Quanex Building Products Corp (NX) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Quanex fiscal fourth quarter and annual earnings conference call. At this time all participants are in listen only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to hand the conference over to Mr. Dave Petratis, Chairman and CEO of Quanex. Sir, you may begin.

Good morning, and thanks for joining us for our fourth quarter and year-end conference call. On the call today with me today are Brent Korb, our Chief Financial Officer, and Jeff Galow, our Vice President of Investor Relations and Corporate Communications. Today's call will include a brief recap of fourth quarter and annual results, an update on our initiative at EPG, a general outlook for demand in fiscal 2012, and a narrative of what we believe the future potential of our business might be once our end markets return to more normalized levels. 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 our complete forward-looking disclosure statements. The Earnings Release is available at Quanex.com.

Engineered Products finished the quarter with strong earnings and a very respectable 11% operating margin. For the year, EPG's operating income was certainly more modest compared to 2010, as 2011 sales suffered from an absence of energy-related window tax incentives for 10 months of the year. However, it's important to note that during 2011, EPG also incurred about $6.5 million of special items. These expenses included costs associated with the closing of a HOMESHIELD facility, building consolidations at Mikron, a warranty reserve at TruSeal, and an asset impairment charge associated with the insulating glass consolidation plan. Operating income for EPG in the quarter was $14.9 million, 32% better than a year ago due to productivity improvements, better cost control, and higher selling prices. According to market intelligence firm Ducker Worldwide, their estimated US window shipments for the 12 months ended September were reported to be down 5% compared to the year ago period. While sales at EPG without Edgetech were up 2% over the same time. We consider this very solid performance given the lack of initiatives this year and overall soft market demand.

Turning to Edgetech. We lost about $400,000 in the fourth quarter. But that's after they absorbed inventory step up expenses and operating losses associated with their startup facility in Germany totaling about $1.5 million. For the year, Edgetech lost about $300,000, a good showing when you consider that the inventory step up expenses and start up losses in Germany came in around $5 million. As we progress through 2012, we aren't expecting any significant inventory step up expenses at Edgetech. And the startup losses we are experiencing at our German facility should come down significantly.

Because of raw material costs, rising raw material costs at EPG, we've experienced pressure on margins this year. We've been trying to lower costs where we can. And we've had some success in selectively raising prices this year. And in further support of our cost recovery action, the oil-based raw material surcharge at TruSeal instituted earlier this year remains in place. As we have previously announced, the senior EPG team completed its evaluation of the organization. Based on their findings, changes were made in the way EPG goes to market. And the modified approach now has us using front line salespeople as product generalists focus on regional mid-market growth. And they are supported by a team of product specialists from each of the businesses. The new structure actually puts more feet on the street while lowering comparable cost. And further positions our sales and marketing organization for future bolt-on fenestration acquisitions.

Turnout at this year's GlassBuildAmerica show in Atlanta was excellent. Our booth provided a great opportunity to meet with many of our existing customers attending the show. And perhaps more importantly, we had the opportunity to meet with potentially new customers who stopped by to see what the excitement was about. We hosted an evening reception and used that opportunity to further the Quanex Building Products brand. We introduced our new Quanex Optimizer sales tool and we were involved in some great interviews that are available on YouTube. We were also recognized by the glass industry with a Crystal Award for our efforts under Project Nexus. As part of EPG's new sales and marketing initiatives, we now have a dedicated major process in place that will be used to run down the many leads that were generated at the show.

Let's now turn to a review of Nichols Aluminum. Shipments in the quarter were weak at 66 million pounds, which was down from 88 million pounds we shipped a year ago. This time last year, we saw customers building inventory to take advantage of the tax credit. But this fourth quarter found our customer base clearly destocking as demand for residential building sheet waned in the face of the approaching winter season. The Aluminum Association, which tracks industry shipments of sheet products, reported volume up 2% for the 12 months ended October 2011 from the year-ago period. While our shipments were off about 14% for the same time frame. This difference is primarily attributed to weaker building and construction demand where we have a large presence, compared to the stronger distribution in transportation demand where we have a smaller presence.

