Quanex Building Products Corp (NX) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quanex Building Products third-quarter earnings release conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, Dave Petratis, Chairman and CEO of Quanex Building Products.

Good morning. Thanks for joining us today for our third-quarter business review and market outlook. Sharing the call with me today are Brent Korb, our Chief Financial Officer, and Jeff Galow, our Vice President of Investor Relations.

Today's call will include a review of our current markets, a brief recap of our third-quarter results, and an update on our progress with Project Nexus, and an outlook for the remainder of the year.

Our comments this morning included forward-looking statements about the future prospects of Quanex. Please refer to our SEC Form 10-K filed in December 2009 for a complete forward-looking disclosure statement. The earnings release is available on our website at Quanex.com.

Our end markets were weak in the third quarter, but the financial results at Engineered Products and Nichols Aluminum were both very healthy. Quanex's combined net sales were an impressive $225 million, up 37% from the year-ago quarter, in part due to a large increase in shipped pounds at Nichols Aluminum. No matter how you measure them, our two operating groups' performance really shined this quarter.

Our blended end market, which is weighted combination of our two market drivers -- residential remodeling and to a lesser extent new residential construction -- was down 9% from the year-ago quarter. So we remain very pleased with how well our business continued to execute in these tough times.

Residential remodeling as measured by Harvard University's Joint Housing Study remained weak, down 12% from the year-ago quarter. However, in an encouraging sign of things to come, Harvard is expecting positive R&R growth for the second half of the calendar year. As R&R is our largest end market today, I hope they are right, as we can always use the help.

We're assuming part of this growth is likely coming from the consumer demand getting ahead of the $1,500 energy tax credit that expires December 31.

Turning to quarterly operating results at Engineered Products, our three businesses -- Homeshield, Mikron, and Truseal -- each experience positive sales growth when compared to a year-ago quarter. The three businesses performed well and our ongoing marketing and sales push into the residential remodeling market continued to prove beneficial.

We recently noted some favorable comments from the big-box stores concerning window and door sales in the quarter. Because many of our larger customers serve these big retailers, we in turn saw good sales growth, up 9% from a year ago.

Engineered Products also earned a very respectable 13% operating margin based on operating income of $13 million. We believe the building and construction season will wind down sooner than normal this year, in part due to the homebuyers tax credit incentives expiring, and therefore we will continue to monitor our inventories and our labor very closely.

Let me give you an update on our progress with Project Nexus. You will recall Project Nexus is our organic initiative focused on growing profitable sales at Engineered Products and is comprised of strategic steps to help achieve those sales. The sales and marketing teams at the three businesses have been collaborating to market and sell a full range of window and door products to our existing customer base. This one-stop shop sales approach is being well received and we are seeing some initial signs of success.

Engineered Products' customer base today represents many of the larger window and door OEMs, and together they account for about one-third of a $35 billion market. Our shared sales and marketing effort is also targeting profitable growth with the regional window and door companies, a market we have traditionally underserved.

Until the last few years, our sales were primarily driven by new home starts. That window market was dominated by these brand leaders, while regional customers had traditionally served the R&R market. Today, we are primarily R&R driven, as our large customers have moved aggressively into that market. So we believe the regional OEMs offer us a sizable opportunity, as their combined sales represent about 60% of the R&R market.

We will further boost our growth through the development and sale of pre-engineered fully certified systems like the newly introduced EnergyCore vinyl window system for the replacement window market. In recognition of just how superior this system is versus the competition today, I am very pleased to announce that our EnergyCore product earned a Crystal Achievement Award for Most Innovative Window Product for 2010 from Window and Door Magazine.

Project Nexus will also further our goal in establishing Quanex as the leading industry efficiency expert in the market. Our announcement this quarter that Gus Coppola, formerly the president of Truseal, will lead the unified EPG sales and marketing initiative highlights the ongoing organizational changes that are happening within Engineered Products. Gus is putting together a strong leadership team, and they are quickly getting the sales and marketing team reorganized to help maximize our success. We have already had some initial wins with regional customers, and we're having ongoing dialogue with many others.

For those of you who might make a trip to the GlassBuild show in Las Vegas next month, you will see for the first time a Quanex Building Products trade booth that incorporates all three of our Engineered Products businesses. We also have a full court press on to grab the attention of every regional window producer that turns out for the trade show.

Both of these efforts are a direct result of Project Nexus. If you find yourself at the Glass Show, please stop in and see us.

Let's turn to a review of Nichols Aluminum, which experienced very strong shipments and healthy operating income in the quarter. The area of the business that could have been better for us was the sales spread, which is the difference between our average sales price and average material cost. Spread was down about 4% from the sequential second quarter, the result of ongoing tightness in the aluminum scrap market.

