American Woodmark Corp (AMWD) 2011 Q1 法說會逐字稿

Good day, and welcome to this American Woodwork 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 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 & Exchange Commission and the annual report to share holders. 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 conference over to Mr. 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 to review the results of our first fiscal quarter ending July 31, 2010. We would like to thank you for taking time to participate. Participating on the call today from American Woodmark will be Kent Guichard, Chairman and Chief Executive Officer, and Jon Wolk, Chief Financial Officer. Jon will begin with review of the quarter and an outlook for the future and after Jon's comments, Ken and Jon will be happy to answer any of your questions.

Jon?

Thanks, Glenn.

This morning we released the results of our first quarter fiscal year 2011 that ended July 31, 2010. Our earnings release contain the following highlights for the first quarter. Net sales for the quarter were $109.3 million, representing an increase of 8% from the prior year's first quarter. The Company's net loss was $3.4 million. This result compared favorably with the Company's net loss in the first quarter of its prior fiscal year of $6.4 million, which included $1.6 million of net of tax restructuring charges relating to cost reduction initiatives that were completed in the prior year.

Earnings per diluted share was a loss of $0.24 for the first quarter of fiscal year 2011. The Company lost $0.45 per diluted share in the first quarter of its prior fiscal year inclusive of $0.11 per share of restructuring charges. The Company generated negative $0.3 million of free cash flow during the first quarter of fiscal year 2011 compared with negative $9.1 million of free cash flow in the prior year's first quarter. Regarding our first quarter sales performance, net sales for the first quarter of fiscal 2011 were 8% higher than in the prior fiscal year.

In the remodeling market, several factors suggest that while the market has stabilized compared with the declines we saw in recent years, we see various economic indicators moving in different directions which equates to a remodeling market that is roughly flat in relation to prior year. On the slightly positive side, gross private residential fixed investment as supplied by the Bureau of Economic Analysis has stabilized after dropping by more than half from its peak in 2005. This measure was 2% less than in the first half of calendar 2009, but did increase sequentially by 4% during the second calendar quarter of 2010 and unemployment has drifted downward to the mid-9% range as the private sector has begun creating jobs.

On the slightly negative side, the consumer confidence index as recorded by the Conference Board has also drifted downward in recent months, remaining at levels well below those typically associated with an economic expansion. Credit availability continues to be constrained as many financial institutions recover from losses sustained during the recession and many borrowers have diminished equity to use as collaterl, and our two largest remodeling customers experienced negative sales comps in our product category during their April and July quarters. The Company's remodeling sales rose modestly during the first quarter of fiscal 2011 compared with remodeling market that was essentially flat.

In new construction, total residential housing starts during the first quarter of fiscal year 2011 were flat with the same period of the prior year and approximately 560,000 homes on an annualized basis. In contrast, the Company's new construction sales increased by well over 20% compared with the prior year's first quarter. The expiration of the housing stimulus accelerated new construction sales in the earlier part of the Company's first quarter, but sales also exceeded prior year levels in June and July at a high single-digit rate. Overall, the Company's net sales increased by 8% in a market environment that can best be described as roughly flat indicating that market share gains were achieved. We continue to bid aggressively and win new business in the still challenging market, focusing on companies that we believe will outlast the downturn. Our market share gains have come from both 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, the gross profit for the first quarter of fiscal year 2011 was 13.2% of net sales, representing an increase over the 11.7% generated in the first quarter of the prior fiscal year. The primary drivers to the improved gross margin were the impact of higher sales volumes which improved labor productivity and overhead cost absorption compared with prior year and savings achieved related to plant closures. Combined, these factors improved gross margin by nearly 300 basis points compared with prior year. Increases from inflationary pressures in materials and diesel fuel cost reduced the overall improvement to 150 basis points.

Regarding operating expenses, total SG&A expense was 18.2% of net sales in the first quarter of fiscal year 2011, down from 19.4% of sales in the first quarter of the prior fiscal year. Selling and marketing expenses were 12.9% of net sales in the first quarter of fiscal 2011 compared with 13.2% of net sales in the prior year's first quarter. Selling and marketing costs in the first quarter increased by 6% over prior year on an 8% sales increase, driven by increased sales promotional cost and increased business development activities. General and administrative expenses were 5.3% of net sales in the first quarter of fiscal year 2011 compared with 6.2% in the prior year's first quarter. G&A costs declined by 7% driven by lower stock-based compensation and bad debt costs.

