American Woodmark Corp (AMWD) 2016 Q4 法說會逐字稿

Good day and welcome to the American Woodmark Corporation fourth-quarter of 2016 conference call. Today's call is being recorded June 2, 2016. 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 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 fiscal quarter and full-year results for FY16 ended April 30, 2016. 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 opening comments, followed by Scott with a detailed review of the quarter and year and an outlook on the future. After Cary and Scott's prepared remarks we will be happy to answer your questions. Cary?

Thank you, Glenn, and good morning to you all. Our fourth quarter brought to an end a very successful fiscal year for our Company. For the quarter we grew sales 16% over prior year, with key drivers once again being our new construction and dealer channels. Similarly for the year we grew revenue 15%, continuing to outperform the industry as a whole.

Looking specifically at new construction, we had a very strong quarter, growing our Timberlake business 27% over prior year. For the fiscal year we grew by 21%, far outpacing single-family starts that were in the lower teens. Our message has been very consistent regarding our market share gains associated with our winning direct service model.

From an industry perspective we have seen little change in the underlying dynamics. Labor and land shortages remain as key bottlenecks, which, when combined with the low existing home inventory, continue to drive up home pricing. With median new home prices over $320,000 and lending remaining difficult for first-time homebuyers, entry-level home demand remains soft.

And although numerous initiatives exist to try to bring the first-time homebuyers back to the market, I personally do not believe we will see significant change within calendar year 2016. On the positive, though, demand for higher-end homes is strong and we do expect it to remain so into our FY17.

Taking a look at our dealer channel, we had a very strong revenue comp for the fourth quarter, growing 35% over prior year. For the fiscal year we grow our revenue 31%.

Our Waypoint team continues to do an outstanding job of differentiating themselves relative to our competition. The results are very evident with the significant market share gain year over year. As we look forward, we expect to continue to over index within the dealer channel and comp favorably due to our ongoing share gain.

Within home center, a more challenging quarter. We were up only 1% for the quarter and 4% for the year. Home centers themselves reported lower than average comps in our category. However, as I mentioned last quarter, we are seeing much greater competitive promotional activity.

Although we have moved up some in our own promotional spend in our fourth quarter we remain far less than competition. The result has been some shift of market share. Up to now we have resisted following the trend as the cost is high and is not having any significant impact on bringing additional consumers into the door. It's simply moving share from one to another.

Historically, over the long term it has been our position to respond appropriately to strong competitive promotional activity to minimize any shift in share. As we move forward we will continue to evaluate our promotional strategy and make sound business decisions. Regardless, we will remain very focused on working with the home centers on longer-term strategic solutions to drive market growth.

From a gross margin perspective, we came in at 20.3% for the fourth quarter. This was down from our prior-year margin of 20.9% with an incremental gross margin of 16.3%. Scott will provide more detail but the key drivers were higher healthcare and increased depreciation as we brought on the second phase of our South Branch expansion.

For the fiscal year, I'm extremely pleased with our gross margin at 21.1%, an improvement of 260 basis points from prior year. Likewise, incremental gross margin was very strong at 39%. Our manufacturing system continues to operate very efficiently with much greater stability.

On net income, we generated $13.4 million in the quarter, up 18% from prior year as we continue to leverage our SG&A spend. For the year our net income was up 65% -- simply exceptional performance. With an operating margin of 9.2% for the quarter and 9.8% for the year we have reached a level of performance rarely achieved in the history of the Company.

As we look forward, we're getting more assertive regarding our investments to continue to profitably grow our business in the long run. Not only are we planning on two significant product launches in FY17 but we are focused on continued core and strategic investments. We have built an indisputable competitive advantage in the markets we serve and are determined to strategically leverage this advantage. As such, we remain extremely confident in our long-term journey.

With that, I will turn it over to Scott for the detailed financials.

