American Woodmark Corp (AMWD) 2009 Q4 法說會逐字稿

Good day and welcome to this American Woodmark Corporation conference call. Today's call is being recorded. The Company has asked to us read the following Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. All forward-looking statements made by the Company involve material risks and uncertainties, and are subject to change based on factors that may be beyond the Company's control.

Accordingly the Company's future performance, and financial results may differ materially, from those expressed or implied in any such forward-looking statements. Such factors include but are not limited to, those described in the Company's filings with the Securities and Exchange Commission, and the Annual Report to shareholders. The Company does not undertake to publicly update or revise 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 call over to Glenn Eanes, Vice President and Treasurer. Please go ahead sir.

Thank you. Good morning, ladies and gentlemen, and welcome to this American Woodmark conference call for the results of our fourth quarter fiscal year ended April 30, 2009 results. Thank you for taking time to participate. Participating on the call today from American Woodmark Corporation will be Kent Guichard, Chief Executive Officer and President, and Jon Wolk, Chief Financial Officer. Jon will begin with a review of the quarter and the year, concluding with an outlook on the future. And after Jon's comments, Kent and Jon will be happy to answer your questions.

Jon.

Thanks, Glenn. This morning we released the results of our fourth quarter of fiscal 2009 that ended April 30th, 2009. Our earnings release contained the following highlights for the fourth quarter. Net sales for the quarter were $140.7 million, down 2% below the prior year's fourth quarter. During the fourth quarter the Company announced it was permanently closing two manufacturing plants, and suspending operations in a third.

The Company recorded restructuring charges relating to these initiatives of $6.0 million net of tax benefits during it's fourth quarter. Net income inclusive of these charges was a loss of $2.9 million. Net income exclusive of these charges was $3 .1 million for the quarter, as compared with a breakeven result in the prior year's fourth quarter.

Earnings per diluted share including restructuring charges was a loss of $0.21 per diluted share for the quarter. Excluding restructuring charges, earnings per diluted share for the fourth quarter was income of $0.22. Compared with a breakeven diluted earnings per diluted share in the fourth quarter of the prior year. The Company generated $18.2 million of free cash flow during it's fourth quarter, up substantially from the $4.8 million generated in the prior year's fourth quarter.

For the entire fiscal year ended April 30th, net sales were $545.9 million, down 9% versus the prior year. Net income, including restructuring charge was a loss of $3.2 million, and excluding restructuring charges was income of $2.8 million, down from net income of $4.3 million in the prior year, which also included $0.9 million of restructuring charges related to a previous plant closing.

Earnings per diluted share included restructuring charges was a loss of $0.23, and excluding restructuring charges was income of $0.20 per diluted share, compared with earnings per diluted share of $0.29 for the prior year. The Company generated free cash flow of $33 million, an increase of $4.4 million, or 15%, compared with the $28.6 million generated in the prior fiscal year.

Regarding fourth quarter sales performance, net sales for the fourth quarter of fiscal 2009 were 2% lower than in the prior fiscal year, and 9% lower than for the entire fiscal year. In the remodeling market, several factors combined to continue the market's negative sales momentum. Existing home sales, a leading indicator for home improvement spending, were $4.8 million during the Company's fiscal year 2009, 8% lower than in the prior year. The Consumer Confidence Index has reported by the Conference Board bounced off it's record lows reached during the quarter, but still remains well below prior year levels.

The median sales price of existing homes continues to trend lower, as foreclosures and other distressed sales, continue to comprise roughly half of all existing homes sold. Credit availability continues to be constrained, as many financial institutions recover from losses sustained during the recession. Unemployment continues to rise as of this morning now exceeding 9%, compared with an average of 5.8% during all of calendar 2008, and our two primary remodeling customers continue to experience negative sales comps.

In contrast, our remodeling sales experienced a modest increase during the fourth quarter, representing the second consecutive quarter in which the Company's remodeling sales were positive, despite a remodeling market which was down by as much as 20%. The Company's primary remodeling customers chose to focus their promotional efforts and marketing programs during the Company's third quarter, on value price points throughout their stores, to drive additional sales in a difficult market environment. As the value player in special order cabinets, the Company realized significant market share gains during those marketing programs, which enabled the Company to maintain it's production levels until April of 2009.

The promotional calendars at both home centers became more balanced across all price points during the Company's fourth quarter, causing market share of new sales orders received to revert to more traditional levels. In new construction, total residential housing starts during our fourth quarter sank to below 525,000 homes on an annualized level, 48% below the 1.0 million level in the prior year's fourth quarter.

Total housing starts during the Company's fiscal year 2009 averaged 725,000, 40% less than the 1.2 million average for the Company's fiscal year 2008. Starts of single-family homes remained well below 375,000 homes during the fourth quarter of the Company's fiscal year, also 48% below prior year. In comparison, our new construction sales were down approximately 25% during the fiscal year and a bit more than that during the fourth quarter, evidencing the share gains the Company has made in this difficult market.

