Quanex Building Products Corp (NX) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quanex Building Products fiscal first-quarter earnings conference call.

(Operator Instructions)

As a reminder this conference may be recorded. I would now like to turn the conference over to our host of today's call, Mr. Scott Zuehlke, VP of Investor Relations and Treasurer.

Good morning and thanks for joining the call. On the call with me today is Bill Griffiths, our Chairman, President and CEO and Brent Korb, our Senior Vice President of Finance and Chief Financial Officer.

This conference call will contain forward looking statement. For a detailed description of our disclaimer please see our earnings release issued yesterday afternoon and posted to our website.

Before I turn the call over to Brent, I'd like to mention the we have set a day for the analyst and investor day that was mentioned on last quarter's earnings call. The event will be held in New York on June 29 at the New York Stock Exchange and will be a great opportunity for us to communicate our story and strategy in more detail. Specifics about the event will be distributed over the coming months. We hope to see you all at the NYSE in June. I'll now turn the call over to Brent to discuss financial results.

Thank you, Scott. We're very excited to have Scott on board. He has hit the ground running and has developed a plan for us to be very active over the next year, spreading the word about the positive transformation that we have accomplished over the last two years.

Turning to the quarter, consolidated net sales during the three months ended January 31, 2016, increased 58% to $201 million, compared to the same period of 2015.

The increase in net sales was primarily driven by contributions from the HL Plastics and Woodcraft acquisition. EBITDA performance during the first quarter was excellent across all product lines and quadrupled to $10.8 million compared to the first quarter of 2015.

After adjusting for $5.1 million in transaction costs, and a $2.3 million one-time expense related to a purchase price allocation inventory step up at Woodcraft, adjusted EBITDA increased significantly to $18.2 million, compared to $2.6 million last year. The acquisitions alone contributed approximately $8.8 million to adjusted EBITDA during the first quarter.

The comparable legacy business which was more than three times as profitable in the first quarter of this year as it was in the first quarter of last year, contributed an incremental $6.8 million in EBITDA, largely driven by improvement in our vinyl profile business in North America, where the team's work throughout 2015 has delivered improvements in productivity.

Switching to leverage and cash flow, let me remind you that immediately following the closing of Woodcraft on November 2 of last year, we had net debt of approximately $304.8 million comprised of a $310 million term loan, $10.5 million outstanding against our ABL, and $7.4 million of other debt, less $23.1 million in cash. Our pro forma net debt to adjusted EBITDA leverage ratio at that point was 2.9 times. As of January 31, 2016, net debt decreased by approximately $5.7 million to $299.1 million.

The reduction in net debt coupled with an improvement in adjusted EBITDA resulted in our pro forma net debt to adjusted EBITDA leverage ratio dropping to 2.7 times. A positive in what historically is a seasonably difficult quarter.

We were also able to generate positive cash flow from operations during the first quarter of 2016 which is something we have not done in the first quarter in quite some time. While leverage remains at a comfortable level, we are confident in our ability to reduce our debt in the later half of this year and drive the leverage ratio to between 2.0 to 2.5 times. Given that debt we have taken on, and therefore increased interest expense, I will spend more time on this call and future calls discussing earnings-per-share.

For the first quarter of 2016, we realized an adjusted EPS loss of $0.02 per share compared to a loss of $0.08 per share in the first quarter of 2015. The adjustments being made for EPS are the same as those for EBITDA mentioned earlier as well as removing the impact of foreign currency losses related to an inter-company note with HL Plastics.

The year over year EPS improvement was driven by the strong operational performance during the most recent quarter, offset by the burden of higher interest expense associated with the added debt as well as the impact of a lower tax rate during a net loss quarter. The full contribution from the acquisitions will more than offset the added interest expense as we progress through the year, especially during the second half.

