American Woodmark Corp (AMWD) 2008 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 in any such forward-looking statements. Such factors include, but are not limited to those described in the Company's filings with the as Securities and Exchange Commission and the annual reports 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 express or implied therein will not be realized.

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

Good morning, ladies and gentlemen, and welcome to this American Woodmark conference call to review our fiscal 2008 second-quarter results. Thank you for taking time out of your busy schedule to participate.

Participating on the call today from American Woodmark Corporation will be Kent Guichard, our Chief Executive Officer and President, and Jon Wolk, our Chief Financial Officer. Kent has some opening comments, and then he will turn over the call to Jon to review the quarter and outlook on the future.

At this time, I'd like to turn the call over to Kent. Kent?

Thank you, Glenn. And good morning, everybody, and again I'd like to add my welcome to all of you who have taken time out to call in for our second fiscal quarter conference call. In a minute I'll turn the call over to John for a normal review of the quarter, followed by a question-and-answer period.

But this morning, as opposed to what we usually do, before John runs through the details of the quarter, I would like to take a few minutes to set some overall context to the current state of affairs.

For those that have listened in on our last several calls, during the last few quarters, we have shared with you our experience in the market. And most notably, our experience suggested that the industry was bouncing along the bottom. We were not experiencing much of an uptick, but we also not experiencing significant additional deterioration in activity from the level we saw, really, in the spring and through the early and midsummer.

As events have continued to unfold during the last few months, it now appears that we were experiencing a false bottom. Every week seems to bring another revelation regarding the fallout from subprime and other credit issues. Many of the major builders have significantly curtailed or even ceased, in some markets, all building activity. We've seen a relatively rapid rise in existing home listings on the market and a reduction in the turnover, which is -- in some markets, the months supply of existing houses for resale is 14 to 16 months. So we've really seen that go up significantly. And that has resulted in potential buyers of new homes exercising the contingency, if they have one, to get out of their new home contract and, if they don't, to even walk away from deposits because they can't get out their equity in their existing home, which has caused another increase in the cancellation rates reported by the major builders in the last few months. And of course, oil is approaching $100 a barrel. [We are pressed] on that.

I could go on with that list for quite some time. But I think the point is that the cumulative impact of both real and perceived events has culminated in some rather dismal consumer confidence numbers over the last several weeks.

Some experts have looked at this dataset and come to the conclusion that the entire economy is headed for a significant recession that would impact everybody well into calendar 2009.

Others have pointed to some other positive signs -- to more positive signs. Job growth, for example, and continued employment levels are consistent with a full-employment economy. People that want to work have a job. Incomes are rising, real incomes are rising. Consumer spending is holding at that increased 3.25%, 3.5% on a year-over-year basis. The first numbers reported from the holiday season were relatively good; they were up at traditional retailers, and of course, Internet sales were extremely -- they were well into the double digits in terms of their growth on a year-over-year basis.

So consumer spending is holding. Core inflation is low. Long-term rates remain very affordable. The credit markets are still a little bit tougher, and it's taking longer, even if you are qualified, for credit to get through the process. But the rates remain very affordable.

Some markets appear ready for growth. Las Vegas, for example, forecast -- the latest forecast that I saw for Las Vegas -- Vegas is expecting an influx of 70,000 new people and the creation of around 40,000 jobs in 2008.

So it's very mixed out there. Looking forward, the reality is that nobody knows the timing of the cycle. The recovery is not going to be this quarter, the quarter that we are currently in. But will we see some life in the spring? Will it be next fall? Will it be sometime in 2009? The reality is that nobody knows.

In this environment, from our perspective, we're not going to maintain [the kind of] profitability, clearly, we've seen over the last five years. We just can't cut back costs to get to $2 a share in EPS. You can spend yourself into trouble, but you can't save your way to prosperity.

