American Woodmark Corp (AMWD) 2012 Q3 法說會逐字稿

Good day, everyone, and welcome to the American Woodmark Corporation conference call. Today's call is being recorded. The Company has asked us to read the following Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

All forward-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 call over to Glenn Eanes, Vice President and Treasurer. Go ahead, sir.

Thank you. Good morning, ladies and gentlemen. Welcome to this American Woodmark conference call to review the results of our third fiscal quarter of 2012 ending January 31, 2012. Thanks 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 a review of the quarter and the year, concluding with an outlook on the future. After Jon's comments, Kent and Jon will be happy to answer your questions. Jon?

Thank you, Glenn.

This morning we released the results of our third quarter of fiscal year 2012 that ended on January 31, 2012. Our earnings release contain the following highlights. Net sales for the third quarter were $120 million, representing an 8% increase over the prior year's third quarter. Net loss excluding restructuring charges was $2.8 million or $0.19 per diluted share compared with a net loss of $5.8 million or $0.41 per diluted share in the prior year's third quarter. The Company generated positive $2.6 million of free cash flow during the third quarter of fiscal year 2012 compared with negative $1.8 million of free cash flow in the prior year's third quarter.

For the nine-month period ended January 31, 2012, net sales were $379.6 million up 16% over prior year. Net loss excluding restructuring charges was $8.5 million or $0.59 per diluted share compared with a net loss of $16.6 million or $1.17 per diluted share in the prior year. The Company generated positive $5.8 million of free cash flow compared with positive $3.4 million in the prior year.

Last December, we announced several restructuring actions to reduce the Company's manufacturing capacity and cost structure. These actions include permanently closing two manufacturing plants and placing a previously closed plant up for sale and realigning its retirement program. These actions are targeted for completion by the end of the Company's fiscal year on April 30 of this year. The Company's results for the three- and nine-month periods ended January 31, 2012 included restructuring charges related to these initiatives with a net of tax impact of $6.3 million or $0.44 per diluted share. Including these charges, the Company's results for the third quarter of fiscal 2012 were a net loss of $9.1 million or $0.63 per diluted share, and for the first nine months of fiscal 2012 were a net loss of $14.8 million or $1.03 per diluted share.

During our previous calls, we have provided five assumptions on which we have compared established assumptions for the current fiscal year. First and foremost, housing starts, which we expected would reach a total of 625,000 for the fiscal year and in fact, the market has improved. And so the housing starts for the first nine months of the fiscal year reached a level of 632,000.

Secondly, in general, the market has improved a bit better than we thought in new construction starts. However, with regard to total market conditions, the net sales overall for the industry reported by the Kitchen Cabinet Manufacturers Association, were flat for the first eight months of the Company's fiscal year. This of course included the improvement in new construction starts, which aggregated approximately 12% compared to last year during the Company's first nine months of the fiscal year, indicating that remodeling sales were down. Overall, the Company -- this was less than the Company's expectation of a market which would begin to slightly improve.

In addition, consumer confidence which has improved to a level of 75 reported by the University of Michigan, compared with 70 at the start of the Company's fiscal year, has been a rocky road. We started the year by diving to 20-year lows because of the sovereign debt crisis which occurred last summer, but the job growth which has occurred during the last three months, which has averaged in the private sector over 200,000 jobs per month, has driven consumer confidence back to levels which were commensurate with where we started the fiscal year. So overall it has not been the slow and steady improvement that we envisioned, but still, consumer confidence has returned to a level that is acceptable at this point and pointing higher.

The Company's remodeling customers were expected to experience comps that were better than the market. In fact, what has happened is that one of the Company's large customers has improved to consumer -- to remodeling sales levels that have improved to levels better than the market, while one has not. So overall sort of a mixed performance in remodeling, but a better performance than -- slightly better performance than expected in new construction starts.

Recognizing that the remodeling market for cabinet is still not improving, the Company's largest remodeling customers and its competitors have continued to maintain the elevated level of sales promotions that have persisted for the last 15 months in the form of free products and additional discounts based upon the amount of sale. To maintain its market share, the Company has eased its promotional offerings somewhat compared with the prior year with the goal of continuing to be competitive and generally less extreme than some of its competitors.

