American Woodmark Corp (AMWD) 2002 Q4 法說會逐字稿

Thank you for standing by. You are currently holding for today's American Woodmark fourth quarter earnings conference call.

At this time, we're still gathering additional participants and should be underway in approximately two minutes. We do appreciate your patience and do ask that you please remain on line.

Please stand by, we're about to begin.

Good day and welcome to this American Woodmark Corporation fourth quarter earnings conference call. Today's call is being recorded.

The company has asked us to read the following Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

"All forward-looking statements made by the company in this conference call involve material risks and uncertainties and are subject to change based on factors that may be beyond the company's control. Accordingly, the company's future performance and financial results may differ materially from those expressed on implied in any such forward-looking statements.

Such factors include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission and the annual report to shareholders. The company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized."

At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President and Treasurer, Mr. Glenn Eanes.

Please go ahead, sir.

Thank you.

Good morning and welcome. I'd like to thank everyone for taking time to participate in our conference call to discuss American Woodmark's fourth quarter and yearend results.

Participating in the call this morning will be James Gosa, President and Chief Executive Officer, and Kent Guichard, Senior Vice President of Finance and Chief Financial Officer. Kent will begin with a review of the quarter and outlook on the future. After Kent's comments, we will be happy to answer your questions.

At this time, I will turn the call over to Kent.

And good morning.

And again, I'd like to repeat, thank you for taking some time out and calling in this morning. I'll do what we normally do. I'll do some prepared remarks on the quarter, and then and I will answer any questions that you might have.

This morning, American Woodmark released the full results of our fourth fiscal quarter ended April 30th. Before I get into any of the numbers, please note that the company was required to adopt the EITF number 01-9 during our fiscal fourth quarter. EITF 01-9 pertains to certain costs for considerations given by a vendor to a customer. The net effect of the EITF is to reclassify certain costs previously reported in SG&A to either a sales deduction or into cost of goods sold.

For American Woodmark the adoption of 01-9 had no impact on net income. The adoption did, however, have an impact on some operating ratios that many of you may have followed.

All prior-year figures in the press release have been adjusted to reflect the adoption of 01-9. Unless otherwise stated, I will be referring to numbers after the adoption, since that will be the basis of the presentation in fiscal 2003.

A table detailing the impact on all quarters for fiscal 2001 and fiscal 2002 will be included in our annual report and 10-K filed with the SEC before the end of July.

Now moving on to the numbers.

Consolidated sales for the fourth quarter were a record $132.4 million, which is up 25 percent over last year. This result is better than the anticipated 18 to 20 percent growth included in our previous guidance released on February 25th, with our third quarter announcement.

Combined with our record three fiscal quarters to start the year, this brings our full year revenue for fiscal 2002 to a record $499 million, which is up 23 percent over last year.

Net income for the fourth quarter was a record $9.1 million, an increase of 31 percent from the prior year record net income of $7 million. Again, combined with our record first three fiscal quarters, this brings 2002 full year net income to a record $32.2 million, which is up 69 percent from last year on the 23 percent increase in sales.

Diluted earnings per share of $1.07 for the quarter compares to 85 cents last year. This marks the first quarter in the history of the company with over $1 per share in earnings.

The result is above the range of 95 cents to $1 included in our previous guidance. EPS for the full year was $3.81 a share versus $2.34 in fiscal 2001.

some more detail on the fourth quarter sales performance. Our improved performance, especially versus expectations was primarily the result of two factors. First, demand last winter was stronger than we expected, and stronger than we would historically have experienced over the winter time, and as a result, we entered the fourth quarter with a higher than normal backlog.

And second, the spring selling season this year was strong and actually ahead of our expectations.

On the remodel side, the remodel market showed some strength during our fourth fiscal quarter. Overall our two primary customers in the remodel market, Home Depot and Lowe's, reported strong growth in their first quarters, which corresponds to our fourth fiscal quarter. They reported comp sales in the four to six percent range.

As for American Woodmark sales, at the Home Depot we experienced increased sales based on the combination of additional store outlets, share gains in existing outlets based on the value of our products and services, and promotional activity.

At Lowe's we also experienced increased sales based on new store openings, share gains and special order cabinets for our exclusive Shenandoah brand, growth in our successful assembled in-stock program and promotional activity.

On the new construction side, shipments to the new construction sector also increased during the quarter versus the same quarter last year.

In our last conference call, for those that listened in, we reviewed - you might remember - we reviewed the impact of the events of September 11th on the new construction industry. At the time, we expressed our opinion that the impact was essentially limited to six to eight weeks immediately after the attack.

