American Woodmark Corp (AMWD) 2011 Q2 法說會逐字稿

Good day and welcome to this American Woodmark second-quarter earnings 2011 -- 2010 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 and Exchange Commission and the annual report to 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 conference over to Mr. Glenn Eanes. Please go ahead, sir.

Good morning, ladies and gentlemen. Welcome to the American Woodmark conference call to review results of our second fiscal quarter ended October 31, 2010. I like to thank you for taking time out to participate.

Participating on the call today from American Woodmark Corporation will Kent Guichard, Chairman and Chief Executive Officer, and Jon Wolk, Chief Financial Officer. Jon will begin with a review of the quarter and an outlook for the future. After Jon's comments, Kent and John will be happy to answer your questions. Jon?

Thanks, Glenn. This morning we released the results of our second quarter of fiscal year 2011 that ended October 31, 2010. Our earnings release contained the following highlights for the second quarter.

Net sales for the quarter were $107.6 million, representing an increase of 3% from the prior year's second quarter. The Company's net loss was $7.4 million. Comparatively the Company's net loss in the second quarter of its prior fiscal year was $5.3 million, which included $0.1 million of after-tax restructuring charges related to cost reduction initiatives that were completed in the prior fiscal year.

Earnings per diluted share was a loss of $0.52 for the second quarter of fiscal year 2011. The Company lost $0.37 per diluted share in the second quarter of its prior fiscal year inclusive of $0.01 per diluted share of restructuring charges. The Company generated positive $5.5 million of free cash flow during the second quarter of fiscal year 2011 compared with negative $2.0 million of free cash flow in the prior year's second quarter.

For the six-month period ended October 31, 2010, net sales were $216.9 million, up 6% over prior year. Net loss with $10.8 million, lower than the net loss of $11.7 million in the prior fiscal year, which included $1.7 million of after-tax restructuring charges. The Company lost $0.76 per diluted share during the first six months of the current fiscal year compared with the loss of $0.83 per diluted share in the prior year which included $0.13 per diluted share of restructuring charges.

The Company generated positive $5.2 million of free cash flow in the first six months of the current fiscal year, a significant improvement from the $11.1 million of negative free cash flow generated in the prior fiscal year. Net sales for the second quarter of fiscal 2011 were 3% higher than in the prior fiscal year.

In the remodeling market several positive factors were overshadowed by negatives suggesting a market that was down by mid-single digits in comparison with prior year.

On the positive side, private sector job creation has become increasingly positive over the last several months. Home prices have stabilized. The median sales price for existing homes during the first 10 months of calendar 2010 is on par with that of 2009 and consumer confidence was reported by the conference board to be similar to its prior-year level, though still below levels typically associated with a strong economy.

On the negative side, gross private residential fixed investment as supplied by the US Department of Commerce was 6% lower than during the third calendar quarter of 2009. Cabinetry sales reported by members of the Kitchen Cabinet Manufacturers Association were down by mid-single digits and our two largest remodeling customers have experienced negative sales comps in our product category during their April, July, and October quarters.

These difficult conditions have severely impacted our market since the onset of the credit crunch two years ago. Recognizing these challenging market conditions the Company and its customers employed aggressive sales promotions for the fall selling season, which took the form of free products and additional discounts based upon the amount of the sale. These promotions were met with a satisfactory response causing the Company's incoming order rate to increase in the mid-teens compared with the prior year's second quarter in a market that was down.

From a timing perspective, the Company's remodeling sales rose modestly during the second quarter and are poised to more closely reflect the increase in incoming orders during its upcoming third quarter. However, these incoming orders were gained at a significantly higher sales promotion cost to the Company than in prior year.

In new construction, total residential housing starts during both the first and second quarters of the Company's fiscal year 2011 were flat with the same periods of the prior year at roughly 570,000 homes on an annualized basis. In contrast, the Company's new construction sales grew by 10% compared with the prior year's first half. The expiration of the second housing stimulus program accelerated new construction sales in the Company's first quarter while the prior-year expiration of the initial housing stimulus program provided a tough comp in the present year's second quarter.

Overall, the Company's net sales increased by 8% in the first quarter in a market that was essentially flat and by 3% in the second quarter in a market that appears to have been down by mid-single digits, indicating that market share gains were achieved in both quarters.

