American Woodmark Corp (AMWD) 2005 Q4 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 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. At this time, 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.

Good morning, ladies and gentlemen. I'd like to welcome you to American Woodmark conference call to review our fourth quarter results. And to thank you for taking time out of your busy schedule to participate. Participating on the call today will be Jake Gosa Chairman and Chief Executive Officer; Kent Guichard Executive Vice President; and Jon Wolk, Chief Financial Officer. Jake has a few opening comments and then Jon will begin with a review of the quarter and an outlook on the future. So, now I'd like to turn the conference call over to Jake.

Thanks Glenn. Thanks for joining us. I'm breaking with our normal format this morning due to the unusual nature of the issues facing the Company. Prior to turning the call over to John who will cover the financial specifics of the quarter I wanted to take just a few minutes to give you some operational color and context which is intended to give you all a clearer picture of our current operating environment, how we got here, and the outlook for recovery of the normalized performance.

The current environment is driven by two separate phenomenon. First, our industry is transitioning from a non-inflationary to an inflationary environment. Building materials industry enjoyed several years of stable and in some cases declining raw material costs. This is due to excess capacity, lower oil prices, and an erosion of domestic demand as many industries such as furniture migrated off shore. Over the past two years, this environment has drastically changed. Various industry sectors have shuttered unprofitable plants, oil prices have exploded, and the housing market has risen to historical highs driving record demand. While we can all agree that inflation is back, the resistance of the market to recognize these cost pressures has been firm.

As you know, we took pricing action last year and we instituted other actions in January, we are in the midst of the pursuing additional actions specific to particular areas of cost pressure and plan to continue on this track until we are home. In the meantime we've been experiencing a time lag in recovery in the needed cost relief from the market. This industry is in transition. Over time I believe that these market forces will have to be recognized and brought back into balance. This is a systemic issue for the industry.

Second, we have experienced a significant operating event that had an impact on the fourth quarter and a significant impact on the outlook for the first quarter. As you're aware we started up two new operations last year. While the startup of these operations went on plan the impact on other facilities caused an imbalance in our inventories. This problem manifested itself in causing part shortages in our system. These shortages led to back orders causing significant disruption to our assembly operations. During the quarter we put in place several fixes which appeared to be addressing the problem only to have it reappear.

Finally the spring orders arrived and these same systems failed. This failure manifested itself creating large scale past dues throughout our operations. These lead to labor inefficiencies, severe overtime, freight inefficiencies, and various other unplanned costs. Currently we have now put a comprehensive plan in place that has isolated the problem to one facility. We expect that the remainder of the cleanup will happen over the next two weeks. The majority of these onetime costs have occurred since mid April. Forecasts for our first quarter FY '06 reflect our estimate that we will experience severely disruptive operations in May. Stabilizing but still underperforming in June, and normalized in July. Our outlook beyond that period is positive if the fundamentals of the Company remains strong. At this time I will turn the call over to Jon who will cover the financial details before we take your questions.

Thanks Jake. Again, thanks for taking the time to hear more about the performance and progress at American Woodmark. This morning, we released the results of our fourth fiscal quarter that ended April 30, 2005. In case you have not had the chance to read our earnings release here are a few highlights.

Net sales for the quarter were 207 million up 15% over the prior year's fourth quarter. Net income for the quarter was 7.5 million, down 11% from the prior year net income of 8.4 million. Diluted earnings per share of $0.44 for the quarter compared with $0.50 last year. For the full fiscal year the comparable figures are net sales of 777 million up 16% over the prior year. Net income of 35.6 million up 12% over the prior year and diluted earnings per share of $2.11 up 11% from last year's $1.90 per share.

Regarding our fourth quarter performance our previous guidance anticipated sales growth of 15 to 20% for the just completed fourth quarter. Our actual sales growth of 15% was at the low end of that range. The market dynamics remained extremely positive. The overall level of new construction activity remains at historical highs. Residential housing starts continue to be robust. Total monthly housing starts for April as reported by the Department of Commerce continue to approximate 2 million units on an annualized basis, single-family starts continue to account for more than 80% of the total starts and are still at near all-time high levels. Mortgage rates as reported by Freddie Mac are at their lowest levels in the last year and the 30-year fixed-rate mortgage continues well below 6%. And based on the value of our Timberlake product line, our extensive service reach, and our partnerships with many leading home builders, American Woodmark continues to see strong underlying demand from the new construction sector.

On the remodeling side things are also strong. Existing homes sales, the leading indicator for home improvement spending, remained at historically high levels. Annualized sales remain well above 6 million units. Demand for our products from home remodeling remains strong. The strength in the remodeling industry is reflected in both the overall growth and the comparative store performance of the major big box retailers. Home Depot and Lowe's continue to operate at record earnings levels and positive comp store sales gains. Demand for our product and services reflects the strength in the marketplace.