Based on the lag time between starts and kitchen installation, we saw that bubble roll through the kitchen and cabinet industry in late December and January. New starts had recovered in November and December and we expected that cabinet shipments would reflect this in March and April.

In this particular case, our expectations were accurate and the primary markets we serve on a direct basis to builders did come back in the fourth fiscal quarter. As demand in these markets returned we were able to both capitalize on our market position with leading builders and take advantage of opportunities with new customers to achieve growth during the quarter.

Moving on to gross margin, gross margin for the fourth quarter was 26-and-a-half percent versus 25 percent the prior year. Looking at the specific components of gross margin, first material. Overall material costs were favorable versus last year. Pricing in the hardwood markets remains generally stable as lumber mills continue to adjust production in light of demand. The company did experience some incremental cost on lumber as demand exceeded our internal capacity and the company was forced to purchase some kiln-dried lumber on the open market. Pricing on our other major raw materials including particleboard was stable and continues to be below prior years.

Our labor costs increased. Productivity in facilities open at least one year remained at or above prior year levels. But overall productivity was unfavorably impacted by initial crewing in preparation of start up at both the new facilities in Kentucky and Oklahoma and the expansions of existing facilities.

Labor costs were also negatively impacted by increase in medical costs. Like most of the world, the company is experiencing the effects of renewed rates of higher inflation in both base medical and prescription costs.

Our freight costs decreased due to a combination of shifts in the company's network of third-party carriers and leverage on higher volume. The company also benefits from leverage on fixed and semi-fixed costs with the higher volume.

In terms of our capital expansion program, the company continues to develop its capital plans to keep pace with growth and demand. Our goal continues to be to keep capacity ahead of the growth curve. Capital spending for the fourth quarter was approximately $19 million, bringing capital spending for the fiscal year to slightly under $40 million.

The expansion at our Monticello, Kentucky, lumber processing facility was brought on line as scheduled in February. The expansion at our Kingman, Arizona, assembly facility is progressing. The pacing item in this expansion is the emissions permitting process for our new finishing operation. We expect to successfully complete the permitting process and bring the capacity on line in the late summer and early fall. The construction of our third lumber processing facility in Hazard, Kentucky, is on schedule. We actually began production in June of 2002, this month.

Finally, the construction of our fifth assembly plant in Tahlequah, Oklahoma, is also on schedule and we also began production in that facility in June of 2002, this month. In addition, the company continues to develop its network of outsourcing partners to provide incremental capacity during peak periods.

SG&A costs increased to 15.3 percent of sales, up from 14.4 percent the prior year, due to costs associated with the company's pay-for-performance employee incentive plan and the outstanding net income performance for the year.

In closing my prepared remarks we'd like to say that our performance during the fourth quarter remained very strong with both excellent top-line growth and record profitability.

We continue to build the company's franchise by focusing on efforts to gain market share with the leading home centers, builders and distributors. As we look forward to fiscal 2003, the company is facing many challenges. First, and probably most obvious to all of you, is that we have record comps in each of the four fiscal quarters. In addition, news on the overall economy remains somewhat mixed, with significant uncertainty in the economy with respect to the strength and duration of the recovery.

Overall, new construction activity remains strong, with May starts reported last week up 12 percent, and an annual rate of almost 1.7 million units. down on the new construction side, new construction activity is, however, significantly different by region. Activity appears to be holding up in the markets with healthy starts in new home sales. Activity in the upper Midwest and Northeast has a tendency to be pretty spotty at this point by market.

On the remodeling side, consumer spending also appears to be holding up. The Consumer Confidence Index is flat to slightly up over the last couple of months. And activity overall in remodeling appears to be stable, although it has shown some signs of weakness over the past month. It is difficult at this time to identify a discernable trend in the marketplace.

While the company believes that the long-term demand for remodeling is still quite strong, the short-term demand may soften if we experience a pause in consumer spending. After sorting through all the data, we believe that demand in the industry will continue to expand and will support our forecast for continued growth.

In this anticipated environment, we expect sales in our first fiscal quarter ending July 2002 to increase approximately 15 percent over the prior year. We expect that we will continue to acquire our primary raw materials at current prices based on the overall market dynamics for many of these items.

Our expected operating levels will provide the opportunity for the company to achieve leverage on our base operating cost. This leverage will, however, be partially offset by startup costs associated with new capacity in Kingman, Monticello, Hazard and Tahlequah.

When you sort through all of that, on the 15 percent increase in top-line sales, we anticipate that net income and EPS will improve from last year, with earning per share in our first fiscal quarter anticipated at between 97 cents and $1.02 per share.

