American Woodmark Corp (AMWD) 2009 Q1 法說會逐字稿

Good day and welcome to be 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 risk and uncertainties and are subject to change based on factors that may be beyond the Company's control. According to the Company, future performance and financial results may differ materially from those expressed or implied in any 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 the forward-looking statements even if experience or future changes make it clear that any predicted results expressed or implied therein will not be realized. At this time I'd like to turn the conference over to Glenn Eanes, Vice President and Treasurer. Please go ahead, sir.

Good morning, ladies and gentlemen. Thank you for taking time out to participate in this American Woodmark conference call to review our first-quarter results for fiscal 2009. Participating on the call this morning will be Kent Guichard, our President and Chief Financial Officer -- Chief Executive Officer, I'm sorry, excuse me there -- and Jonathan Wolk, our Chief Financial Officer. John will begin with a review of the quarter and then Kent and John will be happy to answer any questions you might have. John?

Thanks, Glenn. This morning we released the results of our first-quarter of fiscal 2009 that ended July 31, 2008. In case you've not had the chance to read our earnings release, here are a few highlights.

Net sales for the quarter were $139.2 million, down 16% below the prior year's first quarter. Net income for the quarter was $0.2 million as compared with net income of $5.1 million in the prior year's first quarter. Diluted earnings per share were $0.01 for the quarter as compared with income of $0.34 per diluted share in the prior year's first quarter. The Company generated $7.4 million of free cash flow during the first quarter, an increase of 28% over the $5.8 million generated in the prior year's first quarter.

Regarding our first-quarter sales performance, net sales for the first quarter were 16% lower than the comparable period of the prior year. In new construction total residential housing starts have remained close to the 1.0 million annualized level for the first seven months of the calendar year, 31% below their prior-year levels which at this point last year were still averaging close to 1.5 million starts. Starts of single-family homes for the first seven months of the calendar year fell by an even greater 41% during the same period to their most recent annualized level of only 640,000 homes, down from 1.1 million at this time last year.

Our new construction sales were down approximately 16% below those of the prior year's first quarter, in line with what we had planned, and evidencing the share gains we have made in this difficult market. The short-term outlook for the new construction market continues to be negative as most of our builder customers continue to focus more on reducing their cost and their inventories of unsold homes than on their construction activities.

Reinforcing the short-term outlook, large builders 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, reached a new low last month.

Despite the weak new construction market we continue to aggressively bid and win new business, focusing on companies that we believe have the staying power to outlast this downturn. These share gains have not been a result of buying business through reduced prices, but rather by increasing penetration with existing customers and securing new customers based on our total package of service, products and pricing. These share gains have come at satisfactory margins that we believe will be sustainable over time.

In the remodeling market several factors have combined to continue the negative sales momentum. Existing home sales, a leading indicator for home improvement spending, have continued to hover at or below the 5 million annualized level since September of last year and calendar year to date existing home sales are down 20% below prior-year levels. Inventories of existing homes for resale, which ranged from six to nine months in the first six months of calendar 2007, have consistently ranged from 10 to 11 months in the first six months of 2008 and some forecasts have them extending beyond 12 months.

The consumer confidence index as reported by the Conference Board has remained near its lowest levels experienced in 16 years. The median sales price of existing homes continues to trend lower as the number of foreclosures continue to rise. And finally, our two primary remodeling customers continue to report declines in their comparable store sales.

During the first quarter our remodeling sales declined nearly 16% as compared with the prior year's first-quarter results 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 media coverage settle down.

We remain bullish on the housing market's long-term viability and so we continue to invest company resources to pursue additional share gain 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 first quarter was 15.9% of sales, below the 20.7% we generated in the first quarter of last year and slightly less than the 16.3% we generated in the fourth quarter of the recently completed fiscal year. The primary drivers to our decline from prior-year were increases in overhead and freight costs in relation to sales caused by the impact of lower sales volumes, as well as rising fuel prices that have increased our freight and materials cost. The small decline in gross margin percentage from the fourth quarter was driven primarily by the aforementioned increase in fuel costs coupled with continuing pressures on overhead costs driven by reduced sales levels.

Regarding our operating expenses, total estimated expense was 15.9% of sales in the first quarter of fiscal 2009 as compared with 16.2% of sales in the first quarter of fiscal 2008. Total SG&A expenses for the first quarter were $4.8 million or 18% lower than in the prior year on a sales decline of 16%. Selling and marketing expenses were 11.2% of sales in the first quarter of fiscal 2009, down from 12.2% in the first quarter of the prior year as a 23% reduction in costs more than offset the 16% sales decline.

