American Woodmark Corp (AMWD) 2015 Q2 法說會逐字稿

Good day everyone and welcome to the American Woodmark Corporation's second-quarter 2015 conference call. Today's call is being recorded Tuesday, November 25, 2014.

We will begin the call by reading the Company's 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.

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

Thank you. Good morning, ladies and gentlemen, and welcome to this American Woodmark conference call to review the financial results of the second fiscal quarter ending October 31, 2014. 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; Cary Dunston, President and Chief Operating Officer; and Scott Culbreth, Senior Vice President and Chief Financial Officer. Scott will begin with a review of the quarter and an outlook on the future and after Scott's comment, Kent, Cary and Scott will be happy to answer your questions. Scott?

Thanks, Glenn. Good morning, everyone.

Today we released the results of our second fiscal quarter, ended October 31, 2014. Financial headlines for the quarter, net sales were $218 million, representing an increase of 14% over the same period last year. Quarter net income was $7.7 million, or $0.48 per diluted share, in the current fiscal year versus $5.3 million, or $0.34 per diluted share, last year.

For the quarter, the Company generated $9.4 million in cash from operating activities, compared to $13.6 million for last year. Six months ended October, year-to-date net sales are $430 million, representing an increase of 17% over the same period last year.

Net income was $16.9 million, or $1.07 per diluted share, in the current fiscal year versus $11.9 million, or $0.77 per diluted share, last year. Excluding the one-time benefit of research and experimentation credits from FY11 through FY14, net income was $15.8 million, or $1 per diluted share, an improvement of 30%. For the current fiscal year, the Company generated $18.6 million in cash from operating activities, compared to $15.8 million for 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 3.8% for the second quarter. Single-family starts during June, July, and August in the prior period average 605,000. Starts over that same time period from the current year average 628,000. With the 60 day and 90 day lag between start and cabinet installation, the overall market activity in single-family homes was up 3.8% for the financial second quarter.

Our new construction-based revenue increased over 20% for the quarter. We continue to over index the market due to our partnership with national and regional builders that are gaining share of total starts, increase in share penetration with those builder partners and a better than average health in the markets where we concentrate our business.

On the remodel side of the business, the picture continues to remain mixed. On the positive side, unemployment continues to improve. The U3 unemployment rate dropped to 5.9%. U6 fell to 11.8% for the third calendar quarter 2014. Further drop of the U3 rate in October to 5.8% is the lowest levels seen since 2008. Consumer sentiment was 86.9[%] in October, the highest reading since July 2007.

All-cash purchases fell versus the prior year. 24% of all transactions were paid in cash in September versus 33% last year. The August rate of 23% was the lowest level reported since December 2009. This trend is significant since cash purchases signals investor activity and they are less likely to remodel than an [undocumented] buyer.

On the negative side, although unemployment has improved, wages have not. Inflation-adjusted average household incomes have declined and too many workers are in part-time jobs seeking full-time employment.

Residential investments as a percent of GDP for the third calendar quarter of 2014 remain flat at 3.1%. The index has remained flat for the last four calendar quarters and the index remains well below the historical average of 4.6 from 1960 to 2000. Existing home sales continues to decline through to third quarter of 2014. During July and September of 2013, existing home sales averaged 5.3 million units. That same period for 2014 averaged 5.1 million units, a decline of 3.8%.

Homeownership rates also continue to decline. Percent of Americans who own their own home in the third calendar quarter was 64.4%. This is the lowest reported level since the first quarter of 1995. This year, first-time buyers remains low. September reported rate was 29%, which was well below the historical norm of 40%, represents a 27-year low.

Interest rates held steady in the quarter at 4.16% in September, but has still risen approximately 65 basis points beginning of 2013 or 3.5% to 4.1% for a 30-year fixed-rate mortgage. Combined with the 5.6% rise in average home prices for September, the 31st straight month of year-over-year gains, the affordability index has declined, disqualifying first-time buyers and reducing discretionary funds available for major remodel activity on the part of the successful buyer.

Our view is that the cabinet remodeling market grew in the high-single digits during the quarter. Our combined big-box and dealer remodel revenue grew mid-single digits during the quarter. Our sales growth rate was below the market growth rate due to our higher share of sales to big-box home-improvement retailers.

We maintained our share of the big-box channel and the dealer channel over index of the remodel market, largely due to the more affluent nature of our customer base. Our Waypoint brand continues to gain share and we grew our dealer business at a faster rate in both the overall remodel and dealer channels.