Thanks, Cary, and good morning, everyone. The financial headlines for the quarter -- net sales were $240.9 million, representing an increase of 16% over the same period last year. Reported net income was $13.4 million or $0.81 per diluted share in the current fiscal year versus $11.3 million or $0.69 per diluted share last year. Exclusive of after-tax non-operating charges related to idle land disposal of $0.8 million or $0.05 per diluted share, the Company generated $14.2 million or $0.86 per diluted share of net income for the fourth quarter of the current fiscal year compared with $11.3 million or $0.69 per diluted share for the same period in the prior fiscal year.

For the 12 months ended April year-to-date net sales were $947 million, representing an increase of 15% over the same period last year. Net income was $58.7 million or $3.57 per diluted share in the current fiscal year versus $35.5 million or $2.21 per diluted share last year. Exclusive of after-tax non-operating charges related to idle land disposal of $0.8 million or $0.05 per diluted share, the Company generated $59.5 million or $3.62 per diluted share of net income for the entire current fiscal year compared with $35.5 million or $2.21 per diluted share for the same period of the prior fiscal year. For the current fiscal year the Company generated $71.8 million in cash from operating activities compared to $58.7 million for last year.

Some additional comments on sales performance, starting with the new construction market. Recognizing the 60- to 90-day lag between start and cabinet installation, the overall market activity in single-family homes was up over 18% for the financial fourth quarter. Single-family starts during December, January and February of the prior period averaged 675,000 units. Starts over that same time period from the current year averaged 795,000 units.

Our new construction base revenue increased 27% for the quarter. As we have stated on prior calls, 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 be challenging. On the positive side, unemployment continues to improve. The April U3 unemployment rate dropped to 5% and U6 dropped to 9.7%. Both measures were lower than the April 2015 reported figures.

Residential investment as a percent of GDP for the first calendar of 2016 improved to 3.4% versus 3.2% for the prior year. Although the percentage is improving the index remains well below the historical average of 4.6% from 1960 to 2000.

Existing home sales increased during the first calendar quarter of 2016. Between January and March of 2015 existing home sales averaged 5.05 million units. That same period for 2016 averaged 5.3 million units, an improvement of 5%.

Interest rates remained low in the quarter with a 30-year fixed rate mortgage at 3.61% in April, a decrease of approximately 6 basis once versus last year. All cash purchases in April were 24%, down from 25% in March and unchanged from last year.

The share of first-time buyers improved. The April reported rate was 32%, better than the prior-year rate of 30% but well below the historical norm of 40%.

On the negative side the median existing home price rose 6.3% for April, the 50th straight month of year-over-year gains, impacting our consumers' affordability index. Consumer sentiment dropped to 89 in April versus the 92 reported at the beginning of the calendar year.

Home ownership rates remained low versus historical averages. The percent of Americans who owned their own home in the first calendar quarter was 63.5% or 0.2% below last year's rate.

Our combined home center dealer remodel revenues were up 7% for the quarter. Waypoint represented over 10% of our overall revenue and grew 35% in the quarter. Promotional activity remained higher than the prior year for the fiscal fourth quarter as we responded to competitive positioning and market conditions.

The Company's gross profit margin for the fourth quarter of FY16 was 20.3% of net sales versus 20.9% reported in the same quarter of last year. The Company generated a year-over-year incremental gross margin rate of 16% for the fourth fiscal order. Gross margin was negatively impacted in the quarter by higher healthcare and incentive costs, plus higher depreciation costs related to the previously announced plan expansion.

Year-to-date gross profit margin was 21.1% compared to 18.5% for the same period in the prior year. Year to date the Company generated a year-over-year incremental gross margin rate of 39%. Gross margin was positively impacted in the year by higher sales volume, customer management, product mix, pricing and improved operating efficiency.

Total SG&A expenses decreased from 12.4% of net sales in the fourth quarter of the prior year to 11.1% this fiscal year. Through 12 months SG&A improved from 11.9% of net sales to 11.3%.

