American Woodmark Corp (AMWD) 2010 Q1 法說會逐字稿

Good day, and welcome to the 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 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 the shareholders. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

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

Good morning, ladies and gentlemen, and welcome to this American Woodmark conference call to review our first fiscal quarter results for fiscal 2010. I would like to thank you for taking time to participate. Participating on the call from American Woodmark Corporation will be Kent Guichard, our Chief Executive Officer and President; and Jon Wolk, our Chief Financial Officer. Jon will begin with a review of the quarter, concluding with a brief outlook on the future. After Jon's comments, Kent and Jon will be happy to answer any of your questions. Jon?

Thanks, Glenn. This morning, we released the results of our first quarter of fiscal year 2010 that ended on July 31, 2009. Our earnings release contained the following highlights for the first quarter. Net sales for the quarter were $100.8 million, down 28% below the prior year's first quarter. During the fourth quarter of its prior fiscal year, the Company announced it was permanently closing two manufacturing plants and suspending operations in a third. These actions were completed during the first quarter.

The Company recorded restructuring charges relating to these initiatives of $1.6 million, net of tax benefit during its first quarter. The Company recorded a loss inclusive of these charges of $6.4 million in the first quarter. The net loss exclusive of these charges was $4.8 million for the quarter compared with net income of $0.2 million in the prior year's first quarter. Earnings per diluted share including restructuring charges was a loss of $0.45 for the quarter. Excluding restructuring charges, earnings per diluted share for the first quarter was a loss of $0.34 compared with income of $0.01 per diluted share in the prior year's first quarter. The Company generated negative $9.1 million of free cash flow during the first quarter, down from $7.4 million of positive free cash flow generated in the prior year's first quarter.

Regarding our first quarter sales performance, net sales for the first quarter of fiscal 2010 were 28% less than in the prior fiscal year. In the remodeling market, several factors combined to continue the market's negative sales momentum. Gross private fixed residential investment, as supplied by the Bureau of Economic Analysis, was down more than 30% below prior year levels for the first six months of the calendar year. Existing home sales, a leading indicator for home improvement spending, were just shy of 5 million homes on an annualized basis during the first quarter of the Company's fiscal year 2010, in line with prior year levels. The Consumer Confidence Index as reported by the Conference Board is higher than its record lows of six months ago, but remains well below year-ago levels.

The median sales price of existing homes appears to be in the process of stabilizing, albeit at levels more than 10% below those of the prior year. Credit availability continues to be constrained, as many financial institutions recover from losses sustained during the recession. Unemployment is in the mid-9% range compared with the mid-5% range one year ago and our two primary remodeling customers continue to experience negative sales comps and both report large ticket remodeling to be among their weakest categories.

The difficult conditions I just described have been impacting our market for most of the last year. However, our Company's remodeling sales for the two previous quarters had increased despite these conditions, far exceeding the market, driven by last fall's retail promotional environment that favored our products and price points. As we explained during our conference call last quarter, this favorable impact ceased to be a factor effective with the fourth quarter of our prior fiscal year and we expected that our remodeling sales will be more in line with market trends going forward. During the first quarter, the Company's remodeling sales were down more than 20%, roughly in line with the market and with our expectations.

In new construction, total residential housing starts during our first quarter averaged 565,000 homes on an annualized level, 44% below the 1 million level in the prior year's first quarter. However, housing starts actually experienced a sequential increase of 8% over the last fiscal quarter, the first time this has happened in 3.5 years. The Company's new construction sales managed a small sequential increase over the previous quarter, but were down from prior year levels by more than 20%. Because the Company's sales were down by less than the market, we believe we continued to gain market share in this difficult market. The short-term outlook for the new construction market continues to be challenging, although slightly improving. Although the NAHB Wells Fargo housing market index remains well below levels considered healthy by the industry, it continues to edge upward, just as housing starts have finally begun to do.

We continue to aggressively bid and win new business in this challenging market, 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.