The savings in sales and marketing costs resulted from careful management of the Company's spending, focusing on reducing costs that are not essential to servicing our customers or maintaining our customer touch points which remain central to the Company's strategy of protecting its customer relationships and continuing to gain market share. Cost reductions occurred across several categories of spend driven in some cases by reducing redundant headcount and by lower volume driven costs such as sales commissions, sales promotions and model home installations.

Favorable timing also aided sales and marketing costs during the quarter. Our expectation is the first-quarter sales expense ratio to net sales is at the low end of the range of where these costs will run over the next several quarters.

General administrative expense was 4.7% of sales in the first quarter of fiscal 2009 compared with 4% of sales in the first quarter of the prior year. The increased percentage over prior-year reflected the impact of the current year's sales decline as well as the absence of a credit and bad debt expense that occurred in the prior year's first quarter. We had no significant changes in customer payment status or customer insolvencies during the first quarter and our bad debt expense was less than $0.1 million compared with a credit in the prior year's first quarter of $0.5 million.

Regarding our capital spending, the Company's capital expenditures and promotional displays deployed in the first quarter were $3.2 million, roughly in line with the Company's capital spending levels for fiscal year 2008 and primarily represented maintenance CapEx items. Investments in retail promotional displays were $0.5 million or 24% less than in the first quarter of the prior year driven by a reduced remerchandising requirement from our customers. The Company expects to continue to fund its capital spending from a combination of operating cash flow and existing cash on hand.

Regarding the balance sheet, the Company's financial position remains outstanding. Long-term debt to capital on a book value basis was 10.8% as of July 31, 2008, in line with one year ago. Cash provided by operating activities in the first quarter of fiscal year 2009 was $10.6 million generating free cash flow of $7.4 million as compared with free cash flow of $5.8 million in the first quarter of the prior fiscal year. The Company used $2.4 million to repurchase its shares during the first quarter, encompassing 116,000 shares.

The Company ended the quarter with $60 million of cash on hand, an increase of $3 million over its prior-year levels, and the Company has approximately $93 million remaining on its stock repurchase authorization.

In closing, we continue to focus on improving the quality and breadth of the Company's products and services and continue to invest to drive market share gains and future growth during this industry downturn. We continue to manage the business with the objective of creating long-term value for our shareholders. We are maintaining our touch points and our customer facing jobs and, despite some headcount reductions, we are maintaining adequate manufacturing and field installation capacity to ensure adherence to our stated service levels.

Customers continue to validate our strategy as we continue to gain not only additional market share but also awards and acknowledgments from our customers for delivering superior service and responsiveness to their needs. Although our gross margin in the first quarter continues to be well below the level at which we know our business is capable of operating, we have been taking appropriate actions to reduce our cost and improve efficiencies while continuing to invest in technology, systems and enhanced processes to better service our customers.

As a result of these actions we have reduced our breakeven level by approximately 30% over the last two years which has enabled us to operate profitably and continue to generate positive cash flow at these lower sales volumes. As we look forward to the remainder of our fiscal year 2009 we continue to see a long-term housing environment that is underpinned by sound macroeconomic and demographic fundamentals but remains overshadowed by the combined impacts of inventory overhang, falling home prices and the continuing credit crunch.

We believe these factors and their associated media coverage have contributed to a reduced ability and desire for buyers to obtain mortgage financing. Accordingly, we expect the outlook for the housing economy will remain uncertain until the credit crunch is resolved and housing prices 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 prior-year comps, existing home sales will approximate present levels at a bit less than 5 million homes per year down mid to high single digits below the 5.2 million existing homes sold during our most recent fiscal year. We expect total housing starts will approximate 1 million during our fiscal year that ends April 30, 2009, down approximately 17% below the 1.2 million starts that occurred during our fiscal year that ended April 30, 2008.

During the quarter we continued to win a greater share of business from some of our existing national homebuilder customers that have solid creditworthiness. In addition, we continued 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 position our 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.

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

(Operator Instructions). Peter Lisnic, Robert W. Baird.

Good morning, everyone. John, I guess I was most intrigued by your comment on lowering the breakeven level something on the order of 30% over the past couple of years. And when and if things get better I guess the question would be what does that mean in terms of how much do you get to keep when things turn around, how do we think about that? How much of this is a temporary cut just to respond to market demand and how much of it is structural I guess is what I'm really asking?

