Quanex Building Products Corp (NX) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Quanex Building Products fourth quarter conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Dave Petratis. Sir, you may begin.

Good morning, and thank you for joining us for our fourth quarter review of Quanex Building Products and our 2009 business outlook. On the call with me today is Brent Korb, our Chief Financial Officer, and Jeff Galow, our Vice President of Investor Relations. After the board meeting yesterday, we officially said good-bye to Ray Jean as Quanex's Chairman, and I want to take this opportunity to sincerely thank him for his eight years of service to the company and for his tireless dedication to building shareholder wealth. Ray and I have worked very closely over the last five months preparing me to assume the helm at Quanex. It's been professional, it's been a learning experience for me, and I look forward to my future dialogues with him.

Today's call will include a recap of our fourth quarter and annual results, a brief financial overview, and an outlook for fiscal 2009. Our comments this morning include forward-looking statements about the future prospects of Quanex Building Products. Please refer to our Form 10 filed with the SEC on April 4th, 2008, for a complete forward-looking disclosure statement. The fourth quarter earnings release is available on our website at Quanex.com.

Since joining the company July 1, I've been hard at work developing a solid understanding of our business processes and our markets. I've been to 16 of our 18 facilities. I've met with hundreds of our employees and have also spent time with some of our largest customers. Brent, Jeff, and I have also met with both existing and potential shareholders, and I will continue this important practice in 2009.

The overall condition of the company's end markets was cyclically weak in the fourth quarter. New home starts, a driver of our business, were off 32% in our quarter from the same period last year. While remodeling and repair activity was down 10% over the same time. At our engineered products segment, we continued to battle these extreme market declines by executing well across all our businesses. We were able to keep their quarterly sales decline to a very respectable 9% compared to the fourth quarter of 2007. The strength of the segment's longstanding customers, combined with our ability to generate additional sales through new customer programs and innovative new products, continued to bolster us, and we will remain focused on initiatives that will improve our customers' products by enhancing their durability, thermal performance, and distinctive features.

In 2008 new products at our engineered products division accounted for some $20 million in incremental sales. For 2009, we estimate these same product will generate some $30 million of incremental revenue. These sales include products and programs like invisible window screens, composite window profiles, weatherproof entry door components, advanced insulating glass spacer systems, and thin film solar panel sealants. By way of example, at our TruSeal insulating glass sealant business, solar adhesive sales were three times higher in 2008 compared to 2007, to over $12 million, and we expect that momentum to continue.

We expect production at our new TruSeal facility in China to begin by mid-2009, a bit later than we had originally planned as we continue to push through the licensing and logistics of landing our equipment in China. This facility will produce the adhesive needed to supply our largest solar customer, as well as produce the insulating glass sealant products that will make us a more efficient supplier to the rapidly growing Chinese residential housing market. With the growth of the upper class in China, you are seeing substantially more upscale residential neighborhoods being built, much of which look like any modern suburban community here in the US. We intend to go after these markets in China.

At Homeshield, our traditional wood window and door components business, we've grown our domestic door threshold business with one of the premier suppliers in the space by over 25% year-over-year.

None of these programs happened by chance. It takes the dedication and skill of untold numbers of employees, designers, engineers, sales, and customer service people to make these programs successful. And these attributes are truly a differentiator for us compared to our competitor.

One area where I believe we can add value to our sales efforts is by taking a far more disciplined approach to the opportunities where we have to blend the various skill sets of our engineered products business together. For instance, each of our businesses develops and markets unique products and services independent of the sales efforts of sister divisions. I intend to create even more value with our window and door customers by marketing them a full slate of company-wide products and services that represent the best design and engineering from our combined engineered products businesses. Further building on this concept, we also need to move more aggressively with the idea of selling our customers more complete window and door systems, not just stand-alone components to enhance our value proposition to them.

Let's now turn to the fourth quarter financial results for the engineered products segment. Operating income was off 24% from the year-ago quarter. The ongoing year-over-year decline in demand in engineered products and subsequent reducing operating leverage that results from lower sales has hurt us all year. With 2008 operating income for the segment off 32% from 2007.

