American Woodmark Corp (AMWD) 2007 Q4 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 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, I would like to turn the call over to Vice President and Treasures, Mr. Glenn Eanes, for opening remarks and introductions. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and thank you for taking time out of your busy morning to participate in this American Woodmark conference call to review our operating results for fiscal 2007. Participating on the call with me this morning will be Jake Gosa, Chairman and Chief Executive Officer; Kent Guichard, President; and Jon Wolk, Chief Financial Officer. Jon will begin with a review of the fourth quarter and full-year fiscal 2007 results and provide a brief outlook for the future. After Jon's opening comments, Jake, Jon, and Kent will be happy to answer your questions. Jon?

Thanks, Glenn. This morning we released the results of our fourth fiscal quarter of fiscal year 2007 that ended April 30, 2007. In case you've not had a chance to read our earnings release, here are a few highlights. Net sales for the quarter were 166.1 million, down 23% below the prior year's fourth quarter. Net income for the quarter was 6.2 million, down 54% below the prior year's fourth quarter net income of $13.5 million. Diluted earnings per share of $0.40 for the quarter were 52% lower than the $0.83 we earned in the prior year's fourth quarter. For the year ended April 30th, net sales were 760.9 million, down 9% versus the prior year's 837.7 million. Net income was 32.6 million, down 2% versus the prior year's 33.2 million and diluted earnings per share of $2.04 were 2% higher than the $2 we earned in the prior year. We began recording stock compensation expense during fiscal year 2007. The after-tax impact included in these aforementioned results was $0.06 per share in the fourth quarter and $0.25 per share for the year. Excluding the impact of stock compensation expense, our diluted earnings per share for fiscal year 2007 would have been $2.29, or 15% higher than in the previous year. As we discussed in our last call, in February of this year we completed the transition out of certain low-margin products, including the in-stock cabinet business at Lowe's that had commenced in October of 2005. As in recent calls, I will continue to provide a separate breakout of the transition impact.

Our previous guidance anticipated sales of core products would be down 7% to 9% in the second half of our fiscal year as compared with prior year and that our core sales for the year would reflect a decrease of approximately 1% for the year. Our actual core product sales for the third quarter declined by 7% and for the fourth quarter declined by 15%, which caused total core sales for the year to be 2.8% lower than in fiscal year 2006 or nearly 2% less less than we had previously expected. Sales of the transition low-margin products declined as planned, resulting in a $22 million reduction as compared with the prior year's fourth quarter. As I stated earlier, we made our last shipments of this product set in February. In new construction, residential housing starts continue to hover near the 1.5 million unit annualized level, which represents a drop of approximately 25% from the 2 million run rate from one year ago. On the negative side, our large builder customers still continued to report limited to no visibility as to when a significant improvement in order rates will come and builder confidence according to the NAHB Wells Fargo housing market index remains low.

However, on the positive side, backlog levels for most of our large builder customers have increased in-line with seasonal patterns and their cancellation rates, while still higher than traditional levels, have shown improvement on a sequential basis. And 30-year fixed mortgage rates, as reported by Freddie Mac, while slightly increased in recent weeks, continue to hover in the mid-6% range in-line where they have been for the last year and low by historical standards.

Order rates that were lower than we expected caused our fourth quarter new construction sales to be more than 30% lower than in the comparable period of the prior fiscal year, following high single digit declines in the first half of the fiscal year. Our new construction incoming order rates during the fourth quarter were approximately 20% below those of the prior year's fourth quarter, a bit better than the market's 25% decline in housing starts and showed modest sequential improvement on a monthly basis. Although the new construction market continues to be slow, we continue to aggressively bid and win new business. Based on 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 fundamentals remain sluggish but much healthier than new construction. Existing home sales, a leading indicator for home improvement spending, continued to hover in the low 6 million range on an annualized basis, which is within 5% of prior-year levels. The consumer confidence index remains stable and near recent highs despite rising gas prices as consumers continue to feel positively about the job market. The unemployment rate, as reported by the U.S. Department of Labor,stands at a healthy 4.5 and new job creation continues to remain healthy as well. However, despite these healthy indicators, a number of companies who's products are sold at the national home centers have recently reported sales declines and our two primary remodeling customers have reported declines in comparable store sales. During our fourth quarter, our remodeling sales declined by less than 1% after realizing sales gains in the first three quarters of the year. For the fiscal year, we experienced a 9% increase in remodeling sales, even as our customers experienced weak sales results, indicating that we gained market share throughout the year. We expect the remodeling market will be flat to down in the near term, but begin to show improvement as we approach the fall season with gradual improvement coming as the months progress. We believe that our market share gains and our market position as the value provider of goods and services positions us particularly well during this less robust phase of the housing cycle.

