Scott Zuehlke - VP, IR & Treasurer Bill Griffiths - President & CEO Brent Korb - CFO.

Chris Moore - CJS Securities Nick Coppola - Thompson Research Group Ken Zener - KeyBanc Capital Markets Jay McCanless - Wedbush Securities Julio Romero - Sidoti & Company.

Good day, ladies and gentlemen, and welcome to the Quanex Building Products Corporation Q4 and Full Fiscal Year 2017 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 be given at that time.

[Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Scott Zuehlke, Vice President of Investor Relations and Treasurer. Sir, you may begin..

Thanks for joining the call this morning. On the call with me today is Bill Griffiths, our Chairman, President and Chief Executive Officer; Brent Korb, our Chief Financial Officer; and George Wilson, our Chief Operating Officer. 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 discusses the financial results..

Thanks, Scott. I'll start with the income statement followed by comments on our balance sheet and cash flow. Consolidated net sales during the fourth quarter and full fiscal year of 2017 decreased to $233 million and $867 million respectively compared to $249 million and $928 million for the same period of fiscal 2016.

As discussed throughout the year, the decreases were largely driven by the decision to exit business that does not meet our financial objectives. We reported net income of $10.7 million or $0.31 per diluted share for the three months ended October 31, 2017 compared to $5.4 million or $0.16 per diluted share during the same period of 2016.

For fiscal 2017, net income increased to $18.7 million or $0.54 per diluted share compared to a net loss of $1.9 million, $0.05 per diluted share for fiscal 2016.

Adjusted net income decreased to $13.1 million or $0.37 per diluted share during the fourth quarter of 2017 compared to $15.7 million or $0.45 per diluted share during the fourth quarter of 2016.

Adjusted net income decreased to $27 million or $0.77 per diluted share for fiscal 2017 compared to $27.7 million or $0.82 per diluted share for fiscal 2016.

The adjustments being made for earnings per share are as follows; acquisition related transaction cost, purchase price inventory step up recognition, restructuring charges related to the previously announced closure of several manufacturing plants, accelerated depreciation and amortization for equipment and intangible assets related to these facility consolidations, impairment of goodwill at our U.S.

final profiles business in 2016 and foreign currency impacts primarily related to inter-company note with HL Plastics. On an adjusted basis, EBITDA decreased to $33.3 million during the quarter compared to $34.6 million in last year's fourth quarter. For the full year 2017, adjusted EBITDA was $99.0 million compared to $110.3 million in 2016.

The decreases in adjusted EBITDA were primarily attributable to lower volumes and short-term inefficiencies related to transitioning away from less profitable business throughout the year coupled with the impact of the hurricanes in the U.S. during the fourth quarter which was most notable in our North American cabinet component segment.

Before I continue, I want to highlight a few 2017 specific items. First, during the fourth quarter we received a second reimbursement from our insurance carrier for previously incurred legal fees in the amount of $2 million which brings the total for the year to $4 million.

Second, our effective tax rate in fiscal 2017 was 26.7% which is lower than the 31% we previously expected due to a $1 million discrete benefit associated with the change in the statutory deferred tax rate in the United Kingdom from 19% to 17% over the next three years.

Lastly, the hurricanes that hit Texas in Florida in August and September impacted revenues by approximately $6 million; $1 million in our North American engineering component segment and approximately $5 million in our North American cabinet component segment.

Consequently, margins were down about 30 basis points and 60 basis points into each segment respectively. Now let's move on to the balance sheet and cash flow; cash provided by operating activities was $78.6 million in 2017 compared to $86.4 million in 2016.

We generated free cash flow of approximately $44 million in 2017 which allowed us to repay more than $45 million of bank debt during the year with essentially all of the debt paydown occurring in the second half of the year. Our leverage ratio improved during the fourth quarter and was 2.3 times as of October 31, 2017.

Looking ahead, we will continue to focus on generating cash and deleveraging the balance sheet and expect to end fiscal 2018 with a leverage ratio below 2 times.

To recap the 2018 guidance disclosed in the earnings release, we are forecasting revenue of $890 million to $900 million which represents growth of close to 4.5% to the midpoint after adjusting for the sale of our [ph] flooring.

Adjusted EBITDA guidance of $103 million to $108 million represents margin expansion of approximately 30 basis points to the midpoint. From a capital expenditure standpoint, we expect to spend about the same amount in 2018 as in 2017 or approximately $35 million.

In an effort to be more efficient and help offset labor constraints, we will continue to invest in automation across all the divisions with a continued focus on the North American cabinet component segment. Longer-term, we believe that our annual capital spend level should settle in between $25 million and $30 million.

For modeling purposes, it is appropriate to make the following assumptions for 2018; depreciation of approximately $34 million, amortization of approximately $16 million, interest expense of approximately $9 million and a tax rate of 31%.

