American Woodmark Corp (AMWD) 2013 Q1 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 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. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to this American Woodmark conference call to review the results of our first fiscal quarter, which ended July 31, 2012. Thank you for taking time to participate. Participating on the call today from American Woodmark Corporation 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 concluding with an outlook on the year. After Jon's comment, Kent and Jon will be happy to answer any of your questions. Thank you. Jon?

Thanks, Glenn. This morning, we released the results of our first quarter ended July 31, 2012, of our fiscal year 2013 that will end on April 30, 2013. Our earnings release contained the following highlights -- net sales for the first quarter were $148.3 million, representing an increase of 13% over the prior year's first quarter. Net income excluding restructuring charges was $1 million, or $0.07 per diluted share. These results compared favorably to the prior year's first-quarter net loss of $2.7 million, or $0.19 per diluted share, which included an immaterial amount of restructuring charges. Exclusive of restructuring charges, the Company's net income improved by $3.8 million above prior-year levels, on a sales increase of $17.1 million.

Last December, we announced several restructuring actions to reduce the Company's manufacturing capacity and cost structure. These actions included permanently closing two manufacturing plants, placing a previously closed plant up for sale, and realigning our retirement program. The two plants ceased operations in April and May of 2012, respectively, and the retirement plans were modified as of April 30, 2012, as planned. The Company's results for the quarter ended July 31, 2012 included restructuring charges related to these initiatives. The net of tax impact of these charges for the first quarter was $0.5 million, or $0.03 per diluted share. Net income including restructuring charges was $0.6 million, or $0.04 per diluted share.

When we commenced fiscal year 2013, we provided the following assumptions about market activity and our related expected performance -- regarding the remodeling market, we stated our expectation that existing home prices would finally bottom and begin to slowly increase as the fiscal year progressed. We also stated our expectation that cabinet market remodeling sales would correlate with this activity and be roughly flat for our fiscal year 2013. Regarding the new construction market, we stated our expectation that single-family home starts and new construction market sales of cabinets would continue to grow at a mid-single-digit rate, as they had during our previous fiscal year. Through the first three months of our fiscal year, it seems like our expectations were directionally in line with market activity. For the remodeling market, fundamentals have been encouraging, but they have not yet translated into flat or improved cabinet sales.

Total sales of existing homes during May and June were 7% higher than in 2011. Private sector employment is a continuing positive, having now increased in every month since March of 2010. Consumer confidence reported by the University of Michigan remains stuck in the low 70%s, but even at these levels is still 15% better than one year ago. And the Case Shiller Index has now improved for the fourth consecutive month, indicative of positive movement in housing prices.

Each of these fundamentals for existing housing are trending positively, suggesting that our expectation for our cabinet remodeling market of at least flat sales may still occur during our fiscal year 2013. However, sales reported by members of the Kitchen Cabinet Manufacturers Association during our first quarter were indicative of a total market that was up by mid-single digits, inclusive of a new construction market that was up by double digits; and therefore, suggestive of a remodeling market that appears to have been down by low- to mid-single digits. Against this declining remodeling market backdrop, our Company's remodeling sales were flat with the prior year, indicative of market share gains, primarily with dealers.

Recognizing that the remodeling market for cabinets is not yet 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 seven quarters in the form of free products and/or discounts based upon the amount of sale. To maintain its market share, the Company has attempted to ease its promotional offerings somewhat compared with the prior year, with a goal of continuing to be competitive and generally less extreme than some of its competitors. However, to remain competitive, the Company did experience home center promotional costs that were roughly in line with the prior year's first quarter.

For new construction, housing starts have surprised for the upside, continuing an uptrend that began in calendar 2011. Total housing starts have improved by 26% year on year during calendar 2012. The 20% growth in single-family starts has been lower than the 44% year-on-year growth in multifamily starts, but it still exceeded our expectation for a high-single-digit increase. Even though the prior-year comps get tougher as we get into the second half of our fiscal year, it appears that the market for starts of single-family homes is poised to exceed our expectation for the year and increase at a double-digit rate. The 20% growth in single-family home starts helped propel the Company to a year-on-year new construction sales gain of over 40% in the first quarter, implying that roughly 50% of our gain was market-driven and the other 50% was the result of our market share gains.

