American Woodmark Corp (AMWD) 2004 Q1 法說會逐字稿

Thank you for standing by. You are online for today's American Woodmark conference call. Good day and welcome to the American Woodmark Corporation first-quarter earnings conference call. This 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 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 or 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.

Good morning, everyone and welcome. Thank you for participating in our conference call to review American Woodmark's first-quarter results. Participating in the call this morning will be Jake Gosa, the 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 an outlook of the future and after Kent's comments Jake and Kent will be happy to answer your questions. At this time I will turn the call over to Kent.

Thank you, Glenn and again thank you for taking some time this morning to listen about the performance and progress here at American Woodmark. This morning we released the results of our first fiscal quarter ending July 31. In case you have not had a chance to read and review our earnings release, let me first review a few of the highlights. Consolidated sales for the quarter were $154.9 million, up 13 percent over the same period last year.

Net income for the quarter was $7.4 million, down from the prior year net income of $9.3 million. Diluted earnings per share of 90 cents for the quarter compares to $1.09 last year, but was flat with our most recent quarter ending in April of this calendar year. In regards to our first-quarter sales performance, the higher level of sales activity versus the prior year was the result of continued new growth in both the remodel and the new construction markets.

On the new construction side, overall activity in the new construction markets serviced by the company remains very strong, with both starts and existing home sales remaining well above the annualized unit levels required to generate increasing demand for our products and services. We have seen little impact from the recent rise in mortgage rates. Absolute interest rates are still very attractive in light of historical rates and the demographics driving homeownership remain unchanged. We continue to benefit from the growth of our strategic partners and our two new direct builder operations in Atlanta and Denver, were shifting against initial contracts during the quarter.

We also continue to experience growth on the remodel side. Home Depot announced results from their most recent quarter ending July 31 on August 19. Net sales as reported were up 10.5 percent, an improvement from the previous quarters. Comps store sales were a positive 2.2 percent, also an improvement from the most recent quarters. As you have all read in their public announcements, Home Depot's growth was favorably impacted by their store reinvestment strategy and new products.

As a major supplier to Home Depot, we were also impacted by these same factors, particularly as it relates to our expectations included in our previous guidance. Lowe's announced their results from their most recent quarter ending July 31 on August 18. Again as you have all read in their public announcements, net sales increased 17.2 percent with comp store sales up 6.9 percent. As a major supplier to Lowe's, we have benefited from their overall level of growth and expansion. Our sales to Lowe's continue to be driven in large part by the success of our exclusive brands and lines.

Moving onto gross profit. Gross profit for the first quarter was 21.8 percent versus 26 percent the prior year and forward guidance of 22.5 to 23 percent. From a financial perspective, the quarter was dominated by our aggressive rollout of additional outlets with our right (ph) in-stock product.

As you may recall, our in-stock product is an opening price point cash and carry retail line. We were presented with an opportunity to significantly expand our position and increase market share in this line and made the decision to accept the new business. Over the long-term, this business will provide both financial and operating advantages to the company. During the quarter, however, the higher percentage of opening price point product shipments adversely affected margins. Without this shift in product mix due to the rollout, company results would have been within our forward guidance on both margins and net income.

Looking at the major components of gross profit, overall material costs were up slightly as a percent of sales, but were down on an actual unit basis due to the shift in mix. Overall market pricing for our principal raw materials is relatively stable and the new dimension mill in Kentucky brought on line last fall continues to provide the company with expanded capacity and has reduced the premium purchases of kiln dried lumber which we were experiencing this time last year.

Direct labor costs increased versus the prior year. The labor costs increased due to two primary factors. The company continues to ramp up the capacity, particularly in the new facilities brought online in the fall of calendar 2002. While improving these new operations proved with relatively inexperienced employees were less productive than our mature facilities. Second in relation to the increase in labor costs, differences in demand by geographical region resulted in high levels of overtime in some facilities to meet those customer commitments.

Freight costs were up as favorable leverage from higher volume was more than offset by the impact of out of region shipments to accommodate some of the regional differences in demand. And finally on a year-over-year basis, the company is incurring the overhead costs associated with the new facilities and expansion projects. These costs, primarily depreciation and miscellaneous operating costs, remain within the company's forecast for the startup operations. That does mean, however, that we continue to carry some unutilized capacity costs in preparation for our future growth.