We previously shared with you our plans to combined two component facilities at our Homeshield division into a single facility in order to reduce operating costs and increase operating efficiencies during this cyclical slowdown. We expect to have this consolidation effort complete around the end of December, resulting in some $1.2 million of annual savings going forward. We continue to look at opportunities for additional plant consolidation that will not negatively affect or impact our ability to meet our customers' very demanding delivery and service requirements.

Under my watch, price realization has and will be and remain a major priority. This because of the steady rise we are experiencing in production costs over the last 24 months. We continue to work at price realization and building our system of price. And defending those price realizations and these efforts are paying off. For instance, through the hard work of our Mikron team and their ability to push through higher prices during fiscal 2008, they posted the highest operating income for the fourth quarter compared to a year ago. So seeking price relief to recover rising costs will remain a burning issue.

Let's review Nichols Aluminum. Fourth quarter operating results at Nichols were very respectable when you consider the poor residential building environment and weak transportation markets we experienced in the quarter. In response to slowing demand, we continue to see competitors idling, in some cases closing both rolling and finishing facilities. In the Nichols case, we've taken more than one-third of our annualized (inaudible) capacity off-line by idling the rolling operations at our Alabama facility last month. And we expect that capacity to remain idle for some time. The paint line, however, at Decatur, Alabama, remains operational.

During our fourth quarter at Nichols we shipped 81 million pounds of coiled aluminum which was off 4% from shipments this time last year. For the year, shipped pounds were off 8% compared to fiscal 2007. Operating income for the quarter was off from a year ago due primarily to significant fall-off in the value added painted sheet sales, somewhat lower threads, and slightly reduced volume.

At this point, I'd like to turn the call over to Brent Korb, who will take us through some additional financial highlights.

Thanks, Dave. I would like to add my welcome to our audience, as well. The company reported $0.32 per share from continuing operations in the quarter, and that figure excludes a $3.1 million after-tax LIFO gain that equates to $0.08 per share. For the year, we earned $0.80 per diluted share from continuing operations, which excludes both a $0.01 per share LIFO charge and $0.38 per share for spin-off related costs. There is a GAAP reconciliation table in our earnings release which shows this in more detail.

Moving the discussion to cash, the company generated solid cash flow for its shareholders even as the housing market continued to fall. Fiscal 2008 cash from operating activities came in at $53 million, which is down from a year ago, primarily due to lower operating income and higher working capital associated with the higher unit price of aluminum. Maintaining healthy cash flow in fiscal 2009 is one of my highest priorities. Our cash and equivalents balance at quarter end was particularly noteworthy at $67 million. And that amount does not take into account the tax true-up, now estimated to be $15 million. I will caution that we are still doing our valuation work in this area so this estimate is still subject to change. We expect to receive this cash in the first calendar quarter of 2009.

Total debt to capitalization remains under 1% comprised of industrial revenue bonds totaling some $2.5 million. The balance sheet remains strong and our focus on working capital has further intensified in light of deteriorating market conditions. While it's true we can't control our markets, we can certainly control our working capital, and that issue remains another priority with me in 2009. 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 respectable 31 days, slightly better than the third quarter.

With that I will turn the call back to Dave.

Thanks, Brent. Moving the discussion to the outlook for our markets, the 2009 forecast for residential construction and remodeling is disheartening. Global Insight's estimates for calendar year 2009 new home starts has dropped three times in the last three months, with starts now expected to be 660,000 units, down from 940,000 units. Assuming this latest housing start estimate turns out to be true, it will mean a 30% decline from 2008 and the third year of 30% declines. Painful, to be sure.

However, you can expect us to continue to outperform the market due to new product programs and innovative new product designs and engineered products. We will press harder for additional company-wide cost reductions, and we'll continue to drive price realizations to cover our rising costs. The tremendous strength of our balance sheet from both a cash balance and debt perspective puts us well above most others in the building product space. This strength will provide us the means to fully fund organic growth opportunities and allow to us make well vetted acquisitions that will grow the value proposition for our long-term shareholders.

With that said, we are now ready to answer your questions.

Thank you. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) We will request that you limit yourself to one question and one follow-up question. Our first question comes from Arnie Ursaner from CJS Securities.

Can you highlight priorities for your uses of cash and generally comment on the acquisition outlook?

