Quanex Building Products Corp (NX) 2007 Q4 法說會逐字稿

Good morning. My name is Shasta, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quanex fiscal fourth quarter earnings and annual results 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 session. (OPERATOR INSTRUCTIONS). Thank you. At this time I would like to turn the call over to Raymond Jean, Chairman and CEO of Quanex. Sir, you may begin.

Good morning. And thank you for joining our fourth quarter conference call. On the call with me today is Tom Walker, our Chief Financial Officer, and Jeff Galow, our Vice President of Investor Relations. At the conclusion of my formal comments, we'll take your questions. Today's call will include a recap of fourth quarter results, a brief financial overview, and outlook for fiscal 2008 and an update on the spin-merger process. Our comments include forward-looking statements about the future prospects of Quanex. Please refer to the company's latest 10-K report filed December 15th, 2006, for our complete forward-looking disclosure statement. The current earnings release is available on our website at Quanex.com.

The vehicular products segment posted excellent financial results in the quarter, as our MACSTEEL business experienced relatively strong demand in the light vehicle powertrain market. Ship times at MACSTEEL in the fourth quarter were our second best ever for any quarter. Capacity utilization for the three mills came in above 95% for the quarter, and recent capital projects and the strength of new programs allowed MACSTEEL to maintain a very healthy mix of value-added products and services, representing some 75% of of their fourth quarter shipped tons. For fiscal 2007, total bar shipments were approximately 1.2 million tons.

Operating income as a segment was up compared to both a year ago and sequential quarter. Last quarter, MACSTEEL's income was hurt by a spike in alloy costs that were not recoverable until this quarter. Our alloy surcharges, which cover about two-thirds of our total alloy costs, reset only every 90 days. Throughout fiscal 2007, MACSTEEL was adversely impacted by a persistent rise in the cost of consumable supplies such as graphite electrodes, which are used to melt scrap and refractory, which is used in both our melt and degas furnaces. The cost push inflation on these consumables has been unrelenting and MACSTEEL is looking to recover these higher costs with contract price increases in calendar 2008.

Turning to our Building Products segment, overall market conditions in the fourth quarter were generally weak, but we were able to clearly outperform the market. Specifically, at the Engineered Products group, we had to contend with an acceleration in the decline of new home starts, which were off some 22% from our fourth quarter last year. We were able to keep our sales decline to about 6% compared to the year-ago period. In part, due to our ability to generate additional sales through new programs and product initiatives with our customers. Working hand in hand with the who's who in the fenestration space, our engineered products management teams are focused on product innovation to improve the thermal efficiencies of our customers' windows, make doors and windows more architecturally and structurally desirable and make door entry systems more effective. This commitment to engineering excellence and industry-leading customer service is a differentiator for us.

For 2007, new products like invisible window screens, retractable screen doors, entry door components, advanced insulating glass basis systems and unique solar panel components continued to grow. These new business launches certainly helped up build sales momentum in the quarter and we expect this growth to continue in fiscal 2008. Fourth quarter operating income at Engineered Products was in line with the year ago quarter, as each business turned in good operating results. Our vinyl window profile business, whose quarterly operating income was up a respectable 18% compared to the fourth quarter of 2006, continued to benefit from ongoing lean initiatives and from restructuring efforts that started to take hold late in calendar 2006.

Fourth quarter operating results at our Nichols Aluminum business were very impressive, especially when you consider the substantial drop we saw in the residential housing market during the quarter. Fourth quarter shipped pounds were actually up 3% compared to the year-ago quarter and up some 1% from the third quarter. The increase in volume in the fourth quarter was primarily the result of improving customer demand we are seeing in the remodeling market. Operating income was up about 2% over the year ago quarter, based on these higher shipments. While the material spread slipped about 5%, due to a drop in the LME price of aluminum during the quarter.

At this point, I would like to turn the call over to Tom, who will take you through some of the company's financial highlights.

Thanks, Ray and good morning to everybody on the phone. Quanex continued to generate solid returns and cash flow. Our latest 12 months return on invested capital was 14.6%, well above our weighted average cost of capital and a strong showing considering the general state of our market. Fiscal 2007 cash from operating activities was very strong, at $224 million, compared to $191 million for 2006. Our cash plus short term investments at year end totaled a healthy $218 million. We saw stronger cash flows in the second half of 2007, based on improving earnings and significantly lower capital expenditures at MACSTEEL.

Looking at the capitalization ratio, our 2007 debt, less cash and investments, to total capitalization was about a negative 9%, compared to 3% for 2006. Other than about $5 million of industrial revenue bonds, the only other outstanding debt is our $125 million contingent convertible bond. Our strong balance sheet has been getting stronger and managing our working capital still remains an important part of that process. For fiscal year 2007, our conversion cycle, which is a measure of how long it takes us to convert a customer order to cash, came in at a very impressive 32 days, compared to 33 days this time last year.

