American Woodmark Corp (AMWD) 2006 Q3 法說會逐字稿

Good day, 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 with the Company's filings with the Securities and Exchange Commission and the annual report to shareholders. The Company does not undertake to publicly update of 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'd like to turn the call over to the Vice President and Treasurer, Mr. Glenn Eanes. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. I'd like to welcome everyone to the American Woodmark conference call to review our third quarter results. Thank you for taking time out of your busy schedule to participate.

Joining me on the call today will be Jake Gosa, Chairman and Chief Executive Officer; Kent Guichard, Executive Vice President and Chief Operating Officer; and Jon Wolk, Chief Financial Officer. Jon will begin with a review of the quarter and outlook on the future, and after Jon's comments, Jake, Kent and Jon will be happy to answer any of your questions.

Jon?

Again, thank you for taking time to hear about the performance and progress at American Woodmark.

This morning, we released the results of our third fiscal quarter that ended January 31st, 2006. In case you have not had the chance to read our earnings release, here are a few highlights. Net sales for the quarter were 191.9 million, up 4% over the prior year's third quarter. Net income for the quarter was 6.1 million, down 14% from the prior year's net income of 7.1 million. Diluted earnings per share of $0.37 for the quarter, compared with $0.42 last year. For the nine-month period, net sales were 621.2 million, up 9% over the prior year. Net income was 19.7 million, down 30% from the prior year. And diluted earnings per share of $1.18 per share, down 29% from the prior year's $1.67 per share.

As we discussed in our last call, we will be transitioning out of certain low margin products, including the in-stock cabinet business at Lowe's over the next several quarters. Commencing with this call, I will provide a separate breakout of our transition status and impact; and using the same format to update you on future calls until the transition is complete.

Regarding our third quarter sales performance, our previous guidance anticipated overall sales growth of 0 to 4% for the quarter, inclusive of our previously-announced transition out of the low margin products. Our actual sales growth was slightly more than 4% at the high end of the overall range we had forecast. For new construction, recent indicators suggest a continuation of positive activity. Residential housing starts continue to be very solid. Monthly starts for January 2006, as reported by the Department of Commerce, exceeded 2.2 million units an annualized basis, and were 4% higher than one year ago. This higher than anticipated level may have been influenced by the unusually warm weather. On the other hand, there are some indications of a changing new construction market. 30-year fixed mortgage rates, as reported by Freddie Mac, rose for the fourth straight week to 6.28%. While still low by historical standards, rates are at their highest level since the first half of 2004. In addition, several large builders, although still flush with healthy backlog, have recently announced reduced sales activity as compared with the prior year. All said, we continue to believe the new construction market is healthy. Based on the value of our Timberlake product line, our extensive service reach, and our partnerships with many leading home builders, American Woodmark expects to maintain and grow its market share at what looks to be a somewhat less robust new construction sector.

For the remodeling market, conditions have continued to track positively. Existing home sales, a leading indicator for home improvement spending, dropped below 7 million annualized units in December for the first time in nine months. However, at an annualized rate of over 6.6 million units, December's level was still extremely strong by historical standards, and near the record levels recorded one year ago. The consumer confidence index, which had dropped significantly last October, has rebounded strongly, reaching its highest level in the last 12 months. The unemployment rate, as reported by the U.S. Department of Labor, reached its lowest point in more than three years of 4.7% as new job creation remains strong. And finally, the big box retailers continue to demonstrate overall growth and positive comparative store sales performance. We believe the remodeling market remains healthy and our recent order rates support this belief.

Moving on to gross profit, gross profit for the third quarter was 17.5% of net sales, down from 18.7% in the third quarter of last year, but increased from the low of 15.7% in our previous quarter. Two factors caused our gross margin to be lower than in the prior year's third quarter. First, increased manufacturing overhead costs, driven by two manufacturing plants that opened during our previous fiscal year; and second, to a lesser extent, higher freight costs caused by the combination of higher fuel costs, inflation in rate structures, and additional cost from switching selected carriers to improved customer service. Although the third quarter represents our lowest seasonal sales quarter, gross margins improved nearly 200 basis points as compared with the second fiscal quarter of 2006, driven by several factors. During the previous quarter, we launched a number of actions to improve margins. We reduced head count to better align with present and anticipated sales levels. We reduced discretionary spending levels. We took pricing action to recover inflationary, freight and materials cost. Additionally, the price of diesel fuel moderated somewhat and stabilized, reducing fuel surcharges. The combined impact of these factors helped to sequentially improve gross margin as compared with the previous quarter.