Yes. Our priorities will definitely be, A, preserve cash. But B, to the extent we are going to spend cash, our preference would be obviously long-term growth acquisitions, then from there, depending on what the future looks like there, we would look to share repurchases and potentially dividend increases.

I would add to that, we continue to be active in looking at potential acquisitions. We're mindful that our end markets are declining, which puts a priority on our cash conservation, but we see the valuation of assets that we're interested in declining and it continues to spur our interest.

And do you have a sense of the percentage of your business tied to remodel currently? I know there's obviously a mix depending on new home construction, but given the incredibly rapid decline in new home construction what percent of your revenues do you think are tied to remodel at this point?

If you go back two years, we were clearly driven 60/40 by new housing. That's certainly balanced to about a 50/50 level. It's hard to get an exact number. Remodeling, the R&R market, has come down softer compared to new housing starts, and I think you can see that in our number. We continue to outperform the market versus those declines. It's the strength of our customers, it's the strength -- it's not the strength, it's continued life in the remodeling market, and we believe very strongly that there are Americans out there that are in good shape and they continue to invest in their homes, and I think it reflects in our number.

Thank you. Our next question comes from Peter Lisnic from Robert W. Baird.

First question would be if you could talk a little bit about the first quarter forecast, particularly at Nichols. If I look at what's happening, or at least what I think might be happening with spreads, it looks like what you are projecting there is worse than what I would have expected. So can you give us a sense for what the first quarter looks like in terms of volume and spreads at Nichols?

Yes, Pete, this is Jeff. Let me help you there where I can. You know that cyclically Q1 for Quanex will always be our slowest quarter. That's certainly going to be the case this year. Unseasonally slow, obviously cyclically slow. And to be fair, the backlog outlook is pretty skinny for Nichols for Q1.

Having said that, let's address the spread issue in that I have a squeeze going on at Nichols, and it relates to the raw material spread, if will you. That is my raw material costs versus the LME. What we have really going on in Q1 is a metal lag, to be fair, a negative metal lag in that I've got high scrap inventories at high prices that I'm going to have to run through the income statement to satisfy first quarter sales. So the deterioration I have is not necessarily because scrap is falling slower than LME. If you look at the ratio of LME drop to Nichols' ability to buy scrap it's been pretty much a one for one decline. So great job to Nichols. The bigger issue, I've got this high-priced scrap inventory, and frankly, with a little loan, and I'm going to have to run that through first quarter sales, and it is going to hurt me to do that.

Okay, and does it pretty well run off in the first quarter or does it lag into the second quarter or beyond?

I can tell you, in talking to the folks at Nichols, just this morning, they, as you might guess, have stepped back dramatically from scrap purchases, so it's our hope that we would run through the majority of that in Q1.

Follow-up question for Brent in terms of the working capital targets for next year. Great job on cash conversion. It's always been one of the strong suits here. Is there any sort of official target that you might be looking at for '09 and beyond in terms of cash conversion cycles or working capital as a percentage of sales or anything like that?

I don't have numbers to specifically throw out, but just tell you that that is something that we've -- while we've always focused on it, we are doubling and quadrupling our efforts this year. So I hesitate to give any sort of guidance on what it would be but we are laser focused on that. That is something in my mind that is completely controllable by us. There is no external factor there. We should be able to keep that well under control.

Do you get the sense that there's opportunity for material improvement?

I want to be careful with saying what's material, but I definitely feel we can make improvements over even what we've done before. Everyone has done an excellent job, but we will focus on it, and I think there is room for improvement.

Great, thank you very much. I will jump back in queue.

Thanks, Pete.

Our next question comes from David Cohen from Midwood Securities.

Hi. In the first quarter you attributed much of the loss to come from Nichols, but will EP be in a loss position in the first quarter?

To this point we haven't broken those out so I'm not going to answer the question at this time. It's a very fair question. The one thing I can point you to is, in the information statement for Quanex Building Products, we gave a pro forma Q1 '08, so take a quick look at that, then advise that obviously our markets are down significantly from that period. That proforma basically indicated a break-even, and again, there's additional detail there, but I'm going to stop short of giving an indication on specifically on EP at this point.

Okay. And then what kind of, if any, cash utilization might accompany the type of operating loss that you are indicating for the first quarter?