Regarding gross profit, gross profit for the first quarter of fiscal year 2010 was 11.7% of net sales, well below the 15.9% we generated in the first quarter of the prior fiscal year. The primary driver to our first quarter decline was the impact of significantly lower production volume, which in turn caused labor costs to increase due to lower productivity and overhead costs, although lower due to our plant closures, to be under-absorbed compared with prior year. Partly offsetting this impact were lower fuel costs, which favorably impacted both freight and materials cost during the quarter compared with prior year.

Regarding operating expenses, total SG&A expense was 19.4% of sales in the first quarter of fiscal 2010 compared with 15.9% of sales in the first quarter of the prior year. Selling and marketing expenses were reduced by $2.2 million or 14% below prior year on a sales decline of 28%. Because costs were reduced by a lower magnitude than sales, the cost ratio rose from 11.2% of net sales to 13.2%. 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's strategy of protecting its customer relationships and continuing to gain market share. Cost reductions included lower head count-related costs, such as travel and entertainment, commissions, and meeting costs. General and administrative expense was reduced by $0.3 million or 5% below prior year but rose to 6.2% of sales in the first quarter of fiscal 2010, up from 4.7% of sales in the prior year due to the larger decline in sales.

Regarding our restructuring charges, as we previously mentioned, the Company completed the closure of two of its manufacturing plants and the suspension of operations at a third plant during our first quarter. When these actions were announced during the fourth quarter of the Company's prior fiscal year, along with a reduction in force of salaried personnel, the Company recognized a pretax restructuring charge of $9.7 million that was offset by a tax benefit of $3.7 million for a net charge of $6.0 million. During the first quarter, the Company recognized additional pretax charges of $2.6 million, offset by an income tax benefit of $1 million for a net charge of $1.6 million. Except for property-related charges that may still result if the Company decides to sell one of its manufacturing facilities, the majority of the remaining restructuring charges pertaining to these actions have been realized at this point. The Company began to realize some cost savings stemming from these actions during its first quarter and continues to estimate that savings of approximately $20 million per year will be realized.

Regarding the Company's capital spending, the company's total outflow for capital expenditures and promotional displays deployed during the first quarter of fiscal 2010 was $2.4 million or 25% less than the Company's capital spending levels in the prior year's first quarter. The Company spent less on capital expenditures in line with reduced capital needs associated with fewer plants and 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 its capital spending with 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 $26.3 million at July 31, 2009 and debt to capital was 11.7%. The Company had negative free cash flow of $9.1 million during the first quarter of fiscal 2010 compared with positive free cash flow of $7.4 million in the prior year's first quarter. The primary drivers for this decline were the decline in the Company's net income and payments for severance and performance-based compensation earned during the prior fiscal year. The Company ended the quarter with over $72 million in cash on hand, despite the quarter's cash outflow.

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. The first quarter of fiscal 2010 broke a string of five consecutive quarters in which we had either operated at approximately break-even or earned a modest profit. The difficult actions that we completed during the first quarter will further reduce the Company's break-even production level, which at present is roughly 35% lower than it was three years ago. Recognizing that the Company operates in a cyclical industry, management established a goal more than a decade ago to have the best balance sheet in the industry. The Company has diligently worked to achieve this goal, ending the prior fiscal year with a record level of cash and relatively low debt. This financial position affords the Company the financial flexibility to experience sales declines and net losses like it encountered in the first quarter, while continuing to maintain its financial resources at a more than acceptable level.

The sales decline and net loss we experienced during the quarter are far from satisfying to us. However, we recognize that our present financial performance is the result of choices we have made as stewards of the business, balancing the Company's short-term performance against the ability to maintain adequate manufacturing and field service capability to ensure that we can capably support our customers when the inevitable upturn occurs. We believe the Company has retained both the organizational and production capacity and know-how to service demand in a market with average to above-average new construction and remodeling activity. As we look forward to the remainder of fiscal year 2010, we continue to see a long-term housing environment that is underpinned by sound population growth and demographic trends, but overshadowed by the present impacts of inventory overhang, falling home prices and the credit crunch. 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 5 million homes in line with the previous year, and we expect that total housing starts will approximate 0.6 million during our fiscal year 2010, down approximately 20% below the 725,000 starts during our last fiscal year. In terms of Company performance, we expect that the Company's remodeling sales will continue to more closely reflect the industry sales trends for the remainder of fiscal year 2010. We further expect that our new construction sales will continue to be lower than prior year levels, but at a lower rate of decline than that of the general market.

