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American Woodmark Corporation (NASDAQ:AMWD)

F3Q08 Earnings Call

February 19, 2008 11:00 am ET

Executives

Mr. Glenn Eanes - VP and Treasurer

Kent Guichard - President and Chief Executive Officer

John Wolk - Chief Financial officer

Analysts

Sam Darkatsh - Raymond James.

Eric Bosshard - Cleveland Research.

Joel Havard - Hilliard Lyons

Mukul Kochhar - Oppenheimer & Co.

Robert Kelly - Sidoti & Co..

Operator

Good day and welcome to this American Woodmark Corporation conference call. Today’s call is being recorded. The company 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 that 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 by any such forward-looking statements.

Such factors include, but are not limited to, those described in the company’s filing with the Securities and Exchange Commission and the annual report to shareholders. The company does not undertake to publicly update or revise these forward-looking statements even if 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 Mr. Glenn Eanes. Please go ahead, sir.

Glenn Eanes

Good morning, ladies and gentlemen. Thank you for taking time to participate in this American Woodmark conference call to review our third quarter earnings release. Participating on the call today will be Kent Guichard, our President and Chief Executive Officer and John Wolk our Chief Financial Officer.

Kent will begin with some opening comments and then John will have a review of the quarter and the outlook on the future. Then John and Kent will both be available to answer your questions.

At this time I would like to turn it over to Kent Guichard.

Kent Guichard

Thank you, Glenn and good morning, everyone. In a minute I will turn the call over to John for the normal review of the quarter followed by our question and answer period, but before John runs through the details of the quarter I would like to offer some comments from my perspective.

As you are all well aware, the period covered by our fiscal third quarter was a challenging period for the industry. The third quarter is seasonally slow even in good years. This year, existing home resale activities slowed even more than normal and as you would expect, remodel spending, especially big ticket remodel spending, dropped on a parallel trend. After what many, including our sales team, thought was the bottom through the spring, summer and fall 2007, new construction dropped down a step function in December and January. As you have seen in the press release, we were certainly not immune to these events.

On the remodel side, the fall selling season is usually bimodal. We see a peak in early November and another peak after Thanksgiving really in the early part of December. This year we experienced the first peak but we did not experience the second peak. The normal drop off usually experienced in mid December actually began at the middle of the month. On the new construction side builders reacted to the way the shocks on the credit side and mass by simply stopping activity.

While we continue to hold, and even gain, share at these low levels of market activity, increased share is not providing significant volume. For example, when we are awarded a new subdivision by a builder we still have to wait until the consumer demand allows the builder to actually bring in production in that subdivision. While we continue to believe that our efforts with regard to position and share will pay off in the long term the impact in the current environment is minimal.

We are operating at around breakeven on a GAAP net income basis. We are highly leveraged on the income statement due to the level of fixed cost. In November we operated above breakeven. In December and January the movement and order rate was enough to tip the balance to below breakeven.

While there was clearly an emotional shock to reporting a net loss versus at least breakeven there is little difference from an operating perspective. A few units on either side of the breakeven point really make the difference. Even at these low levels however we remain cash flow positive. We generated over $15 million in free cash flow during the quarter. Even after adjusting for the positive impact on cash from drawing down working capital consistent with lower volume, we still generated cash on an ongoing operating basis.

As I mentioned at the beginning of last month’s call for those that were able to listen in, we continue to focus on three priorities during this part of the cycle. The first and most important is to protect the core assets of the business, this is the franchise value. We are protecting the organization, we are protecting key employees with critical skills and we are maintaining our customer contact points. We are maintaining our training, we continue to invest in our HR programs to perpetuate the vitality of the company. We are also protecting our relationships with both customers and vendors. The strength of these relationships is a core asset to the company.

Finally under core assets, we are protecting our fixed asset base. We are maintaining our core facilities, we are staying current with technology and we did make the decision which John will get into little more details in a minute. We did the make the decision to close a small facility we obtained as part of an acquisition in 1998. This was a small component facility that was not core to our strategy. The timing of the closure was not driven by the current environment, but was part of our continuous review of operational efficiency.

The second thing we focus on in terms of priorities is pursuing volume. We need business. There are as many kitchens out there to be had the ones that are we want. We are not going to do anything stupid to get them but we have to be competitive. It’s not just about price, it also includes quality and service but we have to be competitive. On the other hand, business must make sense within our strategy, our offering to the market and our capabilities. Our focus during this period will remain on market penetration and finally, we are just running the business given the context. We are making sure we are as efficient as possible. We are making sure expenditures are appropriate. We are focused on generating cash, protecting the balance sheet and being overall good stewards of the business.

