William C. Griffiths - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Nominating & Corporate Governance Committee Brent L. Korb - Chief Financial Officer and Senior Vice President of Finance.

Kathryn I. Thompson - Thompson Research Group, LLC John F. Kasprzak - BB&T Capital Markets, Research Division Robert J. Kelly - Sidoti & Company, LLC Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division Scott Justin Levine - Imperial Capital, LLC, Research Division William L. Baldwin - Baldwin Anthony Securities, Inc.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division John Jay Koller - Oppenheimer & Close, Inc..

Good day, ladies and gentlemen. Welcome to Quanex Fiscal First Quarter 2014 Conference Call. [Operator Instructions] During today's conference call, company management may make forward-looking statements about the future prospectives of Quanex Building Products.

Participants should refer to the company's 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, along 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.

Bill Griffiths, Chairman, President and CEO of Quanex Building Products for opening comments. Please go ahead, sir..

Thank you. Good morning, everyone, and thank you for joining us for our first quarter conference call. On the call with me this morning is Brent Korb, our Chief Financial Officer; and Marty Ketelaar, our Vice President of Treasury and Investor Relations.

During our last earnings call, I laid out our thinking on potential acquisitions as well as our early thoughts on future organic growth within EPG. Since then, we have announced acquisition of Atrium's vinyl extrusion assets in Greenville, Texas.

And while this was a small deal in financial terms, it was directly in line with our strategy to acquire vertically integrated assets from window manufacturers and enhance our position as a leading supplier of components to the window and door industry.

The integration of Greenville is now complete, and we have 2 new extrusion lines on order to further increase the capacity at this facility. We also recently announced the divestiture of our Nichols Aluminum business to Alaris.

Once closed at the end of March, this divestiture will pave the way for a new-look Quanex, focused primarily on supplying components to the window and door industry. It also gives us the financial capacity for acquisitions of scale, as well as both bolt-ons within our space.

Also, last quarter, we provided guidance of 5% to 6% organic growth within EPG, despite a strong close to the year. This conservative guidance was based on 3 quarters of below market growth, followed by a strong fourth quarter of 13.9%.

At the time, we questioned the sustainability of the fourth quarter number, particularly as we were entering the weakest season of the year. As it turned out, our first quarter growth came in at a healthy 12.9%.

These numbers include our screens business, which we acquired at the end of 2012, but excludes any non-fenestration products and as such correlates directly with the window shipment numbers reported by Ducker Worldwide. For calendar 2013, Ducker reported total window shipment growth of 10.1%.

On a comparable basis, although offset by 1 month, our trailing 12 months revenue growth as of the end of January 2014 was 8.8%. The improved growth rates over the last 2 quarters are directly attributable to market growth with our regional customers, particularly those in the South and the West.

At the same time, many of our customers who sell nationally have been building inventory in anticipation of a strong spring and summer selling season. There continues to be a high degree of optimism around a continued recovery in new construction and the early stages of a rebound in R&R.

If this materializes, we can clearly expect to see growth rates approaching double digits rather than the 5% to 6% we've previously predicted. As a further reference point, Ducker is forecasting 12% growth in calendar 2014.

The only word of caution is that, as a components supplier, we could see a marked and sudden slowdown, if our customers have difficulty selling through their inventory as a result of the prolonged winter or a slower-than-anticipated summer construction season.

Obviously, we will have much greater clarity on this and its impacts on operating leverage when we report our second quarter results. I am now going to turn the call over to Brent, who will take you through our first quarter results in more detail.

Brent?.

Thank you, Bill, and good morning to everyone on today's call. Consolidated first quarter net sales increased 9% to $202 million, while first quarter EBITDA increased to a positive $5.7 million compared to a loss of $4 million a year ago.

The improved results were due to higher sales across all products within EPG, coupled with a $2.8 million warranty settlement benefit. In total, the EPS loss was reduced from $0.22 per share in the first fiscal quarter of 2013 to $0.11 per share in the first fiscal quarter of 2014.

Included in the $0.11 loss for this quarter is a $0.02 per share income tax expense item associated with the conversion of one of our foreign operations from a branch to a subsidiary. This tax expense was fully recognized in the first quarter. We expect that 2014 full year tax rate to be closer to 38%.

Engineered Products ended the first quarter with net sales up slightly more than 19%, and EBITDA was up $4.8 million over the year-ago quarter. As Bill said earlier, North American fenestration sales for the last 12 months increased 8.8%, including Aluminite's revenues on a pro forma basis. Preliminary Ducker numbers have U.S.

windows shipments increasing 10.1% for the 12 months ended December 2013, driven by a 19% increase in new construction shipments. Sales increases at EPG were largely driven by overall growth across EPG, as well as the inclusion of Aluminite sales.

