American Woodmark Corp (AMWD) 2005 Q2 法說會逐字稿

Welcome to the American Woodmark Corporation conference call with your host Mr. Glenn Eanes. Today's conference will begin with a presentation followed by a question-and-answer session. Before we begin I would like to state the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

All forward-looking statements made by the Company involve material risks and uncertainties and are subject to change based on factors that may be beyond the Company's control. Accordingly, the Company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements.

Such factors include, but are not limited to, those described in the Company's filings with the Securities and Exchange Commission and the annual report to shareholders. The Company does not undertake to publicly update or revise its forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

That said, I would like to turn program over to your host, Mr. Glenn Eanes. Mr. Eanes, please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to the American Woodmark conference call to review our second-quarter results. I would like to thank you for taking time out of your busy schedule to participate. Doing the formal presentation this morning will be Kent Guichard, the Executive Vice President, with his prepared remarks. After Kent's prepared remarks, we will open it up for Q&A.

We're having a little bit of a technical difficulty this morning and Jake may or may not be participating. Jake Gosa may or may not be participating on the call. Again, after Kent's comments we will open it up for questions. At this time I will turn the call over to Kent Guichard.

Good morning, everyone. Again, thank you for taking some time to listen about the performance and progress here at American Woodmark. I would like to echo something that Glenn said, which is express Jake's apologies. He's out of the country this week. We thought we had him linked in, but we have some technical problems with his line. If we can get it fixed in time for questions Jake will join us at that point; if not I will handle all the questions.

Moving to the announcement this morning, we released the results of our second fiscal quarter ending October 31. In case you have not have a chance to read our earnings release, let me first review a few highlights. Consolidated net sales for the quarter were a record $199 million, up 18 percent over the prior year. Net income for the quarter was a record 11.4 million, up 38 percent from the prior year net income of 8.2 million. And diluted earnings per share of 67 cents for the quarter compares to 50 cents last year. All of that is on a post-split basis.

Through 6 months, consolidated net sales are 387 million, up 19 percent from the prior year. Net income is 21.1 million, which is up 34 percent from the prior year. And diluted earnings per share are $1.25 versus 94 cents last year; again on a post-split basis.

In regards to our second-quarter sales performance, our guidance issued at the end of the first fiscal quarter anticipated sales growth between 15 and 20 percent for the second quarter of fiscal 2005. Our actual growth of 18 percent was in the middle of our range.

The overall level of new construction activity remains at historical highs. Residential starts continued to be robust. Total monthly housing starts as reported by the Department of Commerce remain between 1.9 million and 2.1 million units 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 October remain at record levels.

Mortgage rates as reported by Freddie Mac are at the lowest level in 6 months. The 30-year fixed mortgage rate remains below 6 percent; the 15 year fixed-rate just above 5 percent; and 1-year adjustables near 4 percent.

One contrary index is the consumer confidence index as reported by the Conference Board. The index decreased in August, September, and October. The Conference Board did note, however, that the decline in October was due to subdued expectations not eroding present-day conditions. The late summer, early fall decline may be related to the tone of the presidential campaign nearing Election Day in November.

The confidence index aside, long-term demographics driving homeownership continue to be reinforced by low mortgage rates. Based on the value of our Timberlake line, our extensive service reach, and our partnerships with leading homebuilders, American Woodmark continues to see strong underlying 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. Existing single-family home sales, as reported by the National Association of Realtors, was between 6.6 and 6.8 million units on an annualized rate between July and September, the latest numbers reported.

Demand for our products from home remodeling remains strong, consistent with home improvement spending at record levels. The strength in the remodeling industry is reflected in both the overall growth and comp store performance at the major big box retailers. Both Home Depot and Lowe's announced record sales and earnings in November, with both retailers reporting double-digit top-line growth and healthy comp store sales growth of 4.5 and 5.2 percent. Demand for our products and services is reflective of this strength in the marketplace.

Moving on to gross profit, gross profit for the second quarter was 21.4 percent, up from 20.4 percent in the second quarter of last year and 20.7 percent in the first quarter of the current year.

