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American Woodmark Corp. (NASDAQ:AMWD)

F3Q09 (Qtr End 01/31/09) Earnings Call

February 19, 2009; 11:00 am ET

Executives

Kent Guichard - Chief Executive Officer & President

Jon Wolk - Vice President & Chief Financial Officer

Glenn Eanes - Vice President & Treasurer

Analysts

Mark - Cleveland Research

Peter Lisnic - Robert W. Baird

TJ McCondle - Raymond James

Keith Johnson - Morgan, Keegan

Robert Kelly - Sidoti

Operator

Good day everyone 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 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 not be realized.

Now at this time, I would like to turn the conference over to Mr. Glenn Eanes. Please go ahead sir.

Glenn Eanes

Good morning ladies and gentlemen and welcome to this American Woodmark conference call to review the results of our third fiscal quarter of our fiscal 2009. Thank you for taking time to participate. Participating on the call today from American Woodmark will be Kent Guichard, Chief Executive Officer and President and Jon Wolk, Vice President and Chief Financial Officer.

Kent will begin with some opening comments and then Jon will review the results of the quarter and year-to-date information, concluding with a outlook on the future and after Jon’s comments, Kent and Jon will be happy to answer your questions. Kent.

Kent Guichard

Thank you Glenn and good morning everyone. In a moment, I’ll turn the call over to Jon as Glenn mentioned, who’ll walk us through the details on the third quarter along our standard format. Before getting into those details, I’d like to make a couple of comments to sets some concepts specifically relating to the new construction and remodeling markets and to our experience in this environment, particularly over the last quarter, our third quarter ended January.

First as it relates to revenues, sales in our third quarter on a sequential basis continue to slide. Second quarter sales ending last October were 3% below first quarter sales ended in July and then third quarter was also 3% below the second quarter. If you go back and look historically, you can do something historically. I’m not sure about seasonality, I’m not sure in this environment there is such a thing as seasonality any more, but certainly our top-line on a sequential basis continues to slide up a little bit.

On a year-over-year basis, sales in our third quarter were essentially flat, they are down by 1%, but essentially flat with last year. Considering the external environment, almost recent sales performance for three months is somewhat counter intuitive. So, I just wanted to open up with a couple of comments to try and set some context around that.

It’s not counter intuitive in the sense that sequential sales are declining in this market with what’s going on in the world. It is however I think somewhat counter intuitive in the sense that our year-over-year performance for the quarter is different than most of the widely referenced industries for economic building and remodeling activity during that period and in other published reports that you may have picked up.

On a new construction side, let me go there first. The market remains very challenging, that’s kind of an understatement, but it remains very challenging on the new construction side. Looking in the rear view mirror, we didn’t realize as of the time, but looking in the rear view mirror, there was a clearly a step function down last October and this wasn’t just in cabinets.

The most obviously tipping point that I’ve heard people kind of point out was the failure of Lehman Brothers, which happened about that. Whether that was the actual event or not, I think historians will tell years from now, whether that was or not, but we like many others across a broad range of consumers goods, both durables and non-durables, clearly saw a step function down in late October going into November. Something happened out there that just kind of dropped the world.

The network role of new constructions for the whole quarter, for our quarter ended in January either stayed at this low level or in some regions even slipped further, as we went it through the quarter, through our third fiscal quarter. Our sales in the new construction arena reflected the reality of this activity and the drop in starts.

We continued to gain share, but with our shipments down as Jon will get into detail in a little bit, but our shipments are down less than the industry, but they are down. The fact is although we’re gaining share, these building levels are simply not enough total activity out there for share gains to offset the extreme drop in new construction starts. The total industry is just down so much, but you just can’t get enough share to offset that.

So, in new construction, we just can’t continue to overcome the continuing impact of the cycle and I think our performance mirrors the direction of the overall market just to a lesser extent due to some share gain, but that would be consistent with what you all are seeing out there in the world and we expect by the way, we expect the new construction side to continue to be a challenge as we go forward, certainly for the foreseeable future.

During the third quarter, that continued weakness in the new construction market was basically offset by growth in our remodeling business. We believe that the overall remodeling market actually contracted during the third quarter. The level of existing home sales remained historically low at around $5 million in annualized units; remodel spending was down, a big ticket remodeling we believe it was down to an even greater extent. Credit remains restricted all those things that you would expect.

There is activity on the remodel side, it’s just not the level of activity that we will consider normal say at $6.2 million or $6.3 million existing home sales or turnover and so there are people out there, but the activity is clearly less than not only what it was three years ago at the peak, but certainly what we would consider to be kind of a normalized market.