The short-term outlook for the new construction market continues to be negative, as evidenced by continued weak new permitting levels, and by the NAHB Wells Fargo Housing Market Index, which has bounced off it's all-time lows reached a few months ago, but still remains well below levels considered healthy by the industry. 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, product, and pricing. These share gains have come at satisfactory margins that we believe will be sustainable over time.

Regarding gross profit, gross profit for the fourth quarter of fiscal 2009 was 19.6% of sales, above the 16.3% we generated in the prior year's fourth quarter. Gross profit for the entire fiscal year ended April 30th, 2009 was 16.4%, down from 17.1% in the fiscal year 2008. The primary drivers to our fourth quarter improvement were a reduction in fuel costs, which caused transportation costs to decline, as well as lower labor costs driven by improved productivity, and lower workman's compensation costs that were driven by improved safety performance.

Gross profit for the entire fiscal year was 16.4% of sales, down from 17.1% in the prior year. The primary drivers to the decline in prior year were increased unabsorbed overhead and rate costs, that were driven by lower production levels. In addition, higher fuel costs also increased freight and materials costs, but the impact of lower lumber prices somewhat offset these increases. Regarding operating expenses, total SG&A expense was 16.6% of sales in the fourth quarter of fiscal 2009, compared with 16.0% of sales in the fourth quarter of the previous year.

SG&A expense was 15.9% of sales for the entire fiscal year 2009 compared with 16.4% in the prior year. Selling and market expenses were $2.0 million, or 12% lower than the prior year's fourth quarter, on a sales decline of 2%. Selling and marketing expenses were 10.4% of fourth quarter fiscal 2009 sales, versus 11.6% of sales in the prior year's fourth quarter. Selling and marketing expenses were 11.0% of sales for the entire fiscal year 2009, compared with 11.9% in the prior fiscal year.

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 customers or maintaining customer touch points, which remain central to the Company strategy of protecting it's 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 entertainment, and to a lesser extent reduced headcount levels compared with prior year.

General and administrative expense was 6.2% of sales in the fourth quarter of fiscal 2009, up from 4.5% of sales in the prior year's fourth quarter. For the entire year, G&A expense was 4.9% of sales, compared with 4.5% of sales in the prior year. Increased percentages for both the fourth quarter and the entire fiscal year were driven entirely by increased costs relating to the Company's performance-based variable compensation programs.

During it's fourth quarter, the Company announced that it is realigning its manufacturing network by permanently closing two of its oldest manufacturing plants, and suspending operations at a third plant. Management made this difficult decision, based upon it's assessment of current and expected conditions in the housing market for the foreseeable future. Management believes that subsequent to these actions, the Company will continue to have ample production capacity to participate in the housing market's eventual and inevitable recovery.

As a rough guide, management estimates that the Company's remaining hard manufacturing capacity can service nearly double the sales volume achieved during fiscal year 2009. In connection with these actions, and a company-wide reduction in force of salaried personnel performed during the fourth quarter, the Company recognized the restructuring charges pretax of $9.7 million, offset by an income tax benefit of $3.7 million.

The restructuring charges consisted principally of severance and separation costs, and inventory write-downs. The Company expects an additional $6 million of restructuring costs will be incurred related to these initiatives, with the majority of those costs incurred during fiscal year 2010. Once these initiatives have been completed, the Company estimates that savings of approximately $20 million per year will be realized.

Regarding capital spending, the Company's total capital expenditures and promotional displays deployed in the fourth quarter and entire fiscal year 2009, were $2.6 million and $13.8 million respectively, below the Company's capital spending levels in the prior fiscal year, by approximately $1 million and $5.3 million respectively. 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 openings, and lower rates of store remodelings. 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 was $26.5 million at April 30th, 2009, and debt to capital on a book value basis was 11.5%. The Company generated free cash flow of $18.2 million during the fourth quarter of fiscal 2009, compared with $4.8 million in the fourth quarter of the prior year. The primary driver for this improvement was related to the timing of working capital movements, primarily Accounts Receivable driven by higher collections made during the fourth quarter of fiscal 2009.

Free cash flow generated for the entire fiscal year was $33 million, an increase of $4.4 million compared with prior year. This increase was driven primarily by the Company's $5.3 million reduction in cash used for capital expenditures and new displays. The Company returned $7.5 million to shareholders during fiscal year 2009 in the form of dividends and stock repurchases. The Company increased its cash balance by over $25 million during fiscal year 2009, ending the year with a record level of nearly $83 million in cash.

In closing, we continue to manage the business with the objective of creating long-term value for our shareholders. 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. Our recent reduction in force was carefully designed to ensure that we continue to maintain our touch points and customer facing jobs, and maintain adequate manufacturing and field installation capacity, to ensure adherence to our stated service levels.

