American Woodmark Corp (AMWD) 2013 Q2 法說會逐字稿

Good day 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 call over to Mr. Glenn Eanes, Vice President and Treasurer. Please go ahead.

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

Participating on the call today from American Woodmark will be Kent Guichard, Chairman and Chief Executive Officer, and Jon Wolk, Chief Financial Officer. Jon will begin with a review of the quarter concluding with an outlook on the future, and 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 second quarter ended October 31, 2012 of our fiscal year 2013 that will end on April 30, 2013. Our earnings release contained the following highlights, for the second quarter, net sales were $159.8 million representing an increase of 24% over the prior year's second-quarter. Net income both including and excluding restructuring charges was $2 million, $0.14 per diluted share exclusive of charges, and $0.13 per diluted share inclusive of charges, compared with the second quarter of the prior year's net loss of $3 million or $0.21 per diluted share. The Company generated $2.4 million of positive free cash flow compared with $1.1 million of positive free cash flow in the prior year's second-quarter.

For the six-month period ended October 31, 2012, net sales were $308 million, up 19% over the prior year's first half. Net income excluding restructuring charges was $3 million or $0.21 per diluted share, improved from a net loss of $5.7 million or $0.40 per diluted share in the prior year's first half. Exclusive of restructuring charges the Company's pretax income, pretax and net income improved by $13.1 million and $8.7 million respectively over the prior year's first half levels on a sales increase of $48.4 million.

Last December we announced several restructuring actions to reduce the Company's 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 Company's pension plans were frozen effective April 30, 2012.

The Company's current year results included restructuring charges related to these initiatives. The net of tax impact of these charges for the three and six-month periods ended October 31, 2012, were $0.1 million or $0.01 per diluted share, and $0.5 million or $0.04 per diluted share respectively. Net income including restructuring charges for three and six-month periods ended October 31, 2012, was $2 million or $0.13 per diluted share and $2.5 million or $0.17 per diluted share respectively.

When we commenced fiscal year 2013 we provided our expectations about market activity and our 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 grown during our previous fiscal year. For the first six months of our fiscal year, our expectations for the remodeling market activity have been on target, while new construction market conditions have been more robust than we expected.

For the remodeling market, fundamentals have been encouraging but they have not yet translated into improved cabinet sales. Total sales of existing homes for the first half of our fiscal year were 11% higher than in 2011. Private sector employment remains a continuing positive with seasonally adjusted employment levels having increased in every month since March 2010.

Consumer confidence reported by the University of Michigan in October registered at highest levels in the last five years and the Case-Shiller Index has improved for seven consecutive months indicative of positive movement in housing prices. Each of these fundamentals for existing homes are trending positively, suggesting that our expectation for a cabinet remodeling market of flat to slightly improving sales should occur during our fiscal year 2013.

Sales reported by members of the Kitchen Cabinet Manufacturers Association for the first five months of our fiscal year were indicative of a total market that was up by mid-single digits, inclusive of new construction that was up double digits, and therefore suggestive of a remodeling market that appears to have been flat to slightly down during this time. Against this tepid remodeling backdrop, our Company's remodeling sales increased in the low teens during our second quarter and by mid-single digits for the first half of our fiscal year, indicative of market share gains with both dealers and home centers.

Recognizing that the remodeling market for cabinets is not yet increasing, 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 two years in the form of free products and/or discounts based upon the amount of sale. The Company continues to maintain its promotional levels in line with market activity with the goal of remaining competitive. The Company experienced second quarter home center promotional costs that were in line with those of the first quarter and with prior year. Recent signs suggest a promotional environment that is gradually easing suggesting that the Company may be able to reduce its promotional level run rate somewhat for the upcoming spring selling season.

For new construction, housing starts have exceeded our growth expectation building on an uptrend that began in calendar 2011. Total housing starts have had a 29% year-on-year increase during calendar 2012. Breaking this down, single-family starts have grown by 25% and multifamily starts have grown by 41%. The growth in single-family starts has significantly exceeded our expectation of a mid-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 single-family home starts is poised to exceed our expectation for the year. The 25% growth in single-family home starts helped propel the Company to a year-on-year new construction sales gain of over 40% in both the second quarter and for the first six months of fiscal 2013, implying that a bit more than half of the gain was market-driven and the rest was the result of our market share gains.