Of course, if Congress can get through the reconciliation effort, a reduction of the corporate tax rate would benefit us and change this estimate. I will now turn the call over to Bill..

Thanks, Brent. Overall, fiscal 2017 had a lot of moving parts. Just to recap, on an annualized basis, we eliminated approximately $80 million of business that did not meet our overall financial objectives. As a result, we closed four plants, redeployed a significant number of assets and reduced overall headcount by approximately 5%.

We also transferred two plants from the North American engineered component segment to the North American cabinet component segment; those plants represented approximately $25 million in revenue and $3 million of EBITDA on an annualized basis.

And on October 31, 2017 we closed on the sale of a non-core wood flooring business that generated $9.4 million of revenue in 2017 with a negligible amount of EBITDA through the course of the year.

Despite all of this noise, after adjusting for the foreign exchange impact the divestiture of the wood flooring business and other business we constantly shed, our consolidated revenues grew at 4.4% in 2017 led by the legacy window components business at an underlying growth rate of 6.1% which is more than double dock as latest trailing 12 month window shipment growth rate of 2.9%.

On a local currency basis, our European engineered component segment grew at just under 5% for the full year and our North American cabinet component segment grew at just over 5% excluding the business we constantly shed which is a little better than the latest KCMA year-to-date number of 3.5%.

We do not expect to shed any materially relevant business in 2018 based on our current knowledge. All of this gives us great confidence that 4% to 5% overall topline growth in 2018 should be eminently achievable.

The margin expansion we anticipate in 2018 however is being somewhat tampered by material cost inflation in Europe and to a lesser extent in the North American engineered component segment for certain raw materials not covered by automatic pass-throughs; the guidance assumes no price increase to recover this.

Improvement in our North American cabinet component segment will clearly be key to realizing margin expansion in 2018 and beyond. The potential for that business to exceed 15% EBITDA margins longer-term remains intact and we are confident we will see significant progress towards that goal in 2018.

All in all, we're glad to put 2017 behind us and look forward to a clean 2018 with meaningful revenue growth, margin expansion and improvement in free cash flow and further deleveraging. And with that operator, we'll now take questions..

[Operator Instructions] Our first question comes from Daniel Moore of CJS Securities. Your line is now open..

Maybe we can start on the window markets; so in the North American window market are you seeing signs of any faster recovery in the higher end, more energy efficient side of the market or do you expect a good and better to continue to go faster than best for the foreseeable future?.

Actually I think the components business is positioned well enough that we're actually getting traction in every single segment. Our space of business tends to go into more high end windows that's performed very well, and -- but at the other end of the spectrum, our entry price point screen business has also grown disproportionately.

So I think the portfolio is pretty well balanced at this point..

So on the cabinet side, the cabinets business this year, I think with EBITDA margin slightly above 8% -- what margin assumptions for this segment are embedded in the fiscal '18 guidance and what do you think the biggest risks are of achieving them?.

The reality is, we continue to be confident but in the long-term that is a greater than 15% EBITDA business.

We clearly have struggled in terms of timing, we're making some progress in Q3 and expected better performance in Q4, the storms had a much greater impact in the cabinet business than they did in the window business in Q4 and that really slowed our progress down.

So I'm reluctant at this point quite frankly, just because of the timing to put a number on expectations for 2018, although it's fair to say that any overall total Quanex margin improvement, the bulk of it is going to come out of that segment but as I say at this point, I'm reluctant to put a number and timing on it based on our performance thus far..

And last question on potential M&A; I know it sounds like you closed out this year 2.3 times, the goal is to get below 2 times by the end of '18.

Do you need to get below 2 before kind of seriously looking on the M&A side or is there something that could happen in '18?.

No, I think it's fair to say that the ability to afford a transaction is not the constraint.

Quite frankly, there is nothing out there that we have seen in terms of a bolt-on to existing segments until with further down the path with woodcraft, we're not prepared to look at -- seriously, at another segment and we believe that spending another year improving our existing business after a lot of portfolio changes last year is the right thing to do.

We're clearly very confident after three years of solid cash flow in a row that we'll be able to delever to the point that we'll be below 2 times, we just feel that's the prudent thing to do right now..

Our next question comes from Nick Coppola with Thompson Research Group. Your line is now open..

If you look a bit at sales analysis in the press release in the U.S. administration group and back out that $14.5 million of eliminated products that were lost; it looks like the quarter is flattish year-over-year.

Can you talk about some of the drivers of that results, I guess you call out the hurricanes were mostly driving cabinets, was there any drag associated with U.S. administration? Was there any destocking at customers? Just maybe a little bit more color on the quarterly performance there..

Well, the big change in the segment number was really the non-administration parts of the business which we talked about last quarter; those are the ones that are off.