With that, I'll turn it back to Ray.

Thanks, Tom. Moving the discussion to the 2008 market outlook for Quanex, we expect total North American light vehicle builds for calendar 2008 to be down some 100,000 units from this year's 14.9 million estimate. Offsetting this decline will be an increase in vehicle content from new programs still ramping up from 2007, our new 2008 programs and an increase in pricing through a combination of higher base prices, reducing our scrap surcharge window from 90 days to 30 days for most shipments and a provision for an additional alloy charge. For fiscal 2008, we are estimating MACSTEEL's operating income to be in a range of $140 million to $150 million.

For our Building Products segment, the near term outlook for new home construction remains grim, with 2008 estimates for home starts coming in at about 1 million units. But like the year just ended, we are determined not to be a victim to the challenging market. I'm sure you have noted our operating margin at Building Products was 12.3% for the fourth quarter, some 40 basis points above last year's quarter. One reason is that our businesses are clearly hitched to stars. These customers, considered the heavy hitters in the fenestration space, continue to outperform the market. They continue to grow their presence with the big box outlets and they have the financial wherewithal to keep introducing new products and to aggressively promote their brands. We have also seen evidence that our customers are putting more resources into growing their presence in the remodeling market. Add to this the positive impact of our own new programs, new customers and cost reduction initiatives, and we look for Building Products to continue to outperform the market. Building Products' fiscal 2008 operating income is expected to be in a range of$ 80 million to $95 million.

I'll close with an update on the progress of our separation process. On Friday, November 30th, we completed our Hart-Scott-Rodino filing with the justice department, and they have 30 days to review the document. At this time, we are not expecting any impediments We expect to file the Quanex 2007 10-K by mid-December. Our proxy for the merger is expected to be filed by the end of December. We are also making an Exon-Florio filing as Gerdau is a foreign entity and we look to have that filed before month end. The Form 10 filing for the Quanex Building Products Corporation spin-off will be made by mid-January, as will certain documents required by the NYSE in conjunction with the trading of the new shares. We expect to have the transaction closed before the end of the first calendar quarter.

And before I run out of breath, just thinking about what has to get done, I want to take this opportunity to thank everyone on the Quanex team for their diligence and dedication to this process of bringing our strategic transformation to a successful close. That wraps up my formal remarks, and we are now ready to answer your questions.

(OPERATOR INSTRUCTIONS). We'll pause for just a moment to compile the Q&A roster. Management has requested that you limit yourself to one question and a follow-up question, before being placed back into the queue. One moment. Your first question comes from the line of Ildiko Hildreth.

Just had a quick question. In your Building Products outlook, the EBIT you mentioned, I assume that does not include corporate overhead?

It does not.

And then when you had your conference call on November 19th, you kind of put a number like $19 million out there. Is there a difference in the number from there? From any work that you've done?

No, this is Tom. That's the number that we have now.

Okay. And then as far as any execution issues about how the whole process will work with the convert, any new updates on that?

Well, the convert is -- our expectation is consistent with what we said before, and that is that there will be conversions. There will be, as we go forward, the timing of which will be determined as we go forward and we'll convert at the value of the stock at that time, we incorporate both the value of both of our businesses.

Will you -- any thoughts on the first quarter, if there would be a dividend in March?

If the deal is not closed, we would expect to pay a regular dividend, yes.

Okay.

If the deal is closed, all bets are off, of course.

But the timing of the closure within March, am I interpreting this correctly, you have a typical time that you have a payment in March?

Jeff, what is the -- ?

Yes, you would expect a normal quarterly dividend payment at the end of March, set on a shareholder record date, sometime mid-March.

If you're not closed by then?

If we're not closed by then. Closing of the deal would eliminate a dividend.

Okay. Thank you.

Post the closing date.

Your next question comes from the line of Barry Vogel.

Good morning, gentlemen.

Good morning, Barry.

I know the last questioner asked this and I'm just going to make sure I got it right. The operating income estimate of 80 to $95 million for Building Products, is before corporate expense.

It is. Correct.

Barry, let me add to that. In the earnings release under the heading Quanex in the outlook section of the document, we have given you our estimate for corporate overhead for Quanex for fiscal '08. That number is some $25 million estimate and it includes some $4 million estimate for stock options.

That's not for the Building Products segment, that's for the whole company.

As I said, that's for the Quanex corporation estimate for fiscal 2008.

Is that the Building Products entity?

No, sir.

No. Okay. Now, on the same topic, you talk about a 5% drop in sales for your Building Products entity. How are you -- I don't understand how you're so confident early in the year, given that the outlook is still very, very, very negative and murky for the -- because of the financing problems, because of the low housing starts. Because of everything. Why are you so confident about only a 5% drop in sales?

Talking about year-over-year for next year?

Yeah, fiscal '08, Building Products, sales, you said it's only going to be down about 5%.