Somewhere between another $0.10 and another $1 a share in cost cuts in this short-term environment -- somewhere out there, there's a switchover point where you stop just saving money and you start to inflict long-term damage on the value of the franchise. In our opinion, that is clearly not in the best long-term interests of the shareholders.

We clearly believe, firmly believe, that it is when, not if, the market recovers. We are a nation of homeowners. It's core to who we are as a people. Fundamentally, it is in our DNA. So we believe that the market is going to come back, and nobody really knows the timing.

So in the meantime -- the core question is what are we doing? And when we get into here in a minute when I turnover to Jon, behind all the numbers he will review is our approach over the next period of time. And our approach and the things that John will talk about and refer to in the quarter really gives the result of three choices that we've made.

The first is to protect the core assets of the business. You can probably think of this as the franchise value. We're protecting the organization. We are protecting key employees. We are filling customer-facing and critical skilled positions. We're maintaining our training programs. We continue to invest in our HR programs to really perpetuate the vitality of the Company.

We're also protecting our relationships with both customers and vendors. These long-standing relationships and the strength of these relationships are a core asset for the Company.

And we're protecting our fixed asset base. We're maintaining our facilities. We are staying current with technology. So the first choice is we're going to protect our core assets.

The second choice is to pursue volume. We need business, as everybody does right now. There are not as many kitchens out there to be had as there were a year or two years ago. The ones that are -- the new houses that are being built and the remodel jobs that are occurring, we want. And quite frankly, we want more than our share.

Having said that, we're not going to do anything stupid. We have to be competitive in this environment. It's not just about price. It still includes quality and service. But we certainly have to be competitive on price.

On the other hand, the business we are pursuing must make sense within our strategy, within our offering to the market and within our capabilities. For this next period of time, volume is going to come from market share gains, and our focus continues to be on penetrating share.

Our third choice is to run the business given the context -- to make sure we are as efficient as we can, given the first two choices; make sure all of our expenditures are appropriate, generate cash, protect our outstanding balance sheet, and just all-around be good stewards of the business.

Again, nobody knows what the market is going to do -- nobody. The so-called experts can go on and on, but nobody knows. Ultimately, as we go through this next period, we're going to make decisions that we can live with either way. If the market does come back in the spring, we need to be in a position to support our customers. If the market stays or drops even further, we need to be in a position to continue to build the core franchise value of the Company that will be recognized and realized on the other side of the cycle.

With those comments kind of setting the context, let me now turn it over to Jon Wolk to run through the numbers for the quarter and the forward-looking statements and the outlook. And then both John and I will be available for questions. Jon?

As you all know, this morning we released the results of our second-quarter fiscal year 2008 that ended October 31st, 2007. In case you have not had the chance to read the release, here are a few highlights.

Net sales for the quarter were $160.2 million, down 24% below the prior year's second quarter. Net income for the quarter was $1.2 million, down 87% below the prior year's second-quarter net income of $9.2 million. Diluted earnings per share of $0.08 for the quarter were 86% lower than the $0.57 we earned in the prior year's second quarter.

For the six months ended October 31st, net sales were $326.3 million, down 25% versus the prior year's first six months. Net income was $6.3 million, down 72% versus the prior year's first six months. And diluted earnings per share of $0.42 were 70% lower than the $1.40 we earned in the prior year's first six months.

As we previously discussed, in February of this year, we completed the transition that had commenced in October of 2005 out of certain low-margin products, including the in-stock cabinet business at Lowe's. As in the recent calls, I will continue to provide a separate breakout of the transition impact, as our prior-year comparative numbers will continue to include sales relating to these products for the next two quarters.

Regarding our second-quarter sales performance, our previous sales guidance anticipated that our sales of core products for the fiscal year would be 8% to 12% below core sales levels achieved in the prior year, with sales declining more in the first half and less in the second half of the year. Our actual core product sales declined by 17% and 18% in the second quarter and first half of fiscal year 2008, respectively, a slightly greater decline than we had expected.

