Good day, ladies and gentlemen, and welcome to the Quanex Fiscal Fourth Quarter and Annual Earnings Conference Call. [Operator Instructions] During today's conference call, company management may make forward-looking statements about the future prospects of Quanex. Participants should refer to the company's 2011 Form 10-K filed with the SEC for more complete forward-looking statements disclosures, available at the company's website at www.quanex.com. Last, participants are reminded that today's conference call is being recorded. I will now turn the conference call over to Mr. David Petratis, Chairman, President and CEO of Quanex, for opening comments. Please go ahead, sir.

Happy holidays and thank you for joining us for our fourth quarter and year end conference call. On the call with me today is Brent Korb, our Chief Financial Officer; and Martin Ketelaar, our Vice President of Investor Relations and Corporate Communications. Today's call will include a brief recap of fourth quarter results and our annual results, a final update of the consolidated results of our insulating glass spacer facility and a progress report on Nichols Aluminum. We will give a general outlook for demand in fiscal 2013 and a recap of what we believe our earnings prospects will be once our end markets return to more normal levels, including our definition of normal market conditions. We'll also provide you with some additional clarity on some of our recent initiatives and how we expect them to impact our financial results. Before I begin, let me give you a brief update on the Aluminite acquisition we announced Monday evening. We're very pleased to welcome Aluminite to the Quanex family. Aluminite is a strategic acquisition that expands our windows screen product offerings into the vinyl market in addition to increasing our geographical footprint from which we can better serve window and door OEM. The window and door screen market in total is estimated to be a $450 million market, dominated by vertically integrated OEMs who make their own screens. With the addition of Aluminite, the range of screen products and price points positions us better to serve these OEMs. The transaction is expected to close by December 31, 2012, and will be funded from cash on hand. Turning to our quarterly results, Engineered Products finished the year strongly with fourth quarter net sales up 5.2%, but operating income was down $1.3 million over the year ago quarter. Our operating margin was 9.9%…

Thank you, Dave, and thank you to all of you joining us for today's call. Quanex reported earnings from continuing operations of $0.03 per share in the fourth quarter compared to $0.17 per share in the year ago quarter. Earnings in the fourth quarter of 2002 (sic) [2012] included a LIFO benefit of $0.03 per share, $0.04 per share in ERP cost, an asset impairment charge of $0.02 per share and facility consolidation of $0.01 per share. The year ago earnings per share of $0.17 included a LIFO income of $0.03 per share, ERP cost of $0.01 per share, a $0.01 per share warranty benefit and $0.03 per share of other expense items. Our cash balance grew during the quarter to $71 million, and during the year, we purchased 94,337 shares of our common stock at an average cost of $13.61 per share. Our $270 million credit facility remains unused. And due to the EBITDA covenants associated with the agreement, our available borrowings balance is approximately $103 million at year end. We have been in negotiations with our banking group to put a new revolver in place and expect to have those discussions wrapped up by the end of the first fiscal quarter. Our preferred use of our cash continues to be funding internal growth initiatives or making acquisitions that add to or complement our fenestration footprint. Other uses of cash include funding our common stock dividend or buying back stock. For 2013, we expect capital expenditures of approximately $40 million and depreciation and amortization expense of $43 million and a corporate tax rate of approximately 38%. I'll now turn the call back to Dave.

Thanks, Brent. Moving to our 2013 business outlook, I would characterize it as cautiously optimistic. We are certainly encouraged by the significant improvement in new housing starts. According to a recent report by the U.S. Census Bureau, housing construction increased to a post-2008 seasonally adjusted level of nearly 900,000 starts. New home inventories of 147,000 remain at a very low level, and the months supply of new homes was at 4.8 months, well below the industry standard of 6 months. All that is good news, but our caution remains on the repair and remodel side. With unemployment levels high, consumer confidence is improving but still skeptical and home window replacement remaining a big ticket item, we have yet to see the signs of improvement on the R&R side, like what we're seeing on new construction side. The lowering of U.S. window shipments by Ducker Worldwide on the R&R side during the year is additional evidence that the R&R recovery will be slow. Ducker's rolling 12-month estimate for 2013 is approximately 42 million units, up from approximately 39 million units on a comparable basis in 2012, driven almost entirely by new construction. While the R&R market and pricing will likely represent challenges in 2013, we expect our earnings results to significantly improve this year. At Nichols, the loss of Stanley from the strike will not repeat. We also see benefit from the new union contract, and our emphasis on preventative maintenance will result in more reliable operations, which should lead to more shipped pounds. Last, we expect to see some modest improvement in the spreads during the year at Nichols. At EPG, we'll immediately begin seeing the benefit on margins from $8 million of annualized savings from the IG facilities consolidation and won't incur any additional IG consolidation cost. Additionally, EPG should continue to benefit from the improvement in the housing market, and we will continue to see growth internationally as energy efficiency standards are raised in the U.K. While we can't predict whether end markets will return to normalized levels, we can estimate our financial performance when they do. Normalized markets, according to Quanex, will occur when new window shipments, as reported by Ducker Worldwide, reach 60 million units. Additionally, if aluminum spreads improve to more normalized levels, we believe our EBITDA can reach $205 million before factoring in corporate expenses. That is a split between EPG at $135 million and $70 million at Nichols. We have continued to work hard over the years to ensure Quanex is well positioned to add its market-leading positions through organic growth and acquisitions. We have a very strong balance sheet and a strong talented team ready to serve our customers, and we remain very bullish on our long-term prospects. With that, we are ready to take your questions.

