Good day, ladies and gentlemen, and welcome to Quanex Building Products Third Quarter Conference Call. [Operator Instructions] As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Dave Petratis, Chairman and CEO of Quanex Building Products. Please go ahead, sir.

Good morning, and thank you for joining us for our third quarter conference call. On the call with me today are Brent Korb, our Chief Financial Officer; and Jeff Galow, our Vice President of Investor Relations and Corporate Communications. Our comments today include forward-looking statements about the future prospects of Quanex. Please refer to our SEC Form 10-K filed on December 2011 for a complete forward-looking disclosure statement. The earnings release is available at Quanex.com. Engineered Products finished the quarter with sales up 8% from a year-ago quarter, a very good showing. Our gains were predominantly the result of the strong performance at our vinyl extrusion business. JELD-WEN, a major customer that produces mid- to high-end wood and vinyl windows, has gained significant market share this year at the big-box stores. They displaced the competitor that fortunately, for us did not buy our extrusions. So we're experiencing significant sales growth from JELD-WEN's actions. EPG's operating income was a healthy $13 million in the quarter, which included $2.5 million of expenses associated with the Insulated Glass Spacer facility consolidation. We wrapped up the consolidation project last month ahead of schedule and on budget. The total cash spend will be about $16 million once all the bills are paid and while we expect to see some modest benefits in the fourth quarter from its completion, the $9 million in annual savings will begin in earnest in fiscal 2013, while we did leave a few pieces of equipment behind in Barbourville and the building is now being prepared for sale. According to market intelligence for Ducker Worldwide, reported U.S. window shipments for the 12 months ended June were down 2% compared to the year-ago period, while same-store sales at EPG were up 6%. We continue to see a disturbing trend in the residential…

Thanks, Dave, and let me add my welcome to those of you all on today's call. Quanex reported GAAP operating income of $0.04 per diluted share in the third quarter of 2012 compared to $0.24 a year ago. The $0.04 included $0.03 of Nichols strike-related expenses, $0.04 of IG spacer consolidation-related expenses, $0.03 of ERP-related expenses and a $0.02 IG spacer warranty benefits. The year-ago income of $0.24 per diluted share included $0.06 of special item expenses. No shares of common stock were purchased in the quarter and our $270 million revolving credit facility remained untapped. Because of certain EBITDA covenants associated with the revolver, the available balance was approximately $141 million at quarter end. Possible uses of cash included funding our growth initiatives, making acquisitions that fit our fenestration vision, 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 the near-term outlook for Quanex, we expect to see a continued, yet modest improvement in home starts and new home window shipments. We further expect the R&R market for residential windows to remain relatively flat until we see a meaningful improvement in the economy and consumers' access to credit. Our cautious outlook was further reinforced this month by Ducker, who once again reduced their 2012 window shipment estimate, this time by 2%. That reduction was prominently driven by lower expected R&R window shipments. So with that, we're ready to answer your questions.

[Operator Instructions] Our first question comes from the line of Peter Lisnic from Robert W. Baird.

I guess, first question, Dave, if you could just give us a feel for the order book at Nichols. You're looking at, I guess, a fourth quarter that would imply shipments up 15% year-over-year. Maybe give us a feel as to how confident you are in that number and then given some of the things that have gone on with the strike and then maintenance issues, just kind of how sticky has the share or the customer base been with Quanex.

I think the order book remains relatively strong. We could ship clearly -- if we could ship more, we can sell it. As we go out to look to purchase hot band on the market, it's tight, so conditions remain favorable. Our challenge is throughput. We lost 7 days -- 6, 7 days on the caster because of electrical problems. It's an inductor system that should have been replaced years ago. When you get high electrical demand on the grid that we faced in July just because of the heat, it has effects on that system. So if we -- the book is strong, if we can get the throughput, we can process it.

All right. In conviction and getting a throughput, pretty good or...

Yes, Pete, if you look at the timing, I spent almost the full month of June out there in Davenport at the caster. They've got the ability to produce if the equipment hangs in there.

Okay. All right. And then if I can just switch gears to EP, the margin in the quarter maybe a little bit less than we thought, but what I'm wondering there is just how do we -- or how should we think about mix in terms of growth in new construction markets versus this remodel market that's sort of flat and just some of the present pressure that we're seeing there.

So the growth that I was pretty pleased with in Engineered Products is clearly driven by strength at JELD-WEN, number one. Think about what's going on over the last 2.5 years at JELD-WEN, Quanex has come in the quarter down -- they were certainly on the edge. They've rebounded. That's been good for us. So that rebound and their ability to pick up or displace a supplier at Menards, which was Weather Shield, that's been a good outcome for JELD-WEN and for Quanex, and they've been stronger across in their traditional markets. So a big part of the growth, about JELD-WEN. And then we have certainly seen uptick in the multi-family. That's been certainly across the vinyl business. What I would characterize weakness is on the repair and replacement side and the lack of high-performance window sales, which really helps our IG business.