As previously mentioned, the Company completed its restructuring activities in its prior fiscal year. These actions consisted of closing two of its manufacturing plants and suspending operations at a third plant as well as a reduction in force of its salaried personnel. The Company recognized a total of $1.7 million of net of tax restructuring charges during its prior fiscal year of which $1.6 million was recognized in the prior year's first quarter. The Company does not expect to incur any significant costs related to these activities during fiscal year 2011. The Company has realized significant annualized cost savings from these actions of more than $16 million in manufacturing overhead cost and nearly $20 million overall.

Regarding the Company's capital spending, the Company's total outflow for capital expenditures and promotional display deployed during the first quarter of fiscal year 2011 was $2.0 million, down slightly from the $2.4 million deployed in the prior year's first quarter. The reduction in capital expenditures is in line with reduced capital needs associated with operating fewer plants and consistent levels of production. The Company expects that its capital spending for fiscal year 2011 will be at levels consistent with its prior year. 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. The Company ended the quarter with a total of $66.2 million in cash, cash equivalents, and restricted cash and long-term debt of $25.4 million. Debt to capital was 12.9% at July 31, 2010. During the quarter, the Company had negative free cash flow of $0.3 million compared with negative free cash flow of $9.1 million in the prior year's first quarter. The primary drivers for this improvement were the reduction in net loss and the absence of payments made in the prior year related to plant closure activities.

In closing, we continue to manage the business with a primary objective of creating long-term value for our shareholders. We continue to invest in improving the quality and breadth of the Company's products and services. We continue to invest in driving market share gains during this downturn and in maintaining the capability for a significant amount of future growth once the downturn has ended. The Company continues to retain the organizational and production capacity and know-how to service demand in a market with average to above average new construction and remodel activity.

Recognizing that the Company operates in a cyclical industry, management remains focused on maintaining the strength of its industry leading balance sheet. Despite experiencing net losses, the Company has operated at or near break even cash flow levels for the last four consecutive quarters and expects to generate positive free cash flow in fiscal year 2011. The Company's first quarter sales increase marked the Company's first positive year-on-year sales comparison in four years, albeit at a level that is still less than half the Company's sales level at that time. The Company has moved aggressively during the four-year period to reduce its costs, evidenced by the 45% reduction in the Company's break-even production rate.

Although the market remains difficult to predict in the short-term, management remains confident in the Company's ability to weather the difficult market until sustainable market growth occurs. We continue to expect that market activity will eventually return to its historical norms of 1.25 million to 1.4 million new households created and 1.5 million new housing starts per year. However, in the short-term, many consumers are still unwilling or unable to make large ticket purchases because of uncertainty, lower home prices, and the credit crunch. From a market perspective, we note several emerging positive trends. Although they dropped in July because of the expiration of the housing stimulus program, existing home sales had exceeded five million homes on annualized basis for the preceding twelve consecutive months. Long-term fixed mortgage rates have dropped to 4.5%, the lowest levels ever, and housing prices appear to have stabilized and housing affordability has improved by approximately 30% over the last four years. We believe that these factors will eventually bode well for remodeling activity once the factor that is continue to limit aspirational spending, such as uncertainty over unemployment and house prices, are mitigated. For our current fiscal year, we expect our remodeling customers will experience flat sales comps in our category and total housing starts will increase to approximately 650,000 annualized by the end of our fiscal year ending April 30, 2011.

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

(Operator Instructions). And we will take our first question from Peter Lisnic with Robert W Baird. Please go ahead, sir.

Good morning, everyone.

Good morning, Pete.

Jon, I guess first question if I could, a little bit more clarity on the gross margin that you put up for the quarter, and you gave good year-over-year color. What I am wondering, though, is if I look at it sequentially, $3 million decline in sales, and approximately the same decline on the gross profit line. So my guess is that there was an acceleration in materials cost headwinds that you saw from fourth quarter last year to first quarter this year. Is there a way that you can give us a ballpark guesstimate of what the impact there was, or was there a mix issue or a pricing issue that impacted that gross margin sequentially?