The significant material cost pressures we have experienced over the past year and a half eased during the quarter on some but not all of our basic raw materials. The market price of most species of hardwood lumber, particleboard, and plywood appear to have stabilized. Pressure continues on the price of finishing materials, based primarily on the cost of oil, and on the price of steel, based on a worldwide shortage of raw materials. Historically the industry has been able to recover general material cost increases experienced by all manufacturers.

As we reported during both our fourth-quarter call in May and our first-quarter conference call in August, we executed a price increase consistent with the movement in the market at the beginning of the summer. The price increase allowed us to recover some of the raw material cost increases absorbed by the Company.

Labor costs declined as a percentage of sales. Our 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 costs with the higher volume.

Freight cost as a percentage of sales increased, as favorable leverage with higher volume and improved efficiencies in the Company's network of third-party carriers were more than offset by fuel cost premiums. On the overhead side, overhead costs were flat as a percentage of sales, as favorable leverage with additional volume was offset by depreciation and other costs associated with the Company's expansion of capacity.

With regards to that expansion of capacity, capital spending for the second quarter was $22.8 million. Outlays for the quarter included a variety of maintenance and cost savings projects, equipment deposits for expanded capacity, outlays to complete the construction of the new component facility announced in November of 2003, and initial investments associated with the new assembly facility announced this summer.

The new South Branch component facility in West Virginia ramped up reduction of whitewood components after coming on line as scheduled in the first quarter. In addition, the finishing phase has come on line as scheduled. This facility is meeting all our expectations for both volume and costs.

The Company's sixth assembly plant in Allegany County, Maryland, is under construction and remains on schedule to begin production in January of 2005.

Based on the projected completion of the new assembly plant and other miscellaneous cost savings and capacity expansion projects, we expect total capital expenditures of approximately $10 million during the third quarter ending January 31, 2005. The Company will fund the capital spending plan from a combination of operating cash flow and cash on hand.

A couple of quick comments about SG&A. Selling and marketing expense decreased as a percentage of sales from 8.9 percent of net sales in the second quarter of last year to 8.2 percent in the current year, due to the impact of cost management efforts and leverage on higher volume. General and administrative expense was up from 3.4 percent to 3.8 percent of net sales, primarily due to costs associated with the Company's pay for performance employee incentive plans.

A quick note on the balance sheet. The Company's financial position remains outstanding. Long-term debt to capitalization was 12 percent on October 31; in addition we had cash on hand at the end of the quarter of $39 million. The Company did repurchase 3.5 million in common stock during the quarter.

We continued to make progress during the second quarter. In closing what I would say is we continued to make progress during the second quarter. The Company continue to generate top-line growth across all channels. The ongoing expansion of our productline is generating both incremental sales volume and improving the overall product mix.

Productivity improved at both the individual plant level and across the system as a whole. Our capital expansion plans to install additional capacity to serve our customers are on schedule. Despite bringing up the new component plant and absorbing the fixed overhead costs associated with this new capacity, margins improved from both the second quarter last year and the first quarter of this year.

We generated significant earnings leverage with net income growth of 38 percent, over twice the rate of revenue growth of 18 percent. We continue to generate cash to fund our expansion while maintaining our strong balance sheet.

As we look forward to the third quarter of fiscal 2005, we see an environment supporting continued sales growth. The remodel element of our business presents continuing opportunities for growth through the expansion of the home improvement market. Our partnerships with the leading big box retailers position the Company to capture a growing share of this remodeling activity.

The new construction sector also remain strong as low interest rates and other factors continue to drive housing starts. Our strategic partnerships with major builders in established markets provides a strong base for continued growth.

For the third fiscal quarter, we currently anticipate an increase in sales of 8 to 12 percent over the third quarter of the prior year. As opposed to last year, we expect to experience a more normal winter season in the coming quarter. Our higher levels of production capacity are now sufficient to support peak demand. As a result, we have been able to maintain customer lead times during the fall selling season and do not have a large backlog to ship as we had last year.

Sales growth in the third quarter also be dampened by the lasting impact of the active Atlantic hurricane season. Some of our key markets, particularly central Florida, are still recovering from this series of devastating stores. A shortage of trade continues to restrict the normal level of new construction and remodeling activity.

