American Woodmark Corp (AMWD) 2008 Q3 法說會逐字稿

Good day and welcome to this American Woodmark Corporation conference call. Today's call is being recorded.

The Company 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 involved material risks and uncertainties that 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 there in will not be realized.

At this time, I would like to turn the call over to Mr. Glenn Eanes.

Good morning, ladies and gentlemen. Thank you for taking time to participate in this American Woodmark conference call to review our third-quarter earnings release. Participating on the call today will be Kent Guichard, our President and Chief Executive Officer, and Jon Wolk, our Chief Financial Officer. Kent will begin with some opening comments and then John will have a review of the quarter and outlook on the future. Then John and Kent will both be available to answer your questions.

At this time, I would like to turn it over to Kent Guichard.

Thank you, Glenn, and good morning, everyone. In a minute, I will turn the call over to Jon for the normal review of the quarter, followed by our question-and-answer period. Before Jon runs through the details of the quarter, I would like to offer some comments from my perspective.

As you all are well aware, the period covered by our fiscal third quarter was a challenging period for the industry. The third quarter is easily slow even in good years. This year, existing home resale activity slowed even more than normal and as you would expect, remodel spending, especially big-ticket remodel spending, dropped on a parallel trend. After bouncing on what many, including ourselves, thought was the bottom through the spring, summer and fall of 2007, new construction dropped down a step function in December and January.

As you have seen in the press release, we were certainly not immune to these events. On the remodel side, the fall selling season is usually bimodal. We see a peak in early November and another peak after Thanksgiving, really in the early part of December. This year, we experienced the first peak, but we did not experience the second peak. The normal drop-off usually experienced in mid-December actually began at the middle of the month. On the new construction side, builders reacted to the wave of shocks on the credit side en masse by simply stopping activity.

While we continue to hold and even gain share, at these low levels of market activity, increased share is not providing significant volume. For example, when we are awarded a new subdivision by a builder, we still have to wait until consumer demand allows the builder to actually begin production in that subdivision.

While we continue to believe that our efforts with regard to positioning share will pay off in the long-term, the impact in the current environment is minimal. We are operating at around breakeven on a GAAP net income basis. We are highly leveraged on the income statement due to the level of fixed costs. In November, we operated above breakeven. In December and January, the movement in order rate was enough to tip the balance to blow breakeven.

While there is clearly an emotional shock to reporting a net loss versus at least breakeven, there is little difference from an operating perspective. A few units on either side of the breakeven point really make the difference. Even at these low levels, however, we remain cash flow positive. We generated over $15 million in free cash flow during the quarter. Even after adjusting for the positive impact on cash from drawing down working capital consistent with lower volume, we still generated cash on an ongoing operating basis.

As I mentioned at the beginning of last month's call for those that were able to listen in, we continue to focus on three priorities during this part of the cycle. The first and most important is to protect the core assets of the business. This is the franchise value. We are protecting the organization. We are protecting key employees with critical skills and we are maintaining our customer contact points. We're maintaining our training. We continue to invest in our HR programs to perpetuate the vitality of the Company. We are also protecting our relationships with both customers and vendors. The strength of these relationships is a core asset to the Company.

Finally, under core assets, we're projecting our fixed asset base. We're maintaining our core facilities. We're saying current with technology. We did make the decision, which Jon will get into a little more details in a minute, we did make the decision to close a small facility we obtained as part of an acquisition in 1998. This was a small component facility that was not core to our strategy. The timing of the closure was not driven by the current environment, but was part of our continuous review of operational efficiency.

The second thing we focus on in terms of priorities is pursuing volume. We need business. There aren't as many kitchens out there to be had. The ones that are, we want. We're not going to do anything stupid to get them, but we have to be competitive. It is not just about price, it also includes quality and service, but we have to be competitive. On the other hand, business must make sense within our strategy, our offering to the market and our capabilities. Our focus during this period will remain on market penetration.

Finally, we're just running the business given the context. We're making sure we are as efficient as possible, we're making sure expenditures are appropriate. We're focused in generating cash, protecting the balance sheet and being overall good stewards of the business.