[Operator Instructions] Our first question is from Daniel Moore of CJS Securities.

In Nichols, what type of LME aluminum prices do we need to see in order to get the spread up to the point where we would -- you'd be able to achieve the long-term $70 million EBITDA target?

We haven't said what that LME price is. But if really -- if you go back to -- maybe let me say it this way. When you go back to kind of the 2007, 2006 time period when Nichols generated $92 million of EBITDA versus what -- where we're standing today, I would tell you that the spreads that are assumed in that $70 million are somewhere halfway in between those 2 time periods. It would probably be the best guidance I can give you on that. Well, I think what I'm trying to get across is we're not saying that it has to get all the way back to the peak spread, nor do we expect it to, really.

And shifting gears, one follow-up. In terms of SG&A, if I adjust out the ERP implementation expense and the asset impairment, I'm still coming up with somewhere around $27 million or a little higher. Can you give us a sense of what drove the increase in SG&A in the quarter and what a good run rate quarterly as we look up to 2013 might look like?

Yes, there are few things flowing through there. We do end up having one of the variables that gets incorporated. We have some deferred compensation costs that are driven -- impacted by stock price and the appreciation that we saw during the fourth quarter. And the stock price did add some noticeable cost in the fourth quarter. But I don't have the number right off the top of my head. What do we expect kind of run rate going forward? On that comparable basis, I would tell you that kind of in the neighborhood of -- it's north of $25 million, probably south of $30 million here today. Now the one caveat I'm going to put on this is as we go through the rollout of SAP, what's classified as Quanex corporate versus what's in the divisions as we consolidate some of transaction-related stuff, that might create a little muddy water, if you will.

But still north of $25 million, but adjusting for the ERP implementation and other sort of one-time items?

Yes, I would say that's correct.

Our next question is from Richard Paget of Imperial Capital.

I know for the R&R market, you guys are cautiously optimistic. But some of the projections out there are calling for next year to have some double-digit increases in that market. I realized windows are a bigger-ticket item. But I mean, are you guys just being conservative here? Or is the window portion of the R&R market just kind of a separate -- maybe it lags the overall market by a bit? Just trying to get a sense of this cycle versus previous ones.

Windows, from my perspective, are a late cycle because of the high-ticket nature of it. As R&R increases, we will certainly see an improvement, but you've got numbers out there. I think technically, we -- American Plywood Association would be one step adjacent. I think they've got like a 12% increase. I can't even come close to that when I think about windows. As new homes or as existing home sales continue to pick up consumer confidence, cold winters, like they're having today in Chicago, creates more demand around windows. But I think we're going to go -- we're going to have very modest growth in the R&R window replacement over the next 24 months. And then it moves from a like-to-have to a must-have because -- and why we're cautious is that R&R windows, which is 2/3 of the market right now, declined from 2011 to 2012. So I think our caution is well grounded.

Okay. And then just a quick follow-up with the plant consolidation. I think you were saying you’re expecting $8 million in savings going forward. Did you revise that number from previous expectation?

Yes, yes. I would say if you went all the way back to when we announced it, we thought we'd have $9 million in savings. We have pulled it down to $8 million because just to be fair, a couple of years ago or 18 months ago when we developed the models, the assumption was that market would have improved more than it has thus far. So we really pulled it down just based on a lower market number.