I think you've got elements of both, structural stuff that we've done and some of it might be timing or temporary. Because certainly we'll have to scale up some when the market returns back to where it had been. But we believe that we've been significantly investing, as we've been telling you in these calls for the last couple years in this quality initiative that our whole company has undergone it continues to undergo. In addition, we're investing in lean manufacturing as well. So we believe that we've improved our contribution ratio and that has helped us reduce our breakeven point as well as taking out some fixed costs that we just didn't need in the business given how we're operating and how we see the future.

Okay. Can you maybe give us a ballpark as to where the new contribution margin -- where you plan on that shaking out or looking like as the market turns positive?

For competitive reasons, Pete, we don't get into that level of detail on these calls because we are the only pure play cabinet company in the publicly traded companies. So we do refrain from providing that kind of color, but we do feel certainly that we won't need the type of sales level that we experienced in the past to achieve record profits in the future.

Okay. I totally understand that and appreciate that. One more question on that front. If you look at the levers that you've pulled to generate that decline in breakeven, how much of it do you think is headcount or can you maybe give us a sense as to what your headcount number is relative to a year or two years ago right now?

We've reduced headcount levels I'd say by about 30% over the last three years total companywide, that's an indication right there.

Okay, all right. Fair enough. And then just a last quick question. It sounded like the new home side of the business was in line with expectations. I'm not sure if I heard that remodel was along the same lines. Was it worse or better or what's the color commentary there?

I'm not sure that I'd -- it would depend I suppose on what you thought expectations were. I think what we've seen on the new construction side is I think we've seen kind of a new step function that we talked about. We were pretty flat on the new construction side for most of calendar '07 and at the end of calendar '07 it took another step down. We probably now have about five or six months of new construction activity albeit at much lower levels, but it's really been kind of flat and stabilized.

And we've actually seen our order rates pick up slightly because we've gained some share both penetrating -- deeper penetration into existing customers and picking up some new customers. So new construction is obviously still very low in terms of the overall activity, but we think it has stabilized again, particularly if you get out of the West Coast. California, Las Vegas and Phoenix are markets that are still struggling, but elsewhere we've pretty much seen the market activity stabilize again.

We have seen, as we've gone through calendar 2008, we have seen now a continual slide on the remodel side. We're seeing lower activity on existing home sales; we're seeing a significant increase in the inventory of existing homes on the market for sale. You can combine those two and we're really seeing the month's inventory of existing home sales move out significantly, all sorts of reasons for that -- uncertainty, economic, consumer confidence, ability to gain access to credit -- all those types of things.

And it's almost -- to kind of use a description, it's almost from our perspective, if you draw parallels to previous cycles we've gone through, it's kind of like the pig going through the snake, if you will. And the new construction side is starting to stabilize; unsold inventory units peaked at almost 600,000 a year and a half ago, they're now approaching 400,000. So the new construction market appears to be coming back into balance and now it's moved into the existing home market and it will move through that and eventually that supply/demand thing will stabilize and then we'll probably be back on the uptick.

And so we are seeing that. We are seeing that now as it moves through the process and the cycle. We are now starting to see it hit the remodel side and I think you can see that in the major big-box retailers' comps if you've tracked those over the last couple of years as you're starting to see the slowdown now run through the remodel side.

Okay. Is it reasonable to think about that as being a market that could be down kind of in line with the comp that you put up in this quarter?

We've backed away from doing forward-looking. I think what you'll continue to see -- you pick the time period, but I think we're in a time period now where you're going to continue to see the remodel side, that demand is going to be pretty weak and we're going to struggle through that. How long we're going to struggle through that until that stabilizes I don't know.

If I were you, what we do is we kind of watch -- the two big things we watch are the existing home inventory that's out there and obviously the turnover rate. That thing needs to get done and it's probably 11 to 12 months depending on how you want to look at it and where you want to look at it. Some markets are obviously longer than that, some shorter.

A healthy market is as that gets down towards six months of the existing inventory versus the turnover rate you're getting, somewhere certainly under six months. But six months is probably a reasonable number -- as long as that number is over that I think we're going to continue to see some weakness on the remodel side.

Okay. That is extremely helpful. I will jump back in queue. Thank you.

Eric Bosshard, Cleveland Research.