Again, right before I turn it over to Jon here, in times like these, the internal and external pressure to just do something can and certainly has forced some management teams to make short-term decisions at the expense of long-term shareholder value. Having the patience and conviction to wait out a cycle takes discipline. We're going to continue to make decisions in the context of our long-term strategy and protect the long-term enterprise value for our shareholders.

Jon will now walk us through the details of the quarter.

Thanks, Kent. As you know, this morning, we released the results of our third-quarter of fiscal year 2008 that ended January 31, 2008. In case you have not had a chance to read the earnings release, here are a few highlights. Net sales for the quarter were $132.8 million, down 18% below the prior year's third quarter. Net income for the quarter was actually a loss of $2.0 million as compared with net income of $3.8 billion in the prior year's third quarter. Diluted earnings per share was a loss of $0.14 for the quarter, as compared with income of $0.24 in the prior year's third quarter. For the nine months ended January 31, net sales were $459.1 million, down 23% versus the prior year's first nine months. Net income was $4.2 million, down 84% versus the prior year's first nine months. Diluted earnings per share of $0.29 were 82% lower than the $1.64 we earned in the prior year's first nine months.

As we have previously discussed, we completed our transition out of certain low margin products, including the in-stock cabinet business at Lowe's one year ago. As in recent calls, I will provide a separate breakout of the transition impact, as our prior year comparative members included sales relating to these products. Regarding our third-quarter sales performance, total sales for the third quarter were 18% less than in the comparable period of the prior year, inclusive of the impact of the of transition low margin products that were eliminated as planned. Our previous sales guidance anticipated that our sales of core product for the fiscal year would be 10 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 14% in the third quarter and by 17% in the nine months of fiscal 2008, respectively. The smaller sales decline in the third quarter was directionally in alignment with what we had expected, but sales for the third quarter did come in at less than we had expected.

In new construction, total residential housing starts have continued to drift down as the year has progressed, down to the $1.0 million annualized level in December, approximately 38% below the construction levels of December 2006. For the calendar year, new construction starts were down 25% to 1.3 million -- 1.35 million starts.

The short-term outlook for the new construction market continues to be negative as our large builder customers continue to focus more on reducing their land positions and reducing their inventories of unsold homes than on their construction activities. 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 order rates will occur and builder confidence according to the NAHB/Wells Fargo housing market index, remains near its lowest levels reached since the index commenced in 1985. Yet on the positive side, thirty-year fixed mortgage rates as reported by Freddie Mac have drifted to well below 6% to their lowest level in 2.5 years and remain low by historical standards. The Federal Reserve has taken several actions to cushion the impact of the credit crunch and the new federal economic stimulus package should help to bolster consumer confidence and spending.

Our new construction sales were more than 25% lower than in the prior year's third quarter, less than we had expected and a disappointing result considering the recent market share gains the Company has made. During our previous quarter that ended in October, two of our new construction customers filed for Chapter 11 bankruptcy protection, causing us to add $1.5 million to our allowance for doubtful accounts in that quarter. During our third quarter, another large builder customer filed for bankruptcy protection. However, unlike the other two customers, this customer has DIP financing arranged and has continued to operate. Because we anticipated this event, our allowance for doubtful accounts did not need to be increased.

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 down turn. Based on the value of our Timberlake productline, 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 healthier than for new construction, but momentum continues to be negative. Existing home sales, a leading indicator for home improvement spending declined steadily throughout 2007, starting the year at the mid six million annualize level and ended it at less than five million. For the calendar year, sales of existing homes declined by 13%. Also consumer confidence remains at a two-year low as measured by the consumer confidence index and the median sales price of existing homes has now been trending lower for the past year and a half. Finally, our two primary remodeling customers continue to report declines in their comparable store sales.

During the third quarter, our core remodeling sales declined by a low single digit percentage as compared with the prior year's third 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 gain initiatives. We believe that our market share lanes 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 third quarter was 13.3% of sales, well below both the 18% we generated in the prior year's third quarter and the 17.3% we generated in our most recent quarter. The primary drivers to this disappointing performance were inefficiencies in labor, overhead and freight costs that were caused by the impact of lower sales volumes and rising fuel costs. Gross margin was also adversely impacted in the third quarter by onetime severance and separation costs associated with headcount reductions across the Company's 15 manufacturing plants, as well as by costs associated with the Company's decision to close its smallest plant. These onetime charges aggregated 1.0% of net sales in the third quarter of fiscal 2008. Including the impact of this upcoming plant closure, we will have reduced the size of our direct labor force by 35% in the last two years. Our recent reductions in force have caused some inefficiencies to occur as the remaining employees are reassigned to new areas of responsibility. However, we expect that labor productivity will increase from this point if sales demand stabilizes at approximately the levels expected in the fourth quarter.

