American Woodmark Corp (AMWD) 2009 Q3 法說會逐字稿

Good day everyone and welcome to this American Woodmark Corporation conference call. Today's call is being recorded. The Company has asked us to read the following Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. All forward-looking statements made by the Company involve material risk and uncertainties and are subject to change based on factors that may be beyond the Company's control. Accordingly, the Company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, those described in the Company's filings with the Securities and Exchange Commission and the annual report to shareholders. The Company does not undertake to publicly update or revise it's forward-looking statements even if experience or future changes make it clear that any projected results, expressed or implied therein, will not be realized. And now at this time, I would like to turn the conference over to Mr. Glenn Eanes. Please go ahead sir.

Good morning ladies and gentlemen and welcome to this American Woodmark conference call to review the results of our third fiscal quarter and our fiscal 2009. Thank you for taking time to participate. Participating on the call today from American Woodmark will be Kent Guichard, the Chief Executive Officer and President and John Wolk, Vice President and Chief Financial Officer. Kent will begin with some opening comments and then John will review the results of the quarter and year-to-date information, concluding with the outlook on the future and after John's comments, Ken and John will be happy to answer your questions. Kent?

Thank you, Glenn, and good morning, everyone. In a moment I'll turn the call over to John as Glenn mentioned, who will walk us through the details on the third quarter along our standard format. Before getting into those details, I'd like to make a couple of comments to set some context, specifically relating to the new construction and remodeling markets and to our experience in this environment, particularly over the last quarter, our third quarter ending in January.

First, as it relates to revenue, sales in our third quarter on a sequential basis continued to slide. Second quarter sales ending last October were 3% below first quarter sales ended in July and then third quarter was also 3% below the second quarter. If you go back and look historically, you can do some things historically. I'm not sure with seasonality, I'm not sure in this environment there is such a thing as seasonality anymore. But certainly, our top line on the sequential basis continues to slide a little bit. On a year-over-year basis, sales in our third quarter were essentially flat, they were down by 1%, but essentially flat with last year. Considering the external environment, our most recent sales performance for the 3 months is somewhat counterintuitive, so I just wanted to open up with a couple of comments to try and set some context around that. It's not counterintuitive in the sense that sequential sales are declining in this market with what's going on in the world. It is, however, I think somewhat counterintuitive in the sense that our year-over-year performance for the quarter is different than most of the widely referenced indices for economic building and remodeling activity during that period and other published reports that you may have picked up.

On the new construction side, let me go there first. The market remains very challenging. It's kind of an understatement, but it remains very challenging on the new construction side. Looking in the rear view mirror, we didn't realize it at the time, but looking in the rear view mirror, there was clearly a step function down last October. And this wasn't just in cabinets. The most obvious tipping point that I've heard people kind of point out was the failure of Lehman Brothers, which happened about that -- whether that was the actual event or not I think historians will tell you years from now, whether that was or not. But, we like many others across a broad range of consumer goods, both durables and non-durables, clearly saw a step function down in late October going into November. Something happened out there that just kind of dropped the world. The level of new construction for the whole quarter, for our quarter ended in January, either stayed at this low level or in some regions even slid further as we we went through the quarter through our third fiscal quarter. Our sales in the new construction arena reflected the reality of this activity in the drop and starts. We continue to gain share, but with our shipments down as John will get into detail in a little bit, but our shipments are down less than the industry. But they are down. The fact is, although we're gaining share at these building levels, there's simply not enough total activity out there for share gains to offset the extreme drop in new construction starts. The total industry is just down so much that you just can't gain enough share to offset that. So, in new construction we just can't continue to overcome the continuing impact of the cycle and I think our performance mirrors the direction of the overall market, just to a lesser extent due to some share gain, but that would be consistent with what you all have seen out there in the world. And we expect, by the way, we expect the new construction side to continue to be a challenge as we go forward, certainly for the foreseeable future.

During the third quarter, that continued weakness in the new construction market was basically offset by growth in our remodeling business. We believe that the overall remodeling market actually contracted during the third quarter. The level of existing home sales remained historically low at around 5 million annualized units. Remodel spending was down. Big ticket remodeling, we believe, was down to an even greater extent. Credit remains restricted. All those things that you would expect. There is activity on the remodel side, it's just not the level of activity that we would consider normal. Say at 6.2 million or 6.3 million existing home sales or turnover. And so there are people out there, but the activity is clearly less than not only what it was three years ago at the peak, but what we would consider to be a normalized market. As we've discussed in previous calls, we tend to gain share on the remodeling side, particularly in the big box stores, during tough market conditions. Economic conditions due to our position as the value price point. That's really kind of where we live each and every day. And this gives us some natural wind at our back. And we've talked about that the last couple of calls.