Regarding gross profit, the Company's gross profit margin for the second quarter of fiscal year 2013 was 15.5%, higher than the previous quarters 14.9% and well above the prior year's 12.5% of net sales. The Company generated a second quarter year-over-year incremental gross margin of $8.7 million on incremental net sales of $31.4 million resulting in an incremental gross margin rate of 28%. Strong sales gain combined with the two plant closures enabled the Company to realize excellent leverage on its manufacturing overhead costs and some favorability regarding labor costs. However, some 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.

Regarding operating expenses, total operating expenses were significantly improved at 13.5% of net sales in the second quarter of fiscal year 2013, compared with 16.1% in the prior year's second quarter, and 13.6% of net sales for the first half of fiscal year 2013 compared with 16.6% in the prior year's first half. Selling and marketing expenses were 9.4% of net sales in the second quarter of fiscal 2013, compared with the prior year's second quarter of 11.3% and 9.6% of net sales in the first half of fiscal year 2013 compared with 11.8% in the prior year's first half.

Selling and marketing costs increased by $0.5 million or 3% in the second quarter on a sales increase of 24%. The cost increases were driven by higher sales commissions and higher product display and promotional costs for dealer business, offset in part by savings from the changes to the Company's retirement plans.

General and administrative expenses were 4.1% of net sales in the second quarter of fiscal year 2013 compared with 4.8% in the prior year's second-quarter and 4.0% of net sales from the first half of fiscal year 2013 compared with 4.8% in the prior year's first half. G&A costs increased by $0.5 million or 7% compared with the prior year's second quarter, driven entirely by increased costs related to the Company's performance-based compensation plan that more than offset cost reductions from the Company's retirement plan changes.

The Company's recent restructuring initiative resulted in the permanent closure of two manufacturing plants and the realignment of its retirement program. The Company recognized pretax restructuring charges of $0.8 million in the first quarter of fiscal 2013 and a $0.1 million in the second quarter 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.

One of the Company's closed plants were sold during the second quarter leaving two properties still held for sale. The Company has realized the expected pretax savings of approximately $4 million per quarter from these initiatives. However, we estimate that the Company netted roughly half of that benefit during the second quarter because of inefficiencies related to significantly higher production volumes than were expected.

Regarding the Company's capital spending and cash flows, the Company generated operating cash flow of $2 million during the second quarter of fiscal year 2013 compared with $3.7 million in the second 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 working capital investments made in receivables and inventories as business has grown. The Company's gross investment in capital expenditures and promotional displays during the second quarter of fiscal 2013 was $4.3 million, up from $2.6 million expended in the prior year's second quarter.

Both capital spending categories experienced growth over prior year due to investments made to expand production capacity and grow the business. The Company received total proceeds from the sales of a building and from equipment from its closed plants aggregating $4.7 million during the second quarter of fiscal year 2013, creating a net inflow of $0.4 million for the quarter from investing activities.

The Company generated free cash flow, defined as operating cash flow net of cash used for investing activities, of $2.4 million for the second quarter of fiscal year 2013 compared with $1.1 million in the second quarter of its prior fiscal year. The improvement was related to the proceeds from the building and equipment sales, which more than offset the investment in working capital.

For the first half of fiscal year 2013 the Company generated free cash flow of negative $3.2 million compared with free cash flow of positive $3.2 million in the comparable period of the prior fiscal year. Severance and related plant closure outlays of approximately $3 million, pension plan contributions of $2.5 million, and investments in working capital more than offset the improvements from net income earned and from asset sales. The Company expects to continue to fund its capital spending from a combination of operating cash flow and existing cash on hand.

Regarding the balance sheet, the Company's financial position remains outstanding. The Company ended the quarter with a total of $70.1 million in cash, cash equivalents and restricted cash compared with long-term debt of $23.7 million. Long-term debt to capital was 14.9% at October 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 and 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 the 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.

We continue to expect that market activity will eventually return to its historical norms of 1.25 to 1.4 million new households and 1.5 million new housing starts per year. Recent trends suggest to us that housing has finally begun to emerge from 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, ability of credit, or because they simply lack confidence.

From a market perspective, the wall of worry remains formidable with global budget deficits growing and still not yet addressed, at the same time US household formation has returned to nearly normal levels, 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 mortgage rates remain near historic lows. Recent data suggests that existing home prices may have finally put in their bottom and begun what we expect will be a slow climb upward.

Although the cabinet remodeling market appears to have been flat to down during our first half of our fiscal year, 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 continued to show strength. Single family starts now appear likely to grow at a 15% to 20% clip for the remainder of our fiscal year compared with our original expectations of mid-single-digit growth.

