Bill Griffiths - Chairman, President and Chief Executive Officer Brent Korb - Chief Financial Officer Marty Ketelaar - Vice President, Treasury and Investor Relations

Daniel Moore - CJS Securities Nick Coppola - Thompson Research Scott Levine - Imperial Capital

Thank you. Good morning, everyone and thank you for joining us for our 2015 fiscal second quarter conference call.

On the call with me this morning is Brent Korb, our Chief Financial Officer and Marty Ketelaar, our Vice President of Treasury and Investor Relations. Quanex posted a very solid second quarter with net sales growth of 5% year-over-year and EBITDA nearly doubling to $11.5 million compared to last year.

This result, while strong, was in line with our expectations and included the drag of foreign currency translation from our European spacer operations. On a constant currency basis, net sales increased nearly 7%.

We closed the first half of our fiscal year with revenue growth of 3.3%. This includes the contraction in the vinyl business we reported last quarter, the drag of foreign currency translation and almost no sales at spacer in Russia and the Ukraine as a result of the ongoing political unrest.

In the U.S., we continued to see improved volumes from our customers in the West and Southeast offset somewhat by declines in the South, primarily in Texas. Volumes in the Midwest and Northeast were similar to last year.

In the aggregate, we remain on track for our full year guidance of 5% to 7% revenue growth. However, if the strength in the U.S.

dollar continues, we will likely close the year at the lower end of this range. With respect to the reinvestment in our vinyl operations, we have planned major overhauls of 61 extrusion lines, of which 48 are now complete and the balance will be finished by the end of this current quarter.

We also plan complete or partial rebuilds of a further 35 lines of which only 13 have been completed. The remainder will be finished by early in the fourth quarter.

We have now completed the installation of the two lines relocated from Kentucky to Greenville, Texas after being completely rebuilt and a new high output line will be installed in Greenville in the fourth quarter. This will complete the planned expansion of this facility by more than doubling its capacity since the acquisition.

Overall, we are seeing signs of improvement in our vinyl profile business with key operating metrics of on-time delivery, quality, scrap rates and labor efficiency all moving in the right direction. As stated at the beginning of the year however, we will not see the full impact of these operating improvements until we exit the fourth quarter and move into fiscal 2016.

The combination of improved operating results in our vinyl business, continued steady growth in our end markets and incremental improvements in our other product lines give us confidence that we are on track toward our full year guidance of $57 million to $63 million of EBITDA. With respect to the longer term, both of the industry economic forecasters Ducker and Hanley Wood are now forecasting mid single-digit growth rates for the next 3 years with both projecting about 57 million window units in 2017.

This trajectory and our current year EBITDA expectations serve to reinforce our belief that 4 years or 5 years from now window shipments will recover to a point that Quanex can deliver revenues in the $825 million to $875 million range and EBITDA levels of $115 million to $130 million. After Brent covers the second quarter results in more detail, I will talk a little about the status of our strategy.

Thank you, Bill and good morning to everyone on today’s call. Consolidated second quarter net sales increased 5% to $142 million, while second quarter EBITDA increased to $11.5 million, a $5.7 million improvement over the last year.

As Bill mentioned, revenue growth was driven by higher sales of screens and accessories offset by lower sales of spacer products. Second quarter consolidated gross margin of 21.9% was better than the 19.6% in the second quarter of last year and the 17.3% in the first quarter of this year.

The improvement was driven primarily by top line growth while controlling costs, thereby realizing solid operating leverage. We ended the quarter with a cash balance of $60 million and no outstanding borrowings on our revolving credit facility.

All in all, the second quarter was a solid quarter for us to build off of as we enter the busiest time of the year. I will now turn the call back to Bill.

Thanks, Brent. Let me just touch on the status of our acquisition strategy.

As you know, we laid out how we would prioritize capital development last year, namely invest in our existing business to improve operating performance, acquire businesses directly in our current space such as competitors or vertical integration assets and lastly explore adjacencies in products, market channels or geographies. Finally, we said that no opportunities were on the horizon within a given timeframe, we will return capital to shareholders.

We did exactly that beginning last September with $75 million share buyback plan when we encountered a low in M&A activity. This plan was completed this past February, since then M&A activity has picked up.

And while there is never any certainty in the acquisition arena, there is now sufficient potential activity in the pipeline that the Board recently decided we would not initiate another stock buyback at this time. We will of course reevaluate this at the end of the third quarter.

We remain firmly committed to our strategy of operational improvements as the market rebounds to get us to our mid-cycle revenue and EBITDA guidance at a minimum with incremental growth through acquisitions in the areas we have previously outlined. We will remain patient and disciplined.

And with that, we would be happy to take your questions. Operator?

Good morning.

Good morning, Dan.