One item that I would like to provide a heads up on relates to the new segment reporting you'll see in the 10-Q. We have re-evaluated our segments in light of the recent Woodcraft acquisition. And based on the evaluation, we have landed on three separate reporting segments which are as follows:

A North American cabinet components segment which is comprised solely of Woodcraft. A European engineered components segment which is the combination of HL Plastics and our European spacer operations. And finally, a North American engineered components segment which is comprised of both of the legacy Quanex operations, less the European spacer business.

You will also see that beginning in FY16, with retroactive application, we are allocating a portion of corporate costs to better reflect the true cost of each of the new reporting segments. That said, we are not allocating the more volatile items such as stock-based compensation, transaction costs, interest expense and taxes. All of these will be reflected in a separate unallocated Corporate and Other segment. A full recap of the amounts allocated is presented in the 10-Q for the current and comparable period. I will now (technical difficulties).

Thanks, Brent. As you've just heard, FY16 got off to a strong start with a 700 basis point adjusted EBITDA margin improvement over the comparable quarter of 2015. As Brent mentioned, this was driven by solid contributions from our two acquisitions as well as improvements in every product line but especially our vinyl profile business which delivered the lion's share of the 700 basis point improvement.

As you know, we've invested significant capital and strengthened the management team in this business and are now starting to see the benefits. In full disclosure, however, the first quarter of last year was the low point in our vinyl profile business as we were still investing in refurbishing equipment and burdened with the negative impact of the resin price freeze for two of the three months in that quarter.

Since then, the business has been steadily improving and therefore the comps will get increasingly more challenging for the remainder of the year. Having said that, we still expect margins to continue to improve just not at the same rate.

I would also like to point out that all of the EBITDA margin improvement in our vinyl profile business came from efficiency gains in the operations. As price realization has been challenging, and operational leverage is essentially not a factor, with very low single-digit growth.

Keep in mind we never expected to see volume growth in this business in 2016. In fact our original expectation was that it would shrink.

Even with the low growth in vinyl profiles, our US fenestration business grew at about 3.5% year-over-year, which is pretty close to doctor's calendar fourth-quarter US window shipment number of 4.2%. It is important to note that the North American engineered components segment also includes some international sales as well as some non-fenestration sales which collectively was flat with last year. In the aggregate, the segment had year-over-year sales growth of just under 3%.

In the European engineered components segment, volumes were up, but revenues were flat due to foreign exchange translation. Similarly volumes in the North American cabinet components segment were up but revenues were flat due to lower lumber prices relative to the prior year.

Overall, our first quarter revenues were right in line with our expectations and confirm our belief that revenues in 2016 will mirror overall market conditions. At this point, we still think that this will result in 5% to 6% overall topline growth on a pro forma basis. As a result, we currently see no reason to change our 2016 guidance of between $112 million and $120 million of EBITDA on revenues of just under $1 billion.

In my closing remarks on our year-end call, I said that our clear priority in 2016 was to continue to improve profitability and to reduce our pro forma net debt to adjusted EBITDA ratio to below 2.5 times by year-end. While one quarter does not a full year make, we executed well on both of these priorities. Adjusted EBITDA margin was approximately 700 basis points better year-over-year and through a reduction in net debt, combined with improved EBITDA, our leverage ratio dropped to 2.7 times.

It is also encouraging that we were able to generate positive cash flow from operations during the first quarter considering this is always a seasonably difficult quarter for us and something we have not been able to accomplish in a number of years. We will continue to focus intensely on both of these priorities as we proceed through the year.

The integration of HL Plastics and Woodcraft are both unplanned and their early performance is in line with the acquisition justifications. We have found no surprises in either business.

So in summary, our two acquisitions are performing as expected with no surprises or integration issues. Our legacy businesses are performing strongly with margin improvement as a primary objective. The North American vinyl profile business which has been a drag on earnings for the past two years is recovering nicely, and corporate costs are under control and are at an appropriate level for a company of our size.

All of this combined gives us comfort that our guidance for the year is sound and achievable. If market conditions improve as we get into the busy season, the table is set for a corresponding improvement in our operating performance. And now, operator, we are ready for questions.