In regards to our capital expansion program, capital spending for the first quarter was $2.8 million. This decline was expected as all major projects have been completed. We anticipate that maintenance capital combined with a variety of cost savings projects will result in second-quarter capital spending of approximately $5 million. SG&A costs decreased as a percent of sales from 14.9 to 13.8 percent, due primarily to lower expenses associated with the company's pay for performance employee incentive plans.

Quick note on the balance sheet, the company's financial position remains outstanding with long-term debt to capitalization of approximately 10 percent. The cash on hand at the end of the quarter of $19.1 million, net debt on July 31 was less than zero. The company has not repurchased any common stock during the quarter. In closing, we continue to generate strong topline growth across all channels of distribution. During the quarter we made progress on the operational side, particularly with the continued development of our new capacity.

As I mentioned, gross margin and net income was significantly impacted by the temporary change in our shipment mix to the opening price point. As we look forward to the second-quarter of fiscal 2004, we see a favorable environment supporting continued sales growth. The new construction sector remains strong as historically low interest rates and other factors continue to drive a healthy level of housing starts. Our strategic partnerships with major builders in established markets provide a strong base for growth. In addition, we expect to achieve incremental growth with the startup of our new centers in Denver and Atlanta. The remodel element of our business also presents continuing opportunities for growth, as underlying activity remains solid.

Both Home Depot and Lowe's announced forward guidance that reaffirms their expectations as well for continued growth. Within the expected environment covering our second fiscal quarter ending October, 2003, we currently anticipate an increase in sales of approximately 10 to 15 percent over the prior year. On this volume we anticipate gross profit for the second-quarter will improve from the first quarter due primarily to a return in a more normal shipment mix.

We currently expect gross profit of approximately 23 percent for the quarter. With higher volume and an improvement in gross profit over the first quarter, we anticipate diluted EPS of $1.00 to $1.05 per share. This concludes our prepared remarks, and at this time Jake and I will be happy to answer any questions that you have.

Thank you. (OPERATOR INSTRUCTIONS). Sam Darkatsh from Raymond James.

Good morning Jake, good morning Kent, good morning Glenn. Did I understand you correctly in that the effect of the new OPP line with respect to mix was 120 basis points to gross margin in the quarter, is that the right way of looking at it?

You can run those numbers. That sounds probably about right. If we had shipped a normal mix, if we hadn't done a fairly aggressive and accelerated rollout of those stores, we would, believe on both margins, we would have been in that 22.5 to 23 range, and we would have been in the 95 cents to $1 range on a diluted per share.

Okay, here's the million dollar question then I guess. Why did the rollout affect surprise you to that extent?

Well, it was a combination of -- last quarter when we announced we certainly had an idea that we were going to do the rollout. Two things really happened. One of them is when we got done with the final determination of the stores, we ended up with more stores than we had originally anticipated. The second was as the rollout occurred more quickly than our experience would suggest that it would have, so it's a combination of more stores and faster rollout.

What was the effect to the topline in terms of additional growth that you saw from the rollout versus what you were perhaps planning?

Actually, the topline would have been relatively close. We had given forward guidance, 8 to 10. The reason we were over that was the strength of the overall market. It didn't have to do with the rollout, and in fact if we had not done the rollout, we would have shift (technical difficulty) that came in in terms of inbound orders. And so we were really shifting from a crewing standpoint near capacity for a period of time and not from a hard capacity but from a crewing standpoint. So we would have been in that 13 percent range either way, with or without the rollout. But that is due more to the overall strength of the market versus our expectations going into the quarter. It didn't have to do with the in-stock, the aggressive nature of the in-stock rollout.

Obviously, Sam, if we had shipped more standing (ph) product as opposed to opening price points because it had some monthly effect on the topline, if that is what you mean.

So why wouldn't the mix affect be somewhat permanent to some extent due to the fact that you'll probably end up shipping more of the OPP product now as a percent of your sales?

It would be two reasons. Number one, when you had to stock the stores you have to stock the stores with more product than you anticipate turning over on an ongoing basis. That's the first thing. Secondly, the speed at which we have to stock those stores. And thirdly, as we ramp up, continue to ramp up the company, not only do you get back to that normal mix that Kent was talking about, but we don't add new stores. So that becomes a slower growth piece of the business from the other standard products that we would ship. So it doesn't have an ongoing affect like this. Short-term, the impact of this is really short-term. This is a good deal for us long-term.