We expect the improvement in gross margin to slow for a quarter until picking back up in the fourth quarter, due to a combination of a more normal footprint on seasonal demand, some continued pressure on raw material costs, and expenses associated with the startup of the new assembly plant in January.

Considering all these factors we anticipate diluted earnings per share of 51 to 55 cents, versus 46 cents in the third quarter of the prior-year. That concludes our prepared remarks. At this point, we would be happy to answer any questions that you have. With that, operator, I turn it back over to you.

(OPERATOR INSTRUCTIONS) Sam Darkatsh from Raymond James.

Good morning, Kent; good morning, Glenn. How are you?

Good morning. I may check. Jake, have you joined us?

That's all right.

Sir, he will be joining your call.

I have a big delay, so I'm going to let you take care of it.

Okay.

I know you mentioned there's a couple of extenuating circumstances in Q3 that lead to the lower growth rate. Did you see business slow a little bit in terms of the second derivative growth rate as the quarter progressed? Because I noticed the receivables were flat sequentially despite revenues being up 6 percent.

No; not necessarily. The real big reason on a third-quarter over third-quarter basis is last year, if you remember, we were capacity constrained. We had pushed out our lead times, and we have a very large backlog going into the winter season which kept our shipments above what the incoming order footprint would have suggested.

What has happened this year is, because we put the appropriate amount of capacity in place to deal with the current level of incoming demand, is we were able to maintain lead times during the season; and we're not going into the third quarter with that backlog to ship.

If you actually look at order rate versus order right as opposed to shipment levels, our order rates are -- actually we are projecting to be up more consistent with demand in the midteens.

Okay. Because the comparison year-over-year in the January quarter versus the October quarter is not all that much different. It looks like the tough comp is Q4. That is where I get confused.

Again you're looking at shipment rates as opposed to incoming order rates. My comments, in terms of a more normal footprint, are not due to market demand or inbound orders. They are due to what has happened to us on a year-over-year basis based on shipments.

So the third quarter last year, if you look at what we shipped, there was actually a lot of second-quarter incoming demand in that number that was held in backlog due to our capacity constraints.

Okay. The 8 to 12 percent, are you assuming that the builder business continues to grow at a faster rate than the home center business?

Well, we have not actually talked about it in the past that way. Both businesses are growing. Both of them our meeting our expectations and our target. About the only thing I would say on the third quarter that we are likely to see, especially in Florida, is we are probably going to see a little bit stronger January than we normally would because, hopefully, the trade situation will get back in balance and they will be able to build their backlog of homes.

So I would expect that the new construction market in January will be a little bit stronger than normal. But both businesses are growing, both new construction and remodel. They're both growing basically at the same historical rate.

Talk about pricing and mix. You mentioned both of those in the release and in your prepared remarks. Of the 18 percent sales growth, how much of that was units versus pricing and mix?

Pricing and mix was 5.5 to 6 percent.

In aggregate?

Yes, those 2 combined.

Okay. Last question before I'll let others ask. What was the average cost for your share repurchases for the quarter? The average price per share?

I don't have the right off the top of my head. The average, I believe it was in the low 30s.

It was about 37.50.

Excuse me. Glenn has corrected me. It was probably between 37 and 38.

Terrific, thank you very much.

David Campbell from Thompson Davis & Co.

I was wondering if you might be able to elaborate a little bit more on the labor efficiencies and what you are doing there to improve those. Based on your press release, I'm assuming that manufacturing utilization was relatively flat. Could you comment on that as well?

Yes, I will take the first one in terms of -- I am not sure exactly what you are looking for in terms of labor efficiencies. Primarily what we're doing is just a continuation of the programs that we've had in place now for quite some time. I think really what we're seeing is we are seeing the maturation of new capacity we put in a couple of years ago.

If you go back and check we actually opened up 2 brand-new facilities and did in essence a third facility, which was a major expansion to our Kingman, Arizona, plant at the same time. I think a big part of what we're seeing is just the maturation of those facilities and their workforce, just continuing to build the training, and doing the training, and building the expertise in those facilities.

