Scott Zuehlke - VP of IR and Treasurer Bill Griffiths - Chairman, President and CEO Brent Korb - SVP of Finance and CFO.

Daniel Moore - CJS Securities Al Kaschalk - Wedbush Securities Steven Ramsey - Thompson Research Bill Baldwin - Baldwin Anthony Securities.

Good day, ladies and gentlemen. Welcome to the Quanex Building Products Corporation's First Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder today's conference call is being recorded. I would now like to introduce your first speaker for today Scott Zuehlke, Vice President of Investor Relations and Treasurer.

You have the floor sir..

Thanks for joining the call this morning. On the call with me today is Bill Griffiths, our Chairman, President and CEO and Brent Korb, our Senior Vice President of Finance and CFO. This conference call will contain forward-looking statements and some discussion of non-GAAP measures.

For a detailed description of our forward-looking statement disclaimer and a reconciliation of non-GAAP measures to the most directly comparable GAAP measures, please see our earnings release issued yesterday and posted to our website. I will now turn the call over to Brent to discuss the financial results..

Thanks Scott. I will begin with the income statement and conclude by providing comments on our balance sheet and cash flow. Consolidated net sales during the first quarter of 2017 decreased 3% to $195 million compared to the same period of last year.

The decrease is primarily attributable to our previously disclosed decision to walk away from less profitable volume in an effort to increase long-term return and drive margin improvement both near-term and long-term.

We reported a smaller net loss of $3.7 million for the three months ended January 31, 2017 compared to a net loss of $7.2 million for the comparable period in 2016. This improvement was a result of lower interest expense from refinancing our debt in July of last year.

Adjusted net loss was $1.4 million or a $0.04 per share loss during the first quarter of 2017 compared to an adjusted net loss of $400,000 or a $0.01 per share loss in the first quarter of 2016.

The adjustments being made for EPS are as follows; acquisition related transaction costs, purchase price inventory step-up recognition, loss on the sale of fixed assets related to the closure of the plant in Mexico, restructuring charges related to the closure of three manufacturing plants, accelerated depreciation and amortization for equipment and intangible assets related to the facility consolidations, and foreign currency impacts primarily related to an intercompany note with HL Plastics.

As disclosed in the earnings release, we recorded restructuring charges in Q1 related to the closings of two U.S. vinyl extrusion facilities in the cabinet components facility in Mexico. The closure of the three facilities were completed in the first quarter without issuance. Additionally the inventory was relocated along with some of the equipments.

Over the next few months, we will incur expenses as we will relocate the remaining equipment and displace older and less efficient equipment. Longer-term we will continue to incur lease expense until each lease ends. On a consolidated basis, EBITDA improved to $11.6 million during the first quarter of 2017 from $10.8 million last year.

On an adjusted basis EBITDA for the first quarter of 2017 was $13.0 million compared to $18.2 million last year.

The decrease was largely driven by a $1.5 million increase in stock-based comp expense resulting from the increase in our stock price during the quarter combined with short-term inefficiency as we transition away from less profitable volume in our U.S. vinyl profiles and cabinet components businesses.

Moving on to the balance sheet, our leverage ratio ticked up slightly to 2.5 times as of January 31, 2017 primarily due to the seasonality of our business combined with the fact that we paid a onetime earn-out of $8.5 million during the quarter related to the HL Plastics acquisitions.

Cash provided by operating activities increased to $2.0 million in the first quarter of 2017 compared to $800,000 last year.

Historically, we've been a consumer of cash during the fiscal first quarter of each year due to seasonality but the acquisitions of HL Plastics and Woodcraft in 2015 have allowed us to post our second consecutive year of positive cash provided by operating activities during the first fiscal quarter.

From a capital expenditure standpoint, we currently expect to spend $35 million to $40 million in 2017 which is more or less in line with the $37 million we spent in 2016. We will continue to invest in automation across all divisions with a heavier focus on the cabinet components segments.

Longer-term we remain confident that our annual capital spend level should settle in around $30 million. We remain focused on generating free cash flow and similar to last year, we expect to pay down debt as the year progresses, which will ultimately further improve our leverage ratio.

