American Woodmark Corp (AMWD) 2010 Q2 法說會逐字稿

Welcome to this American Woodmark Corporation conference call. Today's call is being recorded. The Company has asked us to read the following Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. All forward-looking statements made by the Company involve material risks and uncertainties and are subject to change based upon factors that may be beyond the Company's control. Accordingly, the Company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include but are not limited to those described in the Company's filings with the Securities and Exchange Commission and the annual report to shareholders. The Company does not undertake to publicly update or revise its forward looking statements even as 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, sir.

Good morning, ladies and gentlemen and welcome to this American Woodmark conference call to review the results of our second fiscal quarter of 2010 ending October 31st, 2009. 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. John will begin with a review of the quarter and conclude with a brief outlook on the future. After John's comments, Ken and John will be happy to answer any of your questions. John?

Thank you, Glenn. This morning, we released the results of our second of fiscal year 2010 that ended October 31st, 2009. Our earnings release contained the following highlights for the second. Net sales for the quarter were $104.1 million, down 23% from the prior-year second quarter sales of $134.9 million. During the fourth quarter of the prior fiscal year, the Company announced it was permanently closing two manufacturing plants, suspending operations at a third plant and performing a Company-wide reduction in force. These actions were completed in the first quarter. The Company recorded restructuring charges related to these initiatives of $0.1 million net of tax benefit during the second quarter. The Company recorded a net loss during the second of fiscal year 2010 of $5.3 million. Excluding the charges, the Company's net loss was $5.1 million for the quarter compared to a net loss of $0.5 million in the prior year second. The Company lost $0.37 per diluted share, including restructuring charges in the second quarter of fiscal year 2010. Excluding charges, the Company lost $0.36 per diluted share in the second, compared with a loss of $0.03 per diluted share in the prior-year second.

The Company generated negative $2 million of free cash flow during the second quarter, down from positive $2.1 million of free cash flow generated in the prior-year second quarter. For the six-month period ended October 31st, 2009, net sales were $204.9 million, down 25% below the prior year's $274.1 million. Net loss was $11.7 million, exclusive of $1.7 million of net restructuring charges, the loss was $9.9 million in the currently fiscal year, compared with a loss of $0.3 million in the prior fiscal year. The Company lost $0.83 per diluted share, including restructuring charges during the first six months of the current fiscal year. Excluding charges, the loss was $0.70 per diluted share, compared to a $0.02 loss per diluted share in the prior year. The Company generated negative $11 million of free cash flow in the first six months of the current fiscal year, down from $9.5 million of positive free cash flow generated in the prior year.

Regarding our second quarter sales performance, net sales for the second quarter of fiscal year 2010 were 23% lower than 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 managed its first sequential improvement since 2005, but was still 18% below prior-year levels. Unemployment now exceeds 10% compared with approximately 6% one year ago, and the economy is not yet creating jobs. The consumer confidence index, as reported by the conference board has declined for two consecutive months and remains well below prior year levels. The median sales price of existing homes seems to be stabilizing, albeit at prices nearly 10% lower than the prior year. Credit availability continue to be constrained as many financial institutions recover from losses sustained during the recession, and our two primary remodeling customers continue to experience negative sales comps, each reporting large ticket sales to be among the weakest categories.

These difficult conditions have severely impacted our market, particularly following the intensification of the credit crunch that occurred when Lehman Brothers collapsed one year ago. Our Company's remodeling sales outperformed the remodeling market during the first half of the period, which spanned last fall and winter, driven by customer promotions that favored our company's price points and products. The latter half of that one-year period has spanned the first two quarters of our present fiscal year. During this time, retail promotions have been more balanced, and the Company's remodeling sales have performed more in line with the market.