The Company's gross profit margin for the first quarter of fiscal year 2013 was 14.9%, up from the prior year's 14% of net sales. The strong sales gain, combined with the two plant closures, enabled the Company to realize strong leverage on its manufacturing overhead cost. However, much of this leverage was offset by inefficiencies connected with the Company's transition efforts during and following the plant closures, which were exacerbated by the unexpected magnitude of our sales increase. Rising material costs also continued to be a factor.

The Company's total operating expenses were significantly improved at 13.6% of net sales in the first quarter of fiscal year 2013, compared with 17% in the prior year's first quarter. Selling and marketing expenses were 9.8% of net sales in the first quarter of fiscal 2013, significantly improved from the prior year's 12.2%. Selling and marketing costs were reduced by $1.5 million, or 9% in the first quarter, on a sales increase of 13%. The cost reductions were driven by lower product display cost, lower dealer promotion cost, and from the changes to the Company's retirement plans. These reductions more than offset an increase in sales compensation costs.

General and administrative expenses were 3.8% of net sales in the first quarter of fiscal year 2013, compared with 4.8% in the prior year's first quarter. G&A costs were reduced by $0.7 million, or 11%, driven by the retirement plan changes and by lower performance-based compensation costs. The Company's recent restructuring initiative resulted in the permanent closure of two manufacturing plants and a realignment of its pension program -- retirement program. The Company recognized pretax restructuring charges of $0.8 million in the first quarter of fiscal 2013, related to these initiatives.

The bulk of the restructuring efforts have been completed, and out-of-pocket costs will decline as the fiscal year progresses. The Company is actively marketing its remaining three properties that are held for sale. The Company continues to expect that pretax savings of approximately $18 million per year will be realized from these actions or roughly $4 million to $5 million per quarter. Last quarter we stated our expectation that the Company would realize roughly two-thirds of this savings level during the first quarter of fiscal year 2013. Because the Company experienced an unexpected jump in production volumes just as the transition was occurring, we realized only about 50% of the benefit that we had expected during the first quarter, and our overall progress in realizing the expected efficiencies was delayed by several months.

The Company's total outflow for capital expenditures and promotional displays during the first quarter of fiscal year 2013 was $3.6 million, up from $2.1 million expended in the prior year's first quarter. The Company received proceeds from the sale of equipment from its closed plants of $1.8 million during the first quarter of fiscal 2013, reducing the net outflow down to $1.9 million. The $1.5 million increase in gross capital outflows was primarily driven by capital expenditures, as the Company increased its spending on machinery and equipment to achieve capacity enhancements. The Company generated operating cash flow of negative $3.8 million during its first quarter of fiscal 2013, compared with positive $4.2 million in the first quarter of its prior fiscal year.

The decline was driven by payments for severance and other restructuring activities, the resumption of funding pension plan contributions, and year-end bonuses based upon prior-year performance. These items represented approximately $6 million of incremental outflows compared with the prior year. The Company generated free cash flow, defined as operating cash flow net of cash used for investing activities, of negative $5.6 million during the first quarter of fiscal 2013, compared with positive $2.1 million in the first quarter of its prior fiscal year. The decline was related to the factors which caused operating cash flow to decline. The Company 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 $67.9 million in cash, cash equivalents, and restricted cash, compared with long-term debt of only $23.7 million. Debt to capital was 15.3% at July 31, 2012, down from 15.5% at April 30, 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; maintaining promotional levels that are commensurate with competitors' offerings to sustain our market share in a challenging remodeling market; expanding channels of distribution that we have not previously emphasized; and maintaining a reduced but still significant capability for future growth as market conditions improve. The Company's first-quarter sales increase marked its ninth consecutive quarter of year over year sales growth -- the first time this has happened in five years. 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 starts -- housing starts per year.

It appears to us that recent trends may finally indicate that housing has begun to come out of its long multi-year downturn. However, consumer confidence and macroeconomic conditions remain uncertain and difficult to predict, and 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 continued to evolve and sometimes to confound. Many market observers expected areas that had been the hardest hit would be the last to recover, including Phoenix and much of Florida. And yet, these same areas are now among the leaders for new construction growth.

