American Woodmark Corp (AMWD) 2004 Q3 法說會逐字稿

Welcome to the American Woodwork 3rd quarter, 2004 earnings results conference call. After the presentation we will conduct a question and answer session. If you have a question, please press the one followed by the four on your telephone. This conference is being recorded Tuesday February 24th, 2004. Please note, 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 it's forward-looking statements, even if experience or future changes make it clear that any projected expressed or impressed therein will not be realized.. I would now like to turn the conference over to Mr. Glenn Eads, Vice President and Treasurer.

Good morning ladies and gentlemen and welcome to American Woodmark conference call to review our 3rd quarter results. I'd like to thank you for taking time out of your busy schedule to participate. Participating in the call will be Jake 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 an outlook on the future. After Kent's comments, Jake and Kent will be happen to answer your questions. At this time it's my pleasure to introduce to you Kent Guichard. Kent?

Good morning and, again, thank you for taking some time out this morning to listen about the performance and progress here at American Woodmark. I'd also like to apologize for our late start this morning, we had a technical problem with a phone line, but hopefully we're hooked up now. This morning we released the results of our third fiscal quarter ending January 31. In case you have not had a chance to read our earnings release, let me first review a few highlights. Consolidated sales for the quarter were $162.9 million, up 19% over the prior year. Net income for the quarter was $7.7 million, which is up 13% from the prior year net income of $6.8 million. Diluted earnings per share of 92 cents for the quarter compares to 80 cents last year. In regards to our 3rd quarter sales performance, our guidance issued at the end of the second fiscal quarter, last November, anticipated sales growth of approximately 15%. The actual growth of 19% was greater than our outlook due to a stronger than expected order rate in both December and January. The normal winter decline was smaller than forecast, due primarily to no seasonal drop in the overall level of new construction activity.

Overall activity in the new construction market serviced by the company remains extremely strong with the residential starts continuing decline. Annual housing starts nationwide grew again in December to almost 2.1 million units on an annualized basis. After increasing slightly during the fall of 2003, mortgage rates have again declined, reaching a seventh month low in early February. Thirty year fixed mortgages in the mid 5% range continue to make housing extremely affordable. Demand for new housing in this environment remains very strong with high start rates and low levels of inventory. Based on the value of our Timberlake line and our extensive service reach, we continue to benefit from the strength in new construction activities. The growth trend also continues on the remodel side. Activity remains very strong with home improvement spending at record levels. The strength in the remodeling industry is reflected in strong overall growth and comp store performance at the major big box retailers. Demand for our products and services is reflective of the strength in this marketplace.

Moving on to gross profit. Gross profit for the 3rd quarter was 20.8% which is a decline from fiscal 2003, but improved from the most recent fiscal quarter. The company continues to experience material cost pressures. The market price of many of our principal raw materials is increasing, particularly hardwood lumber, particle board and plywood. In addition, the decline in the dollar versus the Euro has placed significant pressure on our other materials sourced from Europe, principally hardware. Our labor costs decreased versus the prior year. Direct labor productivity improved across the manufacturing net worth with both established and new facilities achieving better efficiency. While the new facilities still remain on a learning curve as they continue to increase capacity, the productivity gap versus our established facilities continues to shrink. While the company exceeded shipment forecasts, effective straight time capacity continues to grow; and the level of overtime returned to more manageable levels during the quarter.

The company generated favorable leverage on nondirect labor costs due to higher volume. Improvements in direct and indirect labor costs were offset by increases in pension expenses and medical costs. Our freight costs declined as the result of higher volume and improved efficiencies in the company's network of 3rd party carriers. Our overall costs also declined as a percentage of sales due to leverage associated with additional volume. In regards to our capital growth plans, capital spending for the 3rd quarter was $4.1 million. Outlays for the quarter included a variety of maintenance and cost-saving projects, equipment deposits for expanded capacity, and initial outlays for the construction of the new component facility announced last November. The company expects the rate of capital spending to increase during the 4th fiscal quarter of the current year based on approved capacity expansion projects. Outlays during the 4th quarter are currently projected at $18 to $20 million, depending on the timing of equipment deposits, and progress on site preparation and building construction for the new facility.

