American Woodmark Corp (AMWD) 2004 Q4 法說會逐字稿

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 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 near 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 conference over to the Vice President and Treasurer, Mr. Glenn Eanes. Please go ahead, sir.

Good morning ladies and gentlemen and welcome to the American Woodmark conference call to review the fourth-quarter results. I would like to thank you for taking time out of your busy schedule to participate. Also participating in the call will be Jake Gosa, President and Chief Executive Officer and Kent Bouchard, Executive Vice President. Kent will begin with the review of the quarter and outlook on the future, and after Kent's comments both Jake and Kent will be happy to answer your questions. At this time it is a pleasure to introduce Kent Bouchard.

Good morning everybody, and thank you again for taking some time to listen about the performance and progress here at American Woodmark. This morning we released the results of our fourth fiscal quarter ending April 30th. 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 180.4 million, which is up 25 percent over the fourth-quarter of last year. Net income for the quarter was 8.4 million which is up 11 percent from the prior year net income of 7.6 million. And diluted earnings per share of one dollar for the quarter compares to 91 cents last year.

In regards to our fourth-quarter sales performance, our guidance issued at the end of our third fiscal quarter in February anticipated sales growth between 15 and 20 percent. The actual growth of 25 percent was greater than our outlook due to stronger than expected order rates across all channels in both the new construction and remodeling sectors. The overall level of new construction activity remains at historical records. Residential starts continue to be very robust with annualized housing starts remaining around the 2 million unit level.

Mortgage rates have increased modestly over the last three months but remain around 6 percent for a thirty-year fixed loan. The combination of historically low mortgage rates and the current belief that rates may increase appears to be driving many buyers into the marketplace. Based on the value of our Timberlake line and our extensive service reach we continue to see strong demand from the new construction sector.

The growth trend also continues on the remodel side; activity remains very strong with home improvement spending at record levels. The strength in the overall remodeling industry is reflected in the strong growth and comp store performance at the major big box retailers. Demand for our products and services is reflective of the strength in the marketplace on the remodel side.

Moving onto gross profit, gross profit for the fourth-quarter was a disappointing 19.6 percent, which is a decline from both fiscal 2003 and the most recent fiscal quarter. The Company continues to experience material cost pressures. The market price of principal raw materials continues to increase particularly hardwood lumber, particle board and plywood. In addition the decline in the strength of the dollar is placed significant pressure on other material sourced internationally principally hardware. The entire decline in gross margin from the fourth-quarter of fiscal 2003 to the fourth-quarter of fiscal 2004 was due to the increase in material costs.

For those that have followed the company know that historically the industry has been able to recover general material cost increases that are experienced by all manufacturers. We have seen pricing movement in the marketplace that is reflective of these material cost increases across the industry. As a result, we have successfully executed price increases consistent with the movement in the market. These increases will begin to favorably impact our financial results by the end of our first fiscal quarter ending July 31st.

On the labor side our labor costs were flat on a per unit basis. Direct labor productivity improved across the manufacturing network with both established and newer facilities achieving better efficiencies. We continue to increase effective straight time capacity but our high order rates still require the plants to run some premium pay overtime hours in order to service our customers. The Company generated a favorable leverage on nondirect labor cost with higher volume. These improvements in productivity were offset by increases in pension expenses and medical costs.

Freight costs declined as the result of higher volume and improved efficiencies in the Company's network third party carriers. These reductions were partially offset by fuel cost premiums associated with the rising cost of diesel fuel. And finally, our overhead costs declined as a percentage of sales due to leverage associated with the additional volume. In regards to our capital growth plans capital spending for the fourth quarter was $10.8 million. Outlays for the quarter included a variety of maintenance and cost savings projects, equipment deposits for expanded capacity and initial outlays for the construction of our newest component facility which we announced last November.

During our third quarter conference call the company expected the rate of capital spending to increase significantly during the fourth fiscal quarter based on improved capacity expansion projects. Outlays during the fourth quarter were projected at 18 to 20 million depending on the timing of equipment deposits and progress on site preparation and building construction activity for the new facility. Weather delays, moved equipment deliveries and the associated deposits due on delivery by a few weeks. The nature of the delays is not critical and we will be able to catch up and meet the production date of June 30th.

Approximately 9 million of capital spending will however move from the fourth fiscal quarter of fiscal '04 to the first fiscal quarter of fiscal '05. Along with planned expenditures for the first quarter we're now expecting total capital expenditures of 20 to 25 million during the first quarter ending July 31st. The company will fund the capital spending plan from a combination of operating cash flow and cash on hand.