During our third quarter, the -- kind of continue with the analogy, the intensity of the wind at our back temporarily increased. Particularly on the big box side. The big box retailers across many categories, not just cabinets, special order cabinets, made several adjustments to the way they allocated their promotional activity, the way they focused it. I'm not going to speak for these companies, it's not really my place to do that. But, more of a general comment I'd make, is that my experience over the years is that retailers, particularly big box retailers across many consumer categories have a tendency to increase their marketing efforts and creativity when customers with checkbook in hand are hard to find. And so, they really go into kind of a real innovative, creative mode to figure out ways to get people not only -- get traffic in their stores, but to get them to actually walk up to the cash register. In this particular case at this particular time, the big box retailers in the home improvement category, shifted their efforts to focus on products and price points that were directly aligned to both the projects and price points where there was more consumer activity. In essence, they put their money where the people were. They put their money where the action was to see what would happen. They're working in realtime in an effort to attract customers on a week in and week out basis.

Since consumers were predisposed to shop at the value price point in our category, anyway, but I would suggest in most categories, the promotional activity was not exclusively, but was a little bit more focused on our price point. They ran promotions across all categories and all price points and special order cabinets, but there was more concentration and more focus of that promotional activity on the value price point. The result was twofold. First, it appears to have shifted share to the big box retailers from other channels of distribution. We believe that the big box retailers, based on focusing this promotional activity, did in fact pull people in from other channels of distribution. And the second result was it shifted some share to our price point from other price points. In hence, kind of my comment that the increase in wind at our back was -- we had a little bit more wind at our back in the last 2 to 3 months, really the quarter, in addition to just the fact that we're the value price point. As we enter the Spring, retailers continue to experiment and innovate in their approach to the consumer. The Spring promotional, the traditional Spring promotional season has commenced. And again, there is a bit of a shift. There's an emphasis on types of tiered incentives. There are different ways they're delivered, but types of tiered incentives bases on the overall ticket value with higher discounts as the consumer buys more in an attempt to get people in the stores, increase the ticket, increase the size of the project and encourage them to do so by giving them greater discounts, in essence, the more that they purchase. We anticipate that as we go forward, this will take some of the wind out of our sails, to kind of continue that analogy. But, we still expect the value price point will remain a strong position in the current economic environment. I'm going to mix my metaphors a bit here, but when you discount a Cadillac, it's still more expensive at the end of a day than a Buick and they both provide solid transportation. So, you can discount at the top end, but we still believe that, particularly in this environment, the value position still has a strong message.

To sum up the revenue side, it remains a very challenging environment on both sides in both new construction and remodeling. We continue to believe that we're gaining core share. That is that it's sustainable gains, once you balance out all of the things that Mr. Move Around With Promotionals. We think we're gaining core share that we'll be able to defend. But, we also recognize particularly in the third quarter that we benefited in the short term from the retails' promotional decisions during that period.

On the income side, John will get into more of the details this than I will, but we continue to manage around break even. That's essentially where we were in the third quarter and have been now for several quarters. A year ago on similar sales, we lost $2 million, the improvement on a year-over-year basis as John will get into was really due to head count actions we took last year. That was a big driver. So, last year, it increased our costs due to the severance and separation costs. And then of course, this year you get the benefit of reduced costs with lower head count and related head count expenses. Raw material inputs are rising over time. The cost of our raw materials is rising over time. Fuel costs are an obvious item and on a short term basis they can swing things around. They're very volatile. On that short term basis and it moves the quarterly comparisons, it can move quarterly comparisons around quite a bit. So, when you listen to John's ins and outs and numbers when he does it on a quarter, you'll get some things -- a lot of moving parts there. Whether fuel is up or down in any particular quarter, quite frankly, really depends in large part on the point of comparison, where you put the stake in the ground historically. At the end of the day, if you go, one, two, three years, what we're experiencing is that both petroleum and really anything that's got a high energy based input, such as fuel, plastics, finishing materials, those costs are rising, still rising over time. In addition, other material inputs for items such as linerboard hardware, molding material, particle board and plywood that meets the new carb requirements in California for formaldehyde emissions. All those things are giving us -- continuing to put inflationary pressure. These industries that is serve us are rapidly, whether voluntarily or in some cases involuntarily, due to financial problems are taking capacity offline in aggressive attempts to restore balance between supply and demand to both firm up pricing and also recover inflation in their raw material inputs.