During the Company's third quarter, we lapped a period with higher prior-year comparative remodeling sales, and the Company's third-quarter remodeling sales were lower than prior year by mid-single digits, roughly in line with the market. However, the Company's new construction sales exceeded its expectations and improved by more than 30% during the third quarter. Year-to-date the Company's increase in new construction sales has more than doubled the market's 12% increase in total housing starts.

The Company's gross profit margin for the third quarter and first nine months of fiscal year 2012 were 12.2% and 12.9% of net sales respectively. Gross profit margin was favorable to the prior year's third-quarter gross profit margin of 10.9% and 11.1% in the prior year's first nine months. The third quarter's 130 basis point improvement in gross margin was driven by higher sales volume that led to improvements in the Company's labor and overhead cost compared with the prior year's third quarter. Elevated material and freight costs partially offset these gains driven by a higher costs for lumber, finishing materials, imported components, and diesel fuel.

The Company's operating expenses were 16.6% of net sales in both the third quarter and nine-month periods of fiscal 2012, significantly improved from 19.3% of net sales in both the third quarter and nine-month periods of the prior fiscal year. Selling and marketing expenses were 11.4% of net sales in the third quarter of fiscal 2012, improved from 14.4% of net sales in the prior year's third quarter. Sales and marketing expenses improved to 11.6% of net sales during the nine-month period compared with 14% in the prior year. Selling and marketing costs decreased by 15% in the third quarter on a sales increase of 8%. Although the breath of the Company's recent product launches have been in line with those of prior year, efficiencies from lower marketing collateral costs, as well as reductions in branding costs, have driven significant efficiencies.

General and administrative expenses were 5.2% of net sales in the third quarter of fiscal year 2012 compared with 4.9% in the prior year's third quarter. G&A expenses were 5% of net sales for the nine month period compared with 5.3% in the prior year's first nine months. Costs related to the Company's incentive compensation program increased slightly in both the third quarter and the first nine months of the current fiscal year, but the remainder of the cost base was flat to slightly down.

During December, the Company announced several initiatives designed to reduce its manufacturing capacity and its cost base. To this end, two of its manufacturing plants will be permanently closed and one previously closed plant has been put up for sale. The Company also announced it will realign its retirement program by freezing its pension plans and enhancing its 401K match and profit sharing plan by the end of the fiscal year. Management made these difficult decisions based upon its assessment of current and expected conditions in the housing market for the foreseeable future. Management believes that subsequent to these actions, the Company will continue to have ample production capacity to participate in the housing market's eventual and inevitable recovery. As a rough guide, management estimates that the Company's remaining hard manufacturing capacity will be able to service approximately 50% growth in its sales volume without having to make significant capital additions.

In connection with these actions, the Company recognized restructuring charges of $10.3 million in the third quarter of fiscal 2012, offset by an income tax benefit of $4 million. The restructuring charges consisted principally of severance and separation costs, inventory write-downs, and write offs of property and equipment. The Company expects that additional pretax restructuring costs of approximately $5 million will be incurred related to these initiatives, the vast majority of those costs being incurred during the fourth quarter of fiscal year 2012. Once these initiatives have been completed, the Company estimates that savings of approximately $18 million per year will be realized.

Regarding the Company's capital spending and cash flows, the Company's total outflow for capital expenditures and promotional displays deployed during the third quarter of fiscal 2012 was $2.9 million, up from $1.9 million in the prior year's third quarter. Total capital outflows for the first nine months of fiscal 2012 were $7.6 million compared with $5.8 million in the comparable period of the prior fiscal year. These increases were driven by machinery enhancements to facilitate the two upcoming plant closures. The Company expects that its investment in capital expenditures and promotional displays will approximate $10 million during fiscal year 2012, up from $8.4 million in the prior fiscal year.

The Company generated operating cash flow of $5.5 million during its third quarter of fiscal year 2012 compared with $0.1 million in the third quarter of its prior fiscal year. This improvement was driven by improvements in the timing of receipts and disbursements and by the reduction of the Company's operating loss. The Company generated free cash flow, defined as operating cash flow net of cash used for investing activities, of positive $2.6 million during its third quarter of fiscal year 2012 compared with negative $1.8 million in the third quarter of its prior fiscal year.

Year-to-date, the company has generated positive free cash flow of $5.8 million compared with positive free cash flow of $3.4 million in the prior year. The net increase of $2.4 million is over a comparable prior year period that included the beneficial impact of proceeds from a building sale and a more favorable income tax refund that collectively improved prior year results by $8.5 million. Excluding these two items, the Company's year-to-date free cash flow has improved by $10.9 million. The Company expects to continue to fund its capital spending from a combination of operating cash flow and existing cash on hand.