In new construction, total residential housing starts during the first half of our fiscal year averaged 565,000 homes on an annualized level, roughly 40% below the prior year's average of 920,000. The Company's new construction sales approximated the Company's 23% sales decline during the second quarter. Because the Company's sales were down by less than the market, we believe we continue to gain share in this difficult market. The short-term outlook for the new construction market continues to be challenging. The NAHB Wells Fargo housing market index remains subdued and well below levels considered healthy by the industry, although there is optimism that the current, -- that the recent extension and expansion of the housing stimulus program could help improve market conditions in the upcoming spring selling season. We continue to aggressively bid and win new business in this challenging market focusing on companies that we believe will be able to outlast this down turn. Our share gains have come from both increasing penetration from 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 second of fiscal year 2010 was 12.2% of net sales, below the 14.4% we generated in the second quarter of the prior fiscal year. The primary driver to our second quarter decline was the impact of significantly lower sales volume, which in turn, caused labor costs to increase as a percentage of sales due to lower productivity and overhead costs to be under absorbed compared with prior year even though these costs were reduced from prior-year levels. Partially offsetting these adverse impacts were the lower fuel and material costs in relation to sales. Gross profit improved sequentially from the first quarter to the second of the current fiscal year by 0.5% of sales. This improvement was driven by leveraged gain from small increase in sales as well as a sequential decline in manufacturing overhead spending of approximately $0.5 million related to plant closures. These improvements were offset in part by higher sales promotional costs in the second quarter.

Regarding SG&A, total SG&A expense was 20.1% of sales in the second quarter of fiscal year 2010, compared to 15.2% of sales in the second quarter of the prior year. Selling and market expenses were reduced by $0.6 million or 4% below the prior year on a sales decline of 23%. Because costs were reduced by a lower magnitude than sales, the cost ratio rose from 11.2% of net sales to 13.9%. Sales and marketing costs rose sequentially by $1.2 million or 8% over first quarter levels. The increase was driven by timing as well as increased business development activities. General and administrative expense increased by $0.9 million or 17% above prior year, rising to 6.1% of sales in the second quarter of fiscal year 2010, up from 4.0% of sales the prior year, due to both the decline in sales and to the absence of $1 million of credits that reduced prior-year costs related to the termination of a retiree health plan and the reversal of previously accrued incentive compensation costs.

Regarding our restructuring charges, as previously mentioned, the Company completed the closure of two of its manufacturing plants and the suspension of operations at a third plant during the 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 salary and personnel, the Company recognized a pre-tax restructuring charge of $9.7 million that was offset by a tax benefit of $3.7 million for a net charge of $6 million. In the first quarter, the Company recognized additional pre-tax charges related to these initiatives of $2.6 million offset by an income tax benefit of $1 million for a net charge of $1.6 million. In the second quarter, the Company recognized additional charges of $0.1 million net of income tax benefit. Except for property related charges that may still result if the Company decides to sell one of its manufacturing facility, nearly all of the restructuring charges pertaining to these actions have been realized at this time.

The Company has been realizing significant cost savings from the actions. The Company's manufacturing overhead costs during the second and first half of fiscal year 2010 were reduced by $4.7 million and $8.8 million respectively compared with the comparable periods of the prior fiscal year. The Company continues to estimate that savings of approximately $20 million per year will be realized.

Concerning the Company's capital spending, the Company's total out flow from capital expenditures and promotional displays deployed during the fiscal year of 2010 was $2.1 million or 40% lower than in the prior year second 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 up the 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 $26.2 million at October 31st, 2009, and debt to capital was 12.0%. During the second quarter, the Company had negative free cash flow of $2.0 million, compared with positive free cash flow of $2.1 million in the prior year second quarter. The primary drivers for this decline were the increase in the Company's net loss and payments for severance related to the Company's restructuring initiatives. During the first six months of fiscal year 2010, the Company had negative free cash flow of $11.0 million compared with positive cash flow of $9.5 million in the comparable period of the prior fiscal year. Key drivers to the decline were the $11 million increase in net loss coupled with the impact of payments that totaled nearly $12 million in 2010 for severance, income taxes and incentive compensation. With the exception of a small amount of severances, none of these repayments will reoccur in the remainder of the present fiscal year. The Company ended the quarter with over $69 million in cash on hand.

In closing, we continue to manage the business with the primary objective of creating long-term value for our shareholders. We continue to make investments to improve the quality and breadth of the Company's products and services. We continue to invest in both driving market share gains during these industry downturn and maintaining the capability for a significant amount of future growth once the downturn has ended. The Company's results for the second quarter of fiscal 2010 were very similar to those of the first quarter in terms of sales, gross margin and net loss levels, exclusive of restructuring costs. The difficult actions that were completed during the first quarter have further reduced the Company's breakeven production level to roughly 40% lower than it has been three year's ago.