Industrial scrap availability in particular remained tight, due to the reduction in US manufacturing activity. While industrial scrap gets tight, it forces more users into the postconsumer scrap market where prices have been rising. We don't look for any significant near-term improvement in this situation.

Certainly the big news at Nichols Aluminum this quarter was our outstanding shipments of 90 million pounds, up 39% from a year ago. Comparable industry shipments were up 26% according to the Aluminum Association. So the industry continued to climb out of last year's hole.

Nicholas generated excellent profits too, reporting $8.9 million in operating income, up an eye-popping 154% from a year ago. The turnaround in this business is attributable to excellent execution, marketshare gains, and reduced industry capacity. At this point I would like to turn the call over to Brent, who will take you through some additional financial highlights.

Thanks, Dave. I would like to add my welcome to those of you listening today. The Company reported diluted earnings per share of $0.27 from continuing operations in the quarter. That figure included $0.02 of LIFO expense. In the year-ago quarter, we earned $0.22 per diluted share from continuing operations; that included $0.04 of LIFO gain.

So we are very pleased with our ongoing profit growth in today's market. We are also pleased with the growth in our cash balance, which stood at $169 million at quarter end, a $46 million increase over a year ago and $16 million higher than the end of the second quarter. Cash provided by operating activities for the first nine months of the fiscal year was a very healthy $64 million.

You may recall, in the second quarter the Board authorized a 1 million share common stock buyback program. During the third quarter we were active with the purchase of $2.2 million of outstanding stock at an average price of $17.35 per share, and we continued to purchase shares this quarter.

The availability of credit under our $270 million revolving credit facility continued to rise. The facility has an EBITDA covenant of 3.25 times; so rising earnings this year positively impacted the amount of credit available to us. At the end of the third quarter, the estimated availability under the revolver was $237 million, up from $226 million at the end of the second quarter, and it remains undrawn.

Possible uses for the cash include funding the activities of Project Nexus; funding our common stock dividend; ongoing purchases of stock; and importantly, acquisitions that fit with our fenestration vision.

There continues to be lots of behind-the-scenes work in the area of acquisitions. Our interest in companies that operate in the window and door space, which offer products and services complementary to ours, remains high.

We are also considering companies that will accelerate our profitable growth with the regional OEMs and acquisitions that offer technologies that improve the energy efficiency of windows. Finding the right companies at a fair valuation remains our goal.

With that, I will turn the call back to Dave.

Thanks, Brent. Moving the discussion to our business outlook, we expect residential building and construction activity to remain essentially flat for the rest of the year. With today's frail macroeconomic environment there is simply no reason to believe that residential construction industry will have anything but a lackluster finish to the year.

Industry experts who have held out hope for broadly rising home prices this year, which in turn could have spurred consumer confidence and stronger home remodeling activity, were simply wrong. When you add to this mix persistently high foreclosures and elevated inventories of unsold homes, you have what we believe is a near-perfect recipe for a flat residential building environment well into 2011.

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

(Operator Instructions) Torin Eastburn, CJS Securities.

Good morning. The price of aluminum has been pretty volatile lately. Can you talk about the cost of your raw scrap inventories right now and how they will compare to last quarter?

We have seen some difficulty in the available industrial scrap. When that is tight, it moves scrap buyers into the postconsumer arena. So we have seen rising scrap costs, and it affected our margins in the quarter above what we would have experienced in our second quarter.

Okay. The other question, some of the companies that we cover here have said they have seen a pickup in possible sellers in the M&A market lately. Does that hold true for you as well?

I would say we continue to be active in the market. As potential tax changes are looming, people on the private side are clearly more active and more open for discussion.

Okay, thank you.

Peter Lisnic, Robert W. Baird.

Good morning, gentlemen. I guess I just want to understand Project Nexus and some of these other growth-related initiatives that you have. In particular what you might be spending this quarter, next, and in the next year.

Really if I look at the guidance for EP, $32 million to $35 million, is there -- can you maybe help us understand how much spending there is for growth initiatives that are -- and then what drives that, that semi-wide range of $32 million to $35 million for the year operating income for EP?

So, let me give you a little bit of a history on Nexus. Remember before we even announced the program we were working on this beginning in January of '09. We announce the program in January of '10. I would say when we announced in January of '10, we were working with the three businesses on a collaborative basis.

We worked that for about six months; announced Gus Coppola; and put a structure behind him to put more formalization behind the program.

We have invested in a CRM program, salesforce.com, that is connecting that sales force. The tradeshow efforts -- we will spend in our fiscal 2010 about $0.5 million in CRM, tradeshow promotion, common branding that we see in the current fiscal year.

I will ask Brent; he may have some further insights on the numbers.

Yes, Pete, I would just tell you that the costs, the incremental costs, would begin really in this fourth quarter since we have now made the structural change with Gus and we are actively looking for filling some new positions and things like that.