Gross profit for the fourth quarter was 20.9%, slightly lower than the 21.1% we generated in the fourth quarter of last year and higher than the 18.0% we earned in the previous quarter. We generated a 20.5% gross margin for the fiscal year, up significantly from 17.9% in the prior year. The primary driver to the improvement was the Company's successful exit from producing and selling certain low-margin products, which had the dual benefits of eliminating a less profitable product category from our sales mix and enabling sharper focus on continuing to improve core operations and achieving greater production efficiencies. The operational efficiencies the Company achieved reduced material, labor, and freight cost as a percentage of sales in comparison to prior year and enabled a 260-basis point improvement in the gross margin rate, even as lower production due to both the exited products and the reduced new construction business caused manufacturing overhead cost to increase in relation to sales along with increased diesel fuel costs.

Total selling, general and administrative expense was 15.5% of sales in the fourth quarter of fiscal 2007 as compared with 11.0% in the prior year. Total SG&A expense was 14.0% of sales in fiscal 2007 versus 11.5% in the prior year. Selling and marketing expenses were 11.0% of sales in the fourth quarter of fiscal 2007, up from 7.6% in the prior year, driven by a 10% increase in costs coupled with the reduced fourth quarter sales level. Selling and marketing costs were 9.3% of sales in fiscal 2007 as compared with 8.4% in the prior year as consistent cost levels were incurred to service a sales level that was primarily reduced by the low margin products transition. Selling and marketing expenses for fiscal 2007 also included 0.2% of sales for stock compensation expense. General and administrative expense was 4.5% of sales in the fourth quarter and 4.7% of sales for fiscal year 2007 compared with 3.4% and 3.1% of sales in the prior year's fourth quarter and fiscal year respectively. The increase over prior year reflected higher costs relating to the Company's pay per performance incentive plans, stock-based compensation costs amounting to 0.6% of sales and the aforementioned sales decline.

Capital expenditures and promotional displays deployed in fiscal 2007 aggregated 28.1 million as compared to 26.6 million in fiscal 2006. As in the prior year, the split between our investment and promotional displays and property, plant, and equipment was roughly comparable in amount. Capital expenditures deployed in fiscal 2007 comprised a variety of small to medium-sized projects but no new plans were constructed. The Company expects to continue to fund its capital spending from a combination of operating cash flow and existing cash on hand. Outlays for fiscal year 2008 are expected to increase by approximately 5 million to fund more aggressive store merchandising.

Regarding our balance sheet, the Company's financial position remains outstanding. Long-term debt to capital on a book value basis was 10.7% as of April 30, 2007. Cash provided by operating activities in fiscal 2007 was a record 91 million, an increase of nearly 25 million over operating cash flow generated in the prior year. The Company continues to be an extremely efficient user of working capital, as both receivables and inventory levels dropped with the reduction of sales. The Company generated a record 62.9 million of free cash flow in fiscal 2007 as compared with the previous record of 40 million in fiscal 2006. The Company used its free cash flow to repurchase stock and increase dividends. The Company repurchased 62.9 million of its common stock in fiscal 2007, up from 15.3 million in the prior year. The Company repurchased a total of 1.78 million shares during fiscal 2007 and net of new stock issuances from stock option exercises reduced its outstanding share count by over 1 million shares or 6% of the shares that were outstanding one year ago. The Company doubled its quarterly dividend payable to shareholders during its second quarter of fiscal 2007 to $0.06 per share, increasing the dividend outlay for fiscal 2007 by 1.3 million. Net of all this utilization of free cash flow, the Company's cash on hand still managed to increase by 10.2 million to 58.1 million as of April 30, 2007. The Company has approximately 20 million remaining on the 50 million stock repurchase authorization made by its board in November of 2006.