Regarding the Company's balance sheet, the Company's financial position remains outstanding. The Company ended the quarter with a total of $73.6 million cash, cash equivalents, and restricted cash on hand, compared with long-term debt of $23.9 million. Debt to capital was 15.1% at January 31, 2012.

In closing, we continue to manage the business with the objective of delivering a superior customer experience, which in turn delivers 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 competitive with competitors' offerings to sustain market share gains despite challenging market conditions, in expanding channels of distribution that we have not previously emphasized, and in maintaining a reduced but still significant capability for future growth as 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 breakeven cash flow levels for 10 consecutive quarters and generated positive free cash flow in both fiscal year 2011 and the first three quarters of fiscal year 2012. The Company's third-quarter sales increase marked the seventh consecutive quarter of year-over-year sales growth, the first time this has happened in five years. However, consumer confidence and market conditions remain uncertain and difficult to predict. We continue to expect that market activity will eventually return to its historical norms of 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 remain unwilling or unable to make large ticket purchases because of lower home prices, availability of credit, or because they simply lack confidence.

Market conditions have been changing. Instead of a market that is flat to down in both the remodeling and new construction segments, we now have a new construction market where starts have experienced year-over-year increases in seven of the last eight months, coupled with growing builder optimism. The coming months will tell us if this optimism is warranted or perhaps influenced by unusually warm winter that has helped to increase sales activity above an unusually low prior years sales baseline. Against this backdrop, the Company has been able to grow both its remodeling and its new construction sales at a double-digit rate for the first nine months of its fiscal year, although the level of remodeling growth did decelerate in the third quarter as expected.

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

(Operator Instructions) Our first question from Sam Darkatsh with Raymond James.

Couple questions. First off, you mentioned easing off on the promotional activities somewhat during the quarter. Was that tactical with respect to just the quarter or is that going to be a bit of a strategy for you over the coming quarters?

Yes, from a tactical standpoint, as we have all along, we kind of pick our spots when we want to run and when we don't want to run. More I think of what Jon was referring to is we have seen some indication in the marketplace, in the competitive marketplace, of an easing of the level of promotions, so it's not where it was. The big hike was about a year and half ago. It was really a year ago last Fall, the Fall of 2010 was when we saw the last big jump. We are not back in the marketplace below where we were before that jump in late 2010, but what we did see when we went through the Fall is we did see lower levels than the peak the year previous.

We continue to pick our spots and when we do go in, we have seen in the competitive set that people have eased off a little bit. When you come off these high promotional periods, it is a little bit problematic. It is not as smooth lying down. But we are starting to see, we believe, some indications in the marketplace that all the way through the this distribution chain not only the manufacturers but also the retailers are trying to ease back a little bit. Of course the $64 question is, where is the breakpoint where you don't get a consumer in? We do have a consumer that is pretty accustomed to incentives, so as we have talked about on previous calls, I don't see them going away. But we are encouraged by the fact that at least through the Fall and now early into calendar 2012, we have seen some indications in the marketplace that the level of promotions is easing.

I was surprised based on that, Jon, in your commentary with respect to what the drivers were on gross margin on a year on year, it wasn't reduced promotional spend unless that falls on a different line item from the accounting standpoint, that it was more volume based. Am I reading too much into it or was the promotional spend eaten up somewhere else?

It was a little bit in gross margin, a little bit in operating expenses.

Okay, got it. Next question. This morning, Home Depot reported and I mentioned that their kitchen business comped positively. Your remodeling activity is down on a year-on-year basis. Was that a mix between the two major retailers, or is that related to the promotional activity being eased off? I am talking the gap between what you guys saw and what they reported on an overall segment or category basis.

Sam, our remodeling activity I think probably mirrors that of our customers. I think that we did, in line with their performance for the quarter.

I understand. The last thing, the 30% plus growth in the new home construction segment is fantastic obviously, and it's been real good the last few quarters for you all. I know you mentioned this, you mentioned this during your prepared remarks, but is there any way to figure out how much of that was with driven by the weather in the quarter being so benign, that a lot of the builders were able to get jobs done in a period of time when they don't normally do that? Or was it more pure start based demand from a quarter or two back?