Well, it's a forecast, Barry. It's looking at our participation, where we play and some of the newer things that we have going for us and making an estimate of where we think LME pricing will be and so on and so forth. It's a forecast. Not cast in stone.

I know I'm only allowed to ask one question as a follow-up. So that was sort of one question. If we -- looking at MACSTEEL, you're very confident about higher base prices and confident that you're going to lower the scrap surcharge, and what's your outlook for base prices, you know, starting in January?

Barry, I don't want to comment too much on that because we're still in the process with some of our customers.

Right.

So I'm going to hesitate to go there all that much. But I can tell you that we're having some measure of success. As to the scrap surcharges, there what I'm talking about is the threshold, perhaps resetting the threshold on some of them.

Okay. I'll finish -- that's my last question. I'll get back in the queue. You guys are just performing wonderfully well for your shareholders.

Thank you.

Thank you.

Your next question comes from the line of [David Cohen].

Hi, gentlemen. With respect to your revenue versus operating income forecast, by my math, you could have a -- you don't have a range on the revenue side but the range on the operating income side implies a decline of 27% to a decline of 13%. So just trying to understand what are the drivers between that high end and low end of your operating income outlook?

This is Tom. One of the drivers that we have on our base plan for next year is some diminution in the scrap for Nichols Aluminum and that's roughly half our business in Building Products. So that is one thing that will accelerate a drop in margins at a greater rate than the drop in sales. The other thing going forward, we do have housing starts pegged at all the conventional wisdom that's out there at 1,000 or maybe a little bit more in our plans. But as we have to flex our profitability, our operating income, we have to be sensitive to the fact that housing starts might come in a little bit lower than that. And it's really kind of a guess right now. You could line up four economists and get four different answers on that one. Those are the two main drivers that are causing this.

And do you have a -- I don't know if you've typically given this for your forecast, but do you have an outlook that you're willing to share in terms of the capital investment needs of Building Products business in the coming year?

Well, we tend to always budget a little bit more than we spend. We're spending corporately, this is Quanex Corporation, at around $35 million. And so maybe a half or a little bit more than that will be in Building Products going forward.

Okay. Great. Thank you.

Your next question comes from the line of Andy Adebonojo.

Hello?

Hello.

Yes.

Can you hear me?

We can hear you.

I was just curious about the Hart-Scott filing. When you said you filed it on October --

November 30th.

Does that mean that both of -- both you and Gerdau filed and or was it just you?

I believe it's both of us.

Yes.

Oh, okay. And did you request -- did you file a request for early termination?

That is part of our thinking, yes.

Okay. All right. Thanks a lot.

Your next question comes from the line of Mark Parr.

Thanks very much. Good morning.

Good morning, Mark.

I'll just parrot what Barry said and just congratulate you on continuing excellent execution, Ray. You and your team are doing a great job.

Thanks, Mark.

Keep it up. If I could ask two questions here first. One, I was wondering about the apparent change in the level of corporate expenses in '08 versus '07, if you could give some color on that.

Well, certainly in '08 we've been impacted by the strategic process. Specifically, we're talking about legal and outside auditing and accounting fees.

Okay.

So that's been a big driver.

When you talk about the '08 or you're talking about the $25 million or the $19 million?

Yes, well, whatever you want to call it, you know, around that $20 million in '08 and I think the '07 number was something higher than that.

Yes. The 18 -- I'm going to be very clear on that. The 19 million, the 18 to 19 million of expenses going forward for '08 are just BP, Building Products, and we disclosed that in our last call when we announced the deal.

Right.

Okay. Today, we're saying overall, we will spend about $25 million, which is lower than the prior year, because of -- largely because of steel costs.

Okay. Steel costs in '07?

Yes, sir.

Okay. All right. And if I could just ask one other question, the capital spending number that you alluded to for Building Products in '08 --

Right.

It seems a bit on the high side, given the ongoing capital requirements of running three steel mills and I was just wondering if you could talk a little bit about how you would spend, call it, $20 million in Building Products in '08 on the capital side?

Actually, was we disclosed in the last call was actually 16.

Okay.

On the reconciliation sheet. In the 15 to 16 range is about where we would expect to be. I will say the budgets are a little bit higher than that, but that's where we expect to be. We're looking at maybe a third of that to a little bit less than a third of that just in tooling for our Micron businesses. And that's what makes us different, it's the tool that we extrude through. So we invest a lot in tooling to serve our customers. And then the balance of it really is for this coming year is maintenance of our operation, which tend to be machine intensive.

Okay.

We've got some automation equipment that -- at the home shield business as well, so maintenance of franchise spending.

All right. I'll get back in queue. I've got a few more, but again, congratulations.

Thank you.

Thank you.

Your next question comes from the line of Tamara Manoukian.

Hi, guys. I'm just a little still confused about corporate expense, the difference between $19 million that you disclosed on the previous call and the $25 million.

