Scott Zuehlke - Vice President of Investor Relations and Treasurer William Griffiths - Chairman, President and Chief Executive Officer Brent Korb - Senior Vice President, Finance and Chief Financial Officer.

Steven Ramsey - Thompson Research Group, LLC Scott Levine - Imperial Capital Daniel Moore - CJS Securities, Inc Al Kaschalk - Wedbush Securities Kenneth Zener - KeyBanc Capital Markets Inc. Michael Conti - Sidoti & Company Melissa Zayas - Wells Fargo Securities, LLC. William Baldwin - Baldwin Anthony Securities, Inc..

Good day, ladies and gentlemen, and welcome to the Quanex Building Products Fiscal First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference maybe recorded.

I would now like to turn the conference over to our host of today’s call Mr. Scott Zuehlke, VP of Investor Relations and Treasurer. You may begin..

Good morning and thanks for joining on the call. On the call with me today is Bill Griffiths, our Chairman, President and CEO; and Brent Korb, our Senior Vice President of Finance and Chief Financial Officer. This conference call will contain forward-looking statements.

For a detailed description of our disclaimer, please see our earnings release issued yesterday afternoon and posted to our website. Before I turn the call over to Brent, I’d like to mention that we have set a date for the Analyst and Investor Day that was mentioned on last quarter’s earnings call.

The event will be held in New York on June 29, at the New York Stock Exchange and will be a great opportunity for us to communicate our story and strategy in more detail. Specifics about the event will be distributed over the coming months. We hope to see you all at the NYSE in June. I will now turn the call over to Brent to discuss financial results..

a North American cabinet components segment which is comprised solely of Woodcraft, a European engineered components segment which is the combination of HL Plastics and our European Spacer operation.

And finally, a North American engineered component segment which is comprised of the bulk of the Legacy Quanex operations, less the European Spacer business. You will also see that beginning of fiscal 2016 with retroactive applications, we are allocating a portion of corporate cost to better reflect the true cost of each of the new reporting segment.

That said we are not allocating the more volatile items such as stock-based compensation, transaction costs, interest expense and taxes. All of these will be reflected in a separate unallocated corporate and others segment. A full recap of the amounts allocated is presented in the 10-Q for the current and comparable period.

I will now [Technical Difficulty]..

Thanks Brent. As you’ve just heard fiscal 2016 got off to a strong start with a 700 basis point adjusted EBITDA margin improvement over the comparable quarter of 2015.

As Brent mentioned this was driven by solid contributions from our two acquisitions as well as improvements in every product line, but especially our Vinyl Profile business, which delivered the lion share of the 700 basis point improvement.

As you know we've invested significant capital and strengthen the management team in this business and are now starting to see the benefits.

In full disclosure however, the first quarter of last year was the low point in our Vinyl Profile business as we were still investing in refurbishing equipment and burden with the negative impact of the resin price breeze for two of the three months in that quarter.

Since then the business has been steadily improving and therefore the comps will get increasingly more challenging for the remainder of the year.

Having said that we still expect margins to continue to improve just not at the same rate, I would also like to point out that all of the EBITDA margin improvement in our Vinyl Profile business came from efficiency gains in the operations.

As price realization has been challenging and operational leverage is essentially not a factor with very low single-digit growth. Keep in mind we never expected to see volume growth in this business in 2016, in fact our original expectation was that it would shrink. Even with the low growth in Vinyl Profiles, our U.S.

fenestration business grew at about 3.5% year-over-year, which is pretty close to Ducker’s calendar fourth quarter U.S. window shipment number of 4.2%. It is important to note that the North American engineered component segment also include some international sales as well as a non-fenestration sales which collectively were flat with last year.

In the aggregate, the segment had year-over-year sales growth of just under 3%. In the European engineered component segment volumes were up, but revenues were flat due to foreign exchange translation.

Similarly volumes in the North American cabinet component segment were up, but revenues were flat due to the lower lumber prices relative to the prior year. Overall, our first quarter revenues were right in line with our expectations and conforming our belief that revenues in 2016 will mirror overall market conditions.

At this point, we still think that this will result in 5% to 6% overall topline growth on a pro forma basis. As a result we currently see no reason to change our 2016 guidance between $112 million and $120 million of EBITDA on revenues of just under $1 billion.

