what we wrote off, round numbers. So we can't avoid it all. We have to -- in the space we're in it is dangerous. There is just no question about it, but we do spend the time needed to provide necessary vigilance.

Sure. Do any of those danger companies or what have you account for 3 4% a pregnant of revenue or anything of that magnitude?

Not that high as a percentage of total revenues.

One last one. In terms of your mix versus Big Three versus transplants, do you guys have any goals put in place one or two years out in terms of having your transplant mix being X percentage?

I do not have a goal quantified, no.

[Matt Young] with WR Hambrecht.

Just a follow-up with the previous question, how concerned are you about Dana Corp? Can you discuss any exposure you might have with respect to them, and just general comments on it in general?

Yes, certainly Dana is a good customer. We have been I think a valued supplier of Dana for a lot of years. A little disconcerting certainly the news this morning, but you know I'm not surprised that they have a [workout artist] in there because their bank debt has to be renegotiated by May, I believe. So that is not unusual to have such a -- again, a workout guy in the business. I was glad to see it. So we're watching them very closely.

Okay, well real nice quarter.

David Gagliano with Credit Suisse.

Just a bigger picture question on Nichols Aluminum. Have your long-term views regarding Nichols in terms of whether or not it is a core part of your business changed at all over the past year? And as a follow-up, do you think Nichols will be part of Quanex in say five years time?

Our views haven't not really changed. We're well aware of what is going on in the aluminum space right now in terms of the LME. And we believe that there's quite a bit of speculative money driving the price of aluminum. So we're staying on top of all of that. And we continue to review our options surrounding Nichols. Just nothing -- there is just nothing to announce right now.

Okay. In terms of whether or not you think it will be part of the business in five years time?

Time will tell.

Okay, fair enough.

Greg Macosko of Lord Abbett.

Nice quarter. Could you talk a little bit about pricing in the vehicular area? I assume that most of that has been completed. And is there anything coming forward in any of parts of that business in the current year?

You're right about the contracts been completed. The focus this year was on thermally treated products. We wanted some price adjustments there, which we did get for the most part. We focused hard on the alloys that had risen substantially and did not feel that we had the protection that we really wanted there, so we spend a lot of time adjusting the alloys pricing and surcharges. And thirdly it was the surcharge mechanism, the time frame going from 90 to 30 days. So we feel good about what we were able to achieve in the contract negotiations.

Is the surcharge done? I mean have you kind of converted all the contracts over to 30 days that you expect to at this point?

Well, all those that we could. That is a never-ending struggle. As I pointed out in terms of tonnage we are only about 50% of the way there. But we will continue to work on that.

And then finally with regard to surcharge, I know in the last quarter you mentioned natural gas. Has that been included, or what are your thoughts there?

There isn't a -- we don't have a natural gas surcharge mechanism. But what we did do is adjust the pricing upward of course for our thermally treated products where we do sterilize the kneeling, for example, we got some price relief to consider the price of natural gas that we now have.

James Gentile with Sidoti & Co.

Just another follow-up with regard -- I mean if you look at the trends in natural gas and certain natural gas-based risen and plastics costs, we have seen a pretty significant decline in that raw materials since year end. Are we to expect that some of the lower energy cost moving forward into 2006 would be incremental to your guidance?

Not incremental to the guidance. I think that was somewhat inclusive.

Okay, and then just a follow-up -- sorry -- with regard to the contribution of Nichols Aluminum on the top-line to the total Building Products segment. I think we're pretty aware of the maximum capacity of that business. I was wondering if you can give us an idea of the average cost price per pound?

No, we don't go there.

Okay. All right, so I'm just trying to make my own little model within Building Products then. Could you comment then on the TruSeal contribution to Building Products in the quarter?

TruSeal had a good quarter. They had a stronger quarter than prior year. It exceeded plan. And it was largely volume driven, however. They continue to suffer from some margin compression because of the increases in butyl cost and some of their other input cost. But they are working hard at restoring their margin rates.

Could we assume then that the TruSeal contribution to revenue in 2006 would be about $125 million?

This is Jeff. We don't breakout within Building Products either the engineered products side or the Nichols side, nor do we go into those divisions and break those numbers further.

Okay, let me put it to you this way. How much then did TruSeal grow year-over-year from Q1, '04 through year-end '05 from a top-line?

I don't have that number off the top of my head (multiple speakers). You're getting down to the granular level here.