The gross margin rate was also reduced by the change in the form of the Company's sales promotion reimbursement with one of its retail customers that we had discussed last quarter. This change in form did not affect net income, but shifted costs that had previously been selling and marketing expenses to a reduction of sales revenue. Excluding this change, the Company's gross margin percentage would've been higher in the third quarter by 0.7% of sales.

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 transmission. The low-margin products had higher materials and freight costs in relation to their sales prices and by removing the impact of the low margin products, materials and freight costs have improved as a percent of sales.

Total SG&A expense was 16.9% of sales in the third quarter of fiscal 2008, as compared with 16.4% of sales in the first half of fiscal 2008 and 15.1% in the third quarter of the prior year. SG&A expense was 16.5% of sales in the first nine months of fiscal 2008, as compared with 13.6% of net sales in the first nine months of the prior fiscal year. Total SG&A expenses for the quarter and first nine months of fiscal 2008 were lower than in the comparable periods of the prior year by $1.9 million and $5 million, respectively. These cost reductions amounted to 8% in the quarter and 7% year-to-date on sales declines of 18% in the quarter and 23% year-to-date.

Selling and marketing expenses were 12.5% of sales in the third quarter of fiscal 2008, up from 10.5% in the third quarter of the prior year, as the 3% reduction in cost was more than offset by the decline in third-quarter sales. Selling and marketing expenses were 12.0% of sales in the first nine months of the fiscal year, up from 8.9% in the prior year. The increased level of sales and marketing costs in relation to sales was driven by the Company's continued investments to gain additional market share while sales have declined during the year. These investments included increased amounts of product displays deployed with new customers in the new construction channel, as well as costs pertaining to the new product launch.

General and administrative expenses were 4.4% of sales in the third quarter of fiscal 2008, as compared with 4.6% of sales in the same period of last year. G&A was 4.5% of sales in the first nine months of fiscal 2008, down from 4.7% in the prior year. The reduction from prior year primarily reflected lower costs relating to the Companies pay-for-performance incentive plans.

With regard to our capital spending, capital expenditures and promotional displays deployed in the third quarter and first nine months of fiscal 2008 were $4.9 million and $15.5 million, respectively. Year-to-date spending was $2.4 million, or 14% less than in the comparable period of the prior fiscal year, driven primarily by reduced capital expenditures. Investments in retail promotional displays were slightly less than in the prior year on a year-to-date basis. CapEx continued to comprise a variety of small to medium-sized projects and no new plans 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 2008 are expected to be in line to slightly less than those of fiscal year 2007.

The Company's -- regarding the balance sheet, the Company's financial position remains outstanding. Long-term debt to capital was 11% as of January 31, 2008. Cash provided by operating activities in the third quarter and first nine months of fiscal 2008 were $20 million $39 million, respectively, generating free cash flow of $15.8 million in the third quarter and $23.9 million in the first nine months of the fiscal year. The Company used $4.9 million to repurchase its shares during the quarter and $22.7 million to repurchase its stock in the first nine months of fiscal 2008, encompassing 812,000 shares. Including these repurchases, the Company's weighted average diluted shares have been reduced by 1.2 million in the last 12 months, or 8% of the previous share base. The Company's cash on hand was $55 million at January 31, 2008, an increase of $9 million during the quarter. The Company has approximately $98 million remaining on its stock repurchase authorization.

In closing, we continue to believe that the Company's continued emphasis on 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 all of our touch points for our customer-facing jobs and maintain adequate manufacturing and field installation capacity to insure 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 third quarter fiscal 2008 was far below this expectation. We are not satisfied with these results and continue to take steps to reduce our cost base and production capacity to reflect the current and expected level of market demand.