Nichols' fourth quarter operating income was a disappointing $3.1 million, well off the year-ago quarter pace of $10.5 million. While lower overall shipment pounds hurt us, down 25% from a year ago, so too did the sales mix which showed an 18% drop in higher margin painted pounds. We were also hit with higher freight costs, up 25% on a per pound basis, compared to the fourth quarter of 2010, as well as higher repair and maintenance expenses. To some extent, the higher R&M expenses this year are the result of projects that were delayed from 2010 because of strong demand for most of that year. We do expect these costs to fall a bit in 2012 compared to 2011. We got some help during the quarter from a respectable spread which mitigated some of the impact of our higher cost. A review of the spread, which is a difference between our average selling price and our average material cost, was up 10% over the year-ago quarter, primarily due to aluminum prices moving up at a faster rate than our raw material costs.

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

Thanks, Dave. And I'd like to add my welcome to those on the call today. Quanex reported earnings from continuing operations of $0.17 per share in the fourth quarter compared to $0.22 per share in the year-ago quarter. Earnings in the fourth quarter of 2011 included $0.03 of LIFO income, offset by $0.03 of asset impairment charges related to our insulated glass spacer consolidation program. Year-ago results of $0.22 included $0.03 of LIFO expenses and $0.01 of special item expense.

As expected, our cash balance grew during the fourth quarter and we ended the year with $90 million based on seasonal earnings in the back half of the year and continued working capital management. The stock buyback program was active in the fourth quarter, with the Company purchasing 493,751 shares of common stock for $5.8 million at an average price of $11.73 per share. For the fiscal year, we purchased a total of 750,000 shares at an average price of $13.44 per share. You may recall, our Board of Directors authorized an additional 1 million shares to be purchased under the program last quarter. And you should expect us to continue to execute similar to the initial 1 million shares.

Our $270 million revolving credit facility remained untapped. Because of certain EBITDA covenants associated with it, the available balance was about $188 million at year end. Possible uses of cash continue to be funding our growth initiatives, making acquisitions that fit our fenestration vision, funding our common stock dividend, and buying back stock.

With that, I'll turn the call back to Dave.

Thanks, Brent. Moving the discussion to our fiscal 2012 business outlook, unfortunately we expect home starts and residential R&R demand to remain weak throughout the year. Our 2012 outlook is supported by the fairly dramatic drop in estimates we've seen from companies like Global Insight whose housing starts estimate for calendar year 2012 is already down to 675,000 units. In our opinion, is likely to fall further. And Ducker Worldwide, who lowered estimates for US window shipments for calendar '12 by over 10% to 41.6 million units. Which could be considered optimistic based on discussions we've had with customers. We believe much of the troubling economic data that dogged us throughout fiscal 2011 will remain with us in fiscal 2012.

However, even with these challenges, we expect to grow Quanex 2012 earnings over 2011. Before you take into account the $9 million of estimated exit costs associated with the closing of our Kentucky insulating glass facility. Our growth will come from internal initiatives, for more productivity gains, continued cost control efforts, higher selling prices, new products, and programs. We still believe housing is bouncing along the bottom but at this point, we simply can't make a case for meaningful improvements in our end markets during fiscal 2012. And we must acknowledge that both the general economy and in particular our residential construction and repair markets will present difficult challenges in the near term. However with our very strong financial position, we will continue to take advantage of opportunities that will enhance the Company. And of course, we remain bullish on our long-term profitability.

While Quanex cannot predict when our end markets will return to a more normalized level, we can estimate what we believe our financial results might be once they do. Based on hypothetical end market of 60 million US window shipments, we would expect around 1.4 million housing starts, we estimate EPG could generate about $135 million of EBITDA. And aluminum sheet products could generate about $70 million of EBITDA, if and when our markets return to more normalized levels.

With that, we're ready to answer your questions.

(Operator Instructions) Peter Lisnic from Robert W. Baird.