Moving on to gross profit. Gross profit for the fourth quarter was 17.6% of sales down from 19.6% in the fourth quarter of last year and from 20.3% in the first nine months of the current year. The primary drivers to our gross margin rate were external factors consisting of inflationary cost pressures stemming from the cost of materials and transportation as well as internal production and efficiencies as Jake just described stemming from the Q3 startup of two new manufacturing plants. Regarding the external factors, the price of hard wood lumber, hardware, and petroleum based materials increased throughout our fiscal 2005 and particularly during the fourth quarter. We are seeing continuing pressure from materials costs.

As we've discussed in previous calls our freight costs reflect the general industry trends that have been impacting the large package home delivery segment of the transportation industry. These factors include driver availability, new DOT regulations, financial stability of the carriers and the continuing high cost of fuel which worsened during our fourth quarter. During the fourth quarter we changed several of our transportation carriers to avoid the prospect of extremely large rate increases. In making this transition we experienced some transitional costs and absorbed a more manageable level of rate increases. Because of the nature of these industry-wide factors we expect that freight costs will be an ongoing challenge for the foreseeable future. The combination of the inflationary impact for materials and transportation costs accounted for virtually all of the margin erosion the Company experienced in the fourth quarter of 2005 as compared with the prior year's fourth quarter.

On the internal side, as Jake said, during the third quarter of 2005 we started up two new manufacturing plants. A component plant in South Branch, West Virginia and an assembly plant in Allegany County, Maryland. As Jake has explained these two start-ups, particularly the South Branch components plant, impacted the scheduling and production flows of the Company's other facilities in ways that were not fully anticipated. This led to unbalanced production schedules and part shortages which in turn reduced productivity and increased premium overtime hours worked. To rebalance the production flow the Company reduced production levels as compared with incoming order rates and ended the year with a higher order backlog. Consequently the Company's fourth quarter sales increase over the prior year came in at the low end of our guidance.

With regard to our capital growth plans, capital expenditures for the fourth quarter were 8 million and promotional displays deployed were 1 million. Outlays for the quarter included a variety of maintenance and cost-saving projects and equipment deposits to expand capacity. We expect CapEx of approximately 5 to 7 million during the first quarter ended July 31, 2005. The Company expects to continue to fund its capital spending plan from a combination of operating cash flow and existing cash on hand. Selling and marketing expenses increased from 8.5% of sales in the fourth quarter of the prior year to 8.9% in the current year due to an increase in advertising and promotional efforts. General and administrative expense was down from 4% of sales to 3.1% of sales due to ongoing cost management efforts as well as a reduction in costs associated with the Company's pay for performance incentive plans.

Regarding are balance sheet, the Company's financial position remains outstanding. Long-term debt to capital on a book value basis was 12% as of April 30, 2005. Cash on hand at the end of the fourth quarter was 24.4 million. The Company repurchased 4.2 million of its common stock during the quarter. Bringing the total amount we've repurchased for the year to 11.5 million. Since 2001 the Company has repurchased 27.6 million of its stock. The Company has a total of 12.4 million authorized for additional repurchases including the recent 10 million authorization. Since April of 2004 the Company has expended 74 million for capital expenditures and promotional displays and repurchased 11.5 million of its common stock. This aggregate use of 85 million of cash was funded by inflows of 80 million including operating cash flows of 65 million, new debt taken on of 10 million and grant proceeds of 4 million. Our cash balance at April of 2005 is 5 million less than one year ago.

In closing, despite the difficulties we encountered there were some bright spots in the fourth quarter. The Company continued to generate top line growth across all channels. Despite the inefficiencies we have previously described the Company was able to achieve record production levels. The combination of our market positioning and favorable market conditions should continue to generate incremental sales volume and improved product mix. We continue to generate strong operating cash flow while maintaining our strong balance sheet.

Having said that, we are disappointed with our profit margins and our net income for the fourth quarter. To counteract the external and internal factors we have discussed management is working toward several initiatives to restore the Company's margins and profitability levels. Regarding the inflationary materials and transportation cost pressures we are working with customers to achieve pricing relief. Historically the industry has been able to recover general material and freight cost increases when experienced by all manufactures. At the same time, the Company is taking operational steps to offset the inflationary impact to the extent possible.