Regarding gross profit, gross profit for the second quarter of fiscal year 2011 was only 9.1% of net sales, representing a decline compared with the 12.2% generated in the second quarter of the prior fiscal year and with the 13.2% that the Company generated in its previous quarter.

The primary driver to the reduced gross margin was the previously mentioned elevated sales promotion that the Company chose to deploy during its second quarter in order to drive sales growth in a challenging market. Because most of the sales promotions involve the use of free product or reimbursements back to its customers, these costs were deducted from gross margin as opposed to being classified as SG&A.

Absent these elevated costs gross margin would have been at levels similar to the Company's recent performance levels.

Regarding SG&A, total SG&A expense was 20.3% of net sales in the second quarter of fiscal 2011, up slightly from 20.1% of net sales in the second quarter of the prior fiscal year. Selling and marketing expenses were 14.7% of net sales in the second quarter of fiscal year 2011 compared with 13.9% of net sales in the prior-year second quarter.

Selling and marketing costs in the second quarter increased by 9% over prior year on a 3% sales increase, driven by increased product development costs related to an aggressive full product launch and to enhanced business development activities as the Company worked to expand its reach in the remodeling sector.

General and administrative expenses were 5.6% of net sales in the second quarter of fiscal year 2011 compared with 6.1% in the prior year's second quarter. G&A cost declined by 5%, driven by lower incentive compensation and bad debt costs.

As previously mentioned, the Company completed its restructuring activities in its prior fiscal year. These activities consisted of closing two of its manufacturing plants and suspending operations at a third plant, as well as a reduction in force of 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.

Regarding capital spending, the Company's total outflow for capital expenditures and promotional displays deployed during the second quarter of fiscal year 2011 was $1.9 million, down slightly from the $2.2 million deployed in the prior year's second quarter. The reduction in capital investments is in line with reduced capital needs associated with fewer plants and reduced retail store growth by its customers.

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 $70.3 million in cash, cash equivalents, and restricted cash compared with long-term debt of $25.3 million. Debt to capital was 13.3% at October 31, 2010.

During the second quarter the Company had positive free cash flow of $5.5 million compared with negative free cash flow of $2.0 million in the prior year's second quarter. The primary drivers for this improvement were the receipt of the Company's federal income tax refund and proceeds received from the sale of a closed facility. Excluding these special cash inflows, the Company's free cash flow would have been at similar levels experienced in the prior-year second quarter.

In closing, we continue to manage the business with the primary objective of creating long-term value for our shareholders. We have chosen to continue to invest in improving the quality and breath of the Company's products and services, in driving the market share gains despite challenging market conditions, in expanding channels of distribution that we have not previously emphasized, 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. Management remains focused on maintaining the strength of its industry-leading balance sheet. Despite experiencing net losses, the Company has operated at near breakeven free cash flow levels for the last five consecutive quarters and expects to generate positive free cash flow in fiscal year 2011.

The Company's second-quarter sales increase marked the second consecutive quarter of year-on-year sales growth. The first time that this has happened in four years, albeit at levels that are less than half of the Company's former sales levels during that more robust time. The higher-than-normal promotional cost levels that the Company experienced in its second quarter are expected to remain elevated in its third quarter and then to gradually return to more normalized levels.

Although market remains difficult to predict in the short term, management remains confident that the Company's ability to weather the challenging 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 at 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.

For the remainder of its current fiscal year that ends on April 30, 2011, the Company expects that the remodeling market will be roughly flat with prior-year levels as the impact of uncertainty as to home prices and credit availability continue to offset the beneficial impact of a gradually improving employment outlook. The Company originally expected that total housing starts would improve to 650,000 during its fiscal year 2011. But given performance to date the updated number looks to be closer to 600,000 which would represent a flat to perhaps 2% growth over the prior year's 584,000.

The Company further expects that its retail customers will experience sales comps that are roughly in line with the remodeling market's flat performance.

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

(Operator Instructions) Sam Darkatsh, Raymond James.

Good morning, Kent. Good morning, Jon. Happy holidays to you.

A few questions here. First off, you mentioned, Jon, in your prepared remarks that you expect the promotional activity to continue over the next quarter or so and then moderate a bit. Do you anticipate sequential gross margins in Q3 to be down versus Q2 because you are going to have a little bit less volume seasonally also, or how should we look at gross margins sequentially?

