American Woodmark Corp (AMWD) 2017 Q1 法說會逐字稿

Good day and welcome to the American Woodmark Corporation first-quarter 2017 conference call. Today's call is being recorded, August 23, 2016. We will begin the call by reading the Company's Safe Harbor statement under these 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 maybe 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 be -- will not be realized. I would now like to turn the call over to Scott Culbreth, Senior Vice President and CFO. Please go ahead Sir.

Good morning, ladies and gentlemen. Welcome to American Woodmark's first fiscal-quarter conference call. Thank you for taking time to participate.

Joining me today is Cary Dunston, President and Chief Executive Officer. Cary will begin with a review of the quarter and an update on our strategy and I will add additional details regarding our financial performance. After our comments we'll be happy to answer your questions. Cary?

Thank you, Scott, and good morning, all. We enter the first quarter of our new fiscal year on the positive. For the quarter, we grew sales 12% over prior year with the key drivers once again being our new construction and dealer channels.

Looking specifically, in new construction we're had very strong quarter, growing our Timberlake business 19% over prior year. With the success of our direct to builder platform we continue to over-index single family starts with ongoing market share gains. From an industry perspective, single family starts continue to trend up, strength varies by region with particularly strong comps in the Southeast and the Southwest.

Regarding first-time home buyers, the activity is still too low to be noticeable. Although, we are seeing an increase in existing home sales to first-time home buyers, pricing and entry-level home availability continue to be key bottlenecks in the new construction market.

Taking a look at our dealer channels, we were up 13% from prior year as we continue to gain share in this critical channel by both signing on new dealers and improving our dealer penetration. We do have a healthy backlog on the dealer channel as we head into the second quarter.

Our greatest challenge remains with the home center business which was up only 1% in the first quarter. I have been fairly vocal regarding the increase in competitive promotional activity within the home center channel. We been very reluctant to respond at a similar level as there has been little indication that it is resulting in bringing additional consumers in the door.

However, as in our historical past, we will not allow competitors to simply buy share and thus we are finalizing our strategy to respond in a way that moves our share back to more normalized levels. Our goal as part of this is to minimize the impact on our margins. And despite this emphasis on promotions, we will continue our drive to make significant advancement in our innovative and technologically focused approach to the overall consumer value stream.

From a gross margin perspective we're very pleased with the performance at 23%. We had similarly strong performance on our incremental gross margin for the first quarter coming in at 34%. We continue to drive operational efficiency gains throughout our platform as well as benefit from our improved product mix.

However, it's also important to note that we experienced favorable healthcare costs in the quarter. Finally in operating margin for the quarter, we came in at 12.4% and we generated $21.7 million and net income, up 43% from prior year. Relative to where we expected our performance to be in the first quarter, we came in stronger. We had some tailwinds and our production was slightly higher than we had initially planned, however, our focus was on ensuring we kept our backlog at manageable levels.

As you may recall a year ago we ended the first quarter with our backlog too high, thereby negatively impacting our lead times to our customers. This year we did err on the side of being a bit conservative. As a result, we are in a reverse situation from prior year and will be managing our production in our second quarter to bring backlog back up.

In addition, we continue to keep a close eye on increasing headwinds including diesel fuel, contractor logistic cost and inflation. From a market perspective, we remain confident in both new construction and remodel. Our unique position with our Timberlake direct business will allow us to continue to over-index the industry on incoming volume.

Likewise our Waypoint dealer channel will continue to gain share. The big, [far] question mark is within home center. In total home center is under indexing the dealer channel due to the more affluent consumer choosing to shop at dealers.

However, the home center channel remains a very critical part of our overall mix and thus our plan is to restore our long-standing market share position by responding to the competitive promotions. The ultimate impact is hard to predict, but we remain confident in our overall leadership position in the big box channel. Before I hand it back over to Scott, I would like to take a brief moment to give you a little bit of insight on our strategic work that's been underway for some time now.

