American Woodmark Corp (AMWD) 2007 Q2 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 to 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 the 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 there are any projected results expressed or implied therein will not be realized.

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

Good morning, everyone, I'd like to welcome you to this American Woodmark conference call to review our fiscal 2007 second quarter results. Thank you for taking time out of your busy schedule to participate. Participating on the call today from American Woodmark will be Jake Gosa, Chairman and Chief Executive Officer; Kent Guichard, President and Chief Operating Officer; and John Wolk, Chief Financial Officer. John will begin with the review of the quarter and outlook on the future. And after John's comments, Jake, Kent, and John will be happy to answer any of your questions. John?

Thanks, Glenn. This morning we released the results of our second fiscal quarter that ended October 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 $210.8 million, down 2% versus the prior year second quarter. Net income for the quarter was $9.2 million, up 49% over the prior year second quarter net income of $6.2 million. Diluted earnings per share of $0.57 for the quarter was 54% higher than the $0.37 we earned in the prior year second quarter. For the 6 months ended October 31st, net sales were $433.6 million, up 0.8% versus the prior year's first 6 months. Net income was $22.6 million, up 66% versus the prior year's first 6 months and diluted earnings per share of $1.40 per share was 73% higher than the $0.81 we earned in the prior year's first 6 months.

We began recording stock compensation expense during the first quarter of the current fiscal year. The rounded after tax impact included in these aforementioned results was $0.07 per share in the second quarter and $0.12 per share in the first six months of 2007. Excluding the impact of stock compensation expense, our diluted earnings per share would have been $1.52 per share or 85% higher than in the prior year. As we discussed in our recent calls, we commenced the transition out of certain low margin products, including the in-stock cabinet business at Lowe's one year ago at this time. As in the last call, I will provide a separate breakout of our transition status and impact and continue to do so on future calls until the transition impact is complete.

Regarding our second quarter sales performance, our previous guidance anticipated sales per growth for core products of 1% to 5% over the prior year's second quarter. Our actual core product sale growth came in within that range at 3.8%, driven by strong double digit growth in remodeling sales offset by a decline in new construction sales in the high single digits. Sales of low margin products declined as planned, down 44% from the prior year second quarter. The number of retail stores transitioned accelerated as the quarter progressed and the schedule for the remainder of the transition was established. Based upon this schedule, we expect we will completely exit this product category by the end of the current fiscal year.

Our previous guidance anticipated an overall sales decline versus the prior year's second quarter of 1% to 5%, inclusive of our transition out of low margin products. Our overall sales decline of 2% was within that range. In new construction, the market appears to be headed toward achieving the consensus forecast of 1.85 million new units for calendar 2006, a decline of 11% below prior year levels. Our expectation for the new construction market is in line with that of the National Association of Realtors, which expects residential housing starts to drop by another 11% in calendar 2007 to 1.63 million units. On the negative side, the reported backlogs of large customers to whom we sell have been declining due to increased customer cancellations and reduced sales activity. However, on the positive side, a number of economists have recently predicted that unsold inventory levels of new homes may have peaked at the present levels.

And 30-year fixed mortgage rates as reported by Freddie Mac fell to their lowest point in 10 months at 6.18%, and while higher than last year, still remain favorable compared to historical levels. Although the new construction market continues to cool, we continue to aggressively bid and win new business. Based upon the value of our Timberlake product line, our extensive service reach, and our partnerships with many leading home builders, we believe we are growing our market share in what looks to be a relatively weak new construction sector for the next several quarters.

For the remodeling market, economic conditions have been steady. Existing home sales, a leading indicator for home improvement spending, continue to hover above 6.2 million annualized units and are expected to close the year at the third highest level ever. The consumer confidence index remains stable and near recent highs. The unemployment rate as reported by the U.S. Department of Labor stands at 4.4% and new job creation remains healthy. However, despite these healthy indicators, both of the major home centers had negative same store sales comps for the most recent quarters. We believe the remodeling market will be roughly flat with prior year in the coming months. We believe our double digit sales -- our double digit retail sales increases demonstrate that we have gained market share and that our market position as the value provider of goods and services positions us particularly well during this less robust phase of the housing cycle.