Again, I don't want to get into specific forecasting of the cash flow, but we will clearly, to the extent that the business activity decreases substantially during the first quarter, then we will look to manage our working capital down in line with that decrease, but I want to stop short of really giving what our forecast of cash will be.

I'll get back in the queue.

Our next question comes from Robert Kelly from Sidoti & Company.

Good morning. Is there an ability to quantify the negative metal lag as it relates to Nichols in Q 1, or at least prioritize between that, reductions in volumes, any spread one compression?

Bob, this is Jeff. To be fair we have not gone back through and looked at what's the hit volume versus mix versus what I will simply call spread two, this raw material spread. At 50,000 feet, no question, we have a volume issue. The backlog, which I won't disclose, is very skinny, so it is going to be an issue.

This metal lag cannot be minimized so it's material to the outlook. I don't want to put a one, two, three on it but I would suggest to you we have not seen this type of negative metal lag impact, I don't think I've ever seen it. That's going to be a big part of this issue. The other side to that, being very careful, all things being equal, we would expect the lag itself to start to play out in Q2. That doesn't indicate whether it turns positive or more negative, but it is going to be material to Nichols in Q1 and hopefully will run itself out by the end of that first quarter.

Okay. Can you maybe just put some comfort around spread one that what you have seen over the past couple months that that is not in jeopardy at this point?

Yes, I can tell you spread one, for those of you not quite as familiar, spread one is the term we use at Quanex to denote what the industry calls the rolling charge. So the rolling charge spread one is the market driven aspect of the business in that we and everyone else in the industry prices our finished selling goods off of the LME price and a rolling charge. The industry has been very disciplined.

If you look over the last several months, the spread one, as we call it, has held up very, very well. The issue going forward what we are seeing, and we talked about it on the conference call, Dave mentioned that we'd taken more than a third of our rolling capacity off. And you are seeing that through the industry. I won't name specific names but there's been quite a bit of rolling capacity, that'seither been idled, as in our case, or in some cases shut down. So that's a different phenomenon. We had not seen that in the past. To this point the spread one looks pretty good.

Great. And then you had talked in past calls about the pricing initiatives as far as the solutions that you are selling. Will that be material impact on '09? Could you just talk about the success you've thus far since Dave came on.

We commented about our pricing gains at Mikron on the fourth quarter. We're really trying to build our back base of pricing. Remember, we have a lot of SKUs. That gives us the opportunity. So second priority will be building that back base. The third is defending. We took on inflation '06, '07, that was not effectively passed on, and as we look at our customers, we're going to defend what we think is a fair margin on our products. So that's really where our mind-set is. I'm not naive. I understand the times that we're living in, but we want to have a healthy industry, and we think good price discipline helps maintain that.

Thanks, guys.

Our next question comes from Justin Boisseau from Gates Capital Management.

Could you talk for a second about your acquisition outlook, specifically with regard to the size you might be contemplating? I know earlier you talked about a leverage ratio of maybe two times proforma with acquisitions in $100 million, $200 million size. But given the credit markets, are you looking at smaller type acquisitions?

I'd say our leverage ratio targets will remain the same. We're always looking at slightly smaller acquisitions as well. In that $100 million range is kind of the sweet spot of where we'd like to be, but we will entertain smaller acquisitions in that $100 million. There's a level at which it becomes too small unless it's just an absolute bolt-on to an existing operation. But no real change there, obviously looking for the pricing to be able to pull these off in our under our two times target.

Can you talk a second about capex, it looks like you're expecting 18 next year versus 16 this year. Given the environment, I was wondering why you expect that capex would be up next year?

The entire reason for the increase is we have the investment in China that has capital flows in 2009 that will push us above our spending from last year. So our guidance, with the divisions and across the company, is to continue the repair and maintenance activities that must be done, as well as we will continue to invest in those projects that have a very quick return that are strong. That's what's given us our $30 million per year of incremental sales and new products and programs, is our ability to invest in these, and we will continue to do that.

Those new products, or those investments would include new products but also initiatives on lean and efficiency that will help us come out of this stronger.

And then finally, I think you usually comment on the average selling price in Nichols during the quarter. Can you give that to us for the fourth quarter?