Nichols' net sales for the first quarter were $79 million compared to $85 million in the year ago quarter. Nichols shipped 60 million pounds, slightly better than the 59 million pounds shipped in the year-ago quarter.

The Nichols team has done an excellent job, achieving operational efficiency improvement, despite a difficult spread environment and the distractions of the pending sale. Nichols' first quarter 2014 EBITDA was a loss of $2 million compared to the year-ago quarter's EBITDA loss of $2.6 million.

The improvements from operational efficiencies and lower repair and maintenance costs were offset by a decrease in net spread. Net spread decreased $0.04 to $0.40 per pound in the first quarter versus $0.44 per pound in the year-ago quarter, and decreased sequentially by $0.01 per pound when compared to the fourth quarter of 2013.

We recently received government approval to consummate the previously-announced sale of Nichols; and as such, the transaction is expected to close on March 31. In the future, Nichols will be treated as a discontinued operation for financial reporting purposes.

Corporate expenses were $8.4 million this quarter compared to $12.3 million in the year-ago quarter. Included in the current quarter results was $900,000 of expenses split equally between transaction cost, deferred compensation expense and fiscal year 2013 external audit fees.

As you will recall, our corporate expense guidance of $30 million for 2014 excluded the impact of deferred compensation transaction and LIFO inventory-related items. We ended the first quarter with a cash balance of $26 million and no outstanding borrowings on our revolving credit facility.

Our historical seasonal pattern shows us consuming cash during the first 2 fiscal quarters, with the first quarter being the largest cash-consumption quarter, followed by significant cash generation in the third and fourth quarters. We expect to see that pattern continue in 2014 as well. I'll now turn the call back to Bill..

Thanks, Brent. We are obviously pleased with such a strong start to 2014 and continue to be encouraged by the optimism surrounding the construction markets in general. As we progressed through the year, we will continue our focus on profitable growth.

We will pursue organic growth on a customer-by-customer basis, and we will continue to aggressively pursue operational improvements at each of our EPG divisions. We will also spend a considerable amount of our time and energy working on the current acquisition pipeline.

We continue to believe that as the recovery takes hold, capacity constraints within the window industry will bring additional outsourcing opportunities for a more focused Quanex. Now, I would like to open the call for questions..

[Operator Instructions] Our first question comes from the line of Kathryn Thompson from Thompson Research Group..

The first is, what's feedback from OEMs as you pursue your asset acquisition strategy? And also, could you give a little bit more color on how the integration is going with your most recently announced acquisition in the Dallas area?.

Sure, Kathryn. First of all, the Greenville integration is effectively complete. It's now well entrenched within the rest of the vinyl profile business. We have 2 new extrusion lines on order to increase the capacity there, based on the strength of the markets in the southern part of the country.

As far as discussions with the OEMs are concerned, we continue to have meaningful discussions with a number of OEMs regarding further outsourcing opportunities, as well as potentially purchasing some of their assets similar to Greenville.

At this point, there are still -- while we're still talking, it could very well be next winter before other similar transactions are consummated. OEMs are gearing up for what they expect to be a very busy spring and summer. So we'll just wait and see..

And following-up on the integration, what cost saves or what synergies were able to be achieved as part of that integration?.

This is a very small transaction in financial terms. The strategic value of this acquisition is to put us in closer proximity to customers that are growing disproportionately faster because of the strong markets in the South..

Residential remodeling sales, where do you see in terms of product mix? And in particular, what are you seeing in this other building product categories where consumers are starting to move up the product scale as the economy has improved? What are you seeing in trends in terms of your product mix sales?.

a, international players; and b, the local players. So we're starting to think about this more in terms of a customer-by-customer, region-by-region, and we're also starting to think about this more in terms of categorizing our products into good, better and best, without trying to be definitive as to where those products end up.

In discussions with our key customers, even they have difficulty in understanding whether their products go into new construction or R&R; many of our customers actually look at R&R in 2 separate categories, remodeling being a different customer and a different purchase than repair. So it isn't as clear as we perhaps first thought.

But we can say for sure, our regional customers and those in the South and West, that's where the growth is coming from..

That's helpful. And then my final question.

Is there any relative difference in performance across EPG by product types? In other words, is there a difference in spacers, or extrusion, or screens? And if there is, what would be driving the delta?.