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

(Operator Instructions) We will take Joel Havard with Hilliard Lyons.

Thank you. Good morning, everybody. Jon or Kent, on gross margin, a 35% reduction in the break-even point gets us to -- the old target was 20%. What's a reasonable bogey to hang out there internally this year? Maybe you won't get there, but this is what you're working for based on the previous restructuring round.

Joel, we're not guiding, so we're not going to give out internal gross margin targets for the year. But I would say that in general, we have maintained that we should be able to operate in the 21% to 23% gross margin range in a reasonably healthy market. And by lowering our break-even point as we have, it's conceivable that we could operate a bit beyond that target, once the market has come back. But in the meantime, where we operated during the first quarter, I think is roughly representative of how we're going to operate if sales continue at these levels.

That was my concern here, and I was trying to be hypothetical. I appreciate that you all weren't giving guidance. But if we stay at this level, was there anything nonrecurring, restructuring related, charges, nonoperating costs that were built into the Q1 gross margin, or was that truly an organic or fundamental throughput metric?

The 11.7% gross margin that we reported, Joel, is pretty clean. We have a separate restructuring charges line.

I saw the 2.5 or whatever it was, but there wasn't other unallocated tucked into cost of goods?

There are still costs that will come out of the operating run rate, to answer the question. This was a transition quarter in the sense that we were in the process of closing two of the three plant operations that we did close. So there were some charges in cost of sales that ultimately won't continue to recur, but the 11.7% was a pretty clean quarter.

Okay. Lastly, then, probably for you, Jon, given the the restructuring behind us, the removal of two and the at least temporary closure of the third, what does D&A look like for this year?

It's going to be pretty comparable to what it was last year, Joel. We had accelerated a little bit in a couple of plants that we did close operations in, but it's not going to be very different from what it was last year.

Okay. Last question. If I read too closely between your comments, I understand, but I think you said something to the effect of given this round of closure and something about evaluating as you go forward, I know you guys really held on to your production capacity as long as you could. This recession is turning out to be more per pernicious and long lasting. Were you perhaps leaving an opening that yet more reductions are conceivable or have you all modeled that out? What would be the trigger point if that's true?

Joel, this is Kent. You got a whole lot of caveats there in your thing. You never rule anything out, obviously. Everything depends on what happens in the future. Having said that, I think you're probably reading too much between the lines in terms of Jon's comments. We've talked about it a couple times. I believe we even mentioned it on last quarter's call. When you're in a cycle like this, the question is where do you size the Company? Ultimately that's what this all comes down to, is where do you size the Company? And our kind of approach and feeling is you don't size the Company at the bottom of the cycle. Certainly a cycle as severe as this one.

What we did in the fourth quarter going into the first quarter was, we had made the decision based on the depth, the length, depth, severity of the cycle, to take out some capacity. A lot of that capacity ultimately we probably would have taken out anyway due to the age of those facilities and some of the improvements that we're making in terms of efficiency in other plants. So that was more of a timing issue. I think that those, particularly the two plants that we closed, not the one we mothballed, but the two that we closed, you just couldn't do modern lean manufacturing in those facilities. And at some point, we were going to have to either close or replace those facilities anyway. So it was a catalyst, if you will.

Where we are right now, we think that generally speaking, our production platform is a strong production platform in a normal market, and that we're happy with where we've sized the Company. But I would also, to your point, say that if this thing goes on like it has been for another one, two, three years, eventually you have to do something. As Jon mentioned in his comments, we put the Company in a position from a financial standpoint where we can size the Company appropriately during the bottom of the cycle. Our feeling generally is that we're starting to see a recovery in the market. I think most of the things that we've read externally, and we would have a tendency to agree with them, is the discussion now is is it a V-recovery or is it a more gradual recovery? We'll see. But we have now had five consecutive months of increases in new construction starts, four or five. We've had several months now of increases in existing home sales. So I think we're starting to see some recovery.

