Quanex Building Products Corp (NX) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quanex fiscal fourth quarter 2013 conference call. At this time, all participants are in a listen-only mode. Later, we other we will conduct a Q&A session and instructions will be given at that time. During today's conference call Company management may make forward-looking statements about the future prospects of Quanex. Participants should refer to Company's 2012 Form 10-K filed with the SEC for more complete forward-looking statement disclosures. Additionally, the Company may refer to non-GAAP figures throughout today's call.

A reconciliation to the most comparable GAAP figure is included in the Company's most recent earnings release which is available with the Company's Form 10-K at the Company's website at www.quanex.com. Last, participants are reminded that today's conference call is being recorded. I would now like to turn the conference call over to Mr. Dave Petratis, Chairman, President and CEO of Quanex, for opening comments. Please go ahead, sir.

Good morning. And thank you for joining us for our first quarter conference call. On the call with me today is Brent Korb, our Chief Financial Officer, and Marty Ketelaar, our VP of Investor Relations and Corporate Communications. Today's call will include a brief recap of first quarter results, and a general outlook for demand in fiscal 2013.

Engineered Products began the year with first quarter net sales up 6.7%, an operating income up $1 million over the year-ago quarter. Sales increases were driven by higher vinyl extrusion sales, a nice trend that began in 2012, and has continued into 2013.

Some modest growth in insulated glass spacer sales and the inclusion of one month sales from our recent Aluminite acquisition. Excluding Aluminite, EPG sales increased approximately 3%. Lower solar sales and higher materials costs partly offset some of EPG sales an profitability improvement during the quarter.

According to Ducker Worldwide, the marketing intelligence firm we use to benchmark EPG's performance against the industry, total estimated US window shipments increased approximately 5.8% for the 12-month period ending December 2012. With nearly 25% growth in new construction more than offsetting the 2.7% decline in the repair and remodel market.

For Quanex, our domestic fenestration sales for the last 12-months increased 7.9%. Thus, out performing the industry.

Turning to Nichols I'm very encouraged by the significant improvements in operations we are seeing. Net sales were $84.6 million, an increase of 29% over first quarter 2012 results. Nichols' shipped 59 million-pounds, 33% better than the 44 million-pounds shipped in the year-ago quarter.

Much of this improvement can be attributed to the great work the Nichols' team has been making regarding equipment reliability, and improving on our on time delivery to our customers. We have moved a large amount of repair and maintenance spending into the first quarter to make sure our equipment will be fully operational during the peak demand period later this year. This improvement in equipment reliability has allowed us to reduce our backlog of outstanding orders to the lowest point in several years and improve our on time delivery to customers to nearly 90%.

We are proud of this accomplishment. We will continue to push for greater improvement in the equipment reliability and on time delivery.

Nichols' operating loss was $4.2 million, an improvement from the $5.5 million loss reported in the year-ago quarter. The improved results also included $6.8 million in repair and maintenance spending which was $2.2 million higher than the spending in the year-ago first quarter.

We expect repair and maintenance costs to be approximately $4 million per quarter for the remainder of 2013, which will be lower than the repair and maintenance incurred during the same periods of 2012. Lower spread of $0.44 compared to $0.48 in the year-ago quarter also contributed to the operating loss.

The decline in spread is the result of a larger decline in aluminum prices compared to scrap metal prices. The Aluminum Association, which tracks industry shipments of chief products, reported industry volumes for the 12-month ended January 31, 2013, up 7.7% while Nichols' shipments declined by slightly less than 1%.

Our under performance is primarily attributable to the impact of the 2012 strike and equipment reliability issues in 2012. I'm encouraged that we are ahead of schedule related to the turnaround at Nichols, thanks to the effort of Russ Bren and his team. Let me now turn the call over to Brent who will take you through some additional financial highlights.

Thank you, Dave. And thank you to everyone on today's call. Quanex reported a net loss of $0.22 per share in the first quarter, compared to a loss of $0.18 per share in the year-ago quarter. Adjusting for $0.2 in transaction related charges, and $0.03 in ERP costs, the adjusted loss was $0.17 comparable with the adjusted loss reported a year-ago.

