American Woodmark Corp (AMWD) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the American Woodmark second-quarter 2004 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (CALLER INSTRUCTIONS) As a reminder, this conference is being recorded Tuesday, November 18, 2003.

I would now like to mention the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. All forward-looking statements made by the company involve material risk 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. I would now like to turn the conference over to Glenn Eames, Vice President and Treasurer. Please go ahead, sir.

Good morning, ladies and gentlemen. Welcome to this conference call to review American Woodmark's second-quarter results. We do appreciate your taking time out of your busy schedule to participate. Also participating in the call this morning will be Jake Gosa, President and Chief Executive Officer, and Kent Guichard, Senior Vice President Finance and Chief Financial Officer. Kent will begin with a review of the quarter and an outlook on the future; and after Kent's comments, Jake and Kent will be happy to answer any of your questions. At this time I'll turn the call over to Kent.

Thank you, Glenn, and good morning. Again, thank you for taking some time to listen about the performance and progress here at American Woodmark. This morning we released the results of our second fiscal quarter ending October 31. In case you have not a chance to read and review our earnings release, let me first review a few highlights.

Consolidated sales for the quarter were 169.4 million, which is up 17 percent over the second quarter of last year. Net income for the quarter was 8.2 million, which is down from the prior year net of 9.1 million. Diluted earnings per share of 99 cents for the quarter compared to $1.09 last year, but were up 10 percent from our most recent quarter ended in July of this year.

In regards to our second-quarter sales performance, the higher level of sales activity versus the prior year was the result of continued growth in both the remodel and new construction markets. On the new construction side, overall activity in the new construction market serviced by the company remains extremely strong, with residential starts at or near record levels. Annual housing starts nationwide remain very robust, in the 1.8 to 1.9 million unit range. Mortgage rates did increase slightly during the quarter, reaching 60 percent on average for a 30-year fixed mortgage by the end of October. While this is up from the 5.5 percent reported this spring of this calendar year, rates are still well below the 8 percent of three years ago and the 7 percent plateau that was both two years ago and last year; so historically rates are still very low. We continue to benefit from the growth of our strategic partners and our two new direct builder operations in Atlanta and Denver that were shipping against initial contracts during the quarter.

The growth trend also continues on the remodel side. Activity remains very strong, with home improvement spending at record levels. The strength in the remodel industry is reflected in the strong growth and comp store performance reported yesterday by Lowe's and today by Home Depot. Demand for our products and services is reflective of the marketplace, with the growth trend punctuated by the impact of seasonal promotions.

Moving on to gross profit, gross profit for the second quarter was 20.4 percent. Looking at the four major components of gross profit, first on the materials side, overall material costs increased as a percentage of sales. Market pricing for principal raw materials is relatively stable, with the exception of moderate upward pressure on certain types of particleboard, and strong upward pressure on certain species of hardwood lumber.

In addition to these market increases in market prices, material cost as a percent of sales increased due to a change in product mix. The company has experienced growth across all price points in the product line. During the second quarter, however, the rate of growth in the lower price points outpaced the rate of growth in the higher price points. Material cost on our entry lines tends to run a little bit higher as a percentage of sales than our other lines, and that was one of the factors in the increase in material costs as a percentage of sales.

The second major component is labor costs. Our labor costs increased versus the prior year as a percentage of sales due to three primary factors. First, the stronger than anticipated demand resulted in significant levels of overtime in our facilities. The premium paid portion of these overtime hours increased labor costs and hurt our margins. During periods of high demand, we have consistently, over time, made the decision to service our customers at the expense of short-term margins. The second quarter was no exception. We continued to work a great deal of overtime to service our customers.

The second reason for the increase in the labor costs, the company continues to ramp up capacity, particularly in the new facilities brought online in the fall of last year. While these facilities continue to improve, they are still crewed with relatively inexperienced employees and are less productive than our mature facilities. On a facility by facility basis, productivity is improving.

Finally, the company experienced a significant increase in benefit costs versus the prior year. Rising benefit costs were the result of two factors. As we discussed in the first-quarter conference call, our pension costs are up, primarily due to the combination of lower returns on pension assets and reduced rates used in calculations to determine the present value of future obligations.