On the SG&A side, selling and marketing expense decreased as a percent of sales from 9.8 percent of net sales in the fourth quarter of last year to 8.2 percent this year due to the impact of cost management efforts and favorable leverage on higher volume. G&A expense increased from 3.2 percent of net sales last year to 3.8 percent in the fourth quarter this year due to costs associated with the Company's employee pay-for-performance incentive plans.

Quick note on the balance sheet. The Company's financial position remains outstanding with long-term debt to capitalization below 9 percent. Cash on hand at the end of the quarter increased from 15.5 million at the beginning of the fiscal year and 27.8 million at the end of the third fiscal quarter to 29.4 million. The Company did not repurchase common stock during the fourth quarter.

In closing kind of the prepared remarks we'd like to say that quite frankly the fourth quarter was frustrating for us. From an operational perspective we continue to make significant progress during the quarter. The Company continued to generate strong top line growth across all channels. We continue to enhance our line with successful new product launches. Productivity improved above the individual plant level and across the system as a whole. We continue to generate leverage on our overhead costs with a favorable impact of additional volume. We experienced positive year-over-year growth in both net sales and net income. We continue to generate cash and strengthen our balance sheet and our capital expansion plans to install additional capacity to serve our customers are on schedule.

Unfortunately this progress was offset by the impact of rising material costs. Had material costs been at the same level in the fourth quarter as they were in the fourth quarter of last year, our gross margin would have been almost 22 percent. As we look forward to the first quarter of fiscal 2005 we see a continued favorable environment, supporting sales growth, the remodel element of our business presents continuing opportunities for growth as overall activity remains very strong. The new construction sector also remains strong as low interest rates and other factors continue to drive housing starts.

Our strategic partnerships with major builders and established markets provide a strong base for growth. For the first fiscal quarter we are currently anticipating an increase in sales of 15 to 20 percent over the first quarter of last year. We also expect continued progress from an operational perspective. Our productivity should continue to improve and the additional volume will provide leverage on fixed and semi fixed costs.

Gross margin will remain under pressure due to unrecovered material cost increases particularly during the first two months of the quarter until our price increases are fully implemented. With higher volume and improvements in productivity we anticipate diluted earnings per share of $1 to $1.05 versus 90 cents in the first quarter of the prior year.

This concludes our prepared remarks. At this point Jake and I would be happy to answer any questions you have.

(OPERATOR INSTRUCTIONS) Joel Havard with BB&T capital Markets.

I guess 25 percent up line will just go ahead and move beyond the demand environment. Let's talk about cost a little bit. Kent, did I write this down that the principal or the entire cost gross profit discrepancy would be attributable or attributed to the raw materials issue as opposed to the labor, which it sounds like it was mostly pension and medical, those sound more onetime in nature.

Actually labor on a per unit basis was flat, which means we covered all of the increase in pension and medical through productivity. There is a little bit of overtime premium there at 25 percent growth rate. We had to run more overtime than we would have liked to service our customers.

Would that be more than is normal overtime and what is normal overtime, an extra 5 percent, 10 percent?

We like to run overtime in the 4 to 5 percent range.

Okay.

And we were considerably above that based on the 25 percent; the demand that was generating 25 percent top line growth.

Sure, okay.

Maybe to put it a different way, put some numbers on it, we were at 19.6 percent gross margin for the quarter. The fourth quarter of last year we were at 21.7. If we had material costs in the fourth-quarter of this year the same as last year, our gross margin actually would have gone up.

I caught that line. Will back that out. That is a great (multiple speakers) yes, sir. That is valuable insight. Then it sounds like lumber issues are the biggest. Or you all seeing signs that those are beginning to moderate? We're tracking in costs internally, we don't see of course the same kinds of prices you guys do, or looking at spot whatever that is. Any color on what is happening currently?

I'll comment on that, and Kent can chime in if he would like. On the lumber side it is kind of hard to tell. We saw some spikes in lumber costs, and it varies species to species. But it seems to have subsided a little bit in the last couple of months. Pressure has been more on the plywood particle board side, and materials like hardware that Kent commented on, and that is a lot of that is hardware even though we don't source it from Asia, other people do. Our suppliers do. And the weak dollar is really driving some big increases there.

How much of this stuff is catch-up because some of these industries have been overcapacity for the last two or three years and some of them have lost some ground in the pricing front, and how much of this is sustained is hard to say at this point. But we have experienced over the last six months some pretty sharp increases. I would not say that the price increases that we are experiencing are over. I would not anticipate that we would have the same sharp increases over the next six months we had the last six months. That would surprise me a little.