As look forward to the remainder of fiscal 2008, we continue to see a housing market and a housing environment that is underpinned by sound macroeconomic and demographic fundamentals, but continues to be overshadowed by the impacts of 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 reduced ability to obtain mortgage financing as well as to a negative buyer psychology. We expect the outlook for the housing economy will 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 our remodeling customers will continue to experience weakness as compared with their prior year comps. We expect that housing starts will continue their recent trend of roughly 30% below prior year to approximately the $1.0 million level and more than 50% below the market peak. As mentioned earlier, we had three new construction customers file bankruptcy over the last three months. We continue to monitor several other customers on our credit watchlist and it is possible that some of them could also follow this same route.

During the quarter, we continued to win a greater share of business from some of our existing national home builder customers that have solid creditworthiness. 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 the 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 accounts 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 market share. Our partnerships with these national and regional builders position us well to maintain and grow our market share in the future.

Regarding our policy of forward guidance, the trajectory of the market and its resultant impact upon the Company's top line and bottomline have been difficult to anticipate with an acceptable degree of accuracy. As we have set and then subsequently refined our earnings guidance during the year, we at first did not foresee the credit crunch and then proceeded to underestimate its impact upon our customers and upon our company. Because of these difficult conditions, most of our customers have stopped providing both forward financial guidance and reliable volume projections to us. Accordingly commencing with this quarter's earnings release, the Company ceased providing specific earnings and sales expectations until market conditions stabilized and an adequate degree of predictability returns to the housing industry.

Although we will not be providing specific financial guidance, we will continue to provide updates about the status of the business and on our plans to improve results. The company's budget cycle for the upcoming fiscal year is well underway and we're focused on restoring profitability and continuing to generate positive cash flow even while the market environment is expected remain challenging for the next several quarters.

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

(OPERATOR INSTRUCTIONS) Sam Darkatsch, Raymond James.

A couple questions here. First off, Jon, the biggest outlier data point that I saw in the release was the accounts receivable and it is down about 50% both sequentially and year-on-year and if I understood the commentary correctly, it looks like you didn't have any write-downs or changes to your reserves during the quarter? Can you help me understand why that big drop-down on a sequential and year-on-year basis?

It's really -- it is not complicated at all. Unfortunately sales were down. Sales were down quite a bit versus last year. Net sales were down for the three months nearly $30 million below what they had been a year ago. At the same time, collections have been excellent. We've been working with our customers across all of our sales channels to make sure that we are up-to-date and current. For the most part, our new construction customers are paying according to the payment terms. So it is really just the combination of those two factors.

Is this $20 million -- the run rate in the foreseeable future receivables?

No, I would expect it is going to pick up seasonally in the fourth quarter because we'll sell more than we collect in the fourth quarter. It tends to be seasonal. Receivables always drop in the third quarter because sales are lower than what they've been in the second quarter. In the third quarter, you're busy collecting the second quarter's receivable and you're selling less in the third quarter, so it always drops.

Right, I see the normal seasonal impact, but it still normally has ranged in the low 20s from a DSO standpoint. Is it now going to be in the mid-teens or does the sales levels, the overall sales volume levels, go to the point where that historical low 20s DSO range hold true?

Sam, I would not expect the DSO to decrease in this environment. I think it's just purely a circumstance where the way the timing of cash collections worked out, the timing of sales for this particular quarter.

So not to belabor it, but sales in the last month or so of the quarter were down almost 50%?

Sales in December in January were very weak, as Kent alluded to in his comments to start off with, particularly in the new construction sector. So I don't think I would go with a 50% decline in those months, but certainly sales were well below what they had been in the prior year.

Okay, second question, you mentioned that you were running generally at breakeven run rate and then in the last couple of months degraded, so even though you're not giving guidance, we should then kind of intimate from there that it would be below break even, your expectations for this quarter even though seasonally it does pick up a little bit?

We're not going to give specific guidance for the fourth quarter, as I just explained, but traditionally, yes, the fourth quarter is certainly a much better season than third quarter.

You mentioned that your ultimately for gross margins are the 21 to 23% range or so. At this point, given your utilization and given the labor content of your cost structure, what sales volume do you think you need right now in order to see that 21 to 23% gross margin level?

