American Woodmark Corp (AMWD) 2015 Q4 法說會逐字稿

Good day, everyone, and welcome to the American Woodmark Corporation fourth quarter 2015 conference call. Today's call is being recorded, June 2, 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 expressed or implied therein will not be realized.

For opening remarks and introductions, I'll now turn the conference over to Glenn Eanes, Vice President and Treasurer. Please go ahead, Sir.

Thank you. Good morning, ladies and gentlemen. Welcome to this American Woodmark conference call to review our fourth quarter and full year financial results for our fiscal quarter and year ending April 30, 2015. Thank you for taking time to participate.

Participating on the call today from American Woodmark 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 the review of the quarter and year 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 fourth fiscal quarter ended April 30, 2015.

Financial headlines for the quarter. Net sales were $207 million, representing an increase of 10% over the same period last year. Reported net income was $11.3 million, or $0.69 per diluted share in the current fiscal year versus $5.6 million or $0.36 per diluted share last year. Excluding after-tax restructuring charges, the Company generated $11.2 million or $0.68 per diluted share of net income for the fourth quarter of the current fiscal year compared with $5.4 million, or $0.34 per diluted share for the same period of the prior fiscal year.

For the quarter, the Company generated $22.8 million in cash from operating activities compared to $17 million for last year. For the 12 months ended April, year-to-date net sales were $825.5 million, representing an increase of 14% over the same period last year.

Net income was $35.5 million or $2.21 per diluted share in the current fiscal year versus $20.5 million or $1.31 per diluted share last year. Excluding after-tax restructuring charges and a one-time benefit of research and experimentation credits, net income was $34.2 million or $2.10 per diluted share, an improvement of 63%. The current fiscal year, the Company generated $58.8 million in cash from operating activities compared to $40.5 million for 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 over 10% for the financial fourth quarter. Single-family starts during December, January, and February, the prior period averaged 611,000.

Starts over that same time period from the current year averaged 676,000. Our new construction base revenue increased over 15% for the quarter. We continue to over index the market due to share penetration with our builder partners and the health of the markets where we concentrate our business.

The remodel business continues to be challenging. On the positive side, unemployment continues to improve. The U3 unemployment rate dropped to 5.5% and U6 fell to 10.9% for the first calendar quarter of 2015. Consumer sentiment remained high at 95.9 in April.

Existing home sales increased during the first calendar quarter of 2015, marked at its highest annual rate in 18 months. Between January and March of 2014, existing home sales averaged 4.7 million units. That same period for 2015 averaged 5 million units, an improvement of 6.2%.

Interest rates remain low in the quarter with a 30-year fixed rate mortgage at 3.67% in April, improvement of approximately 67 basis points versus last year. All cash purchases fell versus the prior year; 24% of all transactions were paid in cash in March versus 33% last year. On the negative side, inflation adjusted average household incomes 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 EDP for the first calendar quarter of 2015 remain flat at 3.1%. Indexes remain flat for last six calendar quarters and index remains well below historical average of 4.6 from [1960] to 2000.

Homeownership rates also continued to decline. Percent of Americans who own their own home in the first calendar quarter was 63.7%. This is the lowest reported level since the first quarter of 1993.

The share of first time buyers remains low, but is slowly improving. The March reported rate was 30%, which is well below the historical norm of 40%. The median existing home price rose 7.8% for March, the 37th straight month of year-over-year gains, which impacts our consumers' affordability index.

We believe the cabinet remodeling market grew in the low single digits during the quarter. Our combined Big-Box and dealer remodel revenue also grew in the low single digits during the quarter. We continue to maintain our share in the Big-Box channel and the dealer channel over indexed to the remodel market due to the more fluent nature of their customer base.

Our way point brand continues to gain share and we grew our dealer business at a faster rate in both the overall remodel and dealers channels. Waypoint represents approximately 9% of our overall revenue. Promotional activity was higher in the fourth quarter than in the fiscal fourth quarter as we responded to competitive positioning and market conditions.

Regarding gross margin performance, the Company's gross profit margin for the fourth quarter of FY15 was 20.9% of net sales versus 17% reported in the same quarter of last year. The Company generated a year-over-year incremental gross margin rate of 62% for the fourth 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 4% on a 10% increase in sales. Average unit material cost increased approximately 2% primarily due to ongoing inflation.