Certainly.

(Operator instructions)

Our first question comes from Nick Coppola of Thompson Research.

Good morning. This is Steven Ramsey on for Nick.

My first question -- what did growth rates look like between vinyl extrusions, spacers, and screens? Any color or differences by product?

No. As I said on the call -- first of all, we typically don't break out specific growth rates by the individual business units or product lines. But our expectation going into this year was that the vinyl profile business would shrink. It did, in fact, grow in the first quarter. It grew less than the rest of the business and the rest of the business was pretty much on top of window shipment numbers as best we can tell.

Excellent. And then, my second question -- I know you've talked about reducing leverage after these acquisitions and have already begun to do so. With the share price at these levels, would you be opportunistic on the equity side?

It's a very good question.

First of all, we didn't expect the share price to be at these levels at this time of the day. We are clearly limited by our new credit facility. So at this point we have no active plans to put a share buyback in place. But clearly, if we continue to trade off, it's a discussion we will have at the Board level.

Excellent. And my last question -- what are your end-market expectations for the US versus the UK? Any unique trends in windows or cabinets between the two? Thank you.

There's actually not a lot of difference. We feel while all three may move slightly differently, they're all going to coalesce in our view around that 5%, 6%, 7% mark. Obviously, we live in very uncertain times. We don't know what's going to happen in Europe with the UK's potential exit from the Eurozone. Witness today the situation in China and the effect it has on the market.

So I think were going to go through a very unpredictable year from a macroeconomic standpoint. But at this point, down at the customer level, we still see optimism for low mid-single-digit growth as we go through this year, but everybody is very cautious because of the potential uncertainty. But we still feel very good about where we're positioned and feel very good about our guidance at this point in the early part of our fiscal year.

Excellent. Thank you.

Our next question comes from Scott Levine. Your line is open.

Good morning, guys.

Good morning, Scott.

Try for a little bit more detail that it sounds like may come in the 10-Q -- but can you provide a breakdown of your organic growth as a Company as a whole versus the contribution from the two acquisitions? And/or if you can provide the revenue contribution from each of those acquisitions, firstly; and then secondly, if you can update us on your accretion projections for both of the deals for this year. It sounds like they are tracking in line with your initial expectations, but we'll try for maybe a little bit more color there if you can give it.

Yes. So you rattled off a few questions there. I may forget one, so I'm going to start with the last one first, since its top of mind.

On the accretion, the update, and -- sorry, I just have it on a combined -- if we look at HL and Woodcraft combined, with the current view on the interest expense, we would put accretion into the mid-$0.20 range. So, say $0.23 to $0.25 is where we would go accretion-wise. And that's only off from where we would've guided at the time of acquisitions, just because the higher interest expense when we did place the debt.

I think on your question, your first question was sort of contribution of the acquisitions versus organic? I talked about the acquisitions contributed about $8.8 million for the quarter. So that leaves about $6.8 million of incremental contribution from what I will call the legacy business.

You're talking EBITDA there, right?

Yes. Sorry. EBITDA.

Can you say on the revenue on the top line the same statistics? Or do you have those?

I don't have them front and center.

We can follow up off-line if need be.

Yes. I'll get everybody confused on that. Let's just follow up off-line

Got it. That's fine.

And then it sounds like the year is expected to be somewhat second-half weighted. I guess that's reasonable, given the synergy realization and the way the year plays out. But you are affirming effectively the topline growth projections you have as a Company and for each of the individual segments or areas that you highlighted last year. I guess what I'm asking is, are you any more cautious on the year, based on the start that you had to the year from a topline growth perspective? And/or do we need to assess how the spring selling season comes in to assess whether there's greater conviction or maybe some upside potential versus those projections?

I would say the first quarter growth rates came in pretty much as we expected and pretty much as we planned, and therefore at this point of the year, we would say we're still on track for guidance. Now, having said that, clearly we've had a warm winter so far, and this is always the most difficult time of the year to predict how things are going to shape up.

We've had late bursts of winter before, but if this weather trend continues, I think the expectation would be that we'll perhaps be more optimistic as we close out the second quarter. We don't see too much on the horizon at this point that would cause us to be pessimistic, not only with our growth rates, but with our internal projections on continued margin improvement.

Got it. Thank you. One last one if I may.

The three expenses that get added back to arrive at adjusted EBITDA -- can you tell us which cost categories those fall into on the P&L?

The inventory step-up is in cost of sales. The transaction costs is in SG&A, and then the FX on the inter-Company note is in the other net line item.

Got it. Great. Thank you.

Our next question comes from Daniel Moore of CJS Securities.

Good morning. Thanks for taking the questions.

Good morning.

You've obviously made great progress in improvements on the vinyl side over the last few quarters. Looking out beyond the 2016 guidance, talk about your ability to continue to drive margin improvement across the business? Or from here, will most of the gains be driven more by volume and absorption?

We still have some runway with efficiency gains and cost improvement. I think we were pretty clear that we would likely not get back all of the $20 million we left on the table in the vinyl profile business, but are working very hard to recover much of it. We have active programs in every single one of our businesses to improve margins, and trying to do that while growth rates are still at a pretty low level because it's easy to do. And we have additional effort going in there because price-in continues to be a challenge.

I think, as it relates specifically to the vinyl profile business, as we get into the out years of 2017 and 2018, a lot is going to depend on the structure of the industry. As you know, 50% of the vinyl profile business is in stores; 50% roughly is out-store, with only a handful of competitors, some of which are changing strategies. And depending on how that goes, that could bode well for the industry. I think the customers in that vinyl profile -- our customers who consume vinyl profiles -- are also struggling strategically to find their way. I don't there's any question that entry price-point vinyl windows are at a lower price than they ought to be in the marketplace.

So, I think, wait and see what some of the structural changes are. We will continue to work very diligently on whatever we can control, which is our internal costs. And that's where our focus has been for the past year and we will continue along those lines, again, striving for that 15% EBITDA margin overall. We're going to keep working hard internally because that, we have control over.

Very helpful.

Maybe update us on Woodcraft, now that you've had a chance to dig in after a few more months? Has the customer response been to the new ownership and any opportunities for additional outsourcing beyond the current customer base?

Yes. Customer response has been overwhelmingly positive. I had the opportunity at the IBS show out in Las Vegas, which is in conjunction with the Kitchen and Bath Industry show, to meet many of their major customers. So, very positive feedback.

No surprises in the business. We're working very hard with their financial team to get themselves compliant as fast as we possibly can. So that's the primary focus right now. We have our operations team in there assisting them with some margin improvement opportunities as well, which we will see in the second half of the year. Still a little too early to see the benefits of that, but obviously a tremendous amount of focus going into that business.

No surprises. We feel very good about where it is right now and look forward to a strong second half from them.

Okay. And lastly, a question I would almost never ask but -- and a bit unfair -- but with the shares trading, you're at 7 times EBITDA, you're 4.5 times -- maybe less -- mid-cycle EBITDA. Is there any reason you can point to as to why the stock might be under pressure this morning?

Believe me, we were as surprised as you when I looked at the track of this morning. I called the IT guys because I said, there's something wrong with the color on my screen. This red ought to be green. We're completely baffled and we traded close to a half million shares here in 90 minutes. So, we have no clue.

Okay. Thank you.

Our next question comes from Al Kaschalk of Wedbush Securities.

Good morning, guys.

Good morning.

Bill, you made a comment about the vinyl profile business in 2016 was to shrink, but it grew in the first quarter. I'm not sure how to read -- what we should read into that, given that I think the margin of that business today is probably not as strong as the acquisitions you've done. Did that not have some impact on the margin in the quarter? Or does it change -- or have any implications for the midpoint of the margin implied by your current guidance?