You know, Sam, my expectation is that certainly we will be better than last year's gross margin because sales volume was much lower. But gross margin for the third quarter will be perhaps similar to what the second quarter is just because of this promotional factor that has been built into the backlog that we have built up from these orders.

Got you. Second question, what are your production plans versus your sale expectations over the next few quarters? What are you looking to do with overall inventory levels?

Well, I am not sure what you are after on the inventory side -- this is Kent. On the production side, we have, as Jon kind of alluded to in the remarks, we built up a pretty good backlog here through the fall selling season. So we are kind of going to enter the winter down period here -- from a consumer demand we are going to enter the winter period with a much richer backlog, stronger backlog than we have. So we are going to be able to at these levels continue to operate the plant -- operate our plants at the current schedule really kind of all the way through, we believe, into -- near or into the spring next year. So we are going to get pretty level production which should help us.

From an inventory standpoint, as you know, we don't carry any finished goods inventory. We make everything to order so it's just a question of our work in process. A lot of the work that we have done on the manufacturing processes side we and some other types of initiatives have continued to help us bring down that inventory and increase our turns. So I wouldn't suspect that we would see a whole lot of change in the inventory levels.

Got you. Two more quick questions, if I might. First off, if my math holds, Jon, it looks like you might have had $4 million or $5 million worth of unabsorbed promotional costs in the quarter. And I guess it would have driven somewhere between $10 million and $20 million of worth of incremental sales, depending on what your mid-teens order rate looks like and is quantified with.

Is that -- you mentioned that it was a satisfactory response, but if my math holds it looks like that is a pretty low return on your promotional dollar. So how should we look at that promotional spend and the efficacy of that spend?

Well, Sam, the thing is it's really a timing question because the promotional levels have been higher this year than last year pretty much consistently in the first half of the year, but it really hit home in the second quarter on a year-on-year perspective.

In terms of how well it worked and why we are satisfied, you look at this year's backlog that we are sitting on at the end of October, or even today for that matter, and compare it to last year. We have got almost double the backlog that we had from a year ago. So we have effectively built up a strong backlog that, as Kent says, will allow us to produce at a level rate throughout the third quarter and into our fourth quarter which was not the case a year ago.

And last question then. There is a number of moving parts, but looking at your breakeven levels right now what would you posit that your breakeven sales quarterly run rate might be at this point?

Well, I would say that structurally it hasn't changed. This quarter represents a change because the margin did suffer, both gross and operating margin did suffer, but we don't view that as a structural ongoing phenomenon. It's more of a short-term phenomenon based upon our choice to promote in a challenging market more heavily than we had before.

But I would say that we still look at our breakeven level as being roughly half of what it had been four years ago, four and a half years ago.

Could you help quantify that for us, ballpark on a quarterly basis?

We haven't put that out there before; I am not going to put it out there today. But if you work the math then I think you can pretty much determine it.

You are saying four years ago?

Yes, four and a half years ago but today it's down about 46%, 47%.

Okay, thank you very much. Again, Happy Thanksgiving to both of you.

Peter Lisnic, Robert W. Baird.

Good morning, gentlemen. I guess first question, Jon, if you could just clarify. You said the gross margin for the second quarter would have been comparable to previous levels if not for the promotional costs, but you have obviously had gross margin hopping around a bit.

I am just wondering if you could give us a little bit more clarity on where it would have been or the dollars on the promotional spend in the quarter.

Yes, it's roughly about a 3% impact year-on-year, that impact to this gross margin this year versus last year. So take the 9.1% and call it 12.1%.

All right, perfect. And then if we kind of look at what is driving some of that promotional activity is there a way that you can maybe give us a little bit of, I guess, some color or a backdrop as to why? I mean obviously demand is weak but where is the pressure coming from? Is it from other competitors and you are sort of following, or is it just a function of just trying to drive demand? Give us a little color on why this is occurring the way it is.

I suppose yes would be the answer. It's pretty much -- our customers, our primary customers are putting together promotional programs to help their business, as you could suspect. They still, obviously, participate a great deal in the promotional cost to run their business.

As it specifically relates to us, and we have talked about this, as you will recall, several times, is we basically meet competition at the promotional level. So as the promotional programs are put together and our customers talk about them with all their vendors we basically put ourselves in a position where we create a level playing field from a promotional standpoint.

So specifically it relates to what Jon is talking about in this quarter, really the first six months but it really hit us in the second quarter, is that is primarily to meet competition. We are going to price to market. Whether it's the gross sales price or net after promotions, we are going to price to market.

