Quanex Building Products Corp (NX) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the first quarter earnings conference call. (Operator Instructions). As a reminder this conference is being recorded. I would now like to introduce your host for today's conference. Mr. Dave Petratis. Mr. Petratis you may begin.

Good morning. And thanks for joining us for our first quarter conference call. On the call are Brent Korb our Chief Financial Officer and Jeff Galow our Vice President of investor relations and corporate communications. Our call will include a status report on the pending acquisition of Edgetech, a recap of our first quarter results and our outlook for 2011. Our comments today include forward-looking statements about the future prospects of Quanex. Please refer to our SEC Form 10-K filed in December 2010 for a complete forward-looking disclosure statement. The earnings release is available at our website Quanex.com.

Let me begin with an update of our pending acquisition of Edgetech. We announced the deal on January 31 and since then both companies have formed integration teams that today are concentrating on the coordination of back office processes like payroll and banking. As part of this integration process, we now find ourselves working with a broader management team at Edgetech. And we continue to be impressed with the quality of the people throughout the organization. We look forward to closing as it will allow us to begin in earnest our work with Edgetech on enhancing our combined value proposition for the benefit of our customers. Both companies believe that together we can develop the next generation of insulating glass basing products that will allow our customers to take their products to the next level of energy efficiency.

Edgetech has a strong presence in Europe which interests us and their modest but growing presence in the commercial window industry should open opportunities for our existing operations as well. Let's turn to a review of our first quarter results, which in a snapshot reflected very good sales growth but operating income that was disappointing. We did see a healthy jump in demand from the first quarter of 2010. The result of the December expiration of the $1,500 replacement window tax credit. November and December orders were stronger than we had planned but as expected January orders were relatively softer.

Sales at Engineered Products were up 15% over the year ago quarter and part of this growth is attributed to the work being done with our sales growth initiatives and from new products. We continue to gain traction and while there is still work to be done I'm confident that these activities will allow us to continue to outperform the overall window market. According to Ducker Worldwide, they estimate US window shipments in the quarter were down 5%. We are now using the Ducker data for market comparisons because we believe they are doing the best job at zeroing in on what, on that niche of the market that we serve, windows.

Ducker is a well respected research and marketing firm that has been tracking and reporting on window shipments for 20 years. They have worked with us by breaking down their data on a quarterly basis and we believe it will be a very reliable gauge on which to compare our results at Engineered Products. Our operating loss of $650,000, while certainly disappointing, was generally expected. Our [first] quarter earnings typically represent the low point of the year and in this quarter we piled on several big picket items that centered on the rationalization of our production facilities and an increase in warranty reserve.

We finished the building consolidation projects at our Mikron facility in Kent, Washington where we have now consolidated from four buildings to one. We also closed a Homeshield operation located in the The Dalles Oregon. These two initiatives cost us $3.2 million in the first quarter and while painful were nonetheless necessary. We expect to see the payback starting in the second quarter. To wrap this process we worked closely with customers so be insure there would be no service issues related to these activities.

We also increased our warranty reserve for an old spacer product that was discontinued some years guy. This is a localized problem with one window producer who is experiencing higher than expected warranty claims. We believe the problem lies with the process the customer used to install our spacer and not with the product itself. As highlighted in our earnings announcement both material and labor expenses were up. However, labor was up only temporarily as we paid our crews overtime to meet the spike in demand in November and December.

With January's expected drop in demand overtime was not needed. When we are faced with an unexpected short-term hike in demand it generally works best to us to pay overtime, avoiding the cost of hiring temporary employees. Like we did for the GlassBuild show last September, for the first time we had a Quanex building product trade booth that incorporated our Engineered Products business at the International Builders' Show in Orlando. The turnout at our booth was excellent and for those who stopped by to see us, I thank you. We will continue to build the Quanex brand with customers and I'm excited Edgetech is included in our family of businesses.

Let's now turn to a review of Nichols Aluminum. With reported respectable shipments for a first quarter, but like Engineered Product, left something to be desired at the income line. Shipments came in at 52 million pounds, down 15% from a year ago. This time last year we benefited from customers restocking inventory to meet rising demand, resulting from the first time window or first time home buyer tax credit. However, this quarter our customers were generally destocking. Until now, we have had a good track record of out performing the broader market as reported by the aluminum association. For the first quarter they reported industry shipments up 10 while we were off 15%.