Total sales were 24% lower than in the second quarter of fiscal 2007 as the impact of the transitioned low-margin products were eliminated as planned, resulting in a $14 million reduction as compared with the prior year's second quarter.

In new construction, total residential housing starts on a year-to-date basis have drifted down to the $1.2 million annualized level, approximately 25% below 2006 levels. The short-term outlook for the new construction market seems obvious as market sentiment has become decidedly negative. However, we believe the outlook for the industry is far from certain.

Reinforcing the short-term outlook, most of our large builder customers continue to report limited to no visibility as to when an improvement in their sales orders rates will occur; and builder confidence, according to the NAHB/Wells Fargo Housing Market Index, is at its lowest level since the Index commenced in 1985.

Yet on the positive side, 30-year mortgage rates as recorded by Freddie Mac have drifted down to their lowest level of the year, and remain low by historical standards. The underlying economy remains strong, as Kent indicated, as job growth continues above $100,000 per month and the Federal Reserve has begun to take action to cushion the impact of a credit crunch.

Our new construction sales were almost 25% lower than in the prior year's second quarter. However, new construction sales managed a modest sequential improvement for the second consecutive quarter as the impact from our market share gains continue to exceed the impact of a declining market.

At the conclusion of the quarter, two of our new construction customers filed for Chapter 11 bankruptcy protection. After evaluating the likelihood of collection from these and some of our other new construction customers, we added $1.5 million to our allowance for doubtful accounts.

Although the new construction market continues to be slow, we continue to aggressively bid and win new business, focusing on companies that we believe have the staying power to outlast this downturn. Based on the value of our Timberlake product line, our extensive service reach and our partnerships with many leading homebuilders, 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 healthier than for new construction, but momentum continues to be negative. Existing home sales, a leading indicator for home improvement spending, have declined from the mid $6 million level at the beginning of the calendar year to the present $5 million level on an annualized basis.

The consumer confidence index fell for the fourth consecutive month and now stands at a two-year low. The median sales price of existing homes has been trending lower for the past year, and our two primary remodeling customers continue to report declines in comparable store sales.

During our second quarter, our core remodeling sales were approximately 10% lower than in the prior year for the second consecutive quarter, driven entirely by reduced market performance in our product category. We continue to expect that the remodeling market will be flat to down until credit availability, housing prices and the associated headlines settle down.

As we remain bullish on the housing market's long-term viability, we continue to invest company resources to pursue additional share gains initiatives. We believe that our market share gains and our market position as the value provider of goods and services positions us well during this down phase of the housing cycle.

Moving on to gross profit, gross profit for the second quarter was 17.3% of sales, well below both in the 20.3% we generated in the second quarter of last year and the 20.7% we generated in the previous quarter.

The primary drivers for this disappointing performance were inefficiencies in labor and overhead costs that were caused by the impact of lower sales volumes, new product launches, higher medical costs, and also due to rising fuel costs. We reduced production in response to lower order rates during the quarter and made a small corresponding reduction in headcount at the same time.

Through attrition and reductions in force, we have reduced the size of our direct labor force by over 27% in the past 18 months. Subsequent to the reductions, some inefficiency has occurred as the remaining employees are reassigned to new areas of responsibility, which has in turn contributed to the increased labor costs.

The gross margin rate was also reduced by a change in the form of the Company's sales promotion reimbursement with one of its retail customers. This change in form did not affect net income, but shifted costs that had previously been selling and marketing expenses through a reduction of sales revenue. Excluding this change, the Company's gross margin would have been 18.3%.

Somewhat offsetting the impact of these adverse factors was the continuing positive impact upon the Company's sales mix from the completed low-margin products transition. The low-margin products had higher materials and freight costs in relation to their sales prices. By removing the impact of the low-margin products, materials and freight costs have improved as a percentage of sales and are expected to continue to show improvement for the balance of the fiscal year.