In my closing remarks on our year-end call I said that our clear priority in 2016 was to continue to improve profitability and to reduce our pro forma net debt to adjusted EBITDA ratio to below 2.5 times by year-end. While one quarter does not a full-year make, we executed well on both of these priorities.

Adjusted EBITDA margin was approximately 700 basis points better year-over-year and through a reduction in net debt combined with improved EBITDA our leverage ratio dropped to 2.7 times.

It is also encouraging that we were able to generate positive cash flow from operations during the first quarter considering this is always a seasonally difficult quarter for us and something we have not been able to accomplish in a number of years. We will continue to focus intensely on both of these priorities as we proceed through the year.

The integration of HL Plastics & Woodcraft are both on plan and their early performance is in line with the acquisition justifications. We have found no surprises in either business. So in summary, our two acquisitions are performing as expected with no surprises or integration issues.

Our legacy businesses are performing strongly with margin improvement as a primary objective. The North American Vinyl Profile business which has been a drag on earnings for the past two years is recovering nicely and corporate costs are under control and are at an appropriate level for a Company of our size.

All of this combined gives us comfort that our guidance for the year is sound and achievable, if market conditions improve as we get into the busy season, the table is set for a corresponding improvement in our operating performance. And now operator we’re ready for questions..

[Operator Instructions] And our first question comes from Nick Coppola of Thompson Research. Your line is open..

Good morning. This is Steven Ramsey on for Nick.

My first question, what did growth rates look like between vinyl extrusions, spacers and screens any color or differences by product?.

No. As I said on the call, well first of all we typically don't breakout specific growth rates by the individual business units or product lines, but our expectation going into this year was that the Vinyl Profile business would shrink. It did in fact grow in the first quarter.

It grew less than the rest of the business than the rest of the business was pretty much on top of window shipment numbers as best we can tell..

Excellent.

And then my second question I know you’ve talked about reducing leverage after these acquisitions and have already begun to do so with the share price at these levels would you be opportunistic on the equity side?.

It’s a very good question. First of all we didn't expect the share price to be at these levels at this time of the day. We are clearly limited by our new credit facility. So at this point we have no active plans to put a share buyback in place, but clearly if we continue to trade off it’s a discussion we will have at the board level..

Excellent. And my last question are there – what are your in market expectations for the U.S. versus the UK any unique trends in windows or cabinets between the two? Thank you..

There is actually not a lot of difference, we feel while all three may move slightly differently that they’re all going to coalesce in our view around that 5%, 6%, 7% mark. Obviously, we live in very uncertain times. We don't know what's going to happen in Europe with the UK's potential exit from the Eurozone.

I mean witnessed today the situation in China and the effect it has on the market.

So I think we’re going to go through a very unpredictable year from a macroeconomic standpoint, but at this point down at the customer level we still see optimism for low, mid single-digit growth as we go through this year, but everybody is very cautious because of the potential uncertainty.

But we still feel very good about where we’re positioned and feel very good about our guidance at this point in the year – early part of that fiscal year..

Excellent. Thank you..

And our next question comes from Scott Levine. Your line is open..

Good morning, guys..

Good morning, Scott..

Good morning..

Try for a little bit more detail that it sounds like may come in 10-Q, but can you provide a breakdown of your organic growth as a company, as a whole versus the contribution from the two acquisitions and or if you can provide the revenue contribution from each of those acquisitions, firstly.

And then secondly, if you could update us on your accretion projections for both of the deals, for this year it sounds like they're tracking in line with your initial expectations, but we’ll try for maybe a little bit more color there if you can give it?.

Yes. So, you rattled off a few questions there. I may forget one, so I'm going to start with the last one first since its top of mind.

On the accretion, the update and I have it on a combined, if we look at HL and Woodcraft combined with the current view on the interest expense, we would put accretion into the mid-$0.20 range, so say $0.23 to $0.25 is where we would go accretion wise.

And that’s only all from where we would have guided at the timing of acquisitions just because of the higher interest expense when we did place the debt.

I think on your question, your first question was - contribution of the acquisitions versus organic may talked about the acquisitions contributed about $8.8 million for the quarter, so that leaves about $6.8 million of incremental contribution from what I’ll call the Legacy business..