We have been very focused on our 2019 vision, in particular the application of new technology and bringing very innovative approaches to both our market value proposition and to our operating platform. However, we were also recognizing the competitive market is much different today than it was prior to the great recession. Pre-recession within remodel, we were very successful, focusing on the stock segment of the market with our competitors primarily focused on the lower-end, in-stock segment and the higher-end semi-custom and custom segments of the market.

For some time now our strategy has been to defend our stock business while taking an opportunistic approach to semi-custom. During the recession, our leadership in the stock segment positioned us well due to the movement down by consumers to more affordable kitchens. As a result, competition became much more aggressive at launching new product to directly compete against us.

The advantage we have is that our platform was specifically designed to operate efficiently in the segment and our success has been very apparent. In addition, through continued improvement in our manufacturing platform, we have been able to significantly expand our product offering in the lower end of the semi-custom segment.

This is evident in our ongoing improvement in our financials related to product mix. However, the pressure from competitors, both from below and from above our current positioning, is growing. As a result, we have been very focused on a key strategic initiative to broaden our competitive position as a solution provider in all relevant markets.

This initiative has driven a tremendous amount of activity within our business. We are challenging ourselves on many fronts when it comes to being a solutions provider. At the core, however, is a question of what we have determined to be relevant markets.

From a pure product perspective, our stock segment provides a powerful foundation. However, longer-term we can no longer rely on simply defending the segment. We feel it is important to make an intensive move to expand our capabilities beyond our current platform.

We are evaluating a number of strategic options that would position us both above and potentially below the stock segment, including the option of acquisition or building a greenfield facility. Regarding acquisition opportunities, we have been working with the investment banking arm of Robert W. Baird & Company for a number of months now. Likewise, an internal team is developing our formal strategy if we decide to expand organically.

For now, we do not have any details to report and I simply wanted to communicate that we are not sitting still. Our success over the past several years has been very exemplary. Most widely, we recognize that we offer a tremendous amount of leverage with our competitive advantage to be successful in markets we do not currently serve.

We are committed to make the right investments to continue to profitably grow American Woodmark well into the future. With that, I will turn it over to Scott for the financial details.

Thanks, Cary. The financial headlines for the quarter, net sales were $258.2 million, representing an increase of 12% over the same period last year.

Reported net income was $21.7 million, or $1.32 per diluted share, in the current fiscal year versus $15.2 million, or $0.92 per diluted share last year. The Company benefited $0.06 per diluted share from a lower tax rate related to the adoption of a new accounting standard related to stock-based compensation. For the quarter, the Company generated $32.9 million in cash from operating activities, compared to $17.7 million for last year.

The new construction market continues to perform well. Recognizing a 60- to 90-day lag between start and cabinet installation, the overall market activity in single family homes was up over 9% for the financial first quarter. Single family starts during March, April and May of the prior period averaged 689,000 units.

Starts over that same time period from the current year averaged 753,000 units. Our new construction based revenue increased 19% 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 to be challenging. From a positive side, unemployment continues to improve. The July youth re-unemployment rate dropped to 4.9% and U-6 dropped to 9.7%.

Both measures were lower than the July 2015 reported figures. Residential investment as a percent of GDP for the second calendar quarter 2016 improved to 3.6% versus 3.4% 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 second calendar quarter of 2016. Between April and June 2015, existing home sales averaged 5.28 million units. That same period for 2016 averaged 5.5 million units, an improvement of 4.2%.

Interest rates remained low in the quarter with a 30 year fixed-rate mortgage at 3.44% in July, a decrease of approximately 61 basis points versus last year. All-cash purchases in June were 22%, unchanged from last year.

The share of first time buyers improved. The June reported rate was 33%, better than the prior year rate of 30%, though well below the historical norm of 40%. On the negative side, the median existing home price rose 4.8% to $247,700 for June, impacting our consumers affordability index.