The fourth quarter of fiscal 2009 represented the fifth consecutive quarter in which we either operated at approximately breakeven or earned a modest profit, excluding restructuring charges. The difficult actions that we undertook during the fourth quarter are targeted to further reduce the Company's breakeven production level, which is roughly 30% lower than it was two years ago.

In making these choices, management balanced it's ongoing responsibility to maintain the financial health of the Company, with a need to continue to support its customers, move the organization forward toward it's long-term goals, and remain ready to actively participate in the housing market's recovery. Management believes the Company has retained both the organizational and production capacity, to service demand in a market with average to above average new construction and remodel activity.

As we look forward to fiscal year 2010, we continue to see a long-term housing environment that is underpinned by sound population growth and demographic trends, but continues to be overshadowed by the combined impact of inventory overhang, falling home prices, and the credit crunch. We believe these factors have contributed to a reduced ability 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 our remodeling customers will continue to experience negative sales comps, driven by weak consumer confidence, and increasing unemployment levels. Existing home sales will approximate their present annualized levels of 4.5 million homes, down mid-single digits from the fiscal year that we just completed. Total housing starts will approximate 500,000 to 600,000 during our fiscal year 2010, down approximately 25% below the 725,000 starts during our fiscal year 2009.

In terms of Company performance, now that retail sales promotions have become more balanced, with no particular emphasis upon the value price point in the Company's product category, management expects that the Company's remodeling sales will more closely reflect industry sales trends during fiscal year 2010. We further expect that our new construction sales will continue to show weakness compared with prior levels, but that the magnitude of the Company's new construction sales decline, will continue to be less than that of the general market.

During our fourth quarter, we continue to win a greater share of business from some of our existing national homebuilder customers that have solid credit worthiness. Because of our strong competitive position and focus on continuing to enhance and differentiate our value from that of competition, we believe we will continue to achieve market share gains.

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

Thank you. (Operator Instructions). And we will take our first question from Sam Darkatsh with Raymond James.

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

Good morning, Sam.

A few questions here. Jon, you mentioned there were inventory write-downs included within the charges in the quarter. Could you quantify those for me, please?

Yes, Sam, they were roughly $3.5 million.

And will there be further restructuring charges taken in the next quarter or two, or is this the entirety of it?

Well, as I just said in my remarks, Sam, we are going to incur about another $6 million of restructuring costs by the time this effort is done. The bulk of that will be incurred in the new fiscal year. And of that, most of that would occur in the first couple of quarters.

And what is that, I am sorry, I missed in that the prepared remarks, and I apologize. What were the components of that 6 million?

The 6 million, primarily it is severance and separation costs, mostly employee related. You also have accelerated depreciation on some assets that are still in production, but are going to be taken out of production before the fiscal year is out. So it is really a combination of those two things plus a variety of other things.

Then were there restructuring savings in the quarter, or when do the savings, the 20 million that you cited, when does that begin to kick in? Did it already kick in this quarter or next quarter, or how should we look at that, and the progression of that?

You are going to see that as the fiscal year rolls out. I can't give you a precise timing as to when those costs are going to be incurred, but really we have got to get through, I would say the first couple of quarters, and once we get into the back half of the year, we will start to see more of that come through.

And the last question, talk to me about the retail or promos, Kent. What was the timing of when the promotional activity ended, and then what was your sales trends as it ended, and why do you suspect you will be reverting back to more industry type growth levels or decline levels? Help us understand the timing and what exactly happened with the promos?

Yes, Sam, we talked a little about that last quarter. The promos really ended early in January. They were primarily October, November, December, but it rolled over really into the first week of January. And the strength of those promos allowed us to build significant backlog, and that is a lot of what we shipped in January, February, and March, was related to the backlog that we built during that period, we believe a lot of those orders, customers actually didn't want the product for a while, but they wanted to get the price.

So we were able to meet their expectations in terms of delivery, but not ship it until February and March. As you look at when that promo came off, and we really went back in the retail environment, back to what would you consider to be pretty much equal across the board, although at price points generally you are getting right now, what is out there in the world is you are getting greater discounts at bigger tickets. Kind of an escalating scale that the retailers have put into place, which is kind of the bigger the ticket, the more you spend on the total job. The great the total value that gets promoted back.

But even so, when you look at it, at a tier, particularly the value tier that we participate in, we are pretty much all back to a standard kind of playing field, in terms of there isn't a standalone, or there isn't a particular price point in the grand scheme of things, of getting an advantage over other price points, even net of all promotional activity.

So with that we have seen after that promo was over, we did see market shares of all the competitors kind of go back to around historical averages. Now, month in and month out, week in and week out, different retailers and different manufacturers will run different types of promotions, so week to week, you may get some movement around, but if you look at it over time, with what they are doing now, we are pretty much back to historical trends in terms of shares.

So the backlog has already been worked through, or it is still being worked through?

No, we ended up depleting that backlog, really about the end of March.