Okay, and I know from our perspective lumber, well wood products hardwood and ply and particle board are the big ones; hardware as we understand is 8 percent kind of of cost to goods. Am I under allocating for the metal components?

We don't break it out that way.

I understand. I guess I will ask it the other way. Has the price increases on the hardware type of items been so much more dramatic than it has been in wood that its that much more noticeable?

I do not know if I would characterize it that much more. I would just say they've been significant, and in the areas that we're calling out, which is hardwood, particle board, plywood lumber have all been significant. The other place, Joel, that we see some pressure of course is in fuel. And what happens with fuel costs over the summer and on into the fall who knows, but that happens off of an index which is pretty easy to follow. And that is started to peak again in the last three months, as we all know. That will tend to go away, though, if oil prices come down. If they don't, they will stay with us a little bit.

That connection is pretty tight where I guess the lead lag on wood and hardware is a little tougher to gauge?

Yes, the fuel thing is pretty simple. Everybody is pretty much indexed through the carrier. So you see that on Monday and very shortly thereafter within the next couple of weeks you start paying it.

Okay. And Kent, just so I understood the pension and medical, did you all -- could you all assign a dollar to that sort of aggregate number?

We obviously know what the number is, but we don't release again that level of detail.

Okay.

We're -- clearly, as you know we've talked before, the pension cost this year was really driven by the changes in the market rates for both earnings assumptions and discount assumptions, not necessarily due to changes in our plan or the profile of the people covered by the plan. That's really driven by just the discount rates you have to use.

Okay is there --

Medical costs we're in an inflationary environment on the medical side. We did see during the quarter if you remember earlier in the year because we are self-insured up to a stop loss, we have an unfavorable experience in terms of large claims. That has settled down, and in the fourth quarter we were pretty much back down to a running rate of base medical costs. We didn't have that spike in large claims but you're still dealing with an inflationary environment, a significant inflationary environment in medical costs, both prescription drugs and general medical. We actually are at or a little, our increases are actually at or a little bit below what you will find from general published numbers because we have a pretty healthy population. But those costs continue to go up. We were able to offset all of this with our productivity increase.

Again, would -- did those fall entirely in direct labor, or more on the G&A side or was it split up somewhat?

The costs go with the headcount, (multiple speakers) so it is throughout all of those costs lines obviously because the majority of our employees are in our manufacturing group. The majority of those costs are in cost of sales.

A couple of numbers questions. Thanks for clarifying that, by the way. One more overview. On the new plant could you run us through the what, where, when, again? What they are going to do, where the plant is, when it is actually scheduled to open.

The new plant is in West Virginia. Its primary purpose is component manufacturing; doors, frames, door fronts, those types of things.

This is the one that tied to the release a couple months ago?

That's correct.

Got it.

We are on track. The capital thing I mentioned quite frankly was really just a couple of weeks in terms of delay. We had a very wet winter and early spring over in West Virginia and we had a tough time getting down to a base to pour the footers. So that (multiple speakers) a little bit. It is scheduled to really come on line in terms of production at the end of June. And by the time we get into the late discount calendar year certainly at the beginning of next calendar year, we will be getting some more meaningful production out of that facility.

'05 calendar?

Right.

Okay.

Fourth quarter for our current, fiscal year we just started we ought to be getting some real meaningful production out of that facility.

And the cost for this plant as a component of your total CAPEX for fiscal '05.

It'll probably be in the neighborhood of 50 to 60 percent.

Which would put you all still comfortably in the 40, maybe forty plus million for the year range, is that --?

No. Our current estimates are that we will probably be more like pushing 50.

Remember, you got a little delay in this one.

Okay, just trying to make sure I get my timing here.

Well it would basically be the 40 that you are thinking about plus the 9 to 10 million that rolled over from the fourth quarter.

Okay, and then no repurchase in Q4. Is the repo (ph) balance still in the 10 million range or have you all re-upped it or anything there?

We have about 4 million available on the last 10 million.

We will expect you to get on the Board and get on them about that again. I don't want to hog the whole thing. I'll circle back with other calls, guys. Congratulations on the top line. We will keep worrying about costs with you.

From Davenport & Co. David Campbell has our next question.

I wanted to quickly address the costs again and then ask you a few things about the price increases. Your sales exceeded your plan somewhat, but earnings came in at the low end of the range. But you knew about the lumber price increases and the medical and pension at the beginning of the quarter, so what in expenses was greater than what you had forecasted?