Consumer sentiment dropped to 90% in July versus the 92% recorded at the beginning of the calendar year and the 94.7% recorded in May. Homeownership rates remained low versus historical averages. The percent of Americans who owned their own home in the second calendar quarter was 62.9%, or 0.5% below last year's rate.

Our combined home center and dealer remodel revenues were up 3% for the quarter with home centers growing 1% and Waypoint growing 13%. Promotional activity remained higher than the prior year for the fiscal first quarter as we responded to competitive positioning and market conditions. The Company's gross profit margin for the first quarter of FY17 was 23% of net sales versus 21.7% reported in the same quarter of last year.

The Company generated a year-over-year incremental gross margin rate of 34% for the first fiscal quarter. Gross margin was positively impacted in the quarter by higher sales volume, product mix, lower labor benefit cost and improved operating efficiency. Total operating expenses decreased from 11.4% of net sales in the first quarter of the prior year to 10.6% this fiscal year.

Selling and marketing expenses were 6.4% of net sales in the first quarter this year compared with 6.8% in the prior year. We generated a leverage in selling and marketing cost through expense management, lower display cost. General and administrative expenses were 4.2% of net sales in the first quarter this year compared with 4.6% in the prior year.

Decrease in our operating expense ratio as 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 $32.9 million during the first quarter of FY17, compared with $17.7 million during the same period in the prior year. The improvement in the Company's cash from operating activities was driven primarily by higher operating profitability and lower increases in customer receivables.

Net cash used by investing activities was $40.6 million during the first quarter of the current fiscal year compared with $15.3 million during the same period of the prior year. The increase was due to a $35 million investment certificate of deposit which was partially offset by decreased investment in property, plant and equipment. Net cash used by financing activities of $4.3 million increased $5.4 million during the first quarter of the current fiscal year compared to the same period in the prior year.

The Company repurchased 72,400 shares of common stock at a cost of $5.1 million, a $3.3 million increase from the prior year and proceeds from the exercise of stock options decreased $1.5 million. In closing, the new construction market continues to improve with single family housing starts approaching 800,000 units. Home prices continue to increase due to land and labor shortages and low existing home inventories.

Unemployment rates and interest rates have improved but the middle income consumers willingness to spend on a new home or begin big ticket discretionary home improvement projects remains low. We delivered a strong quarter with fuel and healthcare helping drive margin improvement. Some potential headwinds are on the horizon as lumber cost increased year-over-year in the quarter and fuel is projected to become unfavorable as the year progresses.

Looking forward, due to our strong financial performance in the first fiscal quarter, we now believe will improve our operating margins for FY17. As Cary mentioned, we are not standing still and are excited about the strategic work that is underway to expand our capabilities beyond our current platform.

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

(Operator Instructions)

Nick Coppola, Thompson Research Group.

Hi, good morning.

Good morning.

Thanks for the commentary on the strategic initiatives. I just want to ask a follow up on that. You talked about the desire to address the wider spectrum of the market above and below the stock category. Can you just talk more about what that would look like and where you're more interested in growing organically versus M&A and kind of how you think about that?

I would say it's a tough formula. The key focus beyond the strategy was the comments I made about defending the stock segment and that served us very, very well for many years.

But with some of the changes in the in-stock dynamics and where our competition now sits, even if it's a minimal or a small impact on our stock we still lose share as they continue to launch product. And I think it makes sense to expand our horizon and really take our core competency and say where we can -- where can we go out and gain additional market share and take our core strategic advantage with us particularly on the customer service and that experience we talk about and really leverage that to our benefit.

Moving up, we obviously as I commented in the lower end of the semi-custom segment now but we are kind of at the ends of the capabilities of our current manufacturing platform because it was very specifically designed to serve the stock segment. So as we start thinking about moving up, there is -- you look at margin structure, what it takes to serve the market, what product does it take to serve the market, et cetera.

We think we could do well in leveraging our core competency in the semi-custom space. I would not venture up into the custom, certainly not our plan right now. But really the extension of where we are today to move up higher end. Regarding how you do that, obviously it's really only two choices. You grow organically or you grow through acquisition and that's a difficult formula.