These steps include aggressively exploring and implementing acceptable material substitution opportunities and continuing to search for reliable and lower-cost transportation alternatives. Regarding the internal production efficiencies the Company has reorganized its operational team to increase focus on specific aspects of its production scheduling and material flows. This initiative is already bearing fruit as the production inefficiencies experienced during the fourth quarter have been substantially eliminated and should be completely resolved during the first quarter.

As we look forward to the first quarter of 2006 we see a healthy environment that continues to support double-digit sales growth. The remodel side of our business presents continuing opportunities for growth through the expansion of the home improvement market. Our partnerships with existing big box retailers position the Company to capture a growing share of remodeling activity. The new construction sector also remains very strong as low interest rates and other factors continue to drive housing starts. Our strategic partnerships with major builders in established markets provide a strong base for growth.

For the first fiscal quarter of 2006 we anticipate an increase of sales of from 10 to 15% over prior year levels. We expect that any price relief we obtain from customers will have a minimal impact on the first quarter. Consequently we expect we expect we will continue to experience the effect of inflationary pressures for materials and transportation costs similar to that of the fourth quarter of 2005. Once the internal production inefficiencies are resolved later this quarter we expect we will return to a productive and efficient operational state and see margins improved.

Considering these factors we expect our profitability to be less than what we earned in the fourth quarter of 2005 and well below the levels we experienced in the first quarter of 2005 when we were not experiencing these inflationary cost pressures and we were operating more efficiently. We expect diluted EPS will be in a range of $0.30 to $0.40 per share below the prior year's first quarter of $0.58. We also expect these results will improve throughout fiscal 2006. This concludes our prepared remarks. We'd be happy to answer any questions you have at this time.

[OPERATOR INSTRUCTIONS] We will take are first question from David Frank with Winger Asset Management. Please go ahead.

Hello guys. I got a couple questions here. The first would be it seems as though you're rivals particularly Imasco have not had the same problems with input costs and freight costs, do you have any explanation for why their margins have been so robust. I think in the 14% range in cabinets?

Well, if you look at their most recent announcements I think there are some indications contrary to that.

Okay.

They have indicated that they have had some inflationary pressure and that they have had some lag time in recovering those costs. I think also, they're in a whole host of different businesses than us. I'm not sure the timing of some of their increases exactly coordinates with those of ours but the public data that we've read would indicate that they have been undergoing some of the same pressures, they may have found some offsets that we didn't find but I think inflation is clearly there particularly in the material and transportation area.

Insofar as you can disclose the nature of your conversations with your home center clients, have you got any sense of where they are coming from, what is their attitude toward this new inflationary world that we seem to be living in now?

Well, I just think it's the normal resistance of the market that has been conditioned for several years to probably seeing as many price decreases as they did price increases. And over the last two years that's drastically changed. I think we announced that we had a generalist price increase last year, we initiated that, I think it was effective in the first fiscal quarter of FY '05 but we were successful in securing that. Costs have continued to go up. We've taken other actions. They have been across channels and I can't get -- I don't want to get too much more specific than that but they relate to basically all of these areas where we're seeing cost pressure. I anticipate that we're going to get relief in all of these areas but I think that there is a normal push back as we transition into this period from the marketplace. Wanting to make sure that they are staying as competitive as possible. There is movement but when we are in this transition anytime you go from deflationary or a flat stable cost period to one that we've gone through in the last couple of years you have got to change people's minds sets and that is always a slow and difficult thing to do. I think that what's happening is probably explainable, it probably makes sense, it's just difficult living through it. I think we'll get to the other end of it.

Okay. On the home builder side, it looks like according to your most recent 10Q your warranty costs as percentage of sales have almost doubled in the last couple years to 3 almost 3.5% of sales and if my calculations are correct are you seeing higher warranty costs because of more install for the home -- the public home builders? What's going on there?

This is Kent, I'm not sure where you got that calculation. Our costs have not doubled in terms of either warranty or after install service. We have had an increase for a variety of reasons. There are some things going on in the marketplace. JD Power has become involved in the home-building industry and publishes statistics and that has put a lot of focus on that. There are some additional requirements that some home builders are placing on vendors based on that type of activity so there is a little bit more of work that is going into that. Also, as both Jake and Jon mentioned on our -- with some of our issues from an operational side the flow of product into the marketplace has not been as consistent as it has been in the past. We are having to make more trips to the home because all the parts are not necessarily there for the first install. Those are also raising our installation and to some degree warranty costs. We think that will calm back down when we get the flow of materials back in standard order.

So you feel that your warranty costs should at least -- should stabilize around these levels and shouldn't go up from here?

Yes. They should not go up.

Okay. And then finally, just one last issue is the fuel, are you able to push through a fuel surcharge to your clients? Similar to the one you might see from the people that are carrying your freight?