The company will fund the capital spending plan from a combination of operating cashflow and cash on hand. SG&A costs decreased as a percentage of sales from 14% to 13%, due primarily to the impact of cost management efforts and leverage on higher volume. Footnote on the balance sheet, the company's financial position remains outstanding with long-term debt to capitalization of 9%. Cash on hand at the end of the quarter has increased from $15.5 million at the beginning of the fiscal year, and $23.3 million at the end of the second fiscal quarter to $27.8 million. The company did not repurchase common stock during the quarter. In closing my brief prepared remarks, I'd like to say that the company continues to generate strong top line growth across all channels. Performance at gross margin was improved from the most recent quarter, but has still not returned to our targeted levels. Profitability was within previous guidance and earnings have returned to positive year-over-year growth.

We continue to generate cash and strengthen our balance sheet. From an operational perspective, we continued to make progress during the quarter. Our productivity improved at both the individual plant level and across the system as a whole. We are generating leverage on our overhead costs with this additional volume. As we look forward to the 4th quarter fiscal 2004, we see a favorable environment supporting continued sales growth. The remodeled element of our business presents continuing opportunities for growth as activity remains strong. The new construction sector remains extremely strong as low interest rates and other factors continue to drive housing starts and sales. Our strategic partnerships with major builders in established markets provide the strong base for continued growth.

For the 4th fiscal quarter we currently anticipate an increase in sales of 15% to 20% over the prior year. We also expect to continue to make progress from an operational perspective. Our productivity should continue to improve. The additional volume will provide even more leverage on fixed and semi-fixed costs, and we have several activities directed at managing material costs which will help offset the market pricing pressures. We anticipate gross profit for the 4th quarter will improve from the 3rd quarter. With higher volume and an improvement in gross profit we anticipate a diluted EPS of $1 to $1.05 per share versus the 91 cents reported in the 4th quarter of the prior year. This concludes our prepared remarks. Jake and I will be happy to any answer any questions you have at this time.

If you have a question, please press the one followed by the four on your touch-tone telephone. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. The first question will come from the line of Sam Darkatsh from Raymond James.

Good morning.

Good morning.

You mentioned in your prior guidance for this quarter that your gross -- you expected gross margins to be I think between 21 and 21.5. If my notes are correct, what was the higher than expected negative variance to gross margin, at least versus what you were expecting, not so much on a year-over-year basis.

Versus our expectations it's really material. Certainly the hardwood pricing has been with us for several quarters now. We are experiencing more pressure on particle board and plywood than we have. And the other big piece is, the dollar versus Euro which makes a lot of the hardware resource from Europe more expensive.

Okay. Second question, regarding inventories, and this is a mild issue I'm supposing; but sequentially inventories were up a little bit, versus sequentially sales were down a little bit due to the seasonality. How do you feel about your inventories right now, I'm guessing you add a little inventory given the ramp up in extra capacity. How do you feel about your inventories right now?

As you know, based on our GIT system, really the inventories that we've built have been associated with both, opening new plants and also layering in especially green lumber in preparation for the spring selling season. So we feel that our inventories are in pretty good shape, where we want them to be.

As you look over the next three or four quarters, do you expect working capital-- I mean, how much of a use of funds, generally speaking, do you see working capital. Do you see it as a flat percentage of sales or do you think we still need to build a little more on the inventory side?

Generally speaking, I would say we see them pretty much continuing where they are now, with the exception that when we open up this summer, late -- mid to late summer, when we open up the new facility, the new component facility, you'll see us put in -- you'll see a little bit of blip when we put in the initial inventories into that component facility. Generally speaking, over the next year, we would expect to be about where we are now.

Your tax rate was roughly what, 38.5%? Should we model that going-forward? How do we look at the tax rate?

Generally speaking, there are a couple of unique things, generally speaking, we run around 39 and we feel that on an ongoing basis, that's about what we'll report.

So for our models, you would suggest us use 39 not 38.5?