At some point, the industry as we again for those that have followed us for several years, at some point the industry will have to recover these costs from the end consumer. I believe that the industry has begun to move in that direction. From what I've seen, we've seen some price increases that have stuck in some channels of distribution over the last 60 days. It's obviously difficult in this environment to talk about pricing. But, in my opinion, the consumer understands that we live in an inflationary world and accepts the fact that over time the cost of basic inputs does in fact increase.

Before I pass it off to John, let me just close by saying that our strategy remains the same. We're focusing on building the value of the total franchise. By providing our customer and the end consumer superior value and services. We're in the midst of a hundred year flood. Certainly in my 30 plus years in business, I've never seen anything like this, but I'd argue we're in pretty much the hundred year flood stage. You can't ignore or deny the magnitude of the market cycle. In a hundred year flood, you don't stay in the flood plain and try and push -- hold the water back. You find higher, drier ground for a period of time until it subsides. We're holding our own in the marketplace from our perspective. We're managing our costs and making conscious decisions that balance the current reality with our long term goals and what we want to do in the future in the marketplace. And we're protecting the financial health of the Company, as John will go through, by generating and conserving cash to ensure we can both protect the Company and pursue opportunities as they arise. So, with that as a little bit of context, John will take us through the quarter. John?

Thanks, Kent. Good morning, everybody. As you know, we released the results of our third quarter of fiscal 2009 that ended January 31, 2009 this morning. Our release contained the following highlights. Net sales for quarter were $131.2 million, down 1% below the prior year's third quarter sales. Net income for the quarter was slightly above break even as compared with a net loss of $2 million in the prior year's third quarter. Diluted earnings per share was $0.00 for the quarter as compared with the loss of $0.14 per diluted share in the prior year's third quarter. And the Company generated $5.3 million of free cash flow during the third quarter. For the nine months ended January 31st, net sales were $405.2 million, down 12% versus last year's first nine months. Net income was a loss of $0.3 million, down from net income of $4.2 million of the prior year's first nine months. Diluted earnings per share was a loss of $0.02, compared with earnings per diluted share of $0.29 in the prior year's first 9 months. And the Company generated free cash flow of $14.8 million compared with $23.8 million in the first nine months of the prior fiscal year.

Regarding our third quarter sales performance, net sales for the third quarter were 1% below the prior year's fiscal year and for the nine months ended January 31st, were 12% less than the prior fiscal year. In the remodeling market, several factors have combined to continue the markets negative sales momentum. Existing home sales, a leading indicator for home improvement spending, were $4.9 million during calendar year 2008, down 13% in prior year levels. Inventories of existing homes for resale, which range from 6 to 9 months in the first half of calendar 2007, consistently ranged near 10 months during 2008. And the Consumer Confidence Index, as reported by the Conference Board continues to hover at its lowest level since the Index first commenced in 1967. In addition, the median sales price of existing homes continues to trend lower, as foreclosures and other distressed sales now comprise nearly half of all existing homes sold. Credit availability continues to be constrained as many financial institutions recover from losses sustained during the recession. Our two primary remodeling customers continue to describe difficult market conditions. In contrast, our remodeling sales experienced an increase during the third quarter. As Kent has described, the Company benefited from its market position as the provider of special order cabinetry at the value price point for it's remodeling customers.

In addition to our position as the primary value point supplier during our third quarter, both of our primary remodeling customers focused their promotional efforts and marketing programs on value price points throughout the store to encourage their customers that were active in the market to purchase both goods and services. These marketing programs expired in early January. And our expectation is that the promotional calendars at both home centers will be more balanced across all price points during the Company's fourth quarter. Overall, we continue to expect that the remodeling market will be flat to down, until credit availability, housing prices and associated media coverage settle down.