As we’ve discussed in previous calls, we tend to gain share on the remodeling side, particularly in the big box stores during tough market conditions, economic conditions due to our potion at the value price point, that’s really kind of where we live each and every day and this gives some natural wind at our back and we talked about that the last couple of calls.

During our third quarter, we kind of continued with the analogy; the intensity of the wind at our back temporarily increased, particularly, on the big box side. The big box retailers across many categories, not just cabinets, special order cabinets, made several adjustments to the way they allocated their promotional activity, the way they focused it.

I’m not going to speak for these companies, it’s really not my place to do that, but more of a general comment, I’d make is that my experience over the year is that retailers particularly, big box retailers across many consumer categories have a tendency to increase their marketing efforts and creativity when customers with checkbook in hand or hard to find. So, they really go into kind of a real innovative, creative mode to figure out ways to get people not only get traffic in their stores, but to get them actually walk up to the cash register.

In this particular case, at this particular time, the big box retailers in the home improvement category shifted their efforts to focus on products and price points that would directly align to both the projects and the price points where there was more consumer activity. In essence they put their money where the people were, they put their money where the action was, to see what would happen. They’re working in real time, in an effort to attract customers on a week in and week out basis.

Since consumers were previously suppose to shop at the value price point in our category anyway, but I would suggest in most categories, the promotional activity was not exclusively, but it was a little bit more focused on our price point. They ran promotions across all categories and all price points and special order cabinets, but there was more concentration and more focus with that promotional activity on the value pricing point.

The result was two-fold, first it appears to have shifted share to the big box retailers from other channels of distribution. We believe that the big box retailers based on focusing this promotional activity did in fact pull people in from other channels of distribution. The second result shifted some share to our price point from other price points and hence kind of my comment that the increase in wind at our back wasn’t great. We had a little bit more wind in our back in the last two to three months, really the quarter in addition, was just the fact that we’re at a value price point.

As we entered the spring, retailers continue to experiment and innovate in their approach to the consumer. The traditional spring promotional season has commenced and again there is a bit of a shift. There is an emphasis on the types of tiered incentives, there are different ways those are delivered, but types of tiered incentives, based on the overall ticket value with higher discounts as the consumer buys more, in an attempt to get people in the stores, increase the ticket, increase the size of the project and encourage them to do so by giving them greater discounts and that’s more the big purchase.

We anticipate that as we go forward. This will take some of the wind out of our sales to kind of continue that analogy, but we still expect that the value price point will remain a strong position in the current economic environment. I’m going to mix my metaphors a bit here, but when you discount a Cadillac, it’s still more expensive at the end of day than Buick and they both provide solid transportation. So, you can discount the top end, but we still believe that particularly in this environment the value position still has a strong message.

To sum up the revenue side, it remains a very challenging environment on both sides, in both new construction and remodeling. We continue to believe that we’re gaining core shares that are its sustainable gains. Once you balance out all the things that move around with promotional, we think we are gaining core share that we’ll be able to defend, but we also recognized, particularly in the third quarter that we benefited in the short-term from the retails promotional decisions during that period.

On the income side, John will get into more of the details of this than I will, but we continue to manage around breakeven; that’s essentially where we were in the third quarter and have been now for several quarters. A year ago on similar sales we lost $2 million.

The improvement on a year-over-year basis as John will get into, was really due to headcount actions we took last year that was a big driver. So, last year it increased our cost through the severance and separation cost and then of course this year you get the benefit of reduced cost with lower headcount and related headcount expenses.

Our raw material inputs are rising over time, the cost of our raw materials is rising overtime. Our fuel costs are an obvious item and on a short term basis they can swing things around. They’re very volatile on that short term basis and it moves the quarterly comparisons, it can move quarterly comparison around quite a bit. So, when you listen to John’s kind of ins and outs in numbers when he does it on a quarter, you’ll get some things moving around, a lot of moving parts there.

Whether fuel is up or down in any particular quarter, quite frankly really depends in large part on the point of comparison, where you put the stake in the ground historically. At the end of the day, if you go one, two, three years, what we’re experiencing is that both petroleum and really anything that’s got a high energy based input such as fuel, plastics, finishing materials those costs are still rising overtime.

In addition, other material inputs for items such as liner board hardware, building material particle board and plywood, the new kind of requirements in California for formaldehyde emissions and all those things are giving us a continued put inflationary pressure. These industries that serve us are rapidly whether voluntarily or in some cases in-voluntarily due to financial problems, are taking capacity offline in aggressive attempts to restore balance between supply and demand to both firm up pricing and also recover inflation in their raw material inputs.