As we have talked about before, we are going to maintain the position that competitors have to get market share from us some other way than pure price. So we won't lead that parade but as they -- as the competitive marketplace moves in one direction or another we are going to stay competitive with the marketplace.

Okay. And then it doesn't sound like they are getting -- it doesn't appear that they are getting a whole lot of market share through other means. Is that sort of a safe statement? And then I have another follow-up if I could.

Well, I won't speak directly to their position. What I will tell you is that we are pretty confident in all of our challenged distribution that we are increasing share.

So to the general world out there -- again, I won't talk about a specific competitor -- but to the general world our experience is that when we equate price, when we make it a level playing field on the pricing standpoint that our value story and our performance as it relates to giving the consumer a great experience in there, whether its new construction or remodel, that that has a tendency to consistently gain us market share.

Okay. And then just last question. It sounds as though this price or promotional environment is pretty broad. Any concern that all of a sudden the structural profitability of the industry is going to be somewhat different than it was in the past or maybe different than you expected six, nine, 12 months ago?

Yes, I mean whenever you get into a period like this certainly the worry -- from anybody involved the worry is that you set kind of a new standard and new structure. You set new expectations as it relates to price.

The environment we are in I think is obviously extraordinary so there certainly is a piece of you that is always concerned when you get a new period like this. I think as we get it through this I think it's going to ease. Jon mentioned fourth quarter we think it's going to ease. Whether it's fourth quarter or later, I mean I don't know; I don't have a crystal ball for that.

But really if you think about the entire supply chain -- I will make two comments. One is the entire supply chain to the consumer, from our vendors through us through our customers to the consumer, are being very aggressive at this point to protect market share and if possible gain some market share to get as much volume across your platform as you can. As volume comes back I think that is going to ease all the way through the supply chain and everybody is going to want to get back to some more normalized kind of gross margin or margin level.

So I think that there is a lot of -- will be a lot of momentum all the way through the chain to get back to something that is livable for everybody on a long-term basis.

The other thing I would say is that our consumer is pretty sophisticated and I think the consumer understands in a time like this that they are going to get some deals that they are not going to get in other times. So I think we have got historically and I -- the way I view the business I think that everybody's expectation is that this is a great time to buy kitchen, remodel a kitchen, or buy a home if you can afford it and get access to financing, because you are going to see deals now that you are not going to see later on.

And I think we have seen that in several other industries. I think we have seen it in the last two to three years in the automobile industry where certainly the discounts that you were getting a couple of years ago are not available today. Now it's not that they don't run promos and don't have discounts, but they are certainly not at the levels they were a couple of years ago. So I mean I think we are going to see that type of pattern.

The actual timing of it we will see as it comes along, but I think we are going to see that type of a pattern where ewe will still have promotions. There will still be a promotional aspect to the business but it won't be at these levels.

Okay. That is perfect. Thank you for your help and Happy Thanksgiving to you and your families.

David MacGregor, Longbow Research.

Good morning, gentlemen. On the Home Depot call they talked a lot about the success of the Martha Stewart cabinet rollout. I am just wondering how much of this, with respect to the competitive issue we are talking about here, is just the success of the Martha Stewart line.

Yes, again, I won't talk specifically to a line or a competitor, particularly as it relates to our customer. If you want more insight into that, talk to some other folks.

What I would tell you is that it's a pretty crowded space. If you go out there and look anywhere, whether it's new construction, whether it's remodel through whatever channels -- there are many ways that manufactures get to remodels -- it's a pretty crowded space. There is lots of brands out there. There are lots of lines of cabinets out there. It's still a relatively fragmented industry if you look at it particularly on a local or regional basis, but there are a lot of players out there.

So we are used to competing with other lines. We are used to competing with other programs and as they come along we just continue to follow our strategy and execute our strategy to the best of our ability. I think that over time -- again, we have proven that even when other people come in or they introduce things or they rearrange things that our total program, again to give the consumer the best experience with value in giving them a kitchen or bath that they can be proud of in their home, that we have been able to compete with pretty much anything that is out there and continue to gain share.

And so we will continue to do that against all competitors and all lines.

Is it possible that in this kind of a competitive environment that you as a vendor are being asked to pick up a larger portion of the promotional cost at retail than you might otherwise be expected to at another point in the cycle?

Why don't I start with is it possible?

Is that what is happening here?

Yes. Well, what I would say is that the total package, the total value of all promotions to the consumer is clearly significantly larger than it has been historically. How that breaks down -- the mix between what the vendor pays and what the retailer pays, or what the vendor pays and what the builder pays -- yes, it moves around a little bit depending on a particular period.

But generally speaking, how the promotional pie has been split up hasn't changed a whole lot in the last couple of years. It has been pretty consistent, it's just a much -- everybody is throwing in a lot more money. The pie is bigger to try to entice the consumer to come into the marketplace.

But we haven't seen a tremendous amount of shifting between the various players. Everybody is paying more to try to incentivize the consumer.

So with this pressure on the top line from competitive developments talk a little bit about raw material cost inflation and your ability to pass that through to the extent that you are incurring it.

Well, fortunately, we are still not seeing a lot of raw material inflation. There are some areas, again like anything else, that will kind of move around a little bit but generally speaking lumber prices are relatively stable. Most of our other major inputs are relatively stable. The inflation that we are seeing at this point is pretty minor, even on those ones where we are seeing some pressure.

So, fortunately, as of now we still haven't seen a lot of inflationary pressure on our raw materials. It has been pretty flat this year.

As it relates to maybe the second part of your question, which is our ability to pass it on, what I would tell you is -- again I have repeated this on the calls over the years -- is that the industry, generally speaking, has been able to recover inflationary increases in raw materials from the marketplace. But it does come with a lag, anywhere between a six- to 12-month lag is the industry's ability to recover.

But if there is an increase in raw materials that is generally sustained, it's not a brief one like say the spike that we had a couple of years ago in fuel prices, if it's really a new base level of raw material, there is really a fundamental change in the price of any particular input, the industry over about six to 12, maybe a little bit longer than that, but really around six to 12 months has been able to recover from the marketplace.

Last question. You mentioned how you are investing these days; you talked about investing in quality and brand and expanding distribution, gaining share. Wonder if you can just focus in for us on the expanding distribution part of it and just talk a little bit about what your goals are there, how quickly you can achieve them, and what kind of investment from a magnitude standpoint you are making?

In terms of distribution?

Correct.

Yes, it's pretty much -- I mean it's -- there is really only in our business two basic consumers out there. There is somebody that is going to buy a new house and somebody that is going to remodel, whether it's a kitchen, bathroom, or some other space that we might go into; a family room or whatever it might be. So those are really the two end consumer profiles you are looking for.

There are lots of different ways that you can get there. On the new construction side you have everything from national builders to local builders. You have certainly geographic areas. So what we have done on that side is all of the above.

We have continued to pursue either new relationships with builders, all the way from local, regional, to nationals, to penetrating our share with existing customers. We have also gone into new geographic territories. We have expanded our geographic reach to get after the new construction customers.

All of that in terms of cost, it's in those numbers that Jon talked about. We haven't opened up any new locations to do that; it's more of some more windshield time to get farther out from where our central hubs are.

On the remodel side, I would say pretty similar things. We certainly have the big-box retailers where we have had a major presence for many years. We have also had both a distribution and a dealer network. What we have done there is we have just continued, as many people have, to put more emphasis on expanding those areas.

As it relates to cost, between that -- I would throw in product as well, introducing new product and those types of things. I would say that the investment there has been noticeable but not terribly significant.

Just to maybe give you a general, I mean maybe 1% of sales is -- if you roll it all together in terms of everything that we have done to try to get more product out there, to get in new geographic areas, and maybe to put a little more emphasis on some of the channels of distribution, as Jon mentioned, that we haven't put as much emphasis on in the past.

So when you say you are gaining share is that really what is behind the share gains is just expanding your distribution, expanding your region?

Well, I think that is part of it. The other piece is even within existing outlets and existing customers we think we are penetrating share. Again, because of product, because of service levels, because of support for the customer. As they have done what everybody has done; they don't have as many resources either so we continue to support them as they try to go after their consumer.

So I think it's all of those things.

Thanks very much and have a great holiday.

Joel Havard, Hilliard Lyons.

Thank you. Morning, everybody. A lot of good questions so far so just a couple of follow-ups.

Jon, would you mind going back over the characteristics of sales by channel? You ran through it; you were kind of doing year ago and the same time. Could you just kind of hit the Q2 highlights again for retail and new build?

