Quanex Building Products Corp (NX) 2012 Q1 法說會逐字稿

Welcome to the Quanex Building Products fiscal 2012 first quarter and annual earnings 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 presentation Mr Dave Petratis, Chairman and CEO, Quanex Building Products. Sir, you may begin.

Good morning and thanks for joining us for our first quarter conference call. On the call 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 the first quarter, an update on our insulating glass consolidation program and a general outlook for demand in fiscal 2012. Our comments today include forward-looking statements about the future prospects of Quanex. Please refer to our SEC Form 10-K filed in December 2011 for our complete forward-looking disclosures statements. The earnings release is available at Quanex.com.

Engineered Products finish the quarter with same-store sales off about 4% from a year ago. The absence of any window tax related credit, this quarter dampened end demand compared to the first quarter of 2011. EPG's operating income was $1.8 million which included a $1.1 million operating loss at Edgetech. Expenses associated with the $16 million IG Spacer facility consolidation were $2.5 million in the quarter. Out of which $400,000 were included in Edgetech's $1.1 million loss. I am pleased to report that the consolidation program remains on schedule and on budget.

Part of the program involved rearranging processing equipment at the Cambridge facility to ensure the most efficient workflows possible once the consolidation is complete in August. We remain confident in our estimate of annualized savings of about $9 million as a result of this program. According to market intelligence firm, Ducker Worldwide, US window shipments for the 12 months ended December 2011 were down about 7% compared to the year-ago period. While same-store sales at EPG were down 2%.

Let's now turn to a review of Nichols Aluminum. End demand was weak in the first quarter and that weakness was reflected in the 44 million pounds we shipped in the quarter as customers remained in a conservative destocking mode. We also suffered from poor execution at our Alabama facility that cost us several million pounds of shipment in the quarter. Nichols is a high fixed cost operation, so weak shipments usually translate into poor operating results and this quarter was no exception. We reported an operating loss of $5.5 million versus a modest profit in the year-ago quarter.

This time last year, customers were still building inventory to take advantage of the window tax credit but obviously that was not the case this quarter. Also hurting our results was the fact that aluminum prices have dropped recently and that in turn hurts the spread. We define spread as the difference between the average sale price and the average raw material cost. Spread in the first quarter was down 6% from both the year-ago quarter and the sequential fourth quarter. Unfortunately, we expect another drop in spread in the second quarter compared to the sequential first quarter but volumes are expected to improve.

The Aluminum Association reported that industry shipments in our end markets were up 2% for the 12 months ended January 2012 from the year-ago period. Our shipments were off about 14% over the same period. The difference is primarily attributed to weaker residential building demand where we have a larger presence, compared to stronger distribution and transportation demand where we have a smaller presence.

On January 20, Nichols experienced a strike with the Teamsters Union at its casting facility and one finishing facility, both located in Davenport, Iowa. There were no strike related customer disruptions in the quarter and both facilities are being operated by Management and temporary employees. While the Union rejected our last offer, negotiations are continuing. I cannot tell you when the strike will be settled and while nobody wants a strike, we believe the Company's proposals are fair and reasonable, reflecting industry norms. At this point, I'd 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 on the call today. Quanex reported an operating loss of $0.18 per share in the first quarter of 2012 compared to a loss of $0.13 per share in the year-ago quarter. The current loss included $0.04 of expenses associated with the IG Spacer consolidation program. $0.01 related to ERP expenses and $0.01 associated with losses at Edgetech. The year-ago quarter loss of $0.13 included $0.12 of special item expenses. The stock buyback program was active in the first quarter with the Company purchasing about 94,000 shares of common stock for approximately $1.3 million. Our $270 million revolving credit facility remained untapped. Because of certain EBITDA covenants associated with it, the available balance was about $173 million at quarter-end. Possible uses of cash include funding our growth initiatives, making acquisitions that fit our fenestration vision, funding our common stock dividend and buying back stock. With that, I will turn the call back to Dave.

