American Woodmark Corp (AMWD) 2012 Q2 法說會逐字稿

Good day everyone, and 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 on factors that may 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 call over to Mr. Glenn Eanes, Vice President and Treasurer.

Good morning, ladies and gentlemen, and welcome to this American Woodmark conference call to review our financial results of the second fiscal quarter of 2012 ended October 31. Thank you for taking time to participate.

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

Thank you, Glenn. This morning we released the results of our second quarter of fiscal year 2012 that ended on October 31, 2011. Our earnings release contained the following highlights. Net sales for the second quarter were $128.4 million, representing a 19% increase over the prior year second quarter.

Net loss was $3.0 million, or $0.21 per diluted share compared with a net loss of $7.4 million, or $0.52 per diluted share in the prior year's second quarter. The Company generated positive $1.1 million of free cash flow during the second quarter of fiscal year 2012 compared with positive $5.5 million of free cash flow in the prior year's second quarter.

For the six-month period ended October 31, 2011, net sales were $259.6 million, up 20% over prior year. Net loss was $5.7 million or $0.40 per diluted share. Improved from the net loss of $10.8 million or $0.76 per diluted share in the prior year.

The Company generated positive $3.2 million of free cash flow compared with positive $5.2 million of free cash flow -- positive free cash flow in the prior year. Regarding market conditions and our second quarter sales performance, in our recent calls we provided five assumptions about market activity for our fiscal year that ends on April 30, 2012.

First, job growth would average 200,000 per month. Second, that consumer confidence would continue to slowly improve. Third, that housing starts would approximate 625,000. Fourth, that remodeling market would be neutral to slightly positive. And fifth, that our remodeling customers would experience sales comps in line with the market.

Two of these assumptions have been fairly close but three have not held up very well thus far. Job creation has continued to occur but the pace has slowed. Approximately 710,000 private sector jobs were created in the first six months of our fiscal year, an average of nearly 120,000 per month.

This is a bit less than the preceding 12-months run rate and unfortunately represents only a bit more than half as much job growth as we had assumed. Second, consumer confidence. At the start of our fiscal year in May, consumer sentiment measured by the University of Michigan, had been stable and trending positively, especially last spring when job creation was stronger.

Since that time, job creation has slowed and concerns over the US budget, the European situation, and the potential for a double dip recession has dominated the media. These stories undermined confidence causing the index to drop to its lowest level in 20 years.

Although consumer confidence has rebounded somewhat in the last two months, the index continues to register at levels consistent with recessionary conditions. And, the most recent survey contained the lowest level ever for confidence in our government's economic policies. Housing starts have been directionally in line with our expectation despite the relative lack of consumer confidence.

Total starts have averaged 608,000 for the first six months of our fiscal year. 7% higher than the comparable period of the prior fiscal year. The Wells Fargo housing market index of builders confidence was recently measured at 20, its best level of the calendar year but still far below the 50 that is considered characteristic of a normal market.

The remodeling market, sales reported by members of the kitchen cabinet manufacturers association, were down by approximately 1% for the first six months of the Company's fiscal year. And, that's total sales reported by the members of the association. Since these results include both new construction, which has trended up by mid-single digits, as well as remodeling, it appears that the remodeling component of the market has been down by mid-single digits which is worse than we expected.

Fifth and finally, our largest remodeling customers' results have been mixed with one large customer reporting positive comps in their kitchen sales and one with negative. Collectively, these results appear to be in line with our expectation that our customers would perform slightly better than a remodeling market that continues to be modestly negative.

Recognizing that the remodeling market for cabinets is still not improving, the Company's largest remodeling customers and its competitors have continued to maintain the level of aggressive sales promotions that have persisted for the last year in the form of free product and additional discounts based upon the amount of sale. To maintain this competitiveness, the Company has chosen to set its promotional offerings in line with those of its competitors.

During our second quarter, we finally lapped a prior year comparison that contains a similar level of elevated sales promotion costs. Price conscious consumers continued to respond to these promotions through the beginning of the Company's second quarter, which helped to drive the Company's remodeling sales to grow by double digits compared with the prior year's second quarter results.

The Company's new construction sales improved by more than 20% during the second quarter in a market where total residential housing starts were up by mid-single digits. We had anticipated that the Company's sales growth potential would be stronger in the first half of its fiscal year due to the low sales comps that occurred in the prior year's first half.

But, the Company's strong sales growth of 19% for the second quarter and 20% for the first half exceeded those expectations, evidencing strong market share gains in a market that appears to have been about flat overall. The Company's gross profit margins for the second quarter and first six months of fiscal year 2012 were 12.5% and 13.3% of net sales respectively.