We're working on our planning right now and it is hard to imagine that we're going to hit it in the near future, but I think that if you look back, you look back to a year ago at this time in the fourth quarter a year ago, we had 21% gross margin even in that quarter. So I think that you can look back to sales volumes from a year ago roughly and certainly we could be hitting margins in that realm.

Right now, as it stands, if you were between 160 and $170 million in sales, you think you would be hitting gross margin of around 21% or so?

In that vicinity. In the first quarter of this year -- it wasn't that long ago, it was the first quarter that ended in July -- we had north of 20% and our sales were in that vicinity, so I think approximately at those levels, yes.

Does share repurchase activity begin to step up a little bit here, because you didn't buy as much stock in this past quarter as in quarters prior. Was that a market timing issue? Was the cash flow issue? What are your thoughts in terms of cadence of share repurchase activity going forward?

Or policy has been that we want to maintain a consistent amount of cash on our balance sheet and the cash that we have today is a little bit more than the absolute minimum that we feel we need to have. I think we are also looking for the next several quarters and trying to make sure that we feel really good about the continued strength of our balance sheet and that we don't have any unpleasant surprises. So I think you'll see us do some share repurchase activity. I'm not going to comment or predict exactly how much, but I would expect it will step up some.

Okay, thank you.

Eric Bosshard, Cleveland Research.

Two things. One, on the gross margin issue -- and I understand relative to 2Q that the difference is that sales have been much softer than expected and the gross margin is softer than expected -- is there anything outside of sales volumes that is influencing the gross margin degradation the business is seeing right now?

This is Kent. One is factor back in factor back in -- because you know from Jon comment on what we've released -- make sure the only thing that is really in there is the severance and closure costs for that small facility. But basically what is driving it is the lower volume. It's just fixed and semifixed costs and it was -- as I said in my comments, normally we get, particularly on the remodel side, we get another slug of orders that comes in early December. You really get -- the fall selling season kind of traditionally has two peaks to it. One is mid-November and then the other one is after people settle down, Thanksgiving, in between Thanksgiving and Christmas. We just never saw the second bump and so we went into the second half of December and first part of January with pretty low backlog. We just weren't able to run the plants. When that happens to you, the fixed costs, the deleverage on fixed costs is pretty significant. So it really is, at this point, it really is a volume, almost exclusively a volume-driven situation.

Secondly, understanding the revenues of the Company this year will end up being I think almost $230 million less than they were in your peak in 2006 -- and I admire your focus on the long-term, Kent, in terms of managing your capacity, but what is the thought process in not saying, boy, the revenues are down this much from where they were at the peak? Why not take some meaningful capacity off-line? Can you just help us understand, again, some of the thinking behind that decision?

One is if you go versus the peak, what I would say is you need to take in-stock out of there. In-stock was -- is over 50% of the decline from peak, if you will, if you just take the delta and that is a very different animal, very, very different flows. That is not really what takes all of our capacity in terms of SOS. So that is the first thing is make that adjustment, so it doesn't look like -- so in reality from our perspective, from running the network of plants, we're not really seeing that magnitude of downturn because you are really talking more about special order.

The second thing is we basically go through continuous reviews and we just don't look at the capacity of the plants. We look the total cost to deliver. The trade-off, particularly in this environment with diesel fuel and some other things that are happening on the freight side, there is the trade-off calculation you need to go through between closing a facility and the cost that you would save there and the additional transportation costs and those types of things. But generally speaking, as we have talked about before, what we look out is we look out over a period of years in terms of where we're making stuff, what our capacity is. We also look at where our customer base is and the projected growth in that customer base. And we run some calculations to make sure that we can maintain service levels, cost-effective service levels to support our customers. At the moment in this environment, we think that, generally speaking, our core line plants when we look out a couple, three years, when we look at what's going to happen to our core customer base is that we think that the footprint we have right now is an appropriate footprint to service the market.

In terms of the decision on guidance, can you just give us a little bit more of the history or what's going on? I'm assuming that previously when were giving guidance, you were also getting guidance on order rates and order flows from your customers and you suggested that that process from your customers has now changed. Is this something that is simply reflective of what's going on the business? Does this make the business more difficult to run going forward? I know you've never had that much visibility on lead times, but could you just talk a little bit more about what changed within this practice?