Some are our under performance can be attributed to a relatively weak building and construction demand where we have a sizeable presence compared to the relatively strong distribution and transportation demand where we have relatively a small presence. We also have some unplanned equipment outages related to electrical service and we played catch up with some planned outages we deferred from last year. These interruptions prevented us from shipping as much product as we could have, maintenance projects were pushed out in fiscal 2010 because demand turned out to be far stronger than we had planned for most of the year. And if you can manage it properly you don't want to take a maintenance outage when business is strong.

To round out the discussion of our performance versus the market, you can throw in terrible weather conditions, in particular at our facility in Alabama, the area is just not geared to deal with snow and ice. First quarter operating income of $550,000 was unremarkable and is primarily attributed to reduced shipments. However, the outages we took, both planned and unplanned, also hurt us as we ran higher conversion costs in the quarter. We expect to be back on track in the second quarter.

A review of our spread, which is the difference between our average sales price and our average material cost, was up 11% over the sequential fourth quarter. The higher spread was the result of rising aluminum prices, and all things being equal we benefited when ingot prices are rising. The on going tightness in the aluminum scrap market continues. The availability of industrial scrap, called prompt, has improved a bit but unfortunately a lot of post consumer scrap is now under snow and ice.

At this point I would like to turn the call over to Brent who will take you through some additional highlights.

Thanks, Dave. And I'd like to add my welcome to those of you listening today. Quanex reported a loss of $0.13 per share from continuing operations in the quarter compared to earning $0.03 a share in the year-ago quarter. As Dave mentioned earlier we reported several big ticket items which included the rationalization of production facilities and an increase in a warranty reserve that together amounted to $0.09 per share. We ended the quarter with a cash balance of $182 million compared to $187 million at year end 2010. Keep in mind the pending acquisition of Edgetech for $107 million will be a cash transaction.

Cash provided by operating activities for the quarter was about $700,000 compared to $9 million a year ago. The difference is attributed to reduced income and a larger increase in inventory. A result of targeted opportunistic buying coupled with increasing aluminum scrap prices. During the first quarter we were active in buying back our common stock and we purchased 86,649 shares for $1.5 million at an average price of $17.36. Since this program was initiated in the third quarter of 2010 we have repurchased about 337,000 shares at an approximate cost of $5.8 million. Our $270 million revolving credit facility remained untapped.

Because of certain EBITDA covenants associated with it, the available balance was $179 million at quarter end. Possible uses for the cash include funding our growth initiatives, funding our common stock dividend, making on going purchases of stock, and making acquisitions that fit our fenestration vision. Like Dave, I'm very pleased with the pending acquisition of Edgetech. We are very busy working behind the scenes to ensure a smooth integration between the two companies and I'm pleased with the progress to date. I look forward to Edgetech becoming a part of Quanex.

With that I will turn the call back to Dave.

Thanks, Brent. Moving our discussion to the business outlook. We expect residential building and construction activity to be about flat in 2011 versus 2010. Much of the economic data that worried us last year remains today. High unemployment, shaky consumer confidence, a high inventory of homes available for sale and bulging foreclosures. When you throw in rising interest rates and a lack of government sponsored incentives you are left with a macro economic picture that remains troubling.

I still believe housing is bumping along the bottom and while I'm certainly bullish long-term on both the outlook for the US economy and the building and construction markets we serve, the short-term outlook is simply not encouraging. However, I remain confident in Quanex's ability to outperform and I believe the long-term outlook is bright.

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

(Operator Instructions). I'm showing our first question comes from Torin Eastburn from CVS Securities. Your line is open.

Good morning.

Good morning.

You mentioned in the press release that the higher sales in Engineered Products in part reflect the progress you are making with sales initiatives, particularly Nexus. Can you quantify what the revenues in the quarter were from necks us related steals?

No. We are going to stay away from giving an exact Nexus numbers. The best way for us to really track our performance in that is to track it against the market. We are not incurring all of the excess costs to try to break down every single sale and whether it is Nexus or not.

Okay. And along those same lines a little bit. Can you give any sense of how much you think pull forward from the tax credit might have helped you?