Having described our expectations for the market, I will provide our expectation for Company specific performance. The Company's remodeling sales exceeded the market in the first half of its fiscal year by several percentage points and seemed poised to continue to maintain this type of performance for the balance of the fiscal year in a flattish market environment.

The Company gained significant market share in the new construction sector during the last two years which enabled the Company's growth to exceed the market by roughly 15 to 20 points. We continue to expect that the Company's sales will outperform the new construction market, although the magnitude of this out performance may shrink as our fiscal year progresses as prior year comparables become more formidable. We are extremely gratified to have reported a net income for the first two quarters and believe that the Company has the potential to operate profitably throughout the remainder of fiscal year 2013.

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

(Operator Instructions)

Dennis McGill, Zelman and Associates.

Good morning guys, thanks for taking our questions.

First question -- on the Home Center side or the Remodeling side, you made a comment that I think promotional activity across the industry was relatively comparable to Q1, and then also to the year ago period; yet you saw pretty strong acceleration in activity on a growth rate from Q1 to Q2. So can you just maybe square that little bit, and maybe elaborate on what you think was driving the better performance without promotions aiding it?

Yes, it is primary seasonal. The first quarter, once you come off, really, you go early May, first couple weeks of May, you get into the summer period and that just seasonally is slow for remodel. Traditionally, that's been the case. People go on vacation, they don't do as much activity then. When you get in the fall, which is one of the two big traditional selling seasons, it just picks up. And you get some of that out in our second-quarter -- not all that obviously because it goes through November, really Thanksgiving -- but certainly it is mostly seasonal impact.

I was actually thinking about on a year-over-year basis, of the growth rate, I think --

I thought you said sequentially, I'm sorry.

Well, sorry, the way I was looking at it was the growth being relatively flat on the remodel side in the first quarter, but up low teens in the second, on a year-over-year basis.

Last year, Dennis, we had a bit of a falloff in the fall compared to what we expected. Q2 sales were lower than Q1 in Home Center. This year they were sequentially about the same, so we didn't experience that fall off. So I think that we're feeling good in a relative sense that we didn't have that fall off. Home Center -- or I should say the Remodeling sales were probably in line to maybe a little bit less than we had hoped for, for second quarter, but still at a healthy level.

Okay. And on the New Construction side, when you think about the outperformance that you've had on a unit basis and the market share gains you've had, is there any way to split that between partnering with builders or having relationships with builders that are growing faster than the market? Versus doing business with builders today that maybe you didn't do business with a year ago?

Yes, by far the majority of it is partnering with builders that are growing in the market. There is a little bit of geography. We are in some areas that have recovered, I think probably more quickly than others in terms of concentrations, but generally speaking, it's partnering with our customers.

Over the last -- as Jon mentioned, it's really been a couple years where we've tried to partner with customers that we think are best suited to grow as the thing comes. I think we've been pretty successful with that. We've also penetrated share within those customers. So we pick the right customers and we've been able to build our share with them; so there's a little bit, but there's not a lot of new builder activity or new relationships in that number. It is really partnering with the right people.

Okay, great. Then just last quick one -- any sense on when the inefficiencies that you've talked about the last couple quarters would be normalized and maybe out of the P&L?

Yes, we have made progress. We look at, in November, we've continued to make progress.

As we talked about last quarter I think the caveat we put on there was, once the growth slowed down and give us a chance to catch up; and as you can kind of tell from, obviously from the numbers, is it didn't slow down and give us a chance to catch up. So we are making progress, but in some cases we are still chasing it. Because the orders still continue to come in at a pretty good clip, certainly as you can see by the results in the second quarter.

So we have made progress. We did get more of the inefficiencies out during the second quarter, and it was back-end weighted in terms of our success as we made progress through the quarter. And as we continue into the third and then the fourth quarter, we think we will continue to make progress given the fact that we don't continue to see maybe these kind of growth rates and we get a little bit of a chance to catch up.

But we made progress. Maybe not as much as we would've liked; but it is because the topline was growing as well, so we will take that.

A high class problem. Thanks for the time, guys.

Sure thing. Thank you.

Peter Lisnic, Robert W Baird.

Good morning, gentlemen.

Just a follow-up on that question on the inefficiencies and being able to have those dissipate. Is it still a labor issue at this point? Or is it primarily a labor issue -- just having the right people in place to meet the demand? It just seems as though it's maybe taking a little bit longer to get some of these inefficiencies behind us.