We're seeing different kinds of activity out there, and I think that we are anticipating recovering some of our freight costs over the next period. We are seeing that take different forms. I've heard rumors of surcharges out there we have received surcharges from a couple of vendors from this end. What form it will take and eventually standardize to I am not sure. But we are aggressively working to recover those costs.

Okay. Thanks guys, I appreciate that.

We will take our next question from John Tate with Raymond James.

Hi it's Budd Bugatch for Sam. He is on the road. Good morning.

Hey, Budd, how are you doing?

I'm fine Jake. Sorry to see you going through these tougher issues.

Thank you. I'm sorry too.

Let me kind of try and see if I can shed more light than heat on this. Let me see -- a couple of questions. I think if I understood yours or Jon's comments right that you said pretty much all of the 200 basis points were due to material and freight cost inflation; is that right $4 million would that be right number?

That's right most of the 2% reduction was due those factors, almost all of them.

In the fourth quarter, Budd.

In the fourth quarter. I'm only focusing on the fourth quarter. And if I look at the reason for the cost inflation in the lumber side -- in the hardwood side I noticed that there was a trade report that said that there has been a real shift from Red Oak to Maple, and I could account for about $3.5 million worth of your costs that way. Has that been what's factored? We know we've had an increase in Red Maple, I mean in Maple versus Red Oak. Is that a factor in that Jake?

That's a real factor but it's not 3.5 or 4 million. Also those trade reports would apply to a general market but the way we buy lumber and the scale of which we buy lumber, we're able to buy off of those sheets.

I understand that. I'm looking directionally though, when I look at it it's up about 5%.

This is Kent. There's a combination on the hardwood side, there's a combination of in species inflation and there's also a mix issue.

Yes. That's exactly right. We had your-old mix settling at 50, 30, 10, and 10 between Oak, Maple, Cherry, and Hickory and if that increased to 25, 55, 10, and 10 that would get us directionally to that -- I'm trying to get you to quantify that 4 million versus -- freight versus lumber or freight versus hardwood.

I'm with you. The hardwood pieces is significant, it wouldn't account for that much of it.

About half of it you think?

Roughly. The freight piece is just about as significant. So if you broke those two, they represent the lion's share. But there are other material costs other than just hardwood as well.

I understand lumber and other stuff, I mean, hardware other stuff you buy offshore that changes with currency.

Right.

The operating inefficiencies can we put a third bucket in that and see what might be that amount? Because at 4 million it pretty much accounts for the mix. What's the operating of inefficiency piece?

Well, in the fourth quarter that was the smaller piece. Most of those operating efficiencies were kind of created in the quarter and they will be manifested in the first quarter of this coming year. So there were some operating inefficiencies but the lion's share was in the external factors which were freight and material.

Did I hear you just say that the inefficiencies will be manifested in the first quarter as opposed to the fourth?

Yes, most of it. The bigger impact is manifested -- because the cleanup costs are mainly in the first quarter coming. And that is what's really driving down or --.

Yes. Because it looks like the pretax margin in Q1 base on your guidance has got to get down in the 4.5% level at the midpoint of the range; is that right?

Yes. It's about -- if you look at the first quarter we're talking about material and freight versus these internal inefficiencies. We had about a 60/40 split, somewhere in that range. It's still a little over half material and freight but most of the operational issues are hitting us in the first quarter.

Jake, I'm confused as to -- you last gave guidance on May the 13, -- I'm sorry, February 23, pardon me. Okay. We changed estimate. You're right. Okay. I understand that. And let me just make sure that on a forward guidance going forward did you say you would have positive comparisons in the rest of the year after the first quarter?

We said it would improve.

When do you think you will have positive EPS comparisons?

We generally don't give guidance beyond a quarter at a time.

But this is an unusual --.

Well, it's an unusual situation, I think we could expect positive guidance for the second two quarters and possibly -- but I really think the third and fourth quarters are what we're looking at for positive guidance.

Positive guidance in the third and fourth quarter. Okay. My last question is can you give us any mix of growth between the retail segment and the builder segment?

The builder segment has been in runaway growth, it's been very hard to manage, and it would reflect in our numbers kind of a traditional levels that it's been at the last two or three years which is quite high. The problem is is we have been receiving more demand than we can service. The sales numbers that we're showing don't reflect the pressure that the industry is under on a new construction side of the business. We see -- and the current situation shows no abatement of that. So, it's a pretty disturbing situation actually.

So on the 15 % growth could you give us a feel for builder versus residential? Is residentially --?

The residential piece is a little bit higher than that but we -- the problem is is we can't really, because it's all turnkey business we can't do any more than that. We have to trim the demand back to hit that level.