One of the things I was encouraged about by the Cash for Clunkers program is certainly not the administration of the program, but one of the things, one of the ways you can interpret that is that the consumer has financial capacity and is willing to use it if they feel better and if the reason to apply their capacity is compelling. And so that tells me that the consumer isn't tapped out. As soon as we get a stabilization of home prices, which it looks like we're approaching, and there's no benefit to waiting to buy a home and some of these other things come in line, I think we're going to start to see us come off. I really do believe, time will tell, but I do believe we're at the bottom as we speak and we're going to start to come off of this.

That's a long-winded answer to your question. Certainly everything is always, as you know, we always analyze everything and we always have contingency plans based on things happening in the marketplace. But right now we've sized the Company we think appropriately going forward and we'll just have to monitor how the recovery starts to roll out.

Great, Kent. Thanks for that color, guys. Best of luck.

We will take our next question from Peter Lisnic with Robert W. Baird.

Good morning, gentlemen. Jon or Kent, to the point about the break-even, and it sounded like there could be some more opportunities to lower that, can you give us a sense as to how much more opportunity you have to maybe take down break-even levels? If you look at quarters past, around 130 to 140 seemed to be sales wise where you were breaking even. Can you give us an order of magnitude as to how much you could bring that down?

It's hard to give a precise order of magnitude because there's a lot of moving parts, as you would imagine, Pete. But as we continue to embark on this lean manufacturing journey, we uncover lots of opportunities. And some of those opportunities we're taking now, but they are being masked by the impact of declining sales. As things improve and as the market improves and as we continue to introduce new process improvements and so forth, we think there's some more room there.

Okay, and wouldn't that argue that your gross margin range then should be higher than that 21% to 23% that you targeted? I know you said that it's conceivable that the number could be higher, but I'm wondering if it's materially higher? Could this be a mid-20s kind of gross margin business?

That's certainly possible, given the right market conditions. Again, there's a lot of moving parts in there. But as we look at this, certainly we're thinking about that in our future planning.

Okay, and then totally separate question. It sounds like what people are saying is that fundamentals are indeed bottoming, but I'm wondering what you're seeing out of your customers or, not specifically the customers, but people that are walking in the store, do you have any insight into maybe traffic or conversion trends, if you will, people looking at kitchen remodels and then actually going forward and executing on those? Is that percentage maybe increased? Do you have any access to that kind of data? What sort of anecdotes are you getting about your business that would suggest things are indeed flattening out or maybe getting better?

This is Kent. I'll take that one. You seem to focus there on remodel. Let me give you a few comments on new construction first and then I'll talk about remodel. The reason I think is new construction is a little bit, from our perspective, might be a better indicator. New construction has a tendency to go into the cycle first. We've talked about it before. Housing usually leads cycles almost exclusively. If you look historically, housing has led the country into recessions or downturns. That's the bad news. The good news, of course, is housing usually leads the country out.

New construction is more a direct connection because there's not as much noise that can happen between a triggering event and an actual sale for us showing up. But we are starting to see, on the new construction side, particularly with our major builders, we are starting to see some activity. They are getting a little more active in land, and they are getting a little more -- we're starting to see strengthening in terms of starts. I wouldn't get carried away with it. But I think that we are starting to hear from our major builder customers that they are seeing more activity, they're getting more activity through their sales centers, they are feeling a little bit more bullish. They are, again, while not getting carried away, they are starting to put some spec inventory into the ground and so we are starting to see from the new construction side, we're starting to see the beginnings of life out there, the shoots are starting to come out of the ground.

