Good day, ladies and gentlemen, and welcome to the second quarter conference call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Dave Petratis. Mr. Petratis, you may begin.

Good morning, and thank you for joining us for our second quarter conference call. On the call today with me our Brent Korb, our Chief Financial Officer; and Jeff Galow, our Vice President of Investor Relations and Corporate Communications. Today's call will include a short recap of the second quarter, an update on our Insulating Glass Consolidation Program, a progress report on Nichols, post the strike and the general outlook for demand in the second half of the year. Our comments today include forward-looking statements about future prospects of Quanex. Please refer to our SEC Form 10-K filed in December 2011 for our complete forward-looking disclosure statements. The earnings release is available at quanex.com. Engineered Products finished the quarter with comparable sales up 16% from a year ago, a strong showing. The gain was strong from strong performance at Mikron, our vinyl fenestration extrusion business and at our Homeshield business, our finished aluminum screens and door thresholds. Both businesses executed well this quarter and saw a demand rise. While always difficult to precisely know where our products find their way into either the new home construction market or remodeling market, we believe favorable weather, strong new home construction and market share gains were drivers in the quarter. EPG's reported operating income was breakeven in the quarter while expenses associated with EPG's insulating glass spacer facility consolidation came in at $3.7 million. I'm pleased to report the project remains on budget and ahead of schedule. At its completion, our facility in Barbourville, Kentucky will be closed and we expected to market the building for sale. We remain confident in our estimate of annualized savings of about $9 million as a result of the consolidation, and we expect to see some modest benefits before the fiscal year ends. According to market intelligence…

Thanks, Dave. And I'd like to add my welcome to those of you on the call today. Quanex reported an operating loss of $0.34 per diluted share in the second quarter of 2012 compared to a loss of $0.04 per diluted share a year ago. The loss of $0.34 included $0.17 of strike-related items. $0.08 of expense associated with the spacer consolidation program and $0.03 of cost related to the ERP program. The year-ago loss of $0.04 included $0.07 of special item expenses. Those shares of common stock were purchased in the quarter. The $270 million revolving credit facility remained intact. Because of certain EBITDA covenants associated with it, the available balance was about $166 million at quarter end. Possible uses of cash include funding our growth initiatives, making acquisitions that fit our fenestration division and mission, funding our common stock dividend and buying back stock. With that, I'll turn the call back to Dave.

Thanks, Brent. Moving the discussion to our 2012 business outlook, we expect to see a modest improvement in home starts in U.S. window shipments. We know our outlook puts us on the conservative end of things but we still believe it pays to be cautious particularly when access to credit remains constrained for many consumers. We do have our own belief, 2011 represented a bottom for our markets. It's the slope of the recovery that we continue to debate. To drive this point home, Ducker lowered their 2012 U.S. window shipments estimate by about 5% to 40.5 million units. So we believe staying conservative is still appropriate at this time. With that, we're ready to take your questions.

[Operator Instructions] I am showing our first question comes from Trey Grooms from Stephens Inc.

Could you guys breakout the contribution from Edgetech sales and profit on Engineered Products?

So Trey, at this point, we're not going to breaking out the contribution as much because through the consolidation of the facilities, it becomes very difficult to do so. And on the sales front, that's one that's a little easier to get at. I think we had it in the release here, I was even trying to look. We'll have to get back to you on the sales side on Edgetech, but I think we have it in the release.

Okay. And if you look at some of the sales that you guys put up, I mean you talked about favorable weather and market share gains and that kind of thing, did price improvement play any role at all when you kind of look at the year-over-year sales number in Edgetech? Because I know that there was some initiative to try to get a little bit of price at some point when TiO2 and some of the other costs were moving up.

Trey, I think you got to look at our improvement at EPG in the growth. Number one is, it was impressive but number 2, it is being driven by new construction at the low-end, multi-family. We don't see the replacement market working, and that's really where our higher performance products engage so we're doing well with growth in the market but the Edgetech products really kick in where you've got strong energy codes and standards working and that's not happening in this market recovery yet.

