American Woodmark Corp (AMWD) 2017 Q3 法說會逐字稿

Good day and welcome to the American Woodmark Corporation third-quarter 2017 conference call. Today's call is being recorded February 27, 2017.

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 Scott Culbreth, Senior Vice President and CFO. Please go ahead sir.

Good morning ladies and gentlemen. Welcome to American Woodmark's third 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 I will add additional details regarding our financial performance. After our comments, we will be happy to answer your questions. Cary?

Thank you Scott, and good morning to you all. We are pleased with our performance for the third quarter of our fiscal year as well as with our year-to-date performance.

For the quarter, we grew sales 14% over prior year with positive growth in both our new construction and remodel markets. For the first nine months, sales were up 9% over prior year with new construction leading the way. Within new construction, we continued our extremely strong performance. With year-over-year growth of 23%, we significantly outperform the market growth of 10%. As in prior years, we did see some builders pull demand forward from the first quarter of calendar year 2017 to the fourth quarter of 2016 tied to the end of their fiscal years. The pull-forward was a bit stronger than in prior years and could have a slight impact on demand in our fiscal fourth quarter due to the builders temporarily reducing their pipeline. This impact should be short-term, however. As part of the pull-forward, we saw a noticeable increase in the number of spec homes being built, particularly in the Southeast. However, we were very pleased to see that these homes actually are selling, a strong positive for the industry and a reflection of the existing demand in the market.

As we look forward, both our economy and our industry are susceptible to all of the potential policy changes being talked about. Some could be favorable; some could create a challenge. Labor and land shortage remained as key variables in the overall equation, but, at the end of the day, the underlying economics continue to create a very solid foundation for our industry.

With single-family starts sitting just over 800,000 units, solid growth remains. I continue to believe that demand for lower cost starter homes is rising. We are seeing a more robust job market for those with college degrees, along with more renter fatigue. Young families still desire the American dream to own their own home.

The challenge of course is low inventory exists and new construction for the first-time homebuyer remains well below historical averages. With interest rates on the rise, affordability is once again coming into play. Yet it all remains relative as rates are still at historical lows and may be offset by improving availability in credit. As always, demand will ebb and flow, but the trend remains favorable. As I have stated in the past, our tremendous market share gain within new construction is tied to our investment in our direct-to-market strategy and our extraordinary employees that create an exceptional experience, a formula that's quite difficult to replicate.

From a remodel perspective, we were up 4% overall with home center flat and dealer up a very strong 23%. Within the dealer channel, where we have the ability to truly leverage our competitive advantage, we continued to gain share. Traffic is heavy within our dealers and we remain optimistic in our continued growth and ability to over-index the industry within this channel.

Regarding home center, as I mentioned, we were flat year-over-year in revenue. Ship units were actually up by low single digits for the quarter. However, revenue was impacted by a combination of mix and promotional activity. We did see promotional activity begin to drift back towards parity with a corresponding movement in share towards more normalized levels. However, as reported on their call, one specific competitor continues to feel that aggressive promotional activity as healthy for them and the overall industry, and thus we believe this could remain a challenge going forward.

From my perspective, I would much rather invest in long-term strategic solutions that bring new customers into our retail partners and continue to improve the overall customer experience. Our ability to positively influence this experience and gain market share is quite evident without having to run extensive promotions. But at the end of the day, I believe promotions will remain a critical variable that could continue to create a challenge within the home center channel.

From a gross margin perspective, we ended the quarter at 20.7% with an incremental gross margin of 23%. We generated leverage on the higher sales and continued to improve our operating efficiency. Gross margin for the first nine months was 21.7% with a very healthy incremental gross margin rate of 25%.

Finally, our operating margin for the quarter came in at 8.7% and we generated $14.6 million of net income, an increase of 21% over prior year.

So, a very solid third quarter for the Company. We remain extremely confident in our market position and our winning competitive advantage. A vast number of new and undetermined variables exist that could impact our industry. However, I do not believe that it will deter the growth to any significant degree. In fact, I remain confident in a looming cycle that will be initiated when first-time homebuyers begin to account for a larger share of both new and existing home purchases. This will be a positive for both remodel and new construction.

From an overall Company perspective, we continue to be actively engaged in researching and vetting all opportunities to expand our positioning, as I've communicated in the past. We have the right strategic framework and a winning competitive advantage in our service platform that we will leverage to expand our business well into the future.