You are talking EBITDA there, right?.

Yes, sorry. Yes EBITDA..

Yes, can you say on the revenue and the topline, the same statistics or do you have those?.

I don’t have them front and center..

Yes, we can follow-up offline if needed..

Yes, let’s – I mean I get everybody confused on that, so let’s just follow-up offline..

Got it. That’s fine.

And then it sounds like the year is expected to be somewhat second half weighted I guess that’s reasonable given the synergy realization and the way the year plays out, but you’re affirming effectively the topline growth projections you have as a company and for each of the individual segments or areas that you highlighted last year.

Are you – I guess what I’m asking is, are you any more cautious on the year based on the start that you had to the year from a topline growth perspective? And or do we need to assess how the spring selling season comes in to assess whether there is greater conviction or maybe some upside potential versus those projection?.

So I would say the first quarter growth rates came in pretty much as we expected and pretty much as we planned and therefore at this point of the year we would say, we’re still on track for guidance.

Now having said that, clearly we’ve had a warm winter so far and this is always the most difficult time of the year to predict how things are going to shape up. We’ve had sort of late bursts of winter before, but if this weather trend continues, I think the expectation would be that will perhaps be more optimistic as we close out the second quarter.

We don't see too much on the horizon at this point that what cause us to be pessimistic. Not only with our growth rates, but with our internal projections on continued margin improvement..

Got it. Thank you. One last one if I may.

On the three expenses that get added back to arrive at adjusted EBITDA, can you tell us which cost categories those fall into on the P&L?.

Yes, the inventory step up is in cost per sales, the transaction cost in SG&A, and then the FX on the intercompany note is in the other net line item..

Got it. Great, thank you..

And our next question comes from Daniel Moore of CJS Securities. Your line is open Daniel..

Good morning. Thanks for taking the questions..

Good morning, Dan..

Good morning..

Yes, you’ve obviously made great progress and improvements in the vinyl side over the last few quarters. Looking out beyond the 2016 guidance talk about your ability to continue to drive margin improvement across the business or from here will most of the gains be driven more by volume and absorption..

We still have some runway with efficiency gains and cost improvement. I think we were pretty clear that we would likely not get back all of the $20 million we left on the table in the Vinyl Profile business, but are working very hard to recover much of it.

We have active programs and every single one of our businesses to improve margins and trying to do that while growth rates are still at a pretty low level, because it's easy to do and we have additional effort going in there because pricing continues to be a challenge.

I think as it relates specifically to the Vinyl Profile business as we get into that out years of 2017 and 2018 a lot is going to depend on the structure of the industry.

As you know 50% of the Vinyl Profile business is in sourced 50% roughly as outsourced with only a handful of competitors some of which are changing strategies and depending on how that goes that could bode well for the industry.

I think the customers in that Vinyl Profile, our customers who consume Vinyl Profiles are also struggling strategically to find their way. I don’t think there’s any question that entry price point vinyl windows are at a lower price than they ought to be in the marketplace. So I think wait and see what some of the structural changes are.

We will continue to work very diligently on whatever we can control which is our internal costs and that’s where our focus has been for the past year and we will continue along those lines again striving for that 15% EBITDA margin overall we are going to keep working hard internally because that we have control over..

Very helpful.

Maybe update us on Woodcraft now that you had a chance to dig in after a few more months, how is the customer response been to the new ownership and any opportunities for additional outsourcing beyond the current customer base?.

Yes, customer response has been overwhelmingly positive. I had the opportunity at the IBS show out in Las Vegas which is in conjunction with the Kitchen & Bath Industry Show to meet many of their major customers so very positive feedback.

No surprises in the business we’re working very hard with their financial team to get themselves compliant as fast as we possibly can. So that’s the primary focus right now.

We have our operations team in there assisting them with some margin improvement opportunities as well, which we will see in the second half of the year, still a little too early to see the benefits of that, but obviously a tremendous amount of focus going into that business.

No surprises, we feel very good about where it is right now and look forward to a strong second half from then..

Okay. And lastly a question I would almost never ask, but and a bit unfair, but the shares trading here at 7 times EBITDA your 4.5 times maybe less mid-cycle EBITDA.

