American Woodmark Corp (AMWD) 2015 Q1 法說會逐字稿

Good day, 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 and even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

At this time, I would like to turn the call over to Mr. Glenn Eanes, Vice President and Treasurer. Please go ahead.

-- results for our first fiscal quarter ending July 31, 2014. 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 Scott Culbreth, Senior Vice President and Chief Financial Officer. Scott will be begin with a review of the quarter and an outlook on the future. After Scott's comments, Kent and Scott will be happy to answer your questions. Scott?

Thanks, Glenn. Good morning, everyone. Today we released results of our first fiscal quarter ended July 31, 2014. The financial headlines for the quarter, net sales were $212 million, representing an increase of 19% over the same period last year. Reported net income was $9.2 million, or $0.59 per diluted share in the current fiscal year versus $6.7 million, or $0.43 per diluted share last year.

Excluding the one-time benefit of research and experimentation credits from FY11 to FY14, net income was $8.2 million, or $0.52 per diluted share, an improvement of 23%. For the quarter, the Company generated $9.3 million in cash from operating activities compared to $2.3 million from last year.

Some additional comments on sales performance, starting with the new construction market. Single family housing starts impacting the Company's new construction business were up 6.5% for the first quarter.

Single family starts during March, April and May of the prior period averaged 600,000. Starts over that same time period from the current year averaged 639,000. With the 60 to 90 day lag between start and cabinet installation, the overall market activity and single family homes was up 6.5% for the financial first quarter.

Our new construction based revenue increased over 21% for the quarter. Our growth and excess of starts continues to be driven by our partnerships with national and regional builders that are gaining share of total starts and increase in share of penetration with those builder partners and the better than average health of the markets where we concentrate our business.

On the remodel side of the business, the picture continues to remain mixed. On the negative side, residential investment as a percent of GDP for the second calendar quarter of 2014 remained flat at 3.1%. The indexes remain flat for the last three calendar quarters, and the index remains well below the historical average of 4.6 from 1960 to 2000.

Existing home sales continued to decline through the second quarter of 2014. Between April and June of 2013, existing home sales averaged 5.1 million units. That same period for 2014 averaged 4.9 million units, a decline of 4.5 %.

All-cash purchases continue to rise. 32% of all transactions were paid in cash in June versus 31% a year ago. This trend's concerning since cash purchases signals investor activity, and they are less likely to remodel than an own to occupy buyer.

Interest rates declined slightly in the quarter from 4.34% to 4.13% in June, but has still risen approximately 65 basis points since the beginning of 2013 from 3.5% to 4.1% for a 30-year fixed-rate mortgage. Combined with an over 4% rise in average home prices, the 28th straight month of year-over-year gains, the affordability index has declined, both disqualifying first-time buyers and reducing discretionary funds available for major remodel activity on the part of the successful buyer.

From a positive side, unemployment continues to improve. The U3 unemployment rate dropped to 6.2%; U6 remains high, but stable at 13% for the second quarter of 2014.

In our view, the remodel market overall seems to have improved, but remains subdued versus historical levels. Within the overall remodel market, big box retailers saw growth, but under indexed due to their primary consumer, the $50,000 to $60,000 household income that continues to be unable, or at least reluctant, to pull the trigger on a discretionary big-ticket remodel project. We gained share in the big box channel, but we were still impacted by these dynamics.

The dealer channel over indexed to the remodel market, largely due to the more fluid nature of their customer base. As we continue to ramp up the development of our Waypoint brand, we gained share and grew our dealer business at a faster rate in both the overall remodel and dealer channels. Our combined big box and dealer remodel revenue grew 17% during the quarter.

Regarding gross margin performance, the Company's gross profit margin for the first quarter of FY15 was 17.5% of net sales versus 18.9% reported in the same quarter of last year. Although unfavorable to prior year, we did see an improvement of 50 basis points versus the fourth fiscal quarter 2014 result of 17%.

The Company generated year-over-year incremental gross margin of $3.4 million on incremental net sales of $33.8 million, resulting in an incremental gross margin rate of 10%. This is the below our target of 25%, but we believe we are making progress.

Gross margin was negatively impacted by both material inflation in costs associated with accruing and infrastructure to support higher levels of sales and installation activity. We continue to experience inflationary pressure across a broad range of direct material inputs during the first quarter, most notably on hardwood lumber, but the pace has slowed.

Average unit material cost increased almost 12%. While the higher material cost was partially offset through customer management, product mix and pricing relief, gross margin was still adversely impacted by some 130 basis points. We do anticipate that material inflation will continue to impact us in the future.