Year to date gross profit margin was 18.5% compared to 17.1% for the same period in the prior year. Year to date, the Company generated add year-over-year incremental gross margin rate of 29%.

Regarding operating expenses. Total operating expenses increased from 12.3% of net sales in the fourth quarter of the prior year to 12.4% this fiscal year. Through 12 months, SG&A improved from 12.5% of net sales to 11.9%.

Selling and marketing expenses were 8% of net sales in the fourth quarter of this year compared with 7.9% in the prior year. The Company did not generate leverage this quarter due to the launch costs and customer training expenses. General and administrative expenses were 4.4% of net sales in the fourth quarter of FY15 compared with 4.4% in the prior year.

With respect to cash flows, the Company generated net cash from operating activities of $58.7 million during FY15 compared with $40.5 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 in customer receivables, which is partially offset by increases in inventory levels to support higher sales.

Net cash used by investing activities was $56.6 million during the current fiscal year compared with $9.6 million during the same period over the prior year due primarily to a $35.5 million investment in short-term (inaudible) deposit and increased investment in property, plant, and equipment. We spend approximately $10.2 million for our South Branch plant expansion. The Company expects to spend $17 million in the first half of FY16.

Net cash provided by financing activities increased $3.9 million during the current fiscal year compared to the same period in the prior year primarily by reducing debt payments by $3.2 million. Additional activities include lower proceeds from the exercise of stock options of $1.1 million and additional common stock repurchases at a cost of $1.9 million.

Closing and remodel market continues to be a challenge. Dealer channels still outperforming the market with a more fluid customer base while the home center channel continues to lag the market with middle income consumer.

New construction market appears to be improving with April single-family housing starts growing 14.7% versus prior year to 733,000 units. Consumer confidence is improved, but the middle income consumer's willingness to spend on a home a new home or begin big-ticket discretionary home improvement projects remains low.

Inflation pressure has slowed and we continue to generate favorable leverage on our semi-fixed and fixed overhead with additional volume. I'm sure ending cash position of $185 million will generate some questions.

As previously stated, we are comfortable with our cash position as it allows us flexibility and speed as opportunities are presented in the market. Housing starts will continue to rebound. We believe we are better positioned to be able to respond effectively by investing in respective opportunities. In addition, as a means to better manage our stock repurchase program, we are establishing a 10B51 plan for the Company.

Regarding our FY16 outlook, for the market we expect single-family housing starts to grow 8% to 10%, interest rates to climb along with continued increases in the average price of new homes, both factors will negatively impact affordability, particularly for the important first time, first upgrade buyers, and unemployment should remain steady. In this environment, our expectations for Company performance are as follows; the remodeling business continues to be challenged until economic trends remain consistently favorable, so we expect to generate growth in the home center and dealer business; new construction business should continue to perform ahead of the market, but to a lesser extent than prior-year trends; gross margin will be impacted in Q3 and Q4 as we bring on our facility expansion.

In summary, the Company expects to increase its gross margin rate and grow net income in FY16. This concludes our prepared remarks. We would be happy to answer any questions you have at this time.

(Operator Instructions)

And we'll take our first question today from Josh Chan with Robert W. Baird.

Good morning, guys. Congrats on a great quarter.

Thank you.

I wanted to ask about the repair and remodel market. What is your expectation about market growth as you think about next year and if you can talk about also kind of the promotional dynamics that you expect to go on and how that might be different or the same as what you saw this year?

Good morning, Josh. It's Cary. As I always say, forecasting has been pretty tough for us. If we look at home center, I think as Scott mentioned, it is pretty dependent upon that middle income consumer coming back into the market and being able to go out on the discretionary side and start spending some of the bigger ticket items such as cabinets. We're forecasting in the lower single digit this year as well for the home center market. It's all pretty tied to that middle income whether it's a first-time home buyer going out or that consumer getting back in the market. They are all fairly related, but right now we would be looking at probably low single digits.

Okay. Any changes-- The promotional dynamics, any changes there?

It's always hard to judge as well. I mean, obviously, we kind of respond to market and respond to competitors. Right now, our trends would be based on historical norms. So if you look at prior history, we expect to be pretty consistent with where we've been in prior years. I'll say normalized levels, so nothing on the horizon right now that would expect us to have anything outside the norms for core promotional activity in any of our fronts.