Well, Sam, there's a couple things. One of them is, we still actually through early February, but for certainly all of our third quarter, number one is, we have talked about in the last couple of calls, the comps on a prior-year basis are extremely low. There was very, very little builder activity in the fourth calendar quarter of 2010 and even going into January and early February of 2011. So a lot of those increases are -- those kinds of numbers, 30%, are really coming from the fact that there was not a lot of activity in the marketplace, new construction marketplace a year ago.

Having said that, our order rates have held up. There's a little bit that is related to the construction activity, although the winter, particularly the January number that Jon referred to, which jumped up to almost 700 on an annualized basis, we would not have seen activity from that. We are 60 days, 50 to 60 days into the build cycle. So the warm weather for us really did not impact our third quarter. Again what we will have to see is what that does to us as we get into the fourth quarter. Our comps are going to get more difficult as we get into March and April, although our activity in January was actually above what it was in March or April last year on a little bit of tougher comps.

So, is some of that related to the weather? It's probably too early to tell, particularly related to January. We would not have seen that in our impact anyway. So to me the bigger question is whether or not the activity holds up through May in terms of new construction activity. Do we stay in that close to 700 range plus or minus, which is a little bit better than what we have been running and most people have been forecasting?

So the inference then would be you believe you gained share in the builder channel in the quarter then?

That's correct.

Thank you both, I appreciate it.

Next we'll go to Jarrod Rapalje with Longbow Research.

Just following up on share gains in the builder channel, are those kind of a one-time initial bump or do you see a runway of penetration where those are going to continue to be able to expand over the next -- over the coming 12 months?

Our share gain I think has come from two different areas. The first one is, we have been fortunate enough to identify and partner with builders who are gaining share in the builder market. So to some degree, we are getting advantage of their efforts that our partners happen to be in geographic locations that are doing better than some of the other ones, and also they happen to be customers that are gaining share. So we are kind of going along with them.

It also comes in some customers, we have penetrated additional share. So as we've talked about for a while, we think we can continue to outperform the market as it relates to growth, activity and growth. But what we all need is, we all need just higher builder activities. At some point, our share gains are in fact going to stall out here until we get some real lift from the market. So whatever the market is, we think we'll get a little bit more over the coming period, but to get the real kind of big increases that everybody is anticipating when the market comes back, it really does require that overall activity to increase.

Okay. The last quarter you guys talked about orders that tailed off near the end of the quarter. Was that -- I'm assuming that was within the remodel portion of the business. Did you see similar trends carry through by month as they were kind of down mid-single digits through January? And then, have you seen that change at all here in February?

I think orders were pretty steady throughout the quarter, as Kent alluded, at new construction, they were particularly strong compared to seasonally historical experience during the quarter, and that's continued so far into February. On the remodeling side, I think we had a traditional cycle where you are low in December just because of seasonality, January spikes back up with close-outs of promotions at the home centers. I'd say that activity so far for the beginning of February has been in line with what we would have expected.

Last question, just on -- with the dividend being cut recently, what is your view on how long it takes to reinstitute the dividend to the extent you guys see free cash flow -- positive free cash flow this year and then maybe at the beginning of next year? Do you guys consider that or is that more of a longer term until the recovery starts to gain hold?

From the dividend standpoint, it is probably more of a longer term thing for us to consider. When we did that, if you recall, part of what we talked about at the time was, until we get a better sense for the stability -- recovery and stability of the marketplace, when we get to the point where we feel we have some excess cash in light of our kind of view of where the world is headed, that we would buy back stocks, given obviously an attractive price. But for the next period of time, that is probably to the extent that we would come to the conclusion we have excess cash, we'd put it into our buyback program as opposed to restarting the dividend program.

(Operator Instructions) Next we will go to Josh Chan with Robert W. Baird.

Filling in today for Pete today. A number of cabinet manufacturers including yourselves have continued to trim back on capacity even as demand, as you alluded, has sort of bottomed. Where do you think the industry capacity stands right now relative to where it should be and the ability to pull back on some of the promotions?

There's a lot in that question. Let me start by saying that the action that we took -- it reduced our excess capacity, so we still, certainly on a brick and mortar basis, crewing is a separate issue, but on a brick-and-mortar basis, we still have an ability to probably increase our output by 50%. We had been carrying capacity that was almost an ability to double our output. So what we really did was we trimmed excess capacity. Part of it was to get rid of the capacity and, quite frankly, part of it because of the efficiency gains we have made. Even in a recovered market we don't need as much hard capacity, plant footprint to get the same output. So we have plenty of running room from a hard capacity.