Okay. Let me take a stab at that. The $25 million we're giving for '08 is what you would expect on somewhat of a normalized basis on a Quanex as we are going forward. That's basically saying if there were no deal to happen, that is roughly what we would expect to spend. And you know, '07, back to the prior question, was up from there and again, that is distorted to some extent by the high deal costs that we have had this year. And again, that's Quanex, as we were, and assuming that we were to remain the way we are today on a go-forward basis. The $19 million that we came up with of course on our November 19th announcement and conference call, has to do with Building Products on a go-forward basis. It assumes that the deal does happen as we fully expect that it will during the first quarter of this year and what we're saying there on a pro forma basis is that we would expect to spend $19 million of corporate expenses for the following 12 months of Building Products. From the day that we launch the business or spin it off to our shareholders. Does that clear up the issue?

And my follow-up question, relatively new to this story, so I'm wondering, so for aluminum business, 60% of the business is related to the housing segment. I was wondering if the housing continues to deteriorate like it's been today, is there any way that you can diversify into other segments in terms of your end markets?

Yes, there's a certain amount of that that we can do. I mean, obviously there is 40% that goes to other markets as we speak. Some of it is transportation related, some of our aluminum moves through service centers where there are varied end markets from capital equipment to commercial construction to light industrial applications. So we certainly have the ability to move our common alloy sheet across different end markets. Let me tell you that a mitigating factor related to housing is the pick-up in demand that we're seeing from the remodeling market. Some of our large accounts on the aluminum side are people who serve the remodeling market, who install new siding or rain gutter systems on existing homes and so forth. And these people, I mean, given the softness in the new housing area, are focusing their efforts at the remodeling market, doing more promotional work and actively cultivating the opportunities there. And we saw our volume in the fourth quarter for example in the aluminum business pick up very nicely, because of these big accounts that are having some measure of success in the remodeling area, and we would expect that to continue.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS). Your next question is from Peter Lisnic.

It's actually John Haushalter for Pete. Could you guys just with the 80 to $95 million forecast, could you talk about maybe about how that's evolved in the last two to three weeks. It seems like the spreads have kind of tightened a little bit from what we've been able to observe.

As Tom articulated earlier, a good bit of the deterioration that we see in Building Products for next year or at least in the 80 or $95 million that we unveiled is on the Nichols side. There is more deterioration there. And the deterioration has to do with, one, some volume. We expect to lose some volume in the deteriorating market. And the other one, as Tom said, is the spread, because of the drop in LME and as we've said before, there's a high correlation between LME pricing and a piece of the spread that we're able to generate and so we expect to see that -- some softness there and we have forecast accordingly. We see less deterioration on the Engineered Products side of the house, because of new program initiatives which will keep our sales in better stead. And we do expect, again, the remodeling area to be growing as we go into next year, because I can tell you that our large accounts are putting forth a lot more effort into promoting windows to that particular market segment.

Okay. And then as a follow-up, on the Nichols side you've kind of historically seen people trade pricing for volume, and when you have demand softening. The cycle's been a little bit different. Have you seen anything in the marketplace to suggest that we're reverting back to the old paradigm, or are people still pricing pretty much with LME and it's really just a scrap spread compression, so-to-speak?

We've seen far more deterioration on -- I say far more. We've seen more deterioration on the spread two. I think the industry -- did I say -- the difference between LME pricing and scrap. I used a buzz word there. Forgive me. What I meant to say was a portion of the spread, the spread that we generate between LME and what we pay for scrap, a very important element of our spread component, total spread, and we've seen some deterioration there. I think the industry is in reasonable balance from a supply, demand standpoint. You know, the weak dollar discourages imports and we've had some good -- far better pricing discipline than I've ever seen, I can tell you that. So it's a different marketplace than it was five years ago.

Having said that, from an overall trend, it clearly is. But at the lower volumes going into next year, there might be some pricing compression, some minor pricing compression as we go forward that could impact spread one a little bit.

Okay. Thank you.

Your next question comes from the line of David Cohen.

My question's been answered. Thanks.

Next question comes from the line of Mark Parr.

Thanks very much. Ray, you had talked about a pick-up in remodeling related to volume for Nichols. I was wondering if you could talk a little bit about how you view the remodeling scenario for the Engineered Products side in '08?

The same, Mark, as I said. Some of our large accounts just have considerable exposure or participation, is what I should say to the remodeling segment. When you see housing starts where they are, off 50%, you say maybe we need to put forth a little more effort at promoting thermal efficiency in the northeast or the Midwest, wherever it's needed.

Today would be a good day to be doing that.

When you're paying $3.50 for heating oil, you might decide that your single pane windows need upgrading. So that's what's going on. It's anecdotal. It's the double-digit increases that they're reporting with their remodeling sales. We're just seeing evidence that that indeed is happening. I think the big boxes are trying to do the same. So you know, it isn't a lot of hard data that you can pick up because remodeling expenditures are always in arrears. It's not current as the new housing starts are. But I just see this as an encouraging trend.