With that, I'll turn it over to Scott for the financial details.

Thanks Cary. The financial headlines for the quarter -- net sales were $249.3 million, representing an increase of 14% over the same period last year. Reported net income was $14.6 million, or $0.89 per diluted share, in the current fiscal year versus $12 million, or $0.73 per diluted share, last year.

For the nine months ended January, year-to-date net sales were $771.5 million, representing an increase of 9% over the same period last year. Net income was $53.9 million, or $3.28 per diluted share, in the current fiscal year versus $45.4 million, or $2.76 per diluted share, last year. For the current fiscal year, the Company generated $51.7 million in cash from operating activities compared to $53.6 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 10% for the financial third quarter. Single-family starts during September, October, and November of the prior period averaged 748,000 units. Starts over that same time period from the current year averaged 826,000 units.

Our new construction-based revenue increased 23% for the quarter. As we've 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.

Remodel business continues to be challenging. From a positive side, unemployment continues to improve. The January U3 unemployment rate dropped to 4.8% and U6 dropped to 9.4%. Both measures were lower than the January 2016 reported figures.

Existing home sales increased during the fourth calendar quarter of 2016. Between October and December of 2015, existing home sales averaged 5.2 million units. That same period for 2016 averaged 5.57 million units, an increase of 7.1%.

Residential investment as a percent of GDP for the fourth calendar quarter of 2016 held steady at 3.6% versus 3.6% for the prior year. The index, however, remains well below the historical average is 4.6% from 1960 to 2000.

All-cash purchases in December were 21%, down from 24% last year. Consumer sentiment increased to 98.5 in January versus the 92 recorded at the beginning of the calendar year, and the 92 reported in January 2016.

The share of first-time buyers remains steady. The December reported rate was 32% and matched the prior-year rate. Keep in mind the share rate remains well below the historical norm of 40%.

On the negative side, the median existing home price rose 4% at $232,200 for December, impacting our Consumers Affordability Index. Interest rates increased in the quarter with a 30-year fixed-rate mortgage of 4.15% in January, an increase of approximately 28 basis points versus last year.

Homeownership rates remain low versus historical averages. The percent of Americans who owned their own home in the fourth calendar quarter was 63.7%, or 0.1% below last year's rate. Our combined home center and dealer remodel revenues were up 4% for the quarter with home centers flat and Waypoint growing 23%. Promotional activity remained higher than the prior year for the third quarter as we responded to competitive positioning and market conditions.

The Company's gross profit margin for the third quarter of fiscal year 2017 was 20.7% of net sales versus 20.4% reported in the same quarter of last year. The Company generated the year-over-year incremental gross margin rate of 23% for the third fiscal quarter. Gross margin was positively impacted in the quarter by higher sales volume and improved operating efficiency.

Year-to-date gross profit margin was 21.7% compared to 21.4% for the same period in the prior year. Gross margin for the first nine months of the current fiscal year was favorably impacted by higher sales volume, lower labor benefit cost, and improved operating efficiency. Year-to-date, the Company generated a year-over-year incremental gross margin rate of 25%.

Total operating expenses increased from 11.8% of net sales in the third quarter of the prior year to 12% this fiscal year. Through nine months, operating expenses improved from 11.3% of net sales to 11.1%.

Selling and marketing expenses were 7.4% of net sales in the third quarter this year compared with 7.6% in the prior year. We generated a leverage in selling and marketing costs through expense management and lower commissions which were partially offset by higher product launch cost.

General and administrative expenses were 4.6% of net sales in the third quarter of fiscal year 2017, compared with 4.2% in the prior year. The increase in our operating expense ratio is a result of nonrecurring lease exit costs and higher pay-for-performance compensation cost.

With respect to cash flows, the Company generated net cash from operating activities of $51.7 million during the first nine months of fiscal year 2017, compared with $53.6 million during the same period in the prior year. The decrease in the Company's cash from operating activities was driven primarily by higher discretionary contributions to the Company's pension plans which was partially offset by higher operating profitability.

Net cash used by investing activities was $51.7 million during the first nine months of the current fiscal year compared with $33.7 million during the same period of the prior year due to an increased net investment of $29.3 million in certificates deposit, which is partially offset by increased investment in property, plant, and equipment.