The second factor on the benefits side are medical costs. Medical costs are up due to inflation, particularly in drug prescription expenses, and to the impact of large claims. The company is self-insured on medical claims up to a maximum stop loss. During the first two months of the quarter the company experienced an unusually high number of large claims under the maximum stop loss. The combined impact of additional pension expense and higher medical costs reduced gross margin by 1.1 percent versus the prior year.

Freight costs as a percentage of sales were flat. And the fourth component of gross margin, overhead costs, our overhead costs declined as a percent of sales due to leverage associated with the additional volume.

In regards to our capital growth plans, capital spending for the second quarter was $5 million. Outlays in the quarter included a variety of maintenance and cost-saving projects, and some initial equipment deposits for expanded capacity. Just a few weeks ago the company announced plans to construct our 14th manufacturing facility. The facility will be a component plant. Initial production is scheduled for late summer/early fall of calendar 2004, and will be required to meet demand projections during the fall selling season of next year. The bulk of expenditures on this project will occur in the fourth fiscal quarter of the current fiscal year, and the first fiscal quarter of fiscal 2005.

Moving on to SG&A, SG&A costs decreased as a percentage of sales from 13.9 percent in the second quarter of last year to 12.3 percent in the current quarter, due primarily to the impact of cost management efforts and lower expenses associated with the company's pay for performance employee incentive plans.

Before I move on to the closing remarks, a quick note on the balance sheet. The company's financial position remains outstanding, with long-term debt to capitalization below 10 percent. Cash on hand at the end of the quarter increased from 15.5 million at the beginning of the fiscal year, and 19.1 million at the end of the first quarter, to 23.3 million. The company repurchased 2.2 million of common stock during the quarter.

In closing, I would like to say we obviously continue to generate strong topline growth across all channels of distribution. While the performance in the second quarter at gross margin was disappointing, bottom-line profitability did improve from the first quarter of the current year. We continue to generate cash.

From an operational perspective, we did make progress during the quarter. On a plant by plant basis, productivity is improving. Our freight costs have stabilized. And we're now generating leverage on our overhead costs with the additional volume.

As we look forward to the third fiscal quarter of the current year, 2004, we see a favorable environment supporting continued sales growth. The new construction sector remains very strong, with historically low interest rates and other factors driving a healthy level of housing starts. Our strategic partnerships with major builders in established markets provides a strong base for us to participate in that growth. We also expect to continue to achieve additional incremental growth in our new builder centers in Denver and Atlanta. The remodel element of our business also presents continuing opportunity for growth, as underlying remodel activity remains very solid.

Within the expected environment covering our third fiscal quarter ending January 2004, we currently anticipate an increase in sales of approximately 15 percent over the prior year. We also anticipate gross profit for the third quarter will improve from the second quarter to approximately 21 to 21.5 percent, due to continued improvements in productivity, a return to normal levels of large medical claim experience, and the benefits of leverage on fixed costs with the higher volume.

With higher sales and improvement in gross margin over the second quarter, we anticipate diluted EPS of 90 to 95 cents for the third quarter, versus 80 cents in the third quarter of the prior year. This concludes our prepared remarks. Jake and I will be happy to answer any questions you have at this time.

(CALLER INSTRUCTIONS) Sam Darkatsh, Raymond James.

Our prior guidance or thoughts for this quarter's gross margins was about 23 percent; and we clearly came in a little under that. What surprised us? You talked about each of the impacts of materials and labor and so on and so forth. What surprised us more so than what we were looking for three months ago?

The biggest surprise is probably medical, and there is not really a good way to anticipate that. We just had -- for the first 60 days of the quarter we just had extremely high experience on some large claims, approaching the stop loss. So in a rank of an order, that is probably number one.

The second one I would put in there is that we got a lot more volume than we anticipated. And that put a lot of pressure on the plants, and we worked a lot of overtime. And those premium hours are expensive. As I mentioned in my comments, though, we have done and will continue to do that to take care of our customers.

