American Woodmark Corporation
Q1 2015 Earnings Call Transcript

Published: 20 Aug 2015

[Operator:]

Good day and welcome to the American Woodmark Corporation First Quarter 2016 Conference Call. Today's call is being recorded, August 20, 2015. We will begin the call by reading the company's Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. All forward-looking statements made by the company involve material 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.

[Scott Culbreth:]

Good morning, ladies and gentlemen. Welcome to the American Woodmark conference call to review our financial results for our first fiscal quarter ending July 31, 2015. Thank you for taking time to participate. Joining me today are Cary Dunston, President and Chief Operating Officer. The financial headlines for the quarter. Net sales were $231.2 million, representing an increase of 9% over the same period last year. Reported net income was $15.2 million or $0.92 per diluted share in the current fiscal year versus $9.2 million or $0.59 per diluted share last year. For the quarter, the company generated $15 million in cash from operating activities compared to $9.3 million for last year. Some additional comments on sales performance starting with the new construction market. Recognizing a 60-day to 90-day lag between start and cabin installation, the overall market activity in single-family homes was up over 6% for the financial first quarter. Single-family starts during March, April and May of the prior period averaged 642,000. Starts over that same time period from the current year averaged 683,000. Our new construction based revenue increased over 18% for the quarter. As previously stated, 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. On the positive side, unemployment continues to improve. The U3 unemployment rate dropped to 5.3% and U6 fell to 10.5% for the second calendar quarter of 2015. Consumer sentiment remained high at 93.1 in July. Existing home sales increased during the second calendar quarter 2015 with June at its highest annual rate in over eight years. During April and June of 2014, existing home sales averaged 4.9 million units. That same period for 2015 averaged 5.3 million units, an improvement of 8.5%. Interest rates remain low in the quarter with a 30-year fixed-rate mortgage at 3.98% in June, an improvement of approximately 18 basis points versus last year. All cash purchases fell versus the prior year. 22% of all transactions were paid in cash in June versus 32% last year. From a negative side, residential investment as a percent of GDP for the second calendar quarter for 2015 remained flat at 3.2%. The indexes remained below the historical average of 4.6 from 1960 to 2000. Home ownership rates also continue to decline. The percent of Americans who own their own home in the second calendar quarter was 63.5%. This is the lowest reported level since 1967. The share of first-time buyers remains low, but is slowly improving. The June reported rate was 30%, which is well below the historical norm of 40%. The Median existing home price rose 6.5% for June, the 40th straight month of year-over-year gains, which impacts our consumers' affordability index. The average of $236,400 surpassed previous peak in July 2006. Our combined home center and dealer remodel revenues were flat for the quarter. We continue to maintain our share in the home center channel and the dealer channel over-indexed the remodel market due to the more fluent nature of the customer base. Waypoint represents over 9% of our overall revenue and grew greater than 20%. Promotional activity was higher than the prior year for the fiscal first quarter as we responded to competitive positioning and market conditions. Moving to new construction channel, incoming orders outpaced out shipments for the quarter resulting in a healthy backlog as we head into the second quarter. Key drivers associated with incoming demand exceeding our forecast for the quarter and inherent delay in ramping up production. Regarding gross margin performance, company’s gross profit margin for the first quarter of fiscal year 2016 was 21.7% in net sales versus 17.5% reported at the same quarter last year. The company generated a year-over-year incremental gross margin of 67% for the first fiscal quarter. Gross margin was positively impacted in the quarter by higher sales volume, customer management, mix pricing and improved operating efficiency as we generated favorable leverage on our semi-fixed and fixed overhead with additional volumes. Regarding operating expenses, total operating expenses increased slightly from 11.3% of net sales in the first quarter of the prior year to 11.4% this fiscal year. Selling and marketing expenses were 6.8% of net sales in the first quarter of this year, compared with 7.3% in the prior year. We generated leverage in selling and marketing cost through expense management and lower product launch cost. General and administrative expenses were 4.6% of net sales in the first quarter of fiscal year 2016 compared with 4% in the prior year. The increase in our operating expense ratio as a result of increased pay for performance compensation cost. With respect to cash flows, the company generated net cash from operating activities of $15 million during the first quarter of fiscal year 2015, compared with $9.3 million during the same period in prior year. The improvement in the company's cash from operating activities was driven primarily by higher operating profitability. Net cash used by investing activities was $15.3 million during the first quarter of the current fiscal year, compared with $3.3 million during the same period of prior year, due primarily to increased investment in property, plant and equipment. \We’ve spent approximately $18 million for our South Branch plant expansion. The company expects to spend $7.5 million in the second fiscal quarter and $2.5 million in the third fiscal quarter. We remain on time for production equipment run off during the second quarter. Net cash provided by financing activities was $3.8 million during the first quarter of the current fiscal year compared with a $3.6 million use of cash during the same period of prior year. The company repurchased 30,555 shares of common stock at a cost of $1.8 million. A $2.3 million reduction from the prior year and realized increased proceeds from exercise of stock options of $3 million. In closing the remodel market continue to be a challenge. With the dealer channel continuing to outperform the market with a more fluent customer base where the home center channel continues to lag the market with the middle-income consumer. The new construction market appears to be improving with single-family housing fiscal year starts growing approximately 13% versus prior year to over 700,000 units. Consumer confidence has improved, but the middle-income consumer's willingness to spend on a new home or begin big-ticket discretionary home improvement projects remains low. Although the market remains uncertain, we continue to be pleased with our progress. Our gross margin rate improved sequentially for the third straight quarter and we delivered solid sales and earnings growth. Looking forward, we maintained our expectations, we shared in our last call, it will increase margin rates and grow net income in fiscal year 2016. This concludes our prepared remarks. We would be happy to answer any questions you have at this time.