Rental rates are rising as vacancy rates decline, inventories of both new and existing homes for sale are at their lowest levels in five years, and mortgages remain near historic lows. Recent data suggests that existing home prices may finally have put in their bottom and begun what we expect will be a slow climb upward. Although the cabinet remodeling market appears to have been down during our first quarter, we continue to expect that cabinet remodeling sales will follow the direction of existing home prices, and that market remodeling sales will be roughly flat during our fiscal year 2013.

Single-family housing starts have modestly surprised to the upside during the Company's first quarter. Based upon permitting activity, single-family starts appear poised to continue to grow at a double-digit clip during our second quarter, and then potentially to tail off in the second half of our fiscal year when the prior-year comps become more difficult. Having described our expectations for the market, I will provide our expectations for Company-specific performance. The Company's remodeling sales slightly exceeded the market in the first quarter and appear likely to maintain this type of performance in a flattish market environment. The Company gained significant market share in the new construction sector during the last two years, which is reflected in our first-quarter results.

We continue to expect that the Company's sales will outperform the new construction market, although the magnitude of the out performance may shrink as our fiscal year progresses. I think I speak on behalf of many people when I say that we at American Woodmark are extremely gratified to have reported a net income for the first quarter, and believe that the Company has the potential to operate profitably throughout the remainder of our fiscal year 2013. This concludes our prepared remarks. We would be happy to answer any questions you have at this time.

(Operator Instructions)

Robert Kelly, Sidoti & Company.

Just had a question on the comment you made in your prepared remarks regarding the percent of benefit you received from the cost initiatives. You said that it was pushed out a few months.

That is right.

So, you got half of the benefit that you had expected. Do we see the full benefit in the second half of your fiscal '13? Or at some point in the second quarter?

I think, Bob, that it did get pushed out by several months because of the volume pressures that we saw in the first quarter. We are actively working on getting those efficiencies that we expect to have. In terms of exactly when they come through, I think we will see a bit more in the second quarter, but I think probably it's the second half until we really see the bulk of them.

Okay. As far as the commentary on the fundamentals and how the cabinet market will behave, this -- the period we are entering is a seasonally strong period for you. Could you just talk about your order book or backlog, whatever you see demand on hand at the end of your fiscal first quarter, how that looks?

It's consistent with what Jon talked about. On the remodel side, it ebbs and flows with promotional activity. The summer, particularly the late summer, is a period where there is just not a lot of consumers out in the marketplace, so we see lower promotional activity. That will start to come back here as we get into the back half of September; and then certainly October and up until Thanksgiving will be heavy promotional periods with the fall selling season. We are in a little bit of a lull right now. But on a seasonally adjusted basis, I think it continues to support what Jon talked about, which is flat to maybe just slightly up remodel activity.

On the new construction side, we have continued to see very strong demand, pretty much across the board. We can't find a region of the country that we go to, either on a direct or through our distribution network, that aren't experiencing -- continuing to experience pretty strong demand for new construction.

One of the things that is encouraging is it does not appear to be speculative, as they open up lots, as they start to build the houses, they have contracts on them. We are not seeing high cancellation rates. We are seeing -- they are building basically [to-]sold orders. So, it doesn't look, from our perspective, from the data we have, that we are building another mini-bubble in terms of spec housing. We think there is actually demand for this housing.

So, our backlog is in good shape, certainly enough to keep our plants operating at the level that we have been operating at here for, really, the first quarter, going on four months now. And we are trying to work it down a little bit before we get to the fall selling season. But the backlog and order demand is consistent with what Jon talked about, which is again, flat remodeling and continued strong growth on the new construction side.

Okay, great. And then, just two more -- one on the promotions. You talked about they remain elevated, but it doesn't appear that the intensity is increasing. Is that a fair way to characterize it?

Yes. I think that is a pretty fair way to characterize it.

And then, you talked about the -- we heard what Depot and Lowe's said about remodel spend, consumer discretionary spend, and it seems like you are doing better in your remodel business due to dealer share gains? Could you talk about that, how that is trending, and why the dealer is offsetting what is going on in the big-box channel?