In new construction, total residential housing starts during our third quarter sank to below 550,000 homes on an annualized level, 50% below the 1.1 million level at this time last year. Starts of single family homes fell to below 0.4 million homes during the same period, 50% below their prior year level. Starts of single family homes have fallen by 43% during the first nine months of the Company's fiscal year. In comparison, our new construction sales were down approximately 25% in the nine month period and 30% during the third quarter. Evidence in the share gains we have made in this difficult market. The short term outlook for the new construction market continues to be negative as evidenced by the recently released NAHB Wells Fargo housing market index, which has remained at all time low levels for four consecutive months. As well as by the lowest building permit levels recorded since this statistic began to be tracked nearly 50 years ago.

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 the 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. We remain confident in the housing market's long term viability. During this housing cycle we continue to invest Company resources to pursue sustainable market share and improve our operations.

Regarding our gross profit, gross profit for the third quarter was 15.5% of net sales, above the 13.3% we generated in the third quarter of last year. Gross profit for the nine month period end January 31st, was 15.3%, down from 17.4% in the prior year. The primary drivers to our improvement over the prior year's third quarter were the absence of severance and separation cost that aggregated 1.0% of sales in the prior year's third quarter, which stemmed primarily from the decision made one year ago to close a small manufacturing operation in Minnesota. In addition, the Company experienced labor efficiencies and a favorable impact from declining fuel prices versus this time last year. Somewhat offsetting these results, was the continued impact of material cost pressures from several of the Company's inputs as Kent described in linerboard, drawer parts, finishing materials, moldings, particle board and plywood.

Gross profit for the 9 months was 15.3% of sales compared to the 17.4% in the first nine months last year and the primary drivers to this decline were increases in overhead and freight costs in relation to sales caused by the impact of lower sales volumes during this period as well as higher fuel prices and material costs. Regarding our SG&A cost, total SG&A expense was 15.9% of sales in the third quarter of fiscal 2009, compared with 16.9% of sales in the prior year's third quarter. SG&A expense was 15.7% of sales in the first nine months of the current fiscal year compared with 16.5% in the prior year. Total SG&A expense for the third quarter were lower than prior year by $1.6 million or 7% on a sales decline of 1%. SG&A cost for the nine months were lower than prior year by $12.3 million or 16% on a 12% sales decline.

Selling and marketing expenses were 11.3% of sales in the third quarter and 11.2% of sales in the first nine months of the current fiscal year, less than the 12.5% in the third quarter and 12.1% in the first nine months of the prior year. The savings in sales and marketing cost resulted from careful management of the Company's spending, focusing on reducing costs that are not essential to servicing customers or maintaining 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 spending, including lower volume driven costs, such as model home installations, promotional literature, travel and to a lesser extent reduced head count levels compared with prior year.

General administrative expense was 4.7% of sales in the third quarter of fiscal 2009, up slightly from 4.5% of sales in the third quarter of the prior year, driven primarily by an increase in bad debt expense of $0.2 million. G&A expense was 4.5% of sales during the first nine months of the current fiscal year, in line with the prior fiscal year. Regarding capital spending, the Company's total capital expenditures in promotional displays deployed in the third quarter and first nine months of the current fiscal year were $4.2 million and $11.2 million respectively. Below the Company's CapEx in the prior fiscal year by approximately $3.1 million and $7.4 million respectively. The company spent less on call tall expenditures associated with lower levels of production. The Company spent less on capital expenditures in line with reduced capital needs associated with lower levels of production. The Company deployed fewer promotional display units in line with reduced numbers of new home center store openings and lower rates of store remodelings. The Company expects to continue to fund it's capital spending from a combination of operating cash flow and existing cash on hand.

Regarding our balance sheet, the Company's long term financial position remains outstanding. Long term debt levels declined slightly to $25.3 million and it's debt-to-capital on a book value basis was 10.6% as of January 31st, 2009, in line with recent levels. The Company generated free cash flow of $5.3 million in the third quarter as compared with free cash flow of $15.7 in the prior year's third quarter. The primary difference for the decline in the current year is related to the timing of working capital movements, primarily accounts receivable driven by higher January sales levels in the current fiscal year. Free cash flow generated in the first nine months of the current fiscal year was $14.8 million compared with $23.8 million generated in the first nine months of the prior fiscal year. The Company returned $1.4 million to shareholders during the third quarter of the current fiscal year in the form of it's regularly quarterly dividend. And the Company ended the quarterly with nearly $65 million of cash on hand, an increase of nearly $4 million over it's most recent quarter and nearly $8 million more than at the beginning of the current fiscal year..

