Raymond A. Jean
Chairman, President and
Chief Executive Officer
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We are pleased to report this record-setting performance for fiscal
2002, but what gives us a particular source of pride is the significant
improvement in our balance sheet. We entered the year with a debt
ratio of 44% and ended it with 15%. If we do not make any acquisitions,
we could be debt free within six months. Clearly, we have the financial
means to capitalize on our organic growth opportunities and to make
acquisitions that build upon our strong competitive positions.
A Different Quanex Last year we started to redefine
the Company for our employees, our customers, and our shareholders.
We laid out strategic guidelines for our future based on the concept
of core businesses serving target markets. People responded –
both externally and internally. They began to see opportunities
and ways to grow the Company they never saw before.
People began to realize that Quanex is not a steel company, or an
aluminum company, or an operations-driven company. Rather, we are
a market-driven manufacturing enterprise, one that strives to achieve
unique positions and distinctive product offerings in two market
segments – Vehicular Products and Building Products. With
that view of who we are and what we aspire to, people better understand
our economic drivers and outstanding potential for growth.
Internally, we are also transforming our management philosophy from
that of a holding company to that of an operating company. As a
holding company, it is our view that value is created by business
units’ management operating close to the customer. While it
is important to maintain this precept, we also believe additional
value for our shareholders can be created through the aggressive
pursuit of operational and strategic linkages among our business
units. Perhaps most important, this approach makes it easier for
our people to share ideas and ingenuity about solving business problems.
It is a way to recognize and embrace better ideas and develop ways
to leverage them across our businesses.
Quanex’s emerging strength as an enterprise lies in our ability
to deliver added value to our customers in our served markets, while
improving our internal processes – how work gets done –
to drive productivity gains. We call it being market driven and
process based.
What it Means to be Market Driven The true power
of Quanex is only partly rooted in our unique metal processing capabilities.
If we based our business model solely on our metallurgical know-how,
we’d be little more than a collection of skilled engineers
pouring and shaping metal. What really drives us is a focus on understanding
what our customers need, how we can improve the functionality of
what we sell them, and increasing the productivity of their processes.
At MACSTEEL, our core Vehicular Products business, we recently completed
capital projects to increase our value-added capabilities, such
as bar turning and cutting to spheroidized annealing, in order to
optimize the supply chain by shortening lead times, reducing costs
and lowering inventory levels. We continue to seek ways to reconfigure
the value chain beyond the obvious to not only create new market
opportunities, but to ultimately strengthen the competitive advantage
of our customers as well.
At our Engineered Products Division, our core Building Products
business, Quanex provides proprietary products, along with
aluminum and wood component design support for large door and window
OEMs (original equipment manufacturers). We partner with them to
develop more value-added products as a way to help make their products
work and look better.
That’s what being market driven is all about: we don’t
just sell products – we market increased productivity and
performance.
On Being Process Based Customer focus alone doesn’t
ensure success. Excellent customer satisfaction can only be achieved
through excellent operational execution. To live up to our extraordinary
potential, Quanex is committed to robust and disciplined operating
principles that create continuity and inspire new levels of achievement.
Implementation of lean manufacturing principles is the cornerstone
of our corporate culture, and it continues to broaden and deepen
its impact on our organization. We apply the Kaizen mindset –
continuous improvement – to all functions: from manufacturing
to accounting to sales to engineering, to drive real improvements
in all of our processes.
We are intensifying our training and doing more value mapping. Our
use of “six sigma” as a tool is gaining momentum, particularly
at our large metal businesses, where we have considerable opportunity
to reduce process variation. Emphasis on the arsenal of lean tools
varies, but all our businesses are in the game to produce tangible
benefits in 2003 and beyond.
The human resources development process is also coming under closer
scrutiny, as we move to improve our pipeline of talent. We must
identify and develop more leaders of process change to firmly establish
and sustain the “we can do it better” culture we seek
and are determined to have. Identifying and developing our future
leaders is a priority for me.
Growth Growth is also a top priority for Quanex.
Our invigorated focus on our customers and target markets is driving
internal growth initiatives. We also seek sound strategic acquisitions
to complement these initiatives, thereby accelerating our overall
growth and strengthening our competitive advantages. Our powerful
cash flow generation gives us the ability to pursue an active acquisition
program; however, we recognize that superior cash flow generation,
without disciplined allocation of capital, does not benefit shareholders.
Our acquisition criteria are clear. First, we look for acquisitions
where we can leverage the competitive advantages of our core businesses,
or where the addition would add to our current advantages and more
quickly create value. Secondly, we carefully consider the return
on invested capital (ROIC) on all acquisitions, fully expecting
that investments must be capable of earning more than their cost
of capital, generally within three years.
Growing our core businesses is imperative, and the acquisition of
Colonial Craft in February 2002 is a great example of how we want
to go about it. We are now seeing other reasonably priced acquisition
prospects that fit our acquisition guidelines.
Developing new products and new processes is another key to growing
Quanex. Since we are much more attuned to our customers and their
needs, we now have a focused process to help us turn that knowledge
into successful new products and value-adding processes.
Governance Chairman Emeritus Carl Pfeiffer succumbed
to a long illness in July, but not without a valiant fight. It took
lots of the “right stuff” to bring on a unique, low-cost
steelmaking process and Carl had the courage and willfulness about
him to see it through! We will miss his counsel.
In my experience, most public companies value the trust placed in
them by employees, customers and shareholders. It is therefore very
upsetting to witness the breach of that trust by the leadership
of a few large companies. This behavior is simply unthinkable at
Quanex. We value the trust you place in us to do the right thing
and to tell it like it is. I appreciate the guidance and encouragement
of our independent Board of Directors as we continue to raise the
bar on our excellent governance practices.
Outlook Quanex’s primary demand drivers are
light and heavy-duty vehicle builds, along with building and construction
activity, primarily residential housing starts and remodeling expenditures.
We are a consumer durables-driven firm, and we believe the favorable
demographic trends for housing, coupled with increasing innovative
designs for light vehicles, provide us with solid fundamentals for
growth. These markets ended the year on a very strong note, although
we do expect the consumers’ appetite for new vehicles and
homes to moderate somewhat next year.
But with a focus on increasing our content-per-vehicle built in
North America and new products and programs in our Building Products
segment, we have the ability to outpace the underlying
performance of our target markets. Furthermore, should there be
a sharper drop in demand from our primary customer base than we
expect, our low-cost metal businesses are nimble enough to move
products to less strategic and perhaps more buoyant end-markets.
We are indeed well positioned to outperform our markets and competitors
in 2003 and beyond, and we are determined to do just that.
In 2002, perhaps more than ever before, we counted on talented,
passionate people to drive us forward. And drive they did . . .
to record levels! I thank them for their contributions.
We are working diligently to ensure that our strategy is clear,
our operational principles are broadly understood, and their execution
is increasingly crisp. We remain confident that our drive for growth
and operational excellence will result in continued opportunities
for our employees, quality solutions for our customers, and value
for our shareholders. We are committed to making this 75-year old
company a lot better.
Sincerely,
Raymond A. Jean
Chairman, President and Chief Executive Officer
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