Our big-box business is okay. It's basically flat to down a little bit. It's pretty consistent with what our major customers, obviously, have reported. Both of our major customers, in their announcements, their cabinet business did outperform the stores. So, to me, the big-box stuff for us is about flat. As we have talked for the last couple quarters, as we got into this year, we looked on the dealer side for that to actually start to move the needle.

And as we start to build -- emphasize that channel, we start to build a little bit of base there. We get to really some critical mass. We are certainly starting to see that. So, if you go from, say, a remodel market, it was down a couple of points, maybe 2 to 3 points, versus us being flat. The majority of that is in fact from our dealer initiatives to start that business up. So, it's starting to move the needle in the first quarter again; it was probably 2, 3 points.

2, 3 points of growth?

Yes.

Okay. Thanks a lot.

Scott Rednor, Zelman & Associates.

On the new residential construction side, where you guys have clearly taken share, can you talk whether you think that share growth is a function of who you are partnered with, be it the big builders or whether you guys are going out and winning new builder accounts?

Yes, it's all of the above. Certainly, as Jon mentioned, we are seeing an increase in overall market activity. The starts, generally speaking, have been up around 20%. July fell off a little bit, but they pulled a lot of permits. So, generally speaking, we were in the 40% range on the new construction side. About half of that is just market growth.

The rest of that is from our market share gains. And it comes from, really, kind of two general areas. One is our partners. We have put ourselves in a position to partner with the builders that are growing. Not just the nationals, but the regionals and occasionally some locals too. But we have done, I think, a good job of identifying and partnering with those builders that are gaining share in their markets.

And then, within those builders, repenetrated and gained share, either on a -- within subdivision or a number of subdivision levels. So, our growth is really a cumulative effect of all three of those. We are getting good market growth. Our customers are growing faster than the market, and we have gained share within those customers.

Great. That is very helpful. And then, on the dealer side, can you guys allude to the fact of -- clearly you are making nice progress. What are you guys bringing to the table that is differentiated versus the competition? Or -- if you guys can go into a little bit more depth, whether it's on the product or service side, that you guys think differentiates yourselves from your competitors?

We think it's basically our service model. It goes all the way from the beginning to the end, is concentrated around our customer care organization. We just think that we have a model that is built better than a lot of the players out there, in terms of providing service, overall cradle-to-grave service, for the small dealer.

Great. And then, lastly, Jon, is there a tax rate that we could use for the model for the full year?

Yes. I think, Scott, that because -- it was great to have a profit, but it was a relatively small profit, I think that results are fairly close to breakeven. So, I think that we are going to have kind of an erratic effective tax rate as the year progresses. But I think it's going to be a little bit north of 40% because of those factors and because we are using some NOL from prior years, which also reduces the number of permanent deductions or differences that we can take that are favorable to us this year.

Okay, great. Thanks very much, and congratulations, guys.

Thank you.

(Operator Instructions)

Joshua Pollard, Goldman Sachs.

I wanted to get a quick update on what portion of your business at this point is remodel versus new [co]. Also, Home Depot and Lowe's, 68% of your business, but what is the mix of dealers and new construction?

Well, traditionally, it has been a two-thirds/one-third for remodel to new construction. During the depth of the housing downturn, it was slanted more toward remodel than new construction, because new construction fell off so much. I think we are getting closer to a more traditional mix; if anything, new construction is over-indexing just a little bit compared to that. But it's still sort of 65%/35%.

Okay, great. And then, the mix of dealers and new construction that remain at 32%, that is not Depot/Lowe's?

Well, the Depot/Lowe's has been the vast majority of the remodeling business that we would cite. And when we talk about dealer business, we consider that remodeling as well, so that is included in our remodeling numbers.

Okay. And then you said that there is going to be a few additional months to get to that all-in $4 million to $5 million a quarter. And the reason you gave for that was the increase in demand. My quick thought process would be that the increase in demand would get you there quicker. So, could you explain why the increase in the amount of time it will take you guys to get to that overall $4 million to $5 million a quarter?

