Marty Ketelaar - VP, Treasury, IR Bill Griffiths - Chairman, President, CEO Brent Korb - CFO.

Dan Moore - CJS Securities Al Kaschalk - Wedbush Securities Nick Coppola - Thompson Research Brian Denes - Imperial Capital Bill Baldwin - Baldwin Anthony Ken Zener - KeyBanc.

Good morning, everybody and welcome to the Quanex 2015 Fiscal Third Quarter Conference Call. At this time all participants are in a listen only mode. Later during the call, we will conduct a question-and-answer session and instructions will be given at that time.

During today's conference call company's 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 of EBITDA 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 and 10-Q documents at the company's Web site at www.quanex.com. Last, participants are reminded that today's conference call is being recorded.

I'll now turn the call over to Bill Griffiths, Chairman, President and CEO for opening comments.

Bill?.

Thanks Marty. Good morning and thank you for joining us for our 2015 fiscal third quarter conference call. On the call with me this morning is Brent Korb, our Chief Financial Officer and as you just heard Marty Ketelaar, our Vice President of Treasury and Investor Relations.

This has been a very busy summer at Quanex; the addition of a seasoned veteran to lead our vinyl profile business, two acquisitions, which when completed will add $340 million of revenue and $49 million of EBITDA on a pro forma basis and another solid quarter of EPS growth.

Year-over-year quarterly margins improved 200 basis points on flat sales and earnings per share improved more than 20% to $0.28 per share this quarter. We continue to see improvements in our vinyl profile business and expect this to continue under the stewardship of Tim Reese, who joined us recently from Trex.

While we saw negative year-over-year growth in this product line, it was not unexpected. And all of our other fenestration product lines grew generally in line with window shipments.

We continue to track to our internal expectations and to our full year EBITDA guidance which we're now tightening to between $58 million and $60 million including the transaction costs and purchase accounting FX related to HL Plastics. Revenues, however, will come in at the lower end of the previous guidance closer to $650 million.

It does not include any impact from the acquisition of Woodcraft. After Brent covers the third quarter results in more detail, I will talk about the strategic rationale of our two acquisitions and their positive impact on shareholder value.

Brent?.

Thank you, Bill, and good morning to everyone on today's call. Reported third quarter net sales increased 6% to $180 million while reported third quarter EBITDA decreased to $18.3 million.

Revenue was impacted by a $14.2 million contribution from HL plastics offset by $2.5 million in foreign currency translation primarily due to the strength of the dollar against the euro. As we previously disclosed, our third quarter reported results are complicated by several items.

The HL Plastics acquisition and the related purchase accounting adjustments impacting their results, transaction costs associated with both HL Plastics and Woodcraft and the foreign currency translation impact from our European spacer operations.

Included in our press release is a reconciliation of our reported EBITDA and earnings per share to an as adjusted figure which excludes the impact of those items. On an adjusted basis third quarter revenue was essentially flat the third quarter 2014 results.

Revenue growth at our screen and accessory businesses was offset by the expected continued contraction in vinyl volumes and lower oil-based surcharge fees on one of our spacer products due to lower oil prices. Third quarter adjusted EBITDA was $22.3 million compared to adjusted EBITDA of $21.3 million in the year ago quarter.

On an EPS basis, adjusted earnings from continuing operations was $9.6 million or $0.28 per share compared to $8.7 million or $0.23 per diluted share. Gross margins adjusted for the same items improved by 200 basis points to 25.1%. Due to better labor utilization and lower repair and maintenance costs.

Due primarily to the acquisition of HL Plastics, our cash balance was reduced to $27 million and we had $84 million in outstanding borrowings on our revolving credit facility at the end of the quarter.

We borrowed $92 million to fund the acquisition in the middle of June in the first six weeks following the acquisition we paid down $8 million and that balance has been further reduced in August and now stands at $77 million.

In our fourth quarter, we expect to recognize additional transaction costs associated with the acquisition of Woodcraft and the related financing activities.

After we close the Woodcraft acquisition, we will have purchase accounting adjustments similar to those associated with HL Plastics and we will provide additional details on those items when we report our fourth quarter numbers later in the year.