Selling and marketing expenses were 7.2% of net sales in the fourth quarter of this year compared with 8% in the prior year. We generated leverage in selling and marketing costs through expense management and lower display and product launch costs.

General and administrative expenses were 3.9% of net sales in the fourth quarter of FY16 compared with 4.4% in the prior year. The decrease in our operating expense ratio was a result of leverage from increased sales and ongoing expense controls.

With respect to cash flows, the Company generated net cash from operating activities of $71.8 million during FY16 compared with $58.7 million in the same period in the prior year. The improvement in the Company's cash from operating activities was driven primarily by higher operating profitability, which was partially offset by higher customer receivables.

Net cash used by investing activities was $40.8 million during the fiscal year compared with $56.6 million during the same period of the prior year. The improvement was due to a $27 million reduced investment in certificates of deposit, which was partially offset by increased investment in promotional displays and property, plant and equipment of $10.7 million.

Net cash used by financing activities of $6.1 million increased $17.8 million during the fiscal year compared to the same period in the prior year as the Company repurchased 243,143 shares of common stock at a cost of $16.6 million, an $11.5 million increase from the prior year. And proceeds from the exercise of stock options decreased $6.2 million.

In closing, the new construction market continues to improve, with single-family housing starts approaching 800,000 units. Land, labor shortages and low existing home inventories continue to increase new home pricing. Unemployment rates and consumer confidence have improved but the middle income consumers' 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. We established all-time highs in net sales and net income. However, we also realize that our journey has only just begun. As Cary mentioned, we are excited about our future and our ability to continue to win in the marketplace.

Regarding our FY17 outlook, for the market we expect single-family housing starts to grow approximately 10%, interest rates to climb along with continued increases in the average price of new homes. Both actors will negatively impact affordability, particularly for the important first-time and first-separated buyers.

Unemployment should remain steady and cabinet remodeling sales continue to be challenged until economic trends remain consistently favorable. Growth is expected at roughly a mid-single digit rate during the Company's FY17.

In this environment our expectations for Company performance are as follows. The Company expects that its home center market share will be relatively stable in FY17 and it will continue to gain market share in its growing dealer business. This combination is expected to result in remodeling sales growth that exceeds the market rate.

The Company's new residential construction sales growth outperformed the new residential construction market during FY16. Management expects it will again outperform the new residential construction market during FY17 but by a lesser rate than FY16 as its comparable prior-year sales levels become more challenging.

Inclusive of the potential for modest sales mix and pricing improvements the Company expects it will grow its total sales at a low teen rate in FY17. Despite anticipated material inflation, costs related to two product launches, and impacts in the first half of FY17 for the West Virginia plant expansion, the Company expects to maintain operating margins for FY17.

Before taking questions, I know many of you have followed American Woodmark for a number of years. During that time there's been one constant with the investor relations community -- Glenn Eanes. This will be his last earnings call as he will be retiring at the end of the month. I wanted to take this opportunity to say thank you to Glenn for over 40 years of service to our Company.

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

(Operator Instructions)

Nick Coppola with Thompson Research Group.

Good morning. Helpful color on 2017, certainly, there, at the end of your opening comments. I wanted to drill in on the operating margin data point you gave us. You are looking to hold operating margins in 2017. Can you help us think about some of the puts and takes there?

Yes. Going back to my closing remarks there, we are anticipating some material inflation as we go into FY17. We do have a couple of specific product launches that we will incur, as well. And then we've got a bit of carryover associated with our plant expansion that went online the second half of FY16 that will show up in the first half of FY17.

The other remark I would make, and I think we will get questions on this, is over the long term we've said that our goal for operating margin was to be at 8% to 10%. We certainly got very close to the 10% mark in this last fiscal year. But 2002 was, honestly, the last time frame in which we came close to that operating margin level. So, we want to make sure we build a strategy in place that we can maintain that margin and not see that erode.