Regarding gross margin performance, the Company's gross profit margin for the second quarter of FY15 was 17% of net sales versus 16.9% reported in the same quarter of last year. The Company generated year-over-year incremental gross margin of $4.7 million on incremental net sales of $27.1 million, resulting in an incremental gross margin rate of 17%. This is still below our target 25% but an improvement versus our Q1 rate of 10%.

Year-to-date gross profit margin was 17.2% compared to 17.9% for the same period in the prior year. Year-to-date, the Company has generated year-over-year incremental gross margin of $8.1 million on incremental net sales of $61 million, resulting in an incremental gross margin rate of 13%.

Regarding gross margin versus the prior year for the second quarter, gross margin was negatively impacted in the quarter by both material inflation and costs associated with crewing and infrastructure to support our level of sales and installation activity, but the impact was to a lesser degree versus prior quarters. Average unit material cost increased almost 9%. Although increases have slowed, we anticipate that material inflation will continue to impact us in the future.

Gross margin was also negatively impacted by inventory write-offs associated with our September product launch as we discontinued certain lines and higher employee benefit expenses for worker's comp and healthcare. In total all of these items negatively impacted the quarter by approximately 190 basis points.

Negative impact from rising material cost, additional infrastructure, employee benefit cost, product launch cost was more than offset by customer management, product mix, pricing, operating efficiencies and leverage on (technical difficulty) fixed overhead. Company-generated leverage on overhead was spending increasing 8% on the 14% increase in sales.

Regarding operating expenses, total operating expenses improved from 12.3% of net sales in the second quarter of the prior year to 11.3% this fiscal year. Through six-months, SG&A improved from 12.5% of net sales to 11.2%. Selling and marketing expenses were 7.5% of net sales in the second quarter this year compared with 8.3% in the prior year. Improvement in the ratio was generated by favorable leverage from increased sales and ongoing expense control.

General and administrative expenses were 3.8% of net sales in the second quarter of FY15 compared with 4% in the prior year. Improvement in our operating expense ratio was a result of leverage from higher volume.

With respect to cash flows, the Company generated net cash from operating activities of $18.6 million during the first half of FY15 compared with $15.8 million during the same period in the prior year. Improvement in the Company's cash from operating activities was driven primarily by higher operating profitability, partially offset by changes in working capital, which included increases in inventory levels to support higher sales.

Net cash used by investing activities was $26 million during the first half of the current fiscal year, or $8 million excluding the $18 million investment (technical difficulty) deposit. The increase compared to $5.8 million during the same period the prior year is due to higher investment in property, plant and equipment. No significant spending occurred in the second quarter for our South Branch plant expansion. The Company expects to spend $13 million in the second half of the fiscal year for the project, with the remaining $15 million spent in the first half of FY16.

Net cash provided by financing activities decreased $9 million during the first half of the current fiscal year compared to the same period in the prior year, as the Company repurchased 163,326 shares of common stock at a cost of $5.1 million and proceeds from the exercise of stock options decreased $3.6 million. Board authorized an additional $25 million stock repurchase program. Our plan is to continue to repurchase our burn rate annually, which is approximately $10 million and use the addition $15 million authorization for opportunistic repurchases.

Closing, the remodel market continues to struggle. The dealer channel continues to outperform the market with their more fuller customer base, while the home center channel continues to lose share with for (technical difficulty). New construction market remains flat, with single housing family starts averaging 600,000.

Confidence in the middle income consumer's appetite to purchase a new home or beginning big-ticket discretionary home-improvement projects remains a concern. We believe we will continue to be faced with difficult market conditions for the remainder of the fiscal year but our performance will continue to outpace the market.

With respect to cost, inflation is easing as hardware lumber pricing appears to be stabilizing. We continue to generate favorable leverage on our semi-fixed and fixed overhead with additional volume. We delivered gross margin improvement year over year and sequentially after adjusting for higher launch cost and employee benefit costs.

As stated last quarter, we believe the Company has established a three- to four-year trend of improvement, which mirrors the improving housing market. Some quarters have been below the trendline and some have been above the trendline. The first quarter was a good quarter and was above the trendline. The second quarter was also above the trend.

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

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

(Operator Instructions)

Scott Rednor, Zelman & Associates.

Hi. Good morning. Nice quarter.

Scott, I was hoping on the gross margin, the 190 basis points, did that include the unit cost? And then I was hoping you could provide more color on how we should think about the launch costs and inventory write-offs. Should that continue in the back half of the year, or does that go way?