As previously disclosed, we are comfortable with our leverage ratio between 2 and 2.5 times. As we go below the two times level, we will reevaluate our options as to how best to utilize free cash in an effort to enhance shareholder value. I will now turn the call over to Bill..

Thanks Brent, and good morning, thank you for joining the call with us today. In the aggregate, our first quarter results came in pretty much as we expected. Growth and margin performance in our European engineered components segment was actually a little stronger than anticipated particularly in the light of the ongoing Brexit discussion.

On a local currency basis, revenue was up more than 11% and EBITDA margins for the segment improved by approximately 200 basis points compared to the first quarter of 2016. As anticipated we started to see the effects of reduced volumes in our U.S.

vinyl profiles business during the quarter and originally expected that this reduction will be carried out in a slower phased manner throughout this year and into 2018.

However the transition is going much faster than anticipated and while the total number and volume of profiles to be transition has not changed, it is now evident that all of this volume will transition by the end of our fiscal year.

In total, revenues generated by this one customer were $11 million lower during the first quarter of this year compared to the first quarter of 2016. We now expect the full-year revenue impact to be closer to the $65 million rather than the $50 million we originally anticipated.

As such, we accelerated out consolidation efforts during the quarter in order to further reduce the cost structure of this business. At this point, two plants have completely ceased operations and 23 extrusion lines have been taken out of service.

Two lines have been relocated and are now operational, two more lines are in the process of being moved and an additional 11 will be moved during the second quarter. Eight existing extrusion lines have been modified to accept the 86 tools that have already been relocated, 31 of which have now been qualified and are fully operational.

All in all this project is being executed very smoothly with no customer disruptions in the first phase which involves mostly high-volume production assets and tolling should be complete by the end of our second quarter. The final phase of this project will be to consolidate all of our low-volume accessory business into our Illinois facility.

This entails relocating 194 tools, 73 of which have already been moved but the remaining 121 will gradually be relocated throughout the year. We are very confident that with a smaller footprint and the efficiencies gained by better utilization of our most effective equipment, our U.S.

vinyl profiles business will be back to contributing to our margin expansion efforts in the second half of the year and potentially as early as the second quarter. Our cabinet components business somewhat surprisingly realized double digit topline growth year-over-year unfortunately though at lower margins.

This was primarily due to a ramp up in volumes of the previously identified margin diluted business as we initiated discussions around increasing the pricing or transition in this business to alternate suppliers. Customers began to build inventory in preparation for the forthcoming changes.

Negotiations continue on multiple fronts with respect to this margin diluted business but we do not expect a final resolution until the end of the second quarter. And such it is still unclear as to how much of the 20 million will be lost versus obtained in better pricing.

Either way however, we should start to see margin expansion in this business beginning slowly in the second quarter and ramping up significantly through the second half of this year.

While progress is being slower than we would like in our cabinet components business, we believe that we have now turned the corner and the longer term goal of 15% EBITDA margins before corporate allocation is not in doubt. On the flipside, the consolidation and restructuring of our U.S.

vinyl profiles business is moving faster than anticipated and should contribute positively to margin expansion in the second half of the year. Net, net we now expect full year 2017 revenues to be in the range of $880 million to $900 million and adjusted EBITDA to come in between $105 million and $112 million.

The midpoint of this guidance implies EBITDA margins of 12.2%, a 30 basis point improvement over 2016 on significantly lower revenues and after a lot of transition through the first part of the year. Much of this margin expansion will clearly come in the second half of the year.

Looking ahead all the signs continue to point towards a longer, slower recovery in the residential new construction and repair and remodel markets. We feel very good about the actions we are taking this year to shrink our U.S. vinyl profiles and cabinet components businesses, while still expanding margins and improving free cash flow.

This will better position us to achieve our 15% consolidated EBITDA margin target without the aid of price or volume and in particular price is still very difficult to comeback. Our priority this year will be to utilize our strong free cash flow to further pay down debt and we fully expect to exit the year at less than two times net debt to EBITDA.

And operator we're now ready to take questions..

[Operator Instructions] We'll be taking our first question from the line of Daniel Moore from CJS Securities. Your line is open..