Gross profit margin was up significantly from the prior year's gross profit margin of only 9.1% in the second quarter and 11.2% in the first half. The second quarter's 340-basis-point improvement in gross margin was driven by higher sales volume that led to significant improvements in the Company's labor and overhead costs of more than 400-basis-points compared with the prior year's second quarter.

Elevated material and freight costs partially offset these gains driven by a higher cost for finishing materials, lumber, cartons, imported components, and diesel fuel. Regarding operating expenses, total operating expenses were 16.1% of net sales in the second quarter of fiscal 2012, significantly improved from 20.3% of net sales in the second quarter of the prior fiscal year.

Operating expenses for the six-month period also improved, declining to 16.6% from 19.3% in the prior year. Selling and marketing expenses were 11.3% of net sales in the second quarter of fiscal 2012, improved from 14.7% of net sales in the prior year's second quarter. Sales and marketing expenses improved to 11.7% of net sales during the six-month period compared with 13.8% in the prior year.

Selling and marketing costs decreased by 8% during the second quarter on a sales increase of 19%. Although the breadth of the Company's Fall product launch was in line with both its recent launches and with its internal product release schedule, efficiencies from lower marketing collateral costs were of a magnitude to reduce the overall cost levels.

General and administrative expenses were 4.8% of net sales in both the second quarter and the first half of fiscal year 2012 compared with 5.6% in the prior year's second quarter and 5.5% in the prior year's first six months. Costs related to the Company's incentive compensation program increased slightly in both the second quarter and first six months of the current fiscal year but the remainder of the cost base was flat to slightly down, generating favorable leverage in relation to the sales increase.

Regarding capital spending and cash flows, the Company's total outflow for capital expenditures and promotional displays deployed during the second quarter of fiscal 2012 was $2.6 million, up from $1.6 million in the prior year's second quarter. Total capital outflows for the first half of fiscal year 2012 were $4.6 million compared with $3.9 million in the first half of the prior fiscal year.

These increases were driven by machinery enhancements to bolster efficiencies. The Company expects that its investment in capital expenditures and promotional displays will approximate $10 million during the fiscal year 2012, up from $8.4 million in the prior fiscal year. The Company generated operating cash flow of $3.7 million during its second quarter of fiscal year 2012 compared with $5.6 million in the second quarter of its prior fiscal year.

The Company generated free cash flow, defined as operating cash flow net of cash used for investing activities, of positive $1.1 million during its second quarter of fiscal 2012, compared with positive $5.5 million in the second quarter of its prior fiscal year. The Company's prior year free cash flow included the benefit of two large positive items.

The first was an incremental $7 million in tax refunds received, and the second was proceeds from the sale of a previously closed manufacturing facility of $1.5 million. Excluding these two items the prior year's second quarter free cash flow would have been negative $3 million or $4.1 million less than the positive $1.1 million of free cash flow that was generated in the present year's second quarter.

The current year's $4.1 million improvement was driven primarily by the $4.4 million reduction in the Company's second quarter net loss compared with one year ago. The Company continues to -- expects to continue to fund its capital spending from a combination of operating cash flow and existing cash on hand. The Company's financial position remains outstanding.

The Company ended the quarter with a total of $71.5 million in cash, cash equivalents, and restricted cash on hand compared with long-term debt of $24.3 million. Debt to capital was 14.0% at October 31, 2011. In closing, we continue to manage the business with a primary objective of creating long-term value for our shareholders.

We have chosen to continue to invest in a number of initiatives including improving the quality and breadth of the Company's products and services in elevated promotional activities to remain inline with competitors' offerings to drive market share gains despite challenging market conditions. And, expanding channels of distribution that we have not previously emphasized, and in maintaining the capability for significant amount of future growth when market conditions improve.

Management remains focused on maintaining the strength of its industry leading balance sheet despite experiencing net losses the Company has operated at near break even free cash flow levels for nine consecutive quarters and generated positive free cash flow in both fiscal year 2011 and the first two quarters of fiscal year 2012.

The Company's second quarter sales increase marked the sixth consecutive quarter of year over year sales growth, the first time this has happened in five years. However, the uncertainty over the financial condition of many nations, including our own, has adversely impacted consumer confidence and caused market conditions to become increasingly difficult to predict.

We continue to expect that market activity will eventually return to its historical norms of between 1.25 million to 1.4 million new households 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 lower home prices, availability of credit, and because they simply lack confidence.

If changes in the economic and political climate can help to enable consumer confidence to recover to the levels that were maintained last spring we believe that housing starts may still achieve the 10% growth that we originally predicted for our fiscal year. Remodeling order rates have tailed off during the last two months and market conditions in this channel suggest a weaker second half as compared with the first half of the Company's fiscal year 2012.