So Dave's $500,000 -- it is probably $500,000 to $1 million, let's say in the fourth quarter, and with some capital dollars also associated with that for the supply show that is coming up.

I would add one more point. We are certainly investing, but we are taking the sales and marketing spend that was in the three businesses, putting that all under Gus, and then we will incrementally step it up to make sure that we are covering that $35 billion spend that we have not got our fair share of.

Okay, all right. I guess as the follow-up question in terms of Nexus, you mentioned initial signs of success. I am just wondering if you could give us any sort of benchmarks or some signs of that success.

You know, one that is just way out there, we are selling EnergyCore in Russia, and it is a result of our IG sales through Russian sales channels that two years ago our sales people wouldn't even have considered. So an example.

We have been successful in Canada, opening doors through our Truseal accounts with Mikron. And the third would be in our door profiles, the combination of a Mikron wood with our door threshold business into what we call the ImperiClad system. A customer, Feather River, that supplies the big-boxes is generating sales growth. So there would be two or three.

Okay. Perfect. Thank you for your time.

All right.

Robert Kelly, Sidoti.

Hi, good morning, guys. A question on Nichols Aluminum. The fact that you are sold out in 3Q and you look to be sold out in 4Q, is this a function of end market demand being strong?

Historically, no. What I would point to is a reduction in capacity across the flat rolled sheet producers. If you go back and look in the press, you can see that an industrial -- a sheet producer in Canada was shut down, never to be restarted. Texarkana, which is I believe owned by Alcoa, was furloughed for five years, not to come back.

And then you have got the restructuring that went on at Aleris. So there is clearly less capacity out there. I think we took advantage of that situation by bringing our crews back early in 2009, and it helped us gain share.

So, if end market demand weren't to improve over the next 12 to 18 months, or whatever time frame, would you expect to remain sold-out at Nichols? Or would you need some help from end markets?

I think a couple observations. Nichols will behave -- when we go into the winter season you will see some back-off of demand there just because of the seasonal nature of the business.

Second, it appears to me that competitors are being orderly based on economic uncertainty of just bringing crews back on. That is probably the wild card. If you assume demand is flat, you really got to look to that competitive space and say -- who is moving? At this point, it appears to be disciplined and orderly.

Okay. As far as the Engineered Products outlook, expecting the season to wind down sooner than normal, did you see strength, momentum, spill September-October last year into your first seasonal quarter? Is that what will change this fourth quarter?

No. I believe that as we think about our Q3 and think about Q4, we saw some softening at EPG through our third quarter, so May was stronger than July. I would not have predicted that 90 days ago.

We are going into the middle of construction season. July was softer.

Now, as I say that, I think we're just going to see EPG flat to our July in the fourth quarter; and that is how we are reading it.

So a lot of companies have been talking about how things have slowed relative to April/May. Now when you talk slow, is that on a sequential basis? Are you just -- the growth rate is slowing? Are the year-over-year comps getting less growthy? Help us understand that.

I believe you see primary window demand for our Engineered Products have slowed from what we experienced May and June. We saw that in July, and I think that is where they are going to continue to be.

Okay, thank you.

Tim Hayes, Davenport & Company.

Good morning. A couple questions on Nichols. You referenced the impact of 4% down due to spread. Just to clarify, is that combining spread 1 and spread 2 all in that 4%?

Yes, Tim, this is Jeff. When we talk publicly about spread, it is all-in. Even though some of you know that we have both a fabrication spread, which is very market-driven; we also have a raw materials spread, which is that spread between our raw material costs and the LME.

But yes, we were overall down about 4%. And back to Dave's comment about the industrial side remains tight, which means too many of us are crowding into the postconsumer. And that is going to be a bad thing for margin and spread.

Is it fair to assume that that down 4% was all in spread 2 and very little change in spread 1?

Yes, that is a fair statement.

And final question, how much sheet you painted in the quarter?

It has remained relatively flat this year at about 30%. And we don't expect any material change in that, certainly for the fourth quarter.

If you tell me that, for instance, truck-trailer comes back more aggressively, that is a big outlet for painted. But no one is expecting anything too strong there in the near term.

Right. Okay, thank you. That's all my questions.

(Operator Instructions) Sir, I am showing no questions in the queue.

The Company outperformed its blended end markets through the first nine months of the fiscal year. We expect to outperform that market again in the fourth quarter.

As our large customers continue to put more emphasis on their R&R market opportunities, it translates into positive growth for Quanex. As our Project Nexus initiative gains traction it will help us continue to outperform an otherwise lackluster market.

As we manage our Company for the benefit of long-term shareholders, we will continue our efforts in the areas of safety, cost reductions, and lean process improvements while keeping our working capital tightly controlled.

This concludes today's call. Thanks for joining us and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.