Also included in this quarter's operating loss was a small one month loss from the Aluminite acquisition resulting from purchase accounting adjustments. Corporate expenses increased $4.7 million to $12.3 million this quarter compared to $7.6 million in the year-ago quarter. The higher expenses were primarily driven by higher ERP costs of $1.3 million and transaction costs of $1 million.

The majority of the remaining increase was due to higher information technology costs, stock-based compensation expense, group medical, and workers' compensation costs. I am pleased to announce that we successfully went live with the major phase of our ERP implementation earlier this week. As a result we will be placing approximately $20 million in capitalized costs into service. Our corporate expenses will begin seeing higher depreciation of about $700,000 per month or $2.1 million per quarter until the completion of the next phase.

Due to the higher depreciation expense we will begin presenting and discussing our EBITDA results on a consolidated, and business segment basis. In the first quarter of 2013 consolidated EBITDA was a loss of $4 million compared to a loss of $1.6 million in the year-ago quarter. Driven by the higher corporate costs just discussed.

At EPG, EBITDA grew 17%, to $10.3 million compared to $8.8 million in the year-ago quarter. At Nichols, EBITDA results improved to a loss of $2.6 million compared to a loss of $3.1 million a year ago.

ERP costs peaked in the first quarter of 2013 and we expect those costs to be reduced for the remainder of 2013. As a result, we expect our corporate expense to be approximately $12 million per quarter for the remainder of 2013 comprised of approximately $10 million of costs and $2 million of depreciation, primarily driven by ERP.

Our cash balance declined from $71 million at year-end to $5 million at quarter-end as a result of $22 million spent on the Aluminite acquisition, $11.5 million on capital projects, and $40 million in working capital commitments. We expect to see meaningful improvements in our cash balances and working capital usage as we get further into the building and construction season.

During the quarter we finalized a new $150 million revolving credit facility with a $100 million accordion feature. The new facility has very attractive pricing and a five year term expiring in January 2018. This facility allows us to reduce the near-term costs of the older facility while providing the additional capacity to meet any future needs.

We have borrowed $10 million on the new facility, early in the second quarter, and expect that amount to remain outstanding for the next several months. Our intention would be to payoff the borrowings by the end of the third quarter, if not before, as our cash balance improves throughout the year. We continue to invest in internal growth initiatives and making acquisitions that add to, or compliment, our fenestration footprint. I will now turn the call back to Dave.

Thanks, Brent. Moving to our 2013 business outlook, I continue to characterize it as cautiously optimistic. There are clear signs of recovery in the US new construction market which is refreshing. Last weeks case Miller report, with home price increasing about 9% and up for the first three consecutive quarters, was also very welcome news.

Additionally, we expect continued growth in Europe for our [warm edge?] spacers. The outlook remains cautious for the Canadian markets, which appear to be just now experiencing a downturn, and the US repair and remodel portion of the window market. As you know, with our emphasis on energy efficient products, Quanex has much more opportunity in the repair and remodel market than new construction and we are not seeing the R&R market come back yet in the US in any meaningful way.

Recent reports from our competitors and customers have been mixed at best regarding their results in the R&R market. Even with the improved US housing starts and our 2013 estimate of approximately 42 million US window shipments, up from 40 million units in 2012, those numbers remain recessionary from a historical perspective. We also believe that Ducker's estimate of a 2.2 million unit improvement in R&R shipments is aggressive.

While we currently believe the recovery in R&R for eventually occur, we need to see continuing improvement in the macro economic factors led by increasing home values. We think at full recovery in R&R could lag new construction by 12 to 24 months as we believe big ticket window replacement projects will come after the lower ticket home projects are completed.

Excess industry capacity, particularly on the vinyl side, coupled with our moves to increase price over the last four years, has led to some pricing challenges in the current quarter. In fact, renewed contracts with a couple of our large customers had volume based price decreases that took effect in January of this year.

Additionally, a large customer recently lost some business to a competitor which could have some impact on our vinyl business later this year. Further improvements in our end markets will increase demand help alleviate some of that pricing pressure.

I can assure you that we are taking the necessary steps to minimize the impact of these challenges on our bottom line, and we'll remain well positioned to add to our market leading positions through organic growth and acquisitions. We continue to have a strong balance sheet and a strong talented team ready to serve our customers. We remain very bullish on our long-term prospects. With that, we are ready to take your questions.

Certainly. (Operator Instructions). Our first question comes from the line of Daniel Moore, from CJS Securities. Your question, please.