It's really material. The first one is material. Based on the way we flow goods through and the fact that we don't keep a lot of inventories on either end, is that while we did know that there was pricing pressure on certain commodities, some of that pricing pressure was greater than we had anticipated. Things like lumber, for example, if you are just out there buying those in the market every day. And if the market moves, you pay what is required to keep the inbound materials. So material costs actually came in higher than we had forecast.

The second impact is probably what Jake related to, and that is fuel-related or petroleum-based things, its primarily fuel but it also rolled into some of our finishing materials which are petroleum-based. And the third piece is based on that growth rate is as we have consistently done is we will take care of our customers first. So whether it's expediting material or working premium hours we will get as much as we can out in support of the customer. So we had more additional costs in relation to premium labor hours and expediting material than we had anticipated.

Okay, and regarding the imported components, have you made any strides in changing the sources of supply and when might that happen?

We have an ongoing program to work on supplier consolidation programs and material substitution, things of that nature. Those programs have all been stepped-up in conjunction with fiscal year '05 because of the recent pressure that the industry has been under. So throughout the year we would anticipate getting some benefit from some of those things. Those have been ongoing, however, so that is nothing new to us. But with the -- most of this activity has really hit us in the last three or four months. (multiple speakers) So reacting to these sharp increases is going to take a little more time.

I wanted to address the price increases that you're planning to pass along. How much have you raised your prices? Have you discussed it with your retail and (indiscernible) customers and also how do you think the consumer will react to those? Are other competitors doing the same thing, and how do you think it will affect overall demands?

We've never published specific price increases, but I would say to you as to give you a feel for things, yes, we have discussed this with all of our channels of distribution. These material costs hit all areas of the business so the pricing action that we took was pretty much in all areas of the business. The action we took is proportionate or appropriate to the kind of cost increases that we've been receiving. And we look to do what is reasonable to offset that.

We've seen commensurate activity in the marketplace. We think that what we've done is appropriate considering other competitors and what have you. And I think that the amount of increases that you're talking about will have no discernible impact on the end consumer.

What gross margins, then, are you forecasting over the balance of this year or beyond the first quarter?

We're not forecasting gross margin. Again, obviously as directionally as Jake talked about, as we recover some of these material cost increases that we've experienced in the last six to twelve months through the market supported price increase, we would expect certainly gross margin to improve from the 19.6. We continue to generate productivity increases and leverage on overhead. At this point we are in an inflationary environment which we haven't been in for, we went through two or three years there on the material side where we were in some cases in a deflationary environment. As you go forward in gross margin again we certainly expect it to increase.

I think the big question is the one that Jake alluded to earlier, which is the significant and sharp short-term increase, how much of that relates to those industries recouping two and three years worth of activity that they just couldn't do because of low demand and oversupply. So the $64 question, if you will, is what is kind of a normalized increase in material costs now that we are back in an inflationary environment. We don't believe they are going to be as significant or as sharp as what we've experienced in the last year but there will be some.

I think, David, just to expand, Kent is exactly right. If you look at something like particle board which has been very volatile and we use a lot of that over the last several months. Particle board industry was really hurt over the last few years particularly with migration of U.S. furniture to China. And last year that industry took a significant amount of capacity out of play. And so with the improving economy, particularly housing this year, over the last four or five months for the first time in several years they tipped, and they went from being severely oversold -- excuse me undersold to being oversold. ]

In the interim that market had softened to the point that they were selling particle board well below their reinvestment rate. So I think there is obviously some catch-up that has been going on there. And I think that once they get profitable and I think they probably hopefully approaching that but when they get to reasonable levels of profitability and returns, they are more in line with their long-term goals, there will be some natural incentives to maybe bring back capacity online, work seven days, et cetera. And so we will just wait and see. But I think it's reasonable to assume that a lot of that has been going on.

Thanks, Jake and Kent. I appreciate it.

Dan Romanov (ph) with CSFB.

I have a question about inventory, you had maybe approaching a $6 million increase in inventories. Is that anything to be alarmed by or is that just due to the -- I'm talking about your 5 or 6 million in the last quarter, is that just because of the increased sales?

Yes, its the largest, quite frankly, the largest impact of that to the increase was from (technical difficulty) was related to finished goods. We don't carry any finished goods in our plant but by our revenue recognition policy, which is upon delivery of the final customer, when we get delays from some of our third party carriers, whether it's customer driven or their capacity that actually move out the number of days between our final assembly and the end customer. We actually have to show that as finished goods because we do not recognize revenue until the end customer receives it. The biggest increase in that inventory is that we had a little bit of a move out in terms of the number of average days worth of float, if you will between our assembly plant and the customer. That's the biggest increase.