If you back out everything else, the underlying component business actually grew at a pretty significant rate and that's really driven by two things; one, we're starting to see the impact of the high speed lines in our space of business which we've been talking about for some time and that's effectively gaining share from a segment of the market that we were not able to address and our entry price point screen business.

We are starting to see some trends towards further outsourcing because again, as we've talked about in the past, the labor constraints throughout the industry are getting tighter and tighter and entry price point screens are one of the easiest decisions for a customer to make that outsource rather than consume labor internally; so that's what's driving that..

Okay.

And then, you briefly talked about woodcraft in the margin trajectory there; is there anything else that you can add in terms of color on -- the operational improvements that are underway, maybe just kind of what you're doing there to try to improve results?.

Yes, we're clearly seeing benefits from the automation that's being installed. We are in the process of moving some assets around, we're also in the process of relying out a couple of facilities including one at the larger ones, that is likely to have a very significant impact on margins as well as working process inventories.

It's going to take us through our first quarter and probably half way into our second quarter before we see the payoff of that. We're scrambling to get as much done as we can over the holidays and through the quiet period but still have a high degree of confidence.

George Wilson, our Chief Operating Officer, is spending a significant amount of time helping that operation improve the rate of improvement..

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

I appreciate your commentary. To the extent you guys can lay out the quarterly stuff just on the revised that would be helpful for modeling, that's adjusted before but very good results in Europe engineered components sales.

Can you talk to -- you had a lot of strength before and you thought it might be waiting, it doesn't look like the growth nor the margins are waiting; is something happening maybe that you might not have thought 3 to 6 months ago post-Brexit?.

Actually in fairness, the growth rate has in fact slowed. So in 2016, I think the overall growth rate there was either just over or just under double-digits.

For the full year, it's just -- is around 5% but if you look at the quarter-by-quarter, we were double-digits in the beginning of the year and the quarter on a local currency basis was actually just under 2%; so it has slowed down.

The expectation is, we'll kind of stay where we are through 2018; as we read in the press, there is progress being made on Brexit which I think will perhaps ease things a little bit in Europe.

Where we are seeing difficulty, exchange rates between the UK and the rest of Europe are still bouncing around and it's affecting pricing of some of the raw materials a little more so in Europe than we're seeing in North America, particularly on the chemical side..

And I guess, when you talk about chemicals; you made the commentary in the script that you don't assume price on products that are not tied to a cost index.

Could you be a little clear as to perhaps the segments that we're talking about and is that a large percentage of COGS or is it really just a minority component of the COGS?.

Well, it's a minority component but in some cases an expensive component. So specifically TiO2 in the resin business on both sides of the pond is not a pass-through, it is a small ingredient but it's in short supply and it's expensive.

Some of the inputs to the space including silicon, again, not a pass-through, prices are increasing pretty rapidly, some of this driven by lack of supply, some of which was driven by the hurricanes that came through Southeast Texas. So we have some degree of certainty of what the price levels are.

The guidance assumes that we are not able to recover that but don't take that to mean that we're not going to try to recover that; it's just I think the prudent thing to do in guidance is assume no price increase and if we get something, it's upside rather than the reverse..

Reading from your press release, like administration business in the U.S. was 6.1% versus [indiscernible], that's what you commented on.

When you talk about the administration business, that's including all three components of the -- extrusion, screens and spaces, is that correct?.

That is correct but it excludes clearly the business we walked away from which would say -- I think where you're heading, the underlying final business excluding the chunk we walked away from actually grew at a pretty decent rate too..

So that's what I was going to ask is, if you can give us a little more flavor; so you just did it on the excursion side where you guys had the retrenchment. But as it relates to -- I believe your states of business which really is gaining traction in the market as you highlighted as a machine enables you guys to service that higher market.

Could you kind of talk about -- I know you highlighted at the Analyst Day, you had a manufacturer's video complementing the efficiency of that product.

Could you kind of take us from where we went I 2017 if not sales but number of machines out there and kind of what you think about FY18 given your understanding of who is ordering what machines and what market share might move to?.

Look, without getting into specifics which we can do offline when I've got better data in front of me; the lines that were put in '16 and '17 are now really in full production; so we're seeing the benefit of that against the growth in '17.

There are further lines being installed and further lines ready to be installed in the early part of next year, so our expectation is that the growth will in fact increase as we go through 2018.

And I think more broadly, just to recap a point I made earlier; the underlying business is growing at or a little better than duckers [ph] numbers which is sort of what you would expect but the two parts to the business that are driving the extraordinary growth are those new high speed lines in the space of business and some outsourcing activity that's taking place in our entry price point screen business which over the last three years has been the fastest growing component in the whole portfolio..

Would you like to comment on the margins of any of those businesses?.