And I have three more quick questions and then I will defer to others on the call. The state of your inventories at this point in your judgment?

What do you mean by the state of?

Do we feel we are in good shape with inventories, a little too -- we had a little excess inventory the last couple of quarters or so. We drew it down a little bit on a sequential basis. Are we in good shape with inventories or are we still going to draw them down a little bit?

No, I think we're in good shape on inventories.

If anything, Sam, we went to stay a little bit flush because demand has been so strong we want our work in process to be, if anything on the healthy side, until things really settle down a little bit from a demand standpoint because that gives us a little more flexibility in terms of -- weekend work and those kinds of things if we choose to do it.

When do we begin to ramp up capacity again? Was it about this time next year and the degree to which we are adding capacity?

Well, we're ramping up now. We are crewing up as we speak, so we have hard capacity on the ground. Next year you will see us announce another component facility, but it will be coming online nine months or so out. And at this point that's an estimate because we don't have firm plans in place yet.

And last question, we didn't repurchase any shares this quarter. What is the thinking in terms of -- is that more of a cash need type of thing or is it, we are being opportunistic?

It is a combination of two things. One, as Jake mentioned, as we get into next spring we are going to put another component plan into the ground, and so you will see as in the next two quarters probably build a little bit of a cash balance in anticipation for that. The other one is as we have talked about before, is our strategy to repurchase the burn rate from the options with about two percent a year, and we are on schedule with that. So that's -- we're going to come in from time to time basically to offset the dilutive impact, and we are actually slightly ahead of that program.

The component facility adds how much to overall capacity in theory?

You really can't look at it that way, but if you -- I mean the facility we're talking about putting in the ground will give us the ability to ramp up components on a phase basis, probably two or three phases over time for the next three to four years. So it's quite a bit. It would increase our component capacity by a substantial amount, 40 to 50 percent over that period of time as you put the machinery and people in there to run it. What it does is it relieves a bottleneck of capacity that otherwise would choke off our ability to expand. Does that answer your question?

It does. I'm just curious as to the depreciation, the additional depreciation delta that would come online with the new facility. It's probably almost impossible to tell at this point given the we're still in the early stages of the planning.

Yes, that's the case. It wouldn't come on really until probably the second quarter of fiscal 2005. But once we have the project scoped out, we know the location, we're going to put it -- some of those other types of things, we will be able to have a better estimate of the impact.

Yes, we will put that out.

Very good. I've asked too many questions, all right. Thanks.

Joe Havard, BB&T Capital Markets.

This is actually Matt McCullough (ph), Joe's out of the office today. Again on the rollout, it is complete as of the end of the quarter?

Yes, it is.

So we don't expect to see any additional impact in Q2 from the rollout?

No, in fact it actually went us if anything slightly ahead of schedule. We were a bit surprised, but it is in the barn, so to speak.

Okay, and as far as the reset of the Home Depot stores, do we expect any additional changeover costs related to the reset?

The reset Home Depot stores is pretty much an ongoing thing. Are you talking about the reference to the reset of stores in their announcement?

Yes. Do you expect to see any additional changeover costs related to their reset, so are you expecting any incremental costs?

We're not expecting any unusual impact from that.

Okay. Switching gears to the retail wholesale mix, could you talk about that a little bit for Q1 and also discuss the margin levels for each of the channels? I think our understanding is that margins in the builder channel are a little bit lower normally than retail, but maybe the new rollout of this lower price point product changed that in quota, or what was the overall impact to the retail wholesale mix on margin?

It wasn't so much the retail/wholesale mix as it was the mix of products. Our balance between what you refer to as retail and wholesale is pretty consistent. It doesn't really move a whole lot. It has been generally kind of in that two-thirds to one-third, 65/35, 60/40 for quite some time. And also I'm not sure, the second part of your comment, we don't discuss margin differences by channel. But the real impact for us from a margin standpoint didn't have to do with the channels of distribution. It had to do with the product mix.

Okay. And finally just from a housekeeping standpoint, depreciation and amortization. Did I miss that?

No, it's pretty consistent where we've running, a little under $7 million for the quarter.

And dividends total?