All right.

It is less than 3%. I'm sorry, 15%? 15%

Okay, year-over-year top-line growth for TruSeal? Great, thanks.

Mark Parr with KeyBanc Capital Markets.

Congratulations guys. Great quarter. I had one question. I was wondering if you could talk a little bit about the profit opportunity for aftermarket construction products on the residential slide as opposed to the products that you are selling into the new construction market? In terms of your relative profitability, talk maybe a little bit about the margins there?

Yes, in terms of the volume at least half goes into building restoration, you know the additions to the homes and the maintenance as opposed to new construction. And some will say that that is as high as 55% of what we sell. From a profitability standpoint we really don't break it out that much. In many cases we don't know where some of the thresholds for example that we ship will be used. That just gets lost in the various channels of distribution that we are feeding via our Tier 1s. So we don't breakout the profitability by aftermarket and new. It does not really apply to this business.

Okay, if I could ask just a follow-up question along similar lines for the steel business. If you're looking at the issue of mix in steel you have got end market mix associated with Big Three, new American manufacturers. You have got heavy-duty truck, off road. You've got this emerging Ford -- these emerging bar business going into the Ford crankshaft market. Could you talk just a little bit about the underlying profitability of those businesses, and try to help us get a sense of how the profit may respond to mix shifts over the next several quarters?

Don't really expect a big shift in that, Mark. Our focus is more looking at profitability of value added versus untreated bars. We do focus in somewhat on size as well as profitability by size. But in terms of are we making our margins higher with the heavy-duty truck users of our steel versus SUVs, we don't approach it that way.

Okay, if I could ask it just a little differently. If you are looking for crankshaft blanks to go from 10,000 to 40,000 tons, that is clearly a growth opportunity. Is it also something that enriches the mix (multiple speakers) and total margin opportunity?

Not appreciably is what I would say off of the top, Mark, on that point.

Okay and just one last question if I could. Based on your inputs what do you think the March scrap auction is going to look like?

I have got a hard enough time forecasting our numbers. I'm not about to get in the scrap cost business.

I'm sure you have some inputs from somebody. Do you care to venture a guess of what you think is going to happen?

Well write now I will let the Ford bundle auction influence me, and that was sideways from what I understand.

Okay, all right. Thanks very much for all the color. And congratulations on your continued success.

Peter Lisnic with Robert Baird.

I'm back with a couple more. Can you give us a sense on the Nichols business -- you talked, or at least in the press release, put the spreads up around 9%. Can you give us a sense or give us some context as to what that means historically relative to what they had done?

It is very much close to the top. The thing that has been -- I think has exceeded our wildest dreams actually has been the difference, or the spread, let's call it that, between the scrap cost and LME cost. The LME has been galloping in the early months of the quarter, and scrap cost just weren't keeping pace, the increase in scrap cost. And as you know we are a scrap-based user -- or company, so consequently that portion of the spread between LME and scrap cost was very good.

I guess the take away is that you are at or above record levels basically for that business?

Very, very close to that. Yes.

Okay. And outlook for the next few quarters, kind of maintaining that level or don't want to go there, or I'm afraid to ask.

Let me just give you a little color. I think up until January the volume was way down. Certainly volumes have picked up -- the order rate that is in January picked up. And we are certainly seeing some good activity there. So volume is coming back.

As you would expect with the advent of the spring season people like to build up their inventories some. They had been holding back on ordering because they could not believe where the LME was going. So the pipeline -- inventory pipelines are somewhat dry. So there is replenishment going on, which is good. I think on the scrap side just a little more difficult to say. Where is the LME going to go? So far with scrap, availability has been good, pricing has been good, so we are bullish on the near-term future.

Okay. If I could ask one more, the search for new CFO, how that is going, and whether or not that impedes your ability to maybe conduct a transaction or an acquisition?

Well, I think that we have got a great young team of talent, and I don't feel that it has impeded our ability to do acquisitions. I think the process continues. We are nearing the finish line. Hopefully we will have something to announce soon, but that is a little -- I can't do that now, but we will just see. We are taking it one step at a time.

Greg Macosko of Lord Abbett.

Could you just talk a little bit just about the Class A heavy-duty? I mean you mentioned 340. What is your sense of '07? I realize we are looking out there, but just from your vantage point what kind of a fall off are you guys looking at?