And on that IG business, presumably higher margin and that's impacting mix, is that fair to think of it that way?

We like the margins at IG.

Our next question comes from the line of Daniel Moore from CJS Securities.

Can you quantify, whether it be in dollars or margin points, the sort of impact that's lingering in manufacturing inefficiencies at Nichols related to the strike. Maybe in couch [ph] and in terms of a year from now, how much for efficient do you expect to be than where you're running at the moment?

I might stop short of the year from now, but what I would tell you is in the quarter, we had about $2.1 million worth of costs related to the strike, which is buying the hot band that we had already agreed to purchase prior to the end of the strike. We are going to do some things over the coming months to really dive deep into the capital and during our December shut down to make some improvements. They've talked about the ovens, we have some other projects that we're looking at, that we are expecting to have improvements for us next year, but we haven't given any guidance and aren't prepared to, at this time, to really talk through that.

Okay. And then in terms of EPG, same-store sales were up 6% and you continue to take share. How much of that increase was price versus quantity?

Yes, I would say, for -- the 6% is a full 12 months, it's 8% in the quarter. I would say, the vast majority of that is going to really be volume-related for that 12 -- both the 12 and 3-month period. There were some incremental pick-up in price, but the vast majority of that would be volume.

I would just add at 40 million window units shipped, there continues to be pricing pressure from our customers because you've got idle capacity in terms of supplier. So we -- I would just reinforce Brent's point, it came on volume.

Got it. And lastly, just maybe an update on the European implementation, what’ve we learned if anything thus far, and is the $35 million range still a good estimate for the total cost?

Yes. We will put, definitely, pen to paper come November 1. November 1 is our first big go-live. We went live with payroll at January 1, but where we are replacing systems at 2 operating locations in the corporate office, targeted for the first fiscal quarter 2013 for us. It's -- we will look at what the full cost will be at that point because there's still a long tail lift on this thing, so I don't want to give an updated number now, but there's a lot of work that has been done to date, a lot more left to go between now and go live. So I'm confident that we will end up with a system that will give us visibility that does not exist today. And I've talked to other companies here recently that we've talked to from an M&A perspective that have gone through this and all will talk about the pains of going through it, but the true benefits at the end of it to get profitability measures by customer, by product that we're lacking for today.

Our next question comes from the line of Trey Grooms from Stephens Incorporated.

I've a got a couple of questions on Nichols. So the expected improvement in 4Q shipments, can you just talk about kind of what's driving that? I mean, is it -- are you seeing a real pick-up in demand or was there over and above the kind of $5 million that maybe was pushed out. Is there something else playing the role there, is it just a real improvement in demand that you're seeing?

We're working through the backlog that was built during the strike. Our goal is to work that down, get our customers in metal so that we can aggressively go through the preventive maintenance downtimes that we need during the slow periods. I would also stress that demand is there. If we can produce -- and the better we can produce, we can certainly get ourselves to a position that's sold-out and at 80 million pounds, historically, that's about where we've been.

Well, I would also just kind of pointing too, to your comment on when you were buying hot band and kind of in that market, it sounds like things are pretty tight just in the overall market, over and above what you've kind of built in backlog due to the strike and that sort of thing, is there -- are you seeing an overall improvement in the end markets there?

I would say the overall direction of our end markets is favorable, but we have, over the last couple of years, talked about tight capacity and that continues to be valid and results in a tight market. I mean there's not just a lot of capacity out there. We go out and test the market for hot band and we're looking at 4 to 6 weeks delivery if it's available.

Right. And on the oven, you were talking about replacing. Is that going to be completed? I guess, you said you started in December and forgive me if I missed this, but what's the roll out there of the timing there?

We think that's about 2 weeks shutdown. Everything points today that, that will be done over the Christmas shutdown, which is typically a heavy maintenance time for us at Nichols.

Okay. And then last question on the improvement in operating income there at Nichols, I guess, sequentially based on your guidance, I think that implies a sequential improvement over and above the one-time kind of costs. Is there something that's pointing to or driving that improvement there other than just the improvement in utilization.

Well, I mean it's going to be both the utilization. That's going to be -- the biggest pieces is the utilization getting more volume through the system, which is fairly fixed-cost driven, as well as some efficiencies coming -- still coming out of the strike. We're just getting better at getting metal through the process. So it's a combination of the 2.

Our next question comes from the line of John Kasprzak of BB&T.

You mentioned the 2 factors that drove your sales improvement in the quarter, the JELD-WEN market share gain and uptick in multi-family. Any way to parse it a little finer in terms of the relative impact of the 2? Was the 8% sales gain really more the first factor than the second?

It's heavily weighted toward the JELD-WEN recovery gains and market share. You go across the rest of the vinyl business, weakness at the big names, the mid-market kind of a nice recovery that would reflect the Ducker numbers, but that's all going towards multi-family. So heavy weight towards the JELD-WEN and then nice recovery. I would say the wood market as our exposure to the wood market, wood windows, is weaker than it was a year ago, which is reflected in the replacement windows and the lack of construction of high-end homes. When you get to the single-family, what's coming up across the nation is generally on the lower end. So we see weakness in that wood market and high-performance windows. The energy tax credits set in our 5 standards, that was very good for our IG business, so to see that really start to rock, we need recovery on the R&R side because when people replace windows , they typically will reach for a double or triple pane and then recovery in the upscale housing market.

Okay. On EPG, sales in the quarter were up about $10 million and if you adjust for a couple of one-time -- the 2 one-time items, operating income was only up modestly. What factors affect the incremental margin in the quarter?

We need a stronger sales out of the IG business. That clearly is one of our profit pools and we continue to struggle out of the engineered components because of softness in the wood market.

Our next question comes from the line of Keith Hughes from SunTrust.

Just a question on aluminum. What quarter will we start to see the strike-related cost go away?

Well, I mean, what we would call direct strike-related costs have ended, really in the third quarter, we bought hot band. Now something that, as we go through this fourth quarter and our planning for the December shut down, we may have some things, some actions that we take around the shutdown that may impact the first quarter. I'm not going to call those necessarily strike-related, but some things that we want to ensure we get some preventative maintenance completed, maybe as a catch up, that could impact the first quarter. That's a little bit of a hangover, but we'll talk a little bit more about that in December if we choose to move forward with that kind of activity. But really, the direct cost-related purchase of hot band and some of the labor-related direct costs, those are behind us.

As you talk to people in the channel related to the spread, what sort of the channel view -- what the spread's going to do over the next 6 months, if there is a consensus from you?

Not a great deal of consensus. You get a lot of varying beliefs, but I think they all tend to trend around not much in the way of improvement, especially over the next 6 months. Prices have come down. You're hearing things of scrapyard tabs, some other metal but are unwilling to sell it today at those prices waiting for a recovery, which is not -- that's something that we've seen before as metal prices have done this and then there eventually comes a time where the yards starts selling the scrap.

Keith, I'd give you one other perspective. What I see coming out of our flat rolled competitors is noise around the rolling charge in an attempt to improve the spread, and we will be focused in the third or in the fourth quarter and the first quarter improving our on-time deliveries and meeting our customer requirements so that we can potentially influence that rolling charge. So I think you see from the industry signals, that spread are tightening, how do we get the proper return on this metal, at Quanex, we believe, get our on-time deliveries up and we'll able to fully participate in that.

Our next question comes from the line of Robert Kelly from Sidoti & Company.

Could you give us a sense of what the growth with JELD-WEN was?

We don't split it out. It certainly had a favorable impact on us over really the first half of the year, the fiscal year.

So third quarter growth in Engineered Products, is it positive if you strip out the JELD-WEN business.

It would be probably in line with market. It would be the best way to characterize it.

What are some of the other growth engines that's going on in EPG that are positive, our expansion into Europe is a plus, plus for us. The U.K. continues to be strong and it's because you'll see across the U.K. and Europe co-changes that are going to benefit the IG business even in a difficult market. So we feel good about that. We see weakness in the wood market. If you look at any of the Ducker reports, vinyl continues to get a bigger share of prime window demand and that growth benefits the Mikron business, the engineered window systems business.

Is the Project Nexus program having a material benefit as of yet?

I like -- our coverage, I think, some of the strength that we're seeing is positive in terms of how we go to market. What we need to really lever that is the R&R side of this thing to roll. That's 2/3 of prime window demand. So when R&R is not working, you could step back and say, is our realignment getting the traction that we can? I think our overall continued outperformance of the market says we're well positioned.

The customer commentary that you called out as far as the weak remodel spend, does that, I mean, cause you concern that maybe the Ducker window shipments is too aggressive.

I think you’ve seen Ducker, if you follow like we do, they've adjusted downward. So I think it's in fact, reflecting what's going on in the window market. That'd be my observation there. I think the other side of it is, the advancement in vinyl materials, the big guys are only beginning to reposition themselves in the vinyl market and we see that in our number.

