American Woodmark Corp (AMWD) 2016 Q2 法說會逐字稿

Good day and welcome to the American Woodmark Corporation second-quarter 2016 conference call. Today's call is being recorded, November 24, 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 risk 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 these 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 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 second fiscal quarter of FY16 ended October 31, 2015. Thank you for taking time to participate.

Participating on the call today from American Woodmark Corporation will be Cary Dunston, President and Chief Executive Officer; and Scott Culbreth, Senior Vice President and Chief Financial Officer. Cary will begin with an overview of the quarter and then Scott will provide a more detailed review of the quarter and future outlook. After Cary and Scott's prepared remarks, Cary and Scott will be happy to answer your questions. Cary?

Thank you, Glenn. Good morning to all as you noticed we are changing things up a bit, as I'm not going to provide an overview of the quarter prior to Scott getting into the details.

Over halfway through our fiscal year with solid performance on both revenue and earnings. On the revenue side we continue to experience volatility in the market, but we are pleased with our incoming demand for the quarter. As well as for the first half of the fiscal year.

I mentioned on our last call that we came out of our first quarter with higher backlog than we had expected. Tied to elevated incoming demand. As a result, we did ramp up our internal production and brought our backlog back down to more manageable levels as we move into our third quarter.

Taking a look at our revenue by channel, we continue to over-index in the new construction market, with 18% growth in both the first and second quarters. This is attributed to continued market share growth and the strength of our customer base.

Two key variables in this market that we are monitoring closely are labor and land shortages. In my opinion these two variables are having a significant influence on the additional critical factor of first-time homebuyers. In many key markets, the shortages are driving labor and land prices to rise and ultimately home prices are being impacted.

While the rising home prices have some favorability, it does greater challenge with regards to the affordability for first-time homebuyers. In addition, and potentially even more importantly, with limited labor and land, we see builders continuing to make the choice to invest in higher end homes. Therefore, I believe construction and inventory of starter homes will remain at record lows for the foreseeable future.

However, despite this bottleneck on entry-level homes, new construction growth in the $350,000 to $450,000 plus home is strong and we believe will remain so into the future. And we are well-positioned to continue to leverage this growth with our Timberlake direct service model to the nation's top builders.

Within home center, we were up 13% for the quarter and up 4% for the first half. The first half run rate of 4% is the better indicator of the overall growth we are seeing in this market.

From a market share perspective, despite continued, strong competitive promotional activity we have been able to maintain our strong share within home centers through continued investment in our total customer experience. Unfortunately however, we simply have not seen the return of the customer to this market at the same level as we are seeing within the dealer business.

And within dealers, we grew a very healthy 40% in the second quarter and 32% in the first half. Waypoint is approaching close to 10% of our overall business and continues to be our greatest growth opportunity, not only due to market share gains, but overall growth of the dealer business.

Interestingly, we are seeing some labor shortages in this market as well, with a few of our high-growth dealers reporting that they are restraining incoming orders, simply due to a backlog on installations. However, I do not believe this is going to have any sustainable impact.

From a gross margin perspective we were up slightly over first quarter coming in at 21.9%. We continue to leverage our sales growth as well as our operating efficiencies, and I am pleased to say that the ramp up of our South branch expansion is going very well, and we have already begun to effectively leverage this investment. As we look forward, there are some tailwinds, but also a number of headwinds that create continued uncertainty.

The labor and land shortages I mentioned are two examples. As is the lack of the first-time homebuyer in the market, wavering consumer confidence, global uncertainty and the list does go on. Yet we do remain confident in the overall market, both in the short and long-term and our continued strategy of market differentiation by creating value through superior service.

With single family starts sitting at roughly 700,000 units, tremendous growth opportunity remains with the new construction and we are truly well-positioned as a leader in this market with our direct to builder strategy. Our service platform has aligned us with the best builders in the country, which allows for continued strong growth. And the dealers, our Waypoint business is poised to continue to grow aggressively.

Overall, we are confident in our ability to continue to win by investing in our core competencies and driving long-term, sustainable, competitive advantage in the market.

With that I'll turn it over to Scott for the detailed financials.

Thanks, Cary and good morning, everyone.