Good morning.

Good morning, Dan.

Maybe focus on Nichols a little bit, in terms of the spread you're seeing, any improvement in Q1 versus the level we saw, excuse me, Q2, versus the levels in Q1, and just update us on our your outlook for the remainder of fiscal 2013?

Spreads are compressed. I would say in terms of Q1 and looking back historically they're as compressed as I have seen through the down-turn going back to 2008. We have been aggressive in the rolling charge as we're booking new businesses, but I'm cautious that spreads will improve as we go through the year. Our opportunity really sets in our ability to take short lead time business. That's why we put the heavy investment in Q1 with our on time delivery and low backlog, we think we're in a great position, but it's all opportunistic.

Okay. And one of the factors impacting, you mentioned, was solar tape obviously highly profitable. Do you expect that to remain weak, or what's the outlook for the remainder of this year?

I think demand for solar edge tape over the next really two to three years will be pretty consistent. Our shipments on solar really peaked 2010 and 2011 as the solar industry has declined, we have shown that in our numbers, but I think it will be pretty level through 2015. Then the long-term tax incentives run out and then we'll have to figure out where it goes. In the quarter we did sign a three year agreement to supply solar edge tape so we've got that pretty locked up and that major customer has got pretty solid back logs.

That's helpful. And then lastly, with the incremental fire power, or dry powder if you will, on the balance sheet what are you seeing in terms of acquisition opportunities and are there other things that you would consider share repurchases or other ways to maybe flex the balance sheet in the interim while the markets are bouncing along the bottom here?

Yes. We remain active talking to folks on the acquisition front. As we have over many years quite frankly, but we think there's still an opportunity to grow through acquisition and if over time it looks like that may be less and less likely, we will look to doing some things be it share repurchase or what have you, but we are finding the opportunity to come to an agreeable valuation on some of these potential acquisitions so that will be our goal in the near-term here.

Thanks for taking the questions.

Thank you.

Thank you. Our next question comes from the line of Trey Grooms, from Stephens. Your question, please.

Yes. Hi. Good morning is Patrick [inaudible], sitting in for Trey. You guys called out on your release that Alumco contributed 6.3% to EPG's top line. I was wondering if you could give us some more detail on the acquisition specifically, can you talk a bit about the margin profile of this business and how it compares to the rest of the segment?

Yes. So I think we gave what their 2012 sales were, like approximately $47 million. We haven't talked about what their profitability is, but what I would say is it's fairly comparable to our existing screen operation at engineered components from a percentage basis. Now, let me point out that is also before the purchase accounting adjustments, so we have to go through once the dust settles on that final purchase accounting to understand what the go forward margin will look like.

Okay. Thanks for that. And then just a second question, in EPG you called out a shift towards unfavorable mix in the quarter. Can you talk a bit more about what happened there and is this something that was more one time in nature or do you expect this mix shift to continue?

I believe the mix shift will be consistent through the year and it's because of the types of low end construction and multi-family window opportunities that are in the marketplace. Where we're seeing the new construction starts, it's been heavily pushed by multi-family, and let's say [inaudible] less than $250,000 and they just carry lower efficient windows.

Yes. And maybe I'll jump in here real quick. Just think about it as this new construction market has been taking off, a builder typically is trying to fill the hole in the house that they have with the lowest costs, cheapest product they can fill that hole with, versus repair and replacement tends to be a higher end, higher performing window so, to the extent that new construction continues to grow and repair, and replacement declines or remains flat, that mix will remain.

Sounds good. Thank you, gentlemen.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Robert Kelly. Your question, please. Oh, and Robert Kelly comes from Sidotti.

Good morning.

Good morning.

A question on Nichols. You saw nice growth in the shipments. Was that related to winning back share, or was it the short lead time orders picking up with the construction season? Help us out there.

We've got back some share that we lost during the strike. Overall, aluminum demand feels pretty good. Filling those new construction opportunities but I'd describe it as share.

Okay. And then as far as the costs drags for maintenance and repair spending, I believe you called out $4 million a quarter for the balance of F13?

That's right. Extremely pleased with our execution the casting and throughout Nichols but particularly at casting we took out 29 days in the quarter and the highest level of metal since like 2007. So I looked at that as a very good sign and we have lost opportunities in the past construction seasons because the system was not up and reliable. We've made several investments there that I think will really raise our capability.