This is Cary. When you think about it, I'm sure a lot of questions are -- what's in store for us longer term. Right now we are, I mentioned, really, the past three recalls, about our strategic initiatives and the work we're doing. We have a lot of work underway that's really focused on longer term.

To Scott's point, if you had told me two or three years ago that we would be up to 9.8% operating margin I would've said no way, just given the challenges that we were facing, the economy and the industry. So, I'll say we got to what our initial target was much more quickly. Now the question is, do we have a different longer-term target and that's really what we are evaluating.

So, absolutely, from a strategic and just from an initiative perspective we definitely want to move beyond that 10%. What it is we really don't have that answer yet. It's hard to do an apples-to-apples comparison between us and our competition given our mix and the markets we serve and so forth. But we want to continue to focus on longer-term opportunities. And, yes, we are evaluating and we feel we have some very significant longer-term opportunities to continue to grow not only top line but also bottom line.

When you are looking at margin performance, excluding the plant expansion and some inflation, to what extent does your fixed cost leverage provide a natural increase to margin?

We've certainly got that factored in, as well. Our team has a deck of productivity related projects that they will go after. We will clearly get leverage from incremental volume running across the platform that we've got. And then we've got to manage those improvements with some of the other headwinds that we're expecting as we go forward.

From a productivity, obviously labor costs fairly consistently go up. That's normal in any industry. Productivity has always focused on offsetting those labor costs. Then we also have a number of projects really focused on productivity to help with inflation and so forth.

But we get the question many times, and it's been a while since we've done it. We will keep a very close eye on inflation, particularly from a lumber perspective. And the question comes back, is how much of that can you get back in the market through pricing. We're not at that stage yet but it is something we're going to watch very closely.

All right, thanks for taking my questions.

Scott Rednor with Zelman & Associates.

Good morning. A question on the product launches. Can you maybe discuss more what that relates to and how we should think about the share opportunities or the revenue opportunities with those launches?

Sure, Scott. In our business, traditionally the timing historically has been set by launches within the home center markets. You typically do one late summer or early fall and another one mid winter. If you look historically at the launches we've had as a Company, we follow that trend.

This past year we were focused more significantly on really creating that stability and capability of our manufacturing platform, which we achieved. That's resulting in a lot of confidence in us out in the market, and it's really one of the key drivers, along with just the service, that is getting the market share improvements we're seeing in new construction and in the dealer side. So, that investment was well worth it, it's paid off.

And now we're really back to saying -- okay, we've got a stable platform, we can launch more product. We've spent the past six months doing a lot of research with regards to what products are we going to launch, and really where the market is going, what the trends are.

I'm not going to give specifics, actually, on what we are launching but we do have two fairly significant launches late summer and in the winter that do come with associated launch costs. We've talked about that many times Even strategically, it's one of the big initiatives for not just us, the industry as a whole, for home centers.

The cost to launch product is you have to go out, you have to update all your displays, change out selling center doors. That cost we will bear during the year. And then obviously the delayed impact from when you actually do the launch to when you actually start seeing a return on the investment, there is a lag there.

So, we built the cost in. We built in, with obviously the late summer/early fall launch, we started to build in some revenue enhancement from that later in the year. So, all the costs we incur in fourth quarter, really we won't start to see a return on that until FY18.

So, two good launches, really focused on product. We're continuing to work on other, I'll say, projects. We talk about solutions. We've got a number of solutions that we are working on that are really, I'll say, innovative that we are not ready, nor have we budgeted specific costs or savings to those, but pretty significant opportunities that we are also working on.

Should we think about this from our standpoint similar to what occurred in 2014 where you took some actions to invest in the business. It compressed near-term margins but ultimately four to six quarters from now there's margin expansion. Is there a return here in terms of O&M improvement as well as a sales improvement that we should expect for 2018?

You hit it absolutely. There's a delay. We obviously won't launch something unless there's a return on it.