Okay. Is there anything you can quantify for us as far as your LME assumption for '08 for Nichols? I mean, what you've assumed in the spread estimate for LME prices?

It's less than a $1 -- It's about $1.20 if I remember correctly.

It's in that range. We don't usually peg a number, but in the $1.20 range.

Okay. That's about where it is right now?

No, it's below that right now.

Okay.

Yeah.

All right. Thanks again.

(OPERATOR INSTRUCTIONS). Next question comes from the line of Andy Baker.

Thank you and congratulations on the good results. Just want to talk about your estimate for housing starts, down 24% next year. That seems a bit gloomier than most other estimates we've seen out there, whether it's Mortgage Bankers Association or Global Insights seem to be at 1.13, 1.15. You seem to be down at the 1 million level. Is there something that you're seeing out there that makes you a little bit more pessimistic or are you just trying to be conservative into the company's Building Products' first year as a stand-alone entity.

Andy, this is Jeff. You may know, we don't have any comments on stats, so we're using outside services. The very latest from Global Insights unfortunately has taken the number from some 1.1 million down to 1.02 million housing starts for calendar 2008. So that is the very latest thinking. I think the Association of Home Builders is still a bit north of that but still within this 1 to 1.1 and it's our expectation that this 1 million number is going to -- is probably the better number to use at this point.

Okay. My other questions have been answered. Thanks a lot.

Next question is another follow-up question from Mark Parr.

Thanks again. Hey, Ray, getting back to Engineered Products, given that the strength of your operation both fundamentally and from a balance sheet perspective, I mean, and also given what appears to be fairly fragmented nature of the market, there seems to be two opportunities as you move into '08. I think you've talked a little bit about it in the past, but I was wondering if you you could give us just an update on your view of the M&A opportunities you're seeing out there and also, to what extent you've included market share gains into your '08 outlook for Engineered Products?

Let's take the latter first, here. The market share gains, I mean, we're certainly assuming that the ramp-up of some of the new programs that we launched in '07 will benefit us on a full year impact basis. We'll certainly benefit from that. We've got some new items cooking for '08 introduction during the year. So we do expect that we're going to make out very well to help mitigate the decrease in housing starts. And in terms of share, I think the message I want to leave with you is that if you look at our customer base, we're really hitched to guys who have the wherewithal to do well in difficult periods, such as we find ourselves now. They're the ones that have the funding to introduce new products, to aggressively promote their goods, they're hitched to the big boxes who continue to do well, as you well know, in this whole housing area, I say their results are down as well. I'm fully aware of that. But on a relative basis, I think the big boxes continue to have significant impact.

So without citing some percentages, you know, I can tell you that I feel very comfortable that we're -- with the people that we'rer aligned with, and I think that's going to make a difference to us, as it has this year. I just expect it to continue. On the M&A side, I think we certainly expect to be going out there somewhat aggressively. I think the time is right, private equity is on the sidelines. I think any M&A transaction that's going to happen today is going to be done at pricing that will be far more favorable than it was 18 months ago. I think we can move forward and believe that we'll be able to do deals that are going to be within our cost of capital, which is so important to us. So I feel good. I think this environment is going to favor those who show discipline and were patient and didn't go out and spend like drunken sailors. I love the hand we've got.

Okay. Terrific. Thanks again, Ray.

Next question comes from the line of Robert Kelly.

Hey, good morning, thank you for taking my call.

Hey, Bob.

How you doing, Bob?

The Building Products outlook, I'm just trying to get to that down 5%. You're expecting what for new product growth in F '08. Is that the difference between the down 24 starts and slightly up on the remodel side?

The 24 is -- I guess Jeff gave you the -- how we got there, you know, it's -- it could be better than that or -- I mean, it could be less than 24%, could be more than 24%. I don't think the housing industry is necessarily found bottom yet. So it's a tough call. But we expect the LME to stay in a relatively a high level. Obviously that influences the revenue side of things. To me, it's not the revenue that's all that important, it's what you do with the bottom line. And I'd focus more on that number than the top number, I'll tell you.

If we just focus on that number, most of the -- I guess the depression in the operating results would come from the Nichols side? I was under the impression that the EP side faces at least pretty easy comps in the first half of the year.

It's still going to be down from where we were. '07 -- I mean, right now the industry is probably operating at about a 1 to 1, 1 level. Round numbers, I think that's where we were in October, for example. Let's face it, at the beginning of '07 we were still operating I believe at a 1, 3 level. So comps aren't going to be that easy first quarter to first quarter, no, they're not.

They'll be better in the second half.

The second half comps actually improve?

They would be, yes.

If I could just ask a question on the Building Products spin, the tax liability, that's pretty much an estimate. Do I understand that correctly?

That is correct.

Based on what you guys or what the bankers think the BP business is worth versus the cost basis or the tax basis?