Again for those who that have followed us for several years, at some point the industry will have to recover these costs from the end consumer. I believe that the industry has begun to move in that direction. From what I’ve seen, we’re seeing some price increases that have stuck and some channels of distribution over the last 60 days. It’s obviously difficult in this environment to talk about pricing, but in my opinion the consumer understands that we live in an inflationary world and accepts the fact that overtime the cost of basic inputs does in fact increase.

Before I pass it off to John, let me just close by saying that our strategy remains the same. We are focusing on building the value of the total franchise, by providing our customer and the end consumer superior value and services.

We are in the midst of a 100 year flood, certainly it my 30 plus years in business I’ve seen anything like this, but I’d argue we’re in pretty much the 100 year flood stage. You can’t ignore or deny the magnitude of the market cycle and in a 100 year floods, you don’t stand on the flood plan and try and push or hold the water back, you find higher, drier grounds for a period of time until it subsides.

We’re holding our own in the marketplace from our perspective. We are managing our costs making conscious decisions that balance the current reality with our long term goals and what we want to do in the future in the marketplace and we’re protecting the financial health of the company as John will go through by generating and conserving cash to ensure we can both protect the company and pursue opportunities as they arise.

So with that as a little bit of context, John will take us through the quarter. John.

John Wolk

Thanks Kent. Good morning everybody. As you know we released the results of our third quarter fiscal 2009 that ended January 31, 2009 this morning. Our release contained the following highlights; net sales for the quarter were $131.2 million down 1% below the prior year’s third quarter sales and income for the quarter was slightly above breakeven as compared with net loss of $2 million from the prior years third quarter.

Diluted earnings per share was zero for the quarter as compared with the loss of $0.14 per diluted share in the prior years third quarter and the company generated $5.3 million of free cash flow during the third quarter.

For the nine months ended January 31, net sales were $405.2 million, down 12% versus last years first nine months. Net income was loss of $0.3 million down from net income of $4.2 million in the prior years first nine months. Diluted earnings per share was a loss of $0.02 compared with earnings per diluted share of $0.29 in the prior years first nine months and the company generated free cash flow of $14.8 million, compared with $23.8 million in the first nine months of the prior fiscal year.

Regarding our third quarter sales performance, net sales for the third quarter were 1% below of the prior fiscal year and for the nine months ended January 31 were 12% less than the prior fiscal year. In the remodeling market several factors have combined to continue the markets negative sales momentum. Existing home sales, a leading indicator for home improvement spending were $4.9 million during the calendar year of 2008, down 13% of prior year levels.

Inventories of existing homes for resale which range from six to nine months in the first half of calendar 2007 consistently ranged near 10 months during 2008 and the consumer confidence index as reported by the Confidence Board continues to operate at its lowest level since the index first commenced in 1967.

In addition the medium sales price of existing homes continues to trend lower as foreclosures and other distressed sales now comprise nearly half of all existing home sold. Credit availability continues to be constrained as many financial institutions recover from losses sustained during the recession. Our two primary remodeling customers continue to describe difficult market conditions.

In contrast our remodeling sales experience increased during the third quarter. As Kent has described, the company benefited from its market position as the provider of special order cabinetry at the value price point for its remodeling customers.

In addition to our position as the primary value point supplier during our third quarter, both of our primary remodeling customers focus their promotional efforts and marketing programs on value price point throughout the store, to encourage the customers that were active in the market to purchase both goods and services.

These marketing programs expired in early January and our expectation is that the promotional calendars at both home centers will be more balanced across all price points during the company’s fourth quarter. Overall, we continue to expect that the remodeling market will be flat to down until credit availability, housing prices and associated media coverage settle down.

In new construction, total residential housing starts during our third quarter sank to below 550,000 homes on an annualized level, 50% below the 1.1 million levels at this time last year. Starts of single family homes fell to below 0.4 million homes during the same period, 50% below their prior year level. Starts of single-family homes have fallen by 43% during the first nine months of the company’s fiscal year.

In comparison, our new construction sales were down approximately 25% in the nine month period and 30% during the third quarter, evidenced in the share gains we have made this difficult market. The short term outlook for the new construction market continues to be negative as evidence by the recently released NAHB Wells Fargo Housing Market Index, which as remained at all time low levels for four consecutive months. As well as by the lowest building permit levels reported since the statistic began to be tracked nearly 50 year ago.

Despite the weak new construction market we continue to aggressively bid and win new business focusing on company that we believe have the staying power to outlast the downturn. These share gains have not been a result of buying business through reduced prices or rather by increasing penetration with existing customers and securing new customers, based on our total package of service, products, pricing.

These share gains have come at satisfactory margins that we believe will be sustainable overtime. We remain confident in the housing markets long term viability. During this housing cycle, we continue to invest company resources to pursue sustainable market share and improve our operations.