Good question, Pete. You recall that in the fourth quarter we had announced a couple of one-time gains, one of which was an insurance recovery for a loss at one of our plants, and that was pretty material. That was more than 1% of gross margin in the fourth quarter of 2010, and obviously that was not a recurring event.

In addition to that, as I said in my comments, we did have materials and diesel fuel price acceleration during the quarter. So I would say that the combination of those two things were the primary drivers for why we declined on a sequential basis, as well as for lower volume.

Okay. All right. And then if you could, just maybe give us a little bit of color commentary on the pricing environment, what you're seeing from a competitive standpoint, sounds as though, yes, sales have increased, but I am wondering from a -- are you having to compete harder to get those sales from a pricing perspective, or what your competitors are doing? Any color commentary on that front would be helpful.

Yes, this is Kent. I think I mentioned last quarter as well is we have seen the pricing pretty much stabilize. We haven't seen a lot of upward movement on a like versus like. Now, there is still room in some of our new products for us to move up the price point spectrum, which we have done with a couple of our product launches, but on a like versus like basis, we're not really seeing it either decline or increase. It is pretty stable in terms of the pricing.

I think we're at levels on both sides, both the new construction and remodel sides, where the industry has gotten to the point where this is just where we have to be for a while, so again, we're not seeing a downward pressure, but we're not seeing a lot of lift either.

Okay, that is perfect. Thank you for your time.

Sure.

We will take our next question from Joel Havard with Hilliard Lyons. Please go ahead, sir.

Thank you, good morning, guys.

Good morning, Joel.

The implication from your comments is that this was all -- that the top line was units-driven, so we're filling a few more-- and by the way, congratulations on the top line gain. It has been a long time, so do want to give you regards there. But you're filling more trucks. You mentioned logistics expense. Is there anything going on other than fuel costs? Are you facing some vendors pulling away? Are you all doing anything proactively to reduce logistics related costs, something along those lines?

Yes, it is really diesel. Diesel now has been stable. It is up over what it was last year, but it has been stable now for several months.

In terms of our logistics network, we have a group of partners we have had for quite some time. Occasionally, particularly on our inter-plant stuff, which doesn't have quite the same service requirements as outbound to the customer, we will do some movement around to that. But we're not seeing any constraints on capacity in terms of our shipping lanes, and again, we're not seeing a whole lot of movement on just the absolute prices or costs associated with moving product around, other than diesel. It really is the fuel cost premium that is driving that.

Okay. And I guess you guys are kind of always, Kent, in tweaking the margins of the agreements and arrangements and contracts and schedules, et cetera, to try and minimize that. Is there anything within your grasp, or at least on the horizon that the Company may have the ability to address if we do see prices pushing back up over the $3-ish per gallon on diesel range?

I'm -- you're talking about our freight system in particular?

Yes.

No. I think what you're going to find, we're pretty happy with the operation of our overall network, and again, our partner relationships and what they do for us and how they perform. Like many other areas in the Company, I think we have a very stable platform that has a lot of leverage in it.

So I think what will happen, again, as volume comes back, as we climb out of this four-year cycle we have been in, and we start to get on the other side is that we're going to get a lot of really nice leverage because we aren't really taxing the system. It is not overloaded. It is not running at full capacity, and so again, like many other areas in our operation, we think we have quite a bit of leverage from a cost standpoint in there.

It has been years of these calls now, Kent, that I have been needling you on, have you taken the capacity down enough, and you have been steadfast in defending the idea that it will come back. Hopefully, this is the first indicator that that's the case, so I am going to lay off beating you up on capacity.

Well, there is a difference now, remember, the one you have been beating me up on for a while is our internal production capacity.

Exactly.

Our freight network is very different because we have relationships with third party carriers. We don't own our own rolling stock or that kind of stuff, so it is their capacity here, and they and most of our partners have maintained their capacity.

Okay, all right. That's a great point. Thanks. One final one, Jon, if you have it handy, a round figure on what D&A was in Q1?

I don't have that at my finger tips, Joel.

Approximate.

About $1 million compared with the previous year's depreciation and amortization. In the previous year, we had to accelerate some depreciation because of the plant closure activities that we were undertaking, and had to drastically shorten the estimated useful lives of some of the assets, so the reduction was roughly $1 million.