On the remodel side, it's a little bit more difficult. Again, over time, probably the big transaction that we watch is sales of existing homes. You either dress up your kitchen to sell your house or as soon as you get in, you want to redo your kitchen, is one of the central rooms in the home. But there's a lot of things that can happen between that transaction and the actual sales coming through. It's particularly problematic in the Big Box remodel side at this point because the promotional activity is so heavy that it can really mask the underlying demand. It can really move orders around quite a bit between months and even between quarters, between what has historically been selling seasons, depending on how heavy a promotional calendar the Big Box retailers run at that time.

So right now I would not say that we have seen any indication in terms of a trend or coming off the floor on the remodel side. There are periods when they are running heavy promotions where we do get, considering the context, a reasonable order flow, but that is more often than not followed when they go off promotion to pretty much of a wasteland. There is traffic in the stores. The people that are in the stores, I would say at this point versus, say, a few years ago when we were at the top of the cycle, you don't get a lot of tire kickers. If they are in the store looking for a kitchen, they probably need one. My suspicion, because of that, although I don't have any hard statistics, my suspicion would be that the close rate on quotes is pretty good, but there just aren't as many quotes out there to be had because there are not as many people seriously shopping in the marketplace.

Okay. That is perfect. Thank you for your time.

We will take our next question from Robert Kelly with Sidoti.

Good morning, guys. Thanks for taking my questions. On the gross margin for 1Q, you talked about it being a transition quarter. How much opportunity is there, or how much drag was there from closing the plants, inefficiencies related to that? And do we see that as soon as Q2, or is that more of a second half story?

I think that there's probably half a point or so of margin there, Bob, in terms of costs that we incurred in the first quarter that, as the rest of the year progresses, will start to go away. But it's not several points.

Okay, got you. And then as far as right-sizing capacity, you've done a lot of work there. But maybe how much more do you have to do at the selling and marketing line? Are you pretty much fixed as that $13.5 million run rate or so?

I think that it will vary a little bit in terms of -- of course we have a sales force that's on a pay for performance commission, at least partial commission kind of structure. They do get a base pay. But again this, is another one of those choices that we've made. As Jon has mentioned on many of our calls over the last couple of years, we have made a choice to maintain service levels and contact with the customer. So our customer service centers are staffed to answer the phones. We have actually increased our feet on the street in terms of store coverage and those types of things. We have done some things on the G&A side. We're pretty much done there. From our perspective, we think we're down to a good level. So I would look for that to continue from a dollar perspective. We'll have to see what happens in relation to sales. If sales go up suddenly we'll certainly get some short-term leverage off of that. But we have made the decision, consistently made the decision, to be here to service the customer. And so I would anticipate going forward that level of spending would be pretty consistent.

Okay, great. And then just on the comments you had seen signs of life in the new construction universe. First, is that driven by their effort to get a more value price point in their homes? And, two, what does August look like compared to what you saw in 1Q '10?

I think it's a little early on August. We're only halfway through and there is a little bit of a delay. I wouldn't react so much to those numbers as I would when you start to put together -- the old one month does not a trend make. It's when you start to put together three, four, five sequentially that I think, as my comment, which you're starting to see some shoots come out of the ground, you're starting to see a little bit of life. What will normally happen if it holds, you'll get a nice build here through October and then the new construction season will start to tail off a little bit. But we are starting to see, not only in the activity, but in the attitude and the conversations with our builder customers that they are starting to feel that this is in the bottom and they are starting to think about how they start to regrow their businesses. There are still some differences by region that we go through, but some of the Sunbelt regions that have been extremely depressed for some period of time are in the activity, are in the group of builders and subdivisions where we are starting to see a little bit of a pickup.

Thanks.

We will take our next question, Keith Johnson with Morgan Keegan.

Good morning. Just maybe a follow-up on some of the comments around some of the green shoots and the construction side of it. Could you help us understand maybe what price point or if there is a way to think about it that way, price point of maybe increased activity level for the homes? Is it at the starter side? In other words, is the $8,000 first time home buyer tax credit starting to work its way into the system and that's a factor that we need to keep in mind? Or how should we look at that?