That's the end of the prepared remarks on the performance for the quarter and the outlook. At this point, or I will take any questions that you have.

Thank you, gentlemen.

Today's question-and-answer session will be conducted electronically. If you would like to ask a question at this time, please press the star key, followed by the digit one, on your touch-tone phone. Once again, to ask a question, please press star, one on your touch-tone phone.

And we'll go first to Sam Darkatsh with Raymond James.

Good morning, gentlemen. And again, well done.

Thank you.

A couple of quick questions. Your sales were up about 25 percent in Depot. You mentioned a little bit about this. Depot for the quarter, revenue is up 17 percent; Lowe's up 23 percent. So both of those came in underneath where your levels were.

You said some of that was perhaps due to your backlog. But was there also a category share gain within those two particular retailers? Or is that more you folks gaining share versus your competitors?

Well, Sam, first, in terms of the latter part of that question, I'll turn it over to in terms of our share performance and that kind of stuff. I don't understand where you got those numbers, the 17 and 23. We have not released and do not release on an account-by-account basis change in sales. So I don't know where you got that 17 and 23.

That's just Home Depot and Lowe's as a company were up 17 and 23 percent.

Oh, you're talking about their external reported?

Yes, sir.

OK, oh, OK, sure, yeah, sure. I thought you were talking about us.

I misunderstood you also.

But I'm working on perfect information here, of course.

Yeah, right.

We've been gaining share at both accounts, Sam, and continue to gain share at both accounts. And - what was the other part of your question?

Is the category gaining share within - meaning, do you believe that the category within each of those two particular retailers are growing faster than the retailers' overall revenue growth?

Over time they have been, but at the present time, I wouldn't have knowledge of that, Sam. I think that the kitchen, special order kitchen category, has definitely grown faster for the past five to 10 years than the overall store growth.

However, that's not necessarily the case today. And I don't - I can't, you know, tell you that it's either positive or negative to that overall store growth.

OK. Keeping on the same line of questioning, you're modeling, or you're guiding 15 percent revenue growth for the first quarter, which I guess is beneath what both Lowe's and Home Depot are saying they're going to be doing for the first quarter.

Is this you folks being conservative? Are you seeing a bit of a change? Perhaps because the June data might not have been as strong as you thought?

Well, generally speaking, ours is a blended rate of growth. So that's not necessarily what is in our expectations for growth in our remodel business. That's the kind of a blended rate of growth.

Right.

So I would say first of all that - and as you know, over time, our home center business, our remodel business has grown faster than the overall company.

So if we're saying 15 percent for the total company, I think you can safely assume that our expectation is that home center grows faster than that.

The other is, we have seen a little softening in June. It's not out of line with the season. The summer generally is a little bit lower.

But the market's very difficult to read at this point. I mean, we'll - quite frankly, we and many in the industry - we'll have a couple of really good weeks and then we'll have a week that isn't so great.

So there is a little bit of softness out there, but we do expect our remodel business to continue to grow at a higher rate than the overall companies.

Two more quick questions, then I'll defer to my other colleagues on the call.

Number one, you have, obviously, some significant demand and your raw materials seem to be either stable or favorable. Any increase in selling prices that you've been able to do with the higher demand to help margins out even further?

No we have - we continue and have for over 10 years now, continue to get the average take per unit up primarily through the mix of product. But the marketplace at this point, for not only us, for all manufacturers, is not receptive to a price increase.

Last question. You have some other income. Real quickly, just what is that caused by and what was the amount?

Well, we will be breaking that out in a little bit more detail, but there were two things in other income and expense.

The big driver there was, based on our capital expenditure program, we did capitalize a lot of interest expense that was in line with our policy. And a much smaller piece would just be interest rate that we earned on the cash - interest that we earned on cash.

Got it. Thank you very much, and again, good job.

Thank you.

We'll take our next question from Joel Harvard with BB&T Capital Markets.

Please go ahead, sir.

Thanks.

Good morning, guys.

Morning, Joel.

Morning.

Jake, you talked about the sort of on the whole sale channel. And you've spoken in the past about the - I think you said 40 or so of the top 100 builders. Your earlier comments - did I gather from that that - or could I gather from that that you're expanding maybe the number of those top 100-type builders? And if so, could you put a little color on that?

Yeah. We're continuing to pursue the top 100 builders. That's one of the core elements of the strategy. And I would say that a couple of things, , are pertinent there. One, the top hundred builders kind of changes, that's a - they're morphing into each other. So what's happening is, as you know, there's a lot of consolidation going on in that industry ...

Right.