Let me -- I don't have the numbers in front of me, so why don't you give me a call after this formal call, and we can chat about that.

That thanks. That's all I had.

Thank you for your questions.

Our next question comes from Mark Parr from Keybanc Capital.

Good morning. Can you hear me all right?

Perfectly.

Terrific. I was wondering if you could talk a little bit about pricing outlook for '09 that you are anticipating right now. This would exclude the Nichols impact, but you talk about driving higher pricing to reflect higher costs. Is there any way you can quantify that for us?

Difficult to quantify. Our pricing outlook is driven by two things. Make sure that we cover the inflation that we incurred, and that we defend pricing. Our customers are smart people. They see prices coming back down. I want to make sure we keep in our pocket what I would describe as some inflation that we took on '06-'07 that we effectively ate, and I think it's important that we have those. Haven't really quantified it, it's more in my marching orders as we will face negotiations going forward.

Second question, if I could, you talked a little bit about what people are thinking in terms of the residential outlook for '09. Do you have any color you can share with us on the nonresidential side of your business, at least from an industry standpoint?

Mark, this is Jeff. I can tell you particularly as it relates to engineered products, our door and window components, for argument's sake, that business is all residential, new home, and remodel. Whatever tiny bit of light commercial we do there is a rounding error. Jumping to Nichols, you may recall that some 60% of their output is building and construction related, and the vast majority of that is also residential related. We do do just a bit of light commercial, and you should be thinking of strip malls and strip centers and things like that, but it's a tiny percent of the business.

I apologize, that's not an appropriate question. In terms of the $30 million of incremental sales that you talked about, does that include, in addition to new products and new programs, does that also include the geographic penetration that you are looking at?

No, sir, it does not. The numbers that we're relating to that Brent touched on ties back to the original February analyst day where we posted eight or nine different products, new programs, and put up numbers for the next couple years. We have been updating those numbers all along. So, no, we're trying to keep apples to apples, so those same programs that we talked about in February of this year are the same programs that Brent referred to on the $30 million of incremental sales.

All right. So could you give us any color as far as incremental revenues you would expect from geographic penetration in '09?

Mark, I don't have that data. Maybe Brent or Dave has some insight.

I don't have any numbers. What we'll gain out of there is a program called sales performance management. If you put the nation in four quadrants geographically, everybody is down 30%. So as we grow geographically we've got to get new customers and new share. That's what we will be focused object. We think some of the weaker players in our competitive base, there's opportunities for us to gain some strength in a down market.

Okay. Just lastly, I just want to make sure I'm thinking about this right, from a free cash flow perspective. If we're looking at depreciation minus capex, you're starting off at somewhere around $17 million. I think the commentary around working capital is that you would look to pull a little more cash out of working capital in '09, and then there's a tax true-up from [Gurdahl], then the potential earnings. Regarding the earnings outlook, do you have any clue as to whether or not you'd be in the black on the second quarter?

We're not going to go to the second quarter at this time. We'll definitely give everybody an update at the end of the first, but we're going to stay away from that for now.

Guys, keep the faith. The world has not come to an end, and we are going to build houses again one of these days.

We have the faith. Our objective is to be stronger when that occurs.

Mark, when we come out of this, I'm extremely optimistic of our ability of Quanex Building Products.

Thanks for all the color, guys. Thanks.

Our next question comes from [Tamara McLuian] from Fleetwood Investments.

I have a follow-up question about capital expenditures. I was wondering if could you quantify, out of $18 million expected next year, what it means, and what is expansionary.

We estimate maintenance capital at about the $11 million level. So that's what we've experienced so you've got the balance going to new product programs, cost reduction opportunities that we put a pretty tight return on. We want to see those paying back quickly, and we'll be challenging our people to think in those areas.

We have about $2.5 million of that is related to the China that I talked about previously.

Okay, two and a half. In 2008, out of $15 million, about $5 million was related to China?

In 2008? No, I'd say about $2 million of that was China. The $5 million was in total for China, what our investment in China would be, but remember, we're saying we're a little bit delayed in getting that up and running. So it's straddling 2008, 2009.

I see. Another question I have, I was wondering if you guys can give us more color on what your break-even level might be in terms of revenues, if you can give it by segment or total or any way you want to address it.