Recognizing that the Company operates in a cyclical industry, management remains extremely committed and focused on maintaining the strength of its industry-leading balance sheet. The Company's financial position affords it the flexibility to experience sales declines and net losses like those encountered during the first half of fiscal 2010 while continuing to maintain its financial resources at a more than acceptable level. The sales decline in net loss we have experienced in the current fiscal year are far from satisfying to us. However, we recognize that our financial performance is the result of choices we have made and continue to make as stewards of the business. Balancing the Company's short-term performance against the ability to maintain adequate manufacturing and field service capability that ensures we can capably support our customers in the manner that they expect as and 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 see a long-term housing environment that is underpinned by sound population growth and demographic trends, but continues to be overshadowed by an environment in which many consumers are unwilling or unable to make large ticket purchases because of uncertainty, falling home prices and the credit crunch.

Existing home sales exceeded 5 million homes on an annualized basis for the fourth consecutive month for the first time since 2010. The inventory of unsold homes is also at its best levels since 2007 and long-term fixed mortgage rates continue to hover near 5%, the lowest levels in nearly 40 years. These factors will bode well for future remodeling activities once the factors that continue to limit aspirational spending such as unemployment and job losses are mitigated.

For the remainder of our fiscal year, we expect that our remodeling customers will continue to experience negative sales comps driven by weak consumer confidence and lack of job creation. Total housing starts will approximate 0.6 million during our fiscal year 2010, down approximately 20% below the 725,000 starts during our previous fiscal year. We expect that the Company's remodeling sales will continue to reflect the industry's sales trends for the remainder of fiscal year 2010. We further expect that our new construction sales will approach the prior year's relatively low levels during the second half of our fiscal year. Given present sales order trends, we expect that unlike the prior year, the Company's sales will follow traditional seasonal patterns for the remainder of its fiscal year. Accordingly, we expect that our third quarter sales will be our lowest sales quarter and that sales should rebound in the fourth quarter. This concludes our prepared remarks. We'd be happy to answer any questions you have at this time.

(Operator Instructions). We'll pause for a brief moment to give everyone an opportunity to signal for questions. The first question comes from Peter Lisnic with Robert W. Baird.

Good morning, everyone.

Good morning.

I guess first question, John, you talked about the cash severance cost about the taxes and the things that impacted the first-half cash flow. Is it safe to assume that second half free cash flow is obviously better, and I guess, could it be a positive given the exclusion of some of these one-time items in the first half.

Yes, Pete. The second-half cash flow will be a lot better, because that $12 million will not reoccur save for a small amount of severance that will pay out as the year progresses but $11 million out of the $12 million will not reoccur in the second half. So our expectation is that free cash flow will be a lot better. Will it be positive in the second half? You know, it remains to be seen. I think that the bias is probably more negative than positive in the second half, but it will be definitely improved.

Okay. And relative to that expectation, can you give us a sense of what the promotional and CapEx will look like in the second half of the year?

I think you can model that as being consistent with what we've done in the first half.

That's fine. Totally separate subject, I guess. Can you maybe give us a sense of what's going on from a pricing perspective in the marketplace? Are you seeing more competitors outside of the promotional activity? Are you seeing more competitive pricing on the parts of your competitors whether it be in the new construction channel or the DIY?

Yes. Sure. It's Glenn. I'll take that one. Almost historically and continue on that. We have to talk about the channel in kind of in a different way, because the dynamics are very, very different. On the remodel side, what we're primarily seeing continue to be promotional activity. There really hasn't been any change in terms of a product to product kind of price or those things that have to do with price point over there. Now it all nets up obviously at the end, but what we're seeing at the remodel side is a continued trend toward heavy promotional environments in order to entice consumers to come in and launch a big-ticket remodel project, particularly, as John mentioned, that's aspirational in nature. And just -- we're, I think, at the point where it's pretty inelastic in terms of the curve. Came not sure giving more money in a marketplace to a consumer drives them into a store. But having that said, what we continue to see on the remodel side is primarily promotional activity, not I think what would term as pricing activity.

