American Woodmark Corp (AMWD) 2015 Q3 法說會逐字稿

Good day and welcome to the American Woodmark Corporation third quarter 2015 conference call. Today's call is being recorded, Thursday, February 26th, 2015. 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 express or implied therein will not be realized. I would now like to turn the call over to 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 our financial results for our third fiscal quarter ending January 31st, 2015. Thank you for taking your time -- taking time to participate. Participating on the call today from American Woodmark will be Kent Guichard, Chairman and Chief Executive Officer, Cary Dunstan, President and Chief Operating Officer, and Scott Culbreth, Senior Vice President and Chief Financial Officer. Scott will begin with the review of the quarter and an outlook on the future. After Scott's comments Kent, Cary, and Scott will be happy to answer your questions. Scott?

Thank you, Glenn. Good morning, everyone. Today we released the results of our third fiscal quarter ended January 31, 2015. Financial headlines for the quarter. Net sales were $189 million, representing an increase of 12% over the same period last year. Reported net income was $7.3 million or $0.45 per diluted share, in the current fiscal year versus $2.9 million or $0.18 per diluted share last year. Including the one time benefit of research and experimentation credits, net income was $7.1 million or $0.44 per diluted share.

For the quarter the Company generated $17.3 million in cash, from operating activities, compared to $7.7 million for last year. For the nine months ended January, year-to-date net sales were $618.6 million, representing an increase of 15% over the same period last year. Net income was $24.2 million or $1.52 per diluted share in the current fiscal year versus $14.8 million or $0.95 per diluted share last year.

Including the one time benefit of research and experimentation credits, net income was $23 million, or $1.44 per diluted share, an improvement of 52%. For the current fiscal year the Company generated $36 million in cash from operating activities, compared to $23.5 million over last year. Some additional comments on sales performance starting with the new construction market. Recognizing a 60 to 90 day lag between start and cabinet installation, the overall market activity in single-family homes was up 8.5% for the financial third quarter.

Single family starts during September, October and November of the prior period averaged 632,000. Starts over that same time period from the current year averaged 686,000. Our new construction base revenue increased over 15% for the quarter. We continue to over index the market due to an increase in share penetration with our builder partners and the better-than-average health of the markets where we concentrate our business. Remodel business continues to be challenging. On the positive side, unemployment continues to improve.

The U3 unemployment rate dropped to 5.6% and U6 fell to 11.2% for the fourth calendar quarter of 2014. Consumer sentiment was 98.1% in January, the highest reading since January 2004, as lower fuel prices and improvements in the labor market are favorably received. Existing home sales increased during the fourth quarter 2014. Including October and December 2013, existing home sales averaged 4.9 million units. That same period for 2014 averaged 5.1 million units, an improvement of 2.6%. Interest rates fell in the quarter with a 30-year fixed rate mortgage at 3.67% in January, an improvement of approximately 76 basis points versus last year.

All cash purchases fell versus the prior year. 26% of all transactions were paid in cash in December versus 32% last year. On the negative side inflation adjusted average household incomes are at the same -- are the same as they were 20-years ago and too many workers are in part-time jobs wanting full-time employment. Residential investment as a percentage of GDP for the fourth calendar quarter 2014 remain flat at 3.1%. The indexes remain flat for the last five calendar quarters, and the index remains well below the historical average of 4.6% from 1960 to 2000. Home ownership rates also continue to decline.

The percent of Americans who own their own home in the fourth calendar quarter was 64%. This is the lowest reported level since the first quarter of 1995. Share of first time buyers remains low. The December reported rate was 29%, which is well below the historical norm of 40%, represents a 27-year low. Median existing home price rose 6% for December, 34th straight month of year-over-year gains, which impacts our consumer supportability index. We believe the cabinet remodeling market grew in the low single digits during the quarter. Our combined big box and dealer remodel revenue grew high single digits during the quarter. We continue to maintain our share of the big box channel and the dealer channel over indexed the remodel market due to the more fluid nature of the customer base.

Our Waypoint brand continues to gain share and we grew our dealer business at a faster rate than both the overall remodel and dealer [share]. Promotional activity was flat with prior year for the fiscal third quarter. Our early assessment for the fiscal fourth quarter is that activity has increased in the remodel channel. Regarding gross margin performance, the Company's gross profit margin for the third quarter of fiscal year 2015 was 18.6% of net sales versus 15.4% reported in the same quarter of last year. The Company generated a year-over-year incremental gross margin rate of 46% for the third fiscal quarter. Gross margin was positively impacted in the quarter by higher sales volume and improved operating efficiency as we generated favorable leverage on our semi-fixed and fixed overhead with additional volume. The Company generated leverage on overhead with spending increasing 9% on a12% increase in sales.