[Operator:]

Thank you. [Operator Instructions] We will go to Nick Coppola with Thompson Research Group first.

[Steven Ramsey:]

Good morning. This is Steven Ramsey on for Nick. Thanks for taking my questions, can you guys talk for and just give any more details about your market share gains in the dealer channel?

[Cary Dunston:]

Yes, we’re as you know - Scott talked a lot about the dealer channel how we over index and hope the first time we gave you a little bit more detail this time with regards to some share growth or some revenue growth. It’s we still see as an important market for us its say if all the channels they were still lower part of our business, so it’s one that has a lot of opportunistic growth ahead of us and one of our biggest investment opportunity to think as well to continue to grow. If you look at the market is whole from the remodel perspective. The dealer channel makes up roughly about 75% of it compared to what we typically referred as a home center and then we are still - even though we are growing, we are still a smaller player, but when you consider the market share, the opportunity is out there that is what really makes it the biggest growth opportunity for us. So it’s one that [indiscernible] where it takes us strategically it’s something we spend lot of time talking about and its one where we continue to invest in. So can’t really give you any a specific share numbers, it’s very, very diversified market, lot of small players out there, certainly all the big player are in it, but there is a lot of regional players in fact when you get to certain regional markets some of the number one competitors we might have could be very small regional players to deal and [indiscernible] of the market. So it’s really hard to go out and give you specific market share, but it’s a huge opportunity for us, we’re a disruptive in the market right now to be very honest with you, based on - it’s our core competency that we talked about in every one of our channel which is service and we've brought a model to that business on the dealer side that is winning and its resulting in very aggressive share growth for the company.

[Steven Ramsey:]

Excellent. Thank you, there is follow up there on that market my last question, is the dynamic, the competitive dynamics of that market changing much with activity from bigger players and peers in the case market. Thank you.

[Cary Dunston:]

Not really, I mean there are some larger players that once again I think because we are considering [indiscernible] through the market. You are seeing some promotional activity that is targeting our waypoint business. We are not really seeing it being very effective out there once again just because, dealers they want the standard market conditions and they want competition within their dealers and we provide a model that like I said before is winning that both the dealers are happy with, the designers are happy with and customers are happy with. So yes I think there is always different strategies that competitors are taking to try to slow our growth or even knock us out as certain dealers. And honestly up to now it really has not been effective and we see a more opportunities ahead than now.

[Steven Ramsey:]

Excellent. Thank you guys.

[Cary Dunston:]

Thanks Steve. Operator Thank you. Our next question comes from Tim Wojs with R W. Baird.

[Tim Wojs:]

Hey guys nice job.

[Scott Culbreth:]

Thanks.

[Cary Dunston:]

Thank you.

[Tim Wojs:]

I just on gross margins, there are four or five things Scott that he had listed in the prepared comments has being benefits. I was wondering if there is a way to kind of think about how each of those pieces actually impacted gross margin this quarter.

[Scott Culbreth:]

Yes, so I know that is a question we have had in the past trying to break down the key elements and drivers there. We have not typically given that level of disclosure. What I can tell you is there is a number of factors obviously that impact our performance and in the period we had a good result, the factors that impact us are things like yields on lumber, scrap throughout the manufacturing process, fuel prices are of course an impact. Our material improvement cost and then we have operational projects in place to reduce cost. And the answer is when we net those together, we did have a favorable result in the period, but operational projects has been one of the key drivers for us. So our manufacturing team has done an excellent job for the [indiscernible] material cost, labor cost, overhead cost and getting efficiency gains there. We’ve also been able to get, some improvements in yields, input cost we have seen some relief, I would say it’s more stable environment than what we’re experiencing in prior periods.