Moving out to gross profit. Gross profit for the second quarter was 20.3%, significantly higher than the 15.7% we generated in the second quarter of last year, but less than the 22.0% we earned in the first quarter of this fiscal year. For the first 6 months of the current fiscal year, we generated a gross margin of 21.2% as compared with 16.4% in the comparable period of the prior year. Efficiencies were gained in relation to prior year in nearly all of the cost components of gross margin.

As we described in our recent conference calls, numerous operating initiatives that were launched one year ago have significantly improved margins. These initiatives included focusing on operational efficiencies and disciplines, implemented selected pricing actions, rationalizing spending and head count levels and initiating our transition out of selling certain low-margin products. Our transition out of low-margin products commenced one year ago, the reduction of these production volumes have enabled a significantly improved sales mix of more core products with higher margins as well as an enhanced level of focus on realizing operational efficiencies. The impact of pricing actions has helped offset inflationary pressures and material costs. And diesel fuel costs have returned to more normalized levels which has helped to reduce freight costs.

The combined impact of these actions and market dynamics help to improve margins during the second quarter of fiscal 2007 as materials, labor, and freight costs were all more than 1% lower as a percentage of sales from 1 year ago. Gross margins declined sequentially from first quarter levels as relatively flat manufacturing overhead costs were spread over a seasonally lower sales base combined with increases in materials and freight costs. Total SG&A expense was 13.5% of sales in the second quarter of fiscal 2007 versus 11.1% in the prior year. Total SG&A expense was 12.9% of sales in the first half of fiscal 2007 versus 11.3% in the prior year.

Selling and marketing expenses were 8.5% of sales in the second quarter of fiscal 2007, up slightly from 8.4% in the prior year. Selling and marketing costs were 8.3% of sales in the first half of fiscal 2007, which was in line with prior year levels. Selling and marketing expenses for fiscal 2007 included 0.1% of sales for stock compensation expense. General administrative expense increased to 5% of sales in the second quarter and 4.7% of sales in the first half of fiscal 2007, compared with 2.7% and 2.9% of sales in the prior year second quarter, and first half respectively. The increase over prior year reflected higher costs related to the Company's pay for performance incentive plans, stock based compensation costs, amounting to 0.5% of sales, and a provision for potential uncollectible receivables for one of the Company's new construction customers.

With regard to our capital growth plans. Capital expenditures and promotional displays deployed during the first half of fiscal 2007 aggregated $10.6 million as compared with $16.9 million in the first half of fiscal 2006. Capital expenditures drove the majority of the decline but outlays for promotional displays deployed at customers were also somewhat lower, as well. These reductions were driven primarily by timing. We expect capital expenditures and promotional displays deployed in fiscal 2007 will be$5 to 10 million higher than in fiscal 2006, comprising a variety of small to medium sized projects, but no new plant construction activities. The Company expects to continue to fund its capital spending from a combination of operating cash flow and existing cash on hand.

Regarding our balance sheet, the Company's financial position remains outstanding. Long-term debt to capital on a book value basis was 9.9% as of October 31, 2006. Cash provided by operating activities was $52 million in the first half of fiscal 2007 as compared with 30 million in the comparable prior year period. Free cash flow generated and available for financing activities improved to %42 million in the first half of fiscal 2007 compared with only %13 million in the comparable prior year period. Cash on hand improved to over $68 million, up over $20 million from the Company's prior year end in April 2006 and up over $30 million from this time last year. The company doubled its quarterly dividend payable to shareholders 3 months ago to $0.06 per share. The company repurchased 29.7 million of its common stock during the first half of fiscal 2007, up from only 1 million in the prior year. The company has nearly exhausted the $20 million stock repurchase issued by its Board in July 2006 and announced last week that the Board approved a new $50 million stock repurchase authorization.

In closing, overall, we are pleased with the Company's continued positive operational and financial performance. The Company's emphasis on improving the overall quality of its products and services has been well received by many of its core customers. The transition out of low margin products has gone according to plan. As we have previously stated, we believe the Company should generate sustainable gross margins in a range of from 21 to 23% of sales. The company's performance in the first half of fiscal 2007 was in line with these expectations.

As we look forward to the second half of fiscal 2007, the Company has updated its policy of providing forward-looking guidance. Previously we had provided forward-looking guidance for the next quarter. Commencing with our press release and conference call for this quarter, the Company will be providing forward-looking guidance that reflects management's expectations for the fiscal year end and we will cease to provide quarterly guidance.