Regarding our gross profit, gross profit for the third quarter was 15.5% of net sales, above the 13.3% we generated in the third quarter of last year. Gross profit for the nine month period ended January 31 was 15.3%, down from 17.4% in the prior year.

The primary drivers to our improvement over the prior years third quarter were the absence of severance and separation cost that aggregated 1.0% of sales in the prior years third quarter, which stemmed primarily from the decision made one year ago to close a small manufacturing operation in Minnesota.

In addition, the company experienced labor efficiencies and a favorable impact from declining fuel prices versus this time last year. Somewhat offsetting these results was the continued impact of material cost pressures from several of the company’s inputs as Kent described in liner board, drawer parts, finishing materials, moldings, part of the board and plywood.

Gross profit for the nine months was 15.3% of sales compared to the 17.4% at the first nine months last year and the primary drivers to this decline were increases in overhead and freight cost in relation to sales caused by the impact of lower sales volumes during this period, as well as higher fuel prices and material costs.

Regarding our SG&A cost, total SG&A expenses was 15.9% of sales in the third quarter of fiscal 2009 compared with 16.9% of sales in the prior years third quarter. SG&A expense was 15.7% of sales in the first nine months of the current fiscal year, compared with 16.5% the prior year. Total SG&A expense for the third quarter were lower than prior year by $1.6 million or 7% on a sales decline of 1%. SG&A cost for the nine months were lower than prior year by $12.3 million or 16% on a 12% sales decline.

Selling and marketing expenses were 11.3% of sales in the third quarter and 11.2% of sales in the first nine months of the current fiscal year, less than the 12.5% in the third quarter and 12.1% in the first nine months of the prior year.

The savings in sales and marketing cost resulted from careful management on the company’s spending, focusing on reducing costs that are not essential to servicing customers or maintaining customer touch points, which remains central to company’s strategy of protecting its customer relationships and continuing to gain market share.

Costs reductions occurred across several categories of spending, including lower volume driven cost such as model home installations, promotional literature, travel and to a lesser extent reduced headcount levels compared with the prior year.

General and administrative expense was 4.7% of sales in the third quarter of fiscal 2009, up slightly 4.5% of sales in the third quarter of the prior year, driven primarily by an increase in bad debt expense of $0.2 million. G&A expense was 4.5% of sales during the first nine months of the current fiscal year, inline with the prior fiscal year.

Regarding capital spending, the company’s total capital expenditures and promotional displays deployed in the third quarter and first nine months of the current fiscal year were $4.2 million and $11.2 million respectively, below the company’s CapEx in the prior fiscal year by approximately $3.1 million of $7.4 million respectively.

The company spent less on capital expenditures, inline with reduced capital needs associated with lower levels of production. The company deployed fewer promotional display units inline with reduced numbers of new home centers, store openings and lower rates of store remodeling. The company expects to continue to fund its capital spending from a combination of operating cash flow of existing cash on hand.

Regarding our balance sheet, the company’s long term financial position remains outstanding. Long term debt levels declined slightly to $25.3 million and its debt-to-capital on a book value basis was 10.6% as of January 31, 2009 inline with recent levels.

The company generated free cash flow of $5.3 million in the third quarter, as compared with the free cash flow of $15.7 million of the prior year’s third quarter. The primary difference was a decline in the current year as related to the timing of working capital movements, primarily accounts receivable driven by higher January sales levels in the current fiscal year.

Free cash flow generated in the first nine months of the current fiscal year was $14.8 million, compared with $23.8 million generated in the first nine months of the prior fiscal year. The company returned $1.4 million to shareholders during the third quarter of the current fiscal year in form of its regular quarterly dividend and the company ended the quarter with nearly $65 million of cash on hand, an increase of nearly $4 million over its most recent quarter and nearly $8 million more than at the beginning of the current fiscal year.

In closing, we continue to improve the quality and breadth of the company’s products and services and to invest in driving market share gains and future growth during this industry downturn. We continue to manage the business with the objective of creating long term value for shareholders. We are maintaining our touch points in our customer facing jobs and we are minting adequate manufacturing in field installation capacity to insure adherence to our stated service levels.

The third quarter represented the fourth consecutive quarter in which we operated at essentially a break-even level. Our break-even level of production is roughly 30% lower than it was two years ago and has enabled us to achieve these breakeven results and generates positive cash flow despite enduring a year-to-date result decline of 12% compared to the prior year and 33% compared with two years ago.

As we look forward to the remainder of our fiscal year 2009, we continue to see a long term housing environment that is underpinned by challenging population growth and demographic trends, but is overshadow by the combined impacts of the inventory overhang, falling home prices and consumer confidence in the credit crunch.