Yes, they were both pretty much in alignment, Joel, with the overall 3% increase that we had.

Okay. And down on the gross margin line you said probably 300 bps or so related to the promotional absorption. Was there -- and if so could you quantify any freight cost related change, either sequential or year over year?

Nothing real significant, Joel.

It didn't show up yet. Are you -- kind of $3 diesel, are we starting to get into this zone where that starts to show up going forward?

Will, it's actually $3.18 diesel, so yes it's starting to become a concern.

Okay. Any more tricks up the sleeve, a la kind of 2008, where you were able to switch around with some truckers to mitigate that?

I think we have got a pretty stable and very competitive network at this point that we are very proud of and its performance and also cost. We have been making some good service innovations there but I don't think there is anything that is a game-changer right now.

Okay. And did I catch in your previous comment somewhere CapEx this year is similar to last?

Yes.

All right. And broken down between plant and display similar to last year as well?

Yes, I mean it could wiggle a $1 million or $2 million either way, but overall pretty much similar.

All right, I am going to try and -- one last thing. I want to try and backdoor an earlier question on the breakeven point. Just a little bit of a restructuring charge it looks like in this quarter, the $16,000 or so.

Is there anything on the current fiscal year horizon where you can do something that is sort of a tweak to tweak-plus to bring that down a bit to weather the storm maybe a little bit leaner in the near term? Or, Kent, going back to your comments is this really a matter of let's just weather the storm in general and be prepared for that turn in the market more broadly?

Yes, Joel. What I would say -- I mean we are certainly always working on it. The programs that we have put in place across, really across the Company but say in manufacturing specifically, the programs we have put in place based on lean manufacturing and some other types of things. We continue to pursue those and they continue to have an incremental impact.

You know it's a sea change type of thing though, but that is not how those programs work. They are more continues, kind of continuous improvement based programs. So that continues; I don't want to give the indication that we are not doing anything. We are doing a great many things. I think they are probably going to be more -- reveal themselves more on the upside than they will in the environment that we are in. So we continue to work on all those improvements.

In terms of a structural change as it relates to additional hard capacity, brick-and-mortar coming off-line, we are still kind of where we have been for a while which is to kind of stay the course, hold on to those capacities, particularly the sites and the locations that we can then leverage up when volume comes back.

If you look at -- if you go back and work through those numbers, we are -- I wouldn't say we are giddy by any stretch of the imagination, but we are starting to see -- on trend lines we are starting to see the industry trying to come back. We are starting to see more activity on the builder's side. We are starting to see more activity on the remodel side.

Now understand that it's still -- there is still a lot of promotional dollars in both channels that are required to kind of prime the pump. But there is interest coming back; there is activity coming back; there is demand coming back.

Timing is -- nobody is going to guess the timing. None of us are going to be able to do that, but we are starting to see trend lines now that are pretty consistent that are upward movement. Jon mentioned we have had top-line growth two consecutive quarters for the first time in four years.

So right now -- it's kind of a long-winded answer, but particularly as it relates to fixed capacity and locations we are still kind of in that stay the course mode.

Kent, that is a great answer and thanks for the detail. The concern is that if those housing macro trends, the remodelings that follows along with that, is stabilizing here is that going to leave you still just a bit of a gap going getting back to break even and a profit? I know that is very open-ended and I don't mean to be critical but --.

Sure. I understand, Joel. But it's not -- be careful with it. I am not sure what you mean by stabilize. If you go back -- if you even end up at 600,000 houses this year, which is a little below than what -- in our fiscal year, which is a little bit below the 650,000 that maybe a quarter or two ago we would have suggested, 600,000 relates to less than 500,000 last year. Or 500,000 thereabout. So you are still talking about a 20% increase in housing activity as you go 12 month over 12 month period.

Great point.

So, yes, we are not back anywhere near what the 50-year run rate is of $1.4 million or what we need to do to keep up with population and new household formation. But if you go from 500,000 to 600,000 to 700,000 to 800,000 or 900,000 you are still getting double-digit increases in activity in the marketplace even though you are not back to where you were and there is a lot of leverage.

So even with those increases, you start -- say we just maintain market share and you end up posting 10% 15% increases in housing activity as you go forward here and you add 10% to 15%. You start to do that. With the leverage that is built in and where the breakeven point is this is not a doomsday that it takes you a decade to get back there.

