American Woodmark Corp (AMWD) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to this American Woodmark Corporation 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, these 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 predictive results expressed or implied therein will not be realized.

Now for opening remarks and introductions, I would like to turn the call over to the Vice President and Treasurer, Mr. Glenn Eanes. Please go ahead, sir.

Thank you. Good morning, everybody. I would like to welcome you to the American Woodmark conference call to review our first-quarter results, and I would like to thank you for taking time out of your busy schedule to participate. Participating in the call this morning will be Jake Gosa, President and Chief Executive Officer, and Kent Guichard, Executive Vice President. Kent will begin with a review of the quarter and an 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 my pleasure to introduce Kent Guichard. Kent.

Good morning, everyone, and 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 first fiscal quarter ended July 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 a record $187.5 million, up 21 percent from the prior year. Net income for the quarter was a record 9.7 million, 30 percent from the prior year net income of 7.5 million. And diluted earnings per share of $1.16 for the quarter compares to 90 cents last year.

In regards to our first-quarter sales performance, our guidance issued at the end of the fourth fiscal quarter anticipated sales growth between 15 and 20 percent for the first quarter of fiscal 2005 just ended. Actual growth was slightly greater than our outlook due to a more aggressive expansion of production capacity, which allowed us to ship above our forecast. The overall growth rate of 21 percent continues to reflect strong demand in both the new construction and remodeling sectors.

The overall level of new construction activity remains at historical highs. Residential starts continue to be very robust. Total monthly housing starts as reported by the Department of Commerce have been consistently between 1.0 million and 2.1 million on an annualized basis. Single-family starts continue to account for more than 80 percent of total starts, and at 1.65 million annualized units in July remained at record levels.

Mortgage rates as reported by Freddie Mac are stable to declining. A 30-year fixed mortgage has dropped from over 6 percent in May and June of this year to 5.8 percent in mid-August. The consumer confidence index as reported by the Conference Board has increased from under 90 in February 2004 to over 106 this July, an increase of 20 percent.

The long-term demographics driving home ownership are being reinforced by low mortgage rates and the increase in consumer confidence and continue to drive buyers into the marketplace. Based on the value of our Timberlake line, our extensive service reach, and our partnerships with the leading homebuilders, American Woodmark continues to see strong demand from the new construction sector.

The growth trend also continues on the remodel side. Existing home sales, one of the leading indicators for home improvement spending, remains at historically high levels in terms of annualized units. Demand for our products from home remodeling remained, strong consistent with the home improvement spending at record levels. The strength in the remodeling industry is reflected in both overall growth and comp store performance at the major big box retailers. Both Home Depot and Lowe's announced record sales and earnings last week, with both retailers reporting double-digit top-line growth and healthy comp store sales of approximately 5 percent. Demand for our products and service is reflective of this strength in the remodel marketplace.

Moving on to gross profit, gross profit for the first quarter was 20.7 percent, which is down from 21.8 percent in the first quarter of last year, but up over a point from 19.6 percent in the fourth quarter of fiscal 2004, the most recent quarter reported. The Company continues to experience material costs pressures. The market price of principal raw materials continued to increase, particularly hardwood lumber, particleboard, plywood, and finishing materials. Historically the industry has been able to recover general material costs increases experienced by all manufacturers.

As we reported during our fourth-quarter conference call 2 months ago, we have seen price movement in the marketplace that is reflected of the inflationary trend in material costs. Also, as we reported in June, we've executed a price increase consistent with the movement in the market. These price increases began to impact our financial results in July, and will begin the recovery of some of the material cost increases experienced by the Company.

Labor costs as a percentage of sales declined on a year-over-year basis. Direct labor productivity improved across the manufacturing network with both established and new facilities achieving better efficiency. The Company also generated favorable leverage on nondirect labor and salary cost with the higher volume.

Freight cost as a percent of sales declined as a result of favorable leverage with higher volume and improved efficiencies in the Company's network of third-party carriers. These reductions were partially offset by fuel cost premiums associated with the rising cost of diesel fuel.