Regarding SG&A cost, total SG&A expense was 16.5% of sales in the second quarter of fiscal 2008 as compared with 16.2% in the first quarter of fiscal 2008 and 13.5% in the second quarter of the prior year. SG&A expense was 16.4% of sales in the first half of the fiscal year as compared with 13.5% of sales in the first half of the prior fiscal year. Total SG&A expense for the first half of fiscal 2008 were lower than the comparable period of the prior year by $3.1 million or 6% on a 25% decline in sales.

Selling and marketing expenses were 11.6% of sales in the second quarter, up from 8.5% in the previous year, driven by a 3% increase in costs and the reduced second-quarter sales level. Selling and marketing expenses were 11.9% of sales in the first half of fiscal 2008, up from 8.3% in the first half of the prior year.

The increased level of sales and marketing cost was driven by the Company's continued investments to gain market share. These investments included increased amounts of product displays deployed with new customers in the new construction channel as well as remaining costs relating to the Company's summer product launch.

General and administrative expenses were 4.9% of sales in the second quarter as compared with 5% in the prior year's second quarter. General and administrative expenses were 4 to 5% of sales in the first half of fiscal 2008, down from a 4.7% in the first half of the prior year. The reduction from prior year reflected primarily lower costs relating to the Company's pay-for-performance incentive plans. The higher level of cost in the second quarter of fiscal 2008 reflected the Company's $1.5 million provision for doubtful accounts for new construction customers.

Regarding our capital spending, capital expenditures and promotional displays deployed in the first half of fiscal 2008 were $10.6 million, in line with the prior year's first-half amount. As in the prior year, our investments in promotional displays and property, plant and equipment were roughly comparable in amount. Capital expenditures continue to comprise a variety of small to medium-sized projects and no new plants 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 be in line with those of fiscal year 2007.

Regarding the balance sheet, the Company's financial position, as Kent explained, remains outstanding. Long-term debt to capital on a book value basis was 10.9% as of October 31st, 2007. Cash provided by operating activities in the first half of fiscal 2008 was $19.3 million, while free cash flow was $8.6 million. The Company repurchased $17.8 million of its common stock in the first half of fiscal 2008, encompassing 549,000 shares. Including these repurchases, the Company's weighted-average shares have been reduced by $1.5 million in the last 12 months or 9% of the previous share base.

Net of this utilization of free cash flow, the Company's cash on hand was $46 million as of October 31st, 2007. The Company has approximately $102 million remaining on stock repurchase authorizations.

In closing, we believe the Company's continued emphasis upon improving the quality and breadth of its products and services and investing to drive future growth is the right course of action during 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 maintain our staffing levels for our customer-facing jobs and maintain adequate manufacturing and field installation capacity to ensure adherence to our stated service levels.

As we have previously stated, we believe the Company should generate sustainable gross margins in a range of from 21 to 23%. Our performance in the second quarter of fiscal 2008 was well below this expectation, and we are not satisfied with these results.

As we look forward to the remainder of fiscal 2008, we continue to see a housing environment that is underpinned by macroeconomic and demographic fundamentals that remain sound but also overshadowed by inventory overhang, falling home prices and the recent credit crunch. We believe that the impact of these factors and their associated media coverage has contributed to a negative buyer psychology and a reduced ability to obtain mortgage financing. We expect the outlook for the housing economy to remain uncertain until the credit crunch is resolved and housing prices have stabilized.

From a market perspective for the remainder of our fiscal year, we expect the kitchen remodeling market will continue to experience weakness as compared with prior-year comps. We further expect that housing starts will continue to trend 25% lower than prior year to approximately the 1.1 million level on an annualized basis, and roughly 20% less than had originally been forecasted for this year, and approximately 50% below the market peak.

As mentioned earlier, we had two new construction customers file for bankruptcy. We have several other customers on our credit watch list, and it is possible that some of them could also follow this same route.