We believe these factors and their associated media coverage have contributed to a reduced stability and desire for buyers to obtain mortgage financing. We believe the outlook for the housing economy will remain uncertain until the credit crunches resolve and the housing prices stabilize.

From a market prospective, for the remainder of our fiscal year, we expect that our remodeling customers will continue to experience weakness as compared with prior year comps, driven by the planning consumer confidence and increasing unemployment levels. Existing home sales will continue to approximate this present level of slightly less than 5 million homes per year, down mid single digits from our previous fiscal year.

We expect total house starts will approximate $0.5 million to $0.6 million during these last three months for our fiscal year that ends April 30, down approximately 40% to 50% from the $1.0 million starts during the spring of 2008.

As Kent mentioned, we expect the home center sales promotional schedules in spring to be more balanced, with no emphasis on any particular categories or price points within our market segment. We expect that our remodeling sales will not be as favorable as we experienced during our third quarter, but that we will still outperform our market which appears to be in the midst of least a double-digit decline.

We further expect that our new construction sales will continue to show weakness compared with prior year levels, but that the magnitude of our sales decline will continue to be less than of the general market.

During our third quarter, we continued to win a greater share of business from some of our existing national home builder customers that we have solid credit worthiness. In addition we continue to gain market shares at the national home centers. Because of our strong comparative position have focused on continuing to enhance and differentiate our value from that our competitors, we believe, we’ll continue to achieve market share gains.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) We’ll go first to Eric Bosshard with Cleveland Research.

Mark - Cleveland Research

Good morning guys. This is Mark stepping in for Eric.

Kent Guichard

Good morning

Jon Wolk

Hi. Mark.

Mark - Cleveland Research

First question, in term of the retail promotions you guys talked about, are you seeing any sort of halo benefit in the current quarter, or maybe kitchen designers who typically didn’t sell your cabinets, but did during the promotion, are continuing to push your product here in February and then in addition to that, the competitive environment, you’re seeing anything different from pears that might cause you to start to lower your price going forward as the price gap narrows?

Kent Guichard

Two things and two questions there. On the first one in terms of the potential for a halo effect, I think it’s two early to tell. I mean it certainly our belief is that there will be some, that people, designers that traditionally would not have designed with us, had an opportunity to experience our quality and services levels as well as the value of that the product itself.

I think its going to take while for the shares to settle down to see how much of the share gain regard during the third quarter was driven by their focus promotion versus how much is what I call core share, which is sustainable over a longer period of time. Our belief is that we will get some core share gain, but how much of that and if it’s there and how much of its there, I think we probably won’t get a read for another quarter or two as things kind of settle back down from a promotional perspective.

In terms of your second question of pricing movement, in the way that the main comparative lineup is in the big box retailers and other remodeling distribution channels, but I assume your question is focused mostly on the big box retailers, is that all of the major manufactures covers a broad range of price points and so we have the top end of our prices points overlap some of the lower end ranges of our competitors and wise versus, some of the lower end ranges over lap into some of our sales, into some of our traditional prices points.

So, all the manufactures have a pretty broad range. In my view, what we try to do in working with the designers in the store is get the right product at the right price point to satisfy the consumer, to work with the consumer and satisfy the consumer. So, we all try and do that no matter what condition we’re in or where the market is.

So from that perspective it’s not maybe like some other businesses where the pricing changes on a week-in and week-out basis at the retail level, that you go in and you do that; it’s a little bit different on a bid basis on the new construction side. So, I think that what happens in this environment, as we all have a pretty broad product line and then you get down to working with the designer to satisfy the consumer.

Mark - Cleveland Research

In terms of the promotion, I think you said it ended in January. Should we expect some of that revenue benefit to flow into the current quarter as well, just given the lead times in the business?

Kent Guichard

Yes, we built a little bit of a backlog that we shipped in part of February. So February would normally be a pretty difficult month from a production standpoint, because your spring doesn’t really start until to the end of the month, your spring selling season. So, we were able to carry a little bit more backlog into February than we maybe normally would have. Again, we’ll see how that rolls through the quarter, because one could make an argument that when the promotional activity closed out at the end of the first week of January, they also pulled a lot of business forward.

So, there maybe either a delayed start for the spring selling season or the first part of the spring selling season, the volumes maybe reduced just because as an industry we pulled a lot of business forward. So, again we’ll see how it balances out for the whole 90 days, but certainly for the first couple of weeks of February, we have a little bit of backlog we were able to work through.

Mark - Cleveland Research

In terms of capacity utilization, can you walk us through where you stand and maybe where you expect to be once the promotional benefit ends?