[Tim Wojs:]

Okay. I guess that was going to be my next question, just in terms of the input kind of wood cost I mean have we seen - it sounds like there might have been some benefits, but it’s more the input costs aren’t necessarily down it’s just they are more stable.

[Scott Culbreth:]

Yes. One of the things we have as a challenge is based on the spices you are buying, as well as the grade that you are buying. looks 50,000 foot level oak and hard maple you look at the industry and we are seeing some drift down in pricing there, but on the flipside we’ve seen cherry and soft maple be flattish really from a period-to-period standpoint. And then within each of those species again you start looking at the grade you get a different answer, but I would say it has definitely been more stable it has not been on increasing slope; it is on a more of a flattish slope over the last couple of quarters.

[Tim Wojs:]

Okay. Great. That’s helpful and then I guess in general I mean as you kind of look at the quarter and you look at the outlook, is there anything in the quarter that’s surprise you relative to plan and I guess as you look forward over the last couple months, is there anything that has changed either macro related or company specific that would make you change how you think of the full-year.

[Cary Dunston:]

Nothing specific really internally that we would step back and say it was a surprise and we’ve talked a lot about our 2019 vision and we’ve got some key initiatives as Scott mentioned, we are very, very focused on those variables that we can control and even though we get a lot of fluctuation in raw materials, we have a lot of projects focused on those improved efficiency and so forth. As Scott did mention the healthy backlog, little bit of a surprise but the positive one. We have good amount of backlog just based on the incoming demand that we have and we operate our manufacturing platform as mostly within our industry that provide SOS cabinets on a backlog that level load production. So it takes time to ramp up production, because you are hiring labor and so forth. So we had a good incoming, really in all channels and we are over indexing as he mentioned in the dealer and new construction as we have been for many quarters now. So that was a good pleasant surprise and but it’s volatile, we sat here a year-ago, looking forward and hoping we are going to have a good fall selling season and we are sitting here now trying to figure out what’s going to happen in the fall. So it is an accurate, nor is anybody been accurate. Thanks from in years now and trying to guess what is going to happen but right now we are sitting with a healthy backlog.

[Tim Wojs:]

Well nice job again and thanks for the time.

[Cary Dunston:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] We will go to Scott Rednor with Zelman & Associates.

[Scott Rednor:]

Good morning, Gary and Scott. Thanks for talking my question. How much is the backlog up year-over-year if you could help us quantify that versus what you report in revenue growth for the quarter.

[Cary Dunston:]

Yes. We simply don’t get down to that level of disclosure on backlog, because by know you can put a lot of numbers together and look to the future. But it’s we just say it’s favorable and it’s really hard for me to even get a definitive number, because its well misleading, because there are so many other variables that go into that formula with regards to our production and [indiscernible] set a production plan together that actually results in the output or the revenue piece of it. So I don’t want to really misleading [indiscernible] give a specific number and people start guessing on formulas to figure out what our future production net sales would be. But it has improved, it’s healthy and we don’t even look at it too much, we do look at it year-over-year, but it’s really more from our internal forecasting ability and how we schedule our production looking forward. And as I mentioned we are ramping up our production right now. Based on backlog and based on the current outlook the new construction market is looking very favorable that it depends on what paper you pick up, but particularly out west in the Phoenix regions and out in California and so forth that it’s grown pretty well. Even down in Florida it’s looking good too. So we see strong favorability ahead, you are starting to see - build their confidence as high as it’s been in many, many years. So we look at all those indicators. So that combined with our backlog right now we are ramping our production but really not willing to give you a definitive number though.

[Scott Rednor:]

Fair enough. Was there an associated margin less than the quarter, because you - with that favorable backlog or favorable incoming order this is about.

[Cary Dunston:]

No, I would say that that any significant impact on the margin in Q1.

[Scott Rednor:]

Okay. And when we think about for the full year, I believe last quarter you had said that you saw you could get pretty close to that 25% incremental gross margin target even with the play coming on in the back half of the year. So just kind of curious to get your updated thoughts or do you feel better or worse about hitting that target as we sit here today.

[Scott Culbreth:]

Yes I wouldn’t change my full-year outlook but certainly after one quarter being a good result, we got to feel little bit better about ability to hit the full year.

[Scott Rednor:]

Okay, great. I appreciate it guys. Thanks.

[Cary Dunston:]

Thanks Scott. End of Q&A

[Operator:]

Thank you. As I do not see that there is anyone asking question, I like to turn the call back over to Mr. Culbreth for any closing remarks. Please go ahead sir.

[Scott Culbreth:]

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.

[Operator:]

Thank you. And again ladies and gentlemen that does conclude today’s conference. Thank you all again for your participation. You may now disconnect.