We continue to see a mixed housing environment that should support our slightly reduced sales forecast. From a market perspective for the next 6 months, we expect the kitchen remodeling market will experience a flattish to slightly negative sales environment as compared with prior year comps. And new construction market sales will decline by double digits. We believe our company has grown its market share during the first half of fiscal 2007 and remains well-positioned to continue to grow its market share in the second half of the fiscal year. Our partnerships with the 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. Our market position as the provider of excellent products and services at a lower price point is extremely competitive in a more challenging retail sales environment.

Most of our new construction customers expect to continue to gain market share. Our partnerships with these national and regional builders position us well to maintain and grow our market share. And through improved execution and focus on providing higher quality and best in class service, we have regained most of the market share that we temporarily lost last year and expect this trend to continue. For sales in the second half of the fiscal year 2007, we expect we will continue to gain share in a relatively flat remodeling market. Following a successful first half of the year, we expect we will continue to experience double digit remodeling sales growth in the second half.

We will -- we also expect we will continue to gain share in new construction, although given weak market conditions, we expect our customers construction timetables will be elongated causing our sales to decline during this period. We expect our reported new construction sales will be down double digits below prior year levels. Because of the offsetting nature of these two different market dynamics, we expect that our core sales for the second half of fiscal 2007 will be roughly flat with prior year levels. Our low margin products transition is nearing its conclusion a bit faster than expected. We now expect that second half sales from retail low margin products will decline 90% below prior year levels and that fourth quarter sales from this product category will be nearly zero. Factoring in the impact of this decline and low margin product sales, we expect the total net sales for the second half of the fiscal year will be between 6% and 10% lower than prior year levels.

For gross margin in the second half, we expect the Company's gross margin rate will be comparable to the 21.2% we generated in the first half of the year. With third quarter margins dipping a bit lower and then improving above that level in the fourth quarter, both driven primarily by seasonal customer ordering patterns. To maintain labor productivity in the face of lost volume from the eminent completion of the low margin products transition and slightly weaker than expected new construction sales levels, the company will modestly reduce direct labor headcount during the second half of fiscal 2007.

For net income for the year, we expect that the company will achieve a record level of earnings in fiscal 2007 despite the more difficult housing environment. We expect the company's earnings per share will fall within a range of from $2.40 to $2.50 per diluted share. This earnings range includes non-cash charges for stock compensation expense of $0.26 per diluted share. Exclusive of stock compensation charges, earnings are estimated at $2.66 to $2.76 per diluted share, 33% to 38% higher than the $2 per diluted share the company earned in the prior year.

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

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to Eric Bosshard with Cleveland Research.

Good morning.

Hi, Eric.

I Eric.

Couple of things. First of all, could you talk a little bit about what you're seeing going on with the promotional environment right now on both sides of your business, understanding that the customers are seeing softer demand, and there's been some capacity added to the industry. What do you see going on with pricing and promotional spending in the market?

This is Kent, let's start on the retail side first, the retail customers, big retail customers continue their promotional calendars. I'm not sure that I would classify it as either greater than or less than what they've done probably over the last year or two. It really has moved away from if you go back a while ago, an every day low price kind of environment into a promotional driven environment, certainly in special order kitchens. But the level of activity, they set their promotional calendars pretty well in advance. And they've been pretty consistent about the -- sticking to that calendar. Occasionally if there's an opportunity they feel or something they want to push, they might add on to that a little bit. But their promotional calendar is pretty full and they generally stick to that.

I would say at least from our perspective it's not necessarily greater to or less than that what they've done historically. On the new construction side, I would say that we've actually probably seen it lighten up a little bit. The free upgrade for a family room, the free plasma TV, the help with closing costs and those types of things, from our perspective we'd probably say that they peaked, maybe this summer. Earlier this summer and, in fact, the promotional activity in most markets -- there's still a couple of markets where there's a lot of unsold inventory overhang.

But in most markets, we've actually seen the promotional activity dial back on the new construction side. . I think the new construction folks are where they want to be in terms of balancing the operations or waiting for the inventory overhang to go away. They continue to develop their long-term plans in terms of property development, those types of things. I think they've really kind of rebalanced. And we're not seeing as much promotional activity on the new construction side as we saw probably even last time we reported.

Yeah, I concur with that. I kind of watch the Washington Post as I travel around some other papers. This weekend the Post was noticeably, there was noticeably less promotional activity in the real estate section than we've been seeing for the past several months.