Kent Guichard

That’s a $64 question, right. I’ll give you two; one is the historical number we’ve given, which is from a hard capacity standpoint in terms of facilities in those types of things. We’re stilling running around 50% utilization. From a curing perspective, we accrued at the volumes we’ve been running and we’ just have to see. If we have a halfway decent spring selling season, we’ll be able to maintain that, if we don’t then we’ll have to curing down consistent with the demands in the marketplace.

Mark - Cleveland Research

Any updated thoughts on closing down any capacity at this point?

Kent Guichard

No.

Mark - Cleveland Research

Thank you.

Operator

We’ll go next to Peter Lisnic with Robert W. Baird.

Peter Lisnic - Robert W. Baird

Good morning everyone. John I was just wondering if you could maybe help us bridge the gross margin. You gave a little bit of detail, but I’m just wondering if you could take us or maybe close that 100 basis point gap from the 14/3 adjusted for the third quarter last year to the 15/5 this year? Maybe tell us what fuel and labor efficiencies are?

John Wolk

I won’t give you a precise quantification of that Pete, but fuel definitely did help versus last year’s third quarter. I’d say that certainly fuel is the biggest part of the remainder of the 1% improvement.

Peter Lisnic - Robert W. Baird

Okay, that’s helpful and then when you kind of look at some of these efficiencies are getting on the labor front, I would assume if that is sort of a permanent or structural change that you’ve made and wondering if and when things do turn up, are you thinking that the business is being a higher or more profitable business than it used to be during the last cycle?

John Wolk

Well, I think that you have to keep in mind that we only took out one small plant last year, about a year ago or made the decision to do that and then took it out really in the fourth quarter of last year. So, there weren’t dramatic headcount reductions that stemmed from that particular action. So, I wouldn’t say that at this point we made any kind of permanent difference in the structure of headcount or the relationship of labor cost or revenue at this point in time.

Peter Lisnic - Robert W. Baird

Okay, alright and then I know you just answer this, but I want to ask it may be in a different way. In terms of capacity, what you are hearing I guess out of the big competitors at least is that they are taking pretty drastic actions I think in terms of closing down facilities and restructuring their manufacturing operations. Is that going to at some point with the market continuing to be soft, is that going to force your hand to maybe think about the foot print or just the entire manufacturing operation?

Kent Guichard

I am not sure, I don’t follow your logic in your mind how that would force our hand to do anything. The two things I would say or I’ll kind of make a comment specific to us and maybe then put something else out there for everybody to kind of chew on for a while is that, we’re going to run our business based on the customers we have and our strategy and what we see coming and when we make decisions about capacity, whether its hard capacity or whether its practical capacity through curing, we don’t really do those quite frankly in light of the world out there.

Again in my phrase there’s so many moving parts out there that if you try to decide what you’re going to do based on what you see or think you see other doing, you can get yourself into a lot of trouble. So, we run our business and we make our decisions within our context, within our criteria and within our structure.

The point I’d probably bring up as it relates to capacity though is that one of the things that we are beginning to be concerned about, on a much broader scale is that in the entire building materials industry, we are dismantling infrastructure at what I considered to be an alarming rate and it’s not just plants, it’s not just some curing in facilities, it’s brain powers, it’s know-how, it’s capability of organizations, either because they’re disappearing or because they are downsizing so dramatically.

If you believe as I do, that this is a cycle and that the demographics will drives us back to somewhere between on an average 1.5 million to 1.6 million new construction starts and a little bit over 6 million existing home sales, total real estate transactions 7.5 million to 8 million. We don’t have the capacity in my opinion to even come close to supporting that kind of market activity and one of the things that we’re working with our vendor partners pretty hard on at this point is, working with them in terms of plans to keep capacity available, because we could end up with some building materials shortages here if this thing comes back.

If you get a 35% to 50% rebound in the first year back, which several prior year cycles would tell you, it take you three years to get back, but the first year is half of that. If that hits the industry six months or twelve months from now with what’s on the drawing boards to take out, we’re not going to have enough basic materials to meet demand and that is a concern that we’re starting to spend some time on.

Peter Lisnic - Robert W. Baird

Is there any way that you could distinguish the shortages and sort of the brain slide if you will between cabinets and other building materials?

Jon Wolk

I haven’t gotten that specific on it, but I mean I think that I would say in general, it’s in my opinion happing across the entire spectrum of building materials and you’re gong to have trouble building a house. There is the potential that you could have trouble building a house.

Now on the remodel side, its not quite as dramatic, because you don’t need framers and you don’t need quite as much material, but these people, a lot of the people have gone and they’re finding something else to do and even if you can get them back, it’s going to take while to get them back.