The lack of recovery in the R&R, which typically pulls through higher performance windows, affects our IG segment.

Our next question is from Keith Hughes of SunTrust.

In the windows business, have you seen in the last couple of months any kind of inflection, up or down in demand with all this talk of fiscal cliff and other -- that kind of nonsense out there?

Yes, I believe we went through a normal wind-down as we moved into the winter months. The multi-family, new construction are overall up 14% at EPG, plus 6% on same stores, I think, reflects what's happening. And it doesn't seem to be affected by the fiscal cliff.

And to the aluminum segment, you're talking about dramatically improved results for fiscal '13. Is there any other kind of metrics you could point on? I assume pounds are going to be up. Is that implicit in that assumption, I guess?

So pounds, clearly, I think as a measure of health or a measure of the change that's going on at Nichols, in the fourth quarter of '11 which was pre-strike, we produced 66 million pounds. In this fourth quarter, we produced 73 million pounds. That would be with 100 employees that weren't there, 70 to 100, I don't know exactly what the number is. I track the caster output, to me, which is -- it's the heart of the business. In October and November, we were at the 1.2 million pounds level, which is above our 2011 output. So our backlogs are coming into current in terms of what's due, the output is there. And we are taking some hard shutdowns. We were down 5 days at Thanksgiving. We will be shut down at Nichols December 16 through January 6. We are rebuilding the melter. We're rebuilding the delag [ph], which should have been done a year ago, the final improvements on the induction system. The induction system will have a redundant system. That induction system in 2012 cost us 7 days of output. All we have to do is flip the switch. If the primary inductor goes down, we can go to the backup. So I think we're making some fundamental improvements in the pounds. The challenge will be the spread. And as our on-time delivery improves, we're going to get more aggressive on the rolling charge.

Do you think you'll be able to get that end of the block here in the first quarter with that kind of shutdown schedule?

Historically, no. The shutdown schedule limits our pounds, but we need to be good when the market's good. And that's why I pushed extremely hard on the discipline on these preventive maintenance efforts.

Our next question is from Peter Lisnic of Robert W. Baird.

I guess first question. You mentioned the, I guess, throughput on Nichols that may be running at 1.2 million pounds a day. As you progress past the first quarter, how much improvement do you think you can get off of that number with some of the new equipment in place, the new employees, that sort of thing?

I think there's a positive upside. Before I commit to that number, I would like to think. I walk before I run. But as you look, we have to able to step it up in terms of produced pounds off the caster to be able to meet the normal outputs that we would have even a year ago. I'm encouraged with the changes that we're -- we're 10%, 15% ahead of where we were a year ago. So I think the potential is there. But Pete, this is like my golf game. I can have a few good shots. I lowered my handicap by having several solid rounds. And I'd like to be in front of you in the next quarter and say, "Hey, we've had some good rounds here." I see early signs, but that's where I'll make that commitment.

Okay, all right. And then if I could just switch gears a bit to the EP segment. If I look at the margin, the up margin adjusted on a sequential basis, it was actually down even though revenue was up from third quarter to fourth quarter. So I'm trying to understand, is that simply a function of mix or is there something going on there competitively? Just kind of a feel for what caused that? And then when we look to '13, you got the $8 million of savings. But how should we think about mix impacting what the margin might look like, given maybe a strong top line growth for 2013?

I would say mix is playing some role, but more pricing pressures on the vinyl side. We have been aggressive in our price leadership. But with prime window demand effectively flat, there's people out there with capacity that's idle, and it certainly pressed us. So that affects the margin at EPG. Some higher selling costs I think can be offset growth in Europe and an upside on the new construction side.

Our next question is from Robert Kelly of Sidoti & Company.

Just on Nichols, $6 million loss if we throw out everything from the strike, that's kind of your starting point. What can -- if we assume the volumes improve gradually like you're talking about, and spread and pricing is just a little bit better, I mean, what kind of productivity initiative do you have on the board to get this business turned around? What kind of impact can we expect from them?

Yes, I mean I guess the best thing I would do, Bob, is just looking back at the past. When you kind of look back to 2010, 2011, your $6 million loss in '12 is adding back the $11 million that we talked about. But when you see $17 million of OI in '11 and then about $30 million of OI in '10, we think with some simple moves, we can get on the trajectory to get back on that path. One key item that we do need to get in place is the paint line oven upgrade in the middle of the year. That's keen and critical because that's one area were we've had reliability issues, and that's on our highest-margin products on the wide-sheeted -- the wide painted sheet. So we do need some things to happen for us to really get back to the volume levels that we experienced and efficiency levels that we saw in 2010 and early 2011.