The launch costs were essentially a one-time item that occurred in the quarter. That was about 20 basis points. That would not repeat in Q3 and Q4.

And then, as you guys think about getting back to that target rate of the 25% incremental, can you get there this year, or, given that you are trending above trendline on the sales line?

Our thoughts as we look at the second half of the year is that we should be able to aspire to get to our target rate of 25%. There's always open questions around what's going to happen around volume and inflation, but our projections are, we believe we can get there in the near term.

Great. And then on the repo, when you guys talk about separating the $25 million between the $10 million annually and then the opportunistic, what's going into consideration to say that, that -- what's the hurdle rate for that $15 million as you think about opportunistically going forward?

Yes. That's always an important question and we won't declare a strike price on what that target would be for us. We would just continue to say it will be opportunistic, so we will continue to monitor the market if we think there's a good time to go in and jump and buy, we've got an additional $15 million to do that with.

Okay. Great. And then just one last one. Any comments on the promotional environment, particularly at the home centers? Thanks.

Hi, Scott. This is Cary Dunston.

Fairly flat from what we are seeing from ourselves and competitors. The market, as we typically hope to see in the fall selling season, you see a little bit of ramp up in promotional spend in the fall. We saw a little bit of that but it leveled off pretty quickly as it just was not generating a return, what we hoped we'd see in the home-center markets, so basically consistent with where we have been running.

Great. Thanks, Cary.

Rick Johnson, Thompson Research Group.

Good afternoon, or actually good morning. I'm calling in for Nick Coppola. Couple quick questions. You mentioned expansion. I think you talked last quarter about outsourcing or subcontracting. Any more color you can provide there?

This is Cary.

We continue with the -- the expansion plan that Scott mentioned is our expansion of our South Branch facility that we announced last quarter. That's proceeding on plan due to the, obviously, the lead time associated with equipment, the spending associated with that expansion to spread out over really the next six months. Our plan is roughly 9 months from now would be to have that up and running.

Outsourcing is -- it's always a give-and-take. I mean we monitor -- it depends on the incoming volume and our current internal capacities. Right now we're basically running very consistent with where we were prior two quarters on outsourcing.

Okay. Next question. Talk about -- last time talked growing sales into the dealer channel. Any more color you can provide there?

Yes. We're -- as we said in the call, we are continuing to outpace the market. The dealer business we see is a very important growth opportunity for us. It has grown for us, and obviously has become a significant part as we look into the future. We want it to continue to grow and be a much more significant piece of our pie. Right now, that market is where we see more growth compared to the home center market, just because of that more affluent customer that shops there. We are continuing to focus a bit on the dealer market and focused on growing it.

Another question. You talked about raw material prices. What part is -- can you break out what part of that is transportation? We're hearing a lot from other vendors about trucking costs really adding into the material pricing? Any color you guys can add around that?

Nothing --

Moving product?

Nothing that I would highlight as significant in the current period. Our primary increases in the material line and the actual raw material items is not in the freight charges coming our way. Fuel has certainly eased a bit. Across the board, helping us. Nothing that I can really add significantly around freight as being an impact.

Okay. My last question is, any expectations -- or any color on expectations for 2015?

With respect to freight?

Just general color where you -- your outlook.

Nothing beyond what I ended the planned remarks on at this point in time. Our expectations are that we will continue to see sales growth the remainder of the year and deliver that on 2015, and we will expand margin as well as income. We don't give specific guidance around EPS or sales results for the year.

Thank you, gentlemen.

(Operator Instructions)

Garik Shmois, Longbow Research.

Hey. Good morning.

This is Mark Zikeli on the phone for Garik today. I was just wondering if you could talk about the sales cadence as the quarter progressed here. I think you said in the last call you did have a tailwind on the comp aside from the government shutdown. Can you try to quantify that at all?

Yes. I can tell you that a growth rate did accelerate throughout the quarter. We were in the low teens in August and then it accelerated to the high teens by the time we got to October.

Okay. Any commentary on the start of November here?

Yes, I can comment on that. That's through -- as you are mentioning, we've got a pretty low comp out there because of the impact of the shutdown. It's different by channel. The activity on the new construction side is pretty steady, and with the leadtimes there we can see the starts that are coming and specifically with our customers. The growth rate there is continues to be pretty solid.