Peter Lisnic - Robert W. Baird

Okay, thanks on that one and last question just quickly, any margin impact from the promotional activity plus or minus outside of that the volume incremental?

Kent Guichard

No Pete, we didn’t fund the large promotions that went on.

Peter Lisnic - Robert W. Baird

Alright, thank you.

Operator

(Operator Instructions) We’ll go next to Sam Darkatsh with Raymond James.

TJ McCondle - Raymond James

Thanks guys. This is actually TJ McCondle [Ph] filling in for Sam this morning. I had a question for you on the receivables. It looks like you had a pretty significant year-over-year increase in that and essentially flat sales. Can you talk to that a little bit, about what your collections have been looking like and what your retailer partner have been sort of driving there?

Kent Guichard

Yes TJ, it’s a good question. They did go up both from year end and also from the year ago levels. Really, it was just the timing of the sales. Although sales were flat for the quarter, last year we had a very significant deceleration in December and January; this year that was not the case.

If anything we were steady throughout the entire quarter, so just because of the timing of when the sales were made, particularly in the month of January, our receivables were up and our collections were steady. We’ve had no changes in payment terms with any of our significant customers.

TJ McCondle - Raymond James

Okay, great. I appreciate that and back to some of the gross margin discussion. I know we talked about the year-over-year impacts of the lag severance and things like that, more on a sequential basis, we still saw a some nice expansion there, sales actually lower this quarter. Can you talk to whether or not we’re seeing any type of; I know we talked about raw materials inflating your rear, but any type of sequential deflation or anything you’re seeing there?

Kent Guichard

TJ the only thing sequentially that improved in terms of, inputs was fuel. I’ll go back to the comment I made though, in my opening remark, was a lot of that just depends on where you want to put the stake in the ground and so when you go quarter-to-quarter, you get kind of those discussions. When you take a longer perspective, which is one, two, three years or two to three years, we’re still seeing the inflationary impact from basic raw materials and that includes anything that’s petroleum based or has a high energy content into its manufacturer.

We certainly for example on diesel you’ve seen a big pretty good drop from the peak, but the peak was only there for basically four weeks. They went up very quickly and came down very quickly. It didn’t go up and level out for a while, went up hit the top started to come back down.

So, if you pick that point as your comparison you’re gong to get a big decrease. If you pick six or nine months before you had the big run up in fuel prices, you get a very, very different picture. So, as opposed to focusing on a particular quarter depending on what your comparison is, I think the important point is that the step balances around, but there is inflationary pressure on our inputs.

TJ McCondle - Raymond James

Finally here I know we discussed the promotions at length. Can you give any color as to specifically what those promotions were? I know we said they were targeted at the lower price point, was it just individual promotions on your goods specifically or can you describe what they were?

Kent Guichard

Well, it’ll take a long time to get in the details, because the promotional activity and special order kitchens can get pretty complicated. There can be multiple promotions running and overlapping at various times.

Basically what happened during the period was, our customers ran promotions across all their categories, all price points, all vendors, but they kind of reallocated the waiting of those promotions to target customers that were actually seriously in the shopping mode, in the buying mode, not just tire-kickers and the truth, to see if there was a way to in essence increase their capture rate from either just people walking through and grabbing them for sure or all the way to designs to actually closing the quote on the design.

So they were doing some things to move those dollars around and again it’s gets pretty complicated, but the long end short of it is I kind of used my analogy was, in addition to having in the wind in our back, from just being the value price point, particularly in this economic environment, they reweighed their promotional activity, to try and target customers who are shopping, but who are very budget conscious and that had a tendency to give us a little bit stronger wind in our back.

TJ McCondle - Raymond James

Okay, great guys. I appreciate you taking my questions and great job on the quarter.

Operator

We’ll go next to Keith Johnson with Morgan, Keegan.

Keith Johnson - Morgan, Keegan

Good morning. Just I guess two quick question, could you put a dollar amount on the promotion or the effect of the promotions for guys in the fiscal third quarter?

Jon Wolk

We haven’t really put pen to paper to try to estimate that, and quite frankly we wouldn’t be sure anyway, because there is no way of really knowing how much we would have had, had they not promoted.

Keith Johnson - Morgan, Keegan

Just because of the potential share gain and those types of things that have been helping you over time?

Jon Wolk

Well, the thing is they are always promoting. Seasonally speaking, there is always selling seasons, sort of promotions going on. I think this time as we’ve described, the effort was certainly different given the environment, but no ones got a quantification of what that really meant.