The tax credit's an interesting kind of a thing. I think the jury's still out, in my opinion, on the effectiveness of the tax credit. I know that it gets a lot of press and I know there are a lot of suppositions about that. I have not seen a lot of data that would suggest that that is the event that has people go out and buy a house. I know there are a lot of people out there that think that's been a big inducement that's driven behavior. I have a feeling not so much, considering everything that's going on. I personally have a tough time thinking somebody's going to commit to buying a home in this environment with unemployment, with the worries about what's going on in the economy, that that $8,000 is going to make them go out and plunk down $200,000 or $250,000 for a house, but we'll see. I just haven't seen a lot of data yet that correlates any activity with the housing credit. I could be wrong, but I think that's a story left to be told.

In terms of price points, again, make a real general statement, what we've seen is a trend now for I think some time of really kind of a bimodal impact on the business. I think that you have some builders or some divisions of large builders, large production builders, certainly their opening price point where there's been a lot of effort in value engineering and other ways to get the initial price down for a home buyer. We also, however, have seen, continued to see a pretty healthy stream of business, again, considering the mix within the overall activity, at the higher end, the third, fourth, even fifth upgrade buckets on most categories, appliances, carpet, flooring, and certainly our category. I think what that is, is that people are out there buying a house. There is a segment of the market that does have financial resources and they are going to buy a house and they are going to make it a nice house.

So what we've really seen is, in our mix, and we think it's reflective of a lot of what's going on in the marketplace, we've really seen a bimodal thing. We have seen the middle of our price points migrate two ways. If you look at the mix of our business, it's really the middle price point that's been under the most pressure in terms of volume, as people either are moving down towards the opening price point or certainly first upgrade, and you still have a good percentage of the mix that's at the upper end of the price range. They are out there looking for deals, but when they buy a house, particularly if they are early on in the process, which most of them are because there's not a lot of spec activity going on, they are going to spec some upgrade stuff and they're going to deck out certainly the kitchen as one of the rooms of the house.

Okay. Is there a way you could help us get an idea, you talked about sizing the operation, still having capacity to move up and meet customer needs as demand improves. From a revenue standpoint, with the current structure you've got, hard assets, is there a way we could think of a revenue capacity level that that could generate?

Yes, if you're talking about hard assets and particularly as it relates to footprint, the number of factories, not necessarily some of the equipment capacities within it, if you're looking at footprint from a facility standpoint, generally speaking as a guideline, we can probably double our revenue within that footprint.

So the run rate we're seeing today?

Yes.

It sounds like, and I may have looked at the timing or past comments incorrectly, but it sounded like you may have gotten ahead on the plant closures and the way that it sets everything up as you came through the quarter. It sounded like it was going to take a little bit longer maybe than what you initially thought, if I read that correctly.

No, we were almost dead-on schedule. Sorry if we gave you that kind of feeling. In terms of the three plants, the one by the end of the fourth quarter and then the two in the first quarter, we were pretty much dead-on in our plan.

Yes, the thing is that you can't, Keith, you can't take the charges as soon as you make the decision and the announcement. You have to let some of those charges fall based upon the closure activities.

Okay, and so should we think about the $20 million of annualized savings starting into the second quarter of fiscal 2010 and carrying through the rest of the year, or how should we think about that?

We've probably experienced about half to maybe a little bit more than half of the savings on a quarter basis in the first quarter. So the pace will pick up a bit, but we experienced a chunk of it during the first quarter.

Okay. All right. Thanks a lot. Sure.

(Operator Instructions) We will take our next question Eric Bosshard with Cleveland Research Company.

Good morning. Couple things. First of all, in terms of, Jon, I want to understand that last comment, is that savings from the facility closures, where we had a full run rate in 1Q or we were at half of the run rate in 1Q?

Roughly half, Eric.

Okay. So the improvement from that, realizing all of that benefit, is there another couple million bucks and does that show up in gross margin related to absorption, or how much and where do we see that benefit in 2Q that we didn't see in 1Q?