Again, right before I turn it over to John here, in times like these, the internal and external pressure to just do something can and certainly has for some management teams to make short-term decisions at the expense of long-term shareholder value. Having the patience and conviction to wait out a cycle takes discipline. We are going to continue to make decisions in the context of our long-term strategy and protect the long-term enterprise value for our shareholders.

John will now walk us through the details of the quarter. John?

Jonathan Wolk

Thanks Kent. As you know, this morning we released the results of our third quarter of fiscal year 2008 that ended January 31, 2008. In case you have not had a chance to read the earnings release, here are a few highlights.

Net sales for the quarter were $132.8 million, down 18% below the prior year’s third quarter. Net income for the quarter was actually a loss of $2.0 million as compared with net income of 3.8 million in the prior year’s third quarter. Diluted earnings per share was a loss of $0.14 for the quarter as compared with income of $0.24 in the prior year’s third quarter. For the nine months ended January 31, net sales were 459.1 million, down 23% versus the prior year’s first nine months. Net income was 4.2 million, down 84% versus the prior year’s first nine months and diluted earnings per share of $0.29 were 82% lower than the $1.64 we earned in the prior year’s first nine months.

As we have previously discussed, we completed our transition out of certain low-margin products including the in-stock cabinet business of lows one year ago. As in recent calls, I will provide a separate break-out of the transition impact as our prior year comparative numbers included sales relating to these products.

Regarding our third quarter sales performance, total sales for the third quarter were 18% less than in the comparable period of prior year inclusive of the impact of the transition low margin products that were eliminated as planned. Our previous sales guidance anticipated that our sales of core products for the fiscal year would be 10% to 12% below core sales levels achieved in the prior year with sales declining more in the first half and less in the second half of the year; our actual core product sales declined by 14% in the third quarter and by 17% in the nine months of fiscal 2008 respectively. The smaller sales decline in the third quarter was directionally in alignment with what we had expected but sales for the third quarter did come in at less than we had expected.

In new construction, total residential housing starts have continued to drift down as the year has progressed, down to the 1.0 million annualized level on December approximately 38% below the construction levels of December 2006. For the calendar year, new construction starts were down 25% to 1.35 million starts. The short-term outlook for the new construction market continues to be negative as our large builder customers continue to focus more on reducing their land positions and reducing their inventories of unsold homes that are under construction activities.

Reinforcing the short-term outlook, most of our large builder customers continue to report limited and no visibility as to when an improvement in their sales order rates will occur and build a confidence acquiring to the NAHP Wells Fargo housing market index remains nearest lowest levels reach since the index commenced in 1985. Yet on the positive side 30 year fixed mortgage rates as reported by Freddy Mac have drifted well below 6% to their lowest level in 2.5 years and remain low by historical standards, but their reserve has taken several actions to cushion the impact of the credit crunch and the new federal economic stimulus package should help to bolster consumer confidence of spending.

Our new construction in sales were more than 25% lower than in the prior years third quarter, less than we had expected and a disappointing result considering the recent market share gains the company has made. During our previous quarters that ended in October two of our new construction customers filed for Chapter 12 bankruptcy protection causing us to add $1.5 million to our allowance for doubtful accounts in that quarter. During our third quarter another large builder customer filed for bankruptcy protection. However unlike the other two customers this customer has just financing a range and has continued to operate, because we anticipated this event our allowance for doubtful accounts did not need to be increased.

Although the new construction market continues to be slow, we continue to aggressively bid and win your business focusing on companies that we believe have the same powers to outlast this downturn. Based upon the value of our Timberlake product line, our extensive service reach and our partnerships with many leading home builders we believe we are growing our market share and it well looks to be a relatively week new construct sectors for the next several quarters.

For the remodeling market economic fundamentals remain healthier than for new constructions but momentum continues to be negative. Existing home sales, a leading indicator for home improvement spending, declined steadily throughout 2007 starting the year at the mid $6 million annualized level and ending it at less than $5 million. For the calendar year sales of existing homes declined by 13%. Also consumer confidence remains at a two year low as measured by the consumer confidence index and the median sales price of existing homes has know been trending lower for the past year and a half and finally our two primary remodeling customers continue to report to clients and their comparable store sales.