Thanks Brent. Moving the discussion to our fiscal 2012 business outlook, we continue to expect home starts and residential R&R demand to remain relatively flat compared to last year. We know our outlook puts us on the conservative end of the scale particularly with regard to recent home starts activity, but at this point we are not convinced that the weather didn't play a key role in the activity. So for now, we are labeling this higher activity a weathered driven seasonal event and not cyclical recovery.

Ducker Worldwide raised their 2012 US window shipment estimate this month by 10% to 42.6 million units with 90% of that expected to come from new residential construction. We hope Ducker's right, but ongoing discussions with our leading window customers do not reflect that level of optimism. So, we'll continue to maintain a conservative stance. Some of you have inquired about Quanex providing updated guidance, but because of the questionable strength of our end markets, concerns of our large customers, the strike at Nichols, we can offer no guidance for 2012 at this time. I know that is not what some of you want to hear but we believe it's the responsible thing to do. With that, we are ready to answer your questions.

(Operator Instructions) Daniel Moore, CJS Securities.

You touched on, in your comments poor execution at the Alabama facilities, could you maybe give us a little bit more color there and quantify the impact in the quarter?

Our opportunity at Decatur, Alabama is to participate in the transportation sector because we have finish capabilities to do wide coat paint. And we just have got a very old infrastructure there that we have in the capital update plans and the uptime on the system, the paint system was poor. In terms of pounds, I turn to Brent and Jeff to give you a specific answer.

Yes, I'm going to stop from just giving what the direct impact of it was. Because then you get into, well was that this or that, so I'm going to stop short of giving what the amount of pounds were.

Okay. Perhaps one quick follow-up, you gave a little bit of color as to what your outlook for Q2 is in terms of the spread continuing to contract. Any additional color you might want to give? But you did say that you saw volumes improving. Again, any bracketing or greater color you'd want to provide around there might be very helpful.

We are moving into the spring season in terms of aluminum demand. So our customers will be optimistic, it goes on every year. We saw a similar pattern of aluminum stocking in Q2 and Q3 of last year and as we moved into Q3 it fell off the map so we are cautious. Aluminum pricing has been on a downward trend and compressed spreads, your guess is as good as mine on that but we expect pressure to continue.

Keith Hughes, SunTrust.

I have questions on the aluminum segment on the compressed margins, at least on the cash price for aluminum, it looks like we had a little bit of a move in the last month of the quarter and up. Is there something going on with the recycle prices causing this contraction you're expecting in the second quarter?

Brent or Jeff?

No. It's more -- you tend to see over time that the scrap aluminum prices move in line with, but as we see these swings down and up with the global element LME prices, in the short-term we don't see scrap move one-for-one with that, so it really is, what's going on with the global prices. We have seen it decline, a little jump up in the cash price. But I guess the feeling is it's likely to be lower than higher as we progress in the short-term and by that I am talking global prices.

Then jumping over to engineered products, are we completely done with the integration of the most recent acquisition? If you could just give us an update where we stand on that.

The integration of Edgetech, as we deal -- remember that we acquired them April 1, so we'll continue to post that up on same-store sales next quarter. The front end of the business, commercial sales and marketing is fully integrated, operating. Extremely pleased with what we are doing there. We believe that, what we call Project Alpha which is the integration of our Barbourville facility into Cambridge, Ohio will be completed by the end of August.

Robert Kelly, Sidoti & Company.

I just wanted to talk Nichols Aluminum. The compression you saw in Q1 and expect in Q2 is on the raw material side it's not related to the market price or maybe call it the tolling spread?

Brent?

No. I think what we see going on there is if you really look back over the last six months and what's going on with the global LME price that, that's had as much, if not more of an impact than on the scrap side. So the decline over the six months -- as we've said historically, basically any fall or rise in global LME prices we see about 30% of that on the spread line. That decline -- if it declines by $1 as an example we see a $0.30 decline in spread, just as an example. So, that's really what's driving the spread thing.

Let me try it this way. Are you seeing a breakdown in market industry pricing discipline?

No. No, not indicating that at all. It's not on the tolling charge per se just global pricing.