... so kind of the top 10 or 20 names don't change very often but beyond that, you know, a lot of large builders are buying medium-sized builders and particularly the medium-sized tract builder. And so your positioning within that 100 is very important.

So we do into a market and we typically look at the top 20 builders, let's say, in a market like say the greater Dallas area or the greater Orlando area, and we'll really pursue that market primarily through those top 20 builders. Time you - time you add up, you know, 20 builders here and 20 builders there, given the regional nature of the industry, you end up with a hundred or so people that you're chasing at any given time.

I see.

We - but we continue to penetrate that top 100 and that's essentially the core of the builder strategy.

Was that responsible for all of the sort of wholesale side gains is the - in other words, is the two-step flat, is it down, is it - or is it a positive contributor in this environment?

Well, that's a, yeah, that's clearly a faster growing segment than our wholesale business, but they both grew.

OK. All right. That's all I've got right now, thanks.

Thanks, Joel.

Once again, that is star-one if you would like to ask a question.

We'll go next to Dwayne Carryl with Sadoti & Company.

Please go ahead.

Morning, gentlemen.

Dwayne.

Morning, Dwayne.

That's a good quarter by American Woodmark.

Thank you.

Just a couple quick questions. One is capacity utilization, what was it for the quarter versus a year ago?

For the quarter we were basically operating at capacity for most of the quarter, virtually all of the quarter. We got a little bit of relief at the very end. But for the fourth quarter we were pretty much at capacity.

OK.

We will be at capacity for a good portion of the first quarter, although if you reflect back to my comments, especially the new facilities in Oklahoma and Kentucky and the expansion of the Monticello facility, both of those are on line as we speak. So we will start to get capacity relief certainly in July and then rolling into the second quarter.

OK. Which two facilities are those?

It's a new assembly facility in Tahlequah, Oklahoma, and a new lumber processing facility in Hazard, Kentucky. We also had the expansion in Monticello, the Monticello lumber processing facility, that came on in February.

OK. So you're going to see - you anticipate - I mean, do you have like a target that you'd like to get to say by midway through the fiscal 2003?

Yeah, and we've talked about this before. We, during this period of generating consistent double-digit growth, you know we would like to actually be in the 85 to 90 percent kind of range. We have been unable to get there now for quite some time.

We have an ability to efficiently weigh in capacity at about - hard capacity at about 20 percent a year. And we've been growing faster than that. Last year for the whole year we grew at 23, but we had quarters that were substantially above that.

We would like to be able to operate in, as I said, in that 85 to 90 range, but we can still operate efficiently and keep up with our growth and our customers in the low 90s, 92, 93 percent. Right now, we anticipate that in the fourth quarter of fiscal '03. This time next year, the spring of next year, that will probably in those low 90s that are volume forecasts, projections and the capacity coming on line.

OK. So, I mean, with demand so strong, and it appears that you guys are also taking some share, I mean, are price increases or anything you're going to be able to realize or have you realized that kind of help bolster the margins?

This kind of goes back to Sam's question. Our product is priced to market. And right now there are - from our perspective, there are no indications in the marketplace that the price of kitchen cabinets as a category is supporting any type of price increases. So we do not anticipate price increases.

OK.

In terms of the backlog that you mentioned, you said it was one of the reasons for the fourth quarter being so strong was an unusually high backlog leading into it. Where is that now versus, say, a year ago?

We're back to normal lead times and normal backlog.

OK.

So it's not what it was last year.

So you pretty much through all the surplus that you had there?

That's correct.

Right.

OK. All right.

And I noticed I guess you have a little bit more cash there on hand than I guess we're used to seeing. Are you going to try to sustain that level of cash on the books, or is that just kind of a seasonal thing?

Well a lot of it is timing. We had - at the end of the fourth quarter - in the first quarter you'll see - again, you'll see a relatively high capital spending number, when we report the first quarter, because we are finishing those facilities in the first quarter and making a lot of the final payments. At the end of the year, there were also some unusual things in terms of timing.

I mentioned the SG&A cost going up primarily because of the performance. What you'll find again in the first quarter is we pay out all of our annual bonuses to our employees. And there's also some timing in terms of customer incentives and taxes and some of those types of things. I would expect that that cash balance would drop during the first quarter.

OK, great. Thanks a lot.

You bet.

As a reminder, that is star, one to ask a question.

And gentlemen, there are no further questions at this time. I would like to hand the conference back over to Mr. Eanes for any additional or closing comments.

Again, I would like to thank everyone for taking time to participate in this conference call. We at American Woodmark appreciate your continuing support and remain excited and optimistic about the future of American Woodmark, and I hope you do as well.

Thank you, and have a good day. Bye.