Yes, it all starts with labor. Now, as we talked about last quarter, it can show up other places -- inexperienced people have a tendency for example to generate more scrap just because they are not as proficient as their jobs.

But maybe if you think back to the first quarter, the savings that we generated from the restructuring activities, we basically consumed all of those savings in the first quarter or close to it in our inefficiencies. As Jon mentioned in his comment, we got about 50% of them net in this quarter, so that gives you a magnitude of the progress that we made.

But it is still basically related to labor. There's a little bit in terms of changing some of the material movement with the two plant closures; but the source of by far the majority of it continues to be the labor. That has calmed down. We are still adding a little bit of headcount, but most of it is now replacement in terms of some of the turnover we've had with the summer hires that have decided that maybe the work isn't their cup of tea. But it is still primarily labor and we need to calm the labor down. But we did, again, make a lot of progress during the quarter.

Okay. Is it one of those cases where we have a shortage of skilled labor? Is that primarily the issue that we are having here? Or is it just learning curve that employees need to get past?

Is not that we cannot find people, because we are finding people, we are staffing up. It is really just a question of seasoning those folks that we've got in there and turning them into productive members of the team, as Kent was alluding to in terms of overall performance.

Okay.

It's speed, accuracy, it's things like that.

Okay. All right, got it.

And then switching gears -- on the Remodel side, have you seen anything in terms of a material change in the mix of the business that you are getting from the Remodel market? In other words, are you seeing consumers maybe willing to spend a little bit more, have more quote, unquote, bells and whistles on the products that they are adding?

No, not so much. It has been pretty flat. But I think it is all -- it may be a relative question.

In our mix of business, on the Remodel side we never really saw it degrade during the cycle. During the down part of the cycle, the people that were out there buying continued to buy a good mix in terms of features, in terms of price points, and certain terms of those types of things. The issue on the Remodel side was just number of jobs; it was just pure volume. We never really saw a decline in the mix on the Remodel side.

The real shift in the mix downwards was on the New Construction side. To answer your question -- it hasn't really changed, but then again it never really dropped. It's just kind of consistently been about the same number. We've upticked it a little bit because many of our new product introductions have been on the higher side of our average mix, but there wasn't really anything to recover from on the Remodel side.

Okay. All right, I've got it. Thanks for the help and happy Thanksgiving to you and your families.

Same to you.

Thank you.

David MacGregor, Longbow Research.

This is Josh Borstein, in for David MacGregor. Thanks for taking my questions.

Keeping on the mix issue, what's been the impact from New Construction on average pricing? How has it affected overall mix there?

Josh, the mix in general on New Construction business is lower than it is on Remodel. Generally speaking, when people are remodeling they're upgrading from whatever was in their homes previously, in all cases. So typically the New Construction mix tends to be geared a little bit more toward opening price point, and in the market dynamic that we've had over the last several years with appraisal prices being a challenge, sometimes that's tended to, if anything, increase that tendency so that the home will appraise.

Okay, great. Thanks for that color.

And then, just on the, the New Construction saw some impressive growth there -- 40% plus. What's the backlog or order book right now tell you about the business here in Q3? And how much visibility do you have right now on new orders?

For us the backlog doesn't really change a lot -- a few days --but generally we run with an 11- to 12-day backlog; that's just cycle works. On the New Construction side we do have some visibility -- not as much as we would like -- but we do have some visibility into our customers' backlog, which is probably more important.

We don't actually see it until they go ahead and release the kitchen that's ready to us. But if you look at their backlog in terms of lots, in terms of orders, their backlog is still quite strong and it does support -- Jon mentioned the increase or our anticipation for the rest of our fiscal year in terms of the activity on the New Construction side. We can see probably 90 days out with several of our major customers and that backlog is still there.

It will slow down a little bit in December on new starts; they have a tendency to concentrate on closing things before the calendar and fiscal year end. But again, if you look at the lots that are under contract, they are not getting high cancellation rates, so we have a high degree of confidence that the things that they have under contract are in fact going to get built. There is sufficient backlog out there to, again, support Jon's kind of forward-looking comments in good activity going through the winter and into next spring for us on the New Construction side.

Okay, thanks.

And then, just lastly -- could you quantify the impact from raw material cost increases in the quarter? And if you have any comments on visibility you have looking out to the next quarter or two?

Yes, Josh, it didn't move the needle that much during the quarter. It was a noticeable impact, but you'd put it at certainly less than 1% of sales. But as we look out a little bit it begins to get a little more spooky, if you will, because there are inflationary pressures out there within our supply base.