Good luck going forward.

[OPERATOR INSTRUCTIONS] We will take our next question from Joel Havard with BB&T.

Thank you. Good morning everybody. I guess first of all we would want to congratulate Kent for taking on the EVP operational role in a very challenging period for the Company.

He's not had a lot of fun these days.

Well, it'll get more fun. Jake and Kent between you -- could you go back and teach me again the time line for price increases? I seem to recall that you get pretty much one-shot a year to update the quote, catalog at Depot and Lowe's, and I thought I understood that the builders were on a contract to contract or project to project basis. Could you fill in the blanks for me? I'm not sure that I have got that right.

Yes, you're right on that, basically that's the correct assessment. We do have basically one shot a year or two shots a year at the books so it's every six months with the home centers. You basically are operating contract to contract with builders. So any time you do any kind of pricing action if it is general in nature it tends to be about a sixth month --.

Jake, I'm sorry to interrupt you. What are the windows again, for the retailers?

January and July.

And that's when it goes effective? Or that's when you start the process?

That's when it goes effective. That's when the catalogs drawn. It's all electronics though.

All right. Well, you sort of anticipated the follow-up to that question in your remarks. That we are transitioning in the pricing environment, it's not the '90s any more to borrow a quote from one of our good friends this morning. How long, you have got a lot more business experience, certainly in this space than I ever will, how long is it going to take to get these guys retrained to the idea and what methodology can you use if they're doing two books a year, how do you get a more responsive change in pricing particularly with retail?

Well, I think it's just the reality of the market has to set in. I see things moving now and things are happening. We successfully got some relief last year in July. We took some other action in other areas of the business in January. We are just now beginning to see that manifest itself. We have taken other specific actions that are under way currently. We will see that manifest as we mentioned in the third, excuse me, the second fiscal quarter of the coming year, '06. We are seeing more movement than we were seeing a year ago. It's still a heavy, slogging through this stuff. I think it's going to be another year of this and if we continue to see this, I think the marketplace will find its footing.

I think the biggest thing people go through is they haven't seen regular price increases and so there is a natural tendency to think, well, the other guy is probably not taking it. If I take it will I be at a disadvantage? When you get enough of that activity going through these headquarters buildings then whether it is the professional market or the revolving side of the retail side of the market it's pretty much the same kind of phenomenon and I think over the next year if we continue to remain in this sort of moderate inflationary environment. I mean this is not the inflation of the '70s or the '80s.

Oh, sure.

But we do have enough that you just can't offset it with aggressive material substitution activities and productivity and things of that nature, you are just heating it. Those are market forces that just simply have to be recognized. I think another cycle or two of this, a cycle being six months, it will continue to get better understood and what has to happen will happen. We are not there yet.

Let me get a little more on that. Is the methodology then to price in, you're still only getting your two shots a year but do you then get them to understand that you need to hike here in the July catalog to compensate for not only what you've seen thus far to catch up but to get enough ahead that you are at least even?

Well, in an ideal world I think you would be able to sit down and do all that but in reality today, we are sort of playing every situation based on the specifics of that situation so I really can't tell you, Joel, there is a general trend emerging out there. If you're back in the '80s, yes. That is basically what you would do. But this environment has to reform itself.

Okay. All right, well, we will pester you about that more in the future I am sure.

I bet you will.

Second one was, trying to get some flesh on the issue with the capacity utilization. The plant opened in January and I'm just talking the assembly, I assume that the component sort of builds in parallel. Do you start with one line? Two lines running side-by-side? How do you do that?

Well if you want to talk about an assembly plant you basically go through a startup procedure where you during the, if you will the learning curve as you're feeding them the complexity of the product in a very planned basis you don't give them the full product line on day one. But in our JIT environment they have to get up to the full line pretty quickly. You probably do it over 90, 120 days getting them to full line.

And Kent, let's see, Allegany will run, I'm going to assume your other plant, seems like, just kind of off the top of my head, maybe 10, 12 assembly lines running more or less side-by-side is Allegany in that sort of time or size?

It's a normal -- it's the standard footprint of our other assembly operations.

How far along are they now, just, I don't know, if you want to think of it in terms of ultimate capacity utilization by dollars or by lines that are implemented and trained to a degree you find sufficient?

Terms of total capacity output of the facility versus the footprint is probably in the 20 to 25% range.

At the end of Q4?

Yes.

And again, you think another three to six months will get us to close enough we could call it full utilization?

Oh, no, no, no, no, no, no, no. Three to six months is to get full line in so they can make all products. That is not reaching the capacity of the facility. That facility won't get to its full capacity for a couple of years.