During the quarter we continue to win a greater share of business from some of our existing national homebuilder customers that have solid credit worthiness. In addition, we continue to gain market share at the national home centers.

Because of our strong competitive position and focus on continuing to enhance and differentiate our value from that of competition, we believe that the market share gains our Company has achieved will continue 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 a 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 market share. Our partnerships with these national and regional builders position us well to maintain and grow our market share.

We expect that our remodeling sales for the second half of fiscal 2008 will be flat with that of the prior year, resulting in a mid single-digit decline for the year. The continuing decline in the new construction market, which has contributed to an increasingly difficult credit situation for several of our new construction customers, has caused us to once again update our sales expectations for that aspect of our business. Our updated expectation is that our new construction sales for the second half of fiscal 2008 will be flat with the corresponding period of the prior fiscal year -- still evidencing our market share gains, but less optimistic than we have previously expected.

For the entire fiscal year, we expect our new construction sales will decline in the high teens. Overall, we expect that our fiscal 2008 core sales will decline by 10% to 12% as compared to the prior year. During fiscal 2007, the Company had 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 now expects that total sales will decline 14% to 18% as compared with prior-year levels.

The Company's gross margins had held up pretty well until the just completed quarter, when the combined impact of lower production volumes, costs associated with the Company's recent product launch, rising fuel costs and the change in the form of the Company's sales promotional reimbursement all took their toll on the quarter's margins.

The Company has been working aggressively to improve the issues which impacted labor productivity, and now expects labor costs will exceed previously expected levels, but show gradual improvement over the next two quarters. The Company continues to monitor fuel costs, and will consider pricing actions as market conditions persist.

Considering the Company's sales outlook and these increased costs, the Company has reduced its forecast of gross margin for the fiscal year to approximately 18.5%. This gross margin level reflects a reduction of approximately 50 basis points for the change in the form of the Company's sales promotion reimbursements.

Because the Company's costs were higher than expected in its second quarter and because we expect market conditions to continue for the remainder of the fiscal year, we now expect the results for our seasonally weakest third quarter that ends January 31st will approach breakeven, and that we will earn modest net income in the fourth quarter. Overall, we have reduced our earnings guidance for the fiscal year to $0.70 to $0.90 per diluted share, as compared with $2.04 per diluted share in the prior year.

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

(OPERATOR INSTRUCTIONS). Mark Herbek, Cleveland Research Associates.

You didn't revise your remodel expectations versus 90 days ago. Is there something you are seeing within your end markets that gives you confidence remodel is going to improve sequentially as we go forward? Or is it simply a function of easier comparison?

The majority of it is going to be easier comparisons. If you go back, the market for us really started to go January-February of last year. And so we're going to come up here after the holidays with much lower comps. And John mentioned basically flat on the new construction side; it's the same thing over there. It's basically you've got lower comps.

What we are seeing on the remodel side is that there is still activity over there. It's certainly not robust. There's activity. It is, from our experience, highly promotional dependent. So when the retailers run promotional activity, advertising and promotional activity, we get a reasonable amount of activity. But as soon as those promotional dollars stop, it drops pretty quickly.

Are you seeing anything different out of the home centers in regards to 2008 when it comes to promotions or programs asking for additional support?

Well, I think that there's two questions there. One, are we seeing anything different? I won't speak for them. I'll tell you what we are involved with [them]; I won't talk about how they're running their business. I'll talk about how we're running our business with them.

And that is that, first and foremost, we're just going to continue with kind of the normal calendar year -- always tweak around with and experiment with what is attractive to the consumer and what isn't attractive to the consumer. But we continue to work with them to be able to do that.

So that activity will kind of continue. I would say that it may be heightened, there may be more, but it will continue pretty much along the same lines.

