Raymond Jean - Chairman and President Tom Walker - CFO Jeff Galow - VP of IR

Peter Lisnic - Robert W. Baird Barry Vogel - Barry Vogel & Associates

Good morning and thank you for joining our first quarter conference call. On the call with me today is Tom Walker, our Chief Financial Officer and Jeff Galow, our Vice President of Investor Relations.

At the conclusion of my formal comments, we'll take some questions. Today's call will include a recap of first quarter results, a brief financial overview, and outlook for fiscal 2008 and an update on the spin/merge process.

Our comments include forward-looking statements about the future prospects of Quanex. Please refer to the company's latest 10-K report filed December 14, 2007, and our amended Form 10 filed February 18, 2008, for our complete forward-looking disclosure statement.

The current earnings release is available on our website at quanex.com. The Vehicular Products segment reported good financial results in the quarter, as our MACSTEEL business experienced relatively strong demand from its vehicle powertrain customers.

Our shipped tons in the quarter were 8% higher than in the year ago quarter, while total North American light vehicle builds were off about 3% over the same period. Capacity utilization for the three steel mills came in at a very respectable 95% rate and MACSTEEL was able to maintain a very healthy mix of value-added products and service in the quarter.

Operating income at the segment was about even compared to the year ago quarter, but came in below our expectations as operating results were impacted by an unexpected $90 per ton spike in scrap costs in the quarter. The scrap surcharge has since risen to cover these higher costs going forward, and with scrap expected to flow more freely in the spring, MACSTEEL expects to recover some of its margin compression over the next couple of quarters, when scrap prices drop.

The rising cost of our indirect material costs such as graphite, electrodes and refractory both used in our melting operations also negatively impacted profits in the quarter. We were able to raise contractual bar prices about 3% for calendar 2008 which will help recover these higher costs going forward, but the new prices were not effective until January 1st.

Turning to our Building Products segment; overall market conditions in the first quarter were extremely weak, exacerbated by the difficult winter in the midwest and northeast. Specifically at our Engineered Products Group, we had to contend with an ongoing decline of new home starts which were off some 31% from our first quarter last year.

We held our sales decline to about 12% compared to the year-ago period, in part due to our ability to generate additional sales through new programs and product initiatives with our customers. Operating income was well off year ago results, in part from the overall sales decline as well as some unique situation that developed in which we had an obligation to deliver finished products to one of our larger customers as metal costs well below market prices for a period of about two months.

More specifically, our fenestration business had a four-year contract to deliver product at predetermined selling prices and we in turn physically hedged our anticipated metal leads at the outset of the contract. However, our actual metal requirements outstripped our hedge position for the remaining three months of the four-year contract.

So we were forced to buy metal at prices far above those paid four years ago. Unfortunately, we were not able to pass those higher metal costs along to our customer, so we suffered some margin compression through the end of December.

We had since rectified that situation, beginning January 2008, with a new three-year contract with the customer whereby we have covered our metal requirements. Our Engineered Products management teams remain focused on product innovation to improve the thermal efficiencies of our customers windows, make doors and windows more architecturally and structurally desirable and make door entry systems more weather resistant.

This commitment to engineering excellence and industry leading customer service is a differentiator for us. For 2008, new product initiatives at Engineered Products, like invisible window screens, composite window profiles, entry door components, advanced insulating glass spacer systems and unique solar panel components are expected to contribute some 6% organic growth in a down market compared to 2007.

First quarter operating results at our Nichols Aluminum business were respectable when you consider the grim housing statistics we experienced during what is always a very weak quarter for us. Our first quarter shipped pounds were only down about 5% from the year ago quarter.

Operating income was well off year ago levels due to the drop in volume, lower value added painted sheet sales and an 11% drop in spread caused by LME aluminum falling at a faster rate than our aluminum scrap costs fell during the quarter. And, again, winter came into play as it slowed the flow of scrap and kept prices high.

This unprecedented slowdown in the building and construction market forced us to take a very hard look at the Nichols business during the quarter and, as a result of that review, we idled the mill finished kept production at our Alabama finishing facility in late January. We are, however, continuing to paint aluminum sheet at the facility.