Manufacturing overhead costs were flat as a percent of sales as favorable leverage with additional volume was offset by depreciation and other costs associated with the Company's expansion of capacity. In regards to that expansion of the capacity in our capital growth plans, capital spending for the first quarter was $17.4 million. Outlays for the quarter included a variety of maintenance and cost-savings projects, equipment deposits for expanded capacity, and outlays for the construction of the new component facility announced in November of 2003.

That new component facility in South Branch, West Virginia, began production of whitewood components on schedule during the first quarter this year. The finishing system is on schedule to begin operation by the end of the second quarter this October. The Company has also announced plans to construct a new assembly facility, our sixth assembly plant, in Allegheny County, Maryland. This facility is under construction and is scheduled to begin production in January of 2005.

Based on the projected completion of the new component facility in West Virginia, initial outlays for the new assembly plant, and other miscellaneous cost savings and capacity expansion projects, we currently expect total capital expenditures of 15 to 20 million during the second quarter ending October 31. The Company plans to fund the capital spending plan from a combination of operating cash flow and cash on hand.

Selling and marketing expense decreased as a percent of sales from 9.9 percent of net sales in the first quarter of last year to 8.6 percent in the current year, due to the impact of cost management efforts and leverage on higher volume. G&A expenses were essentially flat at 3.7 percent of sales.

A quick note on the balance sheet, the Company's financial position remains outstanding. We continue to improve our financial position. You'll notice that long-term debt-to-capitalization increased from 9 percent on April 30, 2004, to 12 percent on July 31 at the end of the quarter. The change was the result of the Company closing on a $10 million low-interest loan from the state of West Virginia as an element of the economic incentive package to generate investment and employment in the state with the new component facility in South Branch.

Cash on hand at the end of the quarter increased from 29.4 million at the beginning of the fiscal year to 44.2 million. Excluding the loan proceeds, cash of 34.2 million increased to almost $5 million during the quarter. The Company did repurchase 2.1 million in common stock during the quarter.

In closing, from an operational perspective we continued to make significant progress during the quarter. The Company continued to generate strong top-line growth across all channels of distribution. The expansion of our productline is generating strong incremental sales and improving the overall product mix. Productivity improved at both the individual plant level and across the system as a whole. We're generating leverage on our overhead costs with the additional volume, and our capital expansion plans to install additional capacity to serve our customers are on schedule.

We also made progress on several key financial metrics. Margins did improve from the fourth quarter. We experienced positive year-over-year growth in both net sales and net income, with net income growth of 30 percent outpacing top-line growth of 21 percent. We continue to generate cash to fund our capital expansion while we maintain our strong balance sheet.

From a financial perspective, the pressure point remains gross margins, which are still below the minimum target of 23 percent due primarily to material costs. While we have executed a price increase to recover some of the material cost increases absorbed over the last year, we remain in an inflationary environment.

As we look forward to the second quarter of fiscal 2005, we see a favorable environment supporting continued sales growth. The remodel element of our business presents continuing opportunities for growth, as activity remains strong. While there is some growing talk of overall materials shortages in concrete, insulation, and other materials, the new construction sector also remains strong as low-interest rates and other factors continue to drive housing starts.

Our partnerships with both leading retailers and major builders in established markets provides a continuing strong base for growth. For the second fiscal quarter ending this October we currently anticipate an increase in sales of 15 to 20 percent over the second quarter of last year. We also expect continued progress from an operational perspective. Productivity should continue to improve, and the additional volume will provide leverage on fixed and semi fixed costs.

Our gross margin will remain under pressure due to material cost increases, but should improve due to the impact of the price increase for the full quarter. Considering all these factors, we currently anticipate diluted earnings per share of $1.15 to $1.20 versus 99 cents in the second quarter of last year. This concludes our prepared remarks. Jake and I at this time will be happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS) Sam Darkatsh with Raymond James.