In closing we believe the Company's continued emphasis on improving the overall quality of its products and services continues to be well received by its customers and is the right course of action to be pursuing despite this market downturn. We continue to manage the business with the objective of creating long-term value for our shareholders. In so doing, we continue to fill all of our customer facing jobs and we continue to maintain adequate production and field installation staffing capacity to ensure a timely response when sales orders return to more normalized levels.

The transition out of low-margin products went according to plan, with no negative operational impacts to our customers or upon our relationships with our customers. As we have previously stated, we believe the Company should generate sustainable gross margins in a range of from 21% to 23%. The Company's performance in the fourth quarter of fiscal 2007 was nearly in line with this expectation despite lower than expected new construction and remodeling order levels.

As we look forward to fiscal year 2008, we continue to see a housing environment that is underpinned by solid macroeconomics and demographic fundamentals, but overshadowed by inventory overhang, falling home price, and a general negative buyer psychology. We expect the environment to improve as inventories are drawn down and prices stabilize. From a market perspective, we expect the kitchen remodeling market will continue to experience weakness as compared with prior year comps, but to improve as the year goes on. Housing starts will be approximately 20% lower in calendars 2007 than they were in calendar 2006. As with the remodeling market, we believe that the new construction market will improve as the year progresses and that housing starts in 2008 will be higher than present levels with the market recovering throughout the year. We believe our Company has grown its market share during fiscal 2007 and remains well-positioned to continue to grow its market share for the foreseeable future.

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 superior products and services at competitive price points is extremely competitive in a more challenging retail sales environment. Most of our new construction customers expect to continue to gain mark share. Our partnerships with these national and regional builders position us well to maintain and grow our market share. We expect that the Company's remodeling sales will be roughly flat with fiscal year 2007 levels, with a likelihood of sales declines in the first half of the year that will be offset by sales increases in the second half of the year as the market improves and the internal sales comparisons become less challenging. We expect that despite our share gains in new construction, a continuation of weak marketing conditions will continue to elongate our customer's construction timetables. Our expectation is that our sales will decline by about 10% in a market where housing starts are down approximately 20%. As with remodeling sales, we expect that sales will be less than in the prior year during the first half of fiscal 2008 and could swing positive in the latter part of the fiscal year. Overall, our expectation is that core sales will decline by 3% to 7% as compared with fiscal 2007 levels.

During fiscal 2007, the Company achieved approximately $35 million of low-margin product sales that will not reoccur in fiscal year 2008. Inclusive of the impact of these transition products, the Company expects that total sales will decline from 7% to 11% as compared with fiscal year 2000 levels. Despite the head wind of reduced core sales, the Company expects it will be able to maintain its gross margin rate at approximately the 20.5% it generated during fiscal year 2007 as the Company continues to realize operational improvements and balance its head count levels to reflect the expected lower sales volumes and to maintain adequate production and installation capabilities. Driven by the Company's expectation for lower sales and consistent gross margin rate in fiscal year 2008, our expectation is that net income will decline by approximately 15% to 30% and that earnings per diluted share will decline by approximately 12% to 26% to a range from $1.50 to $1.80 per diluted share. All this would be favorably impacted with any sort of resumption of activity in the market. This concludes our prepared remarks. We'd be happy to answer any questions you have at this time.

(OPERATOR INSTRUCTIONS) We'll go first to Eric Bosshard with Cleveland Research.

Good morning. This is actually Mark stepping in for Eric.

Hey, Mark.