Clearly the quarter was stronger but 15% growth in that was respectable. But specific benefit from that, no, I can't. I think the other thing you have to look at is the window companies continue to aggressively market as we went into 2011. So, you have to believe that two years of tax incentives pulled demand forward but the marketing by our end customers has been as aggressive as I have seen over the recent history.

Okay. And my other question is on Nichols. For the last I guess at least year you've outperformed the market pretty handily. You didn't this quarter. Is there anything that you think is actually changing in the competitive dynamic or was this quarter a bit of an aberration?

I think, yes, the quarter was an aberration. We had some electrical issues. Weather really hit Nichols, remember the storm that went through Chicago. We had to fire those casters even though we weren't producing aluminum. So we effectively put 4 million pounds, 5 million pounds into the backlog. I would say versus a year ago [valeras] has emerged. Two years ago remember we had a major player in the space that was working through a major restructuring and they are clearly stable today. And I would note that change.

Okay. Thank you very much.

Our next question comes from Jack Kasprzak from BB&T. Your line is open.

Hi, Jack.

Hey, good morning, everyone. With regard to Edgetech, do we have some general time frame about when you think the deal will close and when it does close will there be pro forma financial information available ?

So Jack, we are going to stop short of giving any guidance of when we think this thing will close. We filed all the necessary filings and we will wait and see at this point. Yes, clearly once we do close the acquisition we will provide some more financial information as it is required by the SEC and we will try to do that as quickly as possible after closing the transaction.

Am I correct right now the only thing we know is that the purchase price for the deal, right?

That is correct. That's all we have disclosed that the point.

Okay. And can you quantify the warranty reserve in the quarter?

I would say that, I'm going to stop short again of just giving a hard dollar amount. Though we are looking at whether we go forth and disclose a dollar amount going forward on that because in total our total warranty exposure is not material to the company necessarily. But we may have more to come on that, just because there was enough of an item in this quarter.

Can you say whether you think it will just be in this quarter, will we see more in future periods?

I don't expect to have an increase in future periods. We think it is a one time event and we went in and worked commercially with a customer. There were some issues in their manufacturing processes that went on in the previous decade on an obsolete product and we thought commercially it was a good decision to help them.

Got it. Okay. And the $1.1 million of transaction costs related to Edgetech, just thinking about comparison purposes, do we see that in corporate expense or is it in the segment?

No, that is in corporate expenses.

Okay. Great. Thanks very much.

Thanks, Jack.

Our next question comes from Peter Lisnic from Robert W. Baird. Your line is open.

Hi, good morning. This is Josh Chan filling in for Pete.

Hi, Josh.

Hi. Back in early December I think you were talking about engineered product sales being down some what meaningfully in this quarter as well. I guess you must have gotten a really large search in December. Can you talk about where the surprise was relative to your previous comments and maybe how much January was down.

There was clearly a rush for the rebate and whether it was big box, local fabricators and installers, you saw a tremendous amount of promotion to encourage consumers to take that $1,500 and they did it. I wouldn't describe, as we went through the quarter, stronger activity November/December at EPG. January was softer. So we were up 15% for the quarter, January year-over-year was plus 12. So remember in the manufacturing environment when you deplete those (inaudible) they would be refreshed and that certainly was reflected in January.

Okay. And then would you expect the comparisons to kind of soften from there just because half of the inventory adjustment?

I think as we move in, you know, to the second quarter I think we will see what we expect. You got a hard winter going on. You have the expiration of the rebate. And that is why we have not changed our guidance. We believe we see the year as it will play out.

Okay. And then on the Engineered Products profitability you talked about that being some what disappointing but you maintained the guidance so I guess you couldn't have really been that disappointed. Could you kind of help me square that away?

Yes, I will. I think if you back out those one time items, which is the plant consolidations and the charges that we took, that you will see our EPG performance was one of the strongest quarters we had in the last five years.

And also let me jump in real quick and add in some of these cases these were expected. We did accelerate some of them maybe into the first quarter when we thought they might have occurred in the second or third quarter. So we did expect, you know, several of these consolidation amounts.

Okay. Then just to clarify. Does your guidance for the year include the special charges?

It does, yes.

Okay.

Let me be clear. It includes all of those consolidation things. The only one where we are kind of excluding is on the corporate side where we do exclude the transaction costs on the $26 million.