This is actually John Pate (ph). Sam had to run to the office for a second. Just a few questions for you this morning. First one, when exactly does that price increase take effect, the one that you just instituted?

In July.

Okay. Last quarter on the conference call, I believe you gave some color regarding your gross margin year-over-year, in that if the same material cost would have been seen in each quarter gross margin would have actually improved. Is that still the case in this quarter?

Yes. I don't actually have that calculation in front me, but it's going to be pretty close to being the same story. We did get a little relief in the last month because of the price increase. Our mix has shifted a little bit; but on an apples over apples basis, the main shortfall in gross margin versus both last year and our target level is related to material cost.

One final question on that. You did mention that your gross margin will remain under pressure and that you would get some of that back from the price increase. Approximately how much of a price increase would you have to institute to see really no gross margin pressure in the second quarter?

Well, that is kind of a back way of getting at price increases. You can run that calculation if you want, just backwards up to 23 percent, and what you are estimating materials as a percentage of cost of sales.

All right. Thank you very much, gentlemen.

David Campbell with Davenport.

I have a couple of questions about the first quarter you just reported, and then the ongoing outlook. Were there any costs in the first quarter that might have shifted into the second quarter, because the SG&A was very much under control?

No.

Okay. All right. Can you provide some clarification on the gross margin? You indicated that you thought gross margin would be under pressure. Is that relative to the 23 percent objective, or relative to last quarter or last year? Last year's gross margin for example was 20.4 percent in the second quarter.

Last year at this time is when we really started to get hit with a lot of those material cost increases, as well as a couple of other impacts. But in regards to my comments in terms of under pressure, it is really relating to our 23 percent really minimum target.

We do expect gross margins to improve from both last year and the first quarter. But getting all the way to 23 percent, based on some things that are going on in the marketplace regarding the price of raw materials, is going to be a pretty big challenge.

Okay. It seems like you're still being fairly conservative then on the earnings outlook for a second quarter. Do you care to comment on that?

No.

Okay. Your sales growth is a little better than -- going back to the first quarter the sales growth is a little bit better than expected. What do you attribute that to? Can you comment on the sales growth by channel at all?

The sales growth was just extremely strong. It has been for some time. Or the marketplace, I should say. Our ability to grow a little bit beyond what we have projected relates to the fact that some capacity planning tended (inaudible) a little bit more favorably than we would have predicted. So some things worked pretty well on the capacity side. Basically enabled us to ship a few more cabinets. So we picked up another point or 2 that (inaudible) forecast.

Is the demand relatively consistent between the remodeling and the new home construction channels? Or would you say that one is outpacing the other?

They are both running at very, very strong levels. So, if you look at the new construction business, which is hanging around 1.9 to 2.1 million starts for the past several months, we have said all along anything in 1.5 to 1.6 million is a healthy market. That market is just extremely hot.

And the turnover of the existing home market, existing home sales, which of course drives the remodeling market, is consistently running between 5 and 6 million, and that as well is an extremely healthy and record-setting market. So, they are both running very, very strong. And to say one is particularly stronger than the other at this point in time is kind of a moot point, because I think people that are in the market are (inaudible) to keep up at this point with both of them.

Okay. Lastly, can you measure your capacity utilization on kind of a net basis at this point and compare that with last year?

Yes, if you compare our output in terms of the bottlenecks of the operation, we're at 100 percent. We're basically shipping everything that we can get through the bottleneck on the operation. Obviously all of our capacity is not a bottleneck, so we do have excess capacity in certain areas of our operation. But the bottleneck is -- we are shipping everything we can that the bottlenecks can handle.

Okay.

The two new plants, the component facility that we are now making whitewood and we will be finishing in October and the assembly plant, are designed to relieve those bottlenecks.

Okay. Great. Congratulations on a great quarter, and good luck.

Dan Romanoff, CSFB.

Good quarter. A couple of questions here. One is, can you give some color? Was there any sort of strength in one half of the quarter versus another, or was it pretty consistent?