Although the Company has been able to grow sales by 20% during the first half of its fiscal year, the combination of weaker incoming order rates plus tougher second-half comps suggest that second-half sales growth will be much more modest.

The Company continues to expect that its free cash flow may decline during fiscal year 2012 compared with prior year driven by a decline in the amount of income tax refunds and the expanded working capital requirements and capital expenditures associated with the sales growth that has already been experienced. This concludes our prepared remarks. We would be happy to answer any questions you have at this time.

Thank you. (Operator Instructions) Sam Darkatsh, Raymond James.

Sequential gross margins, Jon, the volumes, sequentially, were roughly the same in terms of overall sales dollars but your gross margins were off about 150 basis points. You talked about the year-on-year impacts, but can you talk about what the drivers of that were sequentially?

Yes, Sam, there's really a couple of items in there. You've got some material cost inflation which is continuing to slowly impact adversely the results. You've got diesel fuel, which remains elevated. The third item was just timing.

So, how should we look at gross margins then over the near term?

We're not guiding on that, but our expectation would be that the way we operate in the second quarter is probably representative, assuming a similar sales volume.

Okay. And, that leads to my next question then. Incremental margins here, all else equal, from a price and raw materials standpoint, which you can't always see, obviously, but from a volume leverage standpoint what should we look at from an incremental contribution margin standpoint for the Company?

I think that if you look at the second quarter of -- that we just reported versus prior year, those were the first two quarters that had a like for like promotional environment, really, in the last year. If you look at the incremental contribution margin there I think that's probably not too far off.

So, the mid-30% range on the operating line would be applicable?

I think we had a little bit less than that incrementally, year-on-year in the second quarter. I think it was closer to 30%. So, I think that, in that vicinity, you're probably not too far off if you're modeling it.

Last question, then I'll defer to others. The receivables being up 3% year-on-year, I believe, with sales up 20%, was that reflective of -- you said business was tailing off the last couple months of the quarter. Is that reflective of that, or from a collection standpoint, or how should we look at that?

Sam, I think it's really just timing. Our collection efforts are really the same as they've been. Our customers are extremely compliant with our collection calls and collection efforts. And, we've got a good set of customers. So, I think it's -- I wouldn't read too much into it either way. It's favorable trend but we tend to run roughly this rate.

Thank you, very much.

Thank you. Robert Kelly, Sidoti & Company.

Gentlemen, good morning. Had a question on -- you talked about the incoming order rates towards the end of the quarter had tailed off for the remodeling market. But, you also talked about your new construction market being up over 20% year-on-year during the quarter. Is that latter rate of growth also trending down, or are you seeing something sustainable there?

By latter, you mean discount in the new construction side?

The new construction side.

Yes, the new construction side, has it both ways. It's going to continue, I think, on a year-over-year basis for probably another quarter. Last year we were really on the back side, serious back side of the housing credit in the spring. So, the fall into the winter building rates in calendar 2010 were extremely low. So, we've got some low comps. I think we're going to continue, certainly through our third quarter. Once we get to our fiscal fourth quarter you start to get tougher comps. So, I think that continues to be the case. On a sequential basis run rate, the new construction side has actually held up pretty well, even on a run rate basis. As Jon mentioned, there is some building activity out there. It is up slightly from what it was a year ago.

With a little bit of help, if we can get any, we think that we'll actually see close to 10% increase in our fiscal year on a year-over-year basis in terms of starts. Of course, as we've mentioned for several calls, we've gained quite a bit of share we believe on the new construction side. So, both on a year-over-year basis and a sequential basis our new construction activity has held up pretty well.

Okay, great. And then, just as far as the promotional activity within the big box channel, I believe during 1Q you talked about gross margins, you incurred a 200-basis-point drag. Is that a similar type of drag in 2Q compared to the year prior period, or does that start to level off? I'm just trying to parse out how much promotions are hurting the gross margin or suppressing the improvement that you are showing with all the volume coming through.

I think suppressing the improvement is probably the better way to look at it because we're driving sales through those promotions. And, obviously that's benefiting margins to have the increased volume. I think, Bob, that we finally lapped, as I said, a comparable promotional environment in last year's seconds quarter. That was the start of an unprecedented rise for us. I think that this year versus last year it was just about like for like. It was a little bit higher seasonally than the first quarter but not much, it was pretty close.

Okay, fair enough. During the quarter just ended, you all moved, or the Board moved to eliminate the dividend. Was that just due to the nominal size of the dividend, or what was the thought process there? This is your first chance to publicly comment on it.