I would just tell you that we go through significant amount of modeling here, but I'm not prepared to go through a break-even discussion here, so I'm going to hold off from that. We go through quite a bit of modeling, where things are, but we have a lot of levers that we would be looking at well in advance of that.

Okay. So it seems like you do have some flexibility in terms of corporate expenses that can come down in case we see further declines.

I think the business, because of the nature, the construction business has a cyclical nature. It's built into our DNA, that we've got to be able to flex as well as unwind in terms of our cost abilities. For example, if you look back over the last two years, we've taken out some 700 jobs, some 400 temporaries to make sure that we keep a focus on cash flow, on profitability, and we'll continue that focus.

Okay. Very good. Thank you.

Our next question comes from Dennis Delafield from Delafield Asset Management.

Thank you. Just want to understand the first quarter fully. If you are on LIFO, presumably the inventory was valued as of October 31st. So is it the change in price in aluminum since October 31st that is causing the scrap to be overpriced?

It's going to be the change. It's what changed in September, October, November.

But September and October were taken care of in setting your LIFO value of your inventory. You wrote those down to market at October 31st.

That's right. But understand we do LIFO at the corporate level, and LIFO would be an annual look. So, yes, we will look at LIFO at the end of the first quarter but the only time we would adjust LIFO to the extent we have good color, where we expect to end the year.

I understand that, Jeff, in terms of what the charge would be for the quarter, but inventories at year end were valued at market due to LIFO accounting. So your inventory level would not be elevated beyond whatever the scrap values were on October 1. Or am I misunderstanding?

At the Nichols Aluminum level, our segment earnings, what you are looking at is Nichols Aluminum on a FIFO basis.

But I'm not seeing that on your balance sheet. Your balance sheet inventories are whatever they are, and those are on a LIFO basis.

I agree.

So the starting point for Nichols' cost of aluminum is October 31st, isn't it, or am I still missing something?

It is October 31st.

So the high cost is entirely the drop in aluminum price from October 31st until January 31st or whatever.

Let he me make sure we're clear. The October 31st price is our purchase price, what we bought that inventory for, then, yes, we adjust it to LIFO back to many years ago price at the corporate level, but all the while LME has been falling, which has an impact on the selling price.

Right. I see. I'm not sure I do see.

On Nichols' balance sheet at October 31st is what Nichols paid for it over the -- if we have 30 days of inventory, the last 30 days of purchases at Nichols.

Right, agreed.

So that's the lag that Jeff was talking about.

So it's the speed of that decline, and the base of that decline is October 31st to whatever happens. If it's down 30% since October 31st, that's what it is, as opposed to, let's say, the price last June or some other time.

Yes, if you are trying to do a rough calculation of it, that being approximate of it, it's clearly more specific to what we actually paid for the inventory, but that would give you an approximation, yes.

I see. How often do you turn the inventory at Nichols?

Nichols, I would say we probably go through 12 turns.

Oh, you do. Okay. That in itself answers my question. I didn't realize it was that fast.

That's our objective.

Okay, 12 turns.

And Dennis this is Jeff. Let me just pile on just a little bit in that I think I said to an earlier question that we are caught long. On the scrap end. And a lot of the price, as you know as you follow the commodities, a lot of this deterioration has happened really in October, and perhaps even more harshly in November, as well.

Right, but October was taken care of, at least the way I think of it, unless I've got it wrong, so it would be the November, December, January decline, whatever that happens to be.

Yes, I think -- generally speaking, I would agree with that, yes.

Okay. Thank you very much.

Our next question comes from David co hebe from Midwest securities.

In regard to the corporate expense rate, your outlook said $5.5 million on that, which equates to slightly higher than prior commentary on the annual level of spend. Can you provide some color on that, or is that a new level of quarterly spend for corporate, or are we likely to see some reduction in subsequent quarters?

Yes, that is our latest buildup from a very detailed -- all the guidance we've given before is more from our high-level estimates, and the number we provided this time, $5.5 million, is from a very detailed buildup. We are doing some things differently now that we haven't done in the past, that David mentioned, looking at doing some things from sales efforts with engineered products. So under that vein, we are bringing on slightly more expense at corporate to coordinate training, the lean training that Dave mentioned earlier. Those sort of expenditures will roll through corporate because we want to roll those out company-wide to ensure that we have consistent processes across all of our divisions. So we do have a slightly higher level of spending because of that.