First question, Dave. I think you've been mentioning this a couple quarters in a row, the productivity improvements at EPG. Can you give us a flavor for two things -- one, just what you might be able to drive there in the next fiscal year, and then how that translates into some of the EBITDA targets that you just disclosed on a more normalized basis.

We continue to be aggressive in the cost take out. I think what we call Project Alpha, which is the consolidation of the Edgetech facility, we released in our press release, when we complete that project, adds about $9 million. So that's going to take a lot of focus. I think, too, if you look on the profitability of EPG and make our adjustment, EPG is running at a comparable margin level as to what we would have experienced in 2007-2008 when volume was much higher. The remaining pipeline of productivity beyond Project Alpha really becomes incremental. It's the success of us driving our Lean Six Sigma programs, quality improvement. Don't see a lot of big movers beyond what we've done already.

And then if you look at Edgetech ex the step-up charges and some of the costs related to Germany, your op margin is high single digits. But with Project Alpha that drives it into that more EPG-like range. Is that the right way to think about it? Or are there other incremental actions there that could drive margins higher?

I think you're tracking that right. It does drive the EBITDA margins up to what we would expect from EPG. Brent and I were in Germany last week and we're finding productivity there at a higher level than we had at the two Edgetech facilities. So we think those costs are behind us and we'll take those productivity enhancements and apply them to the other facilities.

And then just one quick one on Nichols, if I could. The repair costs that you incurred in the quarter, can you quantify those for us?

We haven't gone so far as to talk about what it was in the quarter. But clearly, throughout the year in each quarter we experienced higher repair and maintenance costs, that I think Dave mentioned. We do expect to have those decrease some in 2012 but we haven't given a number, Pete, for the quarter.

Can you give us what the amount might be down next year?

I can't right now, no.

All right. I appreciate it. Thank you very much for your time.

Torin Eastburn from CJS Securities.

I missed the beginning of the call. I apologize if you went over this. But the loss of Edgetech this quarter, did that include any of the one-time costs for impairments? And if so how much?

At Edgetech specifically, there was nothing as it relates to impairments for this quarter. It was really more focused around the startup costs that took place in Germany than anything else.

Okay. And second, your outlook for housing for 600,000 starts, you've been conservative in the past and you've been pretty accurate so far. In the past couple months housing starts have actually been not terrible. I'm surprised you're not at least slightly more optimistic in your prediction. Can you talk a little bit more about what you're hearing from your customers and why you continue to remain at 600,000 starts?

We've had good exchanges with our customer base. And I would look to the public record of downsizing that have gone on at Symington, Pella, Andersen, Jeld-Wen. A lot of capacity being taken out of the window industry and I think is reflective of a modest view of what's happening. Where you do see increases or strengthened starts is multi-family. And that doesn't necessarily give us the strength that we would see versus single family housing in terms of our end markets. So that's the basis of it. We are poised and ready, if the market is stronger, to benefit from that. But at this point, extremely difficult to see that there's been a dramatic change in any of the market drivers.

Okay. Thank you.

(Operator Instructions) Robert Kelly from Sidoti.

A question on the $9 million in savings from the plant consolidation. Is that at your 600,000 start, 38 million unit window shipment forecast?

That is in line with the forecast that we presented, yes.

And then as far as the drivers of growth in a flattish-type market, a big part of it is Project Nexus. Is there any idea or direction you can point us in as to what is that going to give you in F'12 as far as top-line growth? When does it become meaningful? What type of market do we need to see Project Nexus really contribute?

Obviously we need to see strength in prime window demand. And I think the work that we're doing is reflective in 2011. Market's down 5%, we're up 2%, I would consider that we'll continue to perform at those levels. And as the market gets stronger we'll outperform even on a stronger play. We commented during our comments that we have repositioned the sales and marketing efforts with the integration of Edgetech and we have never had better national and regional coverage in the history of Quanex. We've never had stronger marketing presence. And we're doing that at a consolidated cost savings. So I think it's heavily laden on recovery and prime window demand. But I'm certainly bullish and optimistic that we are starting to see a track record here at Quanex that says that we'll continue to outperform.