First of all, on the gross margin, impressive in the quarter considering the softer than expected sales. Can you add a little bit more color on the improvement in the quarter and then if you're anticipating any further improvement going forward? And then on top of that, capacity utilization rates in the quarter and where you expect those to go over the next several quarters?

Mark, it's Jon, I'll take the gross margin question. For Q4 2007, we had a nice improvement against Q3 really relating to the seasonal pickup in our core product sales we formally get in the spring as compared to the winter months. And that was the driver why we increased from roughly 18.0% to 20.9%, sequentially. In terms of year over year, the improvements we've made in operations and in particular the sales mix transition where we've taken out these low-margin products are the real driver for what's happened with gross margin year over year and that's why you see the improvement there. And primarily, the improvement is in materials and freight costs, they make up essentially all the improvement with labor and overhead sort of offsetting each other. Labor improving, but overhead getting worse with lower production. Going forward, as I indicated in my opening comments, our expectation is that gross margin will be roughly flat with what we earned during the fiscal year that we just completed.

Yes, this is Kent. On your question related to capacity utilization, I'll answer it two ways . From a hard capacity standpoint, as we've talked about in previous calls, at these levels and with our transition out of the low-margin products, we have enough hard capacity for, we think, certainly the foreseeable future, probably at least a couple years before we have to think about a significant expansion of any hard capacity. So there's a lot of running room there. And as Jon mentioned, that's really one of the offsets the improvement -- the operating improvements we've made in gross margin has been the fact that the fixed cost depreciation other fixed costs with our excess capacity are going -- are eating up some margin at these lower volume levels. In terms of where we're accruing to run the plants, which is really our effective output, again as Jon mentioned, what we're trying to do is we are trying to protect our customers to the greatest extent possible, believing that the underlying economics are still relatively strong. They're certainly, we believe, stronger than the order rates -- immediate order rates we're seeing in the activity and that if we get a psychological shift where people just feel better, that, particularly on the remodel side, we could see a significant uptick in volume in a very short period of time. So with that we have accrued the plants probably 10% to 15% higher than our actual production run rates at this point, with the plan that we would -- we could absorb a spike in order rates and we're dealing with that extra accruing by either scheduling curtailment days lower than full production days or full down days during the schedule.

Next on remodel, it looked like remodel sales came in maybe 300 to 400 basis points softer than your guidance. Can you talk a little bit about the remodel market? Why you have so much confidence in continuing to gain share in that piece of the market? And then finally, any color on what you're seeing to this point in the first quarter of '08?

This is Kent again. On the remodel piece, we're a little bit more bullish, if you will, there than new construction for a whole lot of reasons. There are a lot more obviously existing homes than there are new homes. You've got 125, 130 million existing homes. Even at the turnover rates that we're seeing now, which is low -- on an annualized rate, low 6 million, a year, year and a half ago we topped 7 million. But there still is a pretty healthy turnover in the existing housing stock and every time a house turns over either in preparation for sale or the new owner coming in is an opportunity certainly to upgrade -- redo and upgrade the kitchen as the most important room in the house. So as opposed to the drop-off we've seen on new construction, the overall activity in the remodel market, if it's led by existing home sales, is still on a historical basis relatively strong. Rates are good, unemployment is low, people -- the value of housing is going down a little bit, but over time people still have generated a tremendous amount of wealth over the last 5, 10, 15 years in their equity in terms of in their homes. Their balance sheets are in relatively good shape. So we think all of those are fundamental that continue to perform on the remodel side that you don't necessarily see during this period on the new construction side.

The big box retailers do continue to open new stores, so they do continue to put new footprints in the ground. They are getting some negative comps, certainly in the last couple of quarters, but they continue to penetrate new markets and expand in their existing markets. So we think that the remodel business just underlying has some better dynamics during this period than the new construction market. Our position in that, being with the two dominant retailers and certainly our value position as the stock manufacturer, even the people that are out there, if they're a little bit more price sensitive and they're rotating down some price points, that's really quite frankly where we live, where we have the majority of our product line is in those lower price points. So to the extent that people are going to do their project but they're going to rotate down a little bit in terms of the product spectrum, that's really coming into our neighborhood in our product line. And as Jon mentioned, we continue to be, I wouldn't say aggressive, but we continue to stand firm that we are filling our revenue-generating jobs, our points of content, we're maintaining our points of contact with the customer, believing that if there's a remodel job out there, we want to be the ones to get it. So I think all of those things kind of combine to leave us probably a little more optimistic on the remodel side certainly than we are on the new construction side.