Okay. And then just one final one on Nichols Aluminum. The spread -- it sounds like spread was negatively impacted by hot band, $2.5 million, it's about $0.03 a pound.

That's right, in the order of magnitude, that's $0.03 a pound of the spread would be related to the hot band.

So that goes away immediately or has it gone away, does it start to go away in 4Q?

That goes away immediately. We’ve cleared through all the previous hot band that was purchased. And so everything on the ground's just the current spread.

And the spread compression is completely tied to the metals?

Yes, it's comprised -- LME prices falling much more significantly than what we've observed on the scrap side.

So I mean -- this is a dumb question. If the metal side of it the equation is compressing, how come the price discipline side of it doesn't expand to compensate. I mean, aren't we down to just a couple of players in aluminum rolled sheet or is it because the volumes are too weak, that's not happening.

Bob, this is Jeff, let me help you with that. So what you're seeing on the OEM side is manufacturers are trying to raise what we would call spread one, the fabrication spread, like for instance, Solaris went out publicly with a $0.05 per pound increase in the fabrication spread, whereas you had Jupiter going out with a $0.05 energy surcharge. At the end of the day, it's all in. So the industry is certainly trying to get more on the fab side. I don't think all of it's sticking, but there is certainly a push to get that done.

[Operator Instructions] Our next question comes from the line of Tim Hayes from Davenport & Company.

I just wanted to go through the -- how much hot band was purchased or how much hot band affected the 2 -- was it $2.1 million of strike-related cost, was that all hot band or mostly hot band?

That was entirely hot band.

And was that to the hot band purchase because of the -- strictly because of the outage, the one-week outage or. . .

No, no, no. The hot band is related to when we were all in strike. In order to get hot band during the strike, we had to commit to certain poundage, certain volumes, and so that really was inventory that had been purchased during the strike and had yet to be sold as finished goods, so you don't recognize that cost until it's sold. So it really is just carryover to commitment that were made during the strike.

Our next question comes from the line of John [indiscernible] from Oppenheimer.

It's Oppenheimer & Close. Quick question, this might be a little difficult, so I just want to preface it. It sounds like reading between the lines that Nichols is going to require, I guess, a step up in maintenance CapEx and I just want to get your comment on the magnitude of that if I'm reading it correctly and any other projects that you think you might have to put in the works next year.

So, yes, we believe that Nichols will require a step-up in capital maintenance, as well as preventive and predictive maintenance. Our expenditure on the paint line would be an example of that. As we're preparing the 2013 budgets, we're taking a 3- and 5-year cut at those expenditures. It's been a trend that we've been on in addition to the $6 million at the paint line, we just completed $2 million upgrade of our annealing system, and we would -- we'll give you a number as we go into 2013 on how we see that, but we will step it up, we think it makes sense throughput that Nichols will help us grow this profitably.

Okay. And then just to make sure I understand it, I mean, you're not actually looking at any significant capacity improvements, this is just to keep the business going as it is?

That's correct. I do believe that we can capture untapped capacity that's existed in Nichols with higher reliability. So you'll see us really flexing our Lean Six Sigma in what we call standard work and preventative maintenance at the operator level and get more process mastery around the caster.

Okay. Any opportunity to go out there, some higher-margin business while you're doing this, or is that still not really in the works?

I think when we think about Nichols, it's commodity business. Historically, that Nichols accepted that they were in this commodity space and have not flexed their ability to service customers with high levels of on-time delivery, outside a few. Our goal is to raise our reliability of our system and our on-time delivery and participate more aggressively in some of the rolling charges that are being exhibited by our competitors. So we feel this reliability in on-time delivery is an important step in that.

[Operator Instructions] And this does conclude the question-and-answer session of today's program. I'd like to turn the program back to management for any further remarks.

As some of you already know, Jeff is retiring later this year. And like many of you, we're certainly going to miss him at Quanex, and I would put a double underline under that. We will miss him. We did find a good person to take his place. His name is Marty Kettalar [ph] from Memphis Base Service Master [ph]. Marty joins us next week and he will -- he and Jeff will be working closely together to ensure a smooth transition for all of us. I, along with Brent, wish Jeff the best in his retirement and he's going to be right here in Texas, so if we need him, we'll get him back here on the call. We'd also like to extend an invitation for you to join us at this year's GlassBuild show in Las Vegas, Nevada on September 12 through the 14th. Like last year, we'll have many of our EPG business leaders available to meet you. So we hope to see you there. That concludes today's call, and I want to thank you, for your interest in Quanex Building Products. Have a great day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.