Phil Gibbs from KeyBanc Capital Market.

Just a quick one here on EBP. Where do you see the most opportunity to increase your value proposition and increase your pricing moving forward? Where do you see the most opportunity?

Where do we see the most opportunity to improve our market share and pricing in Engineered Products? I think number one, it's the Truseal/Edgetech opportunity. 60% of the world markets are cold edge. So especially as you move outside the United States with rising energy codes, our ability to grow faster in that market with a better solution is one of the key things that we're going after, not only in Europe but internationally. So clearly feel strong about that.

We think we also have some technology in our PVC markets where we're working on better enhanced value position that will give us an opportunity to grow. If you look at our PVC position in North America, we're clearly the market leader with financial strength that other companies don't have. We're going to be around. We're investing. We're improving that and we see that as a leverage opportunity.

The other thing I'd reinforce, back on the IG, we are the world leader in warm edge flexible spacer, with an outstanding position. And there's really a lot of market growth to be -- the market doesn't have to grow, the market is going to convert to warm edge spacing. And we're in an outstanding position to be able to enjoy that.

As that transition takes place is there any cannibalization from your existing technology?

We have positioned the products good, better, best. So I think our opportunity is after that cold edge spacing market, which is significantly underdeveloped, especially in Europe.

And you would expect the Edgetech business in '12 to grow faster than EBP, call it, legacy business?

I think you've got to lump really Truseal and Edgetech together because they are both warm edge flexible spacers. So it's the combination there of -- what we have done is provided customers with an option. And not to get too technical but one is a single-seal spacer and the other is a dual-seal spacer. It's Coke and Pepsi kind of analogy. And so customers that are looking to move to a warm edge spacer, we now have given them two options from a flexible spacer standpoint, whether they want single seal or dual seal. So this is not a -- Edgetech sales will cannibalize our TruSeal sales by any stretch. These are related products that just expand our offering to the customer.

That's terrific. And just lastly here, what's your outlook for the volume at Nichols in '12? Would it be a flattish type scenario given what you're saying about the end markets?

Yes, we're basically saying think about 2012 similar to 2011. And we didn't go this far but maybe how it flows throughout the year might be a little bit different because we had the nuance last year with the window tax credits expiring in December. So that created a little bit of a differential in the seasonality. But a more normal seasonal picture next year, but generally flat from an underlying demand standpoint.

Terrific. Thanks a lot.

Tim Hayes from Davenport & Company.

Under your assumptions for normal markets, that 1.4 million housing starts, 60 million of windows, would your corporate expense have to go up from its current run rate of around $25 million? Do you have an estimate for what that would have to be under a normal environment?

I'm going to stop short of giving you the number, but just tell you that what we see is a need for some increase, if only because as we become more of an international company, that does require us to bring on some additional expense to make sure we're strong in our international capabilities. But beyond that then, nothing much more than some inflationary kind of expense growth. So nothing dramatic is what I can tell you.

And then a follow-up. Last year at this time, you'd given segment guidance for the upcoming fiscal year. This time around not yet. Is there just more uncertainty about the housing market as you look at '12 versus where you were last year?

I think several factors went into our thinking around this. Heavy uncertainty in Europe, which we're exposed to. Second is the 66 million pounds at Nichols, you've got to read that signal at a time where we typically would be stronger. Third is the repositioning of our customers. And fourth, personally, we gave you guidance a year ago that was conservative and the markets underperformed that. And looking at the uncertainty that faces us this year, we were not happy that we had to walk back our guidance during 2011. And based on those factors said, we're better off not offering guidance.

Thank you.

Thank you. I'm showing no further questions at this time, gentlemen.

The growth initiatives we're implementing at Quanex will pay off for our shareholders in the long run and our vision for profitable growth remains on track. We will continue to push our lean process initiatives, drive for productivity improvements, lower costs, expand our customer base, and judiciously raise prices. This concludes today's call. Thanks for joining us. Have a great day and Happy Holidays from all of us at Quanex Building Products.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect. And have a wonderful day.