Great. Then as far as just your outlook, since 4Q, you took out of your shipment outlook a little bit, you're saying $39 million in your release. In 4Q, you said $38 million. I know it's a modest improvement compared to your last outlook what are you seeing to give you even that slight bit of optimism which we typically don't hear from you for calendar 2012.

We continue to be conservative. I would say, our optimism or uplift is really on share gains. I don't know if you follow this closely that we do, but Weather Shield, a Wisconsin-based company has run into some trouble at Menards. That was picked up by Jeld-Wen and we'll benefit from that in terms of overall -- our own window demand. In terms of the overall market, when you $39 million to $40 million -- we see the bulk of that activity coming in multifamily residential.

That doesn't help you that much.

It doesn't help us, those are entry point price products. What we need to see a stronger lift on single-family homes and a stronger pickup on R&R just -- as we talk to our large customers and monitor the market, difficult. I would say this though, Bob, if you look at some external benchmark, Simonton's Q4 off 20%, Deceunick North America off 15% and our modest decline of minus 4%, we're doing a pretty good job of execution in the market and gaining share. That's what we think our actions are.

Peter Lisnic, RW Baird.

First question if we could just beat the dead horse of Nichols a bit. If I look at that margin compression can you bifurcated that between the Alabama issues and the spread compression in the first quarter?

You're talking two animals. Really the Alabama issue is a volume driver whereas what's going on with global aluminum prices, scrap spreads that's all the spread. You are asking when I look at the loss in the first quarter how to bifurcate that? Would that be a better way to rephrase what you're asking?

Yes, I think that's a better way. I'm wondering, because you mentioned paint specifically if I assume at that higher margin and if you had trouble in the paint line I'm guessing that there is a mix impact from that?

Yes. I would say, I don't have the number in front of me, but I would not have expected the mix to be dramatically different than what we have seen in the most recent quarters where it's really, high 20% of what we shipped was painted. But to be fair I don't have that number sitting in front of me. If you just really look at it year-over-year and in the volume, the 44 million pounds in 2012 versus 52 million last year. The earlier question was what is the impact on the Nichols, Alabama issues, it's just how many pounds did we not get out the door, really.

Okay. All right. That helps.

To be fair, we did not perform as we should have but that's not what's driving the 52 million to 44 million. It's a small piece of that. That's more market demand than just Nichols, Alabama. But we like to be hard on ourselves.

All right, understood. Thanks for that. Then second question, at EP if I take out Edgetech, it looks like the core business profitability actually improved year--over-year. So can you give us a sense, Dave as to whether you've got some pricing initiatives there, some positive mix, some restructuring savings? What's driving that underlying core business improvement?

It continues, our improvement at EP continues on the lines that we have been on. Remember we took a pretty big, what I would call restructuring charge a year-ago. We have seen some of the benefits of that working through there. Our pricing initiatives continue to work. Then you look at the overall volume only down 4% where our market was softer -- that more productive workforce and infrastructure is working for us. So pricing, lowered our cost and good execution by the business.

Justin Boisseau, Gates Capital.

Could you talk a little bit about the acquisition opportunities that you're seeing out there and what the appetite is from your end on doing something near term or do you want to wait a while to finish or feel more comfortable about the Edgetech integration?

No, from our perspective it is go time. We think the next 12 to 24 months is critical. We have been working hard on our pipeline in terms of acquisitions and really believe we are in a better position than we have ever been because of the integration of Edgetech. Our front end, as I said, sales and marketing (inaudible) has never been in a better position. So if we can find the type of opportunity that we like building on our fenestration side of the house, we will seek those effectively. Edgetech is a good example, we like opportunities that will build on our fenestration technology and give us the opportunity to have some cost takeout. So, that's what we are on the hunt for.

And size, you would expect? What sizes are you guys going to be comfortable with? Should I think about that $50 million to $100 million as being the largest or would it go up or down from there?

That's certainly our sweet spot. If the opportunity to stretch above that, we would not hesitate to go above that, but it's got to be very close to where our markets are today.

How should we think about the prospect of additional stock buybacks? Is it opportunistic or is it more mechanical? How do you guys think about it internally?

Brent?