Right. So I guess, kind of looking at the market I guess, what we really need to see I guess, from an engineered-products standpoint is really kind of a higher-end type of home start. Is that pretty fair?

High-end, but we also need the replacement market working. If you pullback the Ducker numbers, the replacement market is flat with 2011 and down to 2010 when we had the window tax credits working. The growth we're seeing at EPG is predominantly servicing those new home starts and we see the bulk of that activity operating at the lower end.

Okay. And then on the $9 million of AOS cost savings, should we expect kind of a full year run rate in fiscal '13 from that?

Yes. We should get fairly quickly up to that $9 million run rate. So yes, 2013 if not the full $9 million, pretty darn close to it.

Okay. And then lastly, the timing of the $2 million strike-related expenses, should we think about that all being kind of in the third quarter, fiscal third quarter, or?

Yes. No, that will be entirely third quarter. And just as a follow-up for the benefit of the question on Edgetech sales, about $20 million in the second quarter of 2012.

Thank you. Our next question comes from Daniel Moore from CJS Securities.

You mentioned you don't yet have a formal agreement, but with regard to Nichols, given the integration of so many new employees, can you give us any color on where you are in terms of productivity, maybe the start of the quarter, where you are now and how quickly those new employees are ramping up?

I'm extremely pleased with the integration of those new employees. We hired in from the outside roughly 100. We had roughly 30 crossers, and then we returned 80. We cast 31 million pounds in the month of April. The total quarter I believe was 51 [ph] million. 31 million pounds would be normal operations for us to casting. So I think the team had done a good job to come up the productivity curve and we're happy with that.

And in terms of margin and cost obviously, the LME is going to be the bigger determinant but you're feeling pretty comfortable about where you are in the cost side there?

Some of the big issues on the table there were modernization of healthcare benefits, two-tier wage structure and then some modernization of language. We continue to work on those issues, but our goal is to improve the competitive of Nichols.

And then a follow-up, do you expect 160 million pounds shipped in H2? Willing to give us any color in terms of the ramp, how we might think about spreading those over the last 2 quarters when many fact -- many moving factors?

I think it's considering that we're at 31 million pounds in April, that will be normal demand across the quarter.

You could think of it as almost split in half plus or minus, between the 2.

Perfect. And one more, I'll give a stab [ph]. At EPG, last quarter, you talked about poor execution at the Alabama facility. Any lingering impact there in terms of the numbers in Q2 and going forward?

So that impact at Alabama would be on the Nichols side. We see that facility stabilizing and coming up to speed in terms of its output. We are investing additional capital in that facility to improve its capability.

Okay. So the impact, nothing disclosable going forward, but a few investment dollars?

Correct.

Our next question comes from Peter Lisnic from Robert W. Baird.

First question, if we can -- Brent, if we can get the impact of the strike, where that was recorded in COGS versus SG&A?

Yes, the vast majority -- Yes. of that $0.17 that we talked about, the vast majority of it is going to be cost of goods sold. What it's really broken down into is about $5 million of what I'll call a direct cost, which is really the hot band issues, buying the pre-finished material from a competitor so that it will all flow through cost of goods sold with some other things such as security and some other stuff that does flow through SG&A. But the vast majority will be on cost of goods sold. The remaining $4 million, it is our best estimate of the impact from a volume, what kind of loss volume did we have. So that's again, going to sort of follow with the vast majority in cost of goods sold.

Okay. Makes perfect sense. All right, good on that. And then if I look at the Engineered Products group, the up-and-coming forecast's basically flat, maybe slightly down year-over-year for the second half. Is that just simply the mechanics of the adverse mix with more new housing kind of running through the numbers in the back half of '12 versus '11.