When you get that kind of an increase -- a sudden increase in demand, that puts a lot of pressure on the factories and the material flows. And so, a lots of the efficiency -- inefficiency that Jon referred to is, we had to work a lot of overtime in order to keep up with that. It was related to the transition, because during the transition, you do lose a little bit of capacity, because we did move equipment around.

So, the inefficiencies came from a variety of places. We did keep some of that equipment going a little bit longer than we wanted, but it was also -- we lost capacity because it was out of commission as it was being derigged, moved, and rerigged in the new locations, as an example. So, we had to make up for that with overtime and actually expediting some of our material flows.

So, our trucks that were going around between our plants were on a more frequent cycle. And they were not loaded as fully as they would be in a normal environment, because we had to keep material moving. But the real big impact, quite frankly, was we had to work a lot of overtime in order to keep up with the demand from the customers in a period when we were moving some of that capacity around.

How long before that is corrected?

I think it really depends upon the pace of the sales growth from here, as well as our hiring efforts that are ongoing at this point. So, I think we will see a bit more of the efficiency in the second quarter, but it will really be the second half of the year until you start to see more of it.

Okay. last quarter you talked about hard capacity you could bump up yourselves an additional 50%. But as you look at your soft capacity, some of the things you were saying to my previous question, suggest that there may be some soft capacity issues. So, can you talk about how much in soft capacity you guys would have to add in order to get to that 50% of additional sales, if we were to get there in any quick fashion?

From a soft capacity, say from an accruing standpoint, we are basically accrued at our production level. So, those would be kind of similar numbers. Now, of course, it's a moving target. Over the last 90 days we have increased our capacity, our practical capacity, in terms of what we are actually making and shipping each day. So, the 50%, it's not 50% because we have increased capacity a little bit here over the last 90 days and plan on continuing to do so over the next 90 days. So, that 50% is down a little bit; but generally speaking right now, we are accrued to what we are producing and shipping each day. And so, those are going to be pretty similar numbers.

Okay. Based on your internal information, are you now the lowest-cost producer in cabinets after you have taken out some of your higher-cost capacity?

Well, I'm not sure what low-cost producer means, and you would have to look at it by product, you would have to look at it by price point, some of those types of things. What I would say is that we feel that we are competitively -- we have a competitive cost at the layer of the market that we are in. We don't believe that we are at a cost disadvantage beyond that. I suppose you will get different viewpoints from different people, but we believe that we have a cost base at our price points that allows us to provide value and be competitive.

Okay, great. Thank you so much for your answers.

David MacGregor, Longbow Research.

Great quarter. Congratulations on the progress. Just wanted to explore on the SG&A, how much of the savings was from the reduced spending on sales promotions and product displays, and does that come back next quarter?

Well, there is a seasonal aspect to that. We have product launches a couple of times a year. And some of the costs we were gearing up to the upcoming product launch that is in the fall. So, I think you will see costs trend up a little bit from a seasonal perspective in the second quarter. They normally do, compared to our first quarter.

Right.

But there were a fair amount of savings from the retirement plan changes that we made, as well. So, I think that obviously, those will be ongoing savings.

Okay. Have you broken those out separately?

No, we have not.

Okay. Contribution margins, it looks like you had about a 34% drop in the first quarter. How does that play out over 2Q, 3Q, and 4Q?

It gets back to some of the things that we talked about earlier on the call and that some of the earlier participants have been questioning us on, which is really the rate of the efficiencies that we expected to gain as a result of the restructuring. As Kent explained, we had quite a number of premium costs in the first quarter that we incurred because of production volumes being higher and some of the transition effort being a little bit more complicated than we originally planned on. I don't know that really the first quarter is really the right quarter to look at contribution margin, because it was kind of a noisy quarter with a lot going on.

Is there any way you could speak quantitatively about what you expect that to do over the balance of the year?

Well, I think a couple of others have attempted to get me to quantify that. (laughter) And what I would say is that until we settle down some of the things that we are still working on, it's hard to specifically lay that out. We do expect some incremental improvement in the second quarter, although not as much as we expect in the balance of the fiscal year.