In summary, third quarter results were solid and in line with internal expectations and we look forward to finishing the year on a strong note. I'll now turn the call back to Bill..

Thanks Brent. Ever since we divested our Nichols business now five quarters ago, our strategy has been clear. It has been transparent and it has not changed. Priorities have shifted from time to time as business conditions dictated, but after all, that is the purpose of a well-thought-out strategy, the ability to adjust as conditions change.

Let me remind you of how we articulated that strategy. From the outset, the overall objective of our strategy was to improve the profitability of the total business from its historic 8% EBITDA margins to something closer to 15%.

Certainly operating leverage as our markets recover would help but operating margin improvement would also be required to get there. We also clearly laid out how we would deploy capital given that we had excess cash and no leverage. These priorities were; number one, reinvest in our existing business.

In the last two years, we have reinvested almost $70 million of capital directly back into our core business much of it has been targeted at our vinyl profile business and most of it in an attempt to position ourselves for greater operating leverage when our markets fully recover.

Our second priority was to acquire businesses that gave us scale in our existing space or broadened our customer base or broadened our geographic reach. Although prior to the divestiture of Nichols, the acquisition of Aluminite, our entry price point screen business fits into this category.

This acquisition expanded our presence in the new construction segment, made us a clear number one in the outsourced screen market and help balance our new construction versus repair and remodel position to more closely match the overall window market. Similarly the acquisition of Atrium's vinyl extrusion assets also clearly fit into this category.

Although small, it allowed us to expand in the fastest growing new construction market in the country. As a result we have more than doubled the capacity of this facility, once again, further diversifying the product portfolio to more closely match the overall window market. The recently announced acquisition of HL Plastics also fits this category.

It expands our reach in a geography we understand, in a product line we understand and with minimal integration risk as it is a well run, standalone business and with 18% EBITDA margins, enhances our overall profitability. Our third priority was to acquire businesses in an adjacent space.

Here the hurdles were clearly higher as by definition an adjacency had to have scale, good standalone profitability and minimal integration risk. The announced agreement to acquire Woodcraft Industries fits this strategy perfectly. It adds $240 million of revenues as a standalone business and will likely be a separate segment.

It has 13% EBITDA margins again in enhancing our overall profitability. Throughout the recession it maintained low double-digit margins despite a 50% drop in revenues. It has an experienced management team with an average tenure of over 20 years, who will continue to run the business as a standalone unit with no operational integration.

It serves an industry that on average is 400 basis points more profitable than the window industry. Unlike the window industry, it has almost no seasonality and has 75% exposure to the repair and remodel market. Woodcraft business model has a short lead time supplier to the cabinet OEMs is identical to the Quanex model supplying window OEMs.

The cabinet industry structure is identical to the window industry structure with a relatively small number of OEMs and join the bulk of the industries total market share. This results in tight, long standing customer relationships with the OEMs at both Woodcraft and Quanex.

While the product line may be different, this is a business model we understand and makes us the largest component supplier to OEMs in the building products industry. In a moment, I will put into perspective what this has done in terms of transforming Quanex.

Let me finish the strategy and capital deployment discussion, however, by pointing out that we said last year, if we had excess cash and no immediate visibility of viable acquisitions, we will look at a share buyback program. We executed on this as well and completed a $75 million share buyback program in February of this year.

My message is clear, we laid out a strategy over a year ago and we have executed against every element of that strategy. We've made adjustments in priorities along the way but we did not deviate from it. We continue to believe this strategy is sound and see no reason to change it going forward.

While the immediate priority will be to pay down debt, we will continue to be active in the M&A markets but focused on smaller tuck-in deals that will not materially increase our leverage profile. We will also continue to focus on operational excellence to continue to improve our margins.

So what does all this mean for shareholders? Assuming the midpoint of this year's guidance and excluding transaction costs and purchase accounting FX, the addition of these two acquisitions will put Quanex on a pro forma basis at approximately $950 million in revenues and $108 million of EBITDA or margins of 11.5%.

This compares to 2014 actuals of $595 million in revenue and $48.6 million of EBITDA or 8.2% margins. Our mid-cycle guidance has increased to between $185 million and $210 million of EBITDA a four-fold increase over last year's actual results.