Okay.

So I'm clear.

Okay great, thanks for your time.

Thanks, Josh.

Your next question comes from Barry Vogel from Barry Vogel and Associates. Your line is open.

Good morning, gentlemen.

Good morning.

I don't want to beat a dead horse on that consolidation projects and warranty, but you did give a number of $3.2 million earlier in the call, Brent. And was that a pretax number for the consolidation projects or was that a net after tax number?

That is a pretax number.

Okay. And theoretically, and tell me if I'm wrong, if that is $3.2 million pretax and the expenses in total were $5.2 million, that means $2 million was for the warranty.

That's fair. That is why you kind of heard me stumble on the answer because like I said we are talking about even disclosing it more in the Q so....

Okay, I just wanted to clarify that because if you back out the $3.2 million as an unusual item and if you want to really back out the warranty expense although the warranty expense is part of your business.

Yes.

You then go from a loss to a profit and that is very important for people to understand. That is why two or three people have asked you about that.

Oh yes. No, no, we understand by stripping away some of those items it, we actually feel the performance was good in the quarter but we did have these big ticket items.

Okay. And then on the transaction costs, has that peaked at $1.1 million or will there be any further transaction costs.

We will see transaction costs in the second quarter. You know, as we go through the filings with the government and so just depends on how quickly that goes as to what those fees may look like. But yes, we would expect to have some more in the second quarter and all the way up through until closing effectively.

Alright, and I have a question for David. Now, that you are going to spend $107 million of your cash hoard and you have claimed, you have stated that you still have availability, a decent amount of availability in your credit line, does that mean given the conservative nature of the way you are operating, and I commend you on that, that this might limit some of your initiatives because you just spent, you are going to spend $107 million of your cash?

No, sir. I think that we still are working hard on the acquisition pipeline. I feel very strongly that the time is now to move on the various projects that we have with a focus on deals that are accretive that support our strategy and give us a good opportunity to grow our fenestration EPG business and bring in good cost synergies.

Alright, so what you are saying is you wouldn't mind using some leverage of our availability if it was the right deal.

Correct.

Thank you very much. Continue the good work.

Thank you, sir.

On and our next question comes from Justin Boisseau from Gates Capital Management. Your line is open.

Hi. Good morning, thanks. A quick question on the roughly $6.3 million in unusual charges, the $5.2 million in EP and the $1.1 million in corporate. Where do those break out in terms of SG&A and cost of goods sold and what is the allocation between the two? Thanks.

Yes, the bulk of the consolidations are going to show up in SG&A and then the warranty expense that you are going to see in cost of goods sold and then obviously the transaction costs will transaction costs will be SG&A and corporate.

Okay, so roughly four in SG&A and two of the six in COG, something like that.?

Yes. That would be fair.

And then you filed, you said you are filings for the Edgetech acquisition with the SEC, assuming they don't have any comments or additional requests from you, when does the clock run out on the Hart-Scott stuff?

Again I'm going to sort of stop short of that. You can assume that we filed the Hart-Scott filings within a couple of weeks of the announcement so there is the typical 30 day window after that.

Great, thanks.

And our next question comes from Robert Kelly from Sidoti. Your line is open.

Good morning, Bob.

Good morning. A question on EGP for the quarter. If we throw out everything you called out as one time it is about $4.6 million on $84 million in sales. So you saw like an $11 million increase in sales and $200,000 increase on the operating line. Why, was that all raw material costs tamping down? Was it more people? Why wouldn't we see better leverage on that type of sales number?

We did see some increases in raw material costs especially in butyl rubber. You also remember one year ago we were on strike and so we shipped quite a bit of material out of inventory and didn't incur those costs. So year over year it drives a comparison. The other point I want to emphasize, we announced our growth initiatives at Engineered Products and had been investing in that business to try and pump up the growth that you are seeing. It hasn't come for free and we think it is a good use to position the business for future growth.

As far as the increase in costs relating to just raw materials and increased expenses to grow Nexus, is that split evenly? Is that the way to think about that for the rest of the year?

I would probably tend to say it is probably even to slightly more on the organic growth investment side.

Okay. Got it. You talked in your fourth quarter release about going to get some price increases to help combat the raw material inflation story. Have those been accepted and successful thus far?