Secondly, in terms of gross margins, the contraction from 1Q to 2Q. Sounds like in 3Q you won't get back to 21. Can you help us understand a little bit of the moving parts within that and also how you have confidence that you'll see an improvement back to that 21-plus type of number in 4Q?

Yeah, sure, Eric, this is John. In Q2 we had a little bit lower sales volume, we had relatively flat manufacturing, overhead costs, so that's the primary reason that you saw some sequential decline. Also as we had mentioned on the last conference call, we did experience some material increases. And, of course, fuel costs were higher in the second quarter than they were in the first. Those were the primary reasons that we had a sequential decline. In the third quarter we expect another decline, but this one is purely based on seasonal volumes being lower. It's our lowest seasonal quarter of the year. There won't be enough volume to offset some of the cost base. So margins will decline somewhat. And then the opposite story is true in the fourth quarter. It'll pick up seasonally. And that will more than offset the cost base and we should have higher than 21% margins in the fourth quarter.

Perfect. Thank you very much.

You're welcome.

We'll go next to Joel Havard with BB & T Capital Markets.

Thank you, good morning, everybody.

Morning, Joel.

Let's see. Maybe a Jake or Kent question, here. The press release references the 10 service centers, is that the 8 metro markets that we've been pestering you about, plus a couple of satellites, or is this reflecting a new builder service center somewhere?

No new builder service centers as of now.

Well, that might just hit my follow-up question, which would be -- given that the tide is dropping. What is you all's experience on when it does make sense to think about stepping into a new geography? Is the tide is starting to lift again? Do you want to get in there and start to take some share when your competitors are a little weak? How does that work?

Well, I mean, we really talk -- you go back to John's remarks. We really think about the new construction side. Joel, as we've talked, we can either access that directly as an owned if you will, or indirectly through a distributor or some other type of distribution network. What we do is, it really quite frankly has nothing to do with the current state of housing starts or building. If we're going to go into a market with a direct footprint, it's going to be for strategic reasons because that's where we want to be for, how we want to access or service that market for the long haul. So trying to time that, if you will, based on what you see in a particular market related to starts or building activity. That's just not how we make that determination.

I know you guys have talked in the past about two or three other potential metros that did make sense to get into. Assuming that those are still true, is that the sort of thing that is starting to get talked about at the planning level yet?

Well, sure, I mean, we look at it, they're always on the drawing board. The question is, does it make sense at this point strategically to go in and do that on a direct basis? Or are you going to continue to try and service that market on an indirect basis? The markets that we've talked about, the most obvious markets I think for a direct operation. We have a presence in those markets with the Timberlake brand through the distribution. It's not like we're not participating in those markets.

Exactly.

We're just not participating on a direct basis.

Two of the three markets we've talked about in the past Vegas and Chicago and those two markets in particular we've added significant new distribution customers over the past 18 months. And as long as that is providing access, then we probably going to feel pretty good about continuing on that strategy right now.

Jake, you anticipated that next follow-up too. Jumping over to DIY. We were concerned that the same store story that was unfolding from your two main customers there over the last couple of weeks would hold a lot more risk for you guys. What is it about the Woodmark value proposition that's allowing you to have posted what you did and to be comfortable making that double digit forecast?

Well, I think that first of all when you look at that, their overall comps, they may or may not reflect. Certainly when you get down by region, reflective of what's happening in SOS Kitchens. That's really, what they're reporting externally is for the total store.

Of course.

So within the store, you'll have departments that behave differently. And certainly by regions, you'll have that that behaves differently. So that is, it is a signal that there is not -- John put it as robust, there's not as much traffic. There is traffic, people are buying, they are remodeling and they are buying kitchens. And so there is activity in the department. They are making quotes, they are doing business. What really happens in this particular environment to us if you have a consumer who is -- wants to do their kitchen, a little more budget conscious.

They tend to, the terminology we would use is they would have a greater tendency to rotate down price points. So when you get our value proposition, which is in essence the same look and feel, but maybe not the availability of all the bells and whistles. But when they get a chance to do that, they're still going to do their kitchen, but they're rotating down price points, that's really where we are. So that's kind of the first thing that I would say from a product standpoint. Just look at the pure product is that people will have a tendency in an environment like this to rotate down. And somebody who is a value player is probably going to pick up a kitchen here or there. The other thing that adds on, which everybody works on, but both our service and quality platform. Which are part of our value proposition. It's part of the whole formula. We believe that we provide superior service and quality to the industry. And that helps you at all times, but certainly in times like this.