We're supporting them. Jon mentioned that part of our SG&A increase was more promotional dollars. And we're certainly supporting our customer in doing that and trying to maintain levels of business and gain share. Some of the sales out there are a little more expensive to drive through than they were, say, a year or two years ago. But we still think that it's supportable in terms of the margin structure of everybody that's delivering the value to the end consumer.

The other thing I would say is that we continue to work with both of our large retail customers in terms of next-generation programs, whether they be on the quality side, the service side, whether they be on the layout of the stores in the departments in terms of how it's presented to the end consumer. There's a lot of work going on right now and a lot of retailers, especially big box retailers, to how to get closer, in some cases, in some markets, to a dealer-type environment where you can get a better connection with the end consumer and create more of a bond, level of trust, which is needed to close the sale.

So we continue also to work with them on those long-term initiatives.

Okay, and then last question just in regards to momentum throughout the quarter, working capital would suggest maybe demand was a little bit softer to end the quarter. Can you talk a little bit about how the quarter progressed and then maybe what you're seeing to this point in November?

Yes, I'll talk in general terms. Normally, when we first started the quarter and we got into late summer and even to early fall, we saw a normal uptick in activity that you would expect with the footprint. Now, that would be from a lower base, obviously. But we first started to get into the fall selling season, we saw what we would consider to be a relatively normal footprint.

When we got into the fall selling season, it did not peak like the traditional footprint would suggest, nor did it last as long as the traditional footprint would suggest. So -- and generally, I guess, I hope the answers your question -- is that it started out pretty much on the right trajectory; didn't get as high and didn't last as long as we would have expected from the historical footprint, even considering that we started at a lower level.

Peter Lisnic, Robert W. Baird.

It's actually [John Helfeltran] for Pete. To focus on the balance sheet, if you look back, your average price on the shares was kind of in the $26, $27 level for the quarter, and you bought back about $6 million. In previous quarters, you have been willing to spend a bit more at higher share prices. Is there something we're reading into that where you need cash to run the business, given your outlook right now?

No.

Should we expect activity to resume at a higher level, perhaps?

Yes. What our approach is on the repurchase is, is just like we try to coach all you guys, market timing doesn't really work. And so what we have is we've set internal targets in terms of cash balances. And when we have cash that's in excess of that and we don't think there's anything really strange going on in the market, than we are in the market as buyers. And when our cash reserves hit or drop below our targets, we are out of the market until they recover.

I wouldn't read anything into our activity, especially on a short-term basis like the quarter, that that's a signal of anything -- any change that's coming.

Okay, and then just turning over to the credit side, I guess, with the two customers, the $1.5 million that you guys reserved this quarter -- is that fully those two customers, or is that you guys taking a proactive approach to the other ones on credit watch right now?

It's the latter. It's actually both. It's certainly a 100% write-off on the two customers that did file for bankruptcy, although we hope there can be some collection there. We haven't assumed that will occur. In addition, we proactively reviewed the rest of the portfolio, and made some additional adjustments based upon that review.

(multiple speakers) Let me add one thing; this is Kent. Don't read into that is that they're -- that it's done. The situation remains fluid. And when you go through a market cycle like we're going through now, there are a lot of builders out there that are distressed. And what we did is we went through, like we do every quarter, and did a complete evaluation of all our exposure in light of the performance of these companies. If there's a builder out there that, that if we learn about tomorrow, all of a sudden goes from hanging in there to severe distressed, we'll every quarter true that up based on what we see our exposure is.

Okay. And in general, are you tightening your AR days with those customers, where you are gradually taking everyone down?

That would be a very desirable outcome from our perspective. It's just that the reality is that, as Kent indicated, several of these companies are distressed. And their ability to just reduce our DSO is not necessarily there right now, given their own cash flow dynamics.

But having said that, we're working very closely with a number of these customers. There are in some cases weekly or even daily conversations on cash flow, on housing starts and so forth and on when cash is going to come in to get the accounts receivable balance managed down as much as possible.