It's number one the market. There's not a lot of players, I will be honest with you, out there that you can look at for acquiring. They have to be at the right scope, have to be a strong strategic fit, they have to fit culturally, that's very, very critical to us. And the list goes on. But we have engaged Baird a number of months ago -- actually, we've been working with them for a while now and evaluating all opportunities there.

So -- but at the same time we are committed and, with regards to the ability to expand into that semi-custom space, so if it doesn't work organically, we are committed to do it organically as well. Or if it doesn't work out position-wise, we're committed to doing it organically as well. So in parallel paths we have a team that is very focused on what that would mean to go out and do it organically.

It's not a simple bolt-on to our current platform. It would be a brand-new platform to go out and serve the semi-custom space because it's goes above and beyond really what our capabilities are today. It's just a different technology -- in finishing, the machine and everything, it's just a different technology really what we are set up to do today.

Similarly, we start looking below where we offer product today. Into the lower end of the stock segment. It starts to open up the market.

So it's not just about going to home center with a lower cost product. It's about talking about markets, for example multifamily. We don't currently serve multifamily.

It's tended to be a lower cost market, obviously much different with regards to how your approach that business. More contractual based, more longer-term from a lifecycle. But once again, a market that would place tremendous value on the service that we could bring. So we are in the process of understanding what product it would take, how you serve that market and then what it would take to do it.

Once again, that goes outside the boundaries of our current platform. So we are looking at all options up to and including acquisition and/or going greenfield. So different technologies and so forth.

So what's the right answer and the right action? I don't have that yet. But I think the positive thing is we're open to any of the above and then we will do the proper due diligence and make the best decision for, obviously, a long-term viability company and for shareholders.

Okay, that's certainly helpful color there. And then shifting gears to the quarter, gross margins were really well above expectations and you called out a few different items in your release and your opening commentary there, higher sales volume, lower labor benefit cost, lower display costs, et cetera. Can you just help us think about the magnitude of each of those and how are you thinking about really the gross margin performance in the quarter?

Yes. So within the quarter you hit the high water marks there so of course incremental volume certainly helps us as we go, mix also helps us. So we're getting leverage across our manufacturing base. The piece that I will call out specifically would be on the labor benefit costs and that was related to healthcare, which was favorable for us from a year-over-year standpoint.

It was about 100 basis points of operating margins, so it was fairly significant. A bit of that was timing but we've just seen lower claim rates and participation from our employment base with our health plan. So that was the piece that was, I would say, probably a bit of a surprise in the period.

And then the rest is really around project focus, operating efficiency focus.

Okay and then just last question, I know last quarter we talked about maintaining operating margins for the year. Only one quarter in here, but do you still think that seems like a reasonable expectation and any kind of thoughts about the back nine months of the year?

Yes. So in my closing remarks, based on the strong financial performance we saw in the first fiscal quarter, and we don't give precise guidance, right? So we don't give you an exact value or our quarterly value, but as you referenced in our annual report or coming out of our year-end call, we referenced holding operating margin based on the performance we just delivered at our first quarter.

I believe this will improve operating margin for FY17. I know the follow up will be, well how much? And I'm not ready to declare a value there. But our expectation is we will show improvement and progress in that line now year-over-year.

Okay. Thanks for taking my questions.

Thank you.

Josh Chan, Baird.

Hi. Good morning and great quarter guys.

Thanks.

Could you just elaborate more on the comment about promotion of the home centers, particularly around timing? How much of the increased promotional activity was reflected in the numbers that you reported just now and is there going to be any change in terms of strategy from Q1 into Q2 that's not yet reflected?

Q1 was primarily impacted by the, I would say, the offset of the promotional activity by our competitors versus ourselves. We did not respond in our first quarter. So that 1% comp that we reported was really based on, in our opinion, that inequality in the promotional activity.