Well, right. And if you looked at our current values, trading in the market, our estimates is that there would be a negligible tax, just to give you kind of a benchmark. We're trading the 49, 50 range.

To clarify that, Tom. If the spin were to happen today and the value of the stock were trading at $50, you're saying the tax would be?

Negligible. Because the sale of Quanex for $39.20 implies spin-off value in the $10 range.

So the $85 million liability that Gerdau is absorbing, do you get something back from that if that scenario does indeed happen.

If we actually -- if the total value of this deal, the spun off entity of BP, plus the $39.20 for Quanex was in the $50 range, we would get in excess of $100 million for Building Products.

The answer to your question is yes, we get the benefit. In other words, that's an item that gets trued up. And our assumption was that the trade-off at spin-off time, it would be trading in the 55, $56 range, which is what generating the %85 million in tax, to be specific, it's really a $56 and change number that generates the $85 million of tax. For every dollar below $56 that it happens to trade at at the opening bell, so-to-speak, or the closing bell, for every dollar, you -- we get back in the range of 15 to $18 million or something like that.

So does Quanex get that?

Yes. Building Products. Building Products gets that.

Would get that rebate.

Quanex would pay that to Building Products but Quanex would be owned by Gerdau.

Okay.

And the three elements that are trued up, one is tax, but there's also the convertible bond settlement and the option and so all of those trued up at prevailing prices today, we would have in excess of $100 million of cash coming to Building Products spinco, for its future needs.

Just to give a little more clarity on that, you know the 15 to 18 number I gave you, Bob, it did include consideration for the options that Tom just mentioned as well as the convertible debentures which would be converted as a lower premium price, of course. So that's how you get this rule of thumb that I just gave you. But it includes consideration for all of the elements.

Okay. Great. Thanks, guys.

Your next question is a question from Bob Fetch.

Good morning.

Hi, Bob.

Just to clarify, the operating income estimate for Building Products for the new year, does that -- is the true comparison $109 million, roughly, for the completed year?

Correct.

Correct.

Okay. And are you able to guesstimate how much of your Building Products revenue is actually coming from new construction versus remodel?

Bob, that is not a precise number, I'll tell you. I mean, we are, I think approximately right on that but precisely wrong. In that we're just using estimates from what our customers tell us of where their goods are going and mix is always a factor in what we ship to them. So it's an estimate.

Okay. So that being a given, can you kind of give us a sense as to how that mix may have actually shifted, based on what your customer comments have told you, say, a year ago versus what's it's been more in the last number of months and as you indicated your customers -- their customers, the contractors, if starts aren't where they've been used to and they're going to focus more on remodeling, just to pay the bills, what that mix might potentially be looking like going forward?

Off the top, I don't have percentages on that. As I said, it's more anecdotal. But when I look at each of our business on the Engineered Products side, take it business by business, I know that the profile business in looking at our large customers they've got over 50%, the big guys have got -- are driven by the remodeling market. One of our bigger guys, he's telling us that 80% of his business is driven by that -- by the remodeling market and I'm hesitating to use that in any calculations we make because it seems big to me. But that's what we're hearing. As I look at our components, the wood components business, I know that our big guy there has a business that's growing in the high double digits, having to do with remodeling. That's a statistic that was recently cited to me. But it's not 50% of his business. You know, I also know that.

So -- and when I look at Nichols, some of our larger accounts are indeed guys that have a huge presence in the remodeling area and I know that we've gone back and said my goodness, your numbers are quite high. Your demand is quite high. Why? And we were told the story about his move with the remodeling segment. So, beaucoup anecdotes and it gives us reason for some level of optimism that just because the number 24% was cited here today is a further drop in the new housing sector, you know, that's not what we're faced with in total in the housing market, so-to-speak, the broad housing market, including remodeling.

But it's probably safe to say that the sales decline you experienced in the past 12 months and projected to is principally new homes versus not and just by definition that side of the equation shrinking raises the percent of the remodel side.

Right.

Bob, this is Jeff. If you were to go back several years when housing starts were around 2 million annualized, we were saying then that we thought, again, this is kind of elevation, we thought our business, let's stick with EP for a minute. We thought some 60-plus percent of that was new home. But to your point, now that new home has gone from 2.2 to 1, the math on that obviously has shifted. That's why we're suggesting now that maybe it's 50/50. Maybe it's even now 60% remodeling. Just as a function of the change in new home starts over the last couple years. It is tougher for us to be terribly precise in the last 12 months or so.

And what's your guess in terms of how much -- what's the sales mix towards windows versus doors?

The majority, stick to Engineered Products because the data is a little better. But the majority of that product will end up in windows, only because windows is a much larger part of the fenestration industry compared to doors.

70 to 80%?

Order of magnitude, certainly three-quarters.

Okay. Good. And can you identify for us any of the meaningful cost reduction activities that you will be initiating next year or as you continually do?