If you look at our mix and where we are growing share, absolutely we're going to launch new product. Scott talked about the comps getting a little bit tougher out there, particularly that dealer world. But we are planning to continue to grow pretty aggressively. These new products, in our opinion, required to do that.

So, yes, there's an investment made and there's a return on that investment through market share gain in the dealer world. Certainly in the new construction market, will continue to help us to over-index.

The home center is always a challenge. We mentioned that the promo costs are up. We did see some share shift the last quarter. We are evaluating our promotional strategy. It's costly. It's not really an ideal place where I like to spend money. But if we need to spend more money in the promotions to get the share back in balance then that's what we will evaluate and make a decision on.

But, ultimately, when you launch a product like this, there is a lot of cost in the home center. It tends to be a little more where you have to launch product to defend your share because we are sitting with very high share in the home center market. We want to maintain that share.

Is there an opportunity to pick up a little share? Yes, there is. And one of the challenges specifically, or one of the big boxes specifically, we feel there's some opportunity. It's not going to be the return that you get, say, in a dealer world because of the fact that we are already saturated there. We have a big chunk of share in the home center already.

There's costs there. You defend, you maintain share, hopefully pick up a little share. But that business is very critical to us so you have to make these investments.

And then just lastly, Scott, can you provide some context around how much gross margin was impacted by the higher depreciation maybe for the quarter and for the year?

I don't have that number here for me for the full year. Within the quarter from a year-over-year perspective it was going to be about 40 basis points.

Thanks very much and congrats, Glenn.

(Operator Instructions)

Garik Shmois of Longbow Research.

Thank you. And congratulations, Glenn, on your retirement.

I wanted to ask just about the promotional environment. You did touch upon it earlier. But we heard about the promotional environment in the last call as picking up.

Did the rate of promotions accelerate in the fourth quarter and you are evaluating your position and it's a place that you really don't want to be at right now because it's costly to enter into a promotional environment. But you also indicated that you expect your home center share to be pretty stable in FY17. So, just wondering if you could talk about the promotional environment, if it picked up, and to the degree it did in the last quarter, and your degree of confidence in maintaining your overall market share in 2017.

Hi, Garik, it's Cary. If you go back to when we had the call last quarter, we did announce it had gone up. It's been fairly stable since then at the high level. We were playing the wait-and-see game to hopefully see it come back down.

What we can say is it really has not come down like we expected it to so now we are evaluating whether really what our strategy and position will be going forward. It comes down to the financial return on the investment to take your promo costs up as high as competitors are and what we get out of it.

It's a little bit different formula for us, just given our mix, where we play as a stock player versus a semi custom. So, all that comes into the equation when you look at our promotional costs.

Like Scott said, though, it is our goal to defend our share. We are very high number one overall, if you look at the SOS or special order cabinetry in home center between Lowe's and Depot, and we want to maintain that position. And obviously I want to focus more on the strategic side of it and growing the business and getting consumers in the door, but at the same time we will do more likely what's necessary to maintain our share over the long term. We just prefer it to make financial sense.

That makes sense. I just wanted to shift to raw material costs in the quarter. I think, also, looking back to last quarter you started to see some nascent increases. You didn't really call that out too much as far as what was impacting gross margin in the quarter, it was more on some of these one-off depreciation and healthcare costs, or maybe less sustainable costs, if I can.

What did you see in raw materials this quarter? And how is the raw material outlook impacting your view on price mix as you look out to FY17?

We have started to see some increases. I think I mentioned this even last quarter around particleboard, certainly on the fuel and transportation rate side, as well, and a bit on the maple, soft and hard maple.

From a year-over-year perspective there really wasn't much movement per se in lumber. There was some variation by species but in aggregate not a major player for us. But if you do the Q3 to Q4 look we did see an increase predominantly on the maple species into that period.

As Cary mentioned, earlier we always evaluate and look at this on a monthly basis, and if we see that those trends are going to sustain and be there for some time then we will look at necessary actions to make sure we can offset that.

Okay, thanks so much.

