American Woodmark Corporation
Q4 2013 Earnings Call Transcript

Published: 4 Jun 2013

[Operator:]

Good day, and welcome to this American Woodmark Corporation conference call. Today's call is being recorded. The company has asked us to read the following 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 statement. 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. At this time, I would like to turn the call over to Glenn Eanes, Vice President and Treasurer. Please go ahead.

[Glenn Eanes:]

Thank you. Good morning, ladies and gentlemen, and welcome to this American Woodmark conference call to review our fourth quarter and full year results for our fiscal year ending April 30, 2013. Thank you for taking time to participate. Participating on the call today from American Woodmark Corporation will be Kent Guichard, Chairman and Chief Executive Officer; and Jon Wolk, Chief Financial Officer. Jon will begin with a review of the quarter, concluding with an outlook on the future. After Jon's comments, Kent and Jon will be happy to answer any of your questions. Jon?

[Jonathan H. Wolk:]

Thank you, Glenn. This morning, we released the results of our fourth quarter ended April 30, 2013. Our earnings release contain the following highlights

[Operator:]

[Operator Instructions] We'll go first to David MacGregor with Longbow Research.

[Zoran Miling:]

This is Zoran Miling in for David MacGregor. I guess just firstly just with regard to the opportunistic buybacks, are you able to attach a dollar figure to that? Or maybe even asking it another way, kind of what's the minimum cash balance you need to maintain your day-to-day operations?

[Jonathan H. Wolk:]

We haven't attached a dollar value to that yet. And the minimum amount of cash that we need to maintain operations fluctuates over time based upon our assumption of market conditions and how the company is performing. I think we certainly feel there is a level of cash now that is probably in excess of that. But then again, as I had mentioned, we are reconsidering our capital plans for next year and the years that follow it and so there's a bit of a calculation that goes on in there. But I think based on the year's strong finish, we anticipate that we will be able to, as I said, resume opportunistically repurchasing the stock as the year progresses.

[Zoran Miling:]

That's helpful. And then I know it's an ongoing process and you've done very well, thus far, but can you maybe update us on your efforts to further your presence in the dealer channel? And also I believe, you mentioned on a previous call that, that business was at maybe $5 million on a quarterly run rate. Can you maybe update us as well as to where that stands currently and maybe where you'd like to be going forward?

[Kent B. Guichard:]

Yes, sure. I mean, we continue to progress kind of where we are as we now have what we consider to be a good and critical mass of national dealers. I think the next leg in the journey for us on the dealer channel is not so much to sign up additional outlets, although I'm sure we will continue to do that but at a much lower rate, as much as it is, is to penetrate and really get throughput through the dealer system we have, it's kind of Phase 2. The first one was to get enough dealers out there, so the brand had meaning in the marketplace, we've done that. And now what we're going to try to do is focus on increasing the throughput through the outlets that we have. It continued to build throughout the year. Jon mentioned for the year that our remodel sales were up high single digits. About 2/3 of that overall growth, 1/2 maybe to 2/3 of that overall growth, came out of our dealer initiative and it climbed through the year, so we came out of the year obviously stronger than the beginning of the year. We look for that to continue to go through 2014 on a continued kind of growth. And again, as Jon kind of mentioned in his remarks, we expect growth in '14 out of the remodel side and we expect most of that, quite frankly, come out of the dealer channel.

[Operator:]

Our next question comes from Peter Lisnic with Robert W. Baird.

[Peter Lisnic:]

Jon, just going back to the capital allocation question, first point would be or first question would be it sounds like maybe there's some capital you need to invest in the business. I'm just wondering is it going to be a marked step-up from kind of the run rate that we have seen over the past couple of years? In other words, is there some significant capacity add that you think you might need to use some of that cash with?

[Kent B. Guichard:]

Yes, I'll go ahead and take that one. And yes, I think the answer to that is we talked about at the last couple of calls that the growth rate we've seen, particularly out of the new construction side, has probably put us 12 to 18 months ahead of where we thought we'd be on capacity utilization. Our current forecast based on what we expect to happen going forward is that we would probably need to bring some new capacity online in the fall of 2014, which -- late summer to early fall of 2014, which means with lead times depending on where the capacity is; with lead times, probably this fall into the winter, we would start to see a step-up related to getting that capacity in place so, again, so we can bring it online basically in 15 months. The size and the extent of that, we don't know. We're going through that work right now to determine exactly what that capacity would be. In terms of the area of our operation, we're certainly finishing, but there may be some component in other areas and where the best place to do that is. We expect to complete that work in the current fiscal quarter. So by the time we get to our announcement for our first fiscal quarter of '14, we think that we should be able to give you all some better guidance in terms of the actual magnitude of what that capacity expansion would entail.

[Peter Lisnic:]

And are we looking at -- would that be greenfield plant? Or maybe I should take a step back and say or ask, if I look at the current capacity that you have, what are, and I know you talked about it in terms of hard utilization and soft, where we at in terms of utilization numbers for current footprint?

[Kent B. Guichard:]

Well, on a practically crewed basis, we're in good balance. We're basically running at capacity from a crewed standpoint. If you look at it on a brick-and-mortar kind of basis, we're probably running about 80%. Now, again, that doesn't mean you don't need to buy a machine here or there, but basically we're probably running about 80%. And that's when -- if you projected the growth rate that Jon talked about, that's why we'd probably need to bring some additional capacity on next fall, at fall of '14. In terms of where we'd be, I doubt -- again, we haven't completed the plans, I would really doubt that it would be a greenfield facility. It's more likely to be an addition on an existing facility that we have. We have a couple of facilities where we have additional property and the original designs of the building allows for expansion. Now and again, we get a lot of leverage out of management, out of systems infrastructure, those types of things. So it would probably be an expansion of an existing site rather than a new site.