Well, the latest is in the fourth quarter, we did put down a plant having to do with our profile business, took a hit on that in the fourth quarter. We're looking at another plant consolidation as well, going into '08. No final decision's been made on that. We continue to trim the labor force, depending on -- I mean, consistent with order rates, I guess. We do flex that to the best of our ability. We don't expect to be taking down -- we do have a number of facilities from coast to coast but some of those are strategic in that we're there to service our big guys, so they may be small operations but I think the opportunities to really take down more plants is limited.

We've also -- Bob, we're looking forward to optimizing our plant utilization in this down market so scheduling a plant to process on a level basis throughout the year to absorb our overhead might suggest a little bit of build in inventory. But because of that, we get an efficiency and we'll do that. We're also working very aggressively this year, actually with freight and optimizing our shipment pallets and our loading so that we can -- and we have to coordinate this with our customers, of course, so we can minimize freight. We're always looking for new ways to become more efficient.

Understood. Getting back to the first question, is there -- do you folks have a split on the -- between Engineered Products and aluminum in your estimated income for the year?

No, Bob, we haven't provided that guidance at this point.

Would you expect aluminum to at least be higher again?

I would not care to comment on that at this time.

Okay. And with your customers being who they are, have you had had a need to reserve or because they're for the most part healthy you haven't been.

We have not. We watched that very carefully and we're very happy with the results and I would also take this opportunity to stress that our conversion cycle ended the year in a very, very good position.

And if I may ask, what that might have been when Ray joined?

Higher, I wasn't here but I'm sure it was higher.

I'm sure it is too. Thanks, Ray.

Thank you.

Next question comes from the line of [Jesse Cook].

Good morning, fellows.

Good morning.

Good morning.

I'm not sure if you performed this analysis but I was wondering if you had kind of a break even sales number for engineered Building Products, basically how low can sales go before operating income becomes zero?

This is Tom. Actually, propitious timing with your question, some efforts we have going on in the company. We do have break-even analysis. We don't disclose it. I will say that there's considerable head space on a cash flow basis. That's where our focus is. It's lesser so on an operating income basis because we have a lot of DA in the Building Products business and the Engineered Products area. So -- and that's amortization of acquisition costs. So I'm not -- I'm pretty relaxed. But if we don't disclose the exact number.

Okay. Fair enough. The next question really is about the inventory policy at Nichols Aluminum. Can you tell me how many days of inventory that you typically hold throughout the year?

Very low. Quite low number. It's below -- it's below 30.

Below 30, okay.

That would include the in process and the finished goods and scrap.

And also, with Nichols, I was just --

I meant 30 days.

Oh, yeah, yeah. Okay. And staying with Nichols, as far as new starts, I guess in your press release you say 60% of sales are generated from new and remodel. Can I get a specific percentage, just on new starts?

No, I don't -- I don't have that.

Okay. And next question is basically ownership of the management team, I know sort of your compensation and options haven't been disclosed yet. Do you have kind of the date of when that information is going to be out?

Information on --

Your options and compensation in the new spinco.

Our target right now is to have that out in the Form 10 that we issue toward the end of January, mid- to late January, I was just corrected.

Now, this is probably not going to be answered, but do you -- does the management team have any plans to increase your direct ownership in shares of spinco?

That has yet to be determined.

Okay.

But I can tell you that I have a considerable chunk of my net worth in Quanex.

And will that -- and I guess that will transfer right over to the new spin, so --

Well, for every share of Quanex that I hold today, I will get a share of Quanex Building Products for the shares that I own.

We might want to address the stock option issue about what that -- what transpires there, versus individually owned shares.

The stock options will be cashed out, so Quanex Building Products will not be picking up, say, any options that we currently have and that was done intentionally in that Quanex is cashing out, so-to-speak, Quanex has currently structured and owned and so forth and we didn't want to impose that on the new Quanex Building Products. So that will be the equity that management will have on a go-forward basis will be based on, again, they'll get a share in the new company, all shareholders will get a share in the new company for shares they currently own but for options, those will be cashed out and equity or option grants of course will be made to the management team on a go-forward basis, in the new company, and that remains to be determined by the Board of Directors.

Okay. Now, does this -- the spin-off, does that have any effect on your preferred stock purchase rights?

Preferred?

We have not determined that at this time. We've not determined that at this time.

Okay. And my last question just deals -- it's just a basic question about engineered Building Products. I was just wondering, do you have any information about sales concentration by region of the United States?

I don't off the top, no.

Okay.

We could say that in terms of future outlook, that the Southwest and Southeast are significant markets for our vinyl business, for our micron business, very significant growth markets for us, as there's a conversion from aluminum windows to vinyl, that performs in hot climates and provides a lot of different colors and ours does.

Okay. Thank you very much. Great job in the face of a lot of headwinds here.

Thank you.

Next question comes from the line of Ildiko Hildreth.