They are very different. And it's a very long complicated answer. But there are differences between product categories in terms of growth, and there are differences in operating leverage in those businesses as well. We're not going to go into that level of granularity at this point, but there are certainly differences. They are not all the same..

Our next question comes from the line of Dan Moore from CJS Securities..

This is Colin [ph]. I am filling in for Dan. Recently, your view of the window market has been more cautious than Ducker's.

Given Ducker's 12% projection for fiscal '14, do you still see that as being a bit aggressive or is that still a reasonable projection, based on what you're seeing today?.

We all know we've had a horrible winter. It's dragging on longer than anybody anticipated. And while we continue to see the strong growth in the South and the West, it remains to be seen what happens in the North and Midwest.

And does it just create pent-up demand? And if it does, is there enough capacity to construct enough new homes, build enough new windows? I'm not sure. But we certainly are optimistic based on our last 2 quarters and the discussions we've had with our customers..

One more question. Can you update us on competitive environment in EPG.

Has there been any change in the degree of pricing pressure you've seen over the past few quarters, or is it more of the same?.

So the pricing pressure that we talked about last year has already been built in to our 2014 numbers. And I do not expect that at this point, particularly as the markets continue to recover, to see more significant price pressure as we go through 2014.

Having said that, we are now seeing, on the vinyl profile side of the business, raw material price increases, and obviously, some resistance from our customers to have those pass-through.

So -- well, perhaps, we're not getting as much pressure on price, we are seeing some cost pressure in the vinyl business, which is why we continue to be somewhat cautious about margin improvement of any significance. Obviously, as volume improves, we expect to see a better operating leverage.

But that's the one headwind that we have some concerns about..

Our next question comes from the line of Jack Kasprzak from BB&T..

The CapEx guidance, I think you gave last quarter, was $40 million.

Will that change following the sale to Aleris?.

Yes, it will have a slight reduction. And we haven't gone back now that we know the timing of when that will be. Will it change dramatically? Probably not. I mean, we'll have a slight reduction for what we'll spend at Nichols. We may have some slight increases at EPG as well over the remainder of the year..

So a little lower run rate, but not material or meaningful?..

I think that is the fair way to put it..

Okay. And on corporate expense, similar question.

Will the corporate overhead number run rate change very much following this sale to Aleris?.

No. Well -- I mean, what you have to understand is we gave the guidance through the $30 million at the start of the year. I mean, we obviously had contemplated what we might do with Nichols at that time. So a lot of the restructuring and things that we undertook at the end of last year contemplated this transaction..

And Bill, I'm just curious on your comment regarding capacity constraints in the window industry offering you guys potential opportunities.

What is the nature of those capacity constraints? Were there -- was there a meaningful amount of closures of capacity by virtue of maybe some consolidation or during the downturn? And now that things are getting better, there just people are bumping up against those constraints?.

Yes. Last -- clearly, through the downturn, there were window plant closures. And on a very specific factory-by-factory, region-by-region basis, there are some customers who, last year, was starting to bump up against capacity constraints.

Not universally, I think if you look at global capacity across the country, you would come to the conclusion there is still excess capacity. But at any -- in any given location, that may not be the case. So we've talked about the opportunity, given capacity constraints, to maybe purchase assets from customers.

But on offshoot that is -- some customers are not ready to do that yet, but are potentially to look at further outsourcing, while still keeping some capability in-house..

Our next question comes from the line of Robert Kelly from Sidoti..

Just a question on the opening comments. You had a 12.9% growth number in there for sales related to EPG. Was that the organic growth? Or is that 19....

Okay. So to try and make sure we got the numbers straight here. So within EPG, there are some sales, clearly, that are international, and there are also some non-fenestration sales.

And in order to try and correlate more directly with Ducker's numbers, the 12.9% and the 13.9% I cited for the fourth quarter of last year, those numbers exclude any non-fenestration sales within EPG, and they include, on a pro forma basis, our Aluminite business, which we acquired at the end of 2012.

So those numbers are the most directly comparable to Ducker's total shipment numbers. Now last year, because the acquisition of Aluminite took place in December of '12, most of the numbers, the growth rate numbers we cited, excluded Aluminite rather than including them on a pro forma basis.

This year, because we clearly will have owned it for the whole of calendar 2013, we will include those numbers. And the reason that it's particularly relevant is, obviously, in the case of Aluminite, just about 100% of their revenue is -- goes to the entry price point window market.

Also, because they were the biggest beneficiaries of Quanex's sales network, their growth rates last year were disproportionately higher than the rest of our product lines. So hopefully, those numbers now will make more sense on a go-forward basis. But we're trying to level the playing field here as we enter 2014..

So the 19% EPG growth rate, was that an organic number that you did in 1Q or...?.

Yes, but it includes the international component, and it also includes any non-fenestration sites..

So what percent of EPG sales are fenestration versus non-fenestration? What percent....

It is roughly 80% to 85% fenestration..

So 85% of your business is growing around 13% in 1Q?.

Yes..

The Greenville acquisition you said is completely integrated.

Is there going to be material sales and EBITDA benefit from that business in F'14?.

No. We will expand capacity there as rapidly as we can, but it will not have a material effect on fiscal '14's numbers..

And then, also during the fourth quarter, you hung an EBITDA target for F'14, $55 million to $65 million.

Is that still the bogey with Nichols' pending sale?.

Yes. It is. And we'll -- as we get greater clarity as we close the second quarter, we will update the guidance numbers at that time, because we'll have a much clearer picture there of how the year is going to turn out..

Sure.

Was the EBITDA target also contemplated with the Nichols sale in mind, or was that a blended number?.

No. Well, it has a little bit of Nichols in it. But -- we'll have to get back to you end of the second quarter. And this is the safest bet at this point..

Okay. And then just one follow-on. You talked about the growth with the regional customers and the South and West being above average with respect to EPG.

Was that the benefit of laying the groundwork there over the previous couple of years and the markets turning? Why all of a sudden is the South and West regional market showing such a strong growth?.

I think, the reason it's showing strong growth is, if you actually look at where the new construction markets are growing the fastest, it clearly is in the South and the West. I think, in addition to that, we have been saying for some time, we are focusing on those markets.

And I think the other reason for the growth in those particular quarters is that they were not as affected by weather as the rest of the country..

Okay.

So it's more of a focus on targeting the builder where you really hadn't done that in the past?.

Right. And we've consistently said too that one of our objectives is to try and get closer to the customers that are growing and, obviously, the Greenville acquisition was part of a means to do that..

Our next question comes from the line of Keith Hughes from SunTrust..

A question on the cash payment coverage from the divestiture.

Is there any tax that you're going to have to pay associated with that?.

Yes. So the way that this will occur is, yes, there is tax that will be associated with the transaction itself. On the flip side of it, we do actually get to enjoy the benefit of utilizing net operating losses. So upfront tax, yes. Over time, we in effect get to recoup that through the use of net operating losses..

And another kind of detailed flush on the D&A for the company.

Do you have an estimate what that will be post transaction on a quarterly basis?.

So I would say is that I think the best way to handle all these questions as it relates to Nichols is, we will develop a clear view into what we look like post-Nichols that, that will get out instead of one-offing these things..

That'd be really helpful..

Yes..

So bigger-picture question on the use of those proceeds and acquisition.

Are there opportunities to -- with some of the large window players, and I'm thinking one specifically -- to pull off big chunks of their component business? Is there that kind of thought process going on in windows right now, or is it going to be more like the Atrium and JELD-WEN deals where it was a single product or a single plant here or there?.

So our side of those discussions have been, we will take large chunks. We are prepared to take large chunks. We still have to get to some of the OEMs sort of past the thought process of what's the risk of giving up a substantial portion of my insourced business. So I think that opportunity does exist.

I think, it would be premature to expect something of significance to happen quickly, particularly as they're very focused on a busy spring and summer. Obviously, it's much easier with greenfield -- Greenville-sized assets to convince them to divest..

I have a question. In your prepared comments, you have referred to maybe some choppiness here in short term, given weather, being some wobble in the homebuilder orders.

Are you getting some indications there might be an inventory issue going on or something like that coming here in the very short term?.

No. Here is what we know for sure. We know that some of the large regional customers in the Midwest and the North and some of the national customers have been building inventory through the winter. That's not uncommon. We've seen, perhaps, larger inventory builds this year than in the past.

And my only concern is this, and that the word of caution is simply, because they are now sitting on some substantial inventory, if the winter drags on and look what's happened this week, if it drags on much longer, 1 of 2 things could happened, right.

It can either cause pent-up demand and all of that inventory gets sold through, as expected; or if it just slows down the construction season, we would be the first ones to sort of see our sales get cut, as they sell through the inventory, before they ramp up window production again. That's the only word of caution.

We have no insight at this point as to whether that will or will not happen, but it is just a word of caution as opposed to something we've seen. In the month of February, while we still don't have our financials closed yet, clearly, the month of February, had slower growth than we have seen through the early part of the winter..

Our next question comes from the line of Scott Levine from Imperial Capital..

Certainly, it sounds like you're encouraged by what you've heard and seen in the market in the past couple of months. And I was wondering if you could provide some color with regards specifically to the higher-end line.

And is most of that optimism tied more to new home construction in lower-end products or are you incrementally encouraged by what you've seen on a higher end, if we see mix of a positive impact on margin, or is that partly overdoing it a bit?.

I think it's a little premature. But I will say that, with some customers I have talked to directly, they do have an expectation that the higher-end R&R market is going to recover this summer. I'd still like to see more tangible evidence of that at this point. But clearly, the new construction market, at the lower end, is still on fire.

So -- and the level of optimism, it is hard to find anybody in the industry, no matter what segment they operate in, who seems to be pessimistic at that point going -- at this point going into the new year..

And then 2 other quick items. Can you remind us how your U.S.

sales break out nationally in your exposure, roughly speaking, South and West in the one hand and the Northeast, perhaps, and the Midwest, and the general sense of your regional breakout in your domestic business?.

Actually, we don't have -- no, not that we don't have. We have not released that level of granularity. So at this point, I think, we'll not go into that level of detail..

With regard to the acquisition pipeline, any comment with regard to your interest in expanding international operations, or are you interests primarily in the domestic market?.

We've always said the priority would be, if we can do something directly in our space in North America, that would take precedence over doing something internationally. And as you know, we are a conservative company, and the events in Eastern Europe over the last couple of weeks kind of bring further caution to doing something aggressive in Europe.

And that just becomes another part of the risk assessment of any potential transaction we may have there. I think, in the short term, you will see us still more focused on North America. But we continue to assess opportunities internationally as well, but as a second priority..

One last one.

Preliminarily, would you expect to update your guidance for fiscal '14 pro forma for the divestiture of Nichols at the time that sale closes, or would you expect to do that simultaneously with the 2Q earnings report?.

We'll certainly do it with the second quarter report. We still -- literally, we only just received the government approval. So we are, obviously, very busy trying to finalize the transition details of Nichols right now, and really haven't given a great deal of thought to how best to communicate what we look like after Nichols.

To the extent what we think it's doable and meaningful, we will prepare an investor presentation after the divestiture to sort of clarify a lot of the detailed questions, okay. But no later than the second quarter earnings call, for sure..

[Operator Instructions] Our next question comes from the line of Bill Baldwin from Baldwin Anthony Securities..

Can you give a rough breakdown between what you think the size of the, say, new construction market or your -- for the sake of the way you define your product, good, better and best, the size of the products for your good -- size of the market for your good products versus the size of the market for the higher-end R&R-type products, just looking at the U.S.

markets?.

Yes. I can't give you that information today. But what I can tell you is, that is a work in progress that we are trying to get very definitive on. We have a matrix of where our products fall, and we are actually working through the math right now, and we will put that in our next investor presentation. So we will give much greater clarity on that.

But we're just not quite ready right now..

Our next question comes from the line of Al Kaschalk from Wedbush..

Can you update us on the -- on your -- looking at the partnering domestically -- I know what the Atrium assets you bought, but where do you stand today, especially given the news out of Europe and your comment just recently about that being more secondary in terms of growth?.

It was, in fact, the first question, so I'll cover it again briefly. We continue to have discussions across the board with our customers about divesting the assets. We're also having meaningful discussions about further outsourcing, if they don't want to divest assets. Some of those are large, some of those are small.

We also have other acquisition opportunities within our space that we're actively in discussions over in North America. So lots of discussion taking place, different levels of interest at different customers. But other than that, nothing further to report definitively on it.

But it continues to be a strategy that we will pursue through the balance of this year..

Our next question comes from the line of John Koller from Oppenheimer..

Quick question on capacity utilization maybe in broad terms by product segment, or however you'd like to give that out, just to get a rough idea of where we sat..

I don't have a definitive number. Right now, we have no capacity constraints and don't expect to see any capacity constraints as we go through 2014..

This does conclude the question-and-answer session of today's program. I'd to hand the program to Mr. Griffiths for any further remarks..

Thank you. I'd like to thank everyone for joining us for today's call. We are clearly optimistic about the opportunities in front of us for the remainder of 2014 and look forward to updating you on our progress at the end of the second quarter, and, quite possibly, ahead of time at some of the upcoming investor conferences.

So thank you for your time, again, today. Goodbye..

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