So those are probably the two biggest ones, the medical costs, and the fact that the inbound order rate was a lot stronger than we expected and we had to work a lot of overtime.

The mix that we talked about, the negative effect that the mix towards the lower end price point, is that related to the additional white in-stock product? The cash and carry retail line?

Not necessarily just that, because we do have opening price points across all the channels. And remember, as I said in my comments, we grew across the board in terms of price points. The lower price points just grew a little bit faster, and they do have the tendency to have a little bit higher material costs as a percentage of sales.

Sam, the builder business is extraordinarily strong right now. There is a certain level of opening price points that you service in that market. Those are contract service orders, so it is the priority of the business.

Okay. The new facility, I think if I recall it is about 250,000 square foot, the expectations. First off, is that the primary facility that is expected next year, incrementally over this year? And also, what is your current square footage in total, before that facility is added?

The first part of your question, the answer is yes, that will be the primary capital expenditure that we will focus on next year. It is a component facility, so it will manufacture hardwood parts, and it will also finish those parts. It is around 250,000 square feet. And we do not really look at our capacity, Sam, in terms of square foot increments. So right off the top of my head I could not tell you how many million square feet we have got under roof. It is a few million square feet.

The strategy with this plant is that it would be the latest in terms of automation and wood processing technology. So it would have a relatively high output of product with a relatively low headcount in terms of labor.

If I was trying to -- just speaking broadly, not specifically, but if I was trying to gauge how much additional capacity is coming online with this new facility, since it is just components, and that is -- you have finishing, you've got components, and you have got assembly. So just figuring out what percentage of componentry additional capacity represents does not really get to an overall capacity level. That is why I was trying to figure out what the incremental square footage is. Is there a way we can back of the envelope figure out how much extra capacity is coming online with the facility?

The plant is scheduled to be a three-phase buildup, so the initial phase one will increase the relevant capacity of those hardwood parts around 25 to 30 percent. Phase two and phase three would have the ability to have an incremental impact of about the same.

Okay, and the Q4/Q1 CAPEX budget for the facility is what, Kent?

This facility, by the time we get it all done, will be in the neighborhood of $25 million.

The vast majority of that in Q4 and Q1?

That is correct.

Okay, I will let others ask. Thank you.

Joel Havard, BB&T.

Glenn, I know you are in the background too. Jake, we are probably a year now into Tahlequah and Kingman. Kent, I believe your remarks talked about on a per-factory basis productivity is improving. But is there a target date when these guys should be performing at an acceptable level? I am reading this to sound like there's still an inefficiency drag associated with the expansion or the new plant. Am I being overly critical?

No, there are some, Joel; it is really a couple of things. One is the mix of product coupled with the mix of plant. If you look at the mature facilities in the company, obviously they are doing quite well. However, the ramp up that we are experiencing, the majority of that is occurring in these new facilities. Now what has really happened to us over the last 90 days is our top line is up 17 percent; but with that shift of mix down, you can figure out, reading the remarks, that our unit production is up more than that. And that has all hit those new facilities.

And we do pay a productivity premium the first couple of years of those facilities. And we're running heavier in there than we had planned in this last 90-day period. So we have gone through a very aggressive ramp up of the business. The outlook, though, is more up beat. We are making progress. You cannot run the amount of overtime that we had to run this past quarter, focus it in the new facilities, though, and expect to improve your margins at the same time. It just is not likely to happen.

We do not have big issues with those facilities. They are basically running on plan. We are just having to rely on them more heavily, more quickly, than we had planned on. And that is providing a fairly (technical difficulty) in gross margin in terms of getting it moving forward. But we are, however, pretty upbeat about the future. We continue to make progress. We are absorbing the volumes that we're taking on. And we expect the ramp up over the next quarter or two to be a little bit more modest than what we have experienced since the spring. I do not know if that answers your question or not.

Well, I am not nearly the production manager that you guys are, so I'm going to defer to your I think slightly more upbeat perspective about the next couple quarters.

One point you did make was unit volume versus pricing. Are we still in a negative pricing environment? You said unit volumes up more than 17 percent.