Good morning. Thanks for taking the questions. Bill, you just mentioned the cabinet business and you did mention you expect a significant ramp in margins.

Are you still confident with the 200 basis point improvement in adjusted operating margins for fiscal 2017 and just kind of more color on progress there?.

Yes, we are indeed, because of the transition of business out of Mexico, we undertook to close that facility the day we made the announcement we seized production immediately in that operation and committed to our customers that we will manufacture that product for them at least for the first 60 days which was most of our first quarter at Mexican prices but of course at U.S.

costs. So we worked on extraordinary amount of overtime in the quarter, it was very disruptive. At the same time, we had increase in volumes in other business as we started negotiations with different customers.

So high volumes all at low margins but we clearly track what's going on in the underlying business exclude in that and we can clearly see that our operational improvement program, some of the automation efforts are gaining traction even though it doesn't show up in the consolidated number for the first quarter.

I just looked at the very preliminary February numbers and we had a decent February data and clearly the trend lines are moving directionally towards better performance here in Q2 and significantly better in the second half of the year.

We already have priced increases on the table for all of the margin dilutive business and are waiting decisions from customers whether they'll try and source it elsewhere or whether they will continue to take the price.

So we expect to see better margins in Q2 but really see the effects in Q3 and QSo we feel very good now about where that business is..

Got it, helpful. And just transitioning to the vinyl business, what is your remaining vinyl footprint once you divest the full $65 million from that large customer. And after the two closures what does capacity look like and capacity utilization relative to - prior to that the most recent consolidation..

Yes, so first of all let me say that the team in our vinyl profile business have done a phenomenal job in the first quarter with an awful lot of moving pieces as you heard from the prepared remarks and much of that was on an expedited basis as it became clear that the customer was going to be able to transition faster than we would like.

So we have three facilities. We will consolidate much of the accessory low volume business into the smaller of the three which is in Illinois and its capacity utilization by the time we finish is actually going to be relatively high, probably north of 80% below - some of these are still moving numbers at this point.

The Kent facility which was always pretty crowded we've moved some equipment out of there, we've moved new equipment in there, we've created some additional space by shutting down some assets that were not particularly profitable, that were not extrusion lines.

By the time we finished the moves there which should be complete by the end of the second quarter, the capacity utilization of that facility will also probably be in the 80% range. The biggest facility which is in Richmond, Kentucky we are still relocating or repositioning equipment there.

The capacity utilization of that facility will still be probably below 65% by the time we finish and as the team there finishes the consolidation effort, they are ramping up some pretty aggressive efforts to replace the lost customer with additional business from new customers or additional business from existing customers.

So as we exit this year, we’ll start to see more and more focus there on growing that business back again after the consolidation is complete, but we're very pleased about where that business is to..

Got it. Lastly and I'll jump back. The overall guidance still looking for mid single-digit underlying organic growth started the year obviously a little slower than that.

What gives you the confidence and I guess what will be the delta weather maybe one but what are the factors give you confidence that we'll see an acceleration of underlying organic growth as we move throughout the year?.

Yes, I think one of the things to keep in mind is if you look at the profile of our volume last year, the first quarter comp was pretty tough to what we had - if you will recall we had a very, very strong first quarter last year the comp against.

So if you exclude the vinyl business where most of the shrinkage was, the underlying window components business was flat year-over-year which we actually thought was a pretty good result given how strong it was than through last year somewhat surprisingly the growth rates tapered off as we went through the year.

We expect this year right now and certainly our customers do to be more normalized to ramp up in a little more in Q2 when a very, very strong three and four which really didn't happen last year. So that's why we still have confidence that that underlying growth rate will still be there..

Got it, appreciate the color. Thank you..

Our next question comes from the line of Al Kaschalk from Wedbush Securities. Your line is open..

Hi, good morning guys. Just wanted to follow-up on the cabinet question and in particular maybe a little bit more broader with the guidance comment - for the full year. Specifically Q2 obviously a tough year-over-year comp plus you have business that you regrettably walked away from.

But do you expect each segment to show modest growth Q2 sequentially or is it one business is going to drive more the lion share of the growth. If you could just help us talk through that because I think what we're hearing is a strong second half, but obviously you got one more quarter to go before we start to see some of that left.