So what you are saying is, since the end of March, your comps and the home center level, were pretty much what the home centers were seeing, or was there a share whip-back, I am trying to understand what you are saying. Was there a share whip-back from the higher price points, or you began comping what your customers were comping?

It is a little bit of both what. We saw was after the promo went off, clearly the shares that we were getting, the shares that we were seeing during the promotional period were extraordinary, in terms of both what is historical and what we would consider to be sustainable.

So at the end of the promo did you see, I am not sure if whip-back is the right term, but you did see a return back to more traditional shares, which basically puts us I would say all, but certainly us, back on kind of the footprint of the customer. And so as we kind of get through this period here, our fourth quarter into the first quarter, our order rates and our demand is going to be more reflective of the overall customer, than it is going to be of share shifting around.

Thank you.

And we will take our next question from Eric Bosshard with Cleveland Research.

Good morning. Two questions for you. First of all, in terms of where the cabinet market demand is going over the fiscal year, your fiscal year, can you talk about again sort of what you thought the market did last year, and what you think the market is going to do this year?

Yes, sure. I am going to maybe break a little bit, talking about year-over-year, because what we had really through about the first eight or nine months of calendar 2008, we were pretty much kind of steady state, from a demand from the overall industry. Now obviously reduced levels from not only what we had seen in '05 and '06, but also reduced levels from what you would consider to be a normal environment, that being somewhere around 1.5 to 1.6 new starts, and probably around 6 million, high 5's, 5.7 million to 5.9 million, almost 6 million existing home sales.

But we had seen even at the lower rates, we had seen the industry kind of stabilize for the first nine months, then the Lehman Brothers event, as it did in many industries, was a real tipping point, and the whole industry saw another step-down in demand beginning last October. We were insulated from that for about 90 to 120 days, again based primarily based on some of the promotional decisions in the retail environment, so we had a little bit of a delayed impact, but there was clearly a step-down last October.

But we continue to basically be there on a year-over-year basis, we are still obviously getting some of the big numbers on a sequential basis, not as big, although they are sliding slightly, the new construction rates continue to slide a little bit, the remodel rates continue to slide, we are not seeing a big drop on a sequential basis like we did going back to last October, but the overall market demand is still sliding down.

And so is the expectation for your next full fiscal year that the market is down over that timeframe as well? Is that really what the message is?

Yes. Again, everybody, if you have got a crystal ball, let me know, I would be happy to look over your shoulder. We think that, and I think there is a, I wouldn't say it is general, but probably the prevailing opinion out there, is that by the end of calendar 2009, we should clearly be at the bottom. My personal opinion is we are kind of at the bottom now.

The question is when do you get a little bit of a bounce-back. I certainly don't think we are going to see any significant bounce-back in overall market demand until the end of this calendar year, and we may not actually start to see the recovery until spring of next year. The market is still significantly depressed for our category.

The second question, on the $20 million of cost savings, can you again give a little more color on when that starts to show up, and if it all kind of drops to your bottom line, or do you have to reinvest it somewhere, or does it get offset by the ongoing contraction in the business? Can you just give us a little bit of visibility on where and when it kind of should show up?

I will take this, Eric. I think it is a little bit more of the last point that you made, because we do anticipate, as Kent just indicated, the market to contract, and given the market share reversion back to more traditional patterns that we are expecting, at least on the home center side, clearly that would indicate that we expect our sales to be lower in fiscal 2010. So there is going to be a negative impact from that, and that has already started. It started really in April 2009, and we expect it to be pervasive throughout the fiscal year.

Offsetting that, we are in the process of winding down these three operations. The reduction in force was completed in the fourth quarter, but three operations are still in various stages of wind-down now in the first quarter, and as we progress. So we are not going to see the benefit, the full benefit of those cost reductions really until the second half of the fiscal year.

And should you come out of that net ahead, obviously you are not going to net ahead 20 million, because of what happens with underlying demand, but is the expectation that net you will progress from a profitability standpoint from this effort?

Obviously in the future we are going to progress, but in terms of timing for fiscal year 2010, my expectation is that the cost savings are going to lag the impact of the sales contraction.

Okay, perfect. Thank you.

And we will go next to Joel Havard with Hilliard Lyons.

Good morning, everybody. Congratulations on that gross margin. That is what I would like to spend most of the time you will give me. Kent or Jon, in the prepared remarks you talk about the order of magnitude and contribution there, and I don't know if that is intentionally, but fuel related costs, labor, productivity improvement and workers' comp, presuming the workers' comp differential wasn't a huge swing, but between fuel year-over-year, and labor productivity from this burst of throughput that carried over from DIY, have you all internally raised the floor on gross margin, to sort of this 19% range, or was this very much affected by some of these outside factors?

We produced at a reasonable rate during our fourth quarter. We produced a consistent level really throughout our fiscal year. But during the fourth quarter, the primary thing that really moved the needle for us was the reduction in fuel costs. That is really the biggest single indicator.