As those new facilities mature, then obviously their dilutive impact on the overall productivity of the organization becomes less and less. Now it's not to say that our existing facilities are not improving productivity. They are as well. But what we're really doing I think is seeing a maturing of the network. Did that answer your question on that one?

Yes. How much more improvement do you see in labor efficiency?

Versus where we are today?

Yes, is there any way to quantify that?

Sure. As a baseline at a minimum, we look for productivity increases to offset any wage movement in the marketplace. So that would be a minimum that we would look for. We think that you can do that through investment in technology on a sustainable basis for a long period of time.

The new plants, while they have improved significantly, they have not completely closed the gap with the mature plants. So I think we also have an ability there as those plants continue to mature to get an extra little bounce on top of what we would normally expect out of our operations to offset wage rates and inflation.

Okay. Capacity utilization?

Actually, the beginning part of the quarter we were at full capacity. By the time we got to the end of the quarter, we had come off of full capacity, and we were probably running in the high 90s. As we go into the third quarter and we have some additional capacity coming up, we would anticipate by the time we get to the end of the third quarter that we would be in the lower 90s; probably 93, 94 percent.

Is that more of an optimal level?

For us that really is. Based on our JIT approach, just-in-time manufacturing, we make every kitchen to order and ship it to the home site, to the building site, or to the home. We need that flexibility.

We need a little bit of upside capacity to deal with either promotional volume that comes in, when one of our customers runs a promotional, or even just the general seasonal demand and we would like to run at about 93 percent capacity or thereabouts. We think that is pretty much optimal for us.

Okay. Just turning back to the second quarter, you mentioned there was a change in mix. There were mix changes and price changes. Can you just elaborate on what those mix changes were?

Yes, we basically -- our primary mix in the quarter is we get a little bit with channel mix that goes from one another. But the primary impact in the second quarter was new product. We introduced several new products into our line; some specialty finishes, some specialty cabinets, some of those types of things. That really drove, if you will, the average ticket up on a kitchen for us, based on those premium products.

Were they entries both in the remodeling and the new home construction channels?

Yes, we generally due 2 big product introductions a year, 1 in the spring and 1 in the fall, or winter-summer, to get ready for the 2 selling seasons. While it is not 100 percent the case, generally speaking most of the product introductions are put into both channels.

Great. Can you comment on your plans for new product introductions next year? Or is it still a little early?

We will follow our normal schedule. We will have a new product launch in January. January or early February. We will do another one at the end of the summer in July.

In terms of the specifics, we are not going to release that. Probably would not mean a whole like to you in terms of this conference call anyway. But we will continue with our twice a year product introductions. We will do 1 in January and 1 in July.

Finally, can you update your projections for CapEx this year? Is it still 50 to 55 million? Do you have any initial expectations for next year? Finally, with the cash balance growing nicely, do you think you might get more aggressive on share buybacks or dividends?

A couple. On the first one, in terms of for the year, we would expect third quarter, like I said, to be around 10. We would expect the fourth quarter to probably be a little less than that. You know, 5 to 10 maximum; but probably 5.

We have done a little under 40 million to date. So if you add the 15 to 20 coming, I think we're going to end up in that 55 to $60 million range in terms of CapEx for the year. So we will be pretty much right on that; maybe a tad bit on the high side. But (multiple speakers) the 55. But I think we will be right in that 55 to $60 million range.

In terms of the buyback program, as we have said before, the real target long-term of the buyback program is to offset the dilutive impact of our option plan. It's about a 2 percent burn rate.

If we get into a position where our cash balance and/or the market price is such that we're going to buy ahead a little bit on that burn rate, we will go ahead and do that. But we are going to consistently follow our strategy, which is really to use the buyback program to offset the option (inaudible).

Okay. Thanks very much, Kent.

Dan Romanoff from Credit Suisse First Boston.

Congratulations, guys. Good quarter. A couple of questions here. One regarding the optimal capacity that you're talking about, the 93, 94 percent. You added a couple of facilities in the last couple of quarters. You're getting another one. It has always been an issue with American Woodmark, was the sort of a lumpy capacity additions.