So just want to make sure expectations are calibrated correctly Bill?.

Yes, we will see some margin improvement in Q2 and certainly sequentially, but it's slow and because there're still a lot of moving parts to take place in Q2, I don't want to get too aggressive in our forecast.

Clearly by the end of Q2 as we get into the second half, we feel very good about margin expansion there, but my expectation right now is we’ll start to see it in Q2 the underlying window components business in North America, we'll not see a lot of margin expansion there, we'll certainly see some Woodcraft and I think we'll start to see some further improvement again in the vinyl profiles business..

I appreciate the color on margin. I guess maybe I was hoping to probe a little bit on to the revenue side given a lot of the moving pieces..

I mean we expect to see pretty strong sequential revenue growth as we - even in Q2 and in a similar amount of gain in Q3 and as I said, we expect sort of normal growth and even better fourth quarter. So steady incremental growth as we go through the year..

Got it. And then finally if I may, the 20 million that's under discussion on the cabinet side is - is that in - what assumption have you made on that 20 million as it relates to the $880 million to $900 million of revenue..

The reason for the big spread, is not coincidental that that's $20 million right, so we clearly internally have our own thoughts about how these negotiations are going for obvious reasons we're not going to talk about that publicly yet at this point, I don't think you go far wrong by looking at the midpoint, as where we're most likely to end up realistically.

I mean it could be on the low side, it could be on the high side, but I think at this point I would say if you have to nail down one number I would guide you to the midpoint of that range..

Okay, great. Thank you and good luck. And let's keep pushing the paddle on that pricing formula..

We will. It's not for the one to try in. Thanks Al..

Our next question comes from the line of Nicholas Coppola from Thompson Research. Your line is open..

Good morning, guys. This is Steven Ramsey on for Nick. Had a question regarding CapEx and automation investments, does the exit of the low margin business being faster this year along with the potential ongoing situation in cabinet exiting that business.

Does that speed up the pace of your automation investments long-term?.

Not really. The gating item on automation is physically getting the equipment made and delivered. The robotics guys are busy and the reason for that is we're not the only people or the only industry with labor issues.

So I think there has been a ramp up in automation activity across general industry and so the real gating item we can't go faster because we just can't get it fast enough..

Excellent, that's helpful. My second question switching gears to Europe, the strong volume growth. Can you go into detail little bit more on that strong growth and how we should think about volume growth there throughout the year? Thank you..

The reason it was a surprise to us is that segment grew on a local currency basis at that rate in 2016 compared to 2015 or just a little under that right.

And then if you recall at the beginning of this year, you know the whole rhetoric around Brexit started again with the alleged uncertainty of what Parliament was going to do whether Teresa Maywood would have a mandate or not. So our expectation was that growth rate would actually drop off in the first quarter and it really didn't happen.

Now as it turned out, I think the U.K. is exactly where it expected to be at this time with respect to the negotiations of Brexit.

So I think the only uncertainty I would say in the European segment would be if everybody continues to ignore the noise around Brexit, you know we could potentially be looking at 10% growth on a local currency basis throughout the year. If there is a period of nervousness again maybe it slows down, but right now we haven't seen it..

Excellent. Thank you..

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

Hi, good morning everyone. This is actually Adam on for Ken today. I wish you were wondering and I apologize if I missed this, but on the free cash flow guidance.

Do you guys still expect to close the cash flow by around $10 million this year and if so if you could provide some color on the allocation of the roughly $60 million or so the cash flow that would be for the rest of the year.

And how you guys plan to allocate that capital and maybe rough percentage terms versus buying back debt or stock repurchases? Thank you..

Yes. Adam I think our guidance earlier in the year was for about $10 million increase, we’d be close to that, is it sort of 8 to 10ish. From a debt paydown perspective last year we'd paydown $52 million of debt. I think something in that neighborhood would be expected again this year with the bulk of that taking place in the second half of the year.

I think the paydown was close to $35 million in the fourth quarter. So look very similar to last year in that regards..

Okay, great. Thanks a lot guys and good luck..