I believe, although it's difficult in a relatively fragmented industry like cabinets, I believe that is generally the case out there particularly with our major competitors. They have also trimmed excess capacity, but they have upside potential. So unless you can come up with a scenario that takes us back to the million, 4 million, 5 million start level in a very short period of time, 12, 18, 24 months, I think that the industry as a whole has an ability to support both the remodel and new construction through any type of industry recover other than a real quick bounce back to kind of a normalized level. So I think the industry in is in pretty good shape from a capacity standpoint.

Okay, great. And then relative to the cost savings, some of the actions you announced in December, were there any benefits realized in the third quarter? Or would those mainly be realized after April?

Those are really going to be realized after April, Josh, because what we are doing very hard right now is working toward reaching to executing on all those initiatives that we laid out for ourselves. We have got a pretty full plate to digest, but I think once you look beyond April, that is when you really see the savings start to bear fruit.

Okay, great

Next we will go to Robert Kelly with Sidoti.

Is there a margin or mixed differential between the builder and remodel channel?

It's pretty subtle, Bob, because you have a higher -- a richer mix on the remodeling side. So when people remodel, they tend to go for a bit of a higher priced cabinet, but then again the cost of selling the retail channel are higher. On the builder or new construction site, it tends to be a little bit lower take per unit. But then again your costs on the back end are a lot lower too. So they are pretty nuanced and pretty close.

Okay. Following on the last question from the previous caller, the cost cuts you implemented mid-December did not have a tremendous impact on the quarter just ended. When do we start to see the benefits seep into your results? Is it mid-year F13? Is it fourth quarter F12?

I think, Bob, realistically it's not going to be until first quarter of '13. So the quarter that will start the May 1 and end July 31 is when you'll begin to see the benefits there.

Okay. I might have missed this at the beginning of your prepared remarks. You usually talk about market outlook. What are you seeing as far as cabinet market and then starts and remodel spending, whatever metrics you use for calendar '12.

For calendar '12, we tend to give our updated guidance on that with our next call, which ends the fiscal year. So on this call what we did was really just sort of update the remainder of our fiscal year that ends April of '12. And we've got some thoughts on that, but I think we need to finalize those before we actually come forward with those.

(Operator Instructions) Next we will go to Keith Johnson with Morgan Keegan.

I just have a couple of quick follow-ups, maybe first on the call savings. How should we look at that, kind of split between the operating expenses and you mentioned you did some work on some of the retirement plans and then versus cost of goods sold as we go forward?

You will see it in both places, Keith. The pension changes will help on both operating expenses and gross margin, but obviously the plant closing initiatives will be almost entirely gross margins. So I think you will see more of it there, but you will see it in both places.

And then you made a couple comments on doing better within the new construction space, working with builders that have taken some share. What about from a geography standpoint, is there any color you can give us as far as where you're seeing some of those better trends?

Yes, we actually -- in the Southwest, we are finally starting to see some life in the Southwest, which is probably a little bit different. So that's probably I would say the leading headline is, we have not seen any life out of for example, Phoenix and Vegas, Tucson, even into Southern California. We have not life in there probably in four or five years, and we are starting -- it's certainly not back to where it was, but we're certainly starting to see some there. The other places, we've seen some pickup in the Southeast as well, really kind of from Carolinas maybe as far as North as you want to go. But certainly you get down through Atlanta and into some parts of Florida, you starting to see some more there. Texas has held up pretty well through the entire downturn. So activity there is good, although I wouldn't say that's different from what it has been.

If there is a weak area that we have seen in the last 90, maybe 120 days, it is probably in Northeast, Mid-Atlantic to the Northeast. But certainly the Southwest from the Southeast which has been extremely depressed for the last four or five years, we are starting to see some -- a real pickup in activity there.

Great. One final question, just a point of clarification. I think Jon mentioned that there was a tax benefit. Was that all rolled within the restructuring line, is the way you presented it?

Yes.

(Operator Instructions) It looks like we have no further question at this time, so I'd like to turn it back to our speakers for additional or closing remarks.

Since there are no additional questions, this concludes our call. Thank you again 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.

And that does conclude today's conference. We thank everyone for their participation.