The suspension of the rolling mill will continue until business conditions improve. At this point, I would like to turn the call over to Tom who will take you through some of the company's financial highlights.

Thanks Ray. And good morning to everybody on the phone.

Even in the phase of these significant market headwinds, Quanex continued to generate solid returns and cash flow for our shareholders. The latest twelve months return on invested capital was 12.4 %.

Fiscal first quarter cash from operating activities came in at about $24 million, down from a year ago primarily due to working capital increases in inventory at Vehicular Products caused by a spike in steel scrap prices, as well as lower operating income and deal-related costs. Our cash balance at quarter end totaled a very healthy $215 million.

Our total debt-to-capitalization was about 12% and our debt is essentially comprised of the company's 2.5% contingent convertible bond. I would note that we did have a bondholder convert of $9.4 million of principal during the quarter.

Our balance sheet remained very strong and managing our working capital remains an important part of that process. We continue to monitor our receivables and inventories very closely.

And we are now seeing however some customers stretching terms with us. Our conversion cycle which is a measure of how long it takes us to convert a customer order to cash came in at a reasonable 40 days.

Let me conclude my remarks by commenting on our diluted earnings per share. We reported $0.42 per share for the first quarter, compared to $0.55 per share in the year ago quarter.

The $0.42 excluded the $0.34 impact from a $9.2 million after-tax loss associated with the premium paid on the debenture principal and $4.5 million of after-tax deal costs. With that, I'll turn the call back to Ray.

Thank you, Tom. Moving the discussion to the 2008 market outlook for Quanex, we expect total North American light vehicle builds for calendar 2008 to be down some 400,000 units or about 3% from 2007 builds of $15.1 million.

We expect Vehicular Products to outperform the market through an increase in vehicle content from new programs that continue to ramp up in the 3% price increase in our contracts. Operating income guidance for the Vehicular Products in fiscal 2008 remains unchanged at a $140 million to $150 million, although we are now guiding around the bottom of that range.

For our Building Products segment, the near-term outlook for new home construction is bleak with calendar 2008 estimates for new homes starts from Global Insights now estimated at 900,000 units, down from their recent December estimates of 1 million. Assuming the new housing starts estimate is correct, that will mean a 30 plus percent decline in 2008 starts compared to 2007.

We expect our Building Products sales will only be down about a third of that, in part because our Engineered Products segment remains closely hitched to stars and these stars many consider to be the leaders in the fenestration space continue to do better than market. Add to this the positive impact of new programs and engineered products, new customers and cost reduction initiatives across the board, and we look for the segment to continue to outperform the market.

At Nichols Aluminum, the news is not all bad. Certainly shipments at Nichols will remain under pressure for the next couple of quarters, but some good news can be found in today's LME aluminum prices which have risen better than 20% over the last month or so.

This rise in aluminum prices and the pundit's consensus view that these higher prices will be sustainable into 2009, are expected to have a positive impact on operating income because of the high positive correlation of our material spread with LME prices. While we have not changed the Building Products fiscal 2008 operating income guidance of $80 million to $95 million, as with our Vehicular Product segment, we now expect to come in around the bottom of the range.

However, we have not attempted to factor in any potential upside in our operating income guidance for Building Products due to these recent rise in LME aluminum prices, although this upside may be needed to help offset any additional downside at Engineered Products. I'll close with an update on the progress of our separation process.

Last week we set a record date of February 29th for the special shareholder meeting and we expect that meeting to be held on March 31st. Once we mail our definitive proxy statement to shareholders of record, we will be able to share more information with you.

That wraps up my formal remarks, and we are now ready to answer your questions.

I've been upgraded to Mr. Baird I guess.

Congratulations.

(inaudible) Ray, I guess, if I can just start with Building Products, the question I had there, it sounds like you have shuttered or not shuttered, but just shut off some capacity at Nichols. When you look at the Engineered Products business, do you feel comfortable that you're right sized for the current market environment?

Or are there going to be some incremental actions in that business to kind of right size for the weaker market?

Let me take Nichols first. Yes, we took down some rolling capacity off at Nichols.

What it permits us to do is increase the utilization rate at the other two plants where we do rolling. So it isn't like we're taking operating levels below what the demand level is in the marketplace.

So for us it just means that we will be able to operate more effectively, just again high utilization at the rolling mills that remain opened. We feel that we'll be able to keep supplying the industry with what it needs.

As to Engineered Products, we have taken the work force down close to 25% at Engineered Products, and I feel that we are sized to current conditions. Should those get worse, we will have to do what we have to do.

All right. And then on, I guess the uncovered metal hedge situation that you went through in the quarter.

Does that account for the $1 million that you identified in the press release in terms of non-recurring costs that EP or was there anything else in there?

Peter, this is Tom. About half of it was that and the other half were some unusual medical costs we had.

Okay. And do you see anything else coming forward in the second quarter through fourth quarter, unusual costs there or no?

There might be a little bit unusual costs in medical, probably a lower amount next quarter. And then there is some offsetting things.

Okay. Thank you very much.

Hey, how are you doing guys. Thanks for taking my call.

Hey, Bob how are you?

Great. The timing for the idle at Nichols, that started when and do you see it through the spring, just may be a little help there?

Yeah, it's been off about a month is what I want to say, Bob and as far as bringing it back up to be determined based on market event.

Okay. Does it work in your favor having the idle capacity as far as from a competitive standpoint keeping pricing pretty stable based off where we are now?

Well, I think again for us, when you are operate to process businesses it's always difficult to how many shifts should you be running and so forth and this way here, it enables us to increase the utilization rate at the other two mills. So it's really a cost influenced decision.

It's a means of lowering our costs. We feel we've adequate capacity at the remaining operations to satisfy the demand.

Okay.

Again for us it's a more effective utilization of our capacity.

Okay, great. And then if I could, could you guys provide the D&A for each individual segment for the quarter?

I can give you the D&A for the year. For the Building Products it will be about $38 million.

Okay. Thanks, guys.

Hi, this is Barry Vogel.

Hi, Barry.

Hi, Barry.

Good morning, gentlemen. Ray, you made a comment about organic sales growth of the Building Products, of Engineered Products and you talked about new products initiatives, and then you talked about new housing starts estimates by Global Insights to be down 30%, and I thought I wrote down or I did write down that you might be down a third of that 30%.

Does that mean that you are basically saying that you think sales estimates for the Building Products business will be down 10% for fiscal '08?

That would be, order of magnitude Barry, that's probably about right.

All right, I just wanted to, because you said it was sort of raising speak if you will. I have a question for Tom.

Those charges of $9.2 million and $4.5 million associated with the spin/merge transaction. Are these all absorbed in the deal by Gerdau?

The one charge Barry was the convert, and you may remember from prior conversations that that's all handled by the true-up on the convert. So the answer would be, yes.

Okay.

And then the other charge was, the recharges for deal fees, let's call them, and we have a filing with the SEC. There is a portion of those that would be carried by Building Products and a portion that would be carried by our Quanex Corporation.

Now the portion that would -- do you consider that portion to be carried by the Building Products as part of your low guidance estimate of $80 million in operating profit?

No, it's not in the operating profit line, in that guidance.

Okay. So the $80 million which is at the low end of the range does not include whatever that portion is going to be?

Right. And in terms of the year and the $80 million, it's probably insignificant.

Okay. All right.

And as far as the capital expenditures for Building Products, are you still at that level that you talked about before which I believe was about $15 million?

Well, yeah, we ran the first quarter around $7 million in cap spending for the whole company and about half of that into Building Products. And so that we are running at lower rate.

So we are probably a little bit closer to the $15 million Barry.

Okay. Thank you very much.

I appreciate it.

Good.

Sure. We'll take them.

Can you hear me now?

Yeah, Pete we can hear you.

All right. This is a new system little bit confusing for me.

Ray, do you mind clarifying the spin/merge timing, March 31st is a shareholder vote, but can you gives us a sense -- it sounds like it's going to pushed out past the first calendar quarter now. Is that a safe way of looking at it?