I'd also add to that, from an operational standpoint, our terms, we believe, are well within reason. The thing that can get you exposed, really get you exposed, is if you can't do the punch list and get the house signed off and get it into their system to start the clock ticking. If you wait a week or two weeks or three weeks or however long it is to get that last piece of molding there, that last door, that last part, make that last service call, the clock isn't ticking yet.

And so there's a real premium, particularly with customers that are working at the margins, with making sure that our first-time installs are complete, and we get sign off so we can get into the system. Once we get into the system, the process works pretty normally and we get paid in a timely fashion. The real thing that we can control is to make sure that our first-time complete install is done, and we get the superintendent to sign off and get the thing cleared into the system.

Turning over to the gross margin line, you're attributed the decline to four or five factors. If you were to weight those factors, is it really just the lower sales volume? The one I am curious about is just the fuel prices because that seemed to spike up -- just diesel prices seemed to spike up in the quarter, and just what your outlook is there?

The impact of diesel prices is actually going to get worse, because after the conclusion of the quarter, they shot up another $0.30 per gallon. So that's going to become more and more of an impact. And as I said, we are evaluating taking pricing actions there with customers because of that dynamic.

But in terms of order of magnitude, I'd say that the biggest impact upon us at this point is the lower sales volume and the labor inefficiencies that that causes. And as I indicated in my comments, having reduced the direct labor force by 26, 27% over the last 18 months, we have been pretty much on that. We tend to trail it; we don't lead it. So there's some of that impact as well.

(OPERATOR INSTRUCTIONS) Robert Kelly, Sidoti.

Just a follow-up on the diesel fuel expense. Is that kind of included in your guidance, some sort of flat level with the recent spike for the remainder of the year?

It's not going to move the needle versus the guidance that we just put out there.

You're not expecting any sort of relief there?

No, not at this point.

Just also a question -- you guys had kind of targeted the top builders for market share. We've heard quite a bit about margin pressure up and down the supply chain throughout the year here. Is that something you are experiencing, or is this just an opportunity for those guys to go after the lower price point that you guys are providing?

I'm not sure I understand your question.

We have heard from many guys in the supply chain how the builders are looking to hammer the suppliers over the head. Is that something that you're experiencing? Or are they kind of trading down to your price point? It seems like you've done a pretty good job on the builder side. Could you just give a little color there?

I'm not sure if -- in our category, there's -- especially between suppliers, that you really get a lot of trading down of price points between suppliers. You don't go from one supplier to another for that. Fundamentally, it's different that way than the remodel market, where you will get a significant amount of business in custom, semi-custom and then in our stock category.

The builder market has a tendency to be mostly the stock manufacturers, primarily due to leadtime -- so the large production builders can't live with the leadtimes that come out of, say, a custom house. So a lot of the volume, at least, a lot of the volume from them is that everybody pretty much has pretty similar price points and products. Now, you have trade-up strategy, but it's pretty similar.

In terms of what we've seen from the builder, it varies by builder. Builders that are still trying to keep up their production rates are very aggressively trying to bring down the price of a house. And we're certainly in active discussions about how to do that, value engineering. You can value engineer. You can go to lower price-point products. There are all sorts of ways to do that.

We've had pretty good experience in terms of working with our builders in partnership to be able to make sure that the end result accomplishes something that all parties can live with.

I think more of what I'm starting to see out there in terms of kind of an emerging trend from the builders is we've kind of it -- a lot of them are starting to talk about hitting really an inelastic part of the demand curve, and that is by taking another 20 or 30 or $40,000 out of a house, you are still not going to sell the house.

And so they've gone more in terms of trying to get the inventory out and at least resume some production as opposed to continuing to drive down the point of a house, because they are finding that, again, a few more bucks or an extra plasma TV as an incentive or whatever really isn't moving inventory, because they are really in an inelastic section of the curve.