Essential headlines for the quarter, net sales were $256.3 million, representing an increase of 18% over the same period last year. Reported net income was $18.2 million or $1.10 per diluted share in the current fiscal year, versus $7.7 million or $0.48 per diluted share last year.

For the quarter, the Company generated $24.3 million in cash from operating activities, compared to $9.4 million for last year. For the six months ended October, year-to-date net sales were $487.5 million, representing an increase of 13% over the same period last year.

Net income was $33.3 million or $2.03 per diluted share in the current fiscal year, versus $16.9 million or $1.07 per diluted share last year. For the current fiscal year, the Company generated $39.4 million in cash from operating activities compared to $18.6 million for last year.

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 15% for the financial second order. Single family starts during June, July and August in the prior period average 632,000. Starts over the same time period from the current year average 728,000.

Our new construction-based revenue increased over 18% for the quarter. As previously stated, we continued to over-index the market, due to share penetration with our builder partners and the health of the markets where we concentrate our business.

Remodel business continues to be challenging. A positive sign, unemployment continues to improve. The October U3 unemployment rate dropped to 5%, U6 fell to 9.8%. [The denver sentiment] remained high at 90 in October.

Existing home sales increased during the third calendar quarter 2015, and reported 12 consecutive months of year-over-year gains. Between July and September of 2014, existing home sales averaged 5.1 million units. That same period for 2015 averaged 5.5 million units, an improvement of 8.3%.

Interest rates remained low in the quarter with a 30 year fixed-rate mortgage at 3.8% in October. An improvement of approximately 24 basis points versus last year. All cash purchases remained flat with prior year 24%.

On the negative side, the median existing home price rose 6.1% for September, 43rd straight month of year-over-year gains, impacting our consumers' affordability index. The share of first-time buyers remained low. September reported rate was 29%, which is flat to last year and remains well below the historical norm of 40%.

Homeownership rates improved slightly. The percent of Americans who owned their home in the third calendar quarter was 63.7%. Although this is a 0.3% improvement from the second quarter rate of 63.4%, keep in mind that figure was the lowest reported level since 1967.

Our combined home center and dealer remodel revenues were up 17% for the quarter. We continue to maintain our share in the home center channel, and the dealer channel, over index the remodel market due to a more fluid nature of their customer base.

Waypoint represents over 9% of our overall revenue, and grew 40% in the quarter. Promotional activity remained higher than the prior year for the fiscal second quarter, as we responded to competitive positioning and market conditions.

The Company's gross profit margin for the second quarter of FY16 was 21.9% of net sales, versus 17% reported the same quarter of last year. The Company generated a year-over-year incremental gross margin rate of 49% for the second fiscal quarter.

Gross margin was positively impacted in the quarter by higher sales volume, customer management, product mix, pricing and improved operating efficiencies, which generated favorable leverage on our semi fixed and fixed overhead, with additional volume. Year-to-date gross profit margin was 21.8%, compared to 17.2% for the same period in the prior year. Year to date, the Company generated a year-over-year incremental gross margin rate of 56%.

Total operating expenses decreased from 11.3% of net sales in the second quarter of the prior year to 10.7% this fiscal year. For six months, SG&A improved from 11.2% of net sales to 11.1%. Selling and marketing expenses were 6.5% of net sales in the second quarter this year, compared with 7.5% the prior year, which generated leverage and selling and marketing cost through expense management and lower product launch costs.

General and administrative expenses were 4.2% of net sales in the second quarter of FY16, compared with 3.8% in the prior year. The increase in our operating expense ratio is the result of increased pay for performance compensation costs. With respect to cash flows, the Company generated net cash from operating activities $39.4 million during the first half of FY16, compared with $18.6 million in the same period in the prior year.

Improvement in the Company's cash from operating activities was driven primarily by higher operating profitability, lower increases in inventory levels and higher accrued expenses. Net cash used by investing activities was $25.8 million during the first half of the current fiscal year, compared with $26 million during the same period the prior year, due to a $16.5 million reduced investment in short-term certificates of deposits, which was partially offset by increased investment in promotional displays property, plant and equipment of $16.4 million. The Company expects to spend approximately $3 million during the third fiscal quarter to complete its South branch plant expansion.