Is there any reason you can point to as to why the stock might be under pressure this morning?.

Believe me we were as surprised as you when I looked at the Tracker of this morning I called the IT guys because I said there is something wrong with the color on my screen, this red or to be green. We are completely baffled and we traded close to a half a million shares here in 90 minutes, so we have no clue..

Okay. Thank you..

And our next question comes from Al Kaschalk of Wedbush Securities. Your line is open..

Good morning guys..

Good morning..

Good morning Al..

Bill, you made a comment about the Vinyl Profile business in 2016 was to shrink, but it grew in the first quarter what – I'm not sure how to read what we should read into that given that I think the margins of that business today is probably not as strong as the acquisitions you done.

So is that not have some impacts on the margin in the quarter or does it change or have any implications for the midpoint of the margin implied by your current guidance..

No, I think what you should read into that to be a little more specific, is we talked previously about potentially shrinking the Vinyl business and maybe just exiting some customers because of the complexity and the price levels being forced upon us by some of our external competition.

So, we kind of went into this year with the expectation that we would see some shrinkage, not anything significant. But the first quarter actually came in better than we anticipated from a volume standpoint.

We have a couple of our larger customers that had a stronger first quarter than we anticipated and because of some of the structural events in the Vinyl Profile segment we have some customers that decided rather than run the risk of placing business elsewhere, they are going to continue doing business with us at a price level that was acceptable to both of us.

So that was a bit of a change from the fourth quarter of last year. So I don't think I would read too much into it over the long-term I think it's a reflection that the business is performing better not only internally but externally as well. And certainly so, relative to our competitors..

That’s helpful. Okay and just take your step back in this a little bit broader I know the Q is coming out, but obviously the market is telling you something different this morning, but if you look at gross margin overall and you give yourself credit for the inventory step up.

Let’s say it was closer to 22% that however is down sequentially from the fourth quarter and I know there’s some seasonality. So I’m wondering if you’re willing to share a little bit more broader commentary about the cadence for gross margin given the change in mix of the business.

Obviously, there’s still some very strong Q3, Q4 performance but sort of levels that you think the business should be driving at so that we can get a little bit more comfort for lack of a better word, on what Q2 looks like going into the stronger seasons..

Yes, I think when you see Q there will be some more granularity and some of the details we can maybe follow-up offline. But broadly speaking I mean as you well know, if you look at our margin and volume performance in the legacy business quarter-by-quarter over the last couple of years.

You will be able to see the margin progression it's hard to look at sequentially because of the seasonality of the business. We obviously - it gets a little more confusing because we added two businesses that are more profitable from a gross margin standpoint. That kind of mixes it up. But I mean I think the way to think about it is this.

HL came into the fold as a very profitable business, profitable enough that the opportunity to materially improve their margins is somewhat limited. But we expect to see some incremental improvement and a continuation of their margin performance.

We said with the Woodcraft acquisition, again nicely profitable business more profitable than our legacy business. And we made it clear that we did see margin expansion opportunity in that company. It requires capital investment.

We’ve already invested capital early on in that business and we really won’t see margin expansion there until the second half of the year as a result of our efforts.

And our legacy business, if you look at spacer and accessories and screens, there is opportunity again for continued margin expansion, but not significantly so we expect them both to continue to improve but the numbers won't be material in our spacer business as volumes improved, leverage will really start to kick in there not so much with screens and accessories because of the high variable cost.

And then clearly the Vinyl business still has the greatest amount of runway, but we expect all of those to come into play as we get into the second half of this year and you really saw that in the first quarter as well. If you split those elements out that's how you get to the big improvement year-over-year.

I would expect the same thing in the second quarter just obviously not to the same level. I don’t think we’ll get 700 basis points in Q2. Hopefully that helps out..

That’s great.

And I think just to summarize that I guess what the messaging as you’ve added on some strong margin businesses, you continue to be very focused on driving improved profitability on the legacy business and where there's opportunities to shrink that, whether it be decisions to fire customers, you are prepared to do that in terms of shareholder value..

That's exactly right. I couldn’t have put it better myself. And again I think the focus even externally needs to be on a margin performance not necessarily our revenue performance on the topline..

Great. Thank you and good luck..

Thanks..

