Chairman's Message

2009 was a year for the history books. Our children’s children will study the political changes and global economic forces that were at work throughout the last 15 months. Quanex Building Products (QBP), while facing dramatic declines in our end markets, found ways to improve our financial strength and gain market share across our businesses. Our teams invested significant time to deeply understand our $35 billion industry, its channels, segmentation and customers. QBP pulled together teams from across our businesses to collaborate and discover growth opportunities.

We ended 2009 with one of the strongest balance sheets in our industry. We improved efficiencies at our Engineered Products business, positioned Nichols Aluminum as the strongest player in its niche, reduced injuries in our factories, and deepened our understanding of our existing and potential customers. A recession can be an opportunity and the team at Quanex Building Products took full advantage!

Financially, it was a difficult year. You could call it the tale of two halves. In our first six months we saw huge losses driven by asset impairments totalling $183 million and severe declines in demand across all product lines, exacerbated by a significant fall-off in aluminum prices, resulting in a first half operating loss of $213 million. Our team’s early response was to size our work forces to the “new normal” and manage the business to improve our cash position. We reviewed our product portfolio for pricing opportunities and we were successful in improving margins at our Engineered Products business. By sizing our business, improving our pricing and productivity, and share gains, we were able to earn over $33 million in the second half of 2009. Throughout the year we aggressively managed the Company for cash generation and our cash balance grew by $57 million, from $67 million to $124 million by fiscal year end. This was achieved through the application of lean methodologies and by challenging ourselves to justify every dollar in the system. I am proud of our financial performance in a year when demand plummeted to historic lows.

Innovation has been a key driver for our business. Window and door markets will continue to be driven by energy efficiency and durability. We continue to work with our key customers to earn a seat at the design table. Quanex Building Products develops world class fenestration components that make windows and doors more energy efficient, aesthetically appealing and cost effective. A year ago, I committed to increasing collaboration among our teams at the Engineered Products divisions: Mikron, Truseal and Homeshield. Working together, our teams are taking a systems view, in addition to the existing component perspective, that has yielded exciting new products. In the spring, we introduced the ImperiClad™ door system, which combines MikronWood™ and Homeshield’s patented door threshold. The ImperiClad system gives customers a water- rot- and termite-proof door system that is also easier to install. A second breakthrough was the EnergyCore™ window system which combines Mikron’s industry-leading vinyl profiles with Truseal’s energy efficient insulating glass spacer system. The combination generated the most energy efficient vinyl window system on the market. EnergyCore was recognized by BUILDERnews® magazine as a product of the year in 2009. Working together to develop these and other breakthrough products, Quanex Building Products has established a portfolio of window and door components and systems that are better than ever.

In the second half of the year, we focused on gaining a deeper understanding of our customers. Working across the Engineered Products divisions and together with an outside consultant, we interviewed over 100 current and potential customers. We drilled down to understand both how their window and door products go to market, as well as their value streams. We closed 2009 with a deeper understanding of our markets, channels and customers’ needs. We now believe there are excellent opportunities to grow our business organically over the next several years, beyond our traditional customer base. Our commitment is to use the combined knowledge of our Engineered Products businesses to grow our revenues faster than the growth of housing starts and the repair and replacement markets.

We drive continuous improvement and efficiency in everything we do and efficiency starts with the safety and health of our team. In 2009 we made significant strides in making safety an unconscious act, like breathing. All employees, including myself, are required to have three hours of safety training targeted at improving safety, on and off the job. The result of this and other safety programs was a 40% reduction in recordable injuries versus 2008. Safety is one of the “True North” indicators of a World Class Organization and we took a big step in 2009 to  raising our safety culture. Our goal is to be the safest team in our industry. The health of our teams is also a key priority. In 2009 all employees were incentivized to participate in health risk assessments or physicals. Over 60% of our employees took advantage of these assessments. We believe that assessment, corrective action, prevention and the promotion of health education and lifestyle is our best path to the reduction of rising health care costs. Continuous improvement and efficiency worked in other areas of our business, beyond just safety and health. Mikron implemented SAP during the year, and although the transition was tough, the information system will strengthen and enhance their capabilities as the leading producer of vinyl window systems in the fenestration industry. Homeshield completed the consolidation at Chatsworth, IL. The project consolidated two plants into one, reducing costs and driving efficiencies. QBP invested $16 million in capital expenditures in 2009, with the majority going to Nichols Aluminum where we invested $7 million to update controls that will further strengthen its low cost processing advantage. In 2010, we will work to sharpen our edges through further investment in the skills of our people, our systems and improving the efficiency of our working capital.

The future is BRIGHT at QBP! We are not forecasting a big turnaround in the primary drivers of our business and have therefore built our 2010 business plans on a basis of 600,000 housing starts and a modest increase in repair and remodeling. To many this looks conservative and we hope they are right. Our philosophy on continuous improvement, and our belief in the collaboration of our business units toward growth, is what makes the future bright for Quanex Building Products. We learned through the study of our customers and our markets, there are numerous opportunities for Engineered Products within the 60% of the North American fenestration industry that we currently under-serve. We believe we can continue to outgrow our industry and our end markets by bringing the financial strength of QBP, our innovation and outstanding quality and customer satisfaction to these customers. It’s clear that it will be a long road to economic recovery, but we believe our energy efficient window and door components and systems and the American drive toward more energy efficiency will be a great opportunity for QBP. Rest assured that our employees will be focused on making the best of a challenging 2010.

Thanks to all of our team’s commitment to driving to be the best in everything we do. Thank you to our Board of Directors for your support and guidance. Thank you to retiring members Richard L. Wellek and Joseph J. Ross for your many years of service on the Board. And thank you to our shareholders for your continued confidence in our Company.

My very best,

 

 

Dave Petratis
Chairman, President and
Chief Executive Officer