Good morning. A couple things. First off all, on the remodel side of the business, the down 16 I think is softer than the prior trend and I guess feels like the existing home sales issues have been with us here for a little while. Can you just, first of all, confirm that that down 16 on the remodel side is softer than where it had previously and then help us understand a little bit of why the year-over-year comparison was softer this quarter than we've seen?

I think it's just kind of what we just talked about and that is that, yes, it is softer. I think that it's starting to roll through, as I said, through the cycle now. So you're seeing it on the existing home side, plus there are some other overarching issues as well. But yes, it is softer than it was a year ago. There is some timing associated with the summer and promotions and those types of things that can move numbers around a little bit.

But from a general trend standpoint the remodel market is weaker than it was last year as the cycle kind of rolls through and I would again expect that that would continue for some period of time. How long, who knows? Just like it did on the new construction side is just how long it takes to deplete that inventory that's out there.

The inventory that you see published is probably understated; there are probably people that want to sell their houses that are holding off putting a for sale sign in front based on the market. So I think that even when it picks up you'll see some more inventory come in, it will be a little stubborn for a while. But again, those are the two metrics that I would watch and when those things start to flatten out I think it's a signal that the remodel market is stabilizing.

I guess what I'm trying to understand is the rate of change -- I think the remodel business was down 4% or 5% in the prior quarter and it's down 16% this quarter. What I'm trying to figure out is why -- was there something that changed or did the remodel market just contract 10 or 12 points faster this quarter than it did in the prior quarter?

It's A latter. The remodel market is just -- it took a step down.

Okay.

The trigger to do particularly a big-ticket remodel like ours in the kitchen is either right before the sale, because you can't move your house because it's got an outdated kitchen in it or one that isn't up to snuff or right after you move in and it's one of your first big investments. So it's that resale of the home which is the big trigger for ours and you're just seeing that activity down. You're not seeing as many houses being sold and you're seeing the inventory build up.

And inasmuch as you can see the customer data to make the comments you've made about marketshare, do you think that the market has changed as well? In other words, the step down from the prior quarter to the current quarter on the remodel growth rate is not reflective of you performing worse relative to the market. The market -- I mean your customers performed 10 or 12 points worse this quarter on a year-over-year basis?

Yes, we think that -- even during this period we believe that we've gained share. We think the overall market on that side was actually worse than our performance. And there are two ways we would ascribe that to and one of them is I do think that we have some wind at our back. We are the value player; we do have that price point. And we do believe that there is some rotation down on price points, that even the consumers that are active are rotating down price points.

So we think we've just naturally taken -- gotten the benefit from that based on where we are in the price spectrum. We do also believe, as John mentioned, that our improvements on the service and quality side and our commitment to maintaining contact with the customer, whether it be through our customer service center or through our service reps in the stores, that that's also gained us some share.

And then the second question, in terms of the capacity utilization of the business, where would you imagine that that is presently?

I mean, it's tough. From a real capacity standpoint in terms of things like crewing and that kind of stuff, as John mentioned, we are -- during the summer it's a little bit weaker, but that's okay, we've got people on vacations. We think that we're crewed, if you will, to pretty much -- in balance. So our effective production output and our crewing is pretty much in balance with what's incoming.

If you're looking at how much growth potential we have or how much additional capacity we can bring back into the system during the upside of the cycle without having to do significant brick and mortar, we can probably get close to -- depending on the mix that comes in and the channel and the product mix, we can probably double our output based on our fixed footprint. In other words, we wouldn't have to build a new factory until we probably got double what we're doing now.

And I guess my last question related to that is, is there a consideration recognizing that it will be a while until you fill up the fixed capacity that you have that there is a piece of fixed capacity that would make sense to permanently take off-line?

We've talked about it before. We're constantly evaluating our asset base and certainly as we continue to press through with our lean program that changes some of the math on where that stuff is. As we look at it today, if you look at both the combination of bringing down capacity and then bringing it back up on what we would think would be a reasonable timeframe with the recovery as you get to the other side of the cycle and the other costs associated with the capacity, one of the things that's really changed the math in the last year is transportation cost.

A year ago our modeling might have told us for example that it might make sense to at least mothball a particular facility. All the costs associated with hauling product, particularly finished product which, as you know, for us is a lot of air once the cabinet is put together, is that it was almost $5 a gallon in diesel and the surcharges and those types of things that it really does change the breakeven point between the fixed cost associated with operating a facility and the variable cost of covering that territory and meeting the needs of the customer from a factory that's farther away.

So we continue to examine that. And at this point, when you add all that up, the conclusion that we've come to is that now is not the appropriate time to either mothball or permanently shutter one of our locations.