So our plan is in Q2, can't give you exact timing because we're still working with the home centers and our team is refining it, but in the very near future, we plan to implement a change that will have a impact -- our expectation is will have an impact on our Q2. There is a lag there, obviously. You go out with promotional activity, it impacts your incoming rate but with the backlog built in you don't start shipping those until, on average, 30 to 40 days later.

So it will start to have more of an impact towards the end of the second quarter. But we will definitely -- at least our goal is to have a direct impact in Q2 and obviously leading into Q3 and beyond.

Okay, so it sounds like the home center growth can be better in Q2, I guess. In general for the whole Company, you do have a tougher comp in terms of revenue growth in Q2. Is there any thought behind whether you can overcome that and sustain this type of revenue growth or how should we think about the tougher comp there?

Internally, we tend to focus a lot on incoming. I know what you see, what's visible is the outgoing or the production or the revenue piece of it. I made the comment in mine that our backlog is slightly lower than what we would like it to be. So as we head into Q2 we're going to manage production to bring that backlog back up a little bit.

The challenge is really the forecasting piece or the incoming piece. This business has been pretty tough to forecast.

So what we tend to communicate -- and we do feel strong, is that we will continue to over-index on an incoming perspective which does relate directly to the revenue piece on the dealer side and the new construction business. Home center, we are expecting -- our goal is to get back up to the normalized leadership role that we've had in the past. That will take a couple months to do that, to carry that out.

So yes, it's a tougher comp. The direct comparison, obviously we can't really give that forward guidance, but we will continue to over-index on new construction and dealer from an incoming perspective.

Josh the only other comment I'd add to that is our outlook for the year that we shared last quarter was that we did expect to see growth for the full year kind of low teens. I would say we still hold to that expectation. Again some quarters will be higher, some quarters will be lower but that's still our expectation for the full year.

Okay great so that's unchanged. All right. And then appreciate the comments about the strategy as well.

In deciding between whether you want to go higher price point or a lower price point, I guess what are some of the financial criteria that -- or goals that you look to achieve with these moves? And then if you were to move to the semi-custom, is there kind of a new organizational structure that you would need to build out or do you think you have a fairly good starting point in terms of service and things like that?

The benefit is we would leverage most from an SG&A perspective. That's the biggest benefit is we would be able to leverage what's in place today and even get some synergies there. From a manufacturing perspective, it would be a buildup. So where it's an add-on, be an acquisition which you have the synergies of -- from SG&A perspective, we have the sales force in place.

You go out to our dealer channels, we have the sales force in place. Our home center channels, new construction, et cetera. We really do not feel we would have to expand that to any degree to go out and start selling additional product.

If you get into semi-multifamily, yes, it's going to be some incremental SG&A cost because that's a different business. But I think it would be, from a leverage perspective, you'd still gain quite a bit there. With regards to a decision, we are evaluating both of them.

And expectations, both of them need to be accretive from a revenue and bottom line perspective. You'd obviously think that our expectation is that the semi-custom business should be better margin business, but there's a lot that we are still investigating and strategic work that's under way. But certainly any time we go out and think about adding the business, whether it's greenfield, organically or via an acquisition, is -- we will make the right decision to really help our financial both top and bottom line.

And we feel we definitely can do that. It's not just a growth strategy. We have no desire to go out and grow without also improving our bottom line so -- and we feel we can do that.

Thanks for the color and good quarter.

Thank you.

(Operator Instructions)

Scott Rednor, Zelman & Associates.

Good morning.

Good morning, Scott.

I have a question that you referenced that the backlog was slightly lower than you'd expect it to be. Is that incoming orders in August are slightly lower than you expected it to be or you guys just ate into backlog? I was hoping you could just clarify that comment.

It always goes into plan versus forecasts and we had forecasted Q1. And then we -- like you said, we erred on the side of being conservative. So what we put into the system was designed purposely to bring production up.