[Peter Lisnic:]

Okay. And then my guess is the industry is not running at 80% utilization, so what are the odds that maybe there are some assets out there that you could just acquire that would be perhaps a more attractive use of capital than the alternative, i.e., capacity expansion?

[Kent B. Guichard:]

Well, not really any and the reason is twofold. One of them is as a vertically integrated manufacturer, we need our plants to be in proximity of each other. So if you get a -- a flat stock plant or a component plant, a finishing operations that needs to basically feed an assembly operation, so geographically it doesn't really work. The other one is while we're all in the same industry, we all do things to a different -- significantly different enough degree that even if we bought a facility, we'd have to retool it to the extent that it -- from a financial standpoint, it makes more sense just to go ahead and do it ourselves.

[Peter Lisnic:]

Okay. And then just the last one on capital allocation. Formerly, there was a dividend in place, but I didn't hear that as part of the capital allocation mix. What's the consideration on the dividend as we look forward?

[Kent B. Guichard:]

Yes, at the moment, we're not considering the dividend route. I think, as Jon mentioned, to the extent that we have excess capital above our CapEx and what we think are prudent reserves, our -- what we're going to do is, assuming that we'll pick the right opportunity to enhance our shareholder value because I think our cash, excess cash, at that point will be through stock repurchases, we're not really considering a dividend at this time.

[Peter Lisnic:]

Okay, all right. Then last one, just to switch gears. The pricing environment sort of stabilized, plateaued, whatever the right word is. As you look to that going forward, let's just say it kind of stays where it's at, does that have any implications for what you might be able to realize in terms of your gross margin targets that you've laid out for us in the past, i.e., the kind of low 20% gross margin range, does that have impact on you being able to achieve that?

[Jonathan H. Wolk:]

Pete, just to clarify, when you said the pricing environment, what are you referring to exactly?

[Peter Lisnic:]

Promotional, sorry.

[Jonathan H. Wolk:]

Okay.

[Kent B. Guichard:]

Yes -- no, I don't -- I'm not sure what -- I mean, what we've seen, and again Jon kind of mentioned, I can maybe go a little bit more on the remodel side is, I think we've seen a lot more activity in the marketplace in terms of competitors and customers trying to find that point on the elasticity of demand curve where they are generating that last incremental sale, but they're not throwing money at a sale that they already would have had. So we have seen some easing of that. We've also seen some changes in the nature of it where it's gone from kind of a one-size-fits-all brute force approach to promotions to real targeted promotions, even down to a door style level. But some of those targeted promotions have been very, very aggressive. So I think people are out there trying a lot of different things. Overall, it's down. So I think from a net standpoint, pricing is moving up. I don't -- I think the biggest risk quite frankly to the gross margin side, again as Jon mentioned, is we are seeing material price inflation. And I think particularly short term -- long term we have a history as an industry of recovering permanent raw material increases, But as we've talked about many times on these calls, there can be a timing difference between when the industry starts to get some input increases inflation and when we can pass it on. I think that's more of a risk to margin than the pricing environment at this point. If you get leverage out of additional volume, I think that can still get us up in that kind of low 20 range. And then it's just a question, more in my mind, is what we're seeing now as opposed to the pricing environment it's the trade-off between raw material inflation and when we can recover that from the market place.

[Operator:]

[Operator Instructions] Next, we'll go to Scott Rednor with Zelman & Associates.

[Scott Rednor:]

Just drilling back down on the gross margin. If we hold inflation and promotional activity constant, recognizing that the inefficiencies are behind you guys now, how should we think about that opportunity going forward? Is that 30% incremental still a fair bogey or could it be potentially higher based on all the actions you guys have taken?

[Jonathan H. Wolk:]

Scott, I think, as we think about the business, the traditional sort of incremental operating leverage has been sort of 25% to 30% on the gross margin line on an incremental basis. And of course, there's some variables that impact that either way. As Kent mentioned and I've referred to the raw material price increases, it can tend to dampen and put you at the lower end of the range; however, some of the efficiencies that we've realized can raise it to the higher end of the range. But I still think we're sort of within that range. Time will tell, but that's sort of our planning assumption right now.

[Scott Rednor:]

And the fourth quarter, just to be clear, reflects everything is in the numbers in terms of your savings and that's a clean number, too, as a starting point going forward?

[Jonathan H. Wolk:]

Yes, we believe so.

[Scott Rednor:]

Okay, great. And then on the G&A line, recognizing that there's going to be some noise quarter-to-quarter, how should we think about how incentive comps should trend going forward with the expected sales growth you have even if it's on an annual basis just to get a feel for that to the extent that line item should trend?

[Jonathan H. Wolk:]

Yes, the G&A line, as I mentioned in my comments, was unusually impacted during the fourth quarter by higher incentive compensation because we were sort of catching up based upon roughly 1/2 of the year's net income being realized in the fourth quarter. Roughly 1/2 of our incentive compensation expense was realized in the fourth quarter as well just to time that right. So I would say that probably, looking forward, the G&A line might be about $1 million lighter in an ongoing quarter, for instance, just to normalize that.

[Scott Rednor:]

Got you. And then just last, the tax rate going forward, where do you guys expect to come out as you look forward?

[Jonathan H. Wolk:]

Now, I was just having this conversation yesterday with my tax guy, Kevin, and I think a little bit less than 40% to be conservative. I'm hoping for a bit better than that, but Kevin's holding me to a little bit higher than I'd like.

[Operator:]

And with that, that is all the time we have for questions today. I would like to turn the call back over to our presenters for any final and closing remarks.

[Glenn Eanes:]

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

[Operator:]

Once again, ladies and gentlemen, that does conclude today's call. Thank you for your participation, and have a great day.