Average unit material cost increased approximately 3%, primarily due to ongoing inflation. Year-to-date gross profit margin was 17.7%, compared to 17.1% for the same period in the prior year. Year date the Company generated a year-over-year incremental gross margin rate of 21%. Regarding operating expenses, total operating expenses increased from 12.4% of net sales in the third quarter of the prior year to12.8% this fiscal year. Through nine months SG&A improved from 12.5% of net sales to 11.7%. Selling and marketing expenses were 8.5% of net sales in the third quarter this year compared with 8.5% in the prior year. The Company did not generate leverage this quarter due to timing of displays and product launch costs.

General and administrative expenses were 4.3% of net sales in the third quarter of fiscal year 2015, compared with 3.9% in the prior year. The increase in our operating expense ratio is a result of higher performance-based compensation costs. With respect to cash flows, the Company generated net cash from operating activities $36 million during the first nine months of fiscal year 2015, compared with $23.5 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 and lower increases of customer receivables, which was partially offset by increases in inventory levels to support higher sales. Net cash used by investing activities was $43.5 million, including $29.5 million investment short-term certificates of deposit resulting in a net use of $14 million during the first nine months of the current fiscal year, compared with $8.3 million during the same period of prior year. This increase was driven by additional investment in property and plant equipment.

We spent approximately $4.1 million for our South Branch plant expansion. The Company expects to spend $13 million in the second half of the fiscal year with a project for the remaining $15 million spent in the first half of fiscal year 2016. Net cash provided by financing activities decreased $9.5 million during the first nine months of the current fiscal year compared to the same period in the prior year with 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 $4.4 million. In closing, the remodel market remains challenging.

The dealer channel continues to out-perform the market with their more fluid customer base, while the home center channel continues to lose share with their middle income consumer. New construction market appears to be improving with December single-family housing starts coming in at 727,000, the best since March 2008. January declined to 678,000, but grew 16% versus prior year. Consumer confidence is increased but the middle income consumer's willingness to purchase a new home or begin big ticket discretionary home 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.

Inflation pressure has slowed with hardware lumber prices stabilizing. We continue to generate favorable leverage in our semi-fixed and fixed overhead with additional volume. And we delivered an incremental gross margin rate of 46%. [Data] for the prior two quarters, 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 trend line and some have been above the trend line. The third quarter was a good quarter and again, above the trend line. Looking forward we maintain our expectation we shared in our last call that we will increase margin rates and grow net income in fiscal year 2015.

Although we remain optimistic about future revenue growth, we are somewhat cautious on current industry projections. This concludes our prepared remarks we would be happy to answer any questions you have at this time.

(Operator Instructions) We'll go first to Scott Rednor with Zelman and Associates.

Hey guys, good morning, nice quarter. Scott in your script you mentioned increased activity in 4Q to remodeling. Was that sales or promotional comment?

That was a promotional comment.

How do we think about that in terms of the gross margin going forward? Clearly 3Q is really strong. What do you think is repeatable and how should that factor into what we will see in 4Q?

I think the promotional activity could be a little bit higher from an expense perspective in our quarter versus Q3, but I think it'll be fairly insignificant on our total margin result.

And just within the gross margin analysis, clearly you guys are already in spending for that plant and 3Q is strong, so as we think about going forward, can you still maintain your target rate of 25% incrementals on that gross margin line as this facility is ramped up, or how should we think about that flowing through the P&L? Either beneficial or a headwind on a specific quarter half basis?

I think we've had that question a couple of quarters and I'll given the answer we've given in each of those quarters. Our goal is always to deliver the 25% incremental gross margin rates. Certainly we were able to do that in Q3 and year-to-date we're at 21%. Our belief is that we'll continue to do that as we press and go forward. Initially when we go live with that South Branch facility there will be a drag on margin as we put that depreciation cost in our result and we bring in staff. So there may be a slight dip out of the gate.

I don't have an exact figure to give you. I think that's the question that has been somewhat posed in the past. We're in the midst of our budget exercise, and would likely be able to give a better sense of that next quarter when we come out and give you our outlook and wrap up our Q4 results.

Okay. Great, and just last, on the builder's side, you seeing anything different by region? Clearly you have a plan in Houston. I was curious if any regional commentary you could provide.

Hi Scott, this is Cary. We're starting to see some -- actually as much as you read in the paper about the impact of oil we do have a few builders that are talking about slowing down in the Texas market. We're starting to see a little bit of it. Not a substantial impact thus far, but it is something we're keeping a close eye on, some of the big areas, Phoenix has definitely slowed down. We have actually seen a little slow down even in the Florida market on the builder's side.

Appreciate it. Thanks.