Okay. Great, I appreciate it, and good luck to you.

Thank you.

Sam Darkatsh, Raymond James.

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

Two or three questions, and a couple of them are piggyback questions on prior ones you've received. First off -- Jon I want to make sure I understood what you were talking about with respect to the sustainability of your expected Home Center demand. You're growing at double digits this quarter; the industry is flat to mildly down. Do you expect over the next couple quarters for that variance to moderate? Or for that variance to persist? I'm just trying to get a sense directionally of your performance versus the industry in the Home Center channel -- what you expect over the next six to nine months or so?

Sure, Sam. Thanks for the question.

What I said was that in the first half of our fiscal year our Remodeling sales were up mid-single digits. Although we had a stronger, obviously, Q2 than Q1. And that the market was flat to slightly down. So we outperformed by several points in the first half, and we expect that we have the potential to perhaps continue to outperform the remodeling market in the second half by a similar magnitude.

As the first half combined, not the second quarter percent?

Correct.

Got you. So, why again would that be? I'm sorry, why it would moderate from the strong second quarter differential?

This is Kent, Sam.

The biggest thing in the second quarter, and Jon mentioned it briefly, was our comp. It wasn't so much our run rate, our sequential run rate, as that last fall we had one of our major competitors launched a significant increase in promotional activity at one of the major accounts and we did not respond to that. And so our share last year during that period when they were running the promotion, which was really the second and into the third quarter -- it kind of drove our, obviously, our volume down. You could see that last year in our results.

So what's happened in the second quarter and will happen probably in the third quarter to some degree is, we are comparing our sequential run rates over a low comp. When we get into the fourth quarter that had washed out of the system and you are back to a normal share year-over-year comp. So we would expect to see something pretty similar, just reverse it. We would expect the third quarter to see some reasonable gains like we did in the second quarter on a low comp; and then once we get into the fourth quarter, and you're comping a more normal level of activity and share, we would expect the fourth quarter to look more like the first quarter.

Which leads me to my second question perfectly. The promotional outlook, Jon -- I think you mentioned that you expect it to ease going forward. Is that due to more to the raw material inflationary outlook? Is it more due to the fact that the retailers are not seeing the incremental pull from promotional spend? Why would you anticipate that dynamic, particularly as you suggested, Kent, that promotional comparisons I think get a little bit more difficult going forward?

Not so much they get difficult, I think they normalize is maybe a better way to put it; is that we went through a year ago our second and third quarter, where I don't think they were normalized across competitors or in the accounts.

What I would say in terms of the larger question you have on promotion is, it is kind of more the latter. I think people are recognizing the elasticity of demand that some of these extra levels of promotions are not driving any more business. They are not creating primary demand for either the account or the manufacturers as a whole. And so I think we are starting to see that ease; people are trying to find where that sweet spot is, where an incremental dollar of promotion actually does generate some additional incremental demand.

We've gone through a period now of probably close to two years where my personal opinion that it hasn't been the case. So I think people are testing the markets, they are trying to figure out where that point is -- both our customers and within that, the major suppliers. What we are seeing is, I think, reflective in the marketplace is activity that is recognizing that some of these incremental promotions that started really two years ago are not generating incremental demand. So I think that's what's driving a little bit of the easing off.

Last question if I might. Accounts receivable grew, I think 40%-some odd, year-on-year, which was considerably more than sales. I would think that's a bit counterintuitive, only because your mix to your builders was growing. And I would imagine that your terms to the builders are considerably less than to the Home Centers from a day standpoint. So why would receivables have grown that much? Were you extending terms to builders? Or how should we look at that?

Sam, first off, it's timing that drove the -- depending upon which day of the week the quarter ends, you'd be amazed at the difference it can make in receivable and cash balances and so forth. So first off, that's the headline.

The subtext underneath that is that, in fact, at least for our business, the New Construction DSO tends to be a bit higher than the Remodel DSO in general.

We haven't changed terms to any of our customers or channels distribution.

Okay; thank you much. And again happy holidays to you and your family.

Thank you.

(Operator Instructions)

Robert Kelly, Sidoti & Company.

Good morning.

Question on the remodel growth. Can you help us a little bit with what is going on in the independent dealer channel that you are starting to penetrate, versus an organic growth rate, if you will, in the Home Center channel?

We had market share gains in both, with both types of customers during the quarter. As you know, Bob, we launched the dealer initiative really a couple years ago. So with every quarter there are more dealers transacting, there are more dealers signing up. And pretty much every sales dollar is incremental when you're off of a very small base.