We'd not like to comment on the margins of any of those but a nice try Ken..

Given the cabinets journey from where it was, you know, obviously the cabinet in structure has changed itself related to large manufacturers, product choices; American Woodmarks pending acquisition of RSI could be impact -- could you comment if that impact to the OEM side of the cabinet door business in anyway that's meaningful? Thank you very much for your time..

To the best of our knowledge today and as you know, that's obviously very fresh information. To the best of our knowledge, we do not think that that will benefit us, nor do we think that it will detract from anything we're currently doing with American Woodmark.

Obviously, more to follow as they get deeper into that, we have a very close relationship with those guys and we'll certainly update that situation after our first quarter results..

Our next question comes from Jay McCanless with Wedbush Securities. Your line is now open..

I think Ken stole all my questions but the one I did want to harp on is the fact that you guys aren't expecting any further or not building any pricing into the expectations set for this year.

Like, based on the increasing price of those two chemicals you called out TiO2 and silica; is that the right way to think about it?.

It is the right way to think about it but let me reiterate the point. Don't assume that we're not going to try and recover that, just assume that guidance does not include a recovery, that I think is presumably [ph] there.

Obviously, it's a time of the year where there are pricing discussions taken place, we don't know at this point how -- what the outcome is going to be but as I said earlier, the prudent thing to do is to give guidance and assume that we do not recover any of it..

And the only other question I had is, I know last call we talked a little bit about what's going off the hurricanes and the potential for maybe some flood recovery sales and the cabinet business but sound like that materialized, what have you seen since the end of the fiscal year in terms of sales there? Are you picking up some of that business, what's -- any read there would be helpful..

Yes, we just closed down November and November was in line with our expectations for 2018.

It was also in line with the last year, so we did not see any real significant pickup but I would also say as residence of Houston and Brent here in the room is living and breathing this right now, I don't think that we have seen cabinets being ordered to rebuild flooded homes this early yet.

We're into the rebuilding effort and it's taken longer to recover insurance monies, longer to figure out what people are going to do that weren't insured. So I still don't expect to see a recovery, particularly in cabinet's maybe until our second quarter would beep into the first calendar quarter of 2018; I just think the order cycle isn't there yet.

It clearly has to happen. We've all seen the streets with catching cabinets, full high [ph] on front loans; we know they have to get replaced, we know that business will be there ultimately, we just don't know when..

Our next question comes from Julio Romero with Sidoti. Your line is now open..

Just on that last point, just curious what you're hearing from boots on the ground from your OEM customers on the cabinet side.

In regards to the cadence of orders that you should expect and have capacity ready for as you mentioned, maybe not until the second quarter but do you expect the bulk of that maybe to come in fiscal '19, fiscal '20; any color on that would be much appreciated..

I do think we're going to see it in fiscal '18. I think it's going to be very much backend loaded and I think it will trail into fiscal '19 as well. Interestingly enough, I mean after the storms order intake just ground to a halt and almost every one of our cabinet customers took production days out in our fourth quarter with effectively no warning.

So clearly, there is inventory in the system and we're also hearing stories of labor shifts as well; so one of the things that also impacted the fourth quarter was installation labor was moving around the country, so parts of the country that you would not have expected to have any impact from the storms also slowed down -- just simply to add, no installation labor but I really expect to see the second half of 2018 to see an uptick..

And correct me if I'm wrong, but -- your inventory was -- was that slightly high this quarter or was that owing to the cabinets side or was it -- or any color on that?.

Yes, it was higher than normal. We also got caught with some inventory in the window components business, no cause for concern there, that will get flushed out as we go through our first quarter but it was higher than normal, partly because the suddenness of the slowdown..

And then just lastly, you've talked about in the past about labor constraints, not just affecting your business but also affecting your ability to get automation equipment, get the orders in for that equipment, maybe not being able to get as fast as you would like; is this still something you're experiencing today and if so, how much is that hindering the margin improvement in woodcraft versus the margin diluted business that you're walking away from?.

Labor is still an issue and I don't think that's going to change across the spectrum. It raises the point that I wanted to make earlier, so it's a nice segway for me here.

Because labor is very difficult to come by, one of the reasons that the margin dropped off so significantly in Q4 is, we could not and did not want to react by shedding labor over the short-term because we know we're going to need it here through the early part of next year and chose to keep labor even though production rates were significantly slower.

So that's kind of a tangential impact of the labor situation..

Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Bill Griffiths, Chief Executive Officer, for closing remarks..

Thanks very much for joining us this morning, and we will talk again at the end of our first quarter and we look forward to a very successful 2018 and a lot cleaner 2018 than 2017 was. So thank you everyone, have a great holiday period..

Ladies and gentlemen, thank you for participating in today's conference. This conclude today's program, you may now disconnect. Everyone have a great day..