Yes, there is going to be a little bit of a mix and this is again, excluding the impact of Project Alpha. But again, I think it's really kind of flat to just slightly up over second half of last year. But yes, a little bit of the hangover mix going away from some of the energy efficiency driven by the tax credit.

Okay. All right. And then if I switch gears, last question on the Nichols business, the $0.43 spread that you have assumed for the back half of the year. Sounds like -- or maybe I should ask it this way, can you give us a little bit of color on what you're assuming there for spread 1 and spread 2 as you kind of think about that $0.43 number.

No, I mean, I can't really break that down into what's spread 1 and spread 2. We try to give a little more information to provide a little more color. What I would tell you is really what that's assuming are our pricing, about where we stand today or hold for the second half of the year. So obviously, any increase or decrease to that will have an impact on us.

Okay. And are you getting any sort of lift on the margin from lower gas cost at Nichols?

I think a little bit too early for us to see just yet but would expect to have some favorable impact to us over time from that. We are a big consumer.

Our next question comes from Bill Baldwin from Baldwin Anthony.

Can you all talk a little bit about the products in the markets that you're currently serving in the commercial sector, the non-res sector of the market?

So we're a small player in the commercial sector. Our lead products would be our IG business through Edgetech where you're building curtain walls. It's clearly a development opportunity for us. We've got 3 of our salespeople that are dedicated to that market. It's opened up some opportunities for us in our vinyl business, which would be non-historic for us into the refrigeration space. So it's one of the benefits of Edgetech traditional Quanex had no presence in the commercial basis and we would have Edgetech customers in the IG business that both in Europe, the U.K. and the U.S. but it's small.

And secondly, can you -- and if you've already answered this, I apologize, but have you made any comments on the status of the startup for the German plant there for Edgetech.

So we commissioned the German factory in May of 2011, so it's been open up a year. We're producing on 2 IG lines, we're able to do some mixing and tape operations. And our biggest opportunity there is a growth in the marketplace. We have encouraged some start up cost over the first and second quarters but we got to grow that and we're aggressively working to put volume in that facility. All systems go.

Our next question comes from Robert Kelly from Sidoti.

Just a question on the Engineered Products guidance for the second half, basically flat to a little bit up from a year ago. What is the assumption for top line? By my math, you did almost 8% organic growth in the second fiscal quarter. Do you see that decelerating or going negative in the second half of the year?

I guess the way I would characterize it is we have a conservative forecast for the back half of the year so we have it decelerating a little bit from some of the early gains that we have seen in the first half of the year.

Is mid-single digit kind of the bogey?

I don't have the percentage in front of me, but yes, it would be in that order of magnitude, yes.

Okay. And then as far as the plant consolidation savings, you mentioned in the prepared remarks that we'd start to see some benefits before the fiscal year was out. So the $9 million savings goal, is that at current production, current utilization?

The $9 million is at -- yes, it's really at what we projected 2013 to be. It's how we modeled that $9 million.

But this $9 million could potentially be better over time if you get utilization productivity up?

Oh, yes.

Okay. That's for now, though. Okay, got it. And then just as far as Project Nexus, I know we are in the early stages of that ramping up. Is that contributing to top line or EPS in any way, any material way?

It's definitely having an impact, to say material would be difficult to really measure, to put a number on it. But we are clearly seeing activities, contract signings, new customers and the like that we would not have -- we don't believe we would have enjoyed prior to us consolidating our sales force.

I like our -- the work that we've done. We started Project Nexus July of 2010. We've integrated Edgetech. We are at full integration and I think our results in Q2 reflect that we're on the right path.

And just one final one, if I may, on Nichols. Someone tried to draw it out of you earlier, the spread between -- the spread 1 and spread 2 embedded in the $0.43 estimate for the second half. If you can't put a number around it, could you at least give us some help with whether the price discipline is holding up in the marketplace as you see it for Nichols.