I was talking to the mix shift there. I think Kent in his remarks talked about opening price point representing more of what we've shipped during the quarter. That tells you that we're shipping more units than that 17 percent, because our overall mix ran down a little bit on us. That also puts a little pressure on gross margin (technical difficulty) the first part was gross margin in that remark.

Okay, is there a pretty clear mix devoted to or coming out of Kingman or Tahlequah that is maybe more builder oriented or more dedicated to the white line?

The white line is really not so much at issue here. It is a blend of things. In both the remodeling markets, our retail sector, we have in-stock opening price point products. But also in the builders sector we sell a lot of opening price point, and then we upgrade from there. As you all are all aware, the housing business has just been running at a record pace. Our business is no different.

It is very, very strong with the new construction area. We have been under a lot of pressure to close a record number of houses here in the last couple of months, as these builders get to year-end and they pretty much are trying to close out as many closings against their starts as possible. So we have just been under a lot of pressure at that end of the market. So we've got a little bit of an unusual mix that is weighted in some directions that we would not experience historically.

Jake, that is something maybe I have been a little confused on. My understanding was that, between the remodel product going through the big boxes and the new builds, they probably worked out at about the same operating margin. Is that still true? Or is there something going on? You mentioned trading up once you get into a new development or something. What is going on there?

I'm not sure I entirely understand your question. But the margins vary. We have opening price point margins that are above average. We have them that are below average. It depends on the product line. So there's nothing that you could categorically -- you cannot define them in one statement like that; so it is not an all or nothing.

What we do with the builders is we go in there with opening price point, the base houses; and they typically sell the upgrades. That's the way they sell houses and make money these days. We participate in that upgrade or that sell up. That is generally quite good for us. We are doing that. However, the pressure to service those new construction closings over the last 90 days has been at a heightened level and is representing a higher portion of our mix than we traditionally would experience, because that housing market is so hot.

When things are in relative balance, you are right, those things tend to come in and they fairly balance and cancel each other out. That is not the case right now, though, for the past 60 to 90 days. As we get through that, we go to the winter months, we will see our typical falloff. We expect to get ourselves back into a more traditional or reasonable balance in terms of overall mix of product.

This may be a function of the home buyer taking the stock answer to get into a house right now. Is that a housing dynamic? Is that how I should understand that?

No, no. When these track builders build houses, they put up these houses, these model homes. In these model homes they will have a base price product; they will have first, second, third upgrade. And then when you buy that house, if you or I were to going to buy one of those houses, we would decide whether or not we were going to except the base price product, or whether we would pay some additional money over and above that base price and exercise those upgrade options.

And then we have a fairly high percentage of upgrading, which is what makes the new construction business pretty good. But the new construction business in general also has a relatively high percentage of opening price point product, because a lot of people stay with the base price product. Today we're experiencing a very, very active housing market. It is operating at record levels. So that is putting some pressure on us to service that business, because those are contract closings that we have to meet. So we ship them with a priority.

Okay. Let me switch gears a little bit here. On the raw materials side, could you, Kent, please review the year-over-year price changes you are seeing on hardwood and panel?

No. As you know, Joel, we don't talk about specific increases on specific commodities. What I would say is that the pressure on flat stock at this point, it is there but it is pretty minimal, pretty moderate. On the hardwood side, it is really limited to the real big increases in cherry, if you go out and look at the market pricing of cherry. The other species are okay; maybe a little bit of upward pressure. But the market price of cherry has up significantly.

Okay, that suggests that maybe this medical cost surprise was really the issue. Can you put a dollar sign to that?

To the medical cost? What I said was, between the pension and the medical, it depressed gross margin by about 1.1 percent.

So instead of 20.4 we would've been at 21.5.

That is helpful. Last question, I don't want to hog the call. You said you bought 202; what is left on the repurchase?

About 4 million.

Thanks.

Dan Cillie, Sidoti & Co.

Just wondering if you could give us an updated estimate for your CAPEX totals and depreciation totals for this year and next?