We're were caught off guard last quarter or last year, first quarter primarily driven by our product launch on incoming. But we -- I committed back then and I committed to my team that we'll always err on the side of conservatism to always protect the customer and we did at this time. So we were slightly lower on incoming than what we had forecasted.

Not to any concern level though. It's just a matter of we brought production up to make sure we controlled backlog. As we go into Q2, still have good backlog.

We had --and it varies by channel. Obviously, when you talk about new construction or dealer, we have healthy backlog. We're expecting those to remain strong.

And you have to be careful when you get into Q2 and trying to estimate what production and what revenue will be, just because I say were going to manage backlog, obviously a big variable in that is in what does incoming do in Q2 because that has a major impact on our backlog as well. So we're not expecting production to come down or anything relative to Q1. It's just it is very dependent upon both current levels as well as what we're forecasting on incoming.

And we are expecting a good Q2 from an incoming perspective. It's just that we have to manage that backlog so when I say were going to bring it up, that means we will not take production as high as what we potentially would have given the incoming. So it's -- I know I'm kind of skirting the circle or circular reference here, but we're not giving a lot of guidance.

But that's why don't have any concern with regards to our incoming and so forth and the channels. I feel confident that we're going to continue to regain some of that in home center. It's just a matter of making sure we're protecting the customer and the good thing is we, as you know, we don't live quarter-by-quarter and we use that backlog variable to make sure we take care of our customers and I want to make sure people understood that we are doing that right now.

And when you discuss the actions to respond at the home centers, given how fast your earnings growth and the improvement we're seeing externally on the gross margin line, why is that the right strategy?

To respond to -- it's kind of a long-standing question of where we are from a product mix perspective and our goal, like I commented, we're not going to go out and make any financial decision to take the cost up tremendously on the promotional side that's going to result in a negative impact to the bottom line.

I think we, obviously, Scott and his team go through the financial analysis and say -- okay, what's the equation? If we go out and increase promotional activity and what do we get from it? So if we can go out and improve our market share -- is it worth it?

We've done that math and considering we do feel -- and that was the big thing we're waiting for, right? Is this a steady state new model that exists today and our -- at least our decision today is, yes it is. If we, obviously, don't take any action we will be sitting with quite a bit less share than what we sat for many, many years.

So the question is, you go out and take action to try to regain that share and what's a financial formula to do that. We feel quite confident we can do that in a very positive way. So yes, I will say it's the right decision from both the top- and bottom-line perspective.

And it's also a longer-term question of the strategic implications of not showing the home center that we are taking them very serious. Our competitors are out there being very aggressive in home center. If we step back and just let them continue to buy that share it also sends the wrong message to the designers and to the home center leadership as well.

That's a very, very important market to us. Home center is obviously going to remain very key to our mix for many years in the future. We are working very close with them strategically and from a promotional perspective we made the decision that we need to go out and make some changes.

I think that's very helpful that you clarified that, Cary. And then just lastly, M&A has not been part of the core DNA for American Woodmark probably ever. Recognizing that, that is now on the table, how do you think about the potential bringing on an acquisition in terms of, I think you alluded to before, fitting the culture?

Is this going to be something that you guys think you could see mostly integrate, just that this is the first time around for the Company in terms of adding something inorganically if you choose to pursue that route?

Yes, it's -- and I agree 100%. One is -- we are taking it very serious. I personally do have some prior experience with it so I understand the challenges.

I'm also optimistic when it comes to acquisitions. I know there's a lot of value that often destroyed when you go out and do acquisitions so we would do a lot, a lot of due diligence if we were to make that decision. I think it's a narrow window on what would make a really good strategic fit because you have to take into consideration what you're getting out of it.

The technology you're getting. The industry is really moving forward with regards to technological improvements. The speed to market is improved I believe today.

Look how quickly we have grown our Waypoint business into a channel that we were nonexistent in five years ago, six years ago. So there is a lot of pros and cons to it. So I think we have a good understanding of what it is going to take, but at the same time I will guarantee you we are not underestimating what the implications may be of going out and doing an acquisition.