Yes, we now have leverage but at 3.2x trailing 12 month pro forma EBITDA it's at the midpoint of our building products peer group and highly manageable given the cash generation profile of the business and its dampened seasonality.

While it is too early to give firm guidance, our preliminary expectations for 2016, other revenues will be close to $1 billion and EBITDA would be in the range of $110 million to $120 million excluding any impact from transaction costs and purchase accounting adjustments associated with Woodcraft.

We will of course update this on our year-end call in December when we will have greater clarity on the magnitude of these costs. And with that, I'd be happy to take your questions.

Operator?.

[Operator Instructions] And our first question comes from Dan Moore [CJS Securities]. Your line is open Mr. Moore..

Good morning. Thanks for taking the questions..

Good morning, Dan..

You stole my thunder there a little bit Bill in terms of spending a little more time on the Woodcraft acquisition, but maybe just talk a little bit about, I know it will be run as a standalone, are there any -- what types of synergies be it cost or perhaps more relevant revenue synergies do you expect over time and maybe just describe the CapEx profile of that business and whether you will need to do a little bit of incremental spending after having been owned by private equity for a long period of time?.

Yes. In terms of synergies there are no synergies contemplated as part of the valuation or required to make this transaction work. We do have some wood-based businesses as part of our accessories operation, they are also in the Minnesota area and we expect there may be some small purchasing synergies there.

And then maybe the opportunity to manufacture some product in different facilities, but nothing major and nothing really contemplated in terms of operational integration of the two businesses. It will likely be a separate segment.

In terms of capital, they clearly have been running at relatively low levels for the past several years and our valuation model does include increased capital.

They currently spend in the $4 million to $5 million a year range and we could potentially double that number for the next two or three years to something in the $8 million to $10 million range, still early days yet but we clearly in conjunction with the management team see opportunities for some additional automation that are to improve productivity in their operations..

Very helpful. Appreciate it.

And then shifting gears a little bit in terms of the vinyl excursion lines that you had originally targeted for upgrade, how much or what percentage or how many of those now been upgraded? How much additional work is left on that front?.

That's just about complete. There is some trailing work that will go into the fourth quarter.

But by the time we close out the year, all of that work will be finished and clearly some of the margin improvement we see today and continue to expect going forward is as a result of that but we're not going to get granular and talk about how much specifically. But the whole program is on track with our original expectations..

Very good and obviously, we saw that in the margins in this quarter, 24% gross margin the best we have seen in some time, obviously, excluding Woodcraft, is that level -- that level sustainable, maybe just talk about seasonality, what puts and takes and the sustainability of that type of number on a go forward basis?.

We certainly believe it is sustainable going forward. In terms of seasonality, we pointed out that Woodcraft will significantly impact our seasonality profile. As you know we consume cash in the early part of our fiscal year and then generate all of that cash and profitability in the second half.

There is almost no seasonality at all with Woodcraft's business. So it will really help in the first half of our fiscal year from this point on. Although clearly as we enter 2016, we will see the impact initially of purchase accounting and transaction costs.

The magnitude of which we're still working on and the timing of which is still a little unclear and as soon as we have better knowledge there, we will go public with that information..

Okay. And lastly and I will jump back in queue.

Just talk about organic growth, the vinyl business as not unexpected, when do you expect that to return to positive organic growth and what type of sort of near term 8, 12, 24 month type growth would you expect out at both HL and Woodcraft?.

Yes. A bit of a convoluted answer to that question. Clearly, we anticipated and spoke earlier in the year about one specific program that we lost so that negative growth in vinyl was to be expected. We have replaced some of that with incremental business from other customers and some new customers. It has not fully replaced that.

And in terms of the vinyl business in totality, Tim is taking a very, very close look at how we want to position that business in the future. So it is not inconceivable but we may shrink even a little bit more in the vinyl business to improve profitability and to perhaps improve the utilization of our assets in different parts of the country.

Early days to be talking about that but more to follow as we get into the early part of next year and certainly as we firm up our operating plans here. Generally speaking, the rest of the fenestration components business was roughly in line with window shipments and as you know, we don't have a direct comparison with perfect timing.