Kent, thank you. One more for you. When we've talked about the shedding of the low margin business over the last few quarters, I've described it as you all basically picking up another assembly plant's worth of a capacity with no investment. Where do you start to see running into constraints again given the growth forecast you've talked about? Are we safe into or through fiscal '08?

I assume you're talking about hard capacity?

Well, I know you've talked about that a couple different ways. Assuming you would staff up a little bit at your existing base, et cetera along the way.

Yeah, I mean, basically where we are now, if it's a utilization question. We are crewing the plants to the business that's available that we're doing. And so there is always going to be a little bit of lag time in terms of getting your crewing back. If you're talking about significant investment, which I think might be the point of your question --

Yes.

-- in terms of when do we either have to do a major expansion or start another greenfield site. I would say that once, as John mentioned, we get into the fourth quarter, we get the low margin stuff out, that the base that we are probably talking at least two and probably three years before we start to seriously look at putting more hard capacity, if you will, on the grounds. So we've got some running room here.

That's great. Does that include any needed component expansion along the way? Again in the sense of a major addition, not just --

That would be any type of capacity.

Okay. Very good. And finally, John, on the gross margin comments, if you could just kind of break it into the two parts that had to do with the year-over-year gain here, the elimination of the low margin business versus head count, rationalization, pricing, diesel costs, et cetera. Where did you put the magnitudes?

We haven't really quantified it that way, Joel, but I think it's, you know, there's been excellent contribution from both sides. Both have been very meaningful contributors to us at different points in the cycle in the last year. I'd say it's probably close to a 50/50.

Okay. Guys, that's all I've got. Good work.

Thanks.

We'll go next to [Jeff Breeta] with Raymond James & Associates.

Thank you. My first question, core sales in the quarter, I think you said up 3.8. Are we correct in assuming the units were about flat or maybe even down a little bit?

Units were actually down a bit?

Okay. Down, you know, 1-2% right there?

We'll have it quantified in our 10-Q that comes out. But they're down a bit and really have sales increase because of sales mix improving with the transition out of the low margin stuff.

Okay. And on the transition. Is this purely a timing shift, the changing we're seeing this quarter? the overall size of the transition isn't changing at all here, is it?

The timing is just a little bit quicker than we expected in terms of the impact in third and fourth quarter. We have always expected by the end of our fiscal year we would be out of that product set. But it is certainly a significant sales decline for us planned in the third and fourth quarters as compared with last year.

At different times in this process, we've either been ahead or behind the overall plan. But the overall timing of when we wanted to be out of this has not changed. And there have been times in the past 12 months where we've been a little bit behind the curve. Right now we've seemed to caught up and we're doing very well.

Okay. Can you talk a little bit about particle board pricing, where it was in the quarter and if you expect to see any kind of shift, you know, going into Q3?

This is Kent. We -- the markets, if you go back into the summer time, the markets were very, very tight. And there was a lot of pressure on pricing and that certainly rolled through our purchasing, our price during the second quarter, where we as I think most other people saw a significant increase that hit us as we got to the end of the summer and early end of the fall. Right now they're relatively stable. We haven't seen or heard any really any pressure up or down. We think that the production levels from the major manufacturers are pretty much in balance. They appear to be in balance with the demand. And so it looks to be right now a relatively stable market. What comes in the spring, who knows, but right now we think we've absorbed pretty much the increase that was showing up in the marketplace and we don't expect here over the next short period of time to experience anymore pressure or relief, quite frankly.

Okay. Even despite your guidance for the overall market may be softening a little bit, you don't expect to see particle board coming in?

No, part of what's happened is there's a lot of capacity that's gone offline. There was a major manufacturer who was purchased who shut down a plant in the upper Midwest. And part of what's happened there's been a lot of capacity that's come out of the system by the manufacturers over the last 3-6 months.

Okay. Let's see -- what was your -- what was your lead time in the quarter? I think normally you -- usually around two weeks, is that about where you were for the quarter?

Yeah, we're on standard lead times.