It wasn't so much the nominal size of the dividend, although at the current price, the yield, relative to other yields in the marketplace, wasn't bad. No, it was more of an analysis and an ongoing -- results of an ongoing discussion that the Board has every quarter related to the dividend and the future outlook. Really, with everything that's going on in the world, whether it's the euro zone, whether it's what's happened here at home particularly as it relates to the budget, the not raising the ceiling. And, quite frankly not a surprise that the super committee didn't come out with much. And what hasn't hit the papers, there are things going on in the Far East too. China has got some problems with inflation and banking problems, and some other types of things. The Board, as it does every quarter, looks forward and wanted the flexibility that having, quite frankly, just some additional cash or avoiding the cash outflow, that it would it provide us with some flexibility going forward in a pretty uncertain environment.

Fair enough. Thanks, guys.

Thank you. Peter Lisnic, Robert W. Baird.

Good morning, gentlemen. First question, if I look at the selling and marketing run rate, it's come down relatively substantially, somewhere around 12% year to date versus 13.5% last year. Are we trending back toward that, call it '09 level, of 11%, as we look forward into the back half of this year, and really, more importantly, fiscal '13?

Pete, we're just getting some pretty good leverage on healthy sales increases, is really the best way to look at that. If anything, we are continuing to ramp up some business development activities while at the same time looking for efficiencies in others.

Okay. But is there a way that we could look at that number going forward on a structural basis? Again, you're running closer to 12%. Last couple years it's been more 13.5% to 14%. Previously you were in the 9% to 11% range, I think, if you look back in history. I was just wondering where the selling and marketing might shake out as you look forward to couple years from today?

Yes, I mean, that -- it really isn't related, although there are some puts and takes on the cost side. In Jon's remarks he mentioned, for example, that the product launch we did this fall was a strong product launch for us. But, it didn't have as many costs related to it. It was just the nature of what was in the launch. So, there is some things on the cost side. But, when you see it go from the 9% up to the 13% and start to back down, it really is all sales volume and leverage on fixed costs. And, so as you think about those costs going forward, the level of the absolute dollar level of expenditure is pretty consistent. And, what moves the thing around from your perspective in terms of the percentage is really the top line. So, the way those costs are going to move going forward, as a percentage of sales, depends on your sales projection not so much on your spending projection.

Okay, got it. That's very helpful. And then, just a question again on the pricing or promotional environment. Sounds like it's plateaued, if you will, year-over-year comps, basically flattened out. Just wondering what the forward look looks like in terms of what you're hearing out of your customers? At would point do, for the lack of a better term, does pricing discipline get better in the industry where there isn't as much promotional spend going on?

Yes, I think I alluded to it in the last quarter's call as well, is that we are hearing in the marketplace that people are starting to slowly come to the thought process, the conclusion that we're in an inelastic area of the demand curve. And, that priming the pump more from here on doesn't really get anybody any volume. And, in fact, we may be over promoting now in terms of some of the additional tiers of promotion not yielding additional revenue for the industry. I'm not talking the about for an individual company at this point about moving share around. But, as an industry, whether it's our customers or the manufacturing side of it, as an industry, we're at promotional levels where we're probably putting more on the table than we need to in relation to the volume that we're generating.

So, I continue to -- we continue to hear that kind of conversation. We have not seen it really take hold in the marketplace yet in terms of the actual promotional activity. There have been a couple of movements during the fall selling season where people did, in fact, back off a little bit. I don't know -- Jon mentioned that certainly the back half of the quarter on the remodel side was not as strong as we would have liked or expected. Whether that's related to backing off a little bit or not, I don't know. Only time will tell going forward. But, basically generally speaking, I think we're still kind of -- I think Joel referred to it a couple of quarters ago as the new normal. That conversation continues to exist about backing off, both our customers in the industry but quite frankly we haven't seen it take hold yet in the marketplace.

Okay. That is helpful have as usual. Thank you, and have a Happy Thanksgiving with your families.

Same to you, Pete, thanks.

(Operator Instructions) Joel Havard, Hilliard Lyons.

Thank you, good morning, everybody. Kent, I wonder if there's a sense on your part where maybe product is moving. It's a fuzzy question, but is -- relative to, quote, the old normal, more of a trading down by the consumer, or are you seeing a little move the other direction? Is there something going on that's different than has historically been the case?