But, what I will say is, we were all surprised by a significant slowdown in growth across the board in May and June which is the first two months of our quarter. It picked back up nicely in July and August looks as though it's sort of back on track.

But, clearly the summer months had a slower growth profile in shipments then was originally expected at the beginning of the year. I don't think anything serious. But, once again, I think it speaks to a relatively slow recovery in both the remodel markets and even in new construction. And so that's one of the reasons that Woodcraft is attractive.

It sort of spreads the bet a little bit, gives us much greater exposure to repair and remodel. That market still has a long runway to recover as well and will not be as affected by weather as the window components market..

Good color. Is Woodcraft and HL, anything numerically whether that you care to tie to expectations for growth, I will leave it at that..

No idea. We will leave it at that..

All right. Thank you very much. And congrats on all the heavy lifting..

Thanks..

Our next question comes from Al Kaschalk [Wedbush Securities]. Your line is open..

Good morning, guys. Good morning..

Good morning, Al..

I have sort of an easy one here first for Brent, could you -- I think what I heard is that reported gross margins of 24.1 [ph] and adjusted for some items that was 25 or 25 and change. Could you just give us, I know one was inventory, there was a fuel surcharge I think.

Could you just give us the components of that?.

Yes. I mean we had the FX, we had the oil surcharge and --.

The purchase accounting..

Yes, the purchase accounting on HL backing off the -- really just the inventory portion of the HL purchase accounting..

And is that fully is the inventory there for the flushed through the P&L in terms of the --?.

No. No. That the way that it could generally works on those purchase accounting is, it might take us about three months on average to kind of wash through that. So we would expect it to be fully behind us once we cleared the fourth quarter here..

Okay.

But, the largest chunk of the -- sort of 10 -- in terms of the basis points there, percentage point, was the purchase accounting?.

Oh, yes. Yes, definitely..

Okay. All right. Let me ask, maybe it's a fundamental question on the base business but are we -- have we anniversaried the sort of unfavorable raw material purchases or cost components to the procurement area given lower energy, feedstock prices et cetera..

In fact the reality is, resin prices have really remained unchanged throughout this year. I think last month they came down a penny but materially it hasn't changed at all this year. And if it goes down further or up further, I mean as a reminder from this point on or from actually January 1 on words, it's effectively margin neutral. So, no affect..

Just a question on, I mean it's good to see the leverage from the acquisitions, I think it's -- and adequately serviced by the cash flow but a question more on the structure of the cabinet market or your supply into that market now with the acquisition.

Are you concerned at all you will have the price pressures that you've seen in your core base business come into this market as well or has it been something that historically the margins that they have posted have been fairly firm or steady?.

First of all, Woodcraft's history has been very consistent in terms of its level of profitability and did an excellent job at getting through the recession with still some pretty healthy margins.

And if you pull the public company details of the cabinet industry compared to the window industry, both short-term and over a ten-year horizon the average profitability of those in the cabinet business is in fact 400 basis points higher than it is in the window industry.

So it's a more profitable segment all round and while I think every segment of building product see some level of price pressure, we have no cause for concern here that there is a pent-up price pushback. So we feel pretty good about it going forward here that it really is a big net positive for Quanex going forward over the next several years..

And my final question, if I may, from the size now of the company and the operational changes that you made, that are being implemented for personnel perspective, should we look or -- does this change your ability to procure raw material or your raw materials sourcing any differently whether that be scale, whether it be multiple sources therefore helping on -- from your perspective and obviously a margin perspective..

Not really. I think the only opportunity still on the table that it's still currently being explored is really resin because clearly HL gave us greater scale. They obviously buy resin in a different market than we do in the U.S. but we are still exploring that.

There will be a little on the Woodside because Woodcraft obviously buy a significant amount of hardwood, we buy relatively small amount, but our expectation is that we could perhaps get some leverage their but being a $1 billion business rather than a $6 billion business won't materially change the dynamics of what we purchased in our ability to get better purchase..

Thank you..

Thanks..

And our next question today -- one moment -- comes from Nick Coppola [Thompson Research]. Your line is open, Nick..