Yes. I mean, it's clearly on the spread 1 side, which is what you are asking about, we have not seen a big change in the spread 1. What you're seeing in the volatility of the overall spread is generally being driven by a spread 2. But yes, so you see still some good discipline in the market on the pricing side.

Our next question comes from Jack Kasprzak from BB&T.

On EPG, when you add back the consolidation expense in the quarter, still a fairly modest margin. How would you guys describe that in terms of the expectations going into the quarter adjusting for that expense?

I think what we see is just a sluggish replacement market, which tends to pull through our higher-margin products so there's some makeshift going on. Clearly, the replacement market is lower than it was by 2010. We get some updraft in the new construction market but it's at the low-end.

And I would just add too, I mean, just remember with the seasonality of our business as well, when you really look at the first half of the year and the volume level that we're at, I mean that's always historically close to breakeven. So you really see more margin improvement in the third and fourth quarters.

Okay, fair enough. And stepping back on EPG, with the various things that you guys are doing and are still doing with facility consolidations and of course, the Edgetech acquisition and expansion. I mean, when we go down the road and some of those strategic moves you've made are in place, what kind of business should EPG be in terms of margin? Is this going to be a 10% margin business or should this be more lower [ph], in the mid-teens in terms of a margin business when it's really where you want it?

Yes. So we haven't given the specific items but if look historically at EPG through a cycle, it would be low- to mid-teens margin business. Clearly, we feel confident that the strategic moves that we have made and continue to make will push that higher, we just haven't given what our margin percentage would be.

So the moves are not just in response to a sluggish market and hoping you can keep -- get back to where you were, but you think that you can then in fact, go higher.

Absolutely. I mean, we have clearly changed the game in terms of what our cost structure is for the future.

I would say Jack too, the opportunities that we've got in the U.K. and Europe for growth that's driven by energy efficiency, is attractive to us. In 2013, the codes will change in the U.K. eliminating a significant part of the market that uses cold edge spacer.

I'm showing we have a follow-up question from Peter Lisnic from Robert W. Baird.

Yes, just a couple of quick ones, I hope. Dave, can you give us a little feel for what you're seeing in terms of any competitor or OEM capacity rationalization on the internal products' side.

I don't see a lot on the OEM side. I continue to see almost monthly consolidation at the window fabrication level. Where they are vertically integrated, you could see -- you could structure to say OEM, but I am not seeing a lot in our space in pure OEM takeout. The bulk of that was being 2009 and '10.

Okay. Is it safe to say that's okay, good thing, bad thing, how do you classify it?

We'd clearly like to see more capacity takeout. We are at about -- Ducker is about 40 million units this year. That will force some hard review on the guys that are marginal.

Okay. And then just on the guys that are marginal, does the shift to more new housing maybe create share opportunities for you as some of those suppliers that are more reliant on that higher-margin remodel piece maybe suffer a bit financially?

I think a continued lag in the replacement markets' going to continue to force more pressure on window fabricators. On the OEM side, I think where I would have expected those players to be continued, to evaluate their strategic options 2010, '11, it appears the new reality is setting in on some of these OEMs and they're considering their strategic future, which helped us on the -- I mean, on the acquisition front.

I'm showing our next question comes from Phil Gibbs from KeyBanc Capital.

Dave, what's your sense of the inventory position at the nationals?

I think they continue to run it extremely tight. The response that we had in the vinyl business is reflective of that in the quarter. So as I have met with our big customers, the big OEMs, the big fabricators, they have taken a very conservative line. And as you're seeing an uptick, it's showing our strength, our ability to respond to that but there's not a lot of inventory in the channel.

Okay. And what's your internal view for home starts in calendar '12, or is that less relevant than the view for windows?