For this year? Yes, through the first half of the year our CAPEX is about 78. We would expect the year to come in somewhere in the 25 to 27 range. And next year ought to come in at about the same, maybe a tad bit higher, 26 to 28.

And with respect to the new plant, are you getting any concessionary financing?

I am not sure what you mean by concessionary financing. There are, by all the states at this point, and this plant is no different, in working with the development authorities there are incentives available for job creation and investment. And we're taking advantage of those.

Okay, I just wondered if you were going to be issuing any ROBs or anything like that.

No.

So you (technical difficulty) paying cash?

Yes.

And with respect to the medical costs, is any of that related to a change in the composition of the workforce?

No, it is not. We have had this a couple of times the past in the '90s. You just get into one of those periods where you get a handful of these large claims; and until you hit the stop loss it can be pretty expensive. We do not think it has anything to do with the change in the employee population. And we don't think it as anything to do with any other changes, other than the fact that we just had unfortunately several employees who had a significant medical event.

Okay, and then turning to your builders segment; are you picking up any additional builders or geographic markets?

We have been very active in that market. We have opened, as we mentioned earlier, new operations in Denver and Atlanta. They are actively soliciting and securing business, as we speak. And we have had a very strong experience with our focus on the top 20 builders around the country. That is what we are focused on, because that is where the real action is. They are outgrowing the general market by quite a good measure. And we're selling about 17 out of the top 20. We are focused on those people, and we for the most part are achieving additional business penetration with those accounts.

Thank you.

(CALLER INSTRUCTIONS) Brian Macauley (ph), Acre (ph) Capital.

Is there any way that you can quantify the productivity difference between the new facilities and the more established facilities? Perhaps number of cabinets per shift or cabinets per line? Anything along those?

Probably not in a way that would make a lot of sense to you. But I can tell you that when you start up a brand new assembly plant, for instance, which is a fairly labor-intense operation, you can expect that, after you get up and running, that on a productivity basis you're going to be paying a significant penalty in terms of pieces per man-hour; 30 to 50 percent.

Now, you have some offsets there. One offset being that you may be using a little more modern facility, and you may have some advantages there. The other big offset is you have a new workforce, so you are paying them less money per hour. There's a lot of things that go into that. But you basically look at getting a new labor-intense facility like an assembly operation in Tahlequah, Oklahoma, you look at getting that up to your normal expected productivity rates in about 2 to 2.5 years. On a components facility, where things are much more highly automated, it can be less than that.

Brian Macauley You've seen rising hardwood prices, and I guess you are seeing a little bit rising particleboard prices. If these trends continue, is that something that you think you'll be able to pass along through your new contracts?

Yes, if we saw trend in place that had an ongoing material effect on the business, we would in fact attempt to pass that along. Historically that has been sufficient justification to get price (inaudible). We would expect to get some of those.

With the way the market has performed this year, do you think you might see some improvement in pension expense next year?

Well, my current expectation is that we would not see another jump in it. That the worst-case scenarios is that the pension expense is relatively flat. Now, it will increase for additional employees and additional year of service, that kind of thing. But the real impact that happened this year, based on not only the earnings side but the discount rates that we were all forced to use; not just to us, but all forced to use; I would not expect that next year we would have that kind of an impact.

Great, thank you.

Doug Smith (ph), Basswood Partners.

If your sales are very strong with the home builders; and as you described it, you tend to sell more of the lower price point product to the home builders; should we expect that mix shift to the opening price point to be more permanent?

No, it just is that during a ramp up period you have to prioritize your business. And anytime you are shipping business against firm contracts, you're going to have to put some priority in there. But over the next several quarters, and certainly over the near-term/mid-term outlook, we do not see any significant shift in the business between retail and remodeling and new construction.

And lastly under capital structure, you are the least levered you have been in your history. Where do you think your capital structure in terms of debt to equity will be over the next few years?

Pretty much where it is right now.

Okay, thank you.

(CALLER INSTRUCTIONS) Mr. Eames, there are no further questions at this time. I'll now turn the call back to you.

I would like to thank everyone for taking time out to participate in this time call. We at American Woodmark do appreciate your continuing support. At this time, that would conclude the conference call. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.