Right. That's good to hear. And Scott, on your comment about the gross margin increase. Even with the plant capacity coming on in the second half of the year do you still expect to achieve 25% incremental gross margin this year, or could that be more difficult because of the added capacity?

So our stated goal is to be in that 25% range as we go forward. We'll have some impacts in Q3 and Q4 as we bring the expansion on. We should get relatively close to that 25% goal for the year, but it will be sporadic when you look at first half versus second half.

Okay. And then last question. You mentioned some SG&A program costs and training expenses. Were those related to the dealer initiative and how should we think about SG&A leverage as we look into next year?

No, those costs were not specific to the dealer channel. Those were across the product portfolio. So we had some product launches that came out, so we had literature and sample costs associated with that. There was a specific training event with designers that was more on the home center side as opposed to the dealer side. As far as future progression around SG&A, we don't give specific guidance there, but we don't expect to see any tremendous change up or down versus what our run rate was in FY15.

Okay. Great. Thanks so much and congrats on the quarter.

Thank you.

We'll take our next question from Nick Coppola with Thomson Research Group.

Good morning. I just wanted to follow up on the incremental gross margin question for 2016. And so is the right way to think about it kind of easy comps in the first half, they kind of moderate in the back half and then you've got plant expansion as well? What kind of -- how should we think about incremental gross margin for the year?

Yes, I think that's the appropriate way to view it.

Okay. Is there any kind of pricing impact?

We typically don't give any specific guidance around pricing actions. We've said in the past couple of quarters that pricing typically trails inflationary increases up to six months. Fortunately, for the last couple of quarters, we've talked about the pace of inflation slowing. So that's not created a lot of pressure on the pricing front at this stage. We'll note that we have seen as of late some signals that perhaps hardwood pricing may start to tick up a bit, but we've not experienced any of that in our actual purchases as of yet.

Back to your original question, I always hate the word easier comps, but our performance should be a bit stronger in the first half is how I would state it. And then in the second half we would continue on that trajectory, but then have is the headwinds of the expansion certainly for a quarter or two.

Okay, and then is there any color you would like to add about the management transition and any kind of, anything we would expect to see in terms of strategy or anything like that?

Sorry. You broke up there. What was that? This is Kent. What was the last part, expect to see what?

Any change in strategy or anything like that?

No. I mean, it's -- we're fortunate. We just celebrated our 35th anniversary. As you know, if you've followed us, we do have a lot of consistency and continuity in our leadership and we just got to the point we felt that it was time to, again, make one of those orderly transitions. We do internal promotions. Cary has been around the business for nine years, done a lot of great work. It was kind of time in our history. And again because Cary's been part of the organization for 10 years and part of the strategy development he can speak to it as well, but I wouldn't expect us to see any significant changes in terms of our longer-term strategy.

No, it's really driven by our 2019 vision which we've been pretty communicative on and it is challenging us to think definitely about the business and look at strategy different, but it's not necessarily tied to the change in leadership. It's just a change in the required strategy of the business.

Okay. Thanks for taking my question.

We'll take our next question from Garik Shmois with Longbow Research.

Hi, guys. This is actually [Mark Sikali] on for Garik today. Just on the quarter new construction, obviously very strong up 15%. Wonder if you can speak to the regional variance, if there was any, and if you could talk about what you're seeing in your Texas exposure that would be helpful.

Yes, we got that question specific to Texas last quarter. We've not seen any significant changes in our business there at this point in time as it relates to oil pricing or any significant slowdown. We still saw nice growth in the quarter. From a regional play standpoint, I would say for us we were a little bit weaker from a year-over-year comp standpoint in the southeast region and in California, but then pretty good growth rates in the rest of the country.

We're seeing some recovery. I would say it was a hard winter, so as you start to pull out of that winter you have to start to differentiate any type of leg impact from the winter versus new stuff. And so we're watching it pretty closely. As Scott said, in Houston somewhat surprisingly we haven't seen any negative impact. We're keeping a close eye on it. Even with all the storms down there now, we're keeping a close eye on it, but nothing substantial yet.

Okay. And going back to the dealer channel a little bit, I guess if you could speak to some of the consolidation in the industry, obviously with Fortune brands and Norcraft recently. Just wondering how you guys think that affects you?