And lastly, perhaps for John. Can you quantify what appeared to be a little bit of SG&A benefit, I guess you stated in the quarter, of money that wasn't spent this quarter but will show up next quarter? Can you give us any sense of the magnitude of that?

Yes, I think that there was some benefit from timing on a few things and we ran at about 11.2% of selling and marketing costs as a percentage of sales. I think there's probably a range of about 11.2 to 12.2 that we'll run in over the next year and we were at the lower end of the range this time around.

One of the things -- I'd really like to emphasize that because I know there may be some questions out there, and John mentioned it in his thing. We have not done anything in terms of our cost management on that side to pull back from the customer or pull back from the market. We're not doing anything that would jeopardize our service either our customer or the end consumer or would put us in a position of where we can't participate in the recovery from day one. We're not doing any of those types of things. We're continuing on our strategy to support the customer.

Thank you.

Sam Darkatsh, Raymond James.

Good morning, Kent. Good morning, John. Many of my questions have been asked and answered. John, in your prepared remarks you mentioned your breakeven run rate is 30% lower now than it had been and that's -- you folks should be commended for that. It looks like you're at $135 million to $140 million a quarter sales run rate now and basically breakeven.

If you were to maintain that sales level -- I know you have selling and marketing costs that are probably going to be a little bit higher going out, but based on the number of the initiatives, if we were to look at this from 30,000 feet, would you able to maintain a breakeven rate at this current run rate going forward or perhaps have better margins, worse margins? I'm just trying to get a sense of, along with the higher selling and marketing expenses, are there other sorts of puts and takes that would help you maintain this breakeven point at this run rate?

Let me kind of answer that instead of John, at least I'll give the first shot at it. I think that when you are this close to breakeven -- a couple thoughts I can give you. One of them is, you usually don't have a lot of ability to absorb any kind of shock. So if there's anything that comes through the system during the quarter you just don't have the ability to recover from that.

And so all things being equal, subject to my second comment which I'll make in a minute, all things being equal, yes, we think that we can continue to run breakeven around here as long as you don't get some shock to the system that's unanticipated. You get a bankruptcy, you get a carrier that goes out of business and you have to completely replace those lanes. Those types of things, if they hit you in a quarter you just don't have the ability to absorb them.

The other thing that I would say as we go forward here is there is a significant amount of material cost pressure. Hardwood lumber is relatively stable, but there are some major inputs to the industry, one of course is the price of fuel and that is not just what it shows up in fuel surcharges on the trucking side, but anything that is petroleum-based -- finishing materials, anything that's petroleum-based -- there's a significant amount of pressure on anything that that is there.

If you watch the steel markets, steel has gone up significantly. I mean, I've seen numbers as high as 30% depending on the grade of steel over the -- actually less than a year. There's some pressure on particle board, there's some pressure on liner board, there's some pressure on plywood. To the extent that those increases come through the system and are truly reflective of long-term structural changes in the cost and materials, as we go through the next several quarters that could have an impact and could once again kind of tip that breakeven point where at that kind of volume we don't breakeven, we lose a little bit of money.

Over time, for those that have followed the industry, we have experienced when there are raw material increases that are legitimate and that are reflective of just a new price of those basic materials, the industry has been able to eventually pass those through to the consumer and the consumer understands that, the consumer understands that the price of commodities goes up over time and they accept that that's reflected in the price that they paid for the end product.

There have been, however, some delays in the past between when we incur those increases and when we're able to pass them on to the consumer. So I think that that's one of the big challenges that we face as we go through the next six to 12 months is what are those increases, how much are they and, to the extent that they're really reflective of a new base cost throughout the world and the system for those materials is, how long does it take us to get through and recover those from the customer.

Have there been selling price increases or are any selling price increases anticipated near term?

We price to market, as you know, and so we don't particularly talk a lot in detail about our pricing. We price to market and we've seen things all over the map. We have seen some areas where prices have increased. We have some areas where prices haven't and also by channels of distribution. Some competitors are doing it some place and other places.

I wouldn't say that -- at this point I wouldn't characterize it at this point that we've seen across the board general upward movement in pricing -- but I would also tell you that many of the price increases that I've talked about are relatively recent and would not necessarily have shown up in people's cost structures yet. So I think the next six months is going to be a real telling period in terms of what are the increases that are actually passed on to the manufacturers from the providers of the raw materials and how that ends up showing up in the marketplace.