In closing, we continue to improve the quality and breadth of the Company's products and services and to invest in driving 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 we are maintaining adequate manufacturing and field installation capacity to ensure adherence to our state of the service levels. The third quarter represented the 4th consecutive quarter in which we operated at essentially a break even level. Our break even level of production is roughly 30% lower than it was two years ago and has enabled us to achieve these break even results and generate positive cash flow despite enduring a year-to-date sales decline of 12% compared with prior year and 33% compared with two years ago. 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 [inaudible], population growth and demographic trends, but is overshadowed by the combined impacts of inventory overhang, falling home prices and consumer confidence and the 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. We believe 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 that our remodeling customers will continue to experience weakness as compared with prior year comps driven by declining consumer confidence and increasing unemployment levels. Existing home sales will continue to approximate their present levels at slightly less than 5 million homes per year, down mid-single digits from our previous fiscal year. We expect total housing starts will approximate 0.5 million to 0.6 million during this last three months of our fiscal year that ends April 30th. Down approximately 40% to 50% from the 1 million starts during the spring of 2008. As Kent mentioned, we expect the home center sales promotional schedules for the spring to be more balanced, with no emphasis on any particular categories or price points within our market segment. We expect that our remodeling sales will not be as favorable as we experienced during our third quarter, but that we will still outperform a market which appears to be in the midst of at least a double digit decline. We further expect that our new construction sales will continue to show weakness compared with prior year levels, but that the magnitude of our sales decline will continue to be less than that of the general market. During our third quarter, we continued to win a greater share of business from some of our existing national home builder customers that have solid credit worthiness, in addition we continue to gain market share at the national home centers. Because of our strong competitive position and focus on continuing to enhance and differentiate our value from that of our competitors, we believe we will continue to achieve market share gains. This concludes our prepared remarks. We would be happy to answer questions you have at this time.

(Operator Instructions) We'll go first to Eric [Boshard] with Cleveland Research.

Good morning guys, this is Mark stepping in for Eric. First question in terms of the retail promotions you guys talked about, are you seeing any sort of halo benefit in the current quarter where maybe kitchen designers who typically didn't sell your cabinets, but did during the promotion are continuing to push your product here in February? And then in addition to that, the competitive environment, are you seeing anything different from your peers that might cause you to start to lower your price going forward, as a price gap narrows?

Two things, two questions, in terms of the potential for a halo effect, I think it's too early to tell. Certainly, our belief is that there will be some, that people -- designers that traditionally would not have designed with us, had an opportunity to experience our quality and service levels as well as the value of the product itself. I think it's -- it's going to take a while for us -- for the shares to settle down to see how much of the share gain we got during the third quarter was driven by their focused promotion versus how much is what I call core share, which is sustainable over a longer period of time. Our belief is that we will get some core share gain, but how much of that and if it's there and how much of it's there, I think we probably won't get a read for another quarter or two as things kind of settle back down from a promotional perspective.

In terms of your second question of pricing movement, in the way that the main competitive lineup is in the big box retailers and other remodeling distribution channels, but I assume your question is focused mostly on the big box retailers. All of the major manufacturers cover a broad range of price points. And so, we at the top end of our price points overlap some of the lower end ranges of our competitors and vice versa. Some of the lower end ranges overlap into some of our sale, into some of our traditional price points. So, all the manufacturers have pretty broad range. In my view, what we try to do in working with the designers in the stores, get the right product at the right price point to satisfy the consumer, to work with the consumer and satisfy the consumer. So, we all try and do that no matter what condition we're in or where the market is. So, from that perspective it's not maybe, like some other businesses where the pricing changes on a week in and week out basis at the retail level. You go and do that, it's a little bit different than the bid basis on the new construction side. So, I think that what happens in this environment is we all have a pretty broad product line and then you get down to working with the designer to satisfy the consumer.

And in terms of the promotion, I think you said it ended in January. Should we expect some of that revenue benefit to flow into the current quarter as well, just given the lead times in the business?