If you could just clarify that earlier discussion on the tax situation, the November 19th presentation, the $85 million that you assume for the spinoff tax, how did that relate to the $100 million that you mentioned? Is it just 15 million difference or is it the opposite way?

Actually, that $85 million that we would pay, if we spun off the business at an equivalent of $16.80, which would be the spin-off price, if the whole deal was worth $56, which was the basis of that computation. Would generate a tax of roughly $85 million, based on the tax basis of the spinco, spun-off business. If today's current market price is an indication of what the spin-off value would be, at around $10 a share, there would be virtually no tax. All of these items are trued up between the owner of Quanex and Quanex. I should say between Quanex as owned by Gerdau and the spinco.

When is that --

Back to your overall hundred, to reconcile to that number, that's the sum as Tom just pointed out, if the company were to be spun off today at current pricing, there would be zero tax, so that's $85 million. We had assumed all along or had built in that we would have $20 million of cash, so 85 plus 20 gives you $105 million, round numbers. So that's how you quickly get to 100 -- to above $100 million. Because at $56, if the spin-off value were at $56, we would pay $85 million in tax but there would be $20 million of cash on BP spinco. That was built into our assumptions.

So the variability of cash on BP balance sheet post spin will be determined by some of the parts valuation and when is that going to be determined?

The cash balance on BP will be determined by these things. First, we're going to -- we have already put $21 million into BP.

Right.

Second, we expect to generate cash between now and the closing of the deal.

Right.

Third, we'll have a true-up on three principal items. Taxes, which we've talked about. The converts and the options. These are all disclosed in the 8-K that we filed and also are on page four of our presentation that we gave when we announced the deal.

Yes, and my question --

And the sum of all that would generate in excess, well in excess of $100 million, if we spun off the business today at $10 a share.

And is the spin-off price or the day of the spin-off when that value is determined of the share?

Indeed it is.

For the tax purposes?

Yes.

Thank you.

Thank you.

Next question comes from the line of David Cohen.

Just kind of put together pieces of what you're sort of saying, around the revenue forecast, is it sort of a fair kind of inference to say that revenue on the Nichols side is going to be down less than that 5% and your expectation, more of the weakness could come on Engineered Products side so around that 5%, what are the bands for the Nichols side versus the Engineered Products?

At this point we haven't made that disclosure. So I'm not going to let Ray or Tom address that at this point.

Okay. As you I guess post spin or something, I mean, are you going to sort of address the business in greater granularity at the two business line levels?

Yeah, it will be our goal to make sure that as an analyst that you have an accurate model and we will help you with that at the appropriate times.

I think we have said, though, that the volumes are going to be off a little bit on aluminum and we've also indicated that projections for housing starts will impact the sales volumes in both those businesses, more in EP than aluminum, going forward.

Okay. Thank you.

Your final question comes from the line of Robert Kelly.

Hey, thank you. One -- a follow-up on Nichols for fiscal '07, down shipments only 7% in a terrible housing market. Is that all the remodeling drive the outperformance or is there something I'm missing from a competitive dynamic stand point?

Bob, this is Jeff. Let me try that. The -- it is probably more from the success of Nichols and their sales team finding, finding customers, finding demand, so if you looks at the market in which Nichols participates, as Ray mentioned earlier in the call, we're relatively in balance. But remember that Nichols does have the ability to shift and run to other markets. So not only have we seen as we mentioned earlier kind of a pick-up in remodeling, but the guys have done a very nice job simply filling the mill throughout the majority of the year.

And then on the micron side, oil up, PVC costs, you expecting cost pressure there or stability?

Just for the resin is what you're talking about?

Right, PVC costs.

Right, we would expect to see some pressure, a little pressure on a go-forward basis. There is new capacity coming on line.

Okay. Great. Thanks.

At this time I would like to turn the conference back over to Raymond Jean for any further comments or remarks.

For 2008, we certainly have our work cut out for us, given the weakening economic fundamentals and the ongoing housing recession. However, Quanex goes into this slowdown with an excellent balance sheet, supported by a cash stash and lots of dried powder, given our very low debt to capitalization ratio. The long-term prospects of our end markets remain excellent and we are well positioned to not only out perform them, but for Building Products, we are also determined to take advantage of our capabilities to add significantly to our profile. Our vision for Quanex Building Products is to become North America's leading manufacturer of engineered components, sold to OEMs, and distributors of Building Products. We will grow faster than our served markets through engineering excellence to drive new program initiatives and products.

We will thoughtfully increase the degree of integration for fenestration components by pursuing tight product and process adjacencies in both residential and commercial markets, while striving to be the low cost producer to the industry. And last, but not least, we will seek strategic acquisition opportunities to grow our business, ever mindful of our cost of capital. We believe the merger and acquisition environment now favors those who are patient and disciplined. That concludes today's call. Thank you for joining us.

Thank you for participating in today's conference. You may disconnect at this time.