Okay. And then just lastly, I apologize if I heard this wrong, was there a -- did you mention a writeoff of receivable -- receivable for bad debt in the quarter?

Not a writeoff, but just a provision for potential uncollectibility on one customer's receivable.

Oh, okay. Just -- thank you very much.

Sure.

You bet.

We'll go next to Peter Lisnic with Robert W Baird.

Good morning, guys.

Hey, Peter.

John, would you mind telling us how much that provision was for the receivable?

It was roughly $0.5 million.

Okay. And then if I heard you correctly at the beginning of your commentary, you talked about, or at least I thought it was phrased as aggressively bidding for some of the new home construction business. I understand there were market share losses, you've gained those back. Should we be concerned at all that you've lost margin or had to buy back that business at all? How are you looking at profitability mix between remodel and new construction now?

Kind of two questions there. The market share that we're gaining back is not appreciably different in terms of margin versus business that we have. There really hasn't been any need to buy that business back. A lot of the reason we're getting the business back is because of quality and service levels. It's nothing to do with pricing or cost, it's really our ability to service the customer. And some of the places that they went to just quite frankly didn't have the service or quality levels. So we're really getting most of that business back based on our service platform, not on any type of aggressive pricing action. When we say we're aggressively bidding what it is, we're submitting bids for more subdivisions than we have normally just because the buildout rates in the subdivisions are slower. If we're trying to get the same number of installs done every month, we're just going to have to be in more subdivisions because the buildout rate is slower.

Okay. That makes sense. And I just want to clarify, with these customers or the market share gains, these are customers you previously had and they're coming back because you've gotten your quality and service levels back to where they used to be? Or are these brand new customers?

Both.

Okay, fair enough. John, do you have the average price at which you bought back stock in the second quarter?

I'm looking at Glenn. I can tell roughly what it is, do you know precisely what it is?

No, I didn't bring that with me, it will be in the 10-Q.

I would say between $33 and 34 a share.

Okay, yeah, that's helpful. And then if I look at the balance sheet with the $68 million in cash, or 69, and then the debt on there, you're running with what I perceive to be a relatively healthy cash surplus. Can you help me maybe understand how significant that cash surplus is? And then maybe tie that into, you announced the $50 million incremental buy back last week or two weeks ago, just tie that into your willingness to deploy cash to buy back stock?

Well, I think you want to look at our the 6-month period we just completed, we generated $42 million of free cash flow, we bought back nearly $30 million worth of stock. I think the new authorization of $50 million certainly expresses our Board's willingness to continue to endorse that strategy and certainly Management's extent to continue to exercise that strategy.

So it's basically what you're telling me is all the cash you're generating this year, you're going to buy back shares with.

I didn't quite say that --

But I read into it.

We've got a business to run, we've got capital expenditures and promotional displays to deploy. But certainly to the extent that we have excess cash that is not being deployed for those business reasons or to pay enhanced dividends. As you know we just three months ago doubled our dividend. And certainly stock buy backs are something we continue to do.

What are the excess cash levels as you look at the balance sheet today?

I think it depends really on, expectations and so forth on quite a lot of things, the seasonality. But we believe there is excess cash on the balance sheet today. And certainly we're going to deploy it.

Okay. Fair enough. Thank you.

Thanks.

[OPERATOR INSTRUCTIONS] We'll go to [Sun Li] with Royal Capital.

Hi, guys, quick question on the G&A expense. Looks like it was up pretty big over last year, even sort of taking out that $0.5 million provision and assumptions for what stock comp was. Could you talk a bit more about this pay for performance that you have?

Sure. I will. We have for any employee, any permanent employee of the company, full-time or part-time, they are on a cash bonus program that is linked to a combination of individual performance and overall company performance with the majority being overall company performance. Last year at this time, the payouts were low to none at all on virtually all of those plans. This year, with the performance in the first half and projected performance for the year, those plans are much more in the money, if you will for the average employee and what it reflects is just payments to the employees, gain sharing, profit sharing, however you want to term it that comes through our bonus plan for our 6,000 employees.

Is it linked then to profitability or to top line?

The primary company is linked to profitability, straight to net income.

Got it, thank you. And I want to talk briefly about -- you mentioned that you're gaining share in both of your markets. I want to compare that to sort of what your competitors have been saying on their calls. And it seems like everyone's gaining share in this industry. And I'm trying to understand maybe is it their gaining share in sort of other markets, not cabinet related? How does this -- how does this gel together?