Okay. Great. I said final, but lastly on the CapEx between plants, which I assume is pretty stable and promotional, are you -- your overall comment was spending in line with last year. Does that anticipate any switch between displays versus plant, or are you where you want to be?

You may have some movement by a few hundred thousand dollars either way, or $1 million either way, but roughly comparable, Joel.

Thanks, guys. Best of luck, guys.

(Operator Instructions). And we will take our next question from Sam Darkatsh with Raymond James. Please go ahead, sir.

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

Fine, thank you.

A couple of questions. First off, what was the -- you mentioned, Jon, in your opening remarks that, particularly on your remodeling side, it was a bit unsteady or roughly flat, but it sounded as though it was fits and starts during the quarter a little bit. What was the cadence of demand as the quarter progressed on a year-on-year basis?

Sam, it was just a bit higher than last year, and it is really tough on a monthly basis to say higher or lower, only because the promotional schedule drives a lot of that activity. So, I would say that on the balance for the quarter, it was up just a skosh versus last year, and month to month it was pretty close in individual months, some higher, some lower, but it balanced out to a slight increase.

Okay, so you didn't see a June/July really fall off like a lot of other folks are talking about with their building products demand, where June was really rotten and July is kind of similar? It was more steady than that?

Well, as I said in my comments, the new construction side we did see a drop because we were up 20% plus for the quarter, and we were up high single digits the last two months of the quarter, so obviously the month of May we were quite strong compared to last year. But on the remodeling side, it is a little bit tougher to gauge than that, again, because of that promotional calendar.

And I guess this may -- you may have just answered my next question. The receivables being down on a year-on-year basis, is that more reflection of the mix of builder being stronger because builder, your builder customers don't have the same collection schedules as the home centers might, or is that because business tailed off tail end of the quarter?

Mostly it was just because of timing, and the timing of collections. If anything, as builder mix increases, which it did slightly during the quarter, DSO would tend to elongate because builders don't pay as quickly as the home centers do.

Got you, okay. Next question, you don't give guidance, and I can respect that. What were the variances in the quarter, the primary variances in the quarter versus your internal plan? Where were you surprised, either pleasantly or otherwise, in the quarter?

We were pretty much in alignment with our plan, if anything, we sold a little bit more than planned. Volume was just a little bit better than we had originally planned, but other than that we ran pretty close.

And gross margins going forward? You mentioned this earlier in terms of what sequentially you saw from Q4 to Q1 due to the fuel costs and some materials. Do you see margins expand from here, or as seasonally as things soften up a little bit, naturally, you would have lower fixed cost absorption? How should we look at gross margins the next few quarters or so?

I think we'll follow the typical seasonal patterns, Sam, where Q2 tends to be a little bit higher in sales, and Q3 tends to be a low sales quarter, so we're not going to do as well in margin in that particular quarter. And then we'll see for Q4, it tends to be a better quarter because of the Spring selling season, but I wouldn't want to try to guide you numerically at this point in time.

So, typical seasonal patterns for gross margins?

Yes, as near as we can tell at this point in time.

Okay. Thanks much.

(Operator Instructions). And we will take our next question from Keith Johnson with Morgan Keegan. Please go ahead.

Good morning, everyone.

Hi, Keith.

Good morning.

Just a couple of questions. I want to maybe circle back up on the new construction market, and how it did during the quarter. You said it was up well in excess of 20%. If I look at actual housing starts on a lagged quarter basis, quarter ending April, housing starts on an actual basis were up near 40% plus, I figured that would have spilled over as we got into the July quarter. When you say in excess of 20%, are we talking about numbers up on the new construction market into the 30% and 40% year-over-year?

No, less than 30%.

Okay. As you look at that one market in particular, and see the demand pull forward, should we begin to start seeing a slight decline as we work our way through the October quarter, as the markets adjust to the pull-forward in demand in new construction?

Well, just going back to your previous question, I will quibble a little bit with your being up 40% in housing starts. We track -- the metric we track are total housing starts, because we don't just sell to single-family housing.

Okay.

And if you look at single-family housing starts for the last five quarters, it has been pretty consistent within the 560,000 range, and it popped up in our fiscal quarter ended April to about 624,000. But, we haven't seen any rises of 40%.