In addition, we did have the labor efficiencies that we also mentioned and I spoke of, but fuel was the biggest driver for why margins finally went back toward a more level that we certainly like to operate at.

I am going to tack a follow-up on that. That I know in the past you guys have targeted 20 to 22%, if my memory is right, as a reasonable target range for gross margin. If we think about the current sales environment and expectations over the next year or so, in conjunction with the restructuring effort here, can you stay in this range, move toward that target, despite the market head winds?

As I just said, in answer to the previous question, Joel, I think that at least during fiscal year 2010, the impact of the market contraction and the reversion back to more typical market shares within the home center channel, are going to more than offset whatever savings that we can get from these initiatives during 2010.

I am sorry, Jon is you are fading out on me. I don't know if that's just my phone, but let me see if I can try getting you from the other side. Do the restructuring measures end this headwind, presuming fuel flat, mean that Q4 was very much an unexpected surprise on margin that we really need to be staying kind of toward where we were midyear, or have we seen and should expect some of this lift to stick despite the headwinds? I am sorry, you were fading out, Jon. You may have partially answered that at the end.

Joel, we can hear you fine. Hopefully you guys can hear me. But let me continue.

Thanks.

As I tried to answer to the last caller, our expectation is that the impact of the market headwinds, will more than offset the cost save that is we can bring to bear. I wouldn't call the 19.6% that we operated at in Q4 a surprise. We expect to operate in that range given a stable production environment that holds up at least at that level, and a stable market price input situation as we had in Q4.

The problem is, going forward, at least for fiscal year 2010, we see the market impact the contraction and continued contraction in the market, being of such a magnitude, combined with a reversion to more traditional market share levels in the home center channel, such that it will more than offset the cost savings that we can bring to bear from these initiatives.

Okay. Thanks for --

Joel, this is Kent. Let me try and maybe take a different tact at it from a higher level, or a different perspective. You have got a choice in an environment like this. We are in a 100-year flood. You have a choice where you size your operation.

For us to continue to drive gross margin up, certainly at those longer term target where we intend to operate in a normal environment, if that is your focus, that is going to drive you, in my opinion to make decisions and take action, to size the capacity and capability of your organization at the low watermark in this kind of environment. We just don't think that that is in the interest of any of our constituents. So we have consistently made the decision, although we did finally do some things in the fourth quarter, but we have consistently made the decision that we are not going to in this environment, drive to size the company at the low watermark.

We have made the decision that we are going to absorb some of this overhead, so that we keep both, not only production capacity, but our organizational capacity to service our customers, and the end consumer in the recovery in a more normalized environment. In the mean time, you obviously do everything that you can to get costs out that won't reduce that capacity. You manage to cash and you protect the balance sheet.

Again thanks for that additional perspective, and thanks Jon, for walking back through it a couple of times. One other question, probably for you, Kent. My interpretation of the Company has always been that you are running a very short lead time from order receipt to shipment. Was that particularly different here in Q4 with this carry-over of orders out of the retail channel, and does that mark something different with the Company now, or is that sort of an aberration?

Well, with the seasonality that happens in the business, I mean, we have always had a little bit of flex, in terms of our backlog. When you get into the prime, for example, remodel selling seasons in the spring and the fall, the industry, not just us, certainly us, but the entire industry, has a tendency to builds backlog during those periods, and deplete backlogs during the summer and the winter, and so certainly in the last three to six months, you have seen that, it was exaggerated a little bit by the retail promotions where we probably built, we did, we built more backlog than we certainly have in the last couple of years during that period, and we have been depleting that, as we went through really February and March, late January, February, and March. So at the beginning of the fourth quarter what we had in backlog, in terms of day of shipments, was bigger than what we ended the quarter.

In other words, we depleted backlog during the quarter. I wouldn't translate into the consumer had a deteriorating experience. We meet on a consumer by consumer basis, we meet their requirement or their request for delivery, and I think what we had, because of the attractiveness of some of the dollars that were out there from a consumer perspective, in addition to just the amount off and the free product, there was 12-month no pay, those types of things.

If the people hadn't anticipated doing their project until March, actually placed their order in January to take advantage of all of those things. So we, on an order by order basis, met the need and the request of the customer. When you stand back and look at the total business when you roll up all of that, we did deplete backlog during the quarter, because of the buildup at the end of the promotional period.

So the customer was, in fact, ordering with expectations for later or longer delivery windows than would be customary. Is that --

Yes, in some cases. The way we scheduled delivery it is basically customer determined. The customer tells when you say they want it. In essence we meet that date. And what we saw was we saw extended delivery requests from the customer.

All right, so not a shift on the Company's part.

Yes, that is not a change at all in terms of our lead times or our service platform in relation to the market.

Guys, great. If I can ask one more question before I congratulate you one last time, it was at least a sense or a rough figure, for the number of positions eliminated at the plant, and at the other levels. And I guess that would be as you wind up this process. What would be the total magnitude?

Well, you mean in terms of the number of people?