We've been working on benchmarking at corporate spending. Not going to tell you exactly where we're at, because we're not completely finished, but I promise you our corporate spending benchmark's at the lower quartile.

It wasn't a question of being appropriate in spending. It was just more a matter of are we at a new level as we build our models out. We're going to get skinny back overall profitability versus '08, I assume. And one element of that is a couple more million of corporate expense.

David this is Jeff. As think about our corporate expense, you're absolutely right. We had guided best guess for '09 of some $20 million. I would just add to that, and you know us fairly well, maybe some others don't, that we have run the corporate office, using us as a generic example, pretty lean in the fat times, '04, '05, '06, and obviously now in the lean times. And if you look at the change in staff, we basically have about the same group. So, to Dave's point, there are some opportunities here, but I guess I'm proud to say that we have run this business, particularly here at corporate, extremely lean through the good years and obviously now through the bad year.

Last question. I think Dave said there was $20 million incremental sales of new products in the EP segment in 2008 and $30 million in 2009. Is that incremental to the $20 million or is that incremental to an earlier baseline?

That's incremental to the $20 million. That's in addition to. And out on the website where we have the latest presentation, and it goes through a year by year detail of the products we're even talking about. And the key thing to remember is these are products that are in the marketplace today that have traction that we're selling. These aren't what we hope will come to fruition.

Okay, great. Thanks, guys.

Our next question comes from Tim Hayes from Davenport & Company.

Good morning. Just to clarify on the earnings guidance for Q1, you had operating loss in the range of $7 million to $11 million. If I then include the corporate expense at $5.5 million that takes the range to $12.5 million to $16.5 million. That means, what? 37% tax rate, and into the share count, I can get to EPS. Am I missing anything on that?

You're not missing anything. The tax rate could have the potential of being higher than the 37.5%. I'd put it more in the 38% to 41% -- 41%, 42% range. A lot of it just gets down to the distribution of earnings from one state to another. Some are friendlier than others.

Right. And then you are assuming, though, the LIFO impact in the upcoming quarter, but given that prices are down, it could be a positive for the quarter.

Again, we really view that LIFO more on an annual basis, and I would be lying to you if I told you standing at the end of January that I knew where LME prices were going to be in October 2009. So that's why my hesitancy on LIFO benefiting us from a tax standpoint in Q 1.

Fair enough on that. That final question, can you estimate how much of the LIFO would be allocated to the two segments?

In the fourth quarter?

Yes.

99% of it would be Nichols.

Thank you.

Our next question comes from Bob Fetch from Lord Abbott.

Considering the assets on the balance sheet is there anything that's understated in particular?

Anything understated in particular?

Yes, land or otherwise.

We've gone through a detailed review, goodwill impairment testing that we do in the fourth quarter. We look at all of our assets. We've taken some very minor write-downs on particular pieces of equipment that were phasing out of production, but nothing that really jumps out at us. I think we have a good process of looking at all that.

Okay. What's the bulk of the intangible assets?

Customer relationships.

Okay. And if you net out the goodwill and intangibles from the stockholders equity, it looks like we're about $7.60 a share tangible.

That's around the number that I have in my head, yes.

Does that change your uses of cash? As much as I know you, are wanting to make some acquisitions, at least contemplate buying some stock now that it's under book and would be accretive?

I would tell that you we are looking at all options, but I would also say this is a very interesting, unusual, unforeseen times with what's going on with the credit market and the economy and everything around that. So we are going to be very methodical about what we do with our cash, but we are going to be prudent, and, yes what you suggest is a possibility.

Okay. Thank you.

At this time I'm not showing further questions in queue.

With that, thank you for your questions. I have little doubt that 2009 will be a challenging year for Quanex, but I also know that time is on our side. Between the ongoing government efforts to thaw the near-term credit freeze and reduction in the housing inventory, to the long-term outlook of favorable US housing demographics, Quanex will emerge from this downturn a leaner, sharper focused company. That concludes today's call. Thanks for joining us. I look forward to working with you in the future.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.