Our next question comes from Ken Zener of KeyBanc. Your line is open..

Good morning, gentlemen..

Good morning, Ken..

Good morning..

So along with other people, I’m excited to see the segment data. Ahead of time since you guys haven’t released the Q yet, if I could make the suggestion that you put in supplemental data so we can understand preferably on a trailing quarter basis, how those businesses layout I think that given the nuance, the differences of your business.

More information would hope you all. Just as a general comment.

For the $6.8 million increase in EBITDA on your legacy business, so you said the lion share of that was extrusion I mean should we assume just over half of that $6.8 million is associated with the vinyl or does that mean most of that $6.8 million?.

Ken, nice try. We are not going to give you that level of granularity..

Excellent.

Moving on of the $20 million in extrusion, that you referenced in the call, because the pricing side isn’t going to come back, do you guys expect to get back most of that $10 million that was associated with the inefficiencies by the end of FY 2016?.

Yes, I think we’ve said before that we're hopeful, we can get back half of the $20 million we left on the table, which is the $10 million.

And at this point we’re on track to get to that level?.

Okay. I’m going to stick with the extrusion here because I think that’s an interesting part of your business. You talked about industry structure I think you're referring; I know actually there was some activity with that company in terms of those assets at least being spoken for the time being right now.

And then I believe there was some incremental capacity being added domestically by some European companies. Do you view that change? It sounded like you said it’s changing be more positive in 2017.

I mean could you – is there a way that you could view that is being negative that the European competitor is adding capacity despite there being only modest capacity expansion?.

Yes, there is no question; the expansion of physical capacity in this case is a negative, but I think the other issue, the actual situation, we view as a positive. And so it will depend on how the rest of the story unfolds, but in summary one negative, one positive..

And then just to give an understanding, because I think your warm-edge spacer and screens are probably better businesses and people always think about is my opinion, but, but is there something that led you ultimately to the extrusion business in terms of if it doesn't workout, the one positive, the one negative if there's another negative or something changes.

Do you feel obligated to be in the extrusion business given your position in screens and….

That’s a delicate strategic question. You never waited to a business that's going to significantly under perform in the future.

We don’t view the industry structure as being that negative by any means and clearly we do see benefits in having a full portfolio and we have seen I think probably most recently the benefits of that paying off with the strong relationships.

We have with some of our screen customers and Vinyl customers now looking at spacer products and now buying the spacer products from us that they otherwise perhaps would not have without the relationship.

So I mean I think the answer is strategically we consider it a huge positive that have the full portfolio, but we are also very focused on shareholder value creation and the economics will ultimately answer that question..

Okay, great. And I very much look forward to your Investor Day. Thank you very much..

And our next question comes from Michael Conti of Sidoti. Your line is open..

Hey good morning..

Good morning Mike..

Yes, just your comment to the strong start 2016, can you just I guess take about more on demand trends in February and early March obviously were only a weekend, but maybe areas in the country where you’re seeing strength versus weaknesses?.

Yes, I mean I will say that February, the trend from the first quarter continued into February, if we continue to see good weather there's no reason to expect it won’t continue through the second quarter. Southeast is very strong.

The Northeast and Ohio Valley not so much, Canada is weak, but the rest of the country have absent the one up, one down has been pretty steady..

Okay.

And in the past I think you said you move some vinyl lines to Texas to help support that particular end market, I am curious is to how demand is trending in that part Texas and if the competitive landscape there is forcing any pricing pressure on year-end?.

In Texas it’s not so much pricing pressure, clearly the single-family housing starts are really starting to soften in this market.

We do have a large customer in Texas that services that market more so than our and our so that’s definitely a negative impact and the expectation is I think with the oil and gas situation is that trends probably going to continue throughout this year.

Thus far it's been offset by positives that other customers in other areas, but certainly Texas is weakening, we are starting to see that..

Sure, okay. And last one on the interest expense to me. That stuck out to me.

I mean how should we think about that for the rest of the year where you gave I guess guidance last quarter around $23 million, but just looking at the run rate for the first quarter I mean how should we think about that for the full-year?.

Yes, I mean we have – I think you can still think of our guidance of $23 million as fair for the full-year. I think what you're looking at in that first part of the year is just some of the write-off from the previous transaction, previous revolver we had.