This is Jake. 18 months ago when we were having some big operating issues and I think I was the only CEO I ever met in this industry that admitted we were losing some share in some markets. And we see the same thing. I think what you've got to do is if you look at our company, we're the only pure play in the industry. So there's no place for us to go hide. We talk about cabinet business, we basically talk about it two ways. New construction and remodeling. And we disclosed those figures. So you can more or less compare our figures pretty much straight up to what's going on in the marketplace.

And I think, it's kind of a foregone conclusion there as to whether somebody's gaining or losing share or whether they're closer on the margins. Generally speaking, I think we get compared to other people that are diversified portfolio companies and while cabinets are significant, they're not the only business that the only significant business they're in and their disclosure practices are very different than ours. I can't speak for them, I can only speak for us and it's pretty clear if you look at our numbers over the past couple of years, what's happened and what we've reported.

So clearly with the downturn in the new construction market, clearly we're doing better than the marketplace there. And certainly if you believe anything at all about what you're reading, having double digit increases in this quarter would be positive to the general markets. Other than that, I don't know what to tell you except that, I probably, from your standpoint, share your frustration and try to, you know, slice and dice some of those.

Do you get any data from the do-it-yourself channel as far as category sales and your share of that?

We don't get it from the do it yourself channels. We have industry data, we have different things that we use to vector in on it. But there's no sort of one size fits all kind of thing where everybody in the industry's in there and everybody's reporting and you get a really clean number. There's nothing like that in this business. So we use several points of reference and try and vector in on something. But over the years we've got a pretty strong indication of what that footprint's likely to look like and we're fairly confident as to whether we're saying we're gaining or losing what's going on.

Can you give us a dollar figure as far as remodeling versus new home sales?

You mean our mix of business?

I mean if you have dollars, that'd be great.

Well, we tend to be between 60 and 65% remodel.

Okay.

So the math is fairly straightforward.

Got it, thanks, guys.

You bet.

[OPERATOR INSTRUCTIONS] We'll go to Robert Kelly with Sidoti & Company.

Morning.

Hey, Robert.

Hey, Bob.

Question on the regain -- regaining of the lost share, is that kind of what is driving your forecast? Or is that what we're seeing during the past two quarters. How should we be thinking about that?

This is Kent, I'm not quite sure I -- it's a combination. Most of if you look at what we're talking about going forward is that in some areas it's a recapture of market share. In some areas it's just getting our piece of the normal growth in the channel. So can you help me a little more maybe with what you're after?

No, I think you answered the question perfectly. Also you guys talked about being a -- customers rotating in price points. Historically, has that been the case, when markets soften a little?

We've seen that happen in the past. You know, I wouldn't say that right now I know that's particularly happening. I think that what happens with us, though is that we -- our product occupies that kind of big middle piece of the market both in new construction and remodeling. And I think, kitchens, special order kitchens are in the remodeling side or turnkey kitchens on the new construction side are fairly complex transaction-rich business, therefore they're problematic by nature. So the emphasis on quality and service that we've taken particularly with the program Kent's put in play in the last year and a half I think has played a major role in our ability to gain share this time around. It'll be a little longer before we're able to say definitively, exactly what happened, was there any downward rotation in customers, you know, buying a little more value conscious and that sort of thing. I can't really speak to that. But I would say that I think there's clearly an impact of, you know, the quality and service improvements that the company is -- has realized from these various programs that have been undertaken in the past 18 months, let's say.

All right. Thank you.

You bet.

We'll go next to Patrick Stowe with Priority Capital.

Morning, thanks for taking the call. You mentioned some capacity coming offline. I guess fairly recently in the last 3-6 months. I guess taking that into consideration as you look out to forecast for '07 with starts, 1.6 million maybe a little higher, maybe a little lower, do you feel comfortable with the industry's capacity level in that environment?

Well, the capacity that I was referring to was an answer to a question about particle board pricing. And so the, what's come offline is particle board pricing. Is your question can the particle board manufacturers gear back up?

I'm sorry, I misunderstood that. I guess just in terms of cabinet capacity as you look across the industry going into '07 in a weak housing starts environment. Do you have any commentary on, you know, kind of an equilibrium level for capacity versus starts? and whether you're comfortable with where you stand in that environment?