I think it could drop below to low hundreds, 250. I said 250. Low 200s is where I will leave it at.

Okay. And also onto the -- I know that with regard to the vinyl windows, I think in the last quarter call you mentioned maybe a fourth location in the Southwest eventually. Anymore thoughts on that?

Yes, that remains a possibility for the future. In fact we did move forward on buying some land this quarter. We closed on a property. Right now we are of the opinion that we can do more with the existing facilities in terms of ratcheting up the effective capacity through lean implementation. And that is where the focus is right now.

So the idea that would not be for another year or more that you might start on anything like that?

Correct.

Okay. Any comment, Jeff, on the LIFO swing here? Was there any impact from that?

No, in this first quarter there was no LIFO issues at all.

Okay, was there any 123R charge?

Yes, this is Brent Korb. We had about $800,000 of expense in the first quarter of this year from 123R.

Okay and we should look at that kind of every quarter. Is that kind of a reasonable number to expect?

So much it jumps up in the fourth quarter because we have a tranche that is in the fourth quarter more so than in the first three.

Okay, I can't find anymore questions to ask. Thanks a lot.

And Greg, let me just add to that. In the earnings release that went out yesterday, we do have a bullet for the $0.02 impact of that, so we started disclosing that. You may recall in the past we had a disclosure under other that just talked about that impact quarter to quarter.

Yes?

Okay, so with the 123 now obviously that is being expensed and we are highlighting that for you in this transition.

Well, I thought the other would discuss about the convertible?

That also.

Okay.

Both. And we still continue to have that same discussion in the press release on the convertible as well.

Mark Parr with KeyBanc Capital Markets.

I was wanting to get back and ask -- see if we could get a little more color on the outlook for Nichols. Last year and the first quarter calendar quarter the industry had a very, very strong, unsustainably strong, period of momentum. And I just wonder, Ray, you say you're definitely seeing things pick up. I was just wondering if you could give us some color on how Nichols' second fiscal quarter might compare to last year based on what you're seeing right now?

Yes, right now we are still expecting them to be down somewhat, when we are looking at the pound, but not by a huge amount. It is conceivable that that could correct in the next 60 days.

Or a magnitude like around 5% reduction, would that be a reasonable expectation?

Yes.

Okay. And is it also fair to say though that looking at the second quarter of '06, your second fiscal quarter compared to last year, that the spreads at Nichols have widened considerably. Is that fair?

Versus the second quarter of last year they have -- I wouldn't say appreciably, because last year the spread was pretty good as well. We had a nice second quarter last year at Nichols.

At Nichols, okay. So would you characterize the spreads as comparable?

Mark, this is Jeff. Let me interject here. You're asking us to predict spreads, which we really can't do. To raise a point, spreads last year second quarter were pretty good. If you look at our first quarter just reported, the spreads are higher in our first fiscal quarter than the second quarter last year. It is tough for us to make that prediction on what the LME does (multiple speakers) much less next week.

I'm with you. I'm with you. But it just seems like -- and I hear what you're saying, and I'm not really trying to get you out of your comfort zone. That's really not what I'm trying to do here. But it just seems to me intuitively that with the big increase in the LME number, combined with increasing availability of aluminums scrap coming out of hurricane cleanup activity, and maybe a leveling off of aluminum export scrap export demand, that we could continue to see a fairly wide spread here. And I was just trying to get a sense of how the spread today compares to how it was twelve months ago. That is all I was really trying to do.

Well, you mentioned all the right factors into the equation. You know, you're right. I mean we could see a spread even higher than what we think. It just depends on what happens to the factors you mentioned. Some of it is driven by speculators right now, so I forget.

Good luck with that. Thanks.

Thank you. Gentlemen, there appear to be no further questions.

At this time last year we benefited from a favorable turn in scrap cost and unsustainably high demand as we have just discussed. We do expect demand comparisons to become increasingly favorable as the year progresses, and we are looking for a great 2006. We are optimistic that our consumer durable driven markets will remain healthy, and that our secondary capital equipment markets will continue to be strong. Our under leveraged balance sheet and great cash generation capability gives us the ability to fund the growth of our core businesses and to make selective acquisitions. We like the hand we are holding. That concludes our first quarter conference call. Thank you.

Thank you. This does conclude today's Quanex fiscal 2006 first quarter conference call. You may now disconnect, and have a wonderful day.