Four hundred thousand. We run about 5 cents a share on the 8.3, 8.1.

Okay, I think I have that. Thank you very much.

We will take our next question from Ryan McCauley(ph) from Aker (ph) Capital.

It sounds like you guys are operating at close to your soft capacity and in the first quarter you may have eventually delayed some shipments so that you could produce for this opening price point. Has there been any deterioration in your service level with all the turbulence that has been going on?

We did hit our capacity in terms of our crewing levels of soft capacity, I assume that is what you are referring to there. We have run the plants and we've run them pretty well at what they can do, but we have not overrun the plants, we haven't overheated anything. So our service levels in terms of quality costs (indiscernible) remain intact and that (indiscernible) in good shape.

Okay, and where do you stand in the crewing up of those new facilities?

We continue to crew them up and each plant has its own challenges. Some of those jobs require a little more skill than the other ones, but there is a schedule and we are crewing up assembly, as well as component facilities, where appropriate around the company to meet these demands as quickly as we can do it and still remain stable and rationalize the operations.

So we're doing that on an ongoing basis and we have been crewing up this company essentially for most of the last seven years. So that hasn't changed. We are still hiring people and we're still bringing them on. Right now it is at a pretty healthy pace. I anticipate it will remain at a pretty healthy place right on through the spring of next year, the way it looks now.

Okay, right. And just one other quick question. Your days receivable has increased modestly each of the last two quarters. Could you just talk to that point a little bit?

I'm not sure what you mean by days. Our total has gone up and it is primarily due to just some timing. Part of it is the growth, but in terms of a calculation relating it to sales, there's some timing impacts that we are having related to some payments. Generally speaking our terms have not changed, nor has our performance changed by channel or by customer. It's mostly timing.

So if I look back at the first half of fiscal 2003, it looks like you were running, well by my calculation, at about 22 days receivable. Would you expect to return to similar levels as you were running in fiscal 2003?

I wish we were there.

I'm not sure what's involved in your calculation. We, generally speaking, run in the low 30s as a blended average for the business, 31 to 32.5, maybe even 33 is what we've been running for the last several years and we are consistent with that if we actually get in. If you factor out the artificial cutoffs within the quarters and the fact that you might get a check on the second of a month instead of the 31st of a month, we continue to run on a blended average in that low 30 from date of invoice to date of collection.

Thank you.

(OPERATOR INSTRUCTIONS). Dan Cillie with Sidoti & Company.

With the in-stock program, how many stores is that in now as a total?

We put the -- the new program rolled out to 350 stores. We had originally planned on quite a few less than that. That puts us in total -- I'm not sure of the exact count, but it is about 50 percent of the company, use that as an average. So it's about 450 stores, something like that.

And you are saying that process is complete?

It is complete?

As far as store counts go?

Well now if they build new stores, basically -- and we have always been doing this with in-stock, as they open new stores we basically split those with a competitor, so we stock about half those stores. So if they open 100 stores, that means we put 50 in, but the impact of that is relatively insignificant in terms of the overall performance of the company.

And in terms of the geographic impact, is it something that -- did the flow (indiscernible) not quite match your expectations as to where they would they would be originated?

They pretty much -- I'm not sure it's a question of not matching our expectations. It's just that the West has been particularly healthy for several months now, and while business overall is good throughout the country, in the West it's been particularly strong, and so we have been subsidizing orders out there, out of the East Coast facilities, that we would rather not do.

So we have been under some freight pressure. We are balancing that as we continue to ramp up because we're focusing that ramp up to balance our orders. However, the West Coast has just been really, really strong for the last particularly two or three quarters.

But I just want to make it clear, Dan, the issue we're having with the geographic mix, geographic balancing demand is not caused by the in-stock rollout. It has nothing to do with that. That is by the general demand in the marketplace.

Just one last question. What was your hard capacity used during the quarter?

Hard capacity again, just (indiscernible) we are probably running from a hard capacity standpoint in, I call it 90 percent.

Thanks.

And we have no more questions standing by. I would like to turn the call back to our speakers for any additional comments.

Again I would like to thank everyone for taking time out to participate in this conference call, and we at American Woodmark, appreciate your continued support. Thank you. Have a good day. That was Jake.

And ladies and gentlemen, that does conclude our conference for today. I would like to thank you for your participation. You may now disconnect.