Okay. Thanks for that clarification. So we will be running any number of SKUs that will be required over the course of this fiscal year but still well short of ultimate utilization.

As we sit here today they can basically do the full line. But their total output is about 20 to 25% of what it will be at capacity.

I've got it. Okay.

Think if you have got a building with five lives in it and all five lines do the same thing, they make a full product line but you only have one line running. You use 20% of your capacity but they'd be doing the same thing. The plant will add another line, they'll add another line, they'll add another line but it won't do anything different when it's the end of the day.

The raw materials environment of product substitution all those things I guess we just have to live with that. Freight is the one that really has me perplexed guys. I seem to recall three, four, five years ago we went through an environment like this. You guys ratcheted down the number of truckers that you used from I seem to recall something like 10 or 12 to something like half that. Is there a concern that you can't get a whole lot fewer vendors now from where you've already gotten to without sacrificing some flexibility? The roundabout question is what tools do you have at your disposal right now that you think will alleviate this freight issue over whatever timeframe versus being trapped -- sort of flowing along with the tide?

Well, I think that the freight environment has changed dramatically. I think Jon alluded to the fact that large package home delivery has had a big impact on the freight environment. A lot of carriers out there have tried to adjust to this. Some carriers are there and they can handle a business like ours, some can't. You're right, Joel, we did go through a big change several years ago. The reason we went through that bit change is there were a couple of large carriers that were really capable of handling costs. And we didn't have that many options. Since that time there are a lot more people in the mix. On the other hand you have got two other things though that are really affecting things from an external standpoint separate and apart from customer requirements, and that is the DOT regs which have taken drivers off the road for a lot of hours and the second thing of course is fuel costs. So what we're doing and some of the changes we're making today is we get a lot larger community of qualified carriers that can bid for our business and we're going through that process and have been going through that process for a couple of months because our largest carriers had tried to impose some very significant increases on us, we didn't think we had to take those. That is proving to be beneficial.

We did incur though as Jon indicated in his remarks. We did incur in Q4 and continue to incur some of these transition costs. Now it is settling down somewhat but you will see us moving to a definitely different group of carriers and I think going forward we will just see how these partnerships turn out. One of the things that is really changing in that whole area is the issue of technology and that is being able to take a cabinet off of our dock and know where it is at at every point along the way until it arrives at its intended destination. More and more carriers are now stepping up with this kind of capability. Those types of things offer us opportunities for efficiencies that perhaps aren't in there today. The fuel side is just going to be the fuel side. The industry has just got to learn how to figure out how to pass these things along and whether it is a standard surcharges or whatever the case may be I am not sure what form that is going to take but it will have to take something, because we can't go through this absorbing these crazy fuel shocks and I don't think anybody sees much change in that in the near future.

Jake, you've nailed, I think, the critical issue for us on my side of the street. Is what means will you have if you get a $2 per cubic foot -- I had to make up the numbers, but where you can show that invoice to your customer and say and here is your surcharge.

I think surcharges are one way. We'll see if that happens. I don't to lead you to believe that that's going to happen because I don't have an indication it is. We are seeing and hearing some of that activity out there on the downstream side of the equation, we've incurred some of that activity from, as I indicated earlier, from some of our vendors. So, we will see. But it will have to take some form. I think that's one from that might do that.

Is there a time frame that you think that issue could be addressed?

I think that we're trying to address that now and if it ends up in some more permanent formulation, if it turns out to be a formula driven solution like an industry wide agree to surcharges that would be fine. I don't see that right around the corner.

I understand. Finally, coming back to you Kent, and Jon, if you want to chime in on this. The discussion of the inefficiencies at that factory that are -- you described it being more in catch up or fix it mode in Q1, you talked about a difficult May environment, getting back to even in June, getting back in front of it by July, is there a gross margin or operating margin or capacity utilization number that you could assign to those three months or for the quarter as a whole? I understand the implication of the EPS guidance but I'm trying to look up a few lines in the income statement to get a sense of where that impact is falling?

Obviously, we are studying this and we've sort of got it down to what we think the net income impact is going to be. We would rather not comment on specific captions of the income statement at this point in time.

Okay. I had to try. Well, Jon, I will ask one other question then since I didn't get that. The description that you and Jake, you had added earlier that the builder side was very strong, if we look at just Q4, so just historical, the performance, the revenue performance of the retailers versus the builders. Has your shipment experience Q4 with the DIY customers been exceptionally stronger than their same-store comps?

Yes.

Okay. And then I understand you to say that you're sort of holding the line on what you're able to do with builders?