Yes, sir.

It is an ongoing process. If you look at what was just included in the restructuring charge, as Jon mentioned, you are probably in the 700 kind of range, plus or minus, if you look at total positions.

Is that total positions associated with the three plant operations, or does that include the, where is the line? I saw it here.

It is all of the above.

Salary personnel reductions.

It is all of the above. I am not sure what your interest is in that number. If you go back since the peak, we have reduced a lot more than that to basically get production accruing and organizationally staffing consistent with the market place, we are down significantly more than that over the last two to three years. The particular restructuring, if you just isolate it to the restructuring event, that we had in the fourth quarter, it is probably about 700 people. Over the last three years our total headcount is probably down 50%.

Best of luck to you.

We will go next to Robert Kelly with Sidoti & Company.

Good morning. Thanks for taking my questions.

Good morning, Bob.

Looking beyond S-10, you guys have talked about the long-term gross margin goal in the low 20s. Have the cost cuts and the moves you have made here in April/May, does it raise the bar for the future gross margin goal?

I am not sure I quite understand in terms of raise, what you mean by raise the bar?

I mean, is that range now in the mid-20s or higher, or are you still kind of targeting a 21 to 23% gross margin goal, as you get beyond the near-term weakness, based on your current capacity?

Yes, again, it will depend on the period. Clearly in a period, we talk about the averages of the marketplace, the 1.5 million to 1.6 million housing starts, which has been almost a dead on average for the last 30 to 40 years, the issue, of course is there is never a year that is average. You are either above it or below it. So as we get over that, as the market recovers, and if any past cycle is a guide, we are going to overshoot.

We are not going to get the 1.5 million starts and stops. We are going to go over that as an industry. As you do that, and you start to really leverage your capacity, we would expect that during that period, when you really are running full out, and you are absorbing all of your overhead, and you are producing as much as you can to meet the market demand, that we would expect to overindex that average. In periods of time, certainly now is extreme, but periods of time when you are under those market levels, you would under-index to those averages.

So when we talk about that 22 to 23%, that is kind of that utopian world where you are running right on those long term averages. The reality is that you never run on those. So we would expect that at the peak of the next cycle that we would be operating above that, and then as that cycle starts to wane, and you get back towards average and below average, that would you come down on the other side of that. If there are not extreme market conditions, such as we faced the last couple of years, our target is to operate in a band of 20 to 25, with obviously the long-term averages being that 22 to 23 range.

Thanks. And then I was just curious, and I don't know if you have the data for this, what your geographic breakdown looked like? Your customers were talking, too, a little bit, the more foreclosure-driven markets, the distressed markets seeing a little bit of pickup in remodeling and what not. Are you also seeing in that your order flow?

Yes, we are not seeing a lot of shifts. The markets that have been significantly weak, primarily the sun belt, Florida, California, or the southwest, certainly Arizona as a market, has been very, very difficult. Their kind of rates are 80 to 90% below what they were in 2005.

But the general weakness continues to be in pretty much the same areas. Again going across the Sun Belt. Certainly in the upper Midwest. Ohio, Indiana, Michigan, in that area. We haven't really seen a lot of shift there. There have been a few signs of life in northern California and some other types of places, but we have not personally, from our business, we have not seen one market that has obviously turned around, and is on the way back up. There are pockets of life, but pretty much coast to coast, it is still pretty depressed.

Okay. And just one final one. With the cost savings from the restructuring and the big spread between D&A, and where you will probably end up on CapEx in F'10, should we expect you to be free cash flow positive again F'10?

That is a great question, Bob. I am not prepared to guide on that at this point. I think we will let the first couple quarters show us where we are going, then we will make a better call on that, it is going to be close.

Okay, assuming you are even just flat to modestly burning cash, what do you do with all of that now sitting on your balance sheet?

We leave it right there. I think in this environment, liquidity, cash is king. The old phrase cash is king, and certainly until we get to the other side of this thing, I have said a couple of times in a couple of different forums, I have a lot of confidence. My personal belief is this is a cycle, and there is going to be another side to this cycle. I just don't know when that is going to be.

And between now and then, certainly liquidity, I think, is the most important thing that we can work on. So we are going to maintain the strength of the balance sheet. We are going to maintain our liquidity. We are going to hang on to that cash until we can see the other side. As soon as we see the other side of it, we will start to make decisions in terms of how we deploy that cash.

On the other side some of it will go back into other areas of the balance sheet. We will obviously to have rebuild things like our receivable accounts, as order flows and shipment rate sales go back up. We will look to get back on our stock repurchase program. Clearly do that with some of that cash, but until we can see the other side of the cycle, we are going to hang on to that cash on the balance sheet, so that we can make sure that in any environment, we can continue to execute our strategy.

Okay. Thanks, guys.

Sure thing.

And we will take our next question from Keith Johnson with Morgan Keegan.

Good morning.

Good morning.