In terms of what we're seeing in the first quarter, a lot of that's rolled up in Jon's guidance. The summer has a tendency to be seasonally, to be a slower time in the remodel business. The early spring and certainly the fall are the two big peak times. We're generally seeing trends that are on the historical footprint, so now the base is a little bit different, but we're generally seeing it soften a little bit on the remodel side here in the last few weeks. But that really I think is more seasonal footprint than it is anything else. I wouldn't overread anything into that.

Maybe I'm a little confused. On remodel, you're guiding flat for the year; is that correct?

That's correct. But Jon also mentioned there's going to be -- it will probably be negative in the first half and positive in the second half.

So it is fair to say that the remodel business has some downside to it here over the next quarter or two, given that the fourth quarter was flat?

Well, downside versus, I guess versus what? Downside versus our guidance?

I guess down year over year?

Yes.

Okay. Thank you.

This year last time -- last spring on the remodel side was pretty strong.

Thank you.

We'll go next to Sam Darkatsh with Raymond James.

Good morning, Jake, Kent, Jon. How are you?

Very nice.

Jon, very complete rundown in the beginning, many of my questions were answered. A couple of little nitpicky things. The '08 guidance seems to suggest somewhere around $25 million in net income. Where would you think the free cash flow comes in? I would imagine you have the ability to decapitalize with the sales falling and you don't need to spend money on hard capacity. Where would you suggest free cash flow comes in if net income does hit 25 million?

My expectation, Sam, is that free cash flow would be lower because net income would be down. And also as I mentioned in my opening comments, our expectation is we'll be spending about 5 million more next year on display costs for some of our remodeling customers. So the combination of those two would probably have free cash flow falling something like $10 million or so versus where it was this year, in that vicinity.

But it will exceed net income by a fair margin?

Well, sure it will. Because you've got depreciation and amortization that is exceeding CapEx at this point in time. So it will exceed, yes.

Gotcha. Second question, what was the average price of the share repurchase? I might have missed that. I apologize if I did.

I didn't throw that out, but it's approximately $35 a share, it's in that vicinity.

Third question. Expected tax rate, how should we look at tax rates now that it bumps around a little bit due to the new tax rules? How should we look at it on an annualized basis?

Yes, it's been coming down. In fiscal 2006, it was a little over 38%, in fiscal 2007, it was 36.4%, in fiscal 2008, it'll be closer to 35%.

And last question, help me understand again why gross margins wouldn't be better than the 20.5% that you had in fiscal year '07? You did a 20.9 in the fourth quarter, you're saying that things -- on a year on year basis in absolute terms are pretty rough, but on a sequential basis, I would think your production has already been effectively rationalized, things are sequentially getting at least manageable if not outright improving. Material costs aren't inflating on you dramatically, at least hardwoods. Why wouldn't gross margins be again in that 21% to 22% range instead of merely flat on a year-on-year basis.

Well, they may be, Sam, but our best estimate at this point in time is that given the headwinds of reduced volume and reduced sales in our core product set as well as lost contribution from the exited low-margin products, you've got both impacts there. They sort of counterbalance a little bit in gross margin rate, but in general, losing that volume makes it harder to lever up our existing cost structure. Offsetting that, though, are some of the impact that you just mentioned. So we feel it's sort of a balance and that's why we've guided to a flat gross margin rate.

Okay. Thanks much.

Sure.

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

Good morning, guys.

Hey, Peter.

Jon, in your guidance, can you give us a sense as to what you're assuming for share buybacks for fiscal '08?