Not necessarily in Q2 per se, but my expectation as the remainder of the year rolls out that it will be in cost of sales and gross margin and, yes, overhead absorption primarily.

Secondly, from a cash flow perspective, how much of this was operating and how much of it was catch up on accruals or incentive payments or whatever it was last year? Within that, secondly, trying to figure out what the free cash run rate's likely to look like for the year?

Yes, good question, Eric. There's about $8 million of stuff related to last year for the things that I mentioned, plus we had to make an income tax payment because we had a taxable profit pertaining to last fiscal year and when we paid our extensions, filed our extensions on the tax return, we had to make that installment. So there was about $8 million dollars factored into that negative $9 million of free cash outflow that was, I would call, nonrecurring.

As you think about this year, then, 1Q is representative of the probably quarterly revenue run rate for the year, is a break-even full year free cash flow, is that a reasonable assumption?

My expectation is that we will, if we were to continue to operate at this revenue level, that we would have a negative cash outflow in the free cash line, driven primarily by the first quarter's outflow.

Okay. In terms of signs of life, you talked about some green shoots on the new construction side. On the remodel side, I know that everyone's historically looked at existing home sales as being the best indicator of demand, but we've got flat existing home sales and the remodel demand is down a bunch. Anything that is making you feel that the future growth or contraction in the remodel side of the business is going to be any different than what we've experienced here for the last couple quarters?

I'm not sure what you're -- I didn't quite follow what your baseline was going to be there. I think that over time, and we've been one of the proponents of existing home sales is the closest we can get to remodeled business over time. the existing home sales increase has been relatively recent. So, if you factor into that any lag time to actually get the mortgage and close, you're running 45 to 60 days once you buy a house to get it in there, and then you're going to go through all of whatever you go through before you actually do a remodel job. So I would not have expected to have the recent increase in existing home sales roll through the remodel business yet.

I do, having said that, I do think that the remodel recovery will lag new construction probably by a couple of quarters on a general basis. That's historically what we've experienced. So I would suspect that the remodel business, again, all adjusting for context, that the remodel business will remain relatively weak through the remainder of calendar '09, as an industry. And that I would suspect that as you start to get into spring next year, you're starting, if the green shoots, as I guess we're talking about it now, but if the new construction, if this really is the signal of starting to come off the bottom, add six months to that, which would tell you on the remodel side, for major ticket, big ticket categories, not just ours, but big ticket categories, that the remodel, you start to see some life in the remodel business next spring. And then a year from this fall, the fall of calendar 2010, you might be back in the range where you're starting to get some year-over-year growth and see some activity that might make you a little more excited.

And then lastly, just to make sure I understand, from a capacity utilization standpoint, I understand the desire to maintain service levels. Are you basically looking at the world where we reside right now and saying, okay, that's it, we're done taking capacity and infrastructure out, we're going to play with this capacity or live with this capacity going forward and wait for the demand to recover? Or is there a scenario under which you would take another bite at the apple and pull more capacity off line?

Well, sure, there's a scenario. If this is in fact, if we experience what we did a year ago in October, which was really the -- it seems like it's a lot longer than that -- but the tipping point that happened with the Lehman collapse, if you get another incredible shock to the system like that, that takes the whole step function down, certainly that's a scenario where you have to start to really question if you need to make any additional adjustments. It's difficult for me to put a high probability to that scenario. When you're building at rates that we've been building at, if you're creating new households at the rate of 1.25 million to 1.3 million a year and you're building 500,000 houses, 550,000 houses a year, that's just not sustainable for a long period of time. Once you're on the floor, it's pretty tough to fall off.

So that is a pretty dire scenario, so I don't anticipate that one. If that were to happen, however, yes, there are plans, contingency plans we would pull off the shelf to deal with those. Absence of that, if this in fact does turn out as we get through the fall and into next spring, if this does turn out to have been the bottom here in June, July, maybe August, if this turns out to have been the bottom, then the footprint that we have going forward through the recovery, we're pretty comfortable with that.

Perfect, thank you. Sure.

And at this time, we have no further questions.

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

Thank you for your participation.