The upgrade to the paint line in Alabama is a major move. It's a big capital investment. The same engineering resources and minds that we had on the massive consolidation at Cambridge, Ohio are working in the project at Nichols Alabama. And so I've got a high level of confidence. In terms of scale, it's nothing compared to what we just completed at Cambridge, and it will improve the mix and our margins as a result.

So is this a couple of quarters before we start to see the impact? I mean I know you talked about 4Q feeling some of the impact. But I mean, it sounds like you've got a lot to do in Nichols still before we get back to the F '10, F '11 trajectories.

I would look first to the pounds produced. We produced 66 million in the fourth quarter of '11, and we produced 73 million in the fourth quarter of '12. I think that's a pretty good signal that some things are going right there.

Fair enough. And just on the EPG side, you have a couple of big positives helping the earnings line there in '13 as far as the cost savings and hopefully a tailwind from volume. But you stressed that, that mix is adverse with new construction being strong. Could you just give us an idea of what the differential is between your remodel margin and your new construction margin or how to think about?

It's difficult because we mix so many components. Repair -- the repair and replacement market for windows is 2/3 of the market today. Though the windows that you put it that are replaced -- the low-performance windows they put in new construction, let's say, it's $200 in opening versus $500. And when our customers upsell in that replacement space, it carries a high-performance IG. It carries a higher-performance vinyl. Example, our EnergyCore, our EnergyQuest, the Pella 350 Series, upgraded screens and engineered accessories. So it moves the ball significantly for us in terms of points. I can't tell you, but the R&R space has got to really go.

Our next question is from Tim Hayes of Davenport & Company.

Just one question on Nichols. The 1.2 million pounds per day off the caster. I'm coming up with -- are you up to 440 million annual with that? Or is that just some rounding that we're getting with the 1.2 million?

No. You've often heard me talk about the potential of Nichols. Your math is right, but we shift from wide to narrow. When we go to narrow, we drop down to the 800,000 pounds level. So mix through the caster are important. But the message I'm trying to drive at Nichols, on the days that we operate that we have good throughput on the types of metals that we want to run through there. And I believe there's unlocked capacity. I do not want you to think there's 440 million just waiting to be untapped. But it's what we would call optimization, and we're going to work hard towards that.

So Tim, let me also -- I want to be clear. So that when Dave quotes the number off the caster, that's in gross pounds. That is different than when we talk about shipped pounds in a month. And the 30 million of shipped pounds, that is netted for yield loss that occurs as the metal moves from the casting facility to the finishing plant. So there is an expected amount of yield loss from the gross number Dave's quoting you versus our shipped pounds number. So you can't just take that times the number of days and say, okay, well, you're now producing that 440 million of shipped pounds.

Certainly, certainly.

I want to weigh back in, though. Brent always grounds me, and that's a good thing. Part of the management changes, the investment in Lean Six Sigma and capital is we've historically said 360 million pounds. I believe with good execution, we can raise the lid on that. And I think calculations like that show you that we have the opportunity.

Our next question is from John Koller of Oppenheimer & Close.

A quick question on -- primarily related to maintenance CapEx with Nichols. The $11 million to $13 million or the number that was turned out, that's going to include some accelerated, what I would, I guess, classify as deferred, previously deferred maintenance. Can you give me some idea of what the maintenance CapEx is likely to be once that gets completed?

I think you dropped down a couple million. I'd say a normal CapEx at Nichols should be between $8 million and $10 million. Now let me -- I'll give you a little more color. Running Nichols, you're going to rebuild the melter every year. That's between $1 million and $2 million dollars. There's a level of maintenance CapEx that was some big ticket. But this, the oven system in Alabama was installed in 1965, so we'll get a lot of mileage out of that. But there's some big-ticket items as we went through the strategic assessment of Nichols in 2006 and '07 delay. We believe we will be able to improve the bottom line of the business through better operating efficiency.

Okay. So if company-wide between EPG and Nichols, prior maintenance CapEx was in the $11 million to $13 million annual range, it's likely to go up just a couple of $3 million or so overall?

I think if you exclude the SAP that we're putting there, that's a good assumption.

Okay, great. And I know it's a lot of [indiscernible] products. But I was wondering if you had an overall general capacity utilization figure for EPG in Q4?