You do what you like on your models. Our expectation is that we'll probably average about 39% for an effective tax rate.

Last question, before I let others ask. In your prepared remarks, you said that your cap ex for next quarter would be roughly $18 to $20 million, if I heard that correctly. Would that go back closer to D & A in the quarter following that? Or how do we see cap ex progressing throughout the next few quarters or so?

No. What you would see is, I think the first quarter of next year will be a little lower than the 4th quarter; but you'll really get the back half of finishing off the new component plant. So I would expect in the first quarter that we'll still have a significant outlay of capital expenditures, certainly exceeding depreciation. And we haven't really issued any guidance or anything on after the first quarter, but I think you're going to see the next two quarters to be pretty heavy.

Your depreciation has been running about $7 million. What's the impact on depreciation of the new plant?

Well, the plant, this is a new component plant. And generally speaking, our component plants run in the $30 to $35 million range, in terms of investment; and that's about what this one will be.

On a normal depreciation schedule, or how do you -- how should we straight line that in our assumptions?

It's going to be a mixture of building equipment and everything else, it's a normal plant that we run, and the investment's about $30 to $35 million.

If you took a blended average, would it come to 5 to 10 years or so, is that--or a little longer than that, or how should we look at that?

Our plants generally run a little longer than that.

Okay. Thank you. I'll let others ask questions, thanks.

The next question is from the line of Joel Habbard, with Scott and Stringfellow. Please proceed.

Good morning, guys, it's actually Matt McCall for Joel. Let's see. Can you hear me?

Yes.

You mentioned that the new facilities are moving up the learning curve, and that the production gap is continuing to shrink and I think you said the productivity should continue to improve. I guess two questions, can you expand on where capacity utilization was at the quarter end?

At quarter end? We're basically running at full capacity from a practical standpoint. Certainly not from a -- as we've talked before, brick and mortar stand point. We still have significant room to grow within our facilities, but mostly from crewing standpoint, we were producing at capacity. As we not only got the fall selling season orders out, but also as I mentioned, had to deal with a stronger December and January than we had anticipated.

Okay. I guess given the outlook for 15 to 20% top line growth in Q4, what does that mean if you're -- I know you said you're at full capacity. What does that mean for utilization at year end if you're growing at 15 to 20% top line, should we continue to model full capacity or like quarter in trend?

What we'll do is, you know, as we have been doing for quite some time is, we'll continue to crew up these facilities to increase, so we will have more straight time capacity in the 4th quarter. We always have the opportunity to work overtime if we need it to meet customer orders, we believe that we have the capacity in place to meet our 4th quarter incoming demand and take care of our customers within our lead times. So -- but that will be basically, again, operating at full capacity from a crewing standpoint.

Okay. Okay. That's all I have. Thanks very much.

The next question is from the line of David Campbell with Davenport & Company, LLC, please proceed.

Thank you, good morning. I have a couple questions about the sales and the margins. Your sales were better than what you expected. Was that from the home improvement or the builder channel or both? Could you comment on that, please?

Well, builder. This is Jake. The builder channel was particularly strong. And in the comments, think the elusion to strong housing starts annualizing at 2-plus million has continued to fuel stronger than expected demand in that area. That's been supported also by very solid demand on the remodel side. But the builder business has been particularly strong.

What's your outlook for the housing market this year and interest rates and all that?

Well, my outlook for the housing market is very strong. And if you look at builders backlogs, they're quite long, and the unsold inventory of homes is quite low. So I think the first six months of the year, first 7 months of the year is pretty much a done deal. If you look also at the start rate that continues to come into the mix, it's continued to hover around -- I mean, last month we had a bad month, it was a million 9, which would still be at 25-year highs; if you finished at that level. So I'm looking for a very strong housing start, although on a comparative basis, I doubt that we'll see any growth from last year, I think on a year-over-year basis, it's going to be flat to maybe even down a point or two; but it's still going to be a very, very volatile housing market. Interest rates, I don't really have an interest rate forecast. I'd go with the NHB forecast, which is that long term mortgage rate will probably, over the course of the next two years increase 50 basis points a year; I think that makes as much sense as anything. And I don't think that will have a terribly negative effect on housing.