We have to be very competitive, as I mentioned in my opening comments. We certainly need to be competitive at the opening price points. But I don't think that's anything different, quite frankly, than it has always been. It has always been very competitive at the opening price points. So we think that right now, we're seeing a situation where our customers are working with us, and so far, we think it's manageable.

And then finally, you sounded pretty committed to standing pat here. But is there a level where your outlook drops, were you have a chance to maybe go consolidate some sort of your manufacturing capacity to maybe get the cost structure lower? Is that something that's even on the table at this point?

Well, the way I'd answer that question is, first of all, we always review -- we're constantly reviewing our asset base. For us to make a decision on our asset base, it's a three to five-year decision. What we would have to do is come to the conclusion that, three to five years from now, for whatever reason, we would have excess assets, whether it's a facility or whatever it might be.

And right now, our evaluation -- again, based on our view of the world, which is it's when, not if this thing is going to get back to something normal -- the real question is, what do you look like on the other side? And we still think, in terms of our core facilities, that on the other side, that all of those are assets, good assets in the right place that we're going to earn an adequate return on.

In terms of the shorter-term issue, one is, again, that would be inconsistent with looking out and managing the asset base longer-term. But the other one is, say you think it's going to last a year. Now, if you close a major facility, over the first 12 months, you're probably going to lose money. You're going to have an initial hit, certainly a book hit, some cash hit to close it and get you out of that facility. It would be a large facility, you would be covered by the [Warren] Act; you would have to go through all the notifications and everything else in the world.

But the other thing that John mentioned a little bit earlier is the similar impact in terms of when you reduce headcount significantly, is even after you go through those initial expenditures, you're going to have to rebalance your entire network. We are very freight-intensive, for example, out to the customer. You're going to have to change all your freight lines. You're going to have to redo your distribution network. Your going to have to change your internal flows. So you're going to go through -- even after the initial expenditures, you're going to go through another period of time where you're going to generate a lot of this inefficiency as you rationalize your network. So it's not easy to close down a mainline facility in a durable goods, integrated durable goods manufacturer.

So we wouldn't do that based on a quarter or two quarters. We would only do that if we looked out many years, three to five years, and decided that we just didn't have the platform, we didn't have the footprint that we think was appropriate for out there in a normalized environment.

(OPERATOR INSTRUCTIONS) Keith Johnson, Morgan Keegan.

I had a couple of quick questions. As far as just on the quarter, it looked like the tax rate came in a little bit lower, I guess, than were you guys were in the first quarter of the fiscal year. I didn't know if there was anything driving that, and I didn't know if you could give us a little guidance on tax rate for the remainder of 2008.

Yes, it has been coming down as the year has been progressing, simply because our forecasted amount of net income has been going down, and our permit differences are roughly constant. So the impact of the permit differences in relation to the pretax income has just been going up, and that has been causing the effective rate to go down.

I'd say that, for the remainder of the fiscal year, our expectation is that the effective tax rate is going to be in the vicinity of -- (multiple speakers) sorry, getting our number right here -- (multiple speakers) roughly 34%, give or take.

Okay, for the year? Okay. And just kind of a follow-up question on the doubtful account allowance. On the customers that we're starting to see the financial distress show up, can you give us an idea of what size -- either from maybe a number of homes per year or some type of run rate, give us an idea of the size of those customers?

Well, one was a large -- a builder with a pretty large footprint and publicly traded, but primarily focused on the eastern side of the United States. Another one was a west coast privately held company that was really focused, as I said, pretty much in the West.

In terms of some of the other ones that are showing some distress, it sort of runs the gamut.

At this time, as there are no further questions, I'd like to turn the program back over to Mr. Glenn Eanes for any additional or closing comments.

Well, since there are no additional questions, this concludes our call. And again, I'd like to thank you for taking the time to participate. And speaking on behalf of the management of American Woodmark, we appreciate your continuing support. Thank you.

That does conclude today's conference. You may disconnect your lines at this time.