Okay, I was trying to look at the non-seasonally adjusted numbers, and just try to key off the actual construction numbers. So, thinking about that market and the way it would move going through the second half of calendar 2010, are you guys hearing from your customers on the street that the pull-forward was pretty significant, that we'll begin to see those markets declining for a period of time as they adjust?

This is Kent. Let me see if this helps you out a little bit. One of the things that we have noted is when the first stimulus expired last Fall, it took us about -- in talking to our customers, it took us about four months, maybe a little bit longer, maybe five months to get back on to the trend line that we had seen in terms of a slow, slight slow but relatively steady recovery. After this stimulus, it took us basically two months to get back on trend line. Now, there can be a lot of reasons for that, maybe they didn't get quite as frisky and over-build specs as much on the second in preparation for the expiration of the second stimulus as they did on the first. There could be some demand, I don't know. But after, on the back side of both of those stimuluses, the second one we appear to be recovering faster than we were on the first.

The other thing that I would say is that the activity that we're seeing out there, and what we're hearing from our customers is that they're cautious if you will, cautiously optimistic, but we are seeing increases in activity. We're seeing more land activity, particularly around developed lots. Some of the builders are -- because one of the things that's really stopped in the last couple of years is new development, so they're looking out in the future, and they want to secure some developed lots, so we are starting to see some land transactions, again particularly around developed lots.

We're starting to see our major customers open up more subdivisions, and actually go ahead and build some model homes. We do have a couple of large customers that have started to be a little bit more active in terms of putting spec homes in the ground as well. So we do -- we are in a situation where we're a little bit -- have this dichotomy between some of the press reports that are being picked up, and really what we're hearing from our customers, and the activity we're hearing on the street. How that rolls out in the Fall, your guess is as good as mine, but we continue to hear from our customers, and actually have that backed-up by activity that we're back on trend, which is slightly improving production rates.

If that holds from a seasonality standpoint, we'll see that through really October, late October, and then seasonally, the builders will drop off pretty quickly a little bit before Thanksgiving through December, and then pick back up again in January. So, that would be the normal seasonal pattern, and all the information we have is -- that's the way we think the industry is looking at the back half of the year.

Okay. Appreciate that color. That's very helpful. Make sure I understood or heard the comments right earlier. On the current fiscal year, looking for remodeling flat, and maybe 650,000 annualized starts number by the end of fiscal 2011. Is there a way you can -- how should we think about that translating into the revenue year-over-year for fiscal 2011?

Well, we have avoided guiding at this point in time. I think you really need to make your assumptions about how we'll do in market share vis-a-vis those market assumptions that were given.

Okay. All right. And just final question. I believe last quarter you guys talked a little bit about having some initiatives within the dealer network to expand your presence. I didn't know if there was an update on maybe how that was going, or penetration into that channel.

Yes. We have always had business over there. We've always had a group of dealers we, particularly during the mid-90s, and really actually until the peak in about 2005 and 2006. We're not as aggressive in that channel historically, and the reason was is because it was all we could do to keep up with the other channels of distribution.

In this environment, we clearly have an appetite for some more business, particularly out of channels that we haven't emphasized as much in the past, and so what we mentioned last quarter is we have started to do that. We're moving along. We are picking up some customers over there that we haven't had historically. We're picking up some share in the customers that we did have, as we have been able to put some resources in over there, and help them out with some of their specific wants and needs, desires, issues that they have in serving their particular breed of customer.

But I think part of what we need to realize on that is, is that's a little bit of a long-tailed cat in that it really takes a very large -- there is a critical mass that you need to have on the dealer side to generate -- really start to generate some meaningful numbers. So while we're over there doing that, that's not a quick fix. That's not like going out and signing up a major mass retailer or major builder. It takes awhile for that volume to build.

Okay, great. Thank you.

Sure.

And gentlemen, at this time there are no further questions. Mr. Eanes, I will turn the conference back over to you for any closing comments.

Well, since there are no additional questions, this concludes our call. Again, thank you for taking time to participate. And speaking on behalf of the management of American Woodmark, we appreciate your continuing support. Thank you. Have a good day.

Ladies and gentlemen, this will conclude today's conference call. We thank you for your participation.