Okay. Do you have any estimates of your mortgage share at the end of last year?

Yeah, overall market share is 6.5, 7%. And the market's around $9.5, $10 billion. If you look at our annualized sales it puts you right in that range.

Okay. Do you think you're continuing to gain market share?

We are.

Okay. What was the market size again that you mentioned, Jake?

Between $9.5 and $10 billion.

Okay. And then turning to the margins, were there any mix issues this quarter that might have affected your margins? Also, medical costs, you had expected would normalize in the 3rd quarter from the 2nd, but it appears they didn't. If you could explain that. Thank you.

In terms of mix, there wasn't anything particularly unusual in the mix in terms of it's impact on margins versus the second quarter. Mix is relatively stable. You always get some movement in and out, but generally speaking that was not a big driver of change in margin between the second quarter and the 3rd quarter. In terms of medical costs, we did see them-- versus the second quarter, we did see them normalize in the second half of the quarter. Our large claim experience did come back to more historical levels. They still are, however, up from prior year based on the number of people and general inflation.

Okay. What do you think the margins are that you can get to, and over what time period do you think you will do that?

Generally speaking, we are still below what we consider would be a threshold level of performance which we would put at about 23%. We really need to operate at 23% as a minimum. So we're still -- a couple of points below that, at the high end of the scale, generally speaking, 25%, maybe 25.5%, is probably about as good as we can do in our business. In terms of getting back there, we're not going to forecast out that far, we continue to work as hard as we can towards getting back to that threshold level which is 23%. When we'll get back there, I don't know. We haven't released a forecast on that. We'll get back there as soon as we can. Again, what I would add that we've done -- said several times before, is that our primary focus is to take care of our customers, and if we have to spend some money; whether it's premium overtime or premium shipping, whatever it is, to take care of our customers, we'll do that first, that will always be a priority to us, and we'll pay whatever costs we have to incur to do that.

We are slowly building back our margin structure. We are making progress as I said, in the overhead and labor side. Freight's pretty much stable. A little concern about potentially some of the impacts of not only fuel costs, but the new regulations in terms of driver hours. The real big thing at this point is material costs. The industry is experiencing some pretty good increases, pretty rapid sizable increases in material costs, and we need to deal with that.

Without asking for a forecast, but given the component plant you're bringing onstream next year, next fiscal year; is 23% possible in the next fiscal year?

Well, I mean, anything's possible. Certainly as I said, our feeling is that we need to operate at 23% as a threshold level. We've obviously dropped well below that. For the full year, I don't know, because we are entering the year at around 21; thereabouts, at least the 4th quarter, 21. We'll see what improvement we make in the 4th quarter. I think we'll been able to answer that question a little better 3 months from now. Clearly, I think we would be disappointed if we didn't get back to 23% at some time during the year.

Okay. Great. Thanks very much.

The next question comes from the line of Ken with Deutsche Bank. Please proceed.

Good morning.

Good morning.

The first question is on pricing and related to the material costs. In other building material areas we've read about price increases to the customer. Have you guys been able to get any with the rising material costs?

We -- yeah, we haven't commented specifically on those individual actions, over the years, I would tell you we have been able to recover price-- or to get back our cost pressures through price increases. And the situation that we're in now certainly is a bit unusual. We have a lot of pressure on us. Without commenting on anything specific, I'd just say that in the past we've been able to do do that. Obviously I can't comment on anything that we've done with any particular customer or channel because it would cause other problems for us. That would be a consideration.

Well, how about pricing related to mix--product mix then? I know we had talked--you guys had discussed the mix shift affecting you guys on the price point. Did we see that?

That has not -- in this past quarter it hasn't had a particularly adverse effect. Although we still got some issues in terms of operating at capacity levels we're operating at. We have some facilities that aren't operating in the most efficient fashion and, actually, with the new plant coming on this summer; one of the advantages of that was it will get back into a normal stream of activity. Those components that is we would -- for instance, we have components that we would like to finish in a higher speed process as opposed to a lower speed process, we have some misalignment right now. That will enable us to get those things back into alignment. So we'd find a little bit better balance of that kind of mix.