Yes, that is a great point. Kent, thanks. Jon, Glenn, good luck to all of you all and Happy Holidays.

Robert Kelly, Sidoti.

Good morning. Just a point on -- you talked about raw materials earlier. Hardwood lumber inflation wasn't a big headwind for you compared to the year-ago period?

Not yet. No, Bob.

Will you feel that going forward?

We will see.

Yes, I mean it depends on what the markets do. I mean there is -- but the overall blended average -- and there are some things you can do whether you buy one common, two common, those types of things. But generally speaking, our lumber prices through the end of the reported quarter have been pretty stable.

Okay, that is good to hear. And then just final question was over the past couple quarters you have been talking about backing away from promotion activity, talking about inelasticity of demand really not moving the needle around, yet now it kind of has. What do you think has changed? Is it just you guys have been -- put such a big incentive out there, or is there some movement, you know, on the consumer's part if the price is good enough they will go ahead and commit to a project?

I think it's probably more of the latter. I mean I think that the consumers, at least my read of it, our read of it, is that the consumers are in better shape. They have paid down a lot of debt. Their lives are a little bit more stable; the unemployment has stopped rising.

Job reports, they bounce around a little bit. There was actually less -- this morning they reported fewer new unemployment claims than they had thought. The consumer confidence rose again. It's still obviously not back where it was, but it rose again and that kind of surprised a couple of people.

So I think you have a consumer that is a little bit more apt to be persuaded, particularly if the pricing is right to go ahead and take on a job. People are staying in their houses I think probably a little bit more than they were. They feel a little better and so they are going to fix up their houses.

So I think that the consumer is starting to be a little bit more receptive. When you put on a good promotional schedule for them or attractive financial kind of package that kind of gets them in and finally gets them to pull the trigger in terms of doing the job.

But my read of it, particularly on the remodel side -- actually both sides, new construction and remodel is it's more the consumer starting to be a little more active. They are starting to be a little bit more optimistic and they are going out there and they are actually going ahead and committing to doing the transaction.

Okay, well that is progress. Does that portend more maybe promotional events from you or maybe your customers going forward, or --?

Well, I think that they are -- like I said previously, I think that there will always be promotions. We have had promotions in the business for -- I have been here almost 18 years and we have had promotions that whole 18 years. It's a question of the level of promotion.

I think when the spring and fall selling seasons you will always get some more activity on the promotional side to help the consumer, help them move along with committing to their project. So again I don't think promotion -- promotional activity is going to go away in the industry. But I do believe as we get forward and this thing starts to get back to more normalized levels that you will get a promotional calendar and a promotional schedule that is more consistent with what we have seen historically.

Great, thanks again. Have a good holiday.

Morris Ajzenman, Griffin Securities.

Quick question. On the current quarter revenues were 3% year-over-year; EPS declined $0.15. You had a loss of $0.37 last year; lost $0.52 this year. Logic would dictate that the 15% incremental loss all came by and large from the incremental promotions, etc.

Is that a fair assessment or there are things we are missing both on the plus and the negative side that would have impacted that number?

Well, Morris, there is a lot of moving parts there but the big change in terms of year-over-year is the impact of the additional promotion expense that hit the P&L.

Okay. And just a little more color on the breakeven level. You say you are about half the levels you were four, four and a half years ago.

Yes.

Without giving us a revenue number, could you just give us an idea of what sort of gross margins you are imputing to get to this breakeven level currently?

You know, we have said over time that we think the business should operate between 21% and 23% gross margins. But we wouldn't need that obviously; we need far less than that to get to a breakeven.

Okay, but you wouldn't willing to say to 12%, 15% or something at this point to help us with that number?

No, not at this point, no.

Okay. Last question; any tax plus carry forwards at this point that are available for us to know?

Well, we got a tax refund this year by carrying back taxes. There is a small amount that we can still carry back regarding the current year loss, but other than that it's going to be carry forwards.

Okay. And that amount?

You know, it's 90% of whatever we lose this year will be a carry forward.

Okay, so that is it. Okay. Thank you.

(Operator Instructions) We have no further questions in queue, sir.

All right. Well, since there is no additional questions this concludes our call. Again, thank you for taking time to participate; speaking on behalf of management of American Woodmark we appreciate your continuing support. Everybody have a Happy Thanksgiving.

And that does conclude today's conference. Thank you for your participation.