On the new construction side, it really is kind of all of the above. There are some promotions, although new construction, particularly in our category has been less promotional driven. The homeowners have a tendency to promote with finished basements, maybe free TVs to go into your family room or finished basement, whatever it is. So from an industry standpoint there's still some promotional activity. There isn't as much promotional activity in our category. What we're seeing that impacts our category is a combination of continued rotation, down, and price points that people that are out there that are doing houses are rotating down price point. They're not taking the upgrades to solid insert panels or specialty finishes, those types of things, and we are also seeing, particularly at the opening price point, we're seeing pricing pressure in terms of competitive bidding activity to get contracts.

Okay. That's very thorough and helpful. Thank you. I'll jump back in queue, and happy Thanksgiving to you and your families.

Same to you.

Thanks.

We'll go next to Eric Bosshard with Cleveland Research.

Good morning. This is Mark stepping in for Eric. Real quick, just in terms of your sales, historically, second half, sales have been weaker than the first half in total on average. Any thoughts on current demand trends? If demand trends kind of stay steady, you're potentially looking at quite a bit sharper sales contractions in the second half of the year. So any color on October and November trends how you're thinking about shipments over the next three months.

This is Kent. Excuse me. I'll take that one as well. We had -- and again, I'll separate remodel from new construction. On the new construction side, from about March of this year through September, we had seen an increasing trend. Now, it wasn't anything that was dramatic, but we had seen increased activity pretty much consistent month to month from late February, early March, through December. October and now early November has been broken that trend. It's been considerably weaker. Part of that, I believe, we think is the normal seasonality that pretty much happens to us this time of year. Builders try to concentrate on closing out the houses that they do have in the ground before their fiscal year ends in the end of December. So they have the tendency to tail off. There is some speculation that the $8,000 first-time buyer credit was driving some volume in late summer, early fall, and that the extension of that credit was too late to really impact this time period. I think time will tell whether or not that had that kind of an impact.

So from a new construction standpoint, again, we were building there for most of the middle of the year, and it's tailed off here. I would expect that would continue to tail off was we go from December into January. Mostly because it's a seasonal impact. We think the building will pick up again into February and March of next year. The remodel side is a little bit tougher to get an actual trend. Again, going back to this promotional thing. The promotional calendars are so heavy, that it's very difficult to get an underlying trend in terms of demand in the marketplace, because the way that retailers are going to market with the promotions is really cramming all of the demand in the very short windows when the promotion run and close out, and then there's a call to urgency to get the customers to come in and sign up for the project. So it's very, very difficult. I think, if you look at it over the last six months, the remodel market has clear been weaker. I think it's kind of pretty stable at this point on any particular month or weeks, you can get stuff moving around, promotional activity, but what we've seen it is considerably weaker but it is stable at that lower level, if there is any good news in there, and I would expect that would go on as we move through our third and fourth quarter. Not a lot of aspirational big-ticket going on in the remodeling sector.

Quickly, an update on capacity utilization. You're going into a couple of tough quarters in terms of your comparison given the retail promotions a year ago. Where do you currently stand with capacity utilization, and where do you see that bottoming for you, and any further updates on taking capacity off line?

Yes. We're pretty much accrued to what we're running. Now, I think as we get into the cold dark part of winter, particular the holidays, we will have to adjust at any particular time with either curtailment days or a down day in the system, but from a crewing standpoint, we're accrued to what our production is. From a facility standpoint, our facility, we're close to what we had talked about the last quarter or two, since we took the action in April and may to take the three plants offline, and that is we're probably running somewhere on a hard capacity day about 50% of our capability. Plus or minus depending on the mix, we could double our output and not have to add brick or mortar. That would get us back to servicing the housing starts somewhere around 6 million to 6.2 million of existing home resales. Because of that, we think that our hard footprint is about where it needs to be for a normal market. As we talked on the last couple of calls, we want to keep that capacity the place to take care of our customers when the market comes back. So we don't is any current plans for future shutdowns of hard capacity.

Thanks, guys.

We'll next to Joel Havard with Hilliard Lyons.

Thanks, good morning everybody.

Good morning.

A couple of clarifications hopefully on the top line. Kent, John, sometimes you've made comments. I know we'll see some data in the Q, but if there's a sense of whether the sales trends at DIY versus builder were above or below the corporate average for Q2? That might give us a little flavor for what just occurred.

Yes. Joel, as I said in my remarks, both channels were roughly in line with the overcall company decline of 23% in the quarter.