Our prior two fiscal quarter results included negative gross margin impacts from our decision to retain accruing and infrastructure necessary to support higher volumes. We further narrowed the gap in the first fiscal quarter and believe we made the correct decision to retain the headcount.

The negative impact from rising material costs and additional infrastructure was partially offset by operating efficiencies and leverage on fixed and semi-fixed overhead. The Company generated leverage on overhead with spending increasing 13% on the 19% increase in sales.

Regarding operating expenses, total operating expenses improved from 12.8% of net sales in the first quarter of the prior-year to 11.3% this fiscal year. Selling and marketing expenses were 7.3% of net sales in the first quarter of this year compared with 8.1% in the prior year. We generated leverage in selling and marketing costs through expense management and higher sales.

General and administrative expenses were 4% of net sales in the first quarter of FY15 compared with 4.7% in the prior year. The improvement in our operating expense ratio is a result of leverage from higher volume. Regarding taxes, the Company realized a $1.1 million reduction in tax liability due to a federal research and experimentation credit for FY11 to FY14.

With respect to cash flows, the Company generated operating cash flow of $9.3 million during the first fiscal quarter of 2015, an improvement of $7 million over the same period last year. The improvement in operating cash flow was driven by higher operating profitability and changes in working capital, which included increases in inventory levels to support higher sales.

Net cash used by investing activities was $3.3 million during the quarter compared with $3 million during the same period of the prior year. The increase was due primarily to higher investment in plant property and equipment.

The Company repurchased 130,000 shares of common stock in the fiscal first quarter at a cost of $4.1 million. The Company increased cash by $2.4 million during the quarter to $138.1 million.

In closing, we are pleased with our progress in the quarter. Our gross margins improved 50 basis points from the fourth quarter of FY14, and we delivered solid sales and earnings growth.

We continue to generate favorable leverage on our semi-fixed and fixed overhead with additional volume. However, single family housing starts remain stuck at 600,000 units and confidence in the middle income consumer's appetite to purchase a new home or begin big-ticket discretionary home improvement projects remains a concern. Material inflation continues to place pressure on margins, but hardwood lumber pricing appears to be stabilizing for some species.

In spite of the uncertainty, we believe the Company has established a three to four trend year trend of improvement which mirrors the improving housing market. Some quarters have been below the trend line and some have been above the trend line. The first quarter was a good quarter and it was above that trend line.

Looking forward, we are cautiously optimistic and maintain our expectation we shared in our last call that we will increase margin rates and grow net income in FY15.

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

Thank you.

(Operator Instructions)

Garik Shmois, Longbow Research.

This is Mark Zikeli on for Garik this morning. Good quarter, guys. Just wondering if you can walk through revenue growth by channel for the quarter again. That would be helpful.

Sure. So, taking a look back at the breakdown, our overall remodel business grew 17% in the quarter and new construction was 21%.

Okay. Any color on the dealer channel?

Just say that we over indexed the marketplace as we continue to grow that Waypoint brand.

Okay. That's helpful. Just next, how was mix in the quarter and what was the benefit to sales growth?

Mix was a favorable trend for us within the quarter. Exact impact I don't have a here in front of me, but it did trend positive in most of our retailers.

Okay. That's all for me. Thank you.

Scott Rednor, Zelman.

Very nice quarter. Scott or Kent, can you -- on the remodel side, it sounds like that was better than you would have expected and better than the market. I was hoping you could drill down there what specifically you guys saw or did to drive that outsized growth relative to the market.

I don't think there's anything specifically related to the quarter. And again, you've got some kind of year-over-year play. But we, on the big box side, we did see a little bit of lift there. Going back to Scott's comment, some of it was jobs unit volume, but we also got some lift there on the mix of business. We launched some new products last fall, that takes about six months to really get those in the pipeline and get going. And those new products certainly helped our take. We saw a little bit more in jobs, but we also saw a nice uptick in take. But the big box was probably a little bit stronger than we had anticipated. We've been flat lined there for a while, and we had projected that to continue. And we got a lift, like I said, in jobs and take.

The other one which Scott just briefly mentioned, to answer the last question, was our Waypoint brand continues to really offer a compelling value and marketplace through that channel. We started that program about four years, four or five years ago. And it took us a couple years to get some critical mass going, but we've really got now a good stable of dealers that are ordering on a regular basis. And because we really started it at a pretty low level there through that channel, we've really been able to accelerate that growth. Not only have dealers been over indexing to the remodel market because they've taken share, particularly from the big box, but we are over indexing even to dealers because, again, where we started on the Waypoint side.