No, I am not prepared to say that at all. I think right now our best shot at the close date is March 31st, April 1st whatever, but it would be at the close of the first calendar quarter which is what we've been saying all along.

So you can effectively have that shareholder vote in the morning and then handle the spin and everything else?

Well, the spin comes first and then the merger would be second.

Okay. All right.

It's kind of nearly a simultaneous transaction, but from a legal standpoint the spin comes first is what I am saying.

Okay. And then if I can just ask a question on Nichols again.

The painted sheet business, I am guessing if that is just a function of the (Inaudible) housing market, or was there anything else there that was one-time in nature where you, for whatever reason maybe a production issue or loss some share or whatever or it's just simply a function of the market?

It's really a function of the market, Pete and you mentioned housing and clearly that's the big one. But we also serve secondary markets and those are not particularly robust.

Okay. And I mean what you're doing on the capacity front in Nichols, have you seen competitors in the space kind of take the same approach, in other words is anyone else kind of idling capacity at this point?

Yes, Alaris announced within the last ten days that they were taking down a facility as well, a rolling mill facility.

Okay.

So, yes, the industry is adjusting to the market which is a good thing. We got smart businessmen out there.

Yeah, I guess that is the one way of putting it, yeah. All right.

Thank you for your time.

Hi, this is Lee for Arnie at CJS Securities. You guys mentioned cost savings, and I was wondering if you could detail, we noticed the corporate has been falling rather dramatically from '06 to '07.

I am wondering if what kind of trend is sustainable for '08 given the plant closures and decreased throughput?

Are you addressing primarily the corporate decrease Lee or are going elsewhere with this?

Yeah, definitely the corporate, when you look just Building Products and Aluminum together?

Well, we have structured back our corporate spending operationally. And we would continue to see a lower trend there.

We do have not at the segment level but at the corporate level significant transaction costs that went through quarter which are unusual. But we have been watching very closely our overhead spending, both at corporate and in the operating units and we would continue to see those trend down through the year in a tough market against the prior year.

Right. I am going off with filings.

It looks like you did about 31 in '06 and 21 in '07. Is there still room to go down in '08 or have you bottomed out or is there any more opportunity for savings kind of on an underlying basis?

Probably not too much more on an underlying basis.

So we are pretty there at the bottom now or may be a couple of million more max down.

Over time.

For '08?

For '08, it would be difficult to.

Squeeze anymore out?

Well, yeah, I don't want to commit to a number.

Do you guys have the split on, kind of the underlying corporate for the quarter, what it would be between Building Products and Vehicular?

We don't have that.

Okay.

At this time.

Okay. That's great.

Thanks.

Well, there is no doubt that we will continue to face strong headwinds in our markets given the weakening economic fundamentals and the ongoing housing recession. Many experts hold out hope for a turnaround later this year which is certainly heartening to us.

But in the meantime, we must continue to carefully and effectively navigate our way through today's seemingly deteriorating economy. But we will not be victims to the environment.

We believe now is the time to sharpen the saw, the time to make investments in our future. We have made tough calls to ensure operations are sized to the existing business conditions and to reign in spending, but as to investments, it's full throttle.

Capital projects that have a good return are not being deferred. We are not laying off engineers, we are looking to add more.

I'm excited about 2008, not because of the market, which stinks, but rather because of the opportunities that I believe will come along and the fact that we will be positioned to take advantage of them. This is where discipline and dry powder payoff.

Experts will tell you that more homes will be built in the 10 years than were built over the prior 10 years. Housing is a pillar of the US economy.

It will be back and when the market does come back, we will be ready to very effectively leverage lower cost structure and take advantage of the more favorable economic wins. Our vision for Quanex Building Products is become North America's leading manufacturer of engineered components sold to OEMs and distributors of Building Products.

We expect to grow faster than our served markets through engineering excellence, to drive new program initiatives and products. We will increase the degree of integration for Engineered Products, by pursuing tight product and process adjacencies while striving to be the low cost provider to the industry.

That concludes today's call. Thank you for joining us.