Yes, we built a little bit of a backlog that we shift in part of February. So, February would normally be a pretty difficult month. From a production standpoint because your Spring doesn't really start until the end of the month. Your Spring selling season. So we were able to carry a little bit more backlog into February than we maybe normally would have. Again, we'll see how that rolls through the quarter because one could make an argument that when promotional activity closed out at the end of the first week of January, they also pulled a lot of business forward. So, there may be either a delayed start to the Spring selling season or the first part of the Spring selling season may be -- the volumes may be reduced just because as an industry we pulled a lot of business forward. So, again we'll see how it balances out for the whole 90 days. But, certainly, for the first couple of weeks of February, we had a little bit of backlog we were able to work through.

And in terms of capacity utilization, can you walk us through where you stand and maybe where you expect to be once these promotions -- once the promotional benefit ends?

Well, that's the $64 question. Right? I think -- I'll give you two. One is the historical number we've given which is from a hard capacity standpoint, in terms of facilities and those types of things. We're still running around 50% utilization. From accruing perspective, we're accrued at the volumes we've been running. And we'll just have to see. If we have a halfway decent Spring selling season, we'll be able to maintain that. If we don't, then we'll have to take our accruing down consistent with the demands of the market place.

Any updated thoughts on closing down any capacity at this point?

No.

Thank you.

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

Good morning, everyone.

Good morning, Peter.

John, I was just wondering if you could maybe help us bridge the gross margin. You gave a little bit of detail, but I'm just wondering if you could take us or maybe close that 100 basis point gap from the 14.3 adjusted for the third quarter of last year to the 15.5 this year? Maybe tell us what fuel and labor efficiencies are?

I won't give you a precise quantification of that, Pete, but fuel definitely did help versus last year's third quarter. I'd say that certainly fuel was the biggest part of the remainder of the 1% improvement.

Okay. That's helpful. And then when you look at some of these efficiencies you're getting on the labor front, I would assume that is sort of a permanent or structural change that you've made. And wondering if and when things do turn up, are you thinking at the business as being a higher or more profitable business than it used to be during the last cycle?

I think that you have to keep in mind that we only took out one small plant last year, about a year ago or made the decision to do that and then took it out really in the fourth quarter of last year. So, there weren't dramatic head count reductions that stemmed from that particular action. So, I wouldn't say that at this point we've made any kind of permanent difference in the structure of head count or the relationship of labor costs to revenue at this point in time.

Okay. All right. And I know you just answered this, but I want to ask it maybe in a different way. In terms of capacity, what you're hearing I guess out of big competitors at least, is that they are taking pretty drastic actions I think, in terms of closing down facilities and restructuring their manufacturing operations. Is that going to, at some point, with the market continuing to be soft, is that going to force your hand to maybe think about the footprint or just the entire manufacturing operation?

Well, I'm not sure. I don't follow your logic how that in your mind -- how that would force our hand to do anything. The two things I would say I'll make a comment specific to us and maybe then put something else out there for everybody to kind of chew on for a while. We're going to run our business based on the customers we have and our strategy and what we see coming. And when we make decisions about capacity, whether it's hard capacity or whether it's practical capacity through accruing, we don't really do those, quite frankly, in light of the world out there. There's just again, my phrase, there's so many moving parts out there, that if you try to decide what you're going to do based on what you see or think you see others doing, you can get yourself into a lot of trouble. So, we run our business and we make our decisions within our context, within our criteria and within our structure.

The point I would probably bring up as it relates to capacity though is that one of the things that we are beginning to be concerned about is -- on a much broader scale is that in the entire building materials industry is, we are dismantling infrastructure at what I consider to be an alarming rate. And it's not just plants. It's not just some [crewing] and facilities. It's brain power, it's know how, it's capability of organizations, either because they're disappearing or because their downsizing so dramatically. If you believe as I do, that this is a cycle and that the demographics will drive us back to somewhere between on average 1.5 million to 1.6 million new construction starts and a little bit over 6 million existing home sales, total transactions, real estate transactions -- 7.5 million to 8 million. We don't have the capacity in my opinion to even come close to supporting that kind of market activity. One of the things that we're working with our vendor partners pretty hard on at this point is working with them in terms of plans to keep capacity available. Because we could end up with some building material shortages here if this thing comes back. If you get a 50% -- 35% to 50% rebound the first year back, which several prior cycles will tell you that it takes you three years to get back, but the first year is half of that. If that hits the industry, 6 months or 12 months from now, with what's on the drawing boards to take out, we're not going to have enough basic materials to meet demand and that is a concern that we're starting to spend time on.