Okay. Raw materials -- to what extent -- is there any way you can quantify the first quarter gross margin impact? You called it out in the prepared remarks.

It's definitely rising. We will have that in our 10-Q that comes out in about a week or so, and that talks to that a little bit more. But it's rising. I would say that we are not under a period of stress with regard to raw material costs, but it's a constant factor and it is causing us to deleverage just a little bit.

Okay. Is there any opportunity to pass any of that through in this kind of a promotional or competitive environment?

Yes. I go back to -- for those who have followed us for some time, I think the industry over time for inflationary increases in inbound materials and raw materials, that is permanent and embedded in the material flows, that the industry has proven ability to recover those. But generally speaking, there is a lag there that can be 6 to 18 months. So, what we are seeing -- to Jon's point, what we are seeing isn't extreme enough, I think, to have the industry get that passed through.

It has been relatively minor. And when we do start to get it, there will be a lag impact before we can get it from the industry. So, if you are talking about the next couple, three quarters, even the balance of our fiscal year, to the extent we do get material inflation, it's going to come out of the manufacturers at this point. I wouldn't look for that to be passed on to the consumer probably until next summer.

Okay, great. And then, just on the CapEx, how much CapEx do you expect you are going to need to deploy in the recovery phase of this cycle? Is there any way you can quantify that over an intermediate term?

We haven't really gone out beyond this year. What we said three months ago is that we expected total CapEx, including promotional displays that we had to play out with customers, to increase by about 40% over last year's levels. So, last year's gross expenditures were about $10 million, and we expected this year's to be about $14 million. And I think we are still tracking with that expectation.

Okay. You had mentioned that one of your strategic goals was expanding channels of distribution. You are talking about just picking up more builders, or can you maybe elaborate a little further on that aspiration?

Yes. The biggest one is historically we have been very active in the new construction side, both either on the direct basis and through our distribution network. Obviously, we have also been very active and involved in the big box. The real big channel of growth for us that we really started to emphasize -- historically, we have had some accounts, but put a lot more emphasis on, was the dealer business, which would be people with one to four outlets in a fairly local area.

That is a huge part of the industry; it's probably half of the remodel business. And we haven't really focused on that in the past. That is really what our initiative over the last year to two years has been. So, that is really what we are talking about when we talk about new channels of distribution is that dealer network.

Can you say what your share of that is today and what you would like to get it to? Just give us some sense of --

Because we haven't emphasized it, our share is negligible. And we would like to make it significant. I will just leave it at that.

Okay. Thanks very much.

Peter Lisnic, Robert W. Baird.

Jon, first question if I could, on the plant closure impact -- is there a way of calling out what the impact there might be on the gross profit or gross margin line in the quarter?

I guess the best way to do it, Pete, would be to say that we had thought we would get about two-thirds of the transition benefit, and we only got about one-third. So, I guess, work the math and that is probably the most convenient and easiest way to do it.

All right, that is helpful. And then, when you are talking about the push out in those cost saves, from the two-thirds to one-half run rate, does that do anything, or should it do anything, to our confidence that you can get to that $18 million annual run rate? And then, part two of that question is, at this point, is labor just a bottleneck there? Or are there other, what I would call operational things, that you need to take care of to get to that $18 million run rate?

Yes. Let me try to clarify a little bit. The $18 million run rate, in terms of those savings, is fine. And we have that. What we have is, we have some partial offsets to that. So, we are very confident about the $18 million. And in fact, the $18 million is in there. If you look at what we did between the plant closures and those savings, and we look at what we did on our retirement programs, that savings is there.

What we have is we have some net offsets to that, that come from -- again, additional transportation that comes from a lot of overtime, it comes from hiring costs as we hire people and get them into the system. They are not productive for a period of 60 to 90 days. They have to go through our training programs.

When you start to run that heavy an over-capacity, you do end up, unfortunately, with some additional scrap and those types of things, again, because you are running the machines, your are doing it with employees that are less experienced. So, the $18 million is there, and we are very confident that those are solid numbers. What we are experiencing right now is some offsets to that, based on trying to keep up with the demand from the marketplace.