No, not so much. History, as you know we've been in this now for quite a bit, it's almost the trend we've seen over the last two years, one to two years, is it's almost a bipolar kind of thing. The product range or the price points that are probably, quite frankly, suffered the most are the mid-range price points in our line. That doesn't necessarily mean mid-price in the industry. It depends on how you want to think about custom and real top end stuff. But, the things we've seen, particularly on the builders side, which drives a lot of the mix is at the OPP levels, either the OPP or the first upgrade. And, the remodel side, there's a little bit of that, but it's also high end. It's almost like the consumers that are out there doing kitchens are people that are in good financial shape, they've got confidence, and they really want to put in a top-end kitchen. So, not only are we seeing it in that price point, but we're also seeing those kitchens with a lot of options. A lot of interior organization, a lot of molding buildups, a lot of premium finishes, those type of things.

So, really over the last couple of years what's suffered is that middle. They've either gone, particularly on the new construction side, down towards the more opening price points. But, on the remodel side, quite frankly, the consumers that are actually out there doing business are moving up in our price points. Some of that may be aided by the promotional levels, but we really are seeing that. We've seen it now for probably a couple of years, and I would say that's still where we are.

That's very interesting. One other question. This may be for either of you. The CapEx comment you made a minute ago, Jon, the promotional display expenditure went down pretty dramatically last fiscal year. Is your comment suggesting that we get back more interest that $8 million, $9 million a year, or is there a midpoint that makes sense given where the retail environment is today?

Well, Joel, I think that our CapEx is driven more by actual CapEx in the factories as opposed to the displays being deployed. You don't have as many stores. Quite frankly, there's really no stores being opened right now. So, when you're deploying them on the remodel side, it's mostly to refurbish or to open a new storefront here or there. But, to a limited extent. It's more CapEx in the factories that are driving our increase right now.

Well, now, that's just the opposite of what I expected. I presumed factory expenditures would be fairly flat relative to fiscal '11 going forward. Clearly there's no brick and mortar needs. So, where are you trying to de-bottleneck, or whatever the goal is, plant-wise? Equipment-wise I should say.

There's opportunities for a lot of efficiencies, and we've been cautious in terms of investment in the plants the last couple years because of the environment. We grew sales at a double-digit rate last year. We're up by 20% in the first half this year. Quite frankly, as volume is going up there's some needs that are surfacing that we're just satisfying.

Fair enough, guys, thanks. Good luck. Enjoy the holidays.

You, too, thanks.

Thank you. Keith Johnson, Morgan Keegan.

Good morning.

Good morning.

Just a quick question on your comments regarding some of the remodeling trends slowing down the last couple months. First, did that continue into where we are now in November? And then, I guess secondly, how does that compare from -- just thinking about things seasonally, typically the third quarter, last year was a little bit different, but the third quarter is generally a sequential decline in revenue. Are you seeing it at a faster pace than what you would normally think from a seasonal standpoint, or is it something different going on?

Well, certainly, as Jon mentioned in the quarter, and there's the lag, because generally speaking in our second quarter, we build backlog. That's the fall promotional and selling season. So, we build backlog, then that shifts in the early part of our fiscal third quarter. When you get to the back end of our third quarter is when you've got the December and early January order rates which obviously have a tendency to be pretty low. As it relates to your conversation about what's happened since the end of the quarter, it's difficult to tell. The other thing that's kind of an outcome of this promotional environment, particularly the extreme promotional environment that we've been in, is that orders have a tendency to be concentrated around the close-out dates of those promotions. There's a sense of urgency that's created in both the designer and the store and the consumer. So, we have a tendency to really drive large pieces of volume around those close-out dates.

Since the end of the quarter, our quarter at the end of October, we haven't had a close-out date. The next one is actually next week, the week after Thanksgiving. So, we're not quite sure in terms of the quote logs what's built into the stores, what's out, and what's going to get driven through the final order process as that promotion closes out. My sense is, in just being out in the field, talking to our sales people, being in the stores, is that it hasn't improved from October. I'm not sure it's gotten a lot worse. We do expect on the close-out that we'll get the normal flurry of activity. And, then we'll be able, at the end of next week, to really take a look at what November was like. But, I certainly don't have a sense that November reversed what we saw in September and October. I'm not sure it got much worse. But, I certainly don't have a sense that it got much better.

Okay. Based on your comments earlier on expectations, the new construction market and the remodeling market, is there a way that could you give us a little color around what you think your annual revenue would look like in fiscal '12 versus fiscal '11?

Keith, we haven't specifically guided, but the fact that we're up 20% in the first half argues for a strong finish. Unfortunately, we think that sales growth in the second half is going to be tough to come by, given the market conditions that we're describing.

Okay great, thanks a lot.

Thank you. And, with that, we have no further questions. I would like to turn it back over to the speakers for any additional or closing comments.

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

That does conclude today's call. Thank you for your participation.