So we built our business plan around 40 million units and of course, we did that for our fiscal year, it was actually a little weaker in our Q1. Adapters come in and set 40 million units for calendar year so we're pretty -- we are in line with our thinking. New-home construction is a little bit stronger than we had forecasted and again, that's at the low-end. We're disappointed we are not seeing a little bit stronger activity on the replacement. And we're in line with what we believe we'd see. What is pleasant and I want to reinforce this, I think we're doing a fine job on the front end of supporting, marketing and executing for our customers and so that drives some discussions around share gains.

And the replacement market being subdued is I guess, not surprising to me whatsoever, given the state of the economy, do you see anything potentially in the pipeline over the next 12 to 18 months that would spur increased demand?

The macro indicators that we all look to will have to improve. There's clear -- you have some pull -- you have some demand that was pulled through by the window tax credits.

Do you see any more tax credits? I think that's more what I was getting at. Do you see any more of that playing out?

I don't think so. There's certainly discussions that something might get tucked into a bill but I don't think that would happen and I just assume so you guys get to pure demand.

And I think one other thing to keep your eye on is really on the foreclosures, and what's going on with that, with the settlements that took place with the banks a few months back. There's discussions of the ability to clear through some of these foreclosures or willingness to take more and more short sales. So I think that may have some more of an impact on the repair and replacement, but it's still going to take the consumer believing that house prices have at least leveled off, if not, started to increase before they go spend big money.

I would add one other element that I think is important for us in this replacement market, and that's around codes and standards. The new EPA standards, ENERGY STAR standards are being developed for 2014. And if you look at some of the industry magazines, you'll see Quanex all over that. That's our reorganization of our front end. We've been successful with influencing those codes and standards in the U.K. We will be in Europe and we think just slight movement on that will benefit us significantly.

That's terrific. And I have just one more, just shifting gears to Nichols. How do you see the supply-demand balance in the U.S. for the products that you sell at this point in time?

I would say it's tight. And we became a big buyer of hot band during the strike, to keep our customers in metal and we were able to suck up any excess in the market pretty quickly. So I would describe, if I understand your question correctly, is metal supplies are relatively tight.

Our next question comes from Daniel Moore from CJS Securities.

Just quickly, a follow-up in terms of the ERP implementation, how is that trending both in terms of cost and time relative to your initial expectations?

It's clearly, we're spending a little bit -- we're spending more today than we would have projected early on. It's too early to say what the overall impact will be slightly -- probably slightly higher but we are adjusting our gameplay and sort of mid-shift it to how we're going to try to turn this into more of a company-led effort going forward. But so, a little bit more, a little bit longer, is what I would tell you.

But nothing changed in terms of the ultimate goal?

Oh, no. Definitely not. Definitely. The real issue is really we -- our initial implementation is intended to be a design for the entire company, not just doing this one business unit at a time. So we're spending a little extra dollars, a little extra time upfront to make sure we get it right on the first one and make it much more efficient as we go through all the remaining conversion.

[Operator Instructions] I'm showing our next question comes from Justin Boisseau from Gates Capital Management.

A follow-up on the ERP question. Given the adjustments you're making, how much longer do you expect to be breaking up those cost in corporate and what do you expect those cost to total or how much of those are actually remaining? And then second, what are your expectations for CapEx for this year, I wanted to see if anything has changed from your prior expectations?

Yes. We will begin to break it out more and more I think as we progress. And we started this year with going live with our payroll systems, so that had some dollars flowing through now as we quit capturing that component of capital and are running that through as depreciation. As this investment becomes larger and larger, I think you'll see us break it out more. Your second question regarding capital, I would say that the cash side of what we expect to spend in capital this year remains about on track with where we thought it would be. I mean, we expected this year to be one of the highest, if not the highest capital years when you combine the ERP and the Project Alpha dollars in line with even our standard capital spend and we really see ourselves on that -- the same path, from a cash perspective.

I'm showing no further questions at this time.

You could expect us to continue to push our lean process initiatives, drive for productivity improvements, lower our cost and expand our regional customer base. Our vision for profitable growth remains on track. That concludes today's call. Thanks for joining us and have a great day.

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