Net cash used by financing activities of $11.2 million increased $6.4 million during the first nine months of the current fiscal year compared to the same period in the prior year as the Company repurchased 178,118 shares of common stock at a cost of $13.4 million, a $1.4 million increase than the prior year, and proceeds from the exercise of stock options decreased $5.4 million.

In closing, our new construction and dealer business continues to over-index the market. Our home center market shares recovered, but the promotional environment remains heavy. Our operations team continues to drive productivity, which has improved our gross margins, but increases in fuel and transportation costs are a concern.

The Company had a solid third quarter and our results were consistent with what we communicated to you last quarter.

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

(Operator Instructions). Tim Wojs, Baird.

Good morning. Nice job on the quarter. I don't know if you guys noticed this, but if you look on a trailing 12-month basis, you guys actually breached $1 billion in revenue for the first time. So nice job on that.

I guess, just on full-year guidance for 2017, I don't think, Scott, you gave any mention of that. Is that reiterated in terms of just the double-digit guidance for revenue that you had talked about previously? And then any other preliminary thoughts maybe on fiscal 2018 that you could provide us with, just given what you are hearing in the first couple months here of 2017?

Let me take fiscal year 2018 first and then we will come back and talk about the remainder of fiscal year 2017. So, for 2018, we are just now starting our budgetary process. We actually have all of our internal reviews scheduled for next week, so I don't have a lot of inherent data there to share. Also, I think, as you know, we tend not to give a lot of forward-looking guidance, so our plan would be typically to come to you in the May -- or sorry, the June call and give you some more detail there. However, stepping back from it, I think what you've heard in the marketplace you've heard from competitors, builders, etc., I think a low single-digit growth rate in their model channel maybe to mid is likely, and then on the new construction side, starts of 8% to 10% are reasonable. And based on our track record over the last couple of years, you could look at these two inputs and likely assume that we would perhaps perform a little bit better based on our historical rate on both new construction and dealer. So, that would be my outlook -- very, very high level as I think about 2018.

For 2017, again, we tend not to give guidance for the future periods. Last quarter coming off of that soft result in total, especially on the remodel side, we did affirm that we expected to deliver low double-digit growth rates. We got many questions about that. As you look at the Q3 performance obviously at 14%, that moves us toward that direction. As an exact value, could it be 9% and 10% for the full year? I think that's the range we would target.

Okay. Great. And then just on the promotional activity, was there -- is there any way to just frame what the promotional activity might have done to margin -- gross margins in the quarter?

I can't really give you any specific guidance directly around that. It did impact the topline revenue a bit. You heard Cary mention units were up low single digit, but that was offset by impacts of both mix and some of the promotional costs, but we do get some gain back on the other side from a leverage standpoint on our operating cost as we have more units running through our factory. But I don't have an exact number to quote to you.

Okay. And then on the nonrecurring lease piece that was in G&A, how much was that, and is there any more that we should think of in Q4?

Well, nonrecurring in nature, so I wouldn't expect those to carry forward. But the biggest item in there, just to give you a little bit of color on our history and corporate structures, is we did have a plane that was under lease. That lease expiration was in January of this year, and we let that go and we were under-accrued on some of the expenses and maintenance to turn that in. So that's what hit us. That would not be something that would continue because we are not going to get a new lease, and we are simply going to move to a purely variable model using a third party, if we need to, for flights. So that's the main piece of the story there on the general and admin.

Okay, great. Look forward to June and good luck on the year.

(Operator Instructions). Nick Coppola, Thompson Research Group.

Good morning. So, home centers (technical difficulty) home centers were flat year-over-year, so that was an improvement from last quarter. Is there any other color that you can add about dynamics in that channel? In your opening comments, you did talk about the competitive environment there. I guess what are you seeing in terms of trends there, and how customers are responding?

Trends is the critical word you mentioned there. The good thing is, like we said, the promotional activities restored probably a little bit closer to parity levels, but there are still some ad hoc promotions going on that are very hard to predict and/or forecast as it impacts our incoming demand. So I think we are, on average, we are more confident because we did respond, as we communicated last quarter and even the quarter before. We are going to start to trend that direction, but also mentioned there is a cap of what we're willing to go out and spend on the promotional piece just because I don't think it's right for the industry long-term. So, trend is a question that we are trying to answer even internally, and even as we think about our forecasting for fourth quarter, it's very hard to predict because it's an unknown. We don't know what competitors are going to do, nor what the home centers themselves are going to do. So, we do the best we can, but I do feel it has leveled off some.