We'll go next to Nick Coppola with Thomson Research Group.

Good morning.

Good morning.

I wanted to dig in a little bit more on the gross margin performance in the quarter. Clearly very strong well above the 25% long-term incremental gross margin you talked about. I think I heard you guys call out higher sales volume, improved operating efficiency, which sounds like typical drivers of gross margin improvement. Was there anything a little bit more unusual that drove that really great performance in the quarter? Just in kind of greater detail that you can provide would be helpful.

Two points I would draw you back to. If you went back a year and looked at Q3 of fiscal year 2014, one of the things you would have heard the team talk about at that point in time was accruing infrastructure we put in place for our new construction business. And that was a pretty severe drag on margin in that particular quarter. At this point in time we've now grown into that structure. It was a drag on our first quarter and our second quarter result, but we've essentially grown back into that structure. So that's one comment. The second would be with respect to inflationary impacts. A year ago we were taking pretty big increases. And that pressure has slowed. So that would be the other piece.

That makes sense. It's helpful. And then wanted to ask also about your rate of growth within the new construction channel and so continued (inaudible - technical difficulties) there. Talking about over 15% growth. What kind of -- how sustainable is that kind of growth rate for you? I know a lot of that is in excess of [starts], it's the result of a number of factors. Can you help guide us to where you think the new (inaudible - technical difficulties) is for you and how those positive drivers project out into the future?

Yes, you know, to kind of forecast the housing industry has been quite a challenge for everybody involved, and there's a lot of factors that obviously we look at and I know others look at. We constantly reported and consistently reported that we are over indexing in that market. Obviously with the builders that we do business with, we have teamed up with some of the best builders in the country and they are over indexing in their markets. Also the geographic regions in which we have historically played have been over indexing relative to the U.S. as a whole. And then our market share, as well as substantially improved over the past five-years.

So as you look at those, our market share, we do expect to continue over index I think there will be slowing impacts out there. Both regionally as we just discussed, whether that is Texas, Florida or Phoenix or some of the major markets we play we are starting to see some variation in those markets. Also our accounts will get tougher and tougher when we talk about market share gain. We've gained most of that market share in the past five years, and we're taking advantage of that market share growth and we a re continuing to grow market share, but it will be a slower pace than we've done in the past. So in general I do expect us to continue to over index but I do expect the incremental amount that we do over index will be less than what we've done in the past.

Okay. Thank you for taking my question.

Thanks.

We'll take our next question from Tim [Walsh] with Baird.

Good morning, guys. Nice job.

Thanks.

I guess just I wanted to get a little bit more color on something, Scott, that you alluded to in the comments, that you were somewhat cautious on current industry projections. I guess you know is that the repair market? Is that the new construction market? Just maybe a little bit more color there could be helpful.

This is Cary, Tim. Primarily if you look at what a lot of analysts are talking about out there, and we obviously read what's being projected for calendar year 2015 primarily related to new construction. And obviously there's a strong correlation as new construction, you know, improves and certainly remodel improves, because you assume there's a domino impact of people buying up and so forth. Some of the projections we're seeing out there, and obviously it's a large range from 8% even as high as 27% to 30% when you talk to some folks.

We spent quite a bit of time in the past couple months in preparation for our budget as Scott mentioned. [K biz] several weeks ago and spending time at a lot of our builders. And there tends to be I guess a little more conservatism on the builder side if you talk directly to the builders, with regard to some of their numbers compared to what you may hear from the industry analysts and so forth. At the end of the day if you look at some of the economic underpinnings of that key variable that we track closely and that's first time home buyers.

Some builders are starting to talk about ramping up for that, but for the most part a lot those economic indicators just have not changed enough in our opinion to really go out and kick start anything significant in that market. And they're vital. They are view truly vital to get this thing going at full speed so it can be self supporting within its own self where people can be allowed to buy up. It supports the remodel industry, et cetera. The government is taking action. You're seeing it whether it's FHA premiums, et cetera, that there are things that are improving, small banks are starting to lessen their lending requirements and so forth, but it's still early stages.

Longer term we still remain very optimistic. We do expect to see continued growth in this calendar year. I just say we're going to be a little bit more on the conservative side compared to some of the high numbers we're hearing out there.

Gotcha. So really there's some high numbers out there that are probably a little bit too optimistic?

Yes.

And I guess -- is the first time home buyer -- is that the metric that you guys are really closely watching to maybe get you a little bit more bullish about the strength of the housing recovery?

Yes, a lot of variables but if you compare this recovery to prior recoveries, and one of the key bottlenecks that remains, it is the ability of the first time home buyer to get back into the market. It is an entry level home but that allows other folks that's want to potentially sell to move up. Even allows baby boomers to move down. It's just that domino impact of what this industry needs to really get into full motion. That first time home buyer, as a relative percent of the total, is still quite a bit lower than it was back in the, say, 2006 time frame.