Once you get the new facility up and running, how long do you expect that optimal capacity balance to persist for? Is that going to just be like a 1-year sort of thing, and then you will start facing bottlenecks again?

We hope not. What really happened to us, the real problem we end up was that one a couple of years ago, where we basically put 3 in the ground at the same time. Where we are now in terms of our long-range capital plans is to try to drop those things in on a more balanced schedule as opposed to having to do too many at once.

If you will notice from the quarter, as I mentioned, we brought up this new component facility basically at the end of the first quarter. You really cannot see it in there. Certainly the impact is in there. But we continued the margin improvement, and we really didn't have the bounce this time.

We're up to 14, 15 plants. But when we add 1 now, it is only about a 6, 7 percent impact; as opposed to adding 1 when we had 8, or adding 3 when we had 10 or 11. So there is not as much impact on the overall performance of the business when we bring up a single plant now.

We believe that now that we're back out in front of demand, of the demand curve, we do have our capacity back out in front, that we can do a more orderly installation of new capacity. We can do a better job of timing it. We don't have to do as much at a time in terms of 3 facilities; we can do it 1 at a time.

While it allows us (ph) to add capacity aggressively, based on our growth rate, our compound growth rate of 15 to 20 percent, we think that the variability in terms of the margin impact of bringing up the new capacity is going to be significantly less as we go forward.

Changing gears a little bit, going back to the mix shift, is it safe to say that you're focusing a little more upstream now? Or does that just happen to be what the new products you introduced during the quarter, what those were focusing on; and not necessarily an overall strategy shift?

It is not an overall strategy. From a product standpoint, we cover a broad range of price points to meet all the elements of the market, and we will continue to do that. We're going to cover pretty much the whole stock to superstock segment, which is a pretty broad spectrum of price points and product.

What has happened in the product launch is that this product launch happened to be heavily weighted towards features and products and specialties, if you will, such as a specialty finish that have a tendency to move it up, during this period.

Okay. 1 housekeeping issue. What was the depreciation for the quarter?

I believe it was -- You want depreciation? I will give you depreciation and amortization. Depreciation and amortization was just a shade under 15 million. Excuse, me that is for 6 months. For the quarter, it was 7.9.

Okay. Thanks guys.

Joel Havard from BB&T Capital Markets.

I guess we will have to circle back with Jake and ask about the international growth opportunities. We will just focus today on a couple of operational things. We've talked a little bit this morning about the capacity environment. South Branch is up and running last summer. Am I remembering that correctly?

The whitewood component site, the site of South branch, was basically up at the end of the first quarter, end of the summer. The finishing component of it just came up at the end of the second quarter.

Good. Allegany you're saying will be shipping again at least first rush product early '05. When you guys start to look into '06, I know we have talked in the past about CapEx coming down '06 over fiscal '05. Kent, does that presume just sort of tweaking the base as it exists? Or should we start to think about 1 new assembly or 1 new component or wood plant in there somewhere?

Next year, our next significant constraint from a capacity standpoint is going to be lumber processing, a dimension operation. I would suspect that we would be targeting to bring that up probably a year from now.

So while the CapEx would certainly come down from the 55 -- we anticipate it would come down from the 55 to 60 million that we're going to run this year, next year's reduced rate -- more normalized if you will -- CapEx, which would be in the mid 30s, would include new facility.

All right. That would be a hardwood processing operation?

It would be a dimension processing.

Got it. Thank you. When you talked earlier this morning about the January and July product cycles, I wanted to make sure that we understood where the contract got to renew with either the retail guys or with the builders.

Our understanding is that when you present new product, that is your sort of chance to get new that new price product; and then to sort of reset existing prices. Is that once or twice a year at retail?

I think what you may be referring to is some conversation we have had in the past in terms of -- what happens on the retail side is there is a CAD/CAM program that is really a design disk. What we do really is we really get an opportunity pretty much twice a year. The big box retailers let us in essence put a new disk into the system. In that window of time is when you try to introduce new products to get into that disk. Also, the time -- if you can make pricing adjustments -- that you make them.