I would say, if you look at us over the long-term, we are clearly focused on offsetting dilution and in the short-term we'll be opportunistic where we can be. If we see prices going down, to levels that we think there is a solid opportunity to be in the market buying, we will. But our goal over the long-term is tall stick dilution.

Tim Hayes, Davenport.

First question on Nichols and the decline in volumes year-over-year, is any of that attributable to a competitor reentering the market in the fall of 2010?

I think you can certainly see that our competitors are more healthy than they were a year-ago but if you drill down in the Aluminum Association metrics of market opportunity especially around building products where we are strong, the market was just pretty damn weak. Rainwear, soffit, trim, those types of things off double-digits. We saw that beginning in May -- and let's face it, window production we sell a lot to the fenestration industry. From an aluminum standpoint, the rainwear, trim and siding that follows along with replacement window market was as weak in 2011 as we have seen through the whole downturn.

Second question on the other spread, the conversion price spread, for Nichols, we heard price increases announcement in another competitor here, I guess just recently, how well might that be sticking in your view?

I think this market is disciplined. I think you can see that order over the last seven, eight years. So, I think it sticks.

Phil Gibbs, Keybanc Capital.

Brent, this is a bit of an accounting question, can you explain the D&A related to the ERP implementation and if this runs off at some point or is it permanently a piece of the cost base at this point?

What it really is, we went live with our payroll HCM in the SAP lingo January 1, so really all of the cost that you incur upfront to buy the licenses and then the costs associated with programming the specific payroll applications, on January 1, when we began to depreciate those. Is it a ongoing? It will be ongoing in terms of what we do. What our plan is here is about a 3-year rollout as we begin to replace system after system throughout the Company. So, we are incurring cost to program the system and then once we go live, we move that capitalized costs into depreciation. I don't have the schedule to tell you -- okay it's going to be this amount for the next 12 months and Y amount for the following. But depreciation is here to stay as it relates to the ERP for the next six years, I would say, as we roll this thing out.

Okay. Then the $3 million that you have in corporate costs assuming those are cash expenses when do those start to pare down? Do you expect to be spending at that level in corporate into fiscal 2013, 2014?

Specific to the ERP?

Yes.

No, really heavy lifting here in this 2012, call it the next 12 months. Because as we go through these rollouts what we are really doing is designing a global system which that's where the heavy lifting is. Then as we roll on to additional systems, we will have the bulk of the system already in place and now it's really just getting a different location on. So, no, I would expect the cost in the future years to decrease significantly as it relates to the ERP system.

Okay. Last question here is outside of CapEx related the IG spacer rationalization in the ERP, what do you see as that break out between what you would call growth CapEx and maintenance CapEx? I think it's, what, about $29 million, $30 million after those two items?

Yes. What we have historically said is, you can think of the maintenance capital in the $11 million to $12 million range has been our historical run rate. And then maybe plus or minus $1 million depending on the year you're looking at. But with the rest being -- it's hard because it's primarily growth related. We incur a lot of expenditures in tooling on the vinyl business. So that's a lot of -- for new programs and things like that where the bulk of that, the remaining dollars go.

So, the tooling on the vinyl business basically keeps you just rolling out the new products and moving with the market? Is that the good way to think about it?

Yes. As we've rolled out energy core a year-ago and we have come out with some new window lines this year. We incur a sizable capital cost to build all those new tools.

Rich Glass, Lockwell Investors.

Maybe you covered this, I might have missed it but did you guys give the comparative number from Edgetech for last year?

No. We did not give a comparative from last year in the earnings release or anything like that.

Can you share that with us or at least tell us if it was growing or shrinking or what went on there?

To be honest I don't have it right here in front of me. I'm trying to think in my head what even comes up in the Q. In the Q, I believe there is a pro forma of what it would've looked like. I think would be the best comparison, but I don't have that information in front of me.

All right. I'll take a look there. And then, can you tell me -- give us a little color on the integration of the sales force essentially where you are? I know you had some, at least retraining if not rejiggering in terms of dealing with the sales force with Edgetech to get to the point where you could really think about cross selling and things like that, can you tell us what's going on there?