Yes, I'll give it a shot. I think that when Jon and talked and we went through it is when we put out forward guidance, there's certainly not only a sense of pride, but a sense of responsibility when we put forward guidance out to the external community and the reality is in this environment, the fluidity of the environment, the inability to get information from the field and from our customers in terms of what their plans are and then have those plans even be anywhere near the realm of what actually happens is that there just isn't, in our feeling, there just isn't enough data out there for us to give guidance to you that we feel comfortable with. And as I said, if you go back on the new construction side, Jon and I actually looked at it yesterday. If you go from, really, almost over a ten month period prior to this fall, if you really go from last December through this -- December of '06 through November of '07, we had very, very -- on a unit basis, we had very, very consistent inbound order rates and we got into December and, you know, we thought -- that is why we had used the term bouncing on the floor from the last couple of conference calls. And the floor kind gave way and the industry fell into the basement.

So we are just in a situation where the fluidity in the market and the inability of anybody to predict what's going to happen means that we would end up really taking a lot of guesses in terms of what's going to go on in the market and we just didn't feel that was in the best interests of our shareholders or the external community to put something out there that we didn't find her real strong basis in data and so that's why we decided to pull back this quarter.

Okay, last question, and I know there's some moving parts between SG&A and gross margin with the promotional spend, but it appears that you are spending less money on incentives and a bit on SG&A in total. I guess, first of all, is that accurate? Second, do you believe at some point that this can compromise your ability to continue to gain share as you have been doing?

I will take the first part of that question and certainly, as you rightly point out, Eric, and I alluded to in my discussion, most of the G&A reduction is because the people on this telephone call are going to earn far less, if any, incentive compensation this year as compared to the previous year. So that is the first answer to your question in terms of the ongoing.

I agree with that, it's not just -- we have a pay for performance plan covers all employees. If you are an employee here, you are on incentive plan. And the real -- the big trigger is the Company has to be profitable for any plan to pay out and certainly it won't in the third quarter. That is really the biggest difference when you look those adjustments. Again going back to my opening comments, some of Jon comments not only this call but previous calls, one of the things that we have really been focused on is this idea of protecting the organization and the core asset of the organization. Part of that we define as relationships, certainly, with customers. So as we have made our decisions about where we spend money during a time like this is that we are -- the first priority is to maintain contact points with our customers. We are pulling back from the market. We're not pulling back from the customers. We're certainly trying to think of new and innovative ways to maintain those contact points. Share really comes in the combination of maintaining contact with your customer and keeping your service levels -- your quality and service levels up.

Those are our top two priorities and certainly in the environment the we're in now, we don't see a circumstance where we would have to pull back on any of that, so I don't think any of the things that we are doing are going to negatively impact our ability to either maintain or even in those areas we target increased share.

Thank you very much.

Joel Havard, Hilliard Lyons.

Kent, I think you answered it before, but I want to make sure I understood your comment. The volume pullback ex-Lowe's -- or I should say ex-Lowe's that was half the volume change in Q3, is that correct?

No, my comment, I believe, was it was from peak to where we are today, we have lost a couple hundred million. My comment was more than half of the revenue from peak to where we are today related to our -- not only our in-stock program, if you remember, we also on the new construction side pulled back from some low margin business, so well over half of that peak if you go back a few years in terms of revenue and where we are today related to in-stock and the low margin business on the new construction side.

Okay, that helps. I guess I need a little bit more of a reminder here. Were you out of the Lowe's promo line in Q2 or Q3 last year? Are we fully anniversaried to be out of there?

No, in Q3 of last year there was still -- back to Jon comments -- there was still some revenue. We were basically done in March. (multiple speakers) -- the one year anniversary, excuse me. We had some trickle on into the fourth quarter, but the last real significant revenue on a year-over-year basis was in the third quarter.

I guess that is where I should get them and that's --

Again, back to Jon's comments, the revenue is down 18, core is what basically excludes that stuff, was down 14, so about 4% of the 18% drop still related to in-stock.

That clarified for me. Thank you for holding my hand on that. Finally, do you have a preliminary figure for the unit and pricing trend that you normally discuss in Q?