Thank you. Our next question comes from the line of Bill Baldwin from Baldwin Anthony Securities. Your line is open..

Okay, thank you. Good morning.

Couple of items here, could you bring us up-to-date on what's going on with your spacer program with your larger OEM IG customers?.

Yes very similar….

How that's progressing?.

Yes, very similar story actually to the automation question earlier. The program is going very, very successfully with the equipment that's up and running. Progress is slower than we originally anticipated because of the difficulty in getting the equipment built and installed.

So we continue to see interest from new customers and the existing customers that have bought lines already are getting great productivity out of the lines that are in place and they are anxiously awaiting new equipment deliveries. I think we expect some later this year and in several more installation next year, gone well no issues..

Very good, very good.

And I guess this equipment delivery then will stretch out over a couple of calendar years?.

Yes this is - you know for some of these bigger customers their plans run out over a three-year period of time..

Three-year period, okay.

Now, the last time I think at least I remember on this Bill you had two customers I believe for this - utilize on this new equipment is that still the number you're working with or are there additional?.

We had two that those two are both working very well and expecting deliveries of new equipment over the next two to three years. And we've had two others initiate new lines one of which is just replacing, we already sell spacer to that customer and it's just replacing it with a high volume line, replacing a low volume line.

So there is some cannibalization there in that one customer's case but we still expect incremental business as a result..

Kind of broadly Bill, can you kind of give us a little color on what's transpiring in the cabinet component markets.

Are you seeing any kind of pick-up in repair and remodeling area and if so does that take your demand into the higher price component business there?.

We're really not seeing that, I mean that is still one part of this recovery that we haven't seen happen yet. I think if you look at Ducker's window shipments, the year-over-year growth their estimates for R&R were in the very low single digits. So, that still has not happened.

My broader view of the way the world is going to unfold is I think that labor constraints will still put a governor around new housing starts which is why many of the economist are now forecasting 1.5 million stuffs being further out then any of us would have expected.

I think that's going to governor but the corollary of that is, it is likely to keep prices higher.

So with new homes at high prices, potential increases in mortgage rates, I think we will see more people make the decision, they're going to stay in their existing homes because it's more cost-effective and then as prices continue to escalate, make the decision to renovate their existing properties. So, I think there is still pent-up demand there.

We are not seeing it now and I'm not sure we'll see it this year but I believe it will happen as the cycle gets deeper and deeper..

I kind of thought Bill and tell me if this has been a correlation in the past, but existing home sales have been recently strong in the U.S. here in the last year or so.

I kind of thought that would have some kind of correlation we're spending on repair and remodeling as people moved into new home - not brand new but new homes to them that they bought in an existing home market.

Has there historically been a correlation there between the two?.

Absolutely. It has been - this cycle it doesn't seem to be happening to the same extent.

Now I think it’s happening - if you look at the big bucket of R&R spend, it's doing very well but you know its appliances, its carpeting, it's the big ticket items particularly windows, it's difficult to get a payback and that's to let - people don't pay attention to that when they're buying a new home..

Right. And then lastly can you give us little color of what's going on with the spacer market over the U.K. and Germany plants, how that business is going in Europe and U.K..

All right, going very well. They were a big part of the revenue growth and the margin expansion in Europe. We're very happy with our European business all around..

And HL, have they completed their warehouse expansions and are they in pretty good shape from a capacity standpoint to continue to go over the next several years?.

Yes, they are indeed, they are starting to move into the new warehouse now and then the old warehouse will be converted to manufacturing space in the second half of this year..

Now remind me Bill, they sell almost all of their products in U.K.'s don't they?.

Absolutely, all of it. They don't export at all..

And will that continue to be the case as far how you're looking right now?.

Yes, we do not expect to see that change..

Thank you very much..

Thank you. I'm seeing no other questioners in the queue at this time. So, I would like to turn the call back over to Bill Griffiths for closing remarks..

Thanks again everyone for joining the call and we look forward to updating you at the end of the second quarter where we expect to show some more incremental improvement. Thank you..

Ladies and gentlemen thank you again for your participation in today's conference. This now concludes the program and you may now disconnect. Everyone have a great day..