But having said that, we are pleased with our growth in the channel. I wouldn't say it is indicative of any type of macro trend because we still have such small market share there, but we are pleased with how we are doing in that channel.

Right. So are you up 13% to the Home Centers? I'm just trying to get a sense of --

We were up with both categories of customers. Obviously as a percentage, the dealer growth would have been a much higher percentage than with the Home Centers which is a mature business compared to essentially a growing startup business. But we made gains in both.

Okay, last quarter you said you did about $5 million in the independent channel -- quarterly sales? Can you update us on Q2?

Yes, it was in that vicinity. I'd rather not get into real specific numbers there, but we did have some growth over that level.

Okay, thanks.

As far as the quarterly cost savings associated with last year's restructuring -- about a $4 million run rate, all else held equal -- you said you got half the way there. If we add that back in, assume you got that extra $2 million contribution margin, on the growth line, is about 35%. Is that the right bogie going forward? Is that what you are aiming for with this cost structure?

Obviously, we want to maximize. I'd say that anytime you are in the 30% to 35% incremental margin level you are feeling pretty good about how you are doing.

Right, but shouldn't the incremental margin be around 35% a year from now? Shouldn't you be doing something north of that, just given all the cost savings that you got with the restructuring?

Well, it depends on a lot of factors. It's a simple question, but it is a complicated answer. There are so many factors that go into it. I'd say all things being equal, perhaps. But all things are never equal.

Right, understood. Fair enough.

One final one. The new order growth from the public builders, in the vicinity of the 30% for the last couple quarters. Then you talk about your second half being in the 15% to 20% growth range for the New Construction channel. Can you help us reconcile that with the lags from when a builder order is closed to where you sell them the cabinet, kitchen or what have you, and when it starts to show up for you?

Let me just clarify -- we were up in New Construction business north of, a little bit north of 40%, in both the first two quarters. The market was up in starts -- single-family starts, roughly, let's call it 25% during the comparable period, or for the calendar year-to-date, let's say. And what I said in the guidance going forward was, we expected that the market could continue to run 15% to 20% for the remainder of our fiscal year, the last six months of the fiscal year. And that we'd have a shot at outperforming that because we've done pretty well so far in the first half. Our comps get a little bit tougher in the second half of our fiscal year, so it could be that our outperformance rate shrinks a little bit. That's really what I was trying to imply there in my comments.

I grasp that. It is just that there is a lag between a new order received for a builder and when you're selling them the kitchen now?

Yes.

Or do I not understand that? Okay, so what is that lag about?

Between the time -- we are probably -- in a normal builder's actual build cycle, we are probably 50 to 60 days into the actual build cycle after they move dirt or pour foundation. The time lag between when they actually take the order and when they start moving dirt can vary, obviously, by their production schedules and those types of things. So if you put an average in there, that's probably six, maybe eight weeks; so you can get a good 3.5 to 4 months between the time they actually sign a contract and our product will actually be going into the home.

Okay, great. Thank you very much.

And one final one if I could -- a lot of cash on the balance sheet. Could you just talk about priorities for use of that cash?

Yes, we've talked about it before. The first one is, obviously, reinvestment and performance of the business. And after that we get to some of the other things that we've talked about. In terms of why it is still there, you could maybe help us there if you've got a crystal ball.

We're kind of looking at the next month here, as we look at December 31, and there's a lot of things that can happen between now and December 31. We think that there's, obviously, could be a lot of disruption in everything from the financial markets all the way through the economy, depending on what happens on the larger stage. So our short-term position really hasn't changed, which is, we're going to keep the cash and we're going to keep the flexibility until we think that we have a better look at what's coming down the way.

It clearly is excess cash in a normal environment. But we're not in a normal environment. So we are going to continue to hold onto that and use it inside the business, or use it as, if you will, as security to be able to deal with future shocks until we get some higher level of confidence that the industry is back, that the economy is going to stay on the right trajectory, and that we are not going to end up here with a double-dip or whatever you want to call it.

Long-term, our priorities hasn't changed; and since we talked three months ago, really the short term hasn't much either. I think we are all just sitting around waiting to see what happens here between now and December 31.

Thanks a lot.

Sure.

(Operator Instructions)

It appears we have no further questions.

Since there's no additional questions, this concludes our call. Thank you again for taking time to participate. And speaking on the behalf of Management of American Woodmark we appreciate your continuing support. Thank you and have a good day.

Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.