Yes, Pete. During fiscal year 2007, our weighted average diluted shares declined by about 600,000 shares, roughly. The expectation is for fiscal year 2008, they'll decline by just a tad more than that.

Okay. All right, that settles that. And then if you can talk about -- I mean clearly the market is not getting a whole lot better right now and you guys have done a nice job on gaining share in those initiatives, but I'm just wondering, is there more to do here? In other words, are there things internally that you can do to structurally improve profitability when and if -- more like if, or not if but when the cycle kind of starts to turn for the positive?

This is Jake, Peter. Where we're playing at, as Kent spoke earlier, and I think he was pretty much right on with that, is what we're trying to do is protect our customer's upside. And I think we're in good position to do that. In my own view, I think we're kind of bouncing along here. It's kind of a drudgery and we're at a bottom, we think. But we could do two things. We can ramp up from here and we can take more cost out if we had to. The reason we're kind of hanging in right where we're at is if we can keep gross margins around 20% at these impressed volume levels, protect our upsides and our customers, because we do think this thing comes to an end at some point in time. Every day we come to work, we're one day closer to this thing turning in some new direction. Well then, we like that position.

The other thing, that's counterbalanced with the idea that what do you get for taking the next layer of cost out? Well, you don't get a great upside in terms of EPS and then you start to really make it much more difficult to respond. Where we're sitting at right now is, this is a really tough housing market, as tough as we've certainly seen in 15 years, but we've been in it for a year, year plus now. By historical standards, this thing has been quite severe and it would tell you that sometime in the next several months, at the most, we ought to start to see some signs of life. I think that as Kent said, there's this psychological impairment of the consumer out there. We have lots of consumers that would like to buy a house or remodel a house, we think, but they need to see some stabilization of prices and a few other things to have confidence to do that, to know that they're making a good investment. And I think that we're just positioning ourselves to do that. We've got a lot of upside leverage when that does happen. In the meantime, if we don't see something to really spook us on the downside, we're just going to fight it out and enjoy the ride when things start to turn up, but we don't know when that is.

Okay, but it sounds like if I'm hearing you correctly, that you're basically at the point now where you think you've kind of optimized the cost structure and there's not really a whole lot of incremental work you can do to really meaningfully improve kind of the structural profitability of the firm. In other words, you're kind of -- with this cost structure, you feel comfortable that you'll get to that low to mid 20s gross margin when things kind of turn around?

Yes, this is Kent. We're optimizing it without doing some major surgery -

Okay.

of the base. And as Jake just went through, we don't think that's appropriate with what we see in the future. Now, we may miss it by a quarter or the turnaround by a quarter or a season or whatever. but the fundamentals in terms of the U.S. housing market we believe are still there. And so we have not made the decision to go and do something structurally that would take a real layer of cost out. We are doing everything that we can. It's prudent we're not ignoring, obviously, the situation that we're in, I think the results demonstrate that. So we're doing everything short-term that's prudent without risking or doing any damage to the potential for our position when it does rebound.

Okay, all right. Fair enough on that. Then, Jon, I guess if you could give us a little bit more background on the $5 million of spending or incremental spending that you're looking at for 2008. Is this -- I guess, is this really just to kind of address current market conditions and sort of maintain share, or is this something that you would consider to be more aggressive and would allow you to gain some incremental share and really add to the topline going forward?

Well, Pete, the way this works is we work closely with our customers, particularly on the remodeling side and new construction too, but this increase relates more to remodeling and when they are ready for us to remodel stores and to change out store displays and to freshen things up, we're right there. And this is sort of working with those customers and working on the schedule and getting a little bit more aggressive with them on changing out some of those existing stores. Of course, we own those displays, which is why they're a capital outlay for us.

Okay. I was just wondering whether or not this was more proactive on your part or theirs? In other words, is there something -- are your customers coming to you and saying, hey, we really like what you got comping up in terms of the new product pipeline or however you want to look at it and let's go ahead and be more aggressive and change out the stores right now, or is it just sort of status quo, normal year to year sort of changeouts, if you will?