I would say 55.

Our next question is from Daniel Moore of CJS Securities.

Regarding the ERP spend, any update there? The initial expectation was $35 million or so over 3 years. Are we trending a little bit above that at this stage?

So yes, we're -- yes, we are trending above that. We are working through what our future rollout is going to look like and putting some numbers to that before we can give a revised guidance. But our objective was to have our initial operating plan go live here in November, and that we have held off on that, and we'll push that into early 2013. So that in and of itself tells us that we're above our $35 million number. But we're currently looking to see what we can do for the future here.

Okay. And lastly, anything else you'll be willing to share around purchase price revenue, margins, et cetera, the opportunity for Aluminite?

Not today, but in the future we'll come back and make you whole on that. We feel very pleased about the acquisition and how it complements our strategy.

Our next question is from Peter Lisnic of Robert W. Baird.

Just a follow-up on Nichols. The spread improvement for fiscal '13 that you're embedding in your model, can you give us a sense of order of magnitude? And then I guess maybe more importantly, it's probably 2 or 3 pieces that go into that. Can you give us a feel for how much of that improvement might just be driven by your operations becoming a bit more efficient or better able to service customers versus what might be going on with scrap or spread 1 and 2 or LME versus scrap costs?

Yes, Pete, I guess the way I would say it, in our modeling, to be honest with you, for our operating plans next year, we've only factored in a few pennies, just to give you an order of magnitude, improvement in the spread. And I would say as it relates specifically to spread, that the numbers I'm giving you are really more market-driven as it relates to efficiency and serving the customer and those kinds of things. That's below the line, below the spread line. And we do have efficiencies assumed in here and things of that nature. But specific to spread, we're talking a few pennies is what we're modeling today.

And is that, just to follow up, is that higher LME or lower scrap or combination of the 2? Just wondering what underpins that.

It's probably a combination of really more -- I call it the bigger influencer would be some stability, right? When you think about what's going on there in 2012, we've been in a period of declining prices and then an increase and then decline. So what that assumption is that if we just have some stability, we'll see -- and I don't want to put an exact number on it, but you can see $0.01 improvement just from stable prices, right? Because then our scrap pricing rule will come a little more in line over time with what's going on with LME. But that's just to give you a flavor for what our thoughts are right now. We're not forecasting some noticeable increase in LME prices. Let me put it that way.

Our next question is from Robert Kelly of Sidoti & Company.

I was going to ask about Aluminite too, but I'll just try. Is this going to be a separately run operation, or is there some integration process like you did with Edgetech?

I'll give you some more color at the next call. I think it's a simple operation. It complements what we do. But I'll give you more color down the road.

[Operator Instructions] We have a question from Trey Grooms of Stephens.

Just kind of on the topic of M&A. Can you give us a little bit of color on what you see out there as far as your pipeline? Is there anything sizable that's out on the horizon as you see it? And also kind of just given where we are in this cycle and on everything, kind of what's your appetite for additional M&A as we kind of look forward?

So we would characterize the pipeline as robust. We've got Gus Coppola, a 30-year veteran of the window industry, partnered with a young guy here at corporate [indiscernible]. And that pipeline is as strong as it's been since I have joined Quanex. I think the Aluminite deal are privately negotiated, as an example of that. I would say there is nothing of the scale of an Edgetech today on the horizon, although those things are populating our pipeline. But we continue to work pretty hard. We will -- we think the screen category continues to be important or what we call engineered components, and we have been working hard. We want to get bigger in the fenestration section of the vinyl extrusion. So that, we continue to cultivate those opportunities. The last segment that continues to have interest for us is things that can complement our IG business. We have a world-leading position. It's growing faster in Europe. You're going to see that as we go through. So those are really the 3 arenas, and the pipeline is rich. But a big thing of scale, I'm not intending. That's how I'd characterize it.

I'm not showing any further questions in the queue. I'd like to turn the call back over to management for any further remarks.

2012 presented several challenges and opportunities, and I'm pleased with how the Quanex leadership team responded. In 2013, we'll be looking for improved operational performance from Nichols as the management team pushes our Lean process initiatives and our investment in equipment and maintenance to improve our reliability and throughput. We also continue to derive productivity improvements, lower cost, improve customer service and grow our customer base. All of these things will benefit our shareholders in the long run and allow us to achieve our vision of profitable growth. That concludes today's call. Thank you for joining us, and have a great day, and happy holidays.

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