The product launch in and of itself is not what is tied to the pricing, any pricing movement in the marketplace. What it is all focused around is when the big box retailers actually drop their disks into their systems, which the designers in the store then obviously tap into.

They really give you that window. They give all their suppliers really that window a couple times a year. So through time, through practice, what has happened is any changes that you want to make either to your product or your pricing you really need to kind of focus around those 2 points in the year.

So that is that winter and summer time frame. When you talk about the builders, that product I guess is more continually turning. Is that a sort of thing that you all make price adjustments on the fly with? Or do you lock in contracts with these big builders?

Generally what happens on the new construction side is you basically cut a deal for a development. Now, if it is a national builder you will have an overall national agreement and all those other types of things. But really most of that work is done on a development by development basis and is generally bid work within a certain framework.

It is very difficult to change product or pricing once a development has basically started to build out. Generally, what you do with the builders is you basically commit and lock into. Now, that is not always the case. You can make product changes. It is difficult, because you have to change out the product, the model home.

You can make pricing adjustments if you need to, if there is some situation that warrants it and you can get agreement from the builder. But generally speaking, your real opportunity at the builder is every time you bid a subdivision, and that is ongoing and continuous activity.

That clarifies that a lot. Thank you. The last question I have went back to your first statement, Kent, about the pricing environment. We were not seeing a lot of relief yet -- and maybe you were not telling us that you all were seeing relief. But our proxy for cost of goods is still pretty tough.

How is it you guys are starting to see some flattening, particularly on the wood product side? Is sounded like you said steel and crude derivatives are still pushing up a bit.

I am not sure what you are looking at in terms of market indices or some of those types of things. If you look, for example, I don't know if you are talking about particleboard or the hardwood report or whatever it is, but within that, there are obviously different grades of all those materials. What we can do is we can go in and we can -- within a reasonable range -- we can buy different grades of lumber. We don't necessarily buy what the market index is tracking in terms of particleboard density and those types of things. So those longer-term or those general market indices can be a little bit misleading.

For the product that we buy and our ability to substitute certain grades for certain elements of our manufacturing operation, in those raw materials we have been able to pretty much stabilize. They have not come back down. They have stayed up where they were. But we're not, quite frankly, seeing the pricing pressure on some of those raw materials that we certainly were seeing at this time last year.

So if I'm understanding that right, pricing is stabilizing; and you have done some substitution, rather than this being a function of your buying power or something of that nature.

That is correct.

Thank you for the clarification. Again to make sure I understand, steel and crude derivatives both still increasing? And if so is the pace there also moderating?

Oil is what oil is. You can watch that. It appears to have moderated, but it has moderated at $45 to $50 a barrel. Certainly anything that consumes that, whether it is plastics or finishing materials, solvents, or just the diesel fuel we put into the logistics network --

Yes, that's a big one, I understand.

All of that, again, it bounces around. It is still very high. Steel actually continues to go up. Steel is a big problem. If you have read anything on that, there is just a worldwide shortage of raw material to make steel with. There is a shortage of scrap; there's a shortage of virtually every raw material that goes into steel. There continues to be significant pressure on steel metal-based components.

You guys are getting hit there on -- like slides? Is that more the issue than the hardware and such, which I understand is mostly imported?

Yes, the biggest thing for us is going to be the slides and the hinges.

That is mostly domestic; is that right?

It's a combination.

Last question on cost, and this will be my last question. The direct overhead component of energy, your electric and gas usage, are you all anticipating problems this winter? Are you hedged? Anything you can elaborate on there?

No, not really. That is not a huge component of our cost. There are a couple of places where we do contracts and those types of things. I am not terribly concerned about that being a problem for the winter.

Okay, good. Thanks guys; good luck.

(OPERATOR INSTRUCTIONS) Gentlemen, currently I have no questions in queue.

All right. Again we would like to thank everybody for taking time to participate in this conference call. Speaking on behalf of the management of American Woodmark we appreciate your interest and continuing support. I guess this concludes the conference call. Thank you.

That concludes today's conference. Thank you for your participation. You may now disconnect.