So, we were a little bit surprised from that standpoint. We didn't expect that, quite frankly, on the last couple years, the way we've been running. Whether that continues or not, obviously that's the $64 question. Hopefully that's a little bit of volume, a little bit of take. And the Waypoint side, the dealer side is really helping us pull up that average.

That's very helpful, Kent. Considering that you guys were coming into the year -- correct me if I'm wrong, talking about mid single-digit growth for your remodeling channels. Do think that you could now do better than that, just given where you are now and what the run rate of the business is?

Well, again, we -- going back to Scott's comment, it's one quarter. And the quarter was a little bit above the trend line in a lot of ways. And certainly if you look at the remodel segment, not only our growth, but the industry growth being in the low teens is above what we think the trend line has been for some time. Whether that carries into the fall or not, I don't know. We've got a lot of dynamics coming at us in the fall. One is last year, the industry did not have a good fall, primarily because the federal government shutdown happened right in the middle of the fall selling season. The comps -- from that perspective, the comps are a little bit easier in terms of growth.

If you look at it on a sequential basis, again, I think it depends on what your crystal ball tells you for the fall and how people feel. As Scott mentioned in his comments, there's a little bit on both ways on the remodel side. The news on the new construction side is probably a little bit more optimistic than it is on the remodel side, but we'll see. I think we'll have a better view after the second quarter and we get through the fall selling season. About whether what we're seeing in the remodel side would support something above our guidance, our outlook that we gave last quarter, or whether or not this quarter was just an anomaly in the trend line.

Got it, and then one last for me. On the capacity side, can you give an update of where you are in terms of the addition that you guys are expecting from the CapEx line? And Kent, given that you guys announced that maybe four to six quarters ago, depending on how the recovery comes, is there flexibility that you guys have to progress that spending if you need to? Or has this just been that you guys have been able to create capacity in the meantime and it will be a one-time cost outlay?

In terms of -- there's a couple things, I think, in that question. One in terms of, yes, it was over a year ago that we talked about putting it in. And then a few calls ago we rolled that out a year based primarily on the impact that we saw, again, this time last year from the federal shutdown. Then we rolled into the year and there was a little bit of lingering impact in that, and then we had a really harsh winter in a lot of areas in the country. And so that slid out our timeline. If you go back to when we first talked about the capacity expansion, we talked about needing some meaningful capacity in the spring of 2015 and we moved out to the fall of 2015.

Part of it has been the volume -- the demand side of it, the demand curve and the recovery moved out, say, call it six months, maybe a little bit more, which allowed us to put that out. We did get to do some things to get a little more efficient internally, and we are also did some more outsourcing, which helped supplement our internal capacity. As we look forward, currently our feeling is that we need some meaningful capacity a little over a year from now, really in the fall, mid to late fall of 2015. If we do that primarily through outsourcing, that will be an incremental thing that we do when we need. If we decide to do some piece of that internal, we are going to have to do a plant expansion, and that will be a one-time cost that will load in. And we'll have to make that decision here probably in the next couple months.

Great. Thank you, guys.

(Operator Instructions)

Rick Johnson, Thompson Research Group.

This is Rick. I'm filling in for Nick this morning. Great quarter. Quick question. Where do you guys see any regional strength or weakness in new construction or remodeling? Is there any one region that's really standing out, or can you provide some more color?

Yes. The main places that we play, when you look at the Northeast down at the Southeast and Southwest, I think the areas that I'd concentrate on as of late is we've seen softness in the Phoenix market. We see Southern California strengthening a bit, and then we continue to track well in the Northeast, as well as Florida and Southeast.

Okay. Other question. In terms of remodeling mix, have you seen any uptick in higher-end clients? Is there any more color you can shed there in terms of mix?

Well, it goes back to my comment about Waypoint. For us specifically, the mix is helping us, but it's just because we continue to over index on our Waypoint brand as we've -- that growth curve comes up. If you look at the overall market, we probably started talking a little over a year ago about this idea of the bifurcation in the remodel market. Going back to Scott's comments, our sense is that, that middle income or lower middle income, they still really haven't come back in any force.

I think that, that's been more of a drag on the big box side because that has a tendency to be more of their target consumer than has been on the dealer side, although big box does get upper end consumers and dealers do get middle market consumers. But as a general rule, I would say that we really haven't seen that middle to lower middle consumer come back in, in any force. And that's, I think, has resulted in the big boxes under indexing to the overall remodel market and the dealers over indexing to the market.

Thanks, guys. Those are my two questions.

Okay.

(Operator Instructions)

And that does conclude today's conference -- today's question and answer, and I would like to turn the call back over to Management.

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

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