During the third quarter our core remodeling sales declined by a lowest single digit percentage as compared with a prior years third quarter driven entirely by reduced market performance in our product category. We continue to expect that the remodeling market will be flat to down until credit availability, housing prices and the associated headlines settle down. As we remain bullish on the housing markets long-term viability we continue to invest Company resources to pursue additional share gain initiatives. We believe that our market share gains and our market position as the value provider of goods and services positions us well during this down phase of the housing cycle.

Moving onto gross profit, gross profit for the third quarter was 13.3% of sales well below both the 18% we generated in the prior year’s third quarter and a 17.3% regenerated in our most recent quarter. The primary drivers to this disappointing performance where inefficiency in labor, overhead and freight cost that were caused by the impact of lower sales volumes and rising fuel cost. Gross margin was also adversely impacted in the third quarter by one time severance and separation cost associated with headcount reductions across the company’s 15 manufacturing plants as well as by cost associated with the company’s decision to close it’s smallest plant. These one time charges aggregated 1.0% of net sales in the third quarter of fiscal 2008. Including the impact of this upcoming plan closure we will have reduced the size of our direct labor force by 35% in the last two years.

Our recent reductions in force have caused some inefficiencies to occur as the remaining employees are reassigned to new areas of responsibility. However we expect that labor productivity will increase from this point if sales demands stabilizes at approximately the levels expected in the fourth quarter. The gross margin rate was also reduced by the change in the form of the company’s sales promotion reimbursement with one of its retail customers that we had discussed last quarter. This change in form did not affect net income but shifted cost that had previously been selling and marketing expenses to a reduction of sales revenue. Excluding this change the company’s gross margin percentage would have been higher in the third quarter by 0.7% of sales.

Somewhat offsetting the impact of these adverse factors was the continuing positive impact upon the company’s sales mix from the completed low margin products transition. The low margin products had higher materials and freight cost in relation to their sales prices and by removing the impact of the low margin products materials and freight costs have improved as a percentage of sales.

Total SG&A expense was 16.9% of sales in the third quarter of fiscal 2008 as compared with 16.4% of sales in the first half of 2008 and 15.1% in the third quarter of the prior year. SG&A expense was 16.5% of sales in the first nine months of fiscal 2008 as compared with 13.6% of net sales in the first nine months of the prior fiscal year. Total SG&A expenses for the quarter and first nine months of fiscal 2008 were lower than the comparable periods of the prior year by $1.9 million and $5 million respectively. These cost reductions amounted to 8% in the quarter and 7% year-to-date and sales declines of 18% in the quarter and 23% year-to-date.

Selling and marketing expense were 12.5% of sales in the third quarter of fiscal 2008 up from 10.5% in the third quarter of the prior year as the 3% reduction in cost was more than off set by the decline in third quarter sales. Selling and marketing expenses were 12.0% of sales in the first nine months of the fiscal year up from 8.9% in the prior year. The increased level of sales and marketing cost in relation to sales was driven by the company’s continued investments to gain additional market share while sales has declined during the year. These investments included increased amounts of product displays deployed with new customers and new construction channel as well as cost pertaining to the new product launch.

General and administrative expenses were 4.4% of sales in the third quarter of fiscal 2008 as compared with 4.6% of sales in the same period of last year. G&A was 4.5% of sales in the first nine months of fiscal 2008, down from 4.7% in the prior year. The reduction from prior year primarily reflected lower cost relating to the company’s pay for performance incentive plans.

With regard to our capital spending, capital expenditures and promotional displays deployed in the third quarter and the first nine months of fiscal 2008 were $4.9 million and $15.5 million respectively. Year-to-date spending was 2.4 million or 14% less than in the comparable period of the prior fiscal year driven primarily by reduced capital expenditures. Investments in retail promotional displays were slightly less than in the prior year on a year-to-date basis. CapEx continues to comprise of a variety of small to medium sized projects and no new plans were constructed. The company expects to continue to fund its capital spending from a combination of operating cash flow and existing cash on hand. Out lays for fiscal 2008 are expected to be inline to slightly less than those at fiscal year 2007.

Regarding the balance sheet, the company’s financial position remains outstanding. Long-term debt to capital was 11% as of January 31, 2008. Cash provided by operating activities in the third quarter and the first nine months of fiscal 2008 were 20 million and 39 million respectively generating free cash flow of 15.8 million in the third quarter and $23.9 million in the first nine months of the fiscal year. The company used 4.9 million to repurchase it’s shares during the quarter and $22.7 million to repurchase it’s stock in the first nine months of fiscal 2008 encompassing 812,000 shares. Including these repurchases, the company’s weighted average diluted shares had been reduced by 1.2 million in the last 12 months by 8% of the previous share base. The company’s cash on hