William C. Griffiths - Chairman, CEO, and President Brent L. Korb - CFO and SVP of Finance.

Nicholas Coppola - Thompson Research Group Daniel Moore - CJS Securities Scott Levine - Imperial Capital Al Kaschalk - Wedbush Securities Keith B. Hughes - SunTrust Robinson Humphrey.

Good day, ladies and gentlemen. Welcome to Quanex Fiscal Third Quarter 2014 Conference Call. At this time all participants are in a listen-only mode. (Operator Instructions). During today's conference call, company management may make forward-looking statements about the future prospects 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 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 and thank you for joining us on our third 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.

This has been a rollercoaster year for the housing industry in general and the window industry more specifically. We began with a high degree of optimism for a strong construction season and a recovery in the R&R market. Since the beginning of the year however, we have seen mixed signals.

Strong multifamily starts, weak single family starts, slower existing home sales, and sporadic activity in the R&R market. Housing starts for 2014 are now expected to be up by 9% rather than 19%. Similarly window shipment growth forecast have been cut in half since the beginning of the year from 12% to 6%.

Ducker recently reported 5.5% growth for the trailing 12 month period ended June 30th. Disappointing? Yes, but a recovery nonetheless. We continue to believe that housing starts will recover to 1.5 million and together with a modest recovery in R&R window shipments will recover the 65 million units.

However, we also believe that this will not occur until 2018 or perhaps even 2019. If the current forecast of 46.6 million units for 2014 holds up then 65 million units represents 40% growth over the next four to five years or said another way steady growth of about 8% per year.

Again we consider this good reason to be optimistic about our long-term future. At the end of this quarter revenue growth for North American fenestration sales was 9% for the trailing 12 month period. This compares favorably to Ducker's reported 5.5% trailing 12 month number and their current full year forecast of 6%.

While we expect the growth rate to slow somewhat in the fourth quarter, we still anticipate being within our full year guidance range of 8% to 9%. Operationally we continued to see improvements this quarter which helped to offset the headwinds in our vinyl profile business. Unfortunately this offset will not continue into the fourth quarter.

As we have previously disclosed, we have taken an 11% increase in resin cost so far this year and the resin suppliers are trying to push through another 2% to 4% increase this quarter. The impact of this together with higher operating costs will impact profitability through the fourth quarter and into the first quarter of next year.

As a result we are lowering our full year EBITDA guidance to $53 million to $55 million. Like many companies we consciously under invested in our vinyl facilities during the down turn. As a result of higher volumes this summer, we began to stretch the capability limits of some of our older extrusion lines.

This resulted in higher repair and maintenance cost, higher scrap rates, and labor inefficiencies. This situation will likely continue into early fiscal 2015. We have recently taken delivery of and are currently installing five new high output lines in three of our facilities.

Once these five lines are fully operational by the end of this year, we will retire some of the older high maintenance lines. Eight other lines are also scheduled for replacement by year end. In the meantime we will continue to see higher than normal repair and maintenance costs.

During last quarter’s earnings call, I committed to provide more clarity around that mid cycle guidance and incremental margins. However until we finalize contract negotiations with several key customers with respect to resin cost pass throughs we have decided to delay that guidance.

If we are unsuccessful in renegotiating the resin pass through provision back into our contracts, it could mean some significant changes in the footprint, and capital allocation strategy in our vinyl business. We expect to have those contract negotiations wrapped up late this year and can provide more clarity on our mid cycle guidance at that time.

Finally I’d like to provide you with an update on our M&A strategy. We have now fully explored the fenestration bolt-on part of our acquisition strategy and at this time have not been able to find any targets that meet our disciplined criteria. There are however a number of opportunities pending that could become actionable later next year.

While we continue to monitor these residual opportunities we are now spending more time looking at adjacencies. But because this work is in its early stages it is also unlikely that we will find anything actionable in the short term.

As a result of this temporary hiatus in our acquisition strategy, coupled with our confidence in our long-term prospects, our Board just approved a $75 million share repurchase program which is approximately 10% of our shares outstanding at our current stock price. To be clear this program does not prohibit us from pursuing our M&A strategy.

We continue to have good cash flow generation as well as available borrowing capacity to fund future acquisition opportunities. I’ll now ask Brent to take you through our third quarter results in more detail.

Brent?.

Thank You, Bill and good morning to everyone on today’s call. Consolidated third quarter net sales increased 8.4% to $170 million, while third quarter EBITDA increased to $21.2 million, compared to $17.7 million in the year ago quarter.

The improved results were due to higher sales across all products offset by margin pressure from higher resin pricing, and approximately $1 million of higher repair and maintenance expenditures in our vinyl business, compared to the third quarter of 2013.

The net income from continuing operations improved to $0.23 per share compared to $0.14 in the year ago quarter. As Bill mentioned, Quanex’s North American fenestration sales for the last 12 months increased 9%. Preliminary Ducker numbers have U.S.

window shipments increasing 5.5% for the 12 months ended June 30th driven primarily by new construction window shipments. Sales increases at Quanex were driven by overall growth across all divisions. Corporate expenses were $5.6 million in this quarter compared to $11 million in the year ago quarter.

Primarily due to the lack of VRP related cost, and lower incentive related expenses. We ended the third quarter with a cash balance of $134 million and no outstanding borrowings on our revolving credit facility.

The share repurchase program Bill mentioned earlier will be completed through a combination of open market transactions and privately negotiated transactions subject to market conditions and other requirements. The program is not bound by any time restrictions and it replaces the prior program our Board approved in 2010.

I will now turn the call back to Bill. .

Thanks Brent. In closing let me reiterate, the current operational issues in the vinyl profile business are temporary. And if we are unable to renegotiate resin cost pass throughs we will adjust the size, footprint, and capital allocation strategy of this business accordingly.

Either way we are confident that we can maintain a steady growth trajectory and continue to improve the profitability of our core business as the recovery continues. We have taken and will continue to take a patient, disciplined approach to our acquisition strategy but remain confident that it will ultimately payoff later in 2015.

In the meantime we feel that using surplus cash for a share repurchase program at our current valuation is the prudent thing to do. And with that we will now be happy to take your questions. Operator. .

(Operator Instructions). Our first question comes from the line of Nick Coppola of Thompson Research Group. Your line is open. Please go ahead. .

Hey, good morning. .

Good morning Nick..

I am assuming you are talking about it being unlikely to close an acquisition for the remainder of the year.

You are talking about those larger, more substantial acquisitions is there any update on your ability to close those deals on the extrusion assets convertibly integrated OEMs and any update around that strategy?.

So, yes the message is clear that right now we do not have visibility on being able to close any transaction. Probably in the next six months. Now having said that I could get a call tomorrow from somebody we have already talked to and start over again. But right now we have no visibility.

That includes some sizeable transactions we have looked at, it includes bolt-ons, it includes some of the vertically integrated manufacturers so, it's sort of across the water front.

We are not ruling out that some of these will get resurrected as we go through 2015 but I think the message is at this point we don’t have line of site to anything actionable in the next probably two quarters and therefore using the cash for a share buyback made sense. .

Okay, that's helpful, and then on your end market expectations, your comments about going out to 18 or 19 even to mid cycle 8ish type percent growth, certainly that's all helpful information there can you dig in a bit more and talk about what's been forming that view?.

Yeah, look I am no smarter than anybody else on this call. My opinion isn’t worth any more than anybody else's. But clearly the trends we have all seen so far in the housing industry would say that this is going to be a much slower recovery and I think it is just a multitude of different issues.

The credit policy, availability of labor for the home builders, I think it is house prices now starting to get to level where it is freezing out.

First time home buyers lot of talk about student loans, so I think all of these issues combined are really just sending the signal that this is much more likely to be a long, slow, steady recovery than what was originally anticipated. I think it was a sharp snap back over the next two years.

Now we continue to believe, we have said publicly for some time now that quite frankly the best outcome is four or five years of slow steady growth at 8% to 9% that’s much better than trying to manage growth of 20% to 25% a year.

Some of that witnessed by the issues we’ve had in our vinyl business as volumes increased, we start stretching the capability limits of our organization..

Okay Thanks for the color and thanks for taking my questions..

Thank You. Our next question comes from the line of Daniel Moore of CJS Securities. Your line is open. Please go ahead..

Good Morning..

Good Morning Dan..

And Bill, thank you for the candor.

Maybe just elaborate if you’re unsuccessful in contract renegotiations pushed through pricing, how specifically it might have impacted your capital allocation strategy and your fenestration footprint just, trying to get a order of magnitude degree in terms of potential change on the strategic outlook?.

Yeah, so look first of all because this is a public call and there are other constituents that will listen to this, the fact of the matter is simply this, that as we’ve said over 60% of our current volume right now for this year were unable to pass resin price increases through, nobody anticipated the magnitude of those resin increases a year ago when we entered into those contracts.

We have made it very clear to the customers affected that we will be coming back and we need to have this back in the contracts. We are not at the point yet where anybody has said no. But we are also not at the point where anybody has said yes.

I think we are just making it clear to the investment community that in the event that customers push back and say we will not accept that then our position is going to be that we can’t do business that way with this kind of price level.

And as we have talked to people in the industry there does not appear to be any likelihood that pricing is going to come down.

And so our contingency plan is simply we will forego volume and reduce the footprint accordingly and then by reducing the footprint it will also mean we will not have to replace as many of these older extrusion lines as we currently are predicting in our plan if in fact we get those clauses back into contracts as we expect..

Very helpful..

We’re just saying we have a contingency plan in the event that doesn’t happen. It may mean our vinyl business is smaller but it certainly will be back to its normal level of profitability..

Very helpful, thanks for the color.

And can you elaborate perhaps Brent as well on the incidence of equipment failures and maybe quantify possible impact and cost of margins in Q3 and how much lingering impact you might expect in Q4?.

Yeah, I mean -- I guess what we’ve said because we had a little bit of this in the previous quarter, but what we’re experiencing is about $1 million a quarter in higher repair and maintenance cost.

And then it gets a little fuzzier as to how much of the increase in labor is related to that but I think it’s safe to say that we’ve probably got another $1 million plus to $2 million associated with higher labor cost related to this.

And to sort of follow up on your question, Bill mentioned in his comments that expect this to really continue into the first quarter through the fourth quarter and into the first quarter next year until we can get these new lines installed and up and running..

And then $1.5 million or $1 million to $2 million in labor is quarterly as well correct?.

That’s correct, yes..

Got it, okay.

Lastly just CAPEX, maybe update us on your expectations within the five new lines going in and potential of adding up to eight more, you know what we are looking for this year and will that be a good run rate as we go into next year?.

Yes, so this year we’re going to spend $30 million in capital approximately in this business in the early part of the year. That number was 40, some of which went to what nickel was before it was sold.

Included in that 30 about a half of that has gone to the vinyl profile business and so we have the five type output machines being installed right now but we also have eight others that had been ordered, paid for and are in various stages of starting off as well. So that's already committed in this year's number.

My expectation as we sit here today, if we are successful with the contract negotiations, we will have a very similar level of capital investment that goes into the 2015 operating plan.

And one of the reasons that we are -- was on a wait before we give mid cycle guidance is in the event it goes sideways on us, then volumes will end up being reduced and we will not invest that level of capital in the vinyl business next year. .

Got it, thank you. .

Thank you. Our next question comes from the line of Scott Levine of Imperial Capital. Your line is open. Please go ahead. .

Hey, good morning guys. .

Good morning Scott..

Just maybe following on our last caller I think an earlier question about Q4 cost impact versus Q3 and take that into Q1, sticking with the repair and maintenance cost based on what you see now, would you see the level of cost impact in Q1 of 2015 being similar to what you are guiding to for Q4, should that be tapering off at all and should we expect based on your investment plans and the new lines, that the increased maintenance repair cost would affect these -- the excess cost would cease thereafter?.

Yeah, I think the best way to clarify that is the most important part is for Q4. Clearly this will continue. You now have the latest guidance, so I think that part of it is clear. We would like to think we could get this over with by the end of the fiscal year. It is probably unlikely.

It will start tapering off as we go into the first quarter of next year. But we are not at the point yet where we can give sort of definitive clarity on what the magnitude of that number is..

Okay, fair enough.

And with regard to the M&A landscape, can you comment in general about how things split out, what are your expectations, is this an issue STAR expectations are too high or maybe there weren’t as many prospects out there as you thought and maybe a little bit more elaboration on when you talk about adjacent markets being an area where you can increase focus, what do you mean by that?.

Yeah, so first of all we looked at a vast number of businesses. Some fell into the basket of too small, not very profitable, not too desirable after we had sort of looked under the hood and therefore it sort of voluntarily walked away as this would not be a great fit with our business after all.

Even though the product line itself may have been a good fit. There are also some very attractive businesses that we looked at, that perhaps not surprisingly we were significantly out bid by private equity. Obviously we will not name names but we were at the altar on a couple of occasions and lost on valuation.

There are some businesses where even before we get to that stage, valuation, expectations as you say are still quite high. I think that's starting to taper off somewhat as we go into 2015 simply by virtue of the fact that I think the expectation for a slow recovery as we have said is going to start sort of settling into people's mindset.

So, all of this applies equally to the vertical integration strategy. There are still a number of our customers that are giving consideration to that part of the strategy. They need more time so again that’s the reason for delay in that.

We are starting to work more on adjacencies and so they are some of the examples we have given in the past with the perhaps aluminum extrusion profiles for commercial windows. So, similar to what we do not too far out of our space but adjacent.

And there are a number of other examples that we could use like that trim fencing, decking, siding in the vinyl business is another adjacencies. So we’re -- because we’ve been heavily focused on our own space for the last six to nine months we’ve done some work on adjacencies but we are ramping that up now to make that a much higher priority.

But as a result of that we feel the same way. It’s going to take us a couple of quarters to really analyze the attractiveness of some of those adjacencies, then make contact with the relevant companies, and then we’ll stop the ground work over again..

Got it, thank you..

Thank You..

(Operator Instructions). Our next question comes from the line of Al Kaschalk of Wedbush Securities your line is open please go ahead..

Good Morning..

Good Morning Al..

Bill just, I won’t beat this M&A to death but one more is worth the shot. Could you just comment within the three buckets that you outlined that were product lines were good fit, attractive business and valuation.

Was the size of businesses necessarily in one of those categories more so than another, in other words were the larger businesses just too expensive, any snapshot color you could give on that would be great..

Okay, we did look at a lot of -- a number of larger businesses and by larger I mean greater than 100 million in revenues. That weren’t all too expensive to buy or more expensive in terms of valuation. Some of them came with other issues and that’s why I said in the comments we’ve been patient and we are disciplined.

I mean we do have a disciplined approach to this so we are not going to go out and buy something for the sake of buying it. But, you know, not all companies are as advertised once you get on to the hood.

And so it really is a multitude of reasons and I don’t think you should read anything into that other than we are disciplined and sooner or later the right transaction or transactions will come along.

I think what we are doing is being transparent with the fact that that’s where we are right now and we feel as of today, share repurchase program is a better use of our funds based on what we see in front of us. Do I expect to get some deals consummated in 2015? Absolutely.

We’ve done enough ground work in our own space and we’ll do the same thing in adjacent spaces that I absolutely believe we’ll get something done next year..

I appreciate the transparency and just to comment on that I think in terms of buying, you know best at being your own stock and the valuation level makes lot of sense, great to hear from the Board on that.

On the pricing environment in the current quarter, it looks like volumes was the main driver, you maybe could add some color on that but how would you characterize the current pricing environment maybe from earlier this year and with the changes that have gone on in terms of demand.

Is it more or the same or is it less, how would you characterize pricing?.

I think it’s more of the same. We have successfully taken some price increases in some product lines with some customers. We’ve been very selective about that. That has been successful it has not been a big enough number that’s really going to move the needle.

Clearly the vinyl profile business is the most competitive segment we’re in and we haven’t seen any change there one way or the other primarily because we are locked into contracts and obviously the focus is being on the cost of resin here. And what it's likely to do in the future.

I think that next time we talk in December, we will certainly have more to say because by then we will have concluded or be close to concluding contract negotiations with existing customers and we’ll find out how big a deal the price really is..

And then finally on the volume side though, your comment I think in prior quarter was that shipment to the end market would be greater than production volumes.

It seems like that may have been, that didn’t hold which is a good thing but could you just comment there on your production opportunities versus the end market demand?.

It has been a strange summer. And I will tell you that the reason we are currently outperforming the market is because we just have certain customers that clearly are gaining share. We also we would say that in general, the R&R market has not recovered.

Having said that we do have some customers that are doing extremely well in the R&R market and we are enjoying the benefits of that. But there is a very, very wide disparity in our customer base between who is growing and who is not. So I think it would be fair to say that is the biggest single reason that we have thus far outperformed the market.

Now we do believe for a number of reasons volumes will slow down in the fourth quarter. Some of those customers are tapering off their production. I think a lot of customers are a little concerned about potentially an early winter and not getting stuck with too much inventory.

So we are seeing some signs that the fourth quarter could perhaps be slower than the rate we’ve seen in the last two..

Very helpful though, thank you..

Thank you. Our next question comes from Keith Hughes of SunTrust. Your line is open. Please go ahead..

Thank you.

You should be able to fund the share repurchase obviously with the cash on the balance sheet?.

Correct..

Question is after that, is the Board management if there is another share repurchase program or an acquisition, are you willing at this point to add debt onto the balance sheets as part of a longest example of another share repurchase?.

I think it would be very unlikely that our Boards would approve a share repurchase program funded by debt. Now I never say never because I think that would depend on the circumstances at the time. If debt is still readily available and very cheap and our stock price was at normally low, I think that would be a different set of circumstances.

At you know the current valuation, I don’t think that’s necessary. I don’t think there is any doubt whatsoever the Board would be very willing to take on debt to fund an acquisition. And I think perhaps that's the most likely outcome as we go forward into 2015..

I’m sorry you broke out.

Most likely would use debt on acquisition in the like situation?.

Yes.

Would you say that about cash?.

Yes but unlikely to fund a second share repurchase..

I guess question number two, you talked about looking at acquisition and adjacencies, you mentioned a few times it’s all hypothetical at this point but from a synergy perspective I assume you would be looking for something where you have some type of vinyl or other plastic extrusion synergies, would that be the kind of lead into that?.

Well clearly if you look at our current portfolio of products that would be the most likely direction to go and explore first for exactly the reasons you state. There are definitely synergies there if for example we will use the hypothetical IUs of aluminum extrusion for commercial windows there would not be very many synergies there.

So, yes you are correct, that's where we will start and we will just keep moving around that circle of adjacency and see where it leads.

I think one of the conclusions there would be the further you get away from our direct core competence, the more likely it would an acquisition of scale because you wouldn’t sort of step in to new territory with a small deal. You would do that with a larger transaction, if there were synergies you could do it in a smaller transaction.

So, I think that would be the conclusion there..

Thank you. .

Thank you. Our next question comes from Daniel Moore of CJS Securities. Your line is open. Please go ahead. .

Thank you. Part of my follow-up was answered.

It sounds like you will have a better sense by December in terms of the pricing negotiations, contractually when are the earliest that you could raise prices, is that Jan 1 or later if you are successful?.

It is Jan 1..

Okay. Thank you. .

Thank you. And I am showing no further questions in queue. I would like to turn the call back over to Mr. Griffiths for any closing remarks. .

I want to thank everyone for joining us on today's call and just before we wrap up I would like to invite you all to join us for the 2014 GlassBuild Show in Las Vegas at the Las Vegas Convention Center.

It is the second largest trade fair of the year and gives us a great opportunity to show off our products, meet with our customers, and see what's new in the market place. If you are interested in attending the show which runs from today through Thursday, please give Marty a call and he will provide you with the details.

And once again thanks for joining us and we look forward to updating you on our fourth quarter in December of this year. Thank you. .

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day..