You mentioned, Bill, the impact of the dollar and what that – how that might impact your revenue guidance for the full year? If the dollar in fact remains strong, would it be similar for the EBITDA guidance or do you expect that to be in the lower end of the range or do you see more opportunity there?

No, I think – to be clear, it is a translation effect only, but it’s a pretty significant number from – compared to last year. So, it definitely will soften the EBITDA as well, clearly not to the same extent, because the numbers are smaller as the revenue line, but it will have an impact.

Okay. And then as we kind of look at the various geographies, are you seeing any measurable pickup in the Northeast and Midwest as we head into the back half of the fiscal year?

Kind of interesting, because the answer is yes, but I would temper it by saying through the month of May, which is really the first month that we would expect to see an improvement, it was not as strong as I think some had anticipated, definitely improving and of course at the same time offset by the unusual weather down here in Texas, as I am sure you will have heard, we have had a little rain here for the last month. And we are still uncertain, quite frankly, whether the softness in Texas is really just due to the weather or also due to energy prices.

So, it’s kind of wait and see at this point, but we are seeing improvements where we expect to see improvements, but not as strong as perhaps some of the forecasters anticipated at this stage.

That led exactly into my next question, which was Texas. Anything – any additional color as to whether how much of it might be energy related or did we just cover it there?

We really don’t know how much was energy related and how much was weather related. I think clearly we could see in the state of Texas, a pretty soft summer around a lot of the contractors, as you will imagine, instead of doing repair and remodel work and instead of working on new construction, are actually scrambling with disaster recovery projects right now.

Just on a personal note, I am having some work done at a house I purchased and I can’t get floor guys in to finish a project they started, because they are all doing disaster recovery work here in Houston.

Got it. Okay.

And then shifting gears, just looking at the back half of the year and then I will jump back in queue, the 5% – 5% to 7% growth for revenue obviously implies a pickup in H2, do you anticipate that to be fairly consistent across the quarters or is it more likely given the softness last fiscal Q4 to see an acceleration into – throughout the back half of the year?

I think at this point we would expect it to be relatively consistent over the next two quarters.

Got it. I will jump back in queue.

Thank you.

Thanks.

Hi, guys. Good morning.

Good morning, Nick.

Just want a quick follow-up on that Texas question and I am not sure how specific you can be, but can you help us think about how much of your business is in Texas at this point?

A) I don’t have that number off the top of my head and b) we would be unlikely to release that level of detail publicly.

Okay, understood. I am just trying to think about I guess the impact of any kind of slowdown in Texas, but I got it.

And then can you just talk a little bit more about the extrusion line upgrades you have gone through, what does the benefit look like and maybe was there any kind of short-term drag as you change those lines over?

I think – look it’s fair to say that that program right now is where we expected it to be. It’s on track from a timing standpoint.

Some of the manufacturers doing external work for us are a little behind. So it’s off the original schedule slightly, but not materially.

We are spending about the right amount of money we anticipated. And at this stage in the program, we are getting the results that we anticipated.

So we are pleased with where we are. We clearly have said all year long, this is a big project.

We are managing our way through it and really don’t expect to see significant improvements show up in the bottom line until we get into next year. I mean, we are on the right trajectory.

I have no concerns at this point that the outcome will not turn out to be pretty much exactly as we expected.

Okay, that’s helpful. And then just looking at your, I guess the revenue growth in the quarter, do you have any sense about whether or not OEMs are building or working down inventories, are your sales tracking with kind of end market activity?

Yes. There was very little of the revenue growth in the quarter that went to inventory builds as far as we can tell.

As I think we stated last quarter, our customers were not building winter inventory to the extent they did last year. Everybody built some, but nothing extraordinary.

So I think it’s tracking market more closely. However, I will say – I mean – and we have said this before, but just to reinforce the point we track ourselves very, very closely by specific customer in specific regions.

And so at any given point in time, our sales revenue may not mirror the general market simply because we are shipping to a customer that’s growing disproportionately either through some of their own internal marketing campaigns or because they happen to be servicing a particularly strong region at that time. Conversely, we could also find ourselves in a situation where specific customers are actually consciously shrinking business in some parts of their portfolio or in some regions.

So I would encourage you to think about our revenue growth in terms of customer specific and region specific rather than new construction versus R&R, for example.

Okay, that makes sense. Thanks for taking my questions.

Thank you.

Good morning.

Good morning Scott.

So, looking for a little bit of color with regards to the level of improvement, I am guessing we should maybe think about it in margins or dollar terms, however you want to think about it, you are clear that with regards to the work being done on the lines, that’s more of a 2016 story, the type of improvement you are talking about, but is there any more color or specifics you can provide around that and is it something where we should expect acceleration in margin improvement starting early 2016 or anymore detail you can offer regarding the timing and magnitude of any earnings improvements you expect in those investments?