So we would take it very serious. Culture would be at the forefront and the type of company we were to -- would consider would have to meet those requirements. So Baird is there to help us along the way, though, if we did decide to do something like that. But we would we're taking our time.

That's really why we have not communicated anything in the past even though we've been looking at this for some time because we have been taking our time. So is that the right answer? I don't know.

I think it's important just to say at this point that we are opening ourselves up to make sure we look at all potential opportunities rather than restricting ourselves to just saying we're going to go out and go greenfield. It might make sense, it may not, but it's at least us opening ourselves up to say that we're considering acquisition.

Great. Thank you for all the color.

Garik Shmois, Longbow Research.

Thanks and congratulations on the quarter. Just wanted to follow up on the strategic initiatives that you are exploring? You provide good color on the different choices that you are considering.

I was wondering if you could talk about your view on the capital structure right now. If an acquisition comes along or if the greenfield route is chosen, is there any thoughts to taking on the leverage if the right opportunity presents itself?

We're not, at this point, prepared to get into a lot of detail on that. It's evident, depending on the size and the scope of the company we acquire depending on what decision we make on how to make that acquisition. So once again I would just say that we have to be open to all options including leverage, but that's not something that we are prepared to talk to right now.

So it's, I would say, a lot of variables going into that mix as well. And particularly the size of the company you could acquire. You have to be realistic.

There's not a lot of companies out there that have a lot of size to them. So that's -- I think that's an important thing that people are realizing. If you really go out and look at the semi-custom space, it's not a long list of companies that even have the scope that we would consider.

So -- but by no means we're -- I think people know we been a conservative company in the past with regards to our balance sheet and I have no means -- plan on changing it, I will tell you that. That doesn't mean we wouldn't become more leveraged but by no means are we going to do anything that would substantially put any risk on our balance sheet.

Okay. That's helpful. And my follow up is on the healthcare benefit that you saw in the quarter.

I think coming out of the last quarter there was an expectation that healthcare costs were actually going to be a headwind as you looked out to FY17. So just trying to reconcile the tailwind that you saw in Q1 and how we should think about the healthcare side, looking out over the next several quarters?

Yes. So just to clarify, so it was a benefit from a year-over-year perspective within the quarter. Which is a different comment that what it's been trending throughout the calendar year. So one of the things that's different about our healthcare plan is we do run a calendar program, so it's January to December as opposed to our fiscal-year program.

So we are about halfway through, if you will, our calendar year plan program. So I think from a tailwind standpoint, what you expect to see as you get further into the year is folks from start to hit their deductible and therefore you start to see a bit more cost come across with the program. So that's the point we were making on that.

Okay, thanks so much.

(Operator Instructions)

Josh Chan, Baird.

Hi, just two follow up questions. First is did you incur any product launch costs this quarter? I think you mentioned those costs as potentially one of the factors maybe impacting margins this fiscal year last quarter?

Yes. We did talk about that being an impact on the fiscal year but those are mostly going to be our Q2 and Q3 timeframe. So there were not any essentially in Q1.

Okay. Great. And then second question is, did the dealer growth, the percentage growth has been a little bit lower than what you guys have reported recently, is it just a function of growing off of our higher base or what is the expectation or any comment around that?

Primarily, once again it's incoming versus outgoing. The dealer channel continues to grow. Last year we did have a strong product launch and the timing is going to be different this year on the product launch.

We are in the process of communicating that project launch to the dealers and to other channels now. As Scott mentioned, that'll primarily occur in Q2 and Q3. So it's really just timing.

We remain very confident in the dealer business and we feel we will continue to over-index. So, yes, we are -- comps are slightly lower. Lower than what we have historically been running. But we do expect a good remaining fiscal year and we do have a good backlog sitting out there.

Thank you.

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

Since there are no additional questions, this concludes our call. Thank you for taking time to participate.

Ladies and gentlemen, this does conclude today's conference. Thank you everyone for your participation. You may now disconnect.