QUANEX THE LESS

(FORTUNE Magazine) WHEN was the last time an old-dog steel company thought up new tricks to teach the world? Watch Quanex, founded in 1927 as Michigan Seamless Tube Co. Now in Houston, it has taken the highly efficient technology of mini-mills -- which generally produce nothing fancier than bars for reinforcing concrete -- and upgraded it to make high-quality steel for specialized applications like ball bearings, camshafts, and tank treads. Most of the armor of Desert Storm rode to victory on Quanex steel. Now Carl E. Pfeiffer, a reflective mechanical engineer who became president in 1971 and chairman in 1989, plans to ride Quanex to victory in the aluminum business -- and from there to manufacturing other metals and materials such as graphite composites or ceramics. (The company already has a small mill supplying about $25 million of titanium a year for aircraft engines.) Says Pfeiffer: ''We were a specialty-steel company, we are becoming a specialty- metals company, and we will be a specialty-materials company.'' The reason for his confidence? The combination of mini-mill efficiencies and the high profit margins commanded by custom products has turned Quanex into a hot growth company -- and vaulted it into the FORTUNE 500 (at No. 447) for the first time this year. Between 1987 and 1990, sales nearly doubled, and net income shot up almost fivefold. Lawrence, estimates that the recession will cut earnings about 50% this year but notes that the company is still profitable in an industry where many are not. Says he: ''Quanex is a hidden gem. They do what they say.'' It helps that Pfeiffer, 61, and his gregarious second-in-command, President Robert Snyder, 58, are battle-hardened veterans. In 1981, Quanex began building a $125 million specialty-steel plant in Fort Smith, Arkansas, financed in part by abundant cash flow from customers in the booming oil industry. Then oil prices started falling, and cash flow dwindled. In 1982, after they had already sunk $70 million into the plant, Pfeiffer and Snyder sold junk bonds to complete it. Although they paid off all debt by 1989, ; Snyder says Quanex was ''in very deep trouble for a while. Every single asset we had was pledged as security to someone.'' Out of that peril they fashioned their present, sometimes unorthodox, modus operandi. First, Quanex diversified its customer base. The oil industry's share of company sales shrank from 46% to 7%. Now Quanex steel is used in cars, trucks, trains, agricultural and mining equipment, chemical plants, and power stations. The company ships to Europe and Japan. Second, Quanex now keeps almost no inventory -- a lesson from the days when steel intended for the oil patch rusted on its lots. At Fort Smith, for instance, every batch of steel is a custom recipe, sold before it's even cooked in the pot. When cool, it is bar-coded with the owner's name and address. Another piece of the new strategy: Quanex is happy to settle for 10% or less of its markets. That way it can avoid both overdependence on a single industry and costly price wars to maintain share. Finally, Quanex is the quintessence of lean. ''We don't like to fire people,'' says Pfeiffer, ''so we don't hire many.'' Headquarters has only 32, down from 94 in the early 1980s. Mill workers get a bonus based on the amount of steel shipped, minus any defective steel that comes back. That gives them an incentive to make defect-free steel using as few people as possible. Quanex takes 1.9 man-hours to produce a ton, vs. about four hours for a big integrated mill. Mini-mill companies like Nucor are about as efficient as Quanex, but their commodity-grade reinforcing bars sell for roughly $300 a ton, while Quanex specialty steel fetches around $500. After Quanex paid off its debts, Pfeiffer was inundated with proposals from banks eager to lend him money to do a leveraged buyout. Instead he opted to devote the company's cash flow to growth. For $105 million he acquired Nichols-Homeshield, a small company making aluminum sheet for gutters, downspouts, and windows. (Andersen Co. is a major customer.) Early next year the company will open its first aluminum mini-mill in Davenport, Iowa, which will sextuple capacity to 270 million pounds a year by 1995. Pfeiffer's game plan is to upgrade Nichols from commodity sheet to specialty aluminum. Lawrence projects that Davenport will help increase earnings per share from about $1 this year to $4 by 1995. A gem indeed, like polished steel.

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