Hi, good morning..

Good morning, Nick..

Can you talk a bit more about your go forward acquisition strategy, it sounds in the near term you are more interested in smaller deals which kind of makes sense given the HL Plastic and Woodcraft acquisitions.

Can you comment on how long it will take you to work on leverage and once you have done that where you'd be most interested?.

So, first of all the priority clearly is to pay down debt. The capital structure has been set up to allow us to do that so I want to be crystal clear with everybody. That is the priority but also so the M&A business by definition is opportunistic. And we didn't plan to do these two deals within six weeks of each other it's just the way it happened.

We will, it is unlikely, very unlikely I think that we would look at another deal of scale in the immediate future which would move the leverage profile upwards.

We have stated on a number of occasions that the comfort level is really bracketing around 2.5x and we would like to get down to that level but we are also aware of some smaller transactions that now could slot into potentially our vinyl business now that it's a little more on the control.

There are some tuck-in deals in the cabinet market that would potentially make some sense as well. So I really wanted to point out, we're not going to get out of the M&A business until leverage is back down to the low or mid 2s. We will continue to be opportunistic.

But we will also continue to be very disciplined and when we have said this on a number of occasions, I think we demonstrated that. And while we landed two pretty decent sized fish year in the boat, we have also thrown throughout this period a number of them back into the water.

So again, don't expect a significant increase in the leverage profile but don't expect us to abandon the M&A market in its entirety either..

Okay. That's helpful.

And then just in the extrusion business in the U.S., have you made any progress in terms of price and any update on the competitive environment?.

It is still a tough price environment in the vinyl business. So we have not made a lot of progress in terms of getting back some of the price we gave up over the past 2 to 3 years with the resin freeze. So it does continue to be difficult but as we have also said, we have got a fair amount of runway on an operational improvement.

We're also working on tiered pricing and have introduced that across the board now, so while our total price may not be moving, we're actually compensating for lower prices in high-volume lines with significantly higher pricing on lower volume lines because as we have talked about, the complexity of our U.S.

operations is a major difference in its level of profitability compared to HL Plastics..

Okay. Thanks for taking the question..

Thank you..

Our next question comes from Scott Levine [Imperial Capital]. Your line is open..

Hi, good morning guys. This is actually Brian Denes filling in for Scott Levine.

Most of my questions have been answered but just a quick one regarding Woodcraft, how do plan on financing this acquisition?.

We will refinance the existing revolver with $100 million ABL revolver and a $310 million term loan B..

Okay, great. Thanks..

Next question comes from Bill Baldwin [Baldwin Anthony]. Your line is open..

Yes, good morning..

Good morning..

Congratulations Bill to you and your team on execution of a very focused strategy since you have been at the helm there..

Thank you..

Couple of questions.

Is there any best practices to be achieved between HL extrusion business and your domestic extrusion business here with Mikron?.

Yes. There is indeed and in fact Roger Hartshorn who leads the HL business is just leaving our Kent facility as we speak and will be heading to our Richmond, Kentucky facility. And he and Tim are in active discussions sharing best practices as well as working on resin pricing and some other things as well. So that program is already underway..

Very good.

And secondly, can you offer any color or talk about how you might be making progress on your warm spacer business as far as writing out the customer base to include some of the larger OEMs in that customer base?.

Yes. As you are probably aware, one of the inhibitors to doing more business with the larger OEMs is the ability to produce insulated glass panels as fast as the production lines that the high-volume produces. There is a line at a specific customer that is being debugged as we speak.

And we have another large customer that's going to take delivery of a second line from a second manufacturer that will be on display at the GlassBuild Show in Atlanta next week after there it's going for the customer facility.

So we're in the early stages of proving that out at two very large customers and the early indications are very, very positive..

Is there any comment you can make Bill as far as what the runway looks like on how long it might take to get this actually up and running in production if in fact you are successful in doing that?.

Yes. I think realistically it will be the middle of next year before we start seeing any meaningful volume increases and then both of these customers, it's really a two to three-year program to slowly ramp up volumes assuming early success..

Thank you very much. And best of success to you..

Thank you..