Net cash provided by financing activities of $1.9 million decreased $0.6 million during the first half of the current fiscal year, compared to the same period in the prior year as the Company repurchased 108,787 shares of common stock at a cost of $7 million. A $1.9 million reduction from the prior year, and proceeds from the exercise of stock options decreased $1.9 million. The Board authorized an additional $20 million stock repurchase program, which will be used to offset our annual burn rate.

Closing, the remodel market continues to be a challenge with the dealer channel continuing to outperform the market with a more affluent customer base, while the home center channel continues to lag the market with their middle income consumer. New construction market continues to improve, with single-family housing starts growing versus prior year, remaining above 700,000 units.

Consumer confidence has improved with the middle income consumer's willingness to spend on a new home or begin big-ticket discretionary home improvement projects remains low. Although the market remains uncertain, we continue to be pleased with our progress.

Our gross margin rate improved sequentially for the fourth straight quarter, and we delivered solid sales and earnings growth. Looking forward, we maintain our expectations we shared on our last call that we will increase margin rates and grow net income in FY16.

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

(Operator Instructions)

Scott Rednor, Zelman & Associates.

Good morning, nice quarter, guys. A question on the top line, now that you're about four weeks into the quarter, are your incoming orders tracking with the revenue growth that you posted, that 18% in Q2? Or, Cary, shall I interpret some of the comments that you made that you're seeing some of the slowdown based on some of the shortages in the market?

Hey, Scott it's Cary. Actually not sure referencing shortages, we do have seasonality obviously so we tend to look at as comps compared to last year, and our expectations we'll continue to cut favorably to prior year. The forecasting, as I mentioned is always a challenge. We have good plans and I like I mentioned we have good backlog and what the quarter holds we'll see but we expect good, continued comps compared to prior year on revenue as a whole.

Are the labor shortages that you referenced, are those in any way easing?

I think obviously the market's efficient so what we're seeing builders do, they're going to have to pay more for labor, there's going to be a lag there. Ultimately I think what it is driving is more what I referenced and that they are going to continue to make those investments in the higher-level type home. We do have some of the builders talking about getting some starts going on kind of the entry-level home, first-time homebuyer, but we don't see a lot of action there.

And I just feel that really is the ultimate outcome of the shortage of labor. And yes it does temper growth a little bit, but when you're talking growth of you say low teens or low to mid-teens on the new construction market, I still feel that's healthy growth and it's actually at a nice price point just because of the price of the home.

Okay, great and then on the gross margins I guess, Scott, you previously talk to 25% for the full year, clearly tracking ahead of that here, but with the plant now up and running, are your gross margin incrementals going to still be in positive territory in the back half of the year?

Hey Scott, good to talk to you again. Just clarify that question or to clarify that answer from prior calls, the 25% is our incremental gross margin rate target long-term. And as we discussed there will be some quarters that will trend higher than that and some quarters will trend lower than that, certainly the last four quarters have been strong and we have been over indexing against that result.

Our guidance we gave is that we expected to be able to deliver on that 25% number for the foreseeable future and that was going to be our continuing goal. So we're on line with that, we've certainly gotten ahead due to the first two quarters, but don't really provide guidance on the back half of the year so I can't give you a prescriptive answer as to what exactly those results will be at this point in time.

Okay. Thank you.

Nick Coppola, Thompson Research Group.

Hi, good morning.

Hi, Nick.

So, looking at the home center growth you experienced in the quarter, 13% year over year, can you talk more about the key drivers there? Of improvement? Was there any kind of float in, was it more reflective of the demand in that channel?

It's what I referenced, we really, we had good growth in Q2 but as I mentioned on the call last quarter, we had stronger incoming and therefore we're not able to produce and thus show in our revenue line with regards to what the real incoming was in Q1. So you really have to look at it as a balance of the first half and yes it's a favorable comp to prior year. It just lags what we talk about when we talk about comps in the dealer business and so forth.