Yes. And, Bob, too, the $6 million that we spent in the first quarter, that was planned. Our objective was to move more of that spend into the first quarter because that's when we take our big shutdown and so the objective was to get into the preventative maintenance mode and do everything we could while we had the plant down any way instead of, repair and maintenance when something fails unexpectedly.

So the question is for Nichols. It seems like the volumes are coming back due to some product initiatives and share gains. The spend is going to be a drag on the bottom-line for Nichols in this year, but eventually it comes back to you. If you're trying to build a model for this segment, what kinds of savings will the maintenance spend generate as far as fixed costs operating levers? Any help you can provide on that front would be a great deal of assistance to us.

What I want to make sure we're clear of is our total spend for the year for repair and maintenance for 2013 is expected to be slightly below the spend in 2012. For the full year, so, we feel confident that we will get the reliability and get the pounds out and not have a further drag from the repair and maintenance spending. But also remember, too, we have a very large project with our oven replacement in Alabama for May, that May/June time frame that what remain critical as we move forward because that would be a big area where we spend some dollars on the repair and maintenance historically. So,getting that in and up and running and reliable will be very important to both our reliability as well as bringing our spend down over time.

Is it fair to assume that we'll see the benefits of all the spend you put in in 2012 and 2013 on the top line but not necessarily in the operating line in fiscal 2013? Is that more of a fiscal 2014 story where it comes back to you?

I believe that how you position the spread number will have significantly more impact at Nichols than the investments I'm making. I'm confident we're going to improve, and are showing the improved reliability, but spread's is going to drive the day. If we get some increases in aluminum prices, it's going to help us.

Understood. Understood. As far as on the Engineered Products side, the consolidation savings are due to kick in Q1 2013, I'm sorry for fiscal 2013, Could you talk about what the benefit was, if any in Q1 2013 and if you're still on track for that $8 million savings number?

I would say it this way. The bulk of that $8 million that we projected in savings is clearly going to be in the latter half the year, but when we evaluate our internal forecasting of how that rolls in, we feel pretty good about first quarter, that we achieved what we were looking for, but it obviously picks up in the second quarter, and third and fourth quarter are going to be the highest benefit times. It all goes to when we have the most activity, most volume.

I wantto re-emphasize, though, I was pleased with our Q1 tracking on that savings and as we pick up the volume it helps us even more. There is a little bit of a mixed shift but that IG, again driven by the lower performance windows and the solar, but I feel good about where we're at.

Correct me if I'm wrong the $8 million comes back to you even if volume and mix is similar to F12; is that correct?

Yes. That would be fair, but I mean to the extent we can get favorable mix and increased volume, it only helps.

Right. Understood. Okay. Thanks, guys.

Thank you. Our next question comes from the line of Peter Lisnic, from Robert W. Baird. Your question, please.

Good morning, guys.

Good morning.

First question, Dave, can you give us a little bit more flavor and color just on the pricing trends in EP? You mentioned some of the pressures there little bit but I'm just wondering order of magnitude. And then, what's the probability that maybe there's some vinyl capacity in the industry that gets taken out to maybe help the pricing situation?

I will take your second question first.

Okay.

In terms of vinyl capacity, I don't see it leaving and we would have to acquire it and deal with it that way, which vinyl is always on our acquisition pipeline, but I don't see any capacity leaving. There is a second driver that's important that we've been investing in the last couple years and that's raising codes and standards. Those will tweak up. It forces vinyl extruder's to change tools and that's a good thing for us. The 2014 energy codes will increase window performance. We would have liked it to have been higher so that's kind of the view on that. Pricing, in terms of it's effect on the vinyl industry, or our vinyl pricing, Brent, thoughts?

Yes. Clearly a lot of pressure going on because of the capacity issue that you mentioned, Pete. And we have had to do some things here in 2013 to give up some price to some folks that are really doing an excellent job of taking share and growing their business, and thereby growing our business. So we have had to give a little there and whenever we do that we're obviously looking at everything we can do on the costs side to attempt to offset that, but there's definitely been pressure in that arena. And to understand, too, we've put a little bit of additional pressure on ourselves because we've been raising prices, really, since 2008 each year in small ways. But that just further distances us from the competition which we feel we offer value that makes that worthwhile to our customers, but when there's excess capacity it's clearly pressure.