Early on we brought in a consulting group out of Chicago to help us with the integration. We took four months or five months to work it through. Actually used some models to size the territories properly. Coming out the end of that, 44% more feet on the street, a very defined marketing area that I will comment on and are doing it at less -- fewer dollars than we had with the two standalone entities. So I feel good about that. As we roll into it, we've got focus on our IG business with combined Edgetech to resale, focus on our vinyl business and focus on our facilities. I mean, not facilities but window accessories. Within that you really have the stand-alone capability to service the needs of an external customer and cross sell. You'd have to put order chart, but we use a matrix approach to be able to serve the customer from soup to nuts on our capability.

In addition, the strongest marketing capability that we've had ever at Quanex, supporting those different initiatives, a focus on codes and standards which we think are important. Last week in Washington DC, we had 8 to 10 regional window builders working with the EPA, working with the Department of Energy influencing the 2013 or 2014 energy code, I don't know exactly the date. But we believe more energy-efficient windows is extremely good for Quanex and for our customers and quite frankly it's not been well organized. So we have launched new branding strategies that's apparent at both the glass show an IPS show. I believe when you look at our numbers as we continue to outperform the market and then specific benchmarks, the integration is going extremely well.

Okay. That's great. And can you tell me if you were to rank the opportunities, would you say it's a higher priority to get you're core business into the Edgetech regional guys or is it a maybe a bigger or better opportunity in some ways to push more international, whether its Europe or South America or Central and South America I guess?

So, with Edgetech or our IG's business specifically, our best opportunity is international growth. Between Edgetech and TruSeal, excellent job at covering the market. If you talk domestically that Edgetech-TruSeal position which covers over 800 window fabricators in the United States and Canada, it's introducing our other capabilities our vinyl products our window accessories where the opportunity becomes or vice a versa. Quanex in its history never cross sold and that's what we have opened up with the new structure. So international, clear opportunity, our codes and standards people influencing places like Australia and the ability to bring more products in a cross-selling standpoint throughout the North American continent is where we are focused.

All right. Finally, can you maybe rank the -- I heard what you said about your buyback and I heard what you said about acquisitions. Can you rank the use of cash at this point in time? And dividend might be last on the list, but can you rank order those maybe in terms of priority?

All arrows are in the quiver in terms of the use of that cash. Acquisitions clearly at the top. We continue to be disciplined acquirers. I think when the full story unfolds on Edgetech you will see that. We think there's opportunity here in this weak market we would like to execute on it. After that, Brent, I'd let you comment on the other uses.

I think to be fair -- so acquisitions are clearly a priority that we are looking at. And then, in addition we are investing organically, obviously with Project Alpha, the ERP, we are investing in those foundational things to prepare us for the recovery and put us in better position. And then after that, we look at -- it's tough to order, is it the dividend first or the share repurchase? It depends on what the price of the stock is as to which one of those comes ahead of the other at that moment in time. But acquisitions are clearly top of mind, but I also want to be clear that money is not burning a hole in our pocket and we are very focused on those acquisitions that make the most sense. Something like Edgetech was a tremendous addition to Quanex so we are looking to repeat that.

John Kohler, Oppenheimer.

I have a quick question on the market share. I'm wondering are you seeing that mostly being tied to the top producers or are you starting to make some more headway on the regional manufacturers? Any information on that would be helpful.

We don't like to talk specifically about customer share but clearly the mid market from my perspective was working better in the fourth quarter or our first quarter and the second half -- excuse me, fourth and first. I have never seen more consolidation and take out happen then I saw in the second half of last year and the big guys were leading it. That mid market replacement market was working and I think if you look at our numbers, you've got to step back and say we are having some success in our go to market approaches and it's in the mid market.

I'm showing no additional audio questions at this time.

Okay we will wrap it up.

Ladies and gentlemen --

Hold on, I've got a few more comments. During the year you can expect us to continue to push our lean process initiatives, direct productivity improvements, lower costs and expand our customer base. Our vision for profitable growth remains on track. 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 concludes the program. You may now disconnect. Everyone have a wonderful day.