No. I think what you should read into that, to be a little more specific is, we talked previously about potentially shrinking the vinyl business and maybe just exiting some customers because of the complexity and the price levels being forced upon us by some of our external competition. So, we went into this year with the expectation that we would see some shrinkage -- not anything significant -- but the first quarter actually came in better than we anticipated from a volume standpoint.

We have a couple of our larger customers that had a stronger first quarter than we anticipated; and because of some of the structural events in the vinyl profile segment, we have some customers that decided, rather than run the risk of placing business elsewhere, they're going to continue doing business with us at a price level that was acceptable to both of us. So, that was a bit of a change from the fourth quarter of last year.

I don't think I would read too much into it over the long term. I think it's a reflection that the business is performing better, not only internally, but externally as well. And certainly so, relative to our competitors.

That's helpful.

And then just let me take a step back, and just a little bit broader -- I know the Q is coming out, but obviously the market is telling us something different this morning. But If you look at gross margin overall and you give yourself credit for the inventory step-up -- let's say it was closer to 22%. That, however, is down sequentially from the fourth quarter. And I know there's some seasonality.

I'm wondering if you're willing to share a little bit more broader commentary about the cadence for gross margin given the change in mix of the business. Obviously, there's still some very strong Q3, Q4 performance, but the levels you think the business should be driving at so that we can get a little bit more comfort -- for lack of a better word -- on what Q2 looks like going into the stronger seasons.

Yes. I think when you see the Q, there will be some more granularity and some of the details we can maybe follow up off-line. Broadly speaking, as you well know, if you look at our margin and volume performance in the legacy business, quarter by quarter over the last couple of years, you will be able to see the margin progression. It's hard to look at sequentially because of the seasonality of the business. We obviously -- it gets a little more confusing because we added two businesses that are more profitable from a gross margin standpoint. That kind of mixes it up.

But I mean, I think the way to think about it is this: HL came into the fold as a very profitable business, profitable enough that their opportunity to materially improve their margins is somewhat limited. But we expect to see some incremental improvement and a continuation of their margin performance. We said with the Woodcraft acquisition -- again, a nicely profitable business -- more profitable than our legacy business. And we made it clear that we did see margin expansion opportunity in that company. It requires capital investment. We've already invested capital early on in that business, and we really won't see margin expansion there until the second half of the year as a result of our efforts.

And our legacy business, if you look at spacer and accessories and screens, there is opportunity, again, for continued margin expansion but not significantly so. We expect them both to continue to improve, but the numbers won't be material. In our spacer business, as volumes improve leverage will really start to kick in there. Not so much with screens and accessories because of the high variable cost. And then clearly the vinyl business still has the greatest amount of runway. But we expect all of those to come into play as we get into the second half of this year. And you really saw that in the first quarter as well.

If you split those elements out, that's how you get to the big improvement year over year. I would expect the same thing in the second quarter, just obviously not to the same level. I don't think we'll get 700 basis points in Q2. Hopefully, that helps out.

Great. No, that's great.

And I think just to summarize that, I guess what the messaging is, you've added on some strong margin businesses. You continue to be very focused on driving improved profitability on the legacy business. And where there's opportunities to shrink that, whether it be decisions to fire customers, you're prepared to do that in terms of shareholder value.

That's exactly right. I could not have put it better myself. And again, I think the focus, even externally, needs to be on a margin performance, not necessarily our revenue performance on the top line.

Great. Thank you and good luck.

Thanks.

Our next question comes from Ken Zener of KeyBanc.

Good morning, gentlemen.

Good morning, Ken.

Along with other people, I'm excited to see the segment data. Ahead of time, because you have not released the Q yet, if I could make the suggestion that you put in supplemental data so we can understand, preferably on a -- trailing a quarter basis, how those businesses lay out. I think that, given the nuance, the differences of your business, more information would behoove you all. Just as a general comment.