I would say whatever we've split across to be able to retain business, we've got action plans in place to drive that through productivity.

Okay. Alright. That's fine on that. And if you look at the high-end window market, we could see the aggregate numbers you're pitting up in terms of revenue growth at EPG and what the industry proxy is, but I'm just wondering if you look at that high end piece of the market if we can slice an dice that, are you grabbing your fare share there? Are you gaining share on that high end piece? How does that share trend look?

I described the high-end piece as the wood market and I would say, holding shares slightly up, but that market is declining and that's pretty obvious in the Ducker. If you move into high-end vinyl, the move with aluminates gets us there and we're all over it on the vinyl side. So I think as you see our growth numbers that engineer products, we clearly see that the largest gains in the lower end but we're doing well in the mid-range and it's our Energy Core product, our Energy Quest product and our ability to put accessories on those. We're very well positioned in the marketplace.

Okay. Alright. And then, Brent, just on corporate expense if I just take out some of the thingsthat have been non-recurring over the past several quarters, the run rate used to be somewhere around $7 million if I'm doing the math right. And now you're saying it's going to step up to $12 million and get the couple million bucks of depreciation on the ERP system, but it just seems like that's a pretty material step-up. So is there something there? A, is my math right and B, is there something there that is a bit different that I'm not understanding from a modeling perspective? I'm just trying to understand why such a significant step-up.

Yes, and what you have in the $10 million excluding the depreciation is a continuation on the ERP front. We basically, this weak, replaced, in effect, about three systems with SAT. It was a huge event for us to go live. It's been successful in our first three days. It's obviously still early to tell, but we will continue now forward with our template, but we will continue for the next phase, our next roll out, with some pretty high expenses and that's driving the bulk of that differential from the $7 million to the $10 million that you referenced.

Okay. Alright.

Your ratios are right in terms of where it's going, but as we're in the middle of the deployment we're centralizing some back-office capabilities, payroll would be an example, credits, claims, those types of things so as we put the systems in and created that back office our costs are up and they will come down in future quarters.

Okay.

And I think just to give everybody a flavor for what this looks like is our second implementation will be lower costs than what we have experienced here over the first roll out, but we'll really see significant decline in our costs once we go beyond that one because at that point we, Quanex, will be able to do it using purely internal resources, and so there we will see substantial reduction in our go forward expenses.

Okay. And at what point do we hit that? It sounded like the $12 million of corporate goes through at least this fiscal year.

Yes. To be completely honest, we're going through the go live phase right now. Next 30 days we will be building our detailed plan of exactly how long the next phase will last and then we can give a better sense, but I would say it's safe to assume future rollouts are I think a rule of thumb every year, we should have at least one, and our goal is to accelerate to the extent we can.

Okay.

But we feel very good about where we sit today now we have a template that we can bring across the EPG location.

The other thing that I would say, costs up on the system, we delayed the output of the system, but we went live an we're shipping product.

Okay. Alright. That helps on that. Then last question and I will hand it off. The first quarter cash flow, free cash flow, or cash from operations, either one, seasonally looked somewhat weaker than is typical. Anything there? I mean I assume part of it's probably Nichols related but just wondering how we should think about the cash flow generation of the business in the first quarter and what it should look like for the year?

Yes. We anticipate growing our cash throughout the year. With the bulk of our cash generation really being third and fourth quarter, which is typical for us. First quarter is generally always a cash drain, but definitely this first quarter it was more of a drain than historical. We did use more cash for working capital purposes. Some of it building inventory. An example, Nichols is building inventory ahead of the oven shutdown. So some things that were intentional on our part, but we feel confident that we will grow the cash flow throughout the year.

So we shouldn't expect any sort of material change and turns relative to history? Is that what I get?

No. Not at all.

I was pretty strong with the Nichols team. I want you to run well when you run and if that creates a more work in process inventory, I was okay with that.

Okay. Got it. Thanks for your time. I appreciate it.

Thank you.

Thanks, Pete.

Thank you, our next question comes from the line of Jack Kasprzak, from BB&T. Your question, please.

Thanks. Good morning, guys.

Good morning.

I just want to make sure I caught, Brent, the bridge from the $0.22 reported loss to the $0.17 adjusted loss. Could you review that again, please?