Okay. So most of the 19% was unit volume, then?

Yeah. Correct.

That's correct.

Then second question. Recent efforts have been made to improve the manufacturing and supply chain efficiency, including a new hire in January. Can you quantify and describe some of the benefits you expect to see over the next 12, 18 months, and if you benchmark that against yourselves or industry standards, please? Thank you.

Well, we hired a gentleman by the name of Tom Ward, I think that's who you're referring to, he's a senior manufacturing executive. And he is moved in and is now running our manufacturing facilities, reporting to Dave Blount who runs all of manufacturing and operations for the company. And we would expect Tom to focus his efforts in the area of labor productivity, and material flows and to get our network facilities as efficient as possible. Currently, he's gone through an encouraging orientation, we're very happy with the work he's done so far. We're deep in the budgeting process for next year, we look for him to get us some good advances in both of those areas in the FY '05 fiscal year.

Is that something that you guys might be able to quantify when you complete that process?

Well, certainly for internal purposes, we would quantify targets. Not for external purposes. I would just go back to something I said previously; and that is that we really need to get back to the threshold level of 23% gross margin as quickly as we can. And certainly Tom and everyone else is working towards that. That's about the quantification I could give you.

Thank you very much.

You're welcome.

The next question is from the line of Dan Rubinoff from Credit Suisse First Boston.

I was wondering you would need to add any sort of overhead folks, general administrative to support the 15 to 20% growth you're talking about.

No, not really.

We don't have any plans to do anything significant.

Okay. And what about -- is there any other sort of actions you can take to sort of offset the pricing pressure of materials? Or is it just sort of a passing those prices along to the end users as that becomes possible.

No, there are a number of things we can do, and we always have an aggressive list of material cost reductions, and those can take, you know, all a manner of activities. We could do material substitutions, we can consolidate vendors, you know, we could look at a whole host of other activities, so we'll do a combination of all of those things.

Is that something you'd be -- you're currently doing, or you're going to be doing in the next six months?

We're currently doing. And we do those on an ongoing basis anyway. And the level of that activity has been elevated over the last couple of months, and we'll expect to see some benefits from that in the coming year.

And then in terms of sort of passing the pricing along to the end users there, is that -- when is that up for negotiation again?

Well, we -- all of the channels of distribution that we're in, the three primary channels, it varies. And with our retail channel, it's pretty much once a year, you know, on the -- in the case of the builders, those are contracts. Those could be renegotiated as the contracts turn over. In the case of distributor business, you can pretty much announce as the market moves, so it's a blend of all of those.

And then just one last thing, do you have any sort of programs that are ongoing for just cost controls in the general and administrative category? I think you had referenced them in some earlier comments?

Yeah. I mean, it is something we do consistently, we have been very successful at managing our fixed overhead expenses, and gaining leverage off those as the company grows; so it's an ongoing effort. It's an ongoing program, continuous improvement kind of processes to make sure that we don't get our overhead structure out of line.

Well, relative to the 3rd quarter, would we expect a flat to down in the G & A category?

Well, I mean it I think as we continue to grow, we will get leverage. The one thing that moves that number around for us is we do have very large profit sharing programs, as the company does better, those programs kick in and move that percentage around a little bit. But generally speaking, we've consistently generated leverage with our growth.

Okay. Thanks very much.

Ladies and gentlemen, as a reminder, if you would like to register a question, please press the one followed by the four on your telephone. Gentlemen, there appear to be no further questions, I'll turn the call back over to you. Please proceed with your closing remarks.

I'd like to thank everyone for taking the time to participate this morning in our conference call. And speaking on behalf of the employees and shareholders of American Woodmark, I would like to thank you for your continuing interest and support of our company. At this time, this concludes the -- our conference call. Thank you.

Ladies and gentlemen, thank you for your participation, we ask that you please disconnect your lines, have a nice day.