And so, it's a question of how quickly we can get those employees in place, get them trained, get the system calmed down, get the overtime out of the system, and start working regular hours, whether it's daily overtime or on the weekends. So, I don't want to leave you with the impression that -- which maybe you got as I look back from our remarks, that there is any of the $18 million that is delayed. There is none of the $18 million is delayed; all that stuff is there. What we are experiencing now is some offsets to that.

Right. I'm just wondering whether or not those offsets -- it sounds like they go away, but the confidence that they do is kind of -- I guess the other way of asking the question, based on your response.

No. I'm very confident they are going to go away, as soon as we get the system calmed down, and again we get the capacity up with trained employees on a regular time basis. The question is, how quickly can we get the whole system calmed down? And again, we have made a lot of progress, we made progress sequentially through the quarter each month. We have made more progress, in August. But we continue to expect to experience some of that net during the second quarter.

Hopefully, as we get into the third quarter, we will get a little bit of help. We will get a seasonal slowdown as we get into mid-December, which will allow us to catch up and get some of the more training done and the labor force settled down, in terms of people and doing the right things in the right places. So, we get through the third quarter and the fourth quarters, I think Jon mentioned we expect all of that to be out of the system. But here for the next quarter or so, quarter and a half, we expect to continue to experience some of it.

Got it. And then, by extension, for the longer term it doesn't necessarily -- what we saw here in the first quarter, it doesn't necessarily really impact that targeted gross margin range that you have talked about of 21% to 23%, if I remember the numbers right?

No, it doesn't. It doesn't impact that at all.

Okay. All right, fair enough. Jon, quickly on the G&A number, $5.6 million, it's down about $1 million run rate-wise versus last year. Is that the run rate to use as we look forward from a G&A cost-structure perspective?

Yes --

And maybe a little help on -- I'm sorry, maybe a little help on fixed versus variable in that piece of the income statement would be helpful.

It's relatively fixed. The thing that varies in there is the incentive compensation part of it, Pete. And that was down a little bit because of our performance in the first quarter -- again, it wasn't quite as efficient as we had expected when we did our plan. But it's relatively fixed. And I think that, certainly, the retirement plan changes are embedded in there and will be an ongoing savings. I think that to the extent that this line varies in the future, it's really going to be the incentive comp line that varies the most.

Perfect. Thanks for your time and help. I appreciate it.

Sam Darkatsh, Raymond James.

Nice quarter. Jon, when you mentioned that you had increasing expectations or increasing confidence that you would be profitable through the rest of '13, is that each of the next three quarters? Because I know you that you are going to have a seasonal soft patch in the wintertime. Or is that -- you were talking about the entirety of the year?

A little bit of both, Sam. I think we have the opportunity to be profitable for each of the quarters. It's really going to depend upon, as Kent mentioned earlier, the seasonal ordering patterns and to what extent we can keep the factories running, especially in the third quarter.

Could you talk about how the quarter progressed? There seemed to have been some choppiness at the remodeling side throughout the quarter on a month-to-month basis. Was it fairly steady, or did you see a fair amount of volatility?

Sam, you are talking about from an order perspective?

Both -- yes. Orders and shipments, yes, but mostly on an order perspective on -- at the home center level.

Yes, new construction was strong, beginning to end. What we saw on the remodel side was a normal pattern. And that is coming off the end of the spring selling season at the end of April, into the first week or two of May, and then you get a slowdown in June, which is the natural slowdown. And then it picks up in July, you get a surge in July as our customers really close out some of their promos. Back down in August, and then picks up again in September.

So, that was the pattern, but that is a normal seasonal pattern. We didn't see anything that was unusual or different than what the normal seasonal pattern would be through the quarter that would lead us to believe that remodel is going to be anything other than about flat once you even out all the ups and downs.

So, if I could put words in your mouth, on a year-on-year basis, there wasn't a whole lot of change from month to month throughout the quarter?

No.

Okay. Thank you.

(Operator Instructions)

And Mr. Eanes, it appears we have no further questions.

Since there is no additional questions, this will conclude our conference call. Again, thank you for taking time to participate. Speaking on behalf of the management of American Woodmark Corporation, we appreciate your continuing support. Thank you and have a good day.

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