Yes, at this point, Joel, we are not going to provide that data. In future quarters, we will revisit that and discuss exactly what kind of data we will provide since we are not providing overall financial guidance. We don't have specifics for your right now.

Right now are you saying, Jon, that you don't want to or don't plan to include that in the whole quarterly MD&A?

We're not going to have forward-looking data, no.

Typically, you discuss --

I misunderstood your question, I apologize. We don't typically provide it on the call, but it will be in the Q.

Still in the Q. Thanks, that's all I need. I appreciate it, guys. Good luck.

Mukul Kochhar, Oppenheimer.

On the plant closure, are you expecting some gross margin benefit going forward in the future quarters or near term you expect some of that to be canceled by inefficiencies as you reschedule some of the production?

In the near term it will be muted by the ongoing transition costs that will last for a quarter or two, but as we get out into the future, it should save us a couple of million dollars a year.

Great, and you're looking more in the FY '09 timeframe for that, right?

Yes.

All right, secondly on the gross margin impact, are you seeing a more pronounced impact on the new residential construction side, actually, which is more than what sales volume would dictate. What I mean to say is are you seeing some pricing pressure also there?

Yes, this is Kent. It is very, very difficult -- at these levels of volume, it is very difficult to draw conclusions because a lot of what is happening, quite frankly, is just happening on paper. It's kind of back to my comment about gaining share. We've been awarded -- we think we are gaining share in terms of awarded new subdivisions. The problems is at this level of market activity, nobody is actually building anything. So is that really gaining share or is it not gaining share? I mean, it's gaining share once they start to buildout those subdivisions. It's not gaining share in the sense that its generating revenues for you now.

So when you're doing that and going through on those competitions, certainly an element of those competitions are price, but what is that actually going to end up being when you get there? Who knows. We are seeing in the activity that is going on, we are actually seeing pricing holding up relatively well. I think it's primarily because the lower end of the price points, there just isn't -- where you expect to see most competition, especially price competition, there just isn't a lot of activity. You get down to those levels and because the credit situation, primarily what happened with subprime, is you are really at the lower end of the building price points. From what we've seen there's a very inelastic demand curve. So taking -- if you got a $200,000 house or $190,000 house, taking $10,000 or $20,000 off of that for a builder just isn't going to generate any more activity, because there isn't a customer -- it is not question of price between the $180,000 and $200,000. There just isn't anybody participating in that market. So most of the building that we are seeing is still going on in the mid to higher range of price points where people have a tendency to be less price-sensitive, they're more interested in features and look and upgrades and those types of things, service levels, all that kind of stuff.

So it's very difficult I think to draw any conclusions from the marketplace in terms of at the end of this what is likely to happen to the mix of business within price points or any of those types of things. So hopefully that gives you a little bit more color on it, but we are not seeing, in terms of the work -- the houses that are actually getting built, not the ones that are being bid on paper or those types of things, but the houses that are actually getting built, is that the average kitchen size and value is pretty constant.

Is it -- could it be because the actual -- the houses that are getting built today, they were bid upon maybe three or four months back?

No, not particularly. I think even the ones that you are seeing -- it's not there's not any sales activity, there's some sales activity, but even the ones that are getting built today, the homeowner comes in specs out their house, I think that you're dealing with a buyer that's more interested in upgraded features and they are in the market because they do have the financial wherewithal to be able to get it. Really what's happened is where you think you would get all the pricing pressure at the lower end, there just aren't any buyers out there. There's just no activity at those opening price point and first upgrade houses. Those are the people that are really locked out of the market based on the credit situation.

Thanks a lot. On -- typically you have stayed away from acquisitions and directly focused on organic growth, but at this time, are you seeing some acquisition opportunities which may just allow you to enter a new channel which you haven't been targeting so far?

No.

All right, lastly, bad debt provisioning, is it now higher than before? What are your thoughts on that?

We did not adjust the bad debt provision in this particular quarter, as I said earlier in my comments.

Thank you very much for your help. I appreciate it.

Robert Kelly, Sidoti & Co.

You covered everything nicely so far. Just maybe quickly on the seasonal pickup you expect in 4Q. Have you started to see that materialize or are we still down kind of like we were in December/January?