Is there any way that you could distinguish the shortages and sort of the brain [flight] if you will, between cabinets and other building materials?

I haven't gotten that specific on it. But, I think that I would say in general, it's in my opinion happening across the entire spectrum of building materials. And you're going to have trouble building a house. There's the potential you could have trouble building a house. Now, on the remodel side it's not quite as dramatic because you don't need framers and you don't need quite as much material. But, these people, a lot of the people have gone and their finding something else to do. And even if you can get them back it's going to take a while to get them back.

Okay. Thanks on that one. And last question, just quickly. Any margin impact from the promotional activity plus or minus outside of the volume incremental?

No, Pete. We didn't fund the large promotions that went on.

All right. Thank you.

(Operator Instructions) We'll go next to Sam Darkatsh with Raymond James.

Thanks guys, this is actually TG [McConville] filling in for Sam this morning. I had a question for you on the receivables. It looked like you had a pretty significant year-over-year increase and that on essentially flat sales. Can you talk to that a little bit about what your collections have been looking like and what your retail partners have been sort of driving you there?

Yes, TJ, that's a good question. They did go up, both from year-end and also from a year ago levels. Really, it was just the timing of the sales. Although, sales were flat for the quarter. Last year, we had a very significant deceleration in December and January. This year, that was not the case, if anything we were steady throughout the entire quarter. So, just because of the timing of when the sales were made, particularly in the month of January. Our receivables were up, but our collections were steady. We've had no changes in payment terms with any of our significant customers.

Okay, great. I appreciate that. And back to some of the gross margin discussion, I know we talked about the year-over-year impact of the lack of severance and things like that. More on a sequential basis, we still saw some nice expansion there. Sales actually lower this quarter. Can you talk to whether or not we're seeing any type of -- I know we talked about raw materials inflating year-over-year, but any type of sequential deflation or -- anything you're seeing there?

TJ, the only thing sequentially that improved in terms of inputs was fuel.

Okay.

I would go back to the comment I made though in my opening remark, was a lot of that just depends on where you want to put the stake in the ground. And so when you go quarter do quarter, you get those discussions. When you take a longer perspective which is one, two, three years, two to three years, we're still seeing inflationary impact from basic raw materials. And that includes anything thats petroleum based or has a high energy content into its manufacturer. For example, on diesel you've seen a big -- a pretty good drop from the peak. But, the peak was only there for basically four weeks. It went up very quickly and came down very quickly. It didn't go up and level out. It went up, hit the top, and started to come back down. So, if you pick that point as your comparison you're going to get a big decrease. If you pick 6 or 9 months before you had the big runup in fuel prices, you get a very, very different picture. So, as opposed to focusing on a particular quarter, depending upon what your comparison is, I think the important point is that the stuff bounces around. But there's inflationary pressure on our inputs.

Gotcha. And finally here, I know we discussed the promotions at length. Can you give any color as to specifically what those promotions were? I know they were, we say they were targeted at the lower price point. Was it just individual promotions on your goods specifically, or can you describe what they were?

Well, it would take a long time to get into the details because the promotional activity on special order kitchens can get pretty complicated. There can be multiple promotions running and overlapping at various times. Excuse me. Basically, what happened during the period was our customers ran promotions across all their categories, all price points, all vendors. But, they kind of reallocated the weighting to target customers that were actually seriously in the shopping mode, in the buying mode. Not just tire kickers. And to see if there was a way to, in essence increase their capture rate from either just people walking through and grabbing a brochure or all the way to designs to actually closing the quote on the design. And so, they were doing some things to move those dollars around. And again, it gets pretty complicated, but, the long and short of it is I kind of use my analogy, was, in addition to having the wind at our back from just being the value price point, particularly in this economic environment. They reweighted their promotional activity to try and target customers that were shopping, but were very budget conscious. And that had a tendency to give us a little bit stronger wind at our back.

Okay, great guys. I appreciate you taking my questions and great job in the quarter.

Thank you.

We'll go next to Keith Johnson with Morgan, Keegan.

Good morning.

Good morning.

Just, two quick questions. Could you put a dollar amount on the promotions or the effect of the promotions for you guys in the fiscal third quarter?

We haven't really put pen to paper to try to estimate that and quite frankly, we wouldn't be sure anyway because there's no way of really knowing how much you would have had, had they not promoted.