Regarding our low margin product transition, we commenced the transition out of low margin products in the western region of the United States during the just-completed third quarter. The start of the transition helped to slightly reduce the mix of low margin products sold during the third quarter, which also helped to slightly improve overall margins. We expect we will be complete -- we will complete the western phase of our low-margin product transition before the end of the fourth quarter. Once completed, the western phase of the transition effort will equate to exited annual sales volume of approximately 25 to $30 million, or approximately 30% of the total volume to be transitioned. We continue to expect that the remainder of the transition will occur over the next several quarters. The transition effort is going well operationally, and our sales of core products have, as expected, not been impacted. Sales of core products grew by 6% over the prior year, well within the range of our previous sales guidance of from 4 to 8%.

Regarding our capital growth plans, total CapEx and promotional displays deployed aggregated 21.7 million for the nine months of fiscal 2006 as compared with 65.9 million in the comparable prior year period. Capital expenditures were the reason for the decline, as outlays for promotional displays were essentially flat. The reduction in capital expenditures reflects the completion of two manufacturing plants in fiscal 2005. Outlays for the quarter included a variety of maintenance and cost savings projects and equipment deposits. We expect capital expenditures for the remainder of 2006 to remain on a similar track as we have operated in the first nine months of this fiscal year. The Company expects to continue to fund its capital spending from a combination of operating cash flow and existing cash on hand.

For SG&A, total SG&A expense was 12.4% of sales in the third quarter of 2006, down from 12.5% in the prior year. Selling and marketing expenses increased slightly to 9.4% of sales from 9.1% in the third quarter of the prior year, primarily reflecting lower sales levels than were originally planned; and general and administrative expense was down from 3.4% of net sales to 3% of sales due to ongoing cost management efforts as well as reduced cost associated with the Company's pay-for-performance incentive plans.

Regarding the balance sheet, the Company's financial position remains outstanding. Long-term debt to capital on a book value basis was 11.2% as of January 31st, 2006. Cash on hand at the end of the third quarter was 32.7 million; and during the quarter, the Company repurchased 11.5 million of its common stock during the quarter, representing 2.7% of the Company's previous outstanding stock base. Since 2001, the Company has repurchased a total of $40 million of its capital stock.

In closing, overall, we are encouraged by the improvements we have made in our operational performance and gross margin during the quarter. However, we recognize that much improvement is still needed to achieve more acceptable gross margins. As we look forward to the fourth quarter of fiscal 2006, we continue to see a healthy overall housing environment that should continue to support sales growth. We believe the Company remains well-positioned to maintain and grow its market share. The remodel side of our business presents continuing opportunities for growth through the continued expansion of the home improvement market. Our partnerships with the existing big box retailers, each of whom continue to grow their store counts and market coverage, position the Company to capture a growing share of remodeling activity. Most of our new construction customers expect to continue to gain market share in this new year. The new construction sector outlook remains positive, and our partnerships with both national and regional builders positions us well to maintain and grow our market share. Now that the operational difficulties which impacted the Company earlier in the year have been resolved, we are focused on regaining market share that we temporarily lost, particularly in the west, where we've begun to recover.

For our fourth fiscal quarter that ends April 30th, 2006, we expect that a healthy remodel market, coupled with the less robust, but still healthy new construction market, will enable us to realize core product sales growth in the mid-single digit range. When taking the low margin product transition into account, we expect that overall sales levels will be roughly flat with the prior year's fourth quarter, ranging from a 2% decline to a 2% increase. We further expect that gross margins will continue to show sequential improvement, driven by continuing benefits from the operational initiatives we have taken, combined with seasonally higher sales volumes and manageable materials and fuel costs. Considering these factors, we expect our diluted EPS will be in a range of from $0.45 to $0.50 per share.