Next question, your largest competitor has been publicly talking about a cabinet strategy in which they go more towards an integrated box on a manufacturing process which would be -- instead of having each of the separate manufacturing processes done on a separate plant basis to amalgamate or aggregate each of the processes under one roof which would allow someone to take capacity out without having to increase a lot of the ancillary costs.

Have you guys looked into that? What is your internal capacity to do that sort of strategy and what are the positives and negatives of undertaking that sort of strategy for Woodmark?

There's a whole lot there. I'm not sure. I mean, all the major manufacturers there are a lot of commonalities in terms of both the product that we make and the way we make that product. There is not in many cases a lot of proprietary technology in how you put a box together. We all have the basic components and the same components in the box; there are some minor differences in terms of new construction.

We have over time made different decisions about vertical integration. We've made different decisions about how we source and move product. We constantly look at that and of course that's part of the lean program is where you make the stuff and those types of things. Our factories are pretty flexible in terms of the actual things that we can do in each factory and so some factories you combine raw material processing with component processing, some you combine finishing with component processing, some you combine assembly with various other aspects to it.

So we don't have, as we did many years ago, we don't have dedicated facilities that do just one part of the process. Depending on the end product and what's coming out we do multiple processes at different places. So while we haven't been as public about talking about that, we just think that that's kind of -- our approach is that's just kind of manufacturing, that's just what happens in manufacturing. What happens in continuous improvement is what happens under kind of a lean approach to manufacturing is they're just constantly looking at the right place to do things as your product mix and customer mix changes.

One of the things that benefits -- I would show you to show that we are doing that on a consistent basis is look at our inventory trends. And one of the places that that kind of thing really shows up in terms of whether you're effectively improving the overall efficiencies of your material flows and your supply chain to the customer is, is it taking you more or less inventory to deliver a consistent project and experience to the end consumer?

I think that you'll see not only have we managed our working capital inventory very well over the years, but in fact you're starting to see again additional improvements in our ability to deliver the end experience to the consumer with less inventory in the system.

Final question. John, you've talked in the past about there being an 18- to 24-month payback on closing facilities or mothballing them or restructuring in some form or fashion. Is that a cash-on-cash payback or is that including non-cash items like write-downs or how should we look at that because it just --?

I guess from a lay person's perspective, we don't have the amount of information and reams of data that you folks have, but again, it seems, at least to this analyst, that perhaps more capacity should be coming off line and if we were to understand exactly what constraints you folks have in terms of -- or at least numbers that you look at that have you being a little bit more reticent to that extent that might be helpful? Thank you.

Thanks for the question. Again, there's a lot there, but I guess really, to answer this question, it really depends on how you view the world. If we viewed the world as the level we're producing at today is steady state and it's what we're going to be producing five or 10 years down the road, we'd be running exactly those calculations and refining them to the nth degree and really assessing, running the math, just as you say -- cash on cash or fully accrued or what have you.

But I'll be honest with you, we don't spend a lot of money working that math because we don't see the world that way. We see the world as this space, this housing market and this cabinet space in particular in this country as being fundamentally still a growth market. Viewing the world that way and viewing the long-term demographic trends and all the things that we talk about I highlighted earlier in my discussion and we've talked on prior calls. There are many reasons why a lot of people agree with us that this is a growth market long-term.

So viewing it that way we're not really making decisions based on how do we make the P&L look -- tweak just a little bit better over the next 24 months. We're looking at this as over the next five to 10 years how do we set this platform correctly so that we can participate and help lead the industry growth and really fully reward our shareholders by what we're doing. So I guess perhaps that's not the answer you're looking for, but that is how we're looking at it.

And the 18 to 24 months is cash on cash when you did talk about that last quarter or is that how -- does that include asset write-downs if you were to close a plant down or mothball an operation?

I think that's more of a cash-on-cash sort of view.

Okay, thank you.

Joel Havard, Hilliard Lyons.

Good morning, everybody. First of all, Kent, I'm glad to hear that Glenn's slip didn't mean that you had had enough and were beating yourself in the fray. You said in one of your earlier answers, Kent, that you didn't want to talk about things that would perhaps jeopardize service to customers. But let's theoretically jeopardize some service.

Is there anything here on a labor or plant scheduling basis that you guys might have the flexibility to say run every other Friday off or roll from one assembly or (inaudible) plant to another in some way or are you already doing something like that?