Yes. Look, we are clearly seeing margin improvement right now.

Obviously, a part of that comes from the vinyl operation, a part of it for other reasons. But I think if you look to last year’s actual performance and the guidance we have given for this year it clearly implies that margins are going to improve steadily through the year, particularly in the second half as they typically do and then we would expect that to continue into 2016.

Little early at this point I think to sort of think too granularly about what margin expansion might look like in 2016. As you know, our second half is a big step up from the first half.

And so as we get deeper into that, we will have a much better read about next year’s expectations, but it is – we have said that we expect as volumes improve and as we continue our operating improvements inside the business, our objective is to get this to be a 15% EBITDA total company margin business and we feel we are on the pathway we laid out to get there.

Got it. Fair enough.

A couple of quick follow-ups then, firstly on mix, I think you gave some regional color, which I am guessing speaks more to the housing side than repair and remodel, maybe it doesn’t, but if you could elaborate just on trends, call it, in that repair, remodel or higher end component business, you are seeing improvement there? Is it tracking according to your expectations?

A bit more detail if you have it.

Yes. Again sort of back to my previous comment, we really don’t and can’t track specifically as to what’s going into R&R versus new construction.

It’s really all of our revenue monitoring is around specific customers and specific regions. And even they, in most cases, don’t know where their products ended up other than through their own distribution channels they can have an educated guess.

So, we really don’t have a view at this point as to whether R&R is picking up or remaining static. I guess, if you tortured me, I would say we haven’t really noticed a material change.

Got it. Fair enough.

Then maybe as a follow-up on M&A and so it sounds like there is a pickup in that pipeline in general. I think previously you had indicated maybe less of an appetite for adjacent markets.

Can you give a little bit more color on – is it larger or smaller prospects? Are you willing to revisit adjacent markets as a serious target?

Any additional thoughts you can offer there.

Yes, I think at a 50,000 foot level, I think you all are close enough to understand that as we go deeper into 2015, M&A activity in general and even more specifically in the building products space, has picked up pretty significantly. You have seen some pretty big transactions announced.

I think much of that is driven by the potential end of a low interest rate environment and some of these transactions are getting done. So, the people can add leverage at an affordable rate.

So, we have sort of seen that even at the lower end of the market where we would operate. And we definitely are seeing more discussions around potential divestitures, some of which we mentioned over a year ago.

Again, it’s in its early stages. I think the main takeaway is the pipeline is filling up, we have activity, there is no certainty at all, and as such, we are not going to initiate another share buyback, at least for the next quarter anyway.

We will reevaluate as we go along. And there are opportunities out there in every one of the segments we have talked about, some vertical integration, some direct space, some in adjacencies that make sense, some in adjacencies that don’t make any sense, but there is just a lot more activity than it was 3 months ago.

Understood. Thanks.

Thank you again. Just want to follow-up on that thought.

One is maybe just a little bit more in the thought process of why not re-up the share repurchase, if only to have flexibility to be opportunistic? And two, you talked about the increased M&A activity, is – are you seeing a willingness of buyers to pay up?

Are you seeing sellers maybe be a little bit more realistic, if you will, on multiples? Just what you are seeing in terms of your confidence that there is more activity for – potential activity for you, for Quanex, at a reasonable multiple given you have been so disciplined to-date?

Yes, clearly, I think valuations are settling into a much more realistic range. We are not seeing some of the crazy multiples we saw last year.

And I think there is a greater willingness between buyers and sellers to get to a point. I think from a seller standpoint, we are at a good point in the cycle to divest assets.

There has been enough of a recovery that earnings levels are reasonable and therefore valuations are reasonable and there is enough of the recovery left that the buyer can have some runway as well, which I – so I think that’s one of the reasons we are seeing a pickup in activity. There is sort of former question on why not another buyback.

Obviously, we are not going to get too specific, but part of that revolves around the magnitude of the opportunities that are potentially in the pipeline and therefore the ability to conserve cash and conserve our debt firepower, if you like, to be able to fully explore those opportunities. And again with no level of certainty, which is why we said three months from now, we will come back and revisit it as maybe it will be all for naught and nothing will come of it.

But all the time, there is enough opportunity out there to be able to really grow this business in a profitable, sustainable manner. We are going to continue to look at those opportunities and really don’t want to preclude having to walk away, because we have – we are no longer able to fund the transaction.

Very helpful. And I look forward to seeing you at our conference next month.

Looking forward to it ourselves.

Thanks everyone for joining us again today. We look forward to updating you on our third quarter results in early September and hopefully by then, the building and construction season will be in full swing.

So, thanks for joining us. Goodbye.