We have been active there and I would say we are coming to some favorable conclusions with customers on that point.

In a perfect world, the raw material, selling price story, would you expect that to be neutral or additive in 2011.

I bite my tongue a little bit. It is hard to be certain on where inflation will be.

I don't want to put you on the spot. Just one final one and I understand your need to be kind of conservative here, but sales are up and EGP 15% in 1Q. Flattish in Nichols and you are still talking to flat sales for the year. Are you expecting, is it just a tough comparison thing in the first half of the year or is it just, you are going by what Ducker is telling you for 2011?

It is a tough comparison, you know, year-to-year because clearly our first two quarters a year ago were coming off just a terrible 2009. You have got the new home tax credits and window tax credits working for you so that comparison is difficult. The other challenge that we have got is we think the two years of window tax credits and the hangover created from that we are going to see in the next quarter. And want to make sure that we stare that down before we start seeing more positive about the market. You still look at the fundamental drivers of things across the economy and there has not been significant material changes.

Understood. If I could just sneak in one more as far as the Ducker data. Could you tell us what industry shipments were for 2010, the full year.

Bob, I'm trying to recall the number. I'm not sure I'm going to come up with it . But I will get back to you with it because we certainly have the data.

I have got it for the quarter but I don't have it for the year.

Understood, thanks.

(Operator Instructions). Our next question comes from Mark Parr from KeyBanc Capital. Your line is open.

Thanks very much.

Good morning, Mark.

Good morning. I had a couple of questions. First, can you give some color as far as the volume versus price and mix for the quarter in Engineered Products?

The volume price and mix?

Yes.

I will just tell you the mix angle of it, that is a tough animal for us to crack because there is a myriad of stuff there. But volume, when we say we are up 15%, the bulk of that is going to be on a volume basis with a couple of percentage points maybe on the pricing side. I think that is the best way to look at it. I couldn't begin to give you a mix breakdown.

Okay. I mean as you, how would you handicap the pricing opportunity as you move into the next several quarters?

I think customers are extremely resistant and we are very aggressive. I think we have shown over the last two years our ability to move our margins up with the price lever and we are not backing off. So in my mind it is a key success factor, especially in these inflationary environments because of our input costs. You have PVC at Mikron. You have butyl rubber at Truseal. Aluminum to a lesser extent as Homeshield. We have to make sure that we are aggressive on price realization.

Okay. I know that you had mentioned, call it the resuscitation or the normalization of [valeras], in the marketplace. Any additional color that you can give as far as how they may be impacting you or helping you over the next several quarters?

I think these would all be just opinions but, number one, go back a year ago when you are fighting through a reorganization that takes a lot of management time so they're focused today on their business. Employees are more confident. We have not seen to date significant restoring of capacity. I think they have brought back one shift and I can't remember the site but so with the assets they have they are deploying those but it is not like there has been a huge amount of capacity opened up that would change the lay of the land.

Okay. And just one other question if I could, related to this pending acquisition. Could you talk a little bit about potential customer synergies and how you expect this acquisition could impact your existing core businesses over the next 12 to 18 months?

We can't comment, you know. It is almost like a silent room on the commercial opportunities with this at this point. I would say this. We see Edgetech having great commercial presence in the marketplace, more feet on the street. And very well connected to the mid market that we aspire to. And as we saw that and as we worked with them, we saw that very attractive and we think that can help develop. Second would be in Europe. Our Truseal business, doing nicely in eastern Europe, they are very well positioned in what I call old Europe. It just improves our ability to go and service that market with space or products. We'll give you more color as the project moves along. We are excited about the Edgetech team. We think they bring technology that will help advance energy efficiency and opens up new customers and markets to Quanex.

Yes, I mean the intellectual discussion looks quite good. I'm really looking forward to seeing the numbers and how the strategic developments pan out here over the next couple of quarters. Good luck with that and congratulations on all of the cost progress.

Thank you very much.

I'm showing no further questions at this time.

Okay. We know 2011 will be another tough year. Regardless of what market conditions are we will be working hard to profitably grow our share of it with large and reasonable customers. We have the people, programs, and assets in place to make it happen.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the conference and you may now disconnect. Everyone have a wonderful day.