Just because of the potential share gain and those type of things that have been helping you over time?

Well, the thing is, they're always promoting seasonally speaking. There's always Fall selling season, sort of promotions going on. I think this time as we've described. The effort was different given the environment, but no one's got a quantification of what that really meant.

Typically, you guys see I guess, I know you mentioned earlier it's hard to call anything seasonal in this type of environment. But, you do see kind of a bounce coming into your 4th fiscal quarter as construction markets opened up and that sort of thing.

Well, yes historically, on the new construction side, actually, there's historically, and again, it doesn't work now, but historically, you kind of get a year-end account or a year-end in the Spring. And the calendar year-end is the builders trying to complete and close all the homes before their fiscal year ends, so you get a big push in November and December. Historically, from them trying to close out homes. And then you get another kind of uptick when you get into the Spring and they do those types of things. It's diminished over the years with new building techniques that allow you to pour concrete in colder temperatures in the north and some of those types of things, but generally that's it. On the remodel side, you basicly get a Spring and a Fall season. The Spring season will peak in March going to April. And really tail off in May. You don't get much during the Summer. It will pick back up again in mid-September and really run October through Thanksgiving.

As we kind of look at going into this April quarter,given the underlying environment, would promotions have been strong enough for you guys? I know you suggested that you could have pulled demand into the third quarter from the fourth, but could it have been strong enough to essentially put us in a flat subsequently revenue?

For our fourth quarter?

That's right.

Well, it remains to be seen. Sure, it's possible, but on the other hand, we don't have very much visibility in this business to what incoming order rates are going to be over the next couple of months and that's really going to dictate how we end up.

Okay, alright, I appreciate the question.

Thank you.

And we'll go next to Robert Kelly with [Sodony].

Good morning.

Good morning. Hi, Bob.

I just had a question on the overall cabinet market. Do you guys get independent data or data from your customers indicating what the market was doing during the quarter just ended? I know you saw growth on the remodel side, but what do the retailers say the market was doing? Or independent data, what does that say?

Yes, on the new construction side, we get very good data. We get real accurate data. And the primary reason is that you got to file for starts and so there's a place that you go to which is hard public data in each region, that issues or each office that issues where you can actually get the start data. You can also correlate that with closing data and those types of things that you can get from some real estate sources. So, on the new construction side, generally speaking, we have a lot of hard data that we can zero in pretty quickly on activity. The remodel side is a bit more problematic. And that is because it's a lot more fragmented, you have a lot of small dealers out there, you've got a lot of distributors that may serve both new construction and remodel. And then of course, you've got the big box retailers. So, what you really need to do on the remodel side is you really need to kind of get multiple data points and do the triangulation thing and see if you can directionally try to figure out what's going on. We get some things from KCMA, which is our industry association. We get things from a variety of statistics around. But, you really don't get a real accurate number. You kind of have to zero in on it from several different angles. As I said in my opening comments, we believe that the special order kitchen cabinet market in the 3 months that were covered by our third quarter, that that market contracted in its totality. By how much, you've got to put a range around it, but we believe the remodel market contracted during that period.

Alright, excess of double digits? Closer to 20%. Just like a ballpark.

Well, yes.

I think double digits are a safe bet, but beyond that, it's hard to say.

Alright, fair enough. Price mix trend versus volume for the last couple quarters. Is that helping or hurting you on the revenue line?

Really, it's been volume driven, Bob, because there wasn't much pricing action in there and we have had a little bit of improvement in mix.

Okay, great. And then as far as your cash position and the balance sheet. Any chance you do anything with the dividend or increase the payout to shareholders?

In this enviro -- well, first, of course, you have to defer to our Board. And so we can't speak definitively on that, but in this environment, it's hard to imagine really a dividend increase. I think that from a cash and balance sheet management perspective, we're keeping our powder dry, we're managing the Company conservatively and improving our balance sheet everyday, generating cash and looking to just have an iron safe balance sheet no matter what comes at us.

Alright, thanks guys.

And there appear to be no further questions. At this time, I would like to turn the conference back over to Mr. Eanes for any additional or closing comments.

I'd like to thank everybody for taking time out to participate in this conference call, but since there's no additional questions this concludes our call. Speaking on behalf of the management of American Woodmark, we appreciate your continuing support. Thank you. Have a good day.

Again, that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.