It's growing, home center is growing, just at a really low to mid-single-digit level and that's really what we expected to continue to do at least in the near future. Scott mentioned that middle income consumer where you look at median home income levels or consumer confidence there's just not a lot out there that's telling us that middle income consumer is really back in the market yet. I think it's -- personally I feel it's pretty aligned with first-time homebuyers, it's a domino impact, we need to get first-time homebuyers back in the market and that will have a domino impact and start the flow of that consumer, and that consumer is important. They're important to us, very important to us it's kind of our bread-and-butter.

We've been able to effectively move up and take care of the higher end consumer as well, but we also are very strategically focused on that future middle income consumer that X and Y gen, and where they're going to shop and what they're going to be willing to spend.

Along those same lines, I mean you talked about the dealer segment and the more affluent part of the market over indexing, but again just really strong growth over the last couple quarters, is a lot of that just coming off a low base and maybe can you talk a bit about higher volume there?

That's our Waypoint business, we started that business about six years ago and so anytime you're new in a market and you come in with the experience we have and the winning formula with regards to our customer experience, we have delighted, truly delighted the dealers out there with our ability to serve that market. As a result it's driven pretty high market share gains.

Obviously when you're looking at starting with nothing and you build up over six years, you're going to have pretty favorable comps and we do expect have very strong comps going forward because we are gaining market share, we expect to continue to gain market share. In addition, that market is growing. Just the dealer business as a whole is growing at a higher level pace than the rest of the remodel industry.

Okay, that makes sense. Just my last question here so a little more color got the promotional activities on the quarter? You talked about that being up year over year, primarily where is that happening and kind of the competitive environment out there?

You see it really in, primarily of course in the remodel world and the home center and the dealer business. It's really fairly aggressive on all fronts, on all competitors. It's, I'll say with demand rising and folks some I guess all depends on where their capacity situation is, but what we've seen those competitors are willing to go out and spend some money on really promos and so forth to try to get volume.

Now we've managed it pretty effectively, we're not going to, long-term we're not going to allow competitors to buy margin or to buy volume. So we go out and we make competitive decisions to go out and maintain share and so forth, but it has driven some of our promotional cost up. We're not been as aggressive as what competition is in either one of those markets, both home center or the dealer business, but we are being competitive enough to really maintain share in the home center, and just because we're a service model we're continuing to gain share in the dealer business.

But in dealer we're kind of a target right now, I mean grows as aggressive as we have, you kind of become a target. So people have taken notice of us and the dealer business is very fragmented from very large players to very small regional players and we're really at the front of most people's windows right now with they really look at competition, and with the share we've gained. So we're kind of become a target with regards to folks' promotional activity.

Okay, understood. Thanks for taking my questions.

Thank you.

Josh Shane, Robert W. Baird.

Good morning, congrats on a very good quarter. I wanted to ask about any potential raw material tailwinds that you expect to have in the second half and with those potentially being in place, is there a possibility that you could meaningfully exceed your 25% incremental gross margin target for the year? Just wondering how all that fits together?

So with respect to raw material prices, I guess there's always the possibility that they can drift up or drift down over time, they've been fairly stable as of late. We have seen some recent increases in items like particleboard and we'll start to see that read through our P&L, but they've not been severe. So at this point time today I don't have anything in front of me that's alarming as it relates to this input cost.

To your question on the incremental gross margin, really I reference back the same answer that I gave Scott a little bit earlier in the call. 25% is our long-term goal, we're going to have quarters that are better and quarters that presumably will be worse, but we want to be able to average and consistently deliver that over the long-term. Certainly trending higher than that over the trailing 12 months and we will continue to keep you updated on our progress on a quarterly basis as we go forward.

All right, that sounds good and if I can ask about the Waypoint business, is there a certain portion or segment of the dealer market that you're specifically targeting in terms of penetration? Or would you view the entire dealer market, which is fairly large, as the opportunity set for the Waypoint brand?

Yes, I mean obviously it's -- folks can segment the dealer business quite differently depending on how you go after it. It's really in the Sun Belt that we are in dealers across the country. It's really more of a matter of aligning with dealers that are aligned with our service model, so those obviously that have a desire to grow we definitely approach our dealers from a business partnership perspective.