For the $6.8 million increase in EBITDA on your legacy business -- so you said the lion's share of that was extrusion. Should we assume just over half of that $6.8 million is associated with the vinyl? Or does that mean most of that $6.8 million?

Ken, nice try but we're not going to give you that level of granularity.

Excellent. Moving on. (Laughter) Of the $20 million in extrusion that you referenced in the call -- because the pricing side is not going to come back, do you guys expect to get back most of that $10 million that was associated with the inefficiencies by the end of FY16?

Yes. I think we said before that we're hopeful we can get back half of the $20 million we left on the table, which is the $10 million. And at this point, we're on track to get to that level.

Okay. Then, I'm going to stick with extrusion here, because I think that's an interesting part of your business. You talked about industry structure. I think you're referring -- I know that actually there was some activity with that company, in terms of those assets [at least being] spoken for the time being right now. And then I believe there was some incremental capacity being added domestically, like some European companies. Do you view that change -- it sounded like you said it's changing and it will be more positive in 2017 -- is there a way that you could view that as being negative? That a European competitor is adding capacity despite there being only modest capacity expansion?

Yes. There is no question, the expansion of physical capacity in this case is a negative. But I think the other issue, the Axiall situation, we view as a positive; and so it will depend on how the rest of the story unfolds. But in summary: one negative, one positive.

And then just to give an understanding, because I think your [formatted] spacer and screens are probably better businesses than people think about is my opinion -- but is there something that led you ultimately to the extrusion business in terms of, if it doesn't work out -- the one positive, the one negative -- if there's another negative or something changes, do you feel obligated to be the extrusion business, given your position in screens? And --

That's a delicate, strategic question. You're never wedded to a business that's going to significantly underperform in the future. We don't view the industry structure as being that negative by any means. And clearly we do see benefits in having a full portfolio. And we have seen, I think probably most recently, the benefits of that paying off with the strong relationships we have with some of our screen customers and vinyl customers now looking at spacer products and now buying spacer products from us that they otherwise, perhaps, would not have without the relationship.

So I think the answer is, strategically, we consider it a huge positive to have the full portfolio, but we're also very focused on shareholder value creation. And the economics will ultimately answer the questions.

Okay. Great. And I very much look forward to your Investor Day. Thank you very much.

And our next question comes from Michael Conti of Sidoti.

Good morning.

Good morning, Mike.

Your comment to the strong start of 2016 -- can you talk a bit about more on-demand trend in February and early March? Obviously we're only a week in, but maybe areas of the country where you're seeing strength versus weaknesses?

Yes. I will say that February -- the trend from the first quarter continued into February. If we continue to see good weather, there's no reason to expect it won't continue through the second quarter. Southeast is very strong. The Northeast and Ohio Valley, not so much. Canada is weak. But the rest of the country, absent the one up, one down, has been pretty steady.

Okay. And in the past, I think you said you moved some vinyl lines to Texas to help support that particular end market. I'm curious as to how demand is trending in that part, Texas. And if the competitive landscape there is forcing any pricing pressure on your end?

In Texas, it's not so much pricing pressure. Clearly the single-family housing starts are really starting to soften in this market. We do have a large customer in Texas that services that market more so than R&R, so that's definitely a negative impact. And the expectation is, I think, with the oil & gas situation, is that trend is probably going to continue throughout this year. Thus far it's been offset by positives that other customers in other areas; but certainly Texas is weakening. We're starting to see that.

Sure. Okay. And last one on the interest expense. That stuck out to me.

How should we think about that for the rest of the year? You gave guidance last quarter around $23 million, but just looking at the run rate for the first quarter, how should we think about that for the full year?

Yes. I think you can still think of our guidance of $23 million as fair for the full year. I think what you're looking at in that first part of the year is just some of the write-off from the previous transaction, the previous revolver we had. I don't remember off the top of my head, but there might have been about $0.5 million of financing costs that we had to write off with the new revolver coming on board.

So more of a one-time cost. Yes, that's what I figured. Thanks, appreciate it.

And our next question comes from Lee Brading of Wells Fargo.

Thanks, this is actually Melissa Zayas on for Lee.

I wanted to follow-up and see if there's any updates on CapEx guidance for the year. I know last call you always guided towards $45 million, and Q1 trended a bit below that on an annual basis. So just wondering if the plan was to bring that in? Or expect the CapEx spend to be little more back-half weighted?

Right now, our guidance is unchanged. We would still guide toward the $45 million. We did spend a little bit less than we had even planned in the first part of the year. But part of that is some of the items that we forecasted are longer lead times that are pushing some of that spend out into future quarters. So, as it stands today, we would continue to guide towards $45 million.

Okay. Thanks.

And I think automation was set as a key area of focus. Do you have any color on additional areas you plan on directing that spend toward?

No. That's still at the top of the list. That's where the bigger opportunities are at Woodcraft and also in some of our other operations. So, no, that will be the continued focus throughout the year. And because it's automation, as Brent points out, we actually have a lot of equipment on order. So our commitment to capital is actually greater than our actual cash spend at this point, which is why we're still pretty confident we'll come in at around $45 million for the full year.

Okay. Great. Thanks.

And then moving on to M&A. I think you also mentioned on the year-end call you'd potentially be interested in looking at some bolt-on deals. Are there any updates around what you're focused on? Or updates on the M&A pipeline in general?

Maybe not surprisingly, because of the credit market situation, the pipeline is pretty slow right now. We continue to get and look at bolt-on opportunities. And as we said, I think on the year-end call, if we found a something really compelling, we would take a look at it, but the clear focus is going to be on improving internal profitability and generating cash to pay down debt in the second half of the year. So while we continue to look, A, it's slow; and B, it's not the highest priority for us right now.

Okay, great. Thanks a lot.

And our next question comes from Bill Baldwin. Your line is open.

Thank you. Good morning.

Could you offer some color on how your program is going with your large window manufacturers as far as the utilization of your formatted spacers? I think you had some pilot programs going on there as far as how those might be accepted by the larger companies?

Yes. So, we placed the first high-speed line at a large customer on the West Coast. That started in Fall of last year; has been extremely successful. And our understanding is at this point that the customer has placed orders or is in the process of placing orders for a further six lines to be delivered. I think the first will be at the back end of this year and then spread into calendar 2017.

We have a second line just being readied for full production. The initial testing has been very promising and the expectation is that, that line will go into full production here within the next week or two. And there are discussions underway with that customer to order multiple lines over the next two to three years as well. In fact, it's fair to say that, that program has been so successful, our biggest concern now is that our growth potential will be limited by the ability of the machine manufacturers to keep pace with the order flow.

There's always something, isn't there Bill? (Laughter)

Yes. There's always something. But it's been a very --

That's a nice problem to have there.

Very successful introduction all around.

I know you can't throw out much specifics, but can you assume that if these programs over the next few years come to fruition that it will move the needle in the spacer business for Quanex?

Yes. It will. In fact, we're already investigating a potential expansion to cover those future needs. So we're in the very early discussions about that. But yes, it looks very positive. It will move the needle.

And that would be expansion at your Cambridge facility?

That's an option that we are currently talking about right now. We've also talked about perhaps building an additional facility elsewhere, but I think that's going to come in second to the first solution, yes.

Thank you.

Thanks, Bill.

And I'm showing no further questions at this time. I would now like to turn the conference back to Bill Griffiths for closing remarks.

Thanks again for joining us this morning. Good questions. In summary, we're clearly very pleased with our first-quarter results. We expect to keep that momentum going well into the busy season. And we look forward to updating you as the year progresses.

And hopefully we'll get a chance to see many of you as we hit the road here in the next few weeks to start spreading the story. And finally, please make sure you mark your calendars for our June 29 Analyst Day at the New York Stock Exchange. And if we don't see you before, we will see you then. Thanks very much, everyone.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.