This concludes our prepared remarks. We would be happy to answer any questions you have at this time.

[OPERATOR INSTRUCTIONS]. Eric Bosshard, Midwest Research.

Good morning, and congratulations, gentlemen.

Thanks, Eric.

This is actually Mark [Herbeck] stepping in for Eric. Eric is on a flight.

Hey, Mark.

First question, operating margins used to be in the 8 to 10% range. They fell down to around the 5% range. Can you give us any color on what exactly has changed since then? And when you would expect to see margins climb back to maybe the 8% range?

Well, what basically has happened, for the most part, over the past four quarters, is the absorption of the big internal operating event combined with the freight issues that we faced last year. To the extent that we get those -- we have gotten those operating events behind us, and we see our top line rebuild, we would expect a combination of volume, which will enable us to absorb some excess overhead costs right now. With more normalized operating performance, would get us back into that range. So, as we exit this low margin business, and we replace that with good volume over the next several quarters, we'd expect to start approaching a more normalized operating margin.

Okay. Your plans for pricing, if I remember correctly last quarter, I think you guys spoke about increased pricing in the builder channel, pro channel. Is that still -- was that implemented here in Jan -- I guess, back in January? And then, are there any expectations for price increases in the home center channel?

We -- well, we did affect pricing; we initiated that in the latter part of the prior calendar year to take effect by January. We have done some of that. I would expect that we will be watching our costs over the course of this year. I expect pressure in four areas. I think freight will continue to be volatile. I think that anything related to the price of crude oil, obviously any petrochemical-related products, such as finishing, will -- will be volatile, as well. We are anticipated upward pressure in liner board or packaging, simply because of the condition of that market. The market's been under a lot of cost pressure, and we're starting to see the industry consolidate and shut down some -- some inefficient capacity, I think, that will bring some pressure. And we think that we're going to see some pressure from the particle board business. So, we'll be keeping our eyes on those four categories. We -- and we will respond in kind. We don't have a big pricing initiative on the table, as it were, at this time.

Okay. And then, real quick, final question, any change to sales momentum since the end of the quarter?

Those order rates have been -- improved throughout the third quarter, and they continue to do well up until this point in time.

Okay. Thanks, gentlemen. I appreciate it.

You're welcome.

Peter Lisnic, Robert W. Baird.

Good morning, guys. Nice quarter.

Thanks, Peter. How you doing?

Good. I was wondering if we could get a little bit more detail on the -- I guess the profitability impact of the exited sales? You talked about 25 to 30 million kind of coming out of the top line for the year for '06. What kind of margin impact does that have?

Well, Pete, it's a combination of several factors. This is, for us, what we consider to be low margin business. And so it's not going to have a great deal of incremental impact to our overall results in terms of total dollars of gross margin foregone, although gross margin rates, as a percentage of net sales, will improve.

Okay, yes. I think I've got that part. The thing I'm wondering is -- I'm trying to separate -- your fourth quarter forecast calls for gross margin to be up sequentially and year-over-year. I'm just trying to parse that out in terms of, A, how much is core operational improvement? And, B, how much is just kind of these low margin sales going away?

Well, if you -- Peter, this is Jake. We've never forecasted gross margins, but if you look at the quarter just ended, the -- the withdrawal from -- the low margin business really just started during the quarter, so, as Jon commented in his prepared remarks, it had some, but a relatively minor impact on the quarter just finished. So, what you saw in the quarter just completed was almost totally a result of improved operations.

Okay. That helps. Good.

-- 200 basis points of improvement is just really improved operations. As you go forward, you can look for us to pull out of the business during this quarter. So you won't fully realize it until the next quarter. Another $20-or-so million of top line business, which has very low contribution margins to it. So we would see some impact again in this quarter. We would fully realize the impact of it, though, in the first fiscal quarter of our fiscal year '07, which would begin May the 1st. So, if that helps you a little bit, we're kind of very early in the transition now. We've started in the West, and we know we'll be completed with the West, it accounts for about 30% of the total. That'll be done by the end of this fiscal quarter that we're in now. We anticipate -- we already started work on plans for the next block. We can't give you anything on that right now because it is undecided. We're not sure what that would be. But I'd expect we'd be talking to you in the next 90 days as to what the next leg of the journey looks like.