Yes. The $0.22 and then we were back, hang on I'm trying to flip through to make sure I give you the right thing. I don't want to tell you the wrong.

Yes. Brent, it's actually in the press release. There's a table so the reported loss of $0.22 we've got a $0.2 transaction related costs and a $0.3 ERP implementation that gets you down tots $0.17.

So it was just those two?

Yes.

Got it. Okay. And on that issue of excess vinyl capacity I just want to make sure I understand. That's not anything new I assume, business has been soft here for a while and so that's just an ongoing issue? Or is there something new that's affecting that situation?

Think about the big extruder's it's us, it's Royal, which is Georgia Golf, [inaudible], [inaudible], some groups out of Canada,there's been no capacity takeout during the downturn and now you're five years into this, people will lower their prices just to get volume through the factory. I emphasize that another way, during the downturn we dropped to $38 million windows from $75 million. No capacity takeout. I would say people are getting undisciplined in the marketplace so we're responding to that but the capacity is long. The recovery is welcome but people are hungry to fill their factors.

I was just going to say there has been one player, if you looked over the last five to eight years, the gentleman that owned Royal, that sold it some time ago, has started up a fairly new business called Vision, up in Canada. That group would be adding net new capacity to the market. So even in a period where there has been over capacity issues, there has been some new coming on and Vision has taken quite a bit of share just in the last five years.

Okay. I guess with volumes up a little bit maybe there's a grab for that volume now that we're seeing a bit of increase, is that part of what's going on?

I would just say you've got, two, three year contracts coming up for review so it opening up the competitive window. I would say on the window fabrication side, among the big guys in the regional, it's also been very competitive.

Okay. And, Brent, your comment on ERP roll out in terms of the number of phases, have you guys said how many phases there are?

No, but I mean at some point you roll-off of this phase thing and then it becomes a way of life and I say that from the standpoint as long as we continue to grow through acquisitions, we will continue to have to convert locations on to SAP, but the goal clearly is at some time in the not too distance future where we have developed the in-house expertise that we can just do that with our internal resources and not be dependent on outside resources.

Got you.

So at some point we get to stop having to talk about phases.

Very good. Appreciate the color. Thanks, guys.

Alright.

Thank you. Our next question comes from the line of Phil Gibbs, from Keybanc Capital Markets. Your question?

Hey, Dave, Brent, Marty. Good morning.

Good morning.

The inventory build was a little bit surprising to me in the first quarter of the year. I would assume you're holding that level into the second quarter of the year if you're finally tapping into that revolver. Is that something that seams reasonable to you?

Yes. I would say we will hold a portion of that inventory build. Again, a part of that is building some inventory ahead of when we take the ovens down in Alabama so we will do some pre build of inventory to be able to handle the supply. That's intended to be about a two weak shutdown and a one weak startup so we will have, in essence, three weeks of inventory that we'll need to have prepared ahead of that. So yes, I think we will see slightly higher inventory through the second quarter with the ability to really get it back down in the third.

Okay. So Nichols is tying up cash right now and then you expect to get that back and then some in the second half I would assume?

Yes. We're confident of that.

Okay. And how should we think about the 2Q to 1Q bridge? And I apologize if you addressed this already on the maintenance expense. If the maintenance expense was X in the first quarter how much comes off in the second quarter?

Yes. With we spent about $6.4 million off the top of my head and we're projecting about $4 million in second, third and fourth quarter on a quarterly basis. And that $4 million per quarter would be less than what we spent in those quarters last year because, our objective was to move as much of the repair maintenance into the first quarter when we have the facility shutdown.

How does that jive with what you guys have been saying about increasing the preventative maintenance if your spending levels are lower?

I think we're right in line. It's moving our philosophy from [inaudible] to preventative. You want to do your preventative maintenance in the winter months when your demand is it at the lowest, and have your maximum up time when the demands is the highest.

Okay.

So I'm extremely pleased with our execution there.

And then just the last one on the housekeeping side. $46 million of D&A this year. How do we view that moving into the fiscal 2014 as the ERP launch gets into the second and third phases, is your depreciation going to taper down in 2014 or does it stay level and move higher?

I would expect it to level and then go higher as we go live with the second phase and then, we've got to do some more detailed modeling further out, but I would expect it to level off ideally after that one and begin to decline. And, again, it all gets to when we can move this effort to all internal resources and really bring the costs down significantly.