It's a trade-off, it's a balance obviously between maintaining some base level of efficiency in the plants and those types of things with servicing the customer. And certainly when you get into periods that we've been in for example with seasonality in the summer is you do have the ability to flex up and down in terms of hours and you can take partial days, you can take down days through the system, you can do those types of things.

What you can't do, or you can, but we have chosen not to do is to extend those periods to the point where we flip over and the benefit to us from efficiency comes at the expense of the customer. Our customers will work with us, you can do things, you can produce a day ahead, you can do some other things in shipping, you can work with your customers.

But on a new construction customer, for example, that's building a house on say a 100 day schedule, we're not going to tell them that there's a week or two weeks that they can't get product or we're just not going to produce in their area. We're going to produce product and we're going to meet their production requirements and their schedule requirements.

We may do something for them to work around that, but to the extent that, yes, we are chasing out some hours and we are working half days or we might take a day out of the system if you don't have a backlog to produce effectively. But at the end of the day we will only do those to the extent that it does not negatively impact the customer.

Okay. Along a similar theoretical line, it's getting tougher and tougher I would think to sort of predict the step function of raw materials inflation. Is there a conversation underway or could there be one get underway with your channels about sort of separating the fuel side of it from their cost?

In other words, we got a little relief here recently, there would be a way to pass those "savings back downstream" where if we get another run up you guys will have a shorter lead-time on the ability to pass those through. And I guess we're only talking the outbound side of your business, maybe you're just kind of living with whatever happens on the inbound. But I would appreciate any thoughts you could share on that line?

Are you talking about something like putting in a fuel surcharge system? Is that what you're talking about?

Well, yes, I guess. Where are you now and how much room would there be to work with clients? Certainly both of your end channels have to understand what's going on, they're dealing with it too. Maybe this is sort of a broader rethink of how companies in general deal with erratic fuel prices like this?

The pricing structure of the industry is not really set up for indexing or surcharges on any particular commodity, I mean anything whether it's hardwood lumber, fuel or anything else. That's not really the pricing structure of the industry, that is not how our customers --.

I understand that that's the status quo. I guess I'm asking is there anything underway that could push the boundaries of the status quo.

What you're suggesting is that we restructure the entire way that the industry is going to market.

I have a lot of faith in you, Kent.

Well, yes. This is why I think you started with "you live in a theoretical world"; I live in a (multiple speakers). And in the practical world you're not going to change the history or the pricing structure of the industry. So without carving out any one particular one, now it happens to be fuel, in the past it's been lumber, it's been those types of things.

As you get to some level that is really the base level of the commodity price and that rolls through the pricing structure that we have, carving out one particular component and creating a surcharge or an add-on pricing structure is just from a realist standpoint is not something that anybody is going to be able to drive through the industry.

So you're still getting that once a year chance or so to sort of reset pricing on the retail side and then it's sort of contract to contract or project to project on the new build side, is that --?

No, it's not once a year or twice a year or once every other year. I mean it's a question of when the material -- when commodities actually change their economic value in the marketplace and when the cumulative impact of that, net impact of all the commodities get to a point where the industry decides that it's time to pass that through to the consumer. That can happen more than once a year, it can not happen at all in a year.

I want to make sure I understand that part and I'll jump off at that point. But my understanding was that the "catalog" that the designer is working from at the retail store got repriced on a more or less annual basis. So is there then the ability to make intrayear adjustments to that?

Well, I don't know where you came up with that understanding. Hopefully we didn't give you that over the years. The mechanism on the remodel side, the retail and remodel side, not so much the new construction but the retail remodel side is that they have a CAD/CAM system that they use to both design and price product.

And you have to update that disk and translate it over to them and then they have to drop it down into their system. That can happen anytime both parties come to mutual agreement that you're going to drop a disk, whether it's pricing action or whether it's the addition of product, whether it's the obsolescence of product, whether it's whatever it is that can pretty much happen.

Now the big-box retailers have a tendency to shy away from doing that during peak selling seasons because they don't want to upset the apple cart in peak selling seasons and potentially have a problem with the download or just consume their resources and that kind of administrative exercise when they've got customers coming in pretty hot and heavy. So they've had a tendency to only want to drop those disks for whatever reason and offbeat, off-season periods. But you can drop that -- as long as you both agree you can drop that anytime you want.

All right, that helps a lot. Thanks and best of luck.

Keith Johnson, Morgan Keegan.

Good morning. I guess just maybe one or two questions here. Can you talk a little bit about how the trends during the quarter kind of came together in the different markets? Was there any one period where you saw the step function downward in a particular end market?