A few follow-up questions. Maybe just to make sure I heard correctly on the gross margin, when you were talking about drivers, you were really kind of talking about year-over-year, lower fuel costs, lower workers' comp, that sort of thing. If you look at it sequentially, as you came from the third quarter to the fourth quarter, you saw a pretty good increase, what were the drivers there?

Similar drivers again because the fuel was starting to come down in Q3, but it really, the bulk of the reductions really benefited us in Q4.

Then operating rate in Q4, kind of maybe on a crude basis, what was that looking like, or utilization factor?

Similar to Q3. Production was very similar throughout the year.

Is there a way that, I guess kind of help me understand a little bit, could you talk about excluding the promotions, the underlying remodeling market still being very challenged. Is there a way in the fourth quarter you could give some color around maybe your new order rate that you were seeing? Were you seeing that down double, I guess, kind of low double-digit type range in the remodeling market, excluding what you were using to fill the backlog?

Well, if you look at the overall, depending on the source that you want to use, KCMA, which is our industry association, kitchen and bath business, there are several of them out there. If you look at the February, March, and April, which really equates to our quarter, the remodeling market was probably down 25 to 30%. And we think we gained a little bit of share, but certainly you are trying to overcome those kinds of numbers, so you are seeing significant, I think what has happened, when you look at kind of the two pieces of our businesses, is new construction has historically, and in this cycle as well is the first to be impacted. It drops very, very quickly, which it did in this one.

There is a little bit of a lag factor on the remodel side for a whole lot of reasons. But there is a lag on that side, and I think what you are seeing, particularly after the shock to the system of the Lehman event last September/October, which really started this cascading series of events, that have got us where we are today is that the consumer, particularly on large ticket durables, has just kind of gone into their room, and pulled their blanket over their head.

It is us, look at what has happened to automobiles. The automobile rates, production and sales rates. So you are still seeing I think on the remodel side, you are seeing numbers that we saw in the new construction last year, and maybe the year before, those are now starting to hit the remodel market. So you are looking at big numbers, in terms of what the remodel market is doing right now.

Okay. Stripping away kind of the backlog and promotion, I guess the first half of fiscal 2009 you were seeing kind of mid teen-type declines in the remodeling market. It sounds like you are saying that the current environment is worse than what you experienced in the first half of '09.

That is correct.

And so trends, is there a way you could give some color around trends you may have been seeing, as you came through May?

We haven't seen really any change in that trend.

Okay. I noticed, I guess, kind of the SG&A did bump up, or the general line did bump up, so around the $8 million to $8.8 million range. I think you may have mentioned that was mostly tied to the performance based compensation?

Entirely.

if we look going into fiscal 2010, I guess that suggests we revert back to that $6 million type run rate.

Yes.

I know there has been a lot of questions around the target gross margin, 21 to 23%. Is there a way that you could categorize a revenue level you think you would need to get there in today's kind of business model, or cost structure that you have been working on?

Well, just look at, we did 140 million in net sales in the fourth quarter, and we did 19.6%. I would say that probably if sales were perhaps 5 or 10% higher, we might have touched the bottom of that range. The thing, though, it is really a moving target, because a lot of that is going to depend upon efficiency these we bring to bear, the cost of inputs, and so forth, inflation. There are a myriad of factors that are going to impact that. But just to generally answer your question, if sales were probably 5 to 10% higher than they were in Q4, we would have a decent shot of the lower end of it.

And could you give us any guidance maybe on BD&A and CapEx for fiscal 2010?

I would expect them to be similar to what they were this year.

Okay, thanks a lot.

(Operator Instructions). We will go next to Peter Lisnic with Robert W. Baird. Good morning, gentlemen.

I guess first question, can you maybe talk about the industry, I am just wondering what the competitive aspects of it look like right now? We have heard rumblings from some of the bigger competitors that they are looking at lower value price points across their product spectrum as an opportunity for them, so are you seeing any pressure? Maybe talk about pricing, and any sorts of issues that may have arisen there, or things that you might be concerned about?

Well, I mean, this environment, to start at the back end, in this environment, I think you are always concerned as it relates to pricing disciplines in the marketplace, and what happens as people really try to just get base volume to run through to keep factories running. At some point you just need a base volume to keep them running. In terms of movement around of other competitors, at this point, virtually all of the major competitors in the market place, whether they be national competitors or strong regionals, we all cover a broad range of price points, and have for some time.

So while we may ourselves, and others at times, may try to family size certain price points versus others, we have all had pretty much a full stable of product covering a wide range of price points. So I don't see that particularly being much of a shift. Now there are, in terms of potentially what customers are buying, they may be rotating down to lower price points, which would make us all more active in those areas of our product line, whether they just be pure sales volumes, or where we are deciding as an industry to concentrate our efforts and our promotional dollars, but there is nothing there that shifts.