Yes, it certainly isn't December/first part of January. What we are starting to enter now, there was a little bit in the last two weeks of January. What we're starting to enter now is really the promotional period on the big box retail side. That really started Valentine's Day was really when the two big box retailers started their spring promotional schedule. That was end of last week, so the little bit too early, but we certainly expect that because they haven't run promotions, particularly through the kitchen departments, for quite some time, that that's going to start to drive some business through. People are out about again. They can see that the longer days and the warmer days coming. So we haven't actually seen it hit the orderbook yet, but the information at least that we are getting from the field is that activity is up certainly from where it was in December and January. In the next month or so we will be able to see how that transitions into actual order rates, what that foot traffic actually produces in terms of real hard sales.

On the new construction side, again, there's still not a lot out there in terms of activity. I have heard and seen some sporadic reports of some dirt moving in some places. What that -- why they are doing that, I don't know. We, again, are seeing what you normally expect. There's a little activity with the spring, particularly in the cold weather climates, but I -- we're not seeing anything significant on the new construction side. We are seeing the precursor activity on the remodel side.

Great and in the gross margin comments, you talked about direct labor falling over the past two years 35%. At a certain sales level, you start to see some production efficiencies improve. Care to share where that level is?

Our expectation, as I said, Bob, or tried to indicate in my comments is that we think that productivity to start to resume an upward trend certainly in this quarter, which is a better seasonal quarter for us, but now that we have been making these reductions in force, our expectation is that productivity should be higher in the next fiscal year than has been in this year.

Thanks, guys.

(OPERATOR INSTRUCTIONS) Peter Lisnic, Robert W. Baird.

Jon, I assume that, like your last comment on 10-Q disclosures, you'll have something in there about fuel costs and what that might have cost you in the quarter.

We will alluded to that, sure.

Okay, then it seems like your talking about share gain opportunities and execution on the new homefront and on the home center channel. Is there anything to prevent you from going or looking at the dealer distributor channel as an opportunity for growth during this difficult end market environment?

Yes, this is Kent. There's, I suppose, a couple ways to answer that question. I mean, it clearly is a channel that we have not participated in historically primarily because the channels we were in and were giving us all we could handle. It wasn't that long ago that we were oversold. I know it seems like it but -- so traditionally we haven't gone there.

In terms of entering any new significant channels of distribution, such as a dealer, we would do that only on a strategic basis, because we think it's the right place to be for the long-term and that our business model would be competitive in that arena and would bring something to customers that maybe they don't get someplace else in terms of how we can service -- support and service the business, our price point, our value proposition, those types of things.

We do studies, regular studies in terms of new channels and those types of things. I think that talking about getting into a new channel is easier said than done. To get in, figure out what products you need. Is there unique branding, what is the actual service platform? It is not just a simple as going out and putting some people in cars on the road and starting to sign up customers. So we would only do something like that from a long-term strategic move that we are committed in. Generally speaking our experience -- it has been a long time since we've done it, but certainly our historical experience and from what we know of people we talk to in other businesses is that you start talking about launching an effort into a major new channel of distribution you're going to lose money as opposed to make money for some period time. You've got to invest in the channel to build it before you get critical mass, so I don't think that in this particular window that we're talking about -- particularly if your mentioning a couple quarters, tough time in a couple quarters -- that launching into a new channel is going to help you that much.

Okay, fair enough. Then on the -- John, you talked about potentially stepping up the buyback activity. Any color commentary on what the dividend might look like going forward?

I can't comment for our Board of Directors, but I think we feel pretty confident with the dividend level where it is in foreseeable future. It was -- we had, as you know, aggressively increased the dividend over the last couple of years when the business was doing much better from a cash flow generation perspective. We are still doing well from a cash flow generation perspective, but I think management's recommendation would be to maintain the dividend at current levels for the foreseeable future until we see signs of a pickup.

That sounds good. Thank you for your time, gentleman.

At this time, it appears there are no further questions. I would like to turn the program back over to Mr. Eanes for any additional or closing comments.

I would just like to take time to think everybody for participating in this conference call. Speaking on behalf of management of American Woodmark, we appreciate your continuing support. Thank you and good day.

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