Well, I would say in the short-term depending on, again, what your forecast for starts is is that there's probably excess capacity in the overall industry. Now capacity in the overall industry is kind of interesting discussion. Because there's been overcapacity in the industry for many, many years. The problem is the capacity hasn't had access to what the customers are purchasing. There's been a misalignment in terms of where the capacity is and its ability to get product and services to where the customers are. I don't think that that situation is necessarily any worse than it's been in the past nor necessarily any better.

I think the major three manufacturers have capacity, but I also believe that the major three players in the industry, ourselves included, are happy with their asset base, they're happy with the investments, we certainly are happy with the investments we've made with our asset base. We're going through a period of time where we're not utilizing the asset base maybe as fully as maybe we have at other periods. This is really the first downturn the housing industry's seen probably since '91. Major downturn since '91.

Right.

You look at all the demographics in terms of population growth, in terms of the increase in immigration, in terms of the birthrates all of those other types of things. The country's still growing, all of those people are going to have to live somewhere. We believe that while you may go through an adjustment period and every economist and everybody will give you an opinion on how long they think this one will be. The industry, especially the people that have the capacity aligned with where the demand is going to come from. All of those assets are good investments. We certainly believe that ours were. And ultimately we're comfortable with our capacity situation and we believe we'll effectively utilize that capacity, that asset base going forward.

I think, this is Jake, I think having the assets to put in play if this thing lasts a couple of quarters or longer is a big benefit because if you look at the fundamentals, you've got to be happy about being in the housing industry over the mid and long-term. And so we're, we're going to keep those assets in play and we'll just, you know, deal with whatever the market hands us here and continue to work on our share and continue to position ourselves for success. But I think if you do anything right now, you want to make sure that you can cover your up side risk because when you come out of these things, it usually puts a little up side pressure on you. When that's going to be depends on which camp you're in.

Right.

But we feel good about the midterm and long-term.

I appreciate it. Maybe one other question if I can. If the starts environment stayed somewhat depressed for a little bit longer, do you have the ability to transition capacity between your new construction lines and your remodeling lines? Or just any color on how would you transition? Do you have the ability to? Is it too long of a lead time? Is it an expensive process?

Go ahead, Kent.

Actually, there's really no transition time or costs to go from one channel to the other. Our production is set up where it's essentially interchangeable.

It's a common platform. So we go either way.

Okay. So you have the ability to be very flexible in terms of your end markets?

Yes.

We have six, Patrick, six assembly plants, assembly distribution plants and all six of them make everything in the product line every day if they need to. So they're fully flexible.

Great. Well, thanks for the color, good luck to you.

You bet.

We'll take a follow-up from Eric Bosshard with Cleveland Research.

Two questions. First of all, John, can you help us understand within the repurchase, what the contraction, I guess ask it differently -- what is the share creep that goes on? Or the number that goes from the 30 million gross repurchase to sort of a net reduction in shares?

You've got a couple of reasons that the count increases, Eric. Really it's related to stock options. So you've got annual stock option grants that the company does in roughly the June time frame as well as the occasional stock option grant that falls outside of that when perhaps a new executive might start. But we have maintained this roughly 2% burn rate in terms of our annual grants exclusive of those other occasional one-time grants. And that's been a consistent strategy of the company for several years now. So as those options are issued as the market price fluctuates a tad or exercises of those options, you'll see the share count move for those reasons.

Is there a rough number that you'd say if we do nothing, if we buy back no stock, the share count's going to creep up 100,000 shares.

I would expect roughly that 2%, so that would be around 300,000 shares.

Okay. And then secondly, the option hit this year, you broke out and said were incremental $0.26. That's basically the number you're going to endure going forward, correct with the new accounting rules?

Yes, roughly, but inside of that, there's a couple of other nuances. Obviously you're familiar with the volatility of the stock and the different assumptions and how that comes into play. But I would say roughly that would be the expectation, but it will vary somewhat.

Okay. Great. That's what I needed, thank you.

Sure.

And that does conclude our question and answer session, I would like to turn the call back over to Glenn Eanes for any additional closing remarks.

Thank you and since there's no additional questions, thank you everyone for taking time to participate in our conference call this morning. And speaking on behalf of the Management of American Woodmark, we appreciate your continued support. This concludes our conference call. Thank you.

Thank you for your participation, you may disconnect at this time.