This is Kent, I'll kind of go back. On the new construction side it was pretty flat, through the whole quarter the activity was -- it didn't really go up or down a little bit, it was pretty steady state.

On the remodel side it went down through the quarter, part of that I think is what we talked about previously in terms of the overall market place and part of that is standard seasonality. I mean, you generally see the spring season usually peaks about mid-May and then from mid-May through to really Labor Day, mid-September you'll kind of get a decline, there's just not a lot of people that do kitchens, remodel kitchens in August. It's hot, they're on vacation, just not interested.

And so, as you go through the quarter we saw a decrease in remodel, part of that was the normal seasonality we would expect, the slope of the curve was steeper because we think that the overall market was down more during that period as well.

Okay. And just making sure I'm thinking about the seasonality right, we're about to get over into the October quarter. So you'll start seeing a little bit of a pickup late September, before the holiday?

From an inbound order rate the big-box retailers have a tendency to really kick off their fall selling season with the Labor Day weekend. And so if you look back historically, we'll see what comes in the next couple of weeks, but historically they've gone out with kind of a big push around Labor Day with some promotions and other ways to get people in the store. That will continue through September into October and then it usually lasts almost up to Thanksgiving and then it starts to die down again. So the selling season really -- I suppose really kicks in about mid-September, but they try to kick start it around Labor Day.

I see. And I guess if you look at the quarter just completed, what were the promotional I guess incentives like or the intensity of the promotional trying to get people in the stores? Are you seeing that increase quarter-over-quarter as you started coming through the last several time periods?

You would have come out of April and May with some strong promotions because that's in the height of their season. They would have had promotional activity in June and July, but it would be relatively light, pretty much standard fare. It wouldn't be a big push if you go back and look at what they ran, I mean they'd have promotional in there, but they wouldn't do a lot of stack promotions. They'd run one promotion at a time as opposed to stack promotions and they would have been pretty much standard fare for the industry.

So on a year-over-year basis not (multiple speakers)?

About the only thing that you can get, if one year it changes from one to the next, they may run a big one that literally goes over the week. We go on calendar dates. Retailers have a tendency to do four, four, five, and so you could occasionally get a quarter-over-quarter where their quarter and our quarter doesn't line up right and they drive a promotion at the end of the quarter and it's in their fifth week and it's outside of our cutoff. So you can get some of that but it's unusual. On a quarter-over-quarter basis I would say net net their promotional activity was pretty consistent.

You've talked about the increased or inflationary pressures in some of the raw materials and fuel. Is there a way you could put some more color around that, maybe quantify the dollar impact on either a year-over-year or sequential basis on how it affected you in the first quarter this year?

The first-quarter impact depends on obviously the base period that you want to use. The first-quarter impact, the real significant increase over a year or two years ago on the first quarter was obviously petroleum-based and it was really directed at fuel cost in particular, diesel fuel in particular.

What is now starting to rumble through the system in the secondary wave of everything petroleum goes into, there are some additional impacts for anything that comes in from overseas. For example, the weakness of the dollar and some other things are net effectively increasing that price and those types of things. So what I would say in the first quarter the primary thing that we absorbed, whether you want to use one or two years ago as a baseline is direct fuel cost.

And my comment was as we go through the next six months we're starting to see that activity pick up in terms of request for price increases on while materials and like I said, the six months will tell. The three to six months will tell to see how much of that is actually sustainable and will stick in the marketplace. My guess is that a significant portion of it will be. A, we don't have that quantified at this point; and B, when we do we wouldn't release that in that level of detail, as John likes to say. But it would be big enough to where you would see it in the results.

Okay. All right, thank you.

(OPERATOR INSTRUCTIONS). Robert Kelly, Sidoti.

Good morning, thanks for taking my question. I think, John, you said in your prepared remarks earlier, the 40 basis points sequential slide in the gross margin, was that wholly attributable to the rise in raw materials and fuel and freight?

No, I said it was two things, it was that and also the sales volume going down a bit.

One in priority higher than the other?

Roughly comparable.

Okay, thanks.

And we have no other questions at this time. I'd Like to turn the call back to management for any additional or closing comments.

Again, I'd like to thank you for taking time to participate in this call. Speaking on behalf of the management of American Woodmark, we appreciate your continuing support. This concludes our conference call. Thank you, have a good day.

And again, that does conclude today's call. Again, thank you for your participation. Have a good day.