That is limited by our installation capacity, Joel. There is a labor component there and so when somebody gives you -- if they plan for say 500 houses this year and they are going to do 125 in each quarter and that changes and they come along and say well, this is just good we'd like for you to take 200 this quarter, your ability to do that is very limited because we can't just go find these crews, the qualified people to install these cabinets.

Okay. So these are -- this is that -- you describe it your turn key offering for the builder direct channel. So it is a headcount issue in these eight regional field offices?

That's right. When we talk to builder business that is essentially it. So, it does have this limiting factor that is is whatever our plan capacity is there. You can surge up a little bit from that but to really respond to big the changes there takes time and that's proving to be difficult in the new construction arena because the competition for good labor out there is very severe. Particularly in the Sunbelt where these hot housing markets are located.

Do you all have any programs initiatives underway to try and get around that issue or is this one you just kind of have to slog through?

We're doing okay. The big problem is the planning side with the builders. We sit down and say we are going to plan to take that business up 15 or 18% let's say on plan. We'll have the people and the assets in place to do that. The problem is the last two years the new construction markets have been surging way way above that. They'll throw orders at you requiring you to surge up 25, 35, 40% in some cases in these larger markets and we just can't do that. So my earlier comments are really referring to the fact that this big disconnect between what new housing is being committed to and sold out there and what the industry can actually build. And you're seeing it not just in our area, you're seeing it in concrete, you've seen it in steel, you've seen it in masonry areas, and what have you. So these are the things that we are wrestling with.

All right guys. Thank you for all the detail here. Good luck.

[OPERATOR INSTRUCTIONS] We will take our next question from Mark Gaddis with Grace and White.

Thank you. Good morning. A couple of questions I guess. First the other day or probably yesterday it was announced they were going to expand into Canada. Will you be supplying the Canadian stores?

This was -- I'm sorry I missed part of your statement. Who?

Lowe's.

Oh, Lowe's. I don't know the answer to that yet.

I mean it will take some time before those stores actually --.

We really don't have anything yet on that. This is pretty early so I expect we would have an opportunity to do that. We supply stores in Alaska and Hawaii and Puerto Rico, and big boxes. We could supply Canada. I would say to you that Canada is typically a frameless market so depending on what markets they go to in Canada there may or may not be a large demand for typical American framed cabinetry which would be pretty much the supplier group that you find at Lowe's or Home Depot.

On the sales side for the fourth quarter, just obviously you just hit your -- the low range. With everything being so strong and obviously what you were describing with the waiver et cetera. Was some of the shortfall in the sales due to the inefficiencies, operation inefficiencies?

Yes. We could have put more material out the door and we actually have backlogged some orders going into the new fiscal year that we could have shipped. So, we would have done better than the low end of the range. We would not have gotten above the top end of the range but if you wanted to add a couple of points in there clearly we could have done more top line.

So it will just flow into next year?

Yes.

And the final question. Your window to enter the market to repurchase stock, how long is that from today?

Are you talking about insiders or are you talking about our repurchase program.

The repurchase program.

We have -- our insider window basically our internal -- we have internal guidance that's -- gives a couple of grace days and then runs for a couple of weeks after the announcement. And in terms of the Company's repurchase plan as long as the Company's not -- does not have access to insider information that would move the market we can purchase under our plan, we can do open market purchases on the Company's behalf for periods longer than that.

So it would be possible if you wanted to, to enter the market today?

No. We will have a three day moratorium.

Okay. Thank you.

You bet.

We will take our next question from Brian McAuley with Gottfried Capital.

Good morning gentlemen. With your backlog up and the occasional outages could you just tell me what has happened to your lead times and in your retail channel and also in the builder channel? And just how is your execution in the field?

Generally speaking, it suffered. We are struggling. Very hard to rebalance ourselves. Today, if you are buying cabinets on the East Coast of the country you would find our lead times are falling back in to a more normalized looking balance. In the West though, that is the facility that we're still under pressure and we are operating with extended lead times out there. It depends on the case as to how long. We are prioritizing customers' orders though and we're working with people to avoid any severe situations and for the most part we have been able to avoid those but our lead times are under pressure in the West.

And given that these are unique times in the building industry do -- how at risk are your long-term relationships with any of these customers of yours?