Keith Johnson - Morgan, Keegan

Typically you guys see I guess, I know you mentioned early it’s hard to call anything seasonal in this type of environment, but you do see kind of a bounce coming into your fourth fiscal quarter as the contraction markets open up and that sort of thing?

Kent Guichard

Well yes, historically on the new construction side actually, there is historically and again it doesn’t work now, but historically you kind of get a year end, a calendar year end and a spring; and the calendar year end is the builder is trying to completing and close all the homes before their fiscal year end. So, you get a big push in November and December.

Historically, from them trying to close out homes and then you get another kind of up tick when you get into the spring and they do those types of things. It’s diminished over the years with new building techniques that allow you to pour concrete in colder temperatures in the north and some of those types of things, but generally that’s it.

On the re-model side, you basically get a spring and a fall season. The spring season will peak in March, go into April, and really tail off in May, you don’t get much during the summer. It will pick back up again in mid September and really run October through Thanksgiving.

Keith Johnson - Morgan, Keegan

So, as we kind of look at going into this April quarter, given the underlying environment, would promotions have been strong enough for you guys. I know you suggested it could have pulled demand into the third quarter from the fourth, but it could have been strong enough to essentially put us into the flat sequential revenue?

Jon Wolk

For the fourth quarter?

Keith Johnson - Morgan, Keegan

That’s right.

Jon Wolk

It remains to be seen. I mean sure it’s possible, but on the other hand, we don’t have very much visibility in this business to what the incoming order rates are going to be over the next couple of months and that’s really going to dictate how we end up.

Keith Johnson - Morgan, Keegan

Okay. I appreciate the question.

Operator

And we’ll got next to Robert Kelly with Sidoti.

Robert Kelly – Sidoti

Good morning. Sort of question on I guess the overall cabinet market. Do you guys get independent data or data from your customers indicating what the market was doing during the quarter just ended? I know you saw a growth on the remodel side, but what do the retailers say the market was doing or independent data, what does that say?

Kent Guichard

It’s Kent. On the new construction side we get a very good data or we get real accurate data and the primary reason is that you got to file for starts and so there’s a place that go to which is hard public data, in each region that issues or each office that issues where you can actually get that start data. You can also correlate that with closing data and those types of things that you can get from some real estate resources. So on the new construction side; generally speaking we have a lot of hard data that we can zero in pretty quickly on activity.

The remodel side is a bit more problematic and that is because it’s a lot more fragmented. You have a lot of smaller dealers out there, you’ve got a lot of distributors that book, that may serve both new construction and remodel them in and of course you got the big box retailers.

So, what you really need do on the remodel side is you really need to kind of get multiple data points and kind of try to do the triangulation thing and see if you can directionally try to figure out what’s going on. We get some things from KCMA, which is our industry association, we get things from variety of statistics around, but you really don’t get a real accurate number; you kind of have to zero in order from several different angles.

As I said in my opening comments, we believe that the special order kitchen cabinet market in the three months that were covered by our third quarter that that market contracted in its totality. By how much; I mean you got to put a range around it, but we believe that remodel market contracted during that period.

Robert Kelly – Sidoti

I mean excess of double digits, closer to 20%, just like a ballpark?

Kent Guichard

Well, yes.

Jon Wolk

Double digits are a safe bed, but beyond that it’s hard to say.

Robert Kelly – Sidoti

Fair enough. Price mix trend versus volume for the last couple of quarters, is that helping you or hurting you on the revenue line?

Jon Wolk

No, really it’s been volume driven Bob, because there wasn’t much pricing action in there and we have had a little bit improvement in mix.

Robert Kelly – Sidoti

Okay, great and then as far as your cash position and the balance sheet. Any chance you do anything with the dividend or increase the payout to shareholders?

Jon Wolk

Well first of course you have to defer to our Board and so we can’t speak definitively on that, but this environment it’s hard to imagine really a dividend increase. I think that from a cash and balance sheet management prospective we’re keeping our powder dry, we’re managing the company conservatively and improving our balance sheet everyday, generating cash and looking to just have an iron safe balance sheet no matter what comes at us.

Robert Kelly – Sidoti

All right, thanks guys.

Operator

And there appear to be no further questions. At this time I’d like to turn the conference back to over to Eanes for any additional or closing comments.

Glenn Eanes

I’d like to thank everybody for taking time out to participate in this conference call, but since there are no additional questions, this concludes our call. Speaking on behalf of the management of American Woodmark, we appreciate your continuing support. Thank you. Have a good say.

Operator

Again, that does conclude today’s conference call. Thank you for your participation. You may disconnect at this time.

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Source: American Woodmark Corp. F3Q09 (Qtr End 01/31/09) Earnings Call Transcript
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