(Operator Instructions)

Tim Wojs with Baird.

Hey, guys, good morning. The first question I had was just maybe on the pace of demand that you saw through the quarter. And I know weather in certain parts of the country was more favorable than it typically is. I'm curious, how did the revenue trend through the quarter from February through April? And then what are you guys seeing in May?

As far as February through May, it's fairly consistent. New construction markets remain very strong. As you said, there was some pluses and minuses on the weather.

Some areas, like Texas, obviously getting a lot of rain, and in the Northeast we actually saw a lot of rain. Not a big impact, though, so fairly stable on the new construction side throughout the quarter.

There is a leg there, as you know, so you can't really look at a direct impact from rain right now. The rain last month will really impact us 30 days from now -- 30 to 60 days from now.

On the remodel side, once again fairly consistent. Obviously with our growth in the Waypoint business we go out, and it's hard to tell you exactly how much is really the dealer business as a whole growing versus our own share growth. Obviously very significant share growth in there. Conversations with dealers, it's going very strong. They continue to see the more affluent consumer walk in the door, and it's been fairly consistent.

Same with home center. Home center ebbs and tides just because of the promotional calendar. You get a couple months where the home centers themselves may run heavy promotions, and it empties the quote log, and then you will see a corresponding delay for the next 30 days or so. So, you really have to look at averages over three to four months to really trend that.

It was, as they reported, it was down lower than we expected for the fourth quarter. Can't really give you any specifics as to why. It's just that middle-income consumer that is not really walking in the door. But, for the most part, long answer, but fairly consistent throughout the quarter.

As far as what we're seeing for FY17, May is completed, we are analyzing the data now. We're basically about where we had planned on expectations-wise. We continue to grow in new construction and dealer. And even home center, once again, based on prior promos, is looking fairly decent, about where we expected it to.

Okay. That's really helpful. I appreciate that. And, then, if we think about capacity, I know you guys have just really added some capacity into South Branch, but since you started to add the capacity you've grown 16%, 18% the last couple quarters and you are looking for low teens revenue growth in FY17. So, just curious how you're thinking about capacity over the next couple years, and if you think six to nine months from now you may have to have another internal discussion about adding in some areas.

Yes, we have that constant discussion and we evaluate that quite regularly with regards to the bottlenecks. We're good for now, good for a while here, after the South Branch expansion. That was expansion on both finishing operations as well as what we call our mill operations on the machining side. And we have plenty of assembly capacity.

During the recession a lot of capacity taken out in the industry. That's something we continue to analyze ourselves, is where the industry as a whole is sitting through productivity gains. We are doing very well. And no major investments required for the foreseeable future.

But your question about long term, yes, we do plan to continue to invest in our business. You have to be careful because of the cyclicality of this thing. It's a beast, as we all know, and we know it goes up and down and you don't want to put too much overhead in the ground.

But right now, with the growth opportunities we feel we have as a Company and some of the markets we're looking at, we do plan to continue to grow. The question is what type of investment and when, and there's a lot of variables in that. But for the foreseeable future we are very good on capacity and we will continue to grow, but we will continue to evaluate it.

Okay. And then just last question on maybe the cadence of margins through the year. Overall, maintain the margins for FY17 versus 2016. But should we think about maybe margins being down a little bit in the first half of the year and maybe up a little bit in the second half of the year, and it nets out to neutral? How should we think about the cadence through the year on the margin line?

Yes, it's always a tough question because we don't provide guidance from a quarterly perspective. We prefer to just keep you oriented around a full-year perspective.

The only comment I did reveal a bit was around the West Virginia plant expansion, which would be more of a first half. But at the same time we will have projects that will start to benefit us in the second half. So, I really don't have anything to add about any big swings from a first half to second half.

Okay. Good luck on 2017. And, Glenn, congratulations.

(Operator Instructions)

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

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.

And that does conclude today's conference. Thank you for your participation. You may now disconnect.