I would say that with the -- on the retail side of the business our market position as solid and this is just an event. We will get it behind us. We are working through these issues. I think with the builder side of the business it's a little different situation. Given the consolidation dynamics in the builder market a lot of people are going to have to make some decisions about how many builders they are going to service and what percentage of the builders business they're willing to take. What percentage -- how many vendors a builder wants to take. The market is sorting a lot of those things out now. Historically we have sold most of our builder volume to the top 20 or 30 or so builders around the country with some regionals thrown in there and then we'd do anywhere from -- on a local basis 25 to 100% of that business but on a national basis it might be a very small percentage. As they try and change that it is putting a lot of pressure on major suppliers like ourselves and think that long term relationships are changing because the chances of us selling the same number of builders three, four years from now that we are selling today I think it is remote. We're going to be selling fewer builders and we're going to be selling more cabinets to those fewer builders. So there is a consolidation dynamic that's going on inside of an overheated market that is really putting pressure on a number of people.

Thank you.

We will take a follow-up question from Budd Bugatch with Raymond James. Please go ahead.

Hi. I just wanted to make sure I was clear on the capacity additions in the fourth quarter and I don't think there were any but what capacity was brought on in the fourth quarter?

There wasn't any in the sense in terms of either factories or large machine centers that were actually installed during the fourth quarter. The two new plants were opened up basically one was opened up last fall, October, one was opened up in January. The capacity additions in the fourth quarter were just bringing those factors on line as you kind of scaled them up so there was no new hard capital that went in the ground in the fourth quarter. There was crewing in the plants and additional scheduling for output.

Is there any new capacity now planned. I know you bought some land but what additional capacity are you planning to bring online factory-wise and what about crews to install?

Right now in the short term for the first half of the year, most of the capacity addition is crewing at the facilities we have. There are some selected machine centers that we are putting in place. We do not have a new plant coming out of the ground in the first quarter. We are going to have to, again, do our normal forecasting look at it to see when we go. We do have a piece of property prepared as you mentioned but right now we are basically crewing up the facilities we have.

What about installation crewing, Kent, do plan to do that as well?

Yes. We install, we crew up our -- if you're talking about the direct builder installers.

Yes, sir. Yes. We crew up, we hire on a regular basis and train based on our both current volume and forecasted volume. And modeling the builder business going forward should we actually build that sequentially? Is there a seasonality that we need to factor into that as well?

Much less than the retail side. I would have to go back and look at the charts Budd, but I, boy, the last two years have been so overheated it would be awfully hard to put a traditional footprint on that thing.

The only real seasonality, again, we're concentrated in the Sun Belt areas in terms of our direct new construction business so you don't get a lot of weather related stuff. About the only seasonality, quite frankly, we've seen in the last couple of years have been especially last year, the hurricane season that came, hit Florida, and came up the East Coast to the extent that there is a very active hurricane season that might show up as seasonality. But generally in the areas we are there is no weather-related reason for seasonality.

The other thing is the major builders, we are seeing more of these people that are changing their incentive plans to quarterly closing bonuses as opposed to annual. We have gone through few years there where every December everybody was throwing everything but the kitchen sink at you trying to close. It was creating false seasonality. What they were really doing is compressing a bunch of orders into December. A number of large national builders it looks like they have gone to a quarterly some kind of comp changes and this is spreading it out. What that has the effect of doing though is giving us a pretty flat look at the year. Now how long that will continue, I can't tell you. But it doesn't have the seasonality characteristics that the retail business does.

Well, regarding the hurricanes just please be quiet about those. Don't stir the things back up.

We don't need any more of those either.

I'm told it's 85 degrees now in the Gulf which does not bode well for this season. I do want to make sure I do understand something on the builder program. Just -- so you are saying that you are seeing it's relatively flat quarter to quarter in terms of volume when you look at it.

No. I mean it's going up and we are taking on growth but if you look at the seasonal demand it kind of just is setting in. It's just this sort of steady looking thing. There are no humps in it. If you look at the retail side of the business there is a big hump in the spring and there's a big hump in the fall, just before tax season and just before the Thanksgiving holidays. You are not seeing that but as far as the ongoing growth of the business that is growing very aggressively.

The way I put it is it is a very aggressive trend line. We are not seeing a lot of variations around the trend line.

I'm trying to make sure I understand is that growth sequentially or growth year-over-year, or both?

Both.

So it is sequential and it is year-over-year, and can you give us today a feel of the mix of builder business, direct builder business versus retail or as a percentage of total. We've had to guess over that before so.

It's basically two-thirds, one-thirds. Two-thirds retail, one-third new construction. Apparently hasn't changed very much. No it doesn't change that much.

That is an annualized basis right?

Yes.

Thanks again.

Gentlemen at this time there are no further questions, Mr. Eanes, I will turn the conference back over to you.

If there's no additional questions, again, I would like to thank you for taking time to participate in this conference call. Speaking on behalf of American Woodmark we appreciate your continuing support. This concludes our conference call. Thank you.

Once again, this will conclude today's conference call. We do thank you for your participation and you may disconnect at this time.