Right. Okay. That's very helpful. And I guess as we look at the repair remodel channel is there any way to think about how -- the difference between just the home center market and the dealer market in terms of growth rates this quarter?

The coming quarter or quarter three?

Yes, Q3.

It's actually interesting, the dealer channel, once again, hard to get exact science in those. But the dealer channel did not perform as high as we initially hoped. And at the end of the day, some of it was for good reasons. We actually saw a lot of dealers that due to their success the past couple years were more willing to take a couple weeks off for Christmas, and literally just shut their doors and go on vacation, and that did impact some of the numbers. They continue to over index as Scott said, though, relative to the home center market, primarily just due to the a flew answer of the customers walking in the door.

The average price of the cabinet they sell is quite a bit higher. And so they continue to do better, continue to over index ,and we do expect continued higher growth out of that dealer channel. Our challenges, obviously Waypoint is still a new brand for us. We're growing it in the dealer channel, but relative to our total makeup we will over index as a whole just because we have more weighting in the home center market.

Okay. That's great. And I guess just my last question to maybe follow on to that, could you update us a little bit on the progress in the dealer channel? I know you've made a lot of investments there and I guess is the margin profile of that business today, you know, slightly below the overall Company, and over time should we expect that to be more accretive, just given the dynamics of that channel in terms of pricing and the customer base?

I'll talk a little bit about the business as a whole. It's definitely on our plan, you know, still early, so we're definitely beyond the stages of covering our overhead costs with regard to our SG&A and so forth. We are happy with the margins. I think our opportunity is to go out and grow the business. We have large number of dealers out there. Now it really comes down to penetrating within those dealers and obviously with that comes the incremental margin. We're not where we want to be on margin yet, but the opportunity to improve certainly remains.

Yes I would -- this is Kent -- I would add that the -- on a like versus like product basis, the market's pretty efficient. And we see similar margins on similar products, but as Cary mentioned the difference is the dealer channel has a tendency to sell a higher mix.

Yup.

So as that grows as part of our overall business, it will help re-weight the average of the margin up. But it's more due to the mix than a like versus like. The market is pretty efficient.

Understood. Appreciate the color, guys. Thank you.

(Operator Instructions) We'll go next to Garik Shmois with Longbow Research.

Thank you. Question on -- or I guess a follow up on the comment around promotions in the remodel channel picking up. Just wondering, is this more of a seasonal development that you're seeing or is the pick up in promotional activities something that is potentially more sustainable as you look out over the next several quarters?

For the most part you will typically see a pick up in promotions relative to the spring selling season. That's what's budgeted in ours and certainly most others in the industry, as you move into it. I don't predict it's going to mean anything outside of what we would typically see in our Q4, relative to promotion. We've actually been fairly consistent on our side. You just get a lot of variance when you look at a competitor-by-competitor standpoint. We've seen a little bit of uptick relative to the few competitors out there. Nothing that I would say is out of the ordinary, though for coming into the spring selling season.

Okay. And next question is, you indicated that you're starting -- you lacked some hardwood inflation in the quarter, and that helped with the leverage. I was wondering if you could comment looking out how you are thinking about raw materials and energy and lower transport costs potentially impacting your business for the calendar 2015.

We haven't quite finished the look forward on those respective measures. With respect to material inflation it has somewhat slowed. It wasn't zero in the quarter, we still had an impact in our fiscal third quarter, but the pace is certainly slowed down. Fuel is certainly down, as well, which helps from a transportation perspective. That was a slight benefit for us in the quarter, as well. We're starting our process now as we go through our budget exercise and looking external data to tell us what we think the most likely fuel price will be going forward. So nothing really specific there to offer other than we're in the midst of doing our ground work on that.

Historically if you do see raw material relief I guess two parts. How quickly can you see that in the gross margin, and how much of a significant benefit can you end up realizing?

Let me [jump at one] First of all make sure we're -- right now not anticipating we're going to see any type of relief relative to, you know, potentially positive impact of inflation. We are going to see continued inflation into our fiscal year 2016. The question is how much. What Scott was referring to for our Q3 is inflation was less than what we initially forecasted, which was a benefit for us, but some of the preliminary numbers I have seen for our fiscal year 2016 still show fairly significant inflation into our next -- our fiscal year 2016. The question is how much. And we don't have that detail yet.

All right. Thanks for the help and congratulations.

At this time there are no other questions in queue. I'll turn it back over to Mr. Eanes for any closing comments.

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 include today's conference call. We appreciate your participation.