On the remodel side, we don't have as much visibility, but the fall season, selling season, was above last year because of impact of the shutdown last year. It didn't come quite back to where everybody wanted it to, so it was not a terribly strong fall selling season. If you look at it on a sequential basis it was probably a bit disappointing. If you look at it on a year-over-year basis, which is kind of what Scott was alluding to, because of the shutdown it looks pretty good.

Okay. That's helpful. Just wondering if you can talk a little bit about consumer behavior, especially at the big boxes. I think previously you said middle income households are still reluctant to pull the trigger on a big R&R purchase. I'm just wondering if you're seeing any changes or new developments here over the last couple months.

Unfortunately, not really. The middle income Americas you see -- I think they're out buying cars and appliances and so forth, but from the discretionary spend perspective in our category, we just have not seen them return to the market yet.

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

Jonathan Sacks, Stonehill Capital.

Hi. Thanks for taking my questions. Can you update us as to your approximate mix of sales by channel in terms of home center versus dealer channel, et cetera?

Yes. From a high-level standpoint, our remodel business is still about 53% of the total. Within that, the Waypoint business is about 15% of remodel.

And what portion of sales are to big box customers? I guess I was thinking more by distribution channel as opposed to by purpose.

By default of those percentages, home center would get you to about 45%. Your model is 53% of the total and you've got an 85%/15% split between home center and Waypoint, which is our dealer business.

Okay. Great. And then can you give us a sense of your approximate capacity utilization now? Obviously, you're expanding your capacity, but I'm curious as to how full you are running now.

Obviously since we are -- we go from dry and lumber all the way to assembly in cabinets, it varies greatly by plan, so it's hard to give you a holistic view. We do have enough capacity in both -- between internal as well as our purchasing and outsource purchase plans, we're in good shape.

Okay. And then I recall you have an annual pension, a catch-up contribution on your pension payments. Can you tell us what that is expected to be for the year?

We don't have any catch-up payment per se. In our Q that will be filed here shortly, you'll see that our annual contribution amount is approximately $4.3 million for this fiscal year. It was $2.3 million last year, but there's no catch-up requirement.

Sorry. That's what I was referring to. Does that run through the income statement?

Yes.

Yes. Okay. Great. And then I guess the last question about your cash balance, which is thankfully large and growing due to the great free cash flow generation of the business. You are obviously doing a plant expansion, which will use some cash and you've authorized a stock buyback, which will use some cash, but you'd still have a pretty significant cash balance after that, especially as the business continues to generate cash. Any other thoughts on use of excess cash?

This is Cary. Nothing specific we are going to outline today. Obviously, as a management team, we continue to assess a lot of strategic options, and we are very encouraged, despite some of the ups and downs we are seeing in the market today.

Over the past couple years even, we are very, very encouraged about the long-term outlook of our industry and feel that appropriate investments will be required in the future. The question now is strategically where do we make those investments and what timing. At this point, that's really about all we can say.

Okay. Great. Thank you very much.

Sure.

Josh Chan, RW Baird.

Hi. Good morning. Just a couple of questions.

As you look at your outlook for both the new construction and the remodel market over the second half, I was just wondering if your outlook for these markets has changed over the last three months? I didn't want to read between the lines too much, so I just wanted to clarify if anything's changed in these markets.

Yes, it has come down from where we initially thought we were going to come out. The home center market, as Kent mentioned, was not quite as strong this fall. What that translates to in the spring is anybody's guess.

We are anticipating once again the spring selling season for the remodel market. On the new construction remember, though, if you look pretty much all the industry analysis of analysts have brought down their expectations on the new construction, but we do anticipate that we will continue to outpace some of the numbers that are out there today.

Okay. And then my other question is, as we think about your capacity increase with respect to the new plant, how should we think about the timing of P&L costs starting to hit the income statement?

Yes. So again, from a cash flow perspective, we'll start to procure assets over the back half of the fiscal year, so we will bring in $13 million. We'll start to have some expense associated with the project that will likely happen in the next fiscal year as we bring in the remaining $15 million. Then we'll go live with the project approximately this time a year from now. There certainly will be some margin impact initially until we are able to ramp up that capacity to an effective state from a shift standpoint. I haven't got a model result here to share with you, but I know we've had conversations over the last couple quarters. There will be a drag initially until we are able to fill that line.

Okay. Great. Yes. Thank you for your time and congratulations on the good quarter.

Thank you.

As I do not see there is anyone else waiting to ask a question, I'd like to turn the line back over to Mr. Eanes for any additional or closing comments. Please go ahead.

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

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