The real question, and the concern that you always have in an environment like this, is at what point do you go past that crossover, where the additional dollars you are trying to give to the market place in whatever form or fashion to increase demand, the demand curve is so inelastic that in essence all you are doing is giving away money that is unnecessary, because the person, the only people that are buying are the people that are going to buy anyway. We haven't seen that widespread so far.

As I have said on previous calls, I think that the industry has done a relatively good job considering the extreme nature of this cycle. Has done a relatively good job of holding discipline, and not going out and in essence, and throwing money at consumers that they don't need to, in order to generate demand, but the long this goes, I think it increases the possibility and the likelihood that somebody is going to crack, and lose that discipline.

And it is kind of the old airline thing, where you try to raise the airline, then somebody decides that for a discounted ticket they can fill one more seat that might be empty, then the whole pricing structure craters. That is what you always worry about. That is what I always worry about in an environment like this, that as an industry we don't hold the line. And as soon as somebody breaks ranks, you are in a tough spot.

You are going to have to make a decision about whether or not you break ranks as well. That starts everything coming after that. We have certainly seen pockets of that, but we have not seen that widespread. If that does happen, we will respond. We will price to the market. We are not going to let the industry get away with that from our perspective, in terms of buying our share away from us. I hope that doesn't happen. If it does, we will be ready to respond, but that is probably my biggest concern.

On a broad scale, that has not happened yet, I am guessing with people having to do that, or taking what you do, that they sort of price appropriately or accordingly, and there is not a lot of rumblings out there that could be the case, is that the right way to think about it?

Well, yes, everybody has a different view of the, their hand on a different part of the elephant, and everybody has different pressures, and they have different things that they have, particular cases that they have to deal with. We are in a good position because of the position of our balance sheet, and again we have seen pockets of it, but we haven't seen a real widespread move in the industry, to do things to the pricing structure, that would tip you over in terms of generating primary demand, again not necessarily share between competitors, but doing things in the pricing structure of the industry, where you are flipping the corner, where the additional dollars you are giving to the market, aren't made up by generation of primary demand. From what I have seen, we are not there yet, whether we get there or not, only time will tell. But I think the industry has been relatively disciplined so far.

Great. And then Jon, if I could, on the cash flow commentary, can you maybe give us a sense of what the biggest variable there is, in terms of whether you are plus or minus on a free cash flow op side of the equation? Is it simply volume, is that what we are looking at?

Yes, volume is #1. It really is.

Okay, alright. Just to go back to the gross margin question, because I know you haven't tried to answer it enough. Maybe another way of asking this is, from an incremental or decremental margin perspective, either growth or operating, has your outlook there changed at all, has the cost structure changed to where this business is now either higher or lower decrementals than what we have seen in the past?

I think that it has the potential to change favorably, because of the capacity reductions that we have made. It is just that given where the volume is as we speak, and what we expect for fiscal year 2010, you are not going to be able to see that. We won't be able to see that either. But looking forward, it does have the potential to shift, to notch a bit higher, because of these actions that we have taken.

Do these actions, do these savings flow through, I know you can't give us timing as to when you might realize them exactly, but how about in terms of where, in terms of either growth or SG&A, where are we going to see those savings come through?

Far more in gross margins. There will be a small amount in SG&A, but really the vast majority is gross margins.

Okay. And then $20 million, that depends on your revenue base of course, you are north of 300 basis points of gross margin improvement, some of the confusion might be, if you do realize all of those savings, and I know it is value independent, but it sounds like you are raising your structural gross margin target? Am I incorrect?

We have that potential Pete, but I mean there are so many variables, as everybody on the call knows, what is the go forward industry ability on pricing? What is the go forward mix? What is the slope of the line for recovery in volumes, and so forth? What are the material cost pressures, and so forth, as we come out of this thing? There are just so many variables to fit in this thing, that really what causes us and everybody to pause, try to make bold projections, but what we would say is, that yes, we do have the potential to have a higher margin structure going forward, but assuming a lot of things have been, as we have seen them in the past, we are making that assumption.

Okay, alright, I have got it. The last question, you did get a pretty good bump from some fuel costs during the fourth quarter, but is this a proxy for turning the other way, what are the expectations for '10 or going forward, in terms of overall fuel outlook?

Well, we are looking at, it is true that oil is really ratcheting around quite a bit, it is very volatile, but diesel fuel has not ratcheted around, at least not at this stage nearly as much. I think diesel fuel as of the other day was about $2.30 a gallon nationwide, which is up about $0.10 or $0.15 from where it was at the low, but our expectation is if it stays probably in this range, to maybe as high as $2.50 or $2.60, somewhere in that range [inaudible].

All very helpful. Thank you very much for your time.

Sure.

As there are no more questions at this time, Mr. Eanes, I would like to turn the conference back over to you for any additional or closing remarks.

Since there are no additional questions, this concludes our call, and again, thank you for taking the time to participate. Speaking on behalf of the management of American Woodmark, we appreciate your continuing support. Thank you.

This does conclude the conference for today. We thank you so much for your participation.