Well, the quarter is just strong. You are talking about month-to-month strength, I assume. Right now, Dan, we're not really seeing any month-to-month fluctuations in the business. The demand is very, very strong. If you track starts or turnover of existing home sales, which are the big drivers we watch, those haven't really fluctuated much. They may run a couple of a percentage points either side of these very high levels that they have been running at.

But this morning, if you look in the Journal of New Housing, business dropped 2 to 3 percentage points from last month. But it was 15 to 18 percent or whatever above last year. Last year was very good. So, month-to-month has been very, very strong.

Okay. Any additional price increases coming in the second quarter? Or is that just a onetime shot that happened in July?

What we have always done is try to manage price increases based on the macro impacts of the marketplace that (inaudible) get pricing. And should we see an extended period of rapid increases and inflation of raw materials, why then we would obviously expect that we would see more opportunity to raise prices to offset that.

I don't see that kind of pressure that we were seeing a year-ago. There is still material cost pressure, as Kent mentioned, but that catch-up pressure period that we went through for 6 to 9 months seems to be somewhat abated, although we are still seeing it out there.

As I look at the guidance you have offered, it seems difficult to get to such a low EPS when you are talking about that strong a revenue growth, and if you are hinting that gross margins are going to improve sequentially. It seems really difficult to get to even $1.20 a share. That seems pretty low.

I hope you are right.

All right, guys. Thanks.

Mark Ravitz (ph) with Grace & White.

Fantastic quarter. Thank you. A couple of quick questions. First, regarding Florida and Charlie, do you have any exposure in the sense that that will delay some kitchen installations?

No. Basically I think, Mark, what you will find has happened down there is that Charlie has pretty much had an impact that is pretty devastating in some highly concentrated areas. But if you look at the general market, and that would be the construction areas of South Florida where we are pretty strong, Central Florida which is a big area for us, Tampa, Orlando, St. Pete, and Northeast Florida up around the Jacksonville Northeast Coast, there was minimal impact.

I think what you probably are likely to see that we would notice in about 90 days, the retail side of the business down there in South Central Florida will get a little bit of a spike, because people will be fixing those houses, repairing those houses. But in the macro sense of things, it won't really make a big difference to us.

Right. I was more worried about short-term, I think. Actually long-term (multiple speakers) you might actually have a pickup.

If anything it will cause a pickup, but it will be relatively marginal, even in the short-term sense, in terms of -- when I say macro I'm not really meaning long-term. I am just talking pretty much about the whole country, the whole business. But we will see some sort of a pickup now.

On the Sarbanes-Oxley, are you seeing increased expenses? Obviously you just changed your auditors. Any sense of how much that is going to cost this year?

We believe it is going to be immaterial.

That is great. Okay. In terms of raising prices, are you seeing any shift from or any shift to your entry-level cabinets from your upper level?

When the marketplace felt the effects post 9/11, what we saw for a couple of years was housing that rotated down the price spectrum. And so we saw starts remain relatively high, but we saw a rotation down of the marketplace to opening price point.

Over the past 9 to 12 months, we have seen the return of the move up and the luxury home market again and less emphasis on that. So we are seeing right now a mix of business coming in that would look more like our traditional expectation. The last couple of years we have actually seen a little more pressure to ship at the opening price point.

Once again, thank you for a great quarter. I think your forward-looking guidance may be conservative, but that is just fine. Thank you.

(OPERATOR INSTRUCTIONS) It appears that we have no further questions. Mr. Eanes, I would like to turn the call back over to you for any closing or additional remarks.

Thank you, and again thank everyone for taking time to participate in this conference call. Speaking on behalf of the employees and shareholders of American Woodmark, we do appreciate your interest and continuing support in our Company. This concludes the conference call. Thank you.

Once again, this concludes today's conference call. We thank you for your participation in the American Woodmark conference. Have a good day. You may disconnect at this time.