Okay. Sorry I missed that comment. Is that -- is it too early also to hope that you've got -- sort of a general sense of volume versus pricing? And I hope I didn't miss that if you made it --

You know didn't make that, but it's essentially volume, Joel. There's a small amount of price, but the lion's share is volume.

Okay. Now, thinking in terms of that volume, if we -- let's keep math simple. If we sort of flatline H-1 into H-2, is $20 million of cost of goods carved out via the closures still achievable, or does that sort of require more of a year-ago or a Q4 run rate to get to that savings level?

Well, as I said just now, for the first half, we saved manufacturing overhead costs year on year of about $8.8 million. If you doubled that, you'd be $17.6 million. To your point, if volume is lower you may not achieve the same $8.8 million. But what we said is you should have a run rate basis, $20 million of annualized savings. I think you can see we're going to get to that point.

Still makes sense. I probably missed this, too then, John. The actual nonrecurring dollars that you can point to in SG&A combined or, better yet, if you could sort of separate the two.

In SG&A, nonrecurring dollars there's not a lot of nonrecurring dollars in SG&A, really.

Okay. All the severance and such was a cost of goods line.

Yes, mostly. There's a little bit in SG&A; but, you know, what is in there we've separated out and have been calling restructuring costs. So in terms of the SG&A numbers, per se, you don't really see any severance costs going there. Now, in terms of costs that had been in last year's run rate that would have been taken out.

Yes.

Maybe you're talking about a couple million dollars a year, but not more than that. A few hundred thousand dollars per quarter.

My concern is that that line has shown -- the selling and marketing line especially has shown less flexibility to move down thus far. Is there anything in your ongoing focus on cost reductions that you think could come out of the selling and marketing side?

Certainly there are things that could come out. But again it comes down to choices. I guess I would quibble with you just a little bit. If I dial back a couple of years ago, our selling and marketing costs were about 40% to 50% higher than they are today. So we believe that we have, certainly impacted that line where feasible, where practical without impacting our able to affect customer touch point. Quarter to quarter or in a particular quarter as I mentioned, sequentially we had an increase in the quarter because of timing things as well as additional business development activities we've taken on, but I don't view this as a bad story at all.

Well, John, I'll concede that point. That's legitimate. Is there a more optimistic note to go with those business development opportunity ideas, anything you can discuss yet?

Not at this time.

I'll save that for the next quarter, guys. Good luck.

Thank you.

(Operator Instructions). We'll go next to Robert Kelly with Sidoti & Company.

Hey, John, hey, Ken, good morning.

Hey, Bob.

A lot of it has been covered. Maybe just on the sequential uptick you saw Q2 versus Q1, by channel.

Sales you're talking about?

Yes.

The sales went up a couple million doors from first quarter to second quarter and it was kind of spread between the two chance based on seasonality.

The same amount of up tick in both new and remodel.

That's right.

As far as the regions that you're serving, foreclosures have been a big driver of the existing home sales we've seen thus far in '09. Are you seeing a pick up in the washed out markets, people stepping in and doing some work on some of the distressed homes.

From the remodel side?

Yes.

No, not really. I think, if you look at -- there are a couple of exceptions; but generally if you look at the remodel activity that's out there, when property changes hands, it's either right before or right after. We have not, however, seen that translate in any noticeable pickup in terms of the foreclosures coming out of the system. I assume you're referring to the fact that existing home sales are driven a lot by the foreclosure properties going to market and somebody picking those things up. Because of all the other things, the overall environment and everything else, we haven't seen that yet translate into a significant up tick in remodeling activity in those markets.

And just on the gross margin improvement on that $3 million sales increase increment is about 25%, is that what we should be thinking about longer term for American Woodmark?

Are you asking what our contribution ratio is?

I'm dancing around the question.

I mean, I think it's probably north of, that Bob on a long-term basis. Without reporting specifics, we believe that the able to contribute at a higher rate is certainly there.

Thanks, guys.

Sure.

(Operator Instructions). It appears there are no further questions at this time. For any additional or closing remarks, I would like to turn the call back over to Mr. Glenn Eanes. Please go ahead.

No additional questions. This concludes our call. Thank you for taking time to participate. And speaking on behalf of management of American woodmark, we appreciate your continuing support.

This concludes today's conference. Thank you for your participation.