And our last question comes from Ken Zener [KeyBanc]. Your line is open..

Good morning, gentlemen..

Good morning, Ken..

So couple questions for you. Woodcraft, since it's not in a window area probably requiring some segment, could you talk about how the deal, how you got comfortable, I understand the OEM side. And I looked at a lot of the old filings for this company. So I understand who its customers are.

How did you get comfortable with this kind of entering that space and how did the deal come to you.

I just want to get a sense of how it developed?.

Yes. Probably, I should say this isn't the first time we looked at Woodcraft. In fact, Brent was on the team obviously prior to my time back in 2007, when it was last sold to a private equity and at that time, Quanex was a very serious bidder but was outbid by the current owner and some other private equity players at the time.

So it wasn't completely new to us. That was point one. That was one of the reasons we got a look at this business. The business model is eerily identical. So the similarities are really pretty astounding between the cabinet industry and the window industry.

As I articulated in the prepared remarks there are a lot of good things to like about this and not a lot of bad things to walk away from, but once we met the management team and the way we handle these transactions, as made it very clear to the bankers on the other side, we're not particularly interested in sitting in a meeting room going through a 50 page PowerPoint presentation.

We want to get out into the operations. So Brent and I took [ph] 10 of their 13 operations throughout North America in a relatively short period of time and just looking at the manufacturing process, the order intake process, the way the business operates is so similar to ours that it didn't take very long for us to get comfortable with this at all.

So I mean we feel very good that this is going to be another big platform for Quanex over the recovery cycle here. Diversify the product portfolio somewhat, spread the risk a little bit to but we feel this is a very, very positive addition, not too far out of our comfort zone, different product line but identical business model..

Appreciate that. With this business, could you talk about the customer concentration component and how you got comfortable with that? It's obviously been a very steady operating history in terms of EBIT but how are you comfortable with the customer concentration if you're willing to describe that? Thank you..

It's a little more concentrated on the window industry, but not significantly more so.

But has the same dynamics in that, almost half of doors and components are vertically integrated inside customer operations but -- just like windows, very difficult to switch, high costs to switch and such long, deep relationships, some that go back 20, 30, 40 years even.

As that market continues to expand and as I know you are aware like the window industry a lot of capacity was taken out. So there has been a clear, steady trend of more and more outsourcing and the expectation is that, that will continue albeit at a slow pace but it's likely to continue as we go forward here..

Okay.

Since you touched on FY'16, appreciate that, what I did -- you said $110 million to $120 million, correct for EBITDA?.

That's correct excluding any purchase accounting or transaction costs from Woodcraft..

Right. So if I take the LTM sales for both of those acquisitions, I get a EBIT contribution of almost $50 million. Ands it seems that would -- based on say 60 this year, it would seem to suggest roughly $6 to $7 million incremental EBITDA on your legacy business.

Could you talk to that and that would seem I guess perhaps relative to the passing of the -- in the vinyl business of the $20 million hit in FY'14, some portion of that was obviously the maintenance which would seem to be subsiding relative to the price.

So is that a correct interpretation of your organic EBIT expansion based on that $110 million to $120 million?.

Well, let me tell you this, typically we would never give guidance for 2016 this early. Secondly, there is absolutely categorically nothing in it for me personally or us as an organization to be aggressive in what we think 2016 will look like. Only bad things will happen. So with that as a backdrop, the rest of your comments are kind of in line.

Does that make sense?.

It does. You're saying there's no reason for you to talk about much EBITDA expansion outside of the M&A that's what I heard..

Yes. I mean why would I at this point? You guys collectively will put pen to paper and you will come up with your own view. What I wanted to do was put a stake in the ground and say, at the end of 2014, this was a $48.5 million EBITDA business and as we go into 2016, it's run rate ought to be in the $110 million to $120 million EBITDA range.

And as you are trying to push me into say and it could even be better..

No. I just wanted to clarify for the record. I will talk to you soon. Thank you..

Appreciate it Ken. Thank you..

[Operator Instructions] I'm showing no further questions from the phone line..

Okay. Thanks everyone for joining us on today's call and we look forward to talking to you again at the end of our fourth quarter which we will report in early December. Thank you..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day..