Okay, that's helpful. And then I think, you know, you clearly continue to over-index the market in terms of new construction and you continue to talk about increasing penetration with builder partners and the regions where you are focused. Is there anything else that you would add about your ability to really continue to gain share and how sustainable that is, the types of products you are offering, cost structure? What are -- so I guess any color you would add around that?

The good thing in a new construction, I'd say it's less sensitive to product mix than it is to service. And we made the strategic decision during the recession to not only sustain but continue to invest in our direct platform that we talk about.

I think what you see with our competitors is they've taken a different strategic approach and going through distribution on a larger scale. So that's really served as a winning strategy for us because we've been able to manage that level of service, particularly with the big builders has been very, very critical and particularly with the growth that you're seeing out there. Because not only is it our internal growth, our organic growth that we are getting, but it's also the growth that the top 20 builders are getting in the market as well. So it's just a winning strategy, and it is now what we sustain or continue to over-index at these levels. Actually, that got harder and harder over time. We are not going to continue to gain market share at the levels we've gained over the past five years. But yes, we do expect to continue to over-index and it's based purely on the ability for us to really control that service that we offer to the end customer, which is the big builder.

Congrats on that, and thanks for taking my questions.

(Operator Instructions). Dennis McGill, Zelman and Associates.

Good morning guys. Thank you. I guess the first question is just on your business at the home centers. I would imagine you sort of have your plans set or close to set for the spring here. How would your promotional activity compare to your promotional activity at the same time last year?

I would say that's still going to be a variable that Cary mentioned on the question from just a few minutes ago. It's going to depend on what we see in the marketplace. That certainly has been higher the last couple of quarters versus what we had seen the prior year. However, if we look back and do a comparison for the summer period, it's probably going to be close to the same as we walk through that, assuming no additional changes from the competitive or the retailer perspective.

Okay. So maybe you don't have visibility out as far as I thought, but within the month or two. You have those planned today, do you not?

Yes, but to be honest with you, we have our promotional -- I'll say internally we have our promotions planned, but what we don't know is what can be planned from a competitive standpoint and obviously how that could impact us in our incoming demand. So the answer is yes and no. Unfortunately, it's the second that tends to impact us more.

Okay. If the competitive environment stays relatively static with what you've seen lately, then what you are saying is you will lap that from a year-over-year basis by middle part of the summer.

Yes. We started to take up our promotional -- come closer to matching towards the end of the summer.

Okay. And then on the new construction side, do you have a way of splitting out how much of your business would be at a pure entry-level or first-time homebuyer segment within new construction, and how much would be move-up home?

We do. You caught me off-guard. It's obviously much lower than historical for two reasons. One, starter homes are lower, but we've also made strategic moves internally as well that have taken our -- what we call our opening price point product down relative to our overall mix within the new construction market. So, there's actually two facets that impact that. Obviously, as I think I mentioned on the last call, either that or the call before, there is still a big unknown question out there as first-time homebuyer start to get back in the market on will they select a smaller home and opt for nicer upgrades, which would certainly be our option for them. Or will they go with a larger home and really scale back on the quality of materials that are in the home. I think that's still to be determined. We are seeing some nicer, smaller homes being built out there with non-opening price point product, which is our preference. But that's a big question, and it's a good question and it's one that we are watching very closely as we go forward, because we know where our current mix is. What we really don't have a good understanding of is what it's going to look like six months or a year from now as they really start to make up a larger mix of that total new construction.

Okay, that's helpful. So right now, as you look at what is happening with your current mix, have you seen a shift with the two buckets that you identified there, sort of are they at the pure entry-level versus maybe a move up where they've scaled back?

I'll tell you we've seen very slight change in our mix, which is to the positive. But also if you look at, say, average home sizes, though, they are not drifted down yet either. So you are hearing a lot of builders are starting. I think they've purchased land. They've got subdivisions ready to go. But we really have not seen a change in the number of first-time homes being built out there. So we have not seen that change in mix yet. I think it's coming. We do have some of the key builders that certainly have homes in the ground that are starting to come up, but I think the rate of that change is still a big question mark.

Perfect. Thanks guys. Good luck.

(Operator Instructions). As I do not see that anyone else is waiting to ask a question, I'll turn the line back to Mr. Culbreth for any closing comments. Please go ahead sir.

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

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