Okay. Thanks, guys.

Thank you.

Thank you. Our next question comes from the line of John Kohler from Oppenheimer. Your question please.

It's Oppenheimer & Close. Good morning, gentlemen.

Good morning.

Quick question. A couple questions. Capacity utilization for EPG if you have a rough estimate. I know it's across a whole bunch of different lines.

I would say 50.

Yes.

Okay. Great. The maintenance CapEx going forward on a normalized basis I was wondering if that's still in the $15 million or so annual range once you gets over the hump at Nichols?

Yes. We're right on that number.

Okay. Great. The $27 million in non Nichols CapEx, I was wondering if you could talk a little bit about where you're looking to spend some of that, projects or anything along those lines?

Yes. The ERP portion that we've been talking about already is a big chunk of it. Other things are, we generally have noticeable amount of capital in tooling in our vinyl business. That's for both replace tools that have worn out as well as tooling for new window lines, new profiles. That would probably be our second largest category. Then we roll into some new IG spacer lines that we're actually shipping one over to Europe as we speak today. We likely could have another line by the end of the year. Just for historical view on that, in 2011 we had no lines in Germany. Today we have two with a third one on it's way. That third one has already sold out before it lands and we're likely to be in that same position on a fourth one by the end of the year. So those would be the big buckets and then you get into a whole bunch of smaller efforts after that.

Okay. Great. And then on the balance sheet I know the revolver has been tapped and I understand it will come back, but as you look at the acquisition front, I'm wondering if you still maintain that same discipline that you had before or do you get a little more conservative maybe on your pricing now that you're going to be tapping the revolver?

No. I would say we would use the same discipline. Again, we're tapping the revolver in a very short-term basis. It's intentional. But no, we I think have been very disciplined through the downturn and we'll remain to be that way. We've walked away from many a deal just over the last 24 months just because the valuation wasn't right.

Alright. And then the last question is on that Nichols spend, how much if any of that went through the income statement?

Of the $6 million?

Yes. Exactly.

All $6 million of it.

Okay. Great. Thanks a lot.

Thank you.

Thank you. Our next question comes from the line of Keith Hughes from SunTrust. Your question, please.

Thank you. I understand there was a spread compressed at Nichols but given the strong poundage growth I was just really surprised it was only a $500,000 improvement in EBITDA. Can you just go over again what's happened and why we didn't see a bigger jump?

Yes. Just so the first part that you talk about the spread, $0.4 of spread,that's equivalent to $3 million impact reduction in our earnings even if we just hit the same volume numbers. So you've got a $3 million hit from spread, you've got a $2 million hit from maintenance, so that was our starting point, if you will. And then the incremental volume obviously helped us offset, a big chunk of that. We were more efficient so we did, on some of our conversion costs, operate more efficiently, which benefited us, but the spread in the higher maintenance costs in the first quarter was clearly the big drag.

How were you able to do so much higher maintenance when you had such a big poundage increase? It seems like that would really just take some maintenance off the table.

No. I mentioned 29 days out. We're really trying to drive a discipline at Nichols when we run wide or narrow that we run extremely well and I think it's reflective of the progress that we're making on that.

Okay. Thank you.

Thank you. (Operator Instructions). Our next question as it a follow-up question from the line of Daniel Moore, from CJS Securities.

Thank you again. Just following up on that capacity at Nichols. Given the investments that you made an the fact that you did nearly 60 million pounds despite being down for a month, should we think about the, quarterly capacity previously was 80 million pounds, should we think about that being closer to 90 million going forward?

You need to think about that when I prove it.

Fair enough.

Sometimes Nichols can be like my golf game. I just want to minimize the number of bad slots so when I lower my handicap, then you can make that assumption.

Understood. Appreciate the color.

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to Dave Petratis for any further remarks.

Thank you. As 2013 progresses we will continue to drive the operational performance at Nichols to new levels through our lean process initiatives an preventative maintenance approach. We will deliver the savings from last year's IG facility consolidation as well as drive productivity improvement and improve customer service as we grow our customer base across Quanex. All of this will benefit our shareholders in the long run and allow us to achieve our vision of profitable growth. That concludes today's call. Thanks for joining us and have a great day.

Thank you. Ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.