You also -- inventory will continue to increase over time as we open plants and put in base level of inventories and those types of things. But it is nothing, it is no major structural change to the business. Quite frankly again, the biggest driver to that is timing in terms of the float between us, between our assembly plant and the end consumer.

That could stay the same next quarter or it could come down. It's hard to say. It will depend on the capacity of the truckers that we use to deliver material.

There has been no structural change in our manufacturing operation or how our material is flowing that would impact inventory.

Okay. And then moving back to gross margin, which number you touched on already. The last quarter you had kind of said that a minimum target of 23 percent gross margin was what you would shoot for and something closer to 25 percent in the good period. Is that realistic in light of your price increases to get back to a 23 percent leased gross margin anytime soon?

I think it is -- that is still our target. Our target from an operational standpoint is still to operate in a band of 23 to 25 percent. We obviously moved backwards this quarter, and we mentioned that that was both disappointing and frustrating because we made progress pretty much across all major categories except material. I think that as we mentioned earlier we will move more towards that target realistically; are we going to be at 23 percent in the first quarter? I think the answer is no, but that is still a target we have out there for the organization, and we believe it's realistic overtime that we are going to get back there.

Okay, and then my last question is again about pricing, on pricing pressures on some of your inputs. I think you had indicated that hardwood lumber pressures sort of subsided a little bit at least in the back half of the quarter. What about the pressure on particle board, plywood, hardware, was pressure increasing or was it just kind of equally bad throughout the quarter?

It was -- hardwood did, as Jake mentioned, hardwood did subside a little bit in the quarter. The other one did a little mixture; on the particle board side it was pretty, the pressure was pretty consistent throughout the quarter. Some of the other major materials, I mean you have to get in, but generally speaking what I would reiterate kind of what Jake said, and that is that we are still seeing cost pressures. We are not seeing cost pressures at the rate that we saw 3, 6, 9 months ago. So we are still getting cost pressures it seems to us, however, that the rate of increase of those pressures is subsiding.

(OPERATOR INSTRUCTIONS) Arnold Brief (ph) with Goldsmith and Harris.

Is there a normal relationship between the time you experience raw material price cost increases and when you raise prices? Are prices raised at certain points in the year and you have to absorb those costs for a while? Are they normally raised the month after automatically, how does it work?

That varies channel to channel. And if you look at something like our contractor businesses where we bid contracts on an ongoing basis, obviously if we have pricing pressure, then we can take action on an ongoing basis as well. In the over on the retail side of the business, which is our largest business, typically we negotiate those prices once a year unless there is unusual activity, such as which we've incurred in this period. So we went out and took action.

The market generally falls under these annual patterns or has fallen under these annual patterns over the last 10 or 15 years unless something unusual occurs. This is an event that is significant enough to cause the general markets to move. And so we were able to participate in that.

So I would interpret what you said is you raised your prices once a year at the retail level; if there is gradual creeping cost increases you hope to offset it with productivity. If there is a jump of an unusual nature, you probably have to make sure that jump is going to be sustained a little bit so you probably lag one or two months before you raise prices?

Yes. That's not a bad description.

Is there anybody in your industry that is looking to China as a source of the component, so to speak and just thinking of doing assembly here. In other words manufacturing the product over there, shipping it here and assembling it here? Is there any of that going on? If it went on would it effect pricing and cost, your cost structure at all?

There is some of that going on today. It will be limited, though, because the benefits that you pick up in China in terms of labor costs get offset by inventory and transportation requirements as well as time requirements. This is very different than the furniture industry. Time is a big issue in kitchen cabinets. It's not in furniture. We have to deliver in weeks, not months. And the variety, because when you sell a kitchen you sell a system you don't sell an item like a chair or say a bureau. And so the inventory requirements are pretty prohibitive.

So most of the components that are being imported tend to be along very simple, high-volume lines of product. We've evaluated that. We have done some outsourcing in China over the last couple of years. We have decided that we can compete with Chinese labor costs with more efficient factories here, and the plant that we're building in West Virginia actually is targeted to do exactly that. So one way of getting some cost out is to go to China. Another way is to look at more efficient manufacturing methods here. We think you will see a combination of both in the industry and we will opt for a domestic supply chain because it gives you an awful lot of benefit.

(OPERATOR INSTRUCTIONS) Mr. Eanes, I will go ahead and turn the conference back over to you for any further or closing comments.

Thank everybody for participating in this conference call, and we do appreciate your interest and continuing support in American Woodmark. Thank you.

That does conclude today's conference call. We do thank you for your participation. You may now disconnect.