That's a strategic play on their part. There's always pluses and minuses that come with any change. To us it's just change. We're positioned very well on how we differentiate ourselves based on service. We do not expect it to limit our growth. In fact, we're obviously going out and looking for additional opportunities and we feel there will be some additional opportunities presented by this. So, we'll continue to be aggressive and continue to plan to grow market share.

All right. Thanks so much. Best of luck.

(Operator Instructions)

We'll go next to Scott Rednor with Zelman & Associates.

Good morning. Cary, congratulations on the announcement.

Thank you, Scott.

I wanted to ask, just on the capacity, can you guys frame how much capacity within your planning, however you guys want to contextualize it, how much this expansion is providing for the overall network?

We haven't got specifics in the past. It definitely takes us into the future by several years. So obviously it's kind of hard to predict and give specific numbers because it's very dependent upon mix.

Okay.

And this plant does give us increased capacity on kind of our core product, which solids and paints and so forth. Based on the trends of where we see the market going, it actually has a bigger impact than it would have in the past because the market is growing where we need it and where those plants are adding capacity, so it's valuable capacity, but we're very good on capacity for several years into the future.

Is it fair to say -- please go ahead, Scott. Sorry.

As we've talked about this in the past as well as when we did the announcement for the expansion, this was the next bottleneck. So, we're attacking the bottleneck. It gets us out a couple of years and we feel we won't have any pressures unless the market takes off, and then we would all face that challenge at that point in time. And obviously how we define capacity is depending upon the type of plant. You have assembly capacity and so forth and we have many strategic options available to us to deal with capacity limitations as well. So, we are very well situated going into the future.

So I guess there's a general consensus the housing market will get close to 1.5 million housing starts, plus or minus. If we were to get there, do you guys need another big capacity expansion beyond this or is that sufficient within that context?

We continue to analyze. That's the important part of our discussions now. We talk about certainly our balance sheet and then Kent has mentioned about opportunities as the market grows. We do expect the market to grow. We expect single-family to get back up to that 1.2 million or so. As it does, yes, we'll continue to evaluate opportunities and where we make additional investments. Is that brick and mortar? We can't say for sure yet, but we're well positioned as we've said in the past to be able to take advantage of that.

Okay. And Scott on the 10B51 plan, can you just maybe give a little more detail what exactly that entails now going forward and why you chose that route versus just repurchasing through the open market?

Yes, I won't get into the specifics of exactly how we have the plan established, but we wanted to put one in place because as we found in the past we were limited in our ability to execute the market because of the overall volume that we see. Plus, do we trade inside the window, do we trade outside the window that we have engaged for our employees? We wanted to make sure we had the appropriate level of flexibility to be able to execute trades and purchase going forward and 10B5 was the rest route we saw going forward for that.

And within context, you guys would be committed to offsetting dilution? I think that was the prior guidance. Is that still fair with this new plan?

That is correct.

Okay, great. And then just lastly. With the unit cost material up 2%, was that a fourth quarter comment?

Yes, it was.

So can you help understand that with your comments on kind of inflation slowing and then I think there was a separate comment that you were seeing hardwoods tic up. At what point on the P&L, I guess there's a lot of different inputs going on, but kind of what's the outlook in the near-term should you continue to see modest inflation in the P&L or just kind of how are you guys -- what are you guys currently seeing in your inventory I guess is a better way to frame it?

Yes, sorry. There were a couple questions in there wrapped up. Let me try to segment them into a couple of different buckets to talk through. So the comment with regards to Q4, the 2% inflation that we're seeing, the pace is slowed and that's what we keep referencing and we've done so over the last couple quarters. We still see inflation on certain species, so that's one of the challenges. You can't generically state if the trend is up or down, it depends on which species you're talking about. Are you looking at maple, soft maple, hard maple? Are you looking at cherry? Different trends are happening on each of those species.

We've seen that play out over the last couple of quarters where the pace of change has slowed. I don't think it will be stagnant forever. I think there's likely going to be some uptick as we go forward. We started to see some signals of that in lumber pricing reporting, but we've not incurred any of that actual cost yet. As far as guidance for FY16, we're not expecting significant uptick in inflation. We were assuming it would be somewhat steady to current state.

Great. That's very helpful. Appreciate the detail and congrats on a great quarter, guys.

Thank you.

(Operator Instructions)

Mr. Eanes, at this time there are no other questions in queue. I'll turn it back to you for closing remarks.

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

Ladies and gentlemen, thank you for your participation. This does conclude today's conference.