I don’t remember on top of my head that there might have been about $0.5 million of financing costs that we had to write-off with the new revolver coming on Board..

So more of a one-time cost, yes, that’s what I figure it. Thanks. Appreciate it..

And our next question comes from Lee Brading of Wells Fargo. Your line is open Lee..

Hi, thanks. This is actually Melissa Zayas on for Lee. I wanted to follow-up and see if there is any updates on CapEx guidance for the year. I know last call you all had guided towards $45 million and Q1 trended a bit below that on an annual basis.

So just wondering if the plan was to bring that in or expect the CapEx spend to be a little more back half weighted..

Yes, right now our guidance is unchanged. We would still guide towards the $45 million. We did spend a little bit less than we had even planned in the first part of the year, but part of that is some of the items that we forecasted are longer lead times that are pushing some of that spend out into future quarters.

So, as it stands today, we would continue to guide towards $45 million..

Okay, thanks. And I think automation was set as sort of a key area of focus.

Is there any color on maybe additional areas you kind of plan on directing that spend toward?.

That’s still at the top of the list that's where the bigger opportunities are at Woodcraft and also in some of our other operations. So now that will be the continued focus throughout the year and because it’s automations as Brent pointed out.

We actually have a lot of equipment on order, so our commitment to capital is actually greater than our actual cash spend at this point, which is why we are still pretty confident, we will come in at around $45 million for the full-year..

Okay. Great, thanks. And then moving on to M&A. I think you would also mention on the year end call potentially be interested in looking at some bolt-on deals.

Are there any updates around sort of what you’re focused on or updates on the M&A pipeline in general?.

Yes, maybe not surprisingly because of the credit market situation. The pipeline is pretty slow right now. We continue to get and look at bolt-on opportunities.

And as we said I think on the year-end call, if we found something really compelling, we would take a look at it, but the clear focus is going to be on improving internal profitability and generating cash to pay down debt in the second half of the year. So while we continue to look a) its slow and b) its not the highest priority for us right now..

Okay, great. Thanks a lot..

And our next question comes from Bill Baldwin. Your line is open..

Thank you. Good morning..

Good morning Bill..

Could you offer some color on how your programs going with your large window manufacturers as far as the utilization of your warm edge spacers? I think you’ve had some pilot programs going on there as far as – how those might be accepted by the larger companies?.

Yes, so we placed the first high speed line at a large customer on the West Coast that started in full of last year has been extremely successful and our understanding is at this point that the customer has placed orders or is in the process of placing orders for a further six lines to be delivered.

I think the first will be at the back end of this year and then spread into calendar 2017.

We have a second line just being ready for full production, the initial testing has been very promising and the expectation is that line will go into full production here within the next week or two and there are all discussions under way with that customer to order multiple lines over the next two to three years as well.

In fact it’s fair to say that program has been so successful. Our biggest concern now is that our growth potential would be limited by the ability of the machine manufacturers to keep pace with the order flow..

There is always something in your [belt]..

Yes, there is always some, but it’s been a very, very….

That’s a nice problem to have there..

Yes, very successful introduction all around..

I know you can't throughout much specifics but can you assume that if these programs over the next few years that come to fruition that it will move the needle in the spacer business for Quanex?.

Yes, it will. In fact, we are already investigating a potential expansion to cover those future needs. So we are in the very early discussions about that but yes it looks very positive, it will move the needle..

And that would be expansion at your Cambridge facility?.

That’s an option that we are currently talking about right now. We've also talked about perhaps building an additional facility elsewhere but I think that's going to come in second to the first solution, yes..

Thank you..

Thanks Bill. End of Q&A.

And I am showing no further question at this time. I would now like to turn the conference back to Bill Griffiths for closing remarks..

So thanks again for joining us this morning. Good questions. In summary, we’re clearly very pleased with our first quarter results. We expect to keep that momentum going well into the busy season. And we look forward to updating you as the year progresses.

And hopefully we'll get a chance to see many of you as we hit the road here in the next few weeks to start spreading the story. And finally, please make sure you mark your calendars for a June 29 Analyst Day at the New York Stock Exchange and if we don't see you before we will see you then. Thanks very much everyone..

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