Okay, that is helpful. If I could follow up with one more question. The -- in the quarter, Jon, I think you said buyback activity was 11.5 million?

That's right.

And that's, I think, ahead of what you typically do in terms of just buying back -- what comes out in terms of options. So it sounds like you're being more aggressive on the buyback front, is that --?

Yes. That was a strategy that we embarked on at the beginning of last quarter. At these prices, we feel that the stock was undervalued, and we took advantage of that.

Okay. And would you mind just letting us know, again, how much is left on current buyback authorizations?

Yes, at this point we've pretty much exhausted the authorization that we had in place, and so we'll be seeking a new authorization from our Board.

Okay, thank you.

You're welcome.

Yes.

Robert Kelly, Sidoti & Co.

Good morning, gentlemen.

Hi, Robert.

Hi, Bob.

Could you break out what capacity utilization was for the third quarter?

I'd say -- go ahead, Kent.

Yes, Robert. This is Kent. It really varied through the quarter. We started the quarter with a good backlog, and we're pretty much running at crude capacity, not hard capacity. We still have quite a bit more hard capacity available to us, but we were really running at crude capacity. We got into the holiday period -- excuse me -- and we started to run significantly less than that. At the low point during the quarter, we were probably at about 80% utilization. We averaged a little bit higher than that for the full quarter, but the low point, we were probably about 80%.

80% of what was crude or hard?

What was crude.

Okay. And that's a seasonal thing?

Yes, that is seasonal.

And would you just give out the breakout for -- in the 4% sales increase, pricing versus volume?

We traditionally haven't given given a lot of color on that, Bob, but what you had in there was the impact of the transition of the low margin product started, so that brought down units a little bit. Overall it was primarily price and mix --

Right.

-- that drove the -- the sales increase.

Although units and dollars were both positive.

Both positive. Okay. That helps. And do you feel like the labor force, with the head count reductions you made, do you feel like that's right-sized at this point or do you still have more to go on that initiative?

Sorry, Bob. One more time?

The labor force, do you feel like you are going to be reducing it further, or are you guys right-sized at this point?

I'll give -- this is Kent again. I'll give an overall comment. I mean, certainly, if you look at any particular operation, based on the mix that's coming through, we constantly make adjustments to do that. We actually have hit the low point in terms of crewing. As we here start the spring selling season, we're actually selectively increasing crewing in a couple of our facilities to accommodate the demand. So we don't anticipate any further reductions in the overall level of crewing.

All -- pretty much most -- I think most of the furloughed people have been offered a chance to come back at the couple of plants where we did furlough.

Okay, that covers it. Thank you very much.

[OPERATOR INSTRUCTIONS]. Joel Havard, BB&T Capital Markets.

Thank you. Good morning, guys. Congratulations. Great quarter.

Thanks, Joel.

On the transportation side, I seem to recall you all have spoken a little bit recently about one of the challenges you faced over the last couple of quarters was a carrier who'd become a really principal vendor for you, had to move away, left you kind of behind the curve on getting that distributed again properly. Could you update us on what's going on there? Do you feel like you're all the way rebalanced now? And then the sort of move from that capacity issue to the pricing issue specifically, if there's a way to quantify the year-over-year change and your experience on a per truckload or whatever basis you can discuss?

Joel, it's Kent. I'll start from an operational standpoint, and then I'll let Jon make a comment on the financial side. From an operational standpoint, we are nearing the end of those transitions. They're primarily west of the Mississippi, is really the last round of transitions that we have. We really only have a couple of areas. The Northwest is really the only area we have left which we'll do here in the first half of March. All the new carriers that we've brought up, really, since the beginning part of January have come up to speed very quickly. They've done an outstanding job of getting their operations prepared for our product to flow through. We really have seen virtually no issues out of those start-ups. So, here in another -- well, probably two weeks, we will be completed with the conversion from an operational standpoint; and we will now be going forward with our new network.