This is Kent. There's a lot there in that question. Basically, what happens with the big box retailers is they will develop a schedule in terms of remerchandising their stores. It is a big expense for them and it's a large disruption. When they remerchandise a store, we do have an opportunity to go in and represent ourselves in terms of the products we put on display and how we display them. What I would say in answering your question is that they next year or this year, the calendar year that we're in, is that they are increasing their activity in relation to remerchandising their stores versus what we've seen in the last one to two years.

Okay.

Which is good news for the category in general because, obviously, a much fresher-looking store is going to present itself. This is a very tactile product. People want to go in and open and close doors and drawers and touch what they're going to buy. So as they update that it brings more people into the stores, that's a good thing and they being more aggressive than they've been for the last couple of years. It also gives us an opportunity to go in and remerchandise our offering in terms of the display sets we have and put in more current products. So it's kind of a win for the store and we believe it's a win for us. It does give us an opportunity to, again, remerchandise and potentially pick up some share.

Okay. Great. Thank you for that answer.

(OPERATOR INSTRUCTIONS) We'll go to Robert Kelly with Sidoti and Company.

Good morning.

Hey, Rob.

A question on the selling and marketing expense. What was the driver for that to be up about 10% year over year?

Bob, that was just talking about the display area that we were just speaking of, some launch material that we were preparing some display cost, as well as stock compensation. Those were the two drivers that drove sales and marketing expense up in the fourth quarter versus last year.

Okay. I assume you had some staffing involved with the low-margin products that you exited. Has that been cut back or do you kind of reassign those folks?

There was based on how -- on the SG&A side, based on how that was covered at the stores, there was not a dedicated, for example, sales force that did that. It was additional responsibility of folks that we have. We've taken the position on our touch points, as Jon mentioned with the customers that we're maintaining those. That we believe that in this environment that's the most prudent thing to do. We continue to fill revenue generating jobs when they come open, so we haven't really seen a reduction in head count on that side. There has, of course, been on the production side as you take that volume out, we have done a significant reduction in terms of the number of hourly head count in our factories and those kind of things commensurate with that volume coming out.

Is that complete on the direct labor side?

Yes, that is complete.

Okay. Could you just touch on pricing on the builder side with the decline in volume. Are you asked to give some back here?

Sure. You're asking to give it back when things were good. The builders are very good about making sure -- testing the market and making sure that they are in fact providing their end consumer the ultimate value. What I can say is that we price to market and it varies from market to market, but generally speaking, there wasn't obviously even if you go back a couple three years ago, before we got in the slowdown, in our category, there was not a lot of excess margin. Matter of fact, there was no excess margin from a manufacturers standpoint. So the pricing has been relatively stable in our category as it relates to servicing the direct builder community. And the reason is is because we never quite frankly ran our prices up during the good times. So there just isn't anything there to give in this environment. We're facing a relatively stable pricing environment on like product. Now what we are seeing again as we are on the home center side a little bit of pressure of the large builders to rotate down price points and do fewer upgrades. The business that you're getting is not necessarily as rich as it was a couple of years ago, but that's more mix than it is pricing.

Yes, Bob, this is Jake. I think the thing you've got to always be watching these days is when you see these prices falling, particularly median price of new houses and what have you is that a lot of the major builders, particularly the large national builders, saw their operating margins or their gross margins in many cases double or even more than double during this run up. And that's where most of the excess was. And as those businesses normalize their margins again, which they're doing now, I believe that's where most of the price cutting in housing has come from. New housing.

All right. Thank you very much.

Sure.

(OPERATOR INSTRUCTIONS) And this does conclude our question-and-answer session. At this point I'll turn it back to our presenters for any additional or closing remarks.

I would like to -- since there are no additional questions, I'd like to thank you again for taking time out of your busy morning to participate and listen to the results of American Woodmark Corporation and thank you for your continuing support.

This does conclude today's conference. Thank you for your participation. You may disconnect at this time. Have a nice day.