We are what we call our TBMs, or territory business managers or sales reps. A little more sophisticated with regards to ability to walk into really work with dealers with regards to their marketing strategy and promotional campaigns and product strategies and so forth. And certain dealers are really -- appreciate that and take advantage of it and some don't, so really comes down to more aligning ourselves with the dealers that we feel we can grow with.

So, that presents a very wide open range for us to go out and talk to dealers who avoid conflicts, so we're very sensitive with regards to signing up dealers that could conflict with others. For the most part, it's been really the single to maybe some dealers might own two to three stores, so there is a large growth opportunity in the future as you start to align yourself with perhaps larger regional players that might own multiple dealership or might distribute into geographical areas and so forth.

So we're pretty open to it. We've got a very aggressive growth strategy and we continue to refine it and learn and utilize our targeted approach to the dealers. I can't really tell you it's a very specific other than just aligning with our strategy.

Thank you for that one. My last question is, the balance sheet continues to be very strong and obviously the end market is improving. It has been improving, so any changes in terms of how you're thinking about utilizing the balance sheet for growth or cash returns or any other purposes?

I think it goes back to what I mentioned before, it's, we are doing a lot of research into the market. That really, that middle income we always call it kind of the Western side of the product offering, that middle income consumer that appears to not -- they are coming back slowly but not really back aggressively. I think the future for us really rests in defining the ultimate solution for that consumer, recognizing it is going to be an X and Y gen consumer that's going to drive this business into the future.

In mean, we have a strong platform today that really serves the current consumer and the, call it obviously the baby boomer consumer. So we're doing a lot of research and any large, future investments you may see us do in the future are really going to be designed to make sure we establish a platform that will carry this Company forward for many, many years into the future. So, I think there's lots of opportunities out there, it's just a matter of choosing the right one and then moving forward with it and we are certainly progressing with that strategy.

Great, thank you for your time.

Thank you.

(Operator Instructions)

Garik Shmois, Longbow.

Hey guys, good morning this is Mark Zikeli on for Garik. Just on the quarter, the 18% new construction comp, just curious how that varies by region, if you can call any strong or weak markets that would be pretty helpful?

I mean it does vary by quarter. We are seeing regionality and we are seeing volatility even by quarter. We talk about the Sun Belt a lot so the Southwest, Phoenix, you've heard quite a bit of positives out of that region. They were, went through a big growth spurt last spring and actually a lot of, even a lot of our customers and a lot of the experts out there thought it would level off in early summer and it just kept right on going, it's continue to go, it's growing strong.

So it's really been hit by the bottleneck I talked about with regards to labor and land shortages, they are continuing to work through it. But when we talk about throttling back, it throttles back from very high growth levels to manageable levels, but it's still growing pretty aggressively. California is up and down, it's a little bit tougher market to serve, it is growing, we are starting to see previous growth down in, I want to say the southeast, it's in kind of the Carolinas and Georgia. Florida remains strong and the Northeast, a little more volatility in the Northeast, but the Northeast as strong as well, so it's really that Sun Belt that drives a lot of our growth.

Very good thanks for that. Just looking out to 2016 as well, just curious how increased interest rate environment likely change your thoughts on new housing starts or just overall top line expectations? Thank you.

I'll take one piece and Scott might have something to add to that as well. It's all relative, for those of us that are seeing really high interest rates, we think of a small interest rate hike as being insignificant, but I know that there's a pretty strong emotional tie to it. And the reality is, it will impact affordability for first-time homebuyers. Given the fact that they're really absent today, I don't expect any significant impact on that percentage of first-time home buyers in the market. It may further delay it.

I think it really depends not only in this percent, but if they get into a steady period here of increasing interest rates, it will go into impact affordability and the emotional context of the first-time homebuyer. What impact it will have, it's hard to really understand the emotions. I think it will be short-term, I think there's bigger economic factors in the play like median household income and so forth is a big factor. Along with a number of others.

So I think it will have an impact. I don't think it's going to be significant, though. At least in the market that exists today, I don't think it's going to be significant. I think it could delay, further delay the return of the first-time homebuyer though.

All right. As I do not see there is anyone else waiting to ask a question, I would now like to turn the line over to Mr. Eanes for any closing remarks, please go ahead, sir.

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

Ladies and gentlemen this does conclude today's presentation, we thank you for your participation.