All right. And Kent, one follow-up on that before we go to Jon, the number of vendors -- I mean, was I right in remembering that one vendor had become very important to you, and now that's distributed back to another 5 or 10 or 20?

Yes, I mean really we had a concentration of one particular vendor. They decided to exit the business so we had to replace them. We've replaced them with a handful of vendors, so we do have some more. The places that have -- they have -- most of them were given to existing vendors who just expanded territory.

Okay.

So -- but we have increased our carrier network by a handful of people.

Okay. And, Jon, that's a great hand-off to you on sort of what the year-over-year difference in the cost of freight is?

Yes, Joel. It's sort of evenly split between fuel surcharges that are embedded into our various contracts and rate increase that's we have absorbed, given the tight freight conditions in the marketplace these days. So year-over-year, you're talking about freight had been up nearly 200 basis points on a year-over-year basis. If you dial back a quarter ago, that's probably down to about 100 basis points or so on year-to-date basis now because we had a little bit of relief this quarter as the diesel fuel prices came back down a notch.

Okay. And, Jon, one other follow-up. If we think back -- and actually, Kent, you may have to do some remembering for us here, too, but let's go back three or four years, where you were on track to have a nice year-over-year gain and everybody's looking forward to that year-end bonus. What was the sort of maximal dollar impact of bonus accrual -- again, go back five years or so to put a handle on that.

Joel, we haven't really disclosed that impact in the past, so I don't think that's a number we really want to give out at this point. But, certainly, it's been the most significant aspect of our G&A costs being lower this year as a percentage of sales than it was last year. We have had some cost reductions in our professional fees and so forth in year two of Sarbanes-Oxley instead of year one, but really the reduction of pay-for-performance incentive comp has been more of principal driver there.

That's -- I'll live with that for now. If we -- and, of course, I'll try and get around it. If we go back -- or if we look forward and presume that -- '07, my hypothesis, not yours -- could be better than '06 -- Jake, you may want to chime in on this. Would the improvement be enough relative to sort of a trailing one-, two-, three-, four-year basis that the Board would be thinking about allowing that accrual again? Or maybe you could just give us some brief -- just a brief overview of what sort of the backward-looking improvement is needed to get the bonus program fired up?

Well, the bonus program is always fired up. What happens is, is that depending on the level of job you're in, beginning with me -- I get paid 100% of my incentive compensation based on net earnings. People that work for me have -- the predominance of theirs, and then it scales down from there. So there are people in our facilities who are getting paid for that, combined with other things, and so they still have a chance to earn some money. We are -- we have a very strong commitment in the Company to pay for performance. So we have a high element of total compensation in the variable piece. So going into FY '07, we fully expect to be putting together a budget forecast that would be a good balance of meeting both shareholder and organizational interests as far as the bonus is concerned. So -- and I don't think we'll have trouble doing that. But we'll be working on that between now and the end of the year, and we would expect to see more normalized bonus payouts resume next year with better performance on behalf of the Company.

Okay. Guys, thanks again. Congratulations on a great quarter. Good luck.

[OPERATOR INSTRUCTIONS]. Peter Lisnic, Robert W. Baird.

I'm back. Jake, I was wondering if you could just clarify the earlier pricing question. You put through a price increase at the end of calendar '05, I'm just wondering if that applied to both home center and builder?

That was primarily in the professional area, or over in the builder distributor area.

Okay. And --

Primarily that was over in that area.

Has anything happened on the home center side in terms of pricing?

Not on our behalf, and we watch the market, we'll price the market and we'll keep our eye on those cost pressures that I -- I itemized earlier.

Okay, great. That's all I had. Thank you.

You bet. Sure.

And this does conclude our question-and-answer session for today. I'd like to turn it back to Mr. Eanes for closing remarks.

Because there are no additional questions, again, thank you for taking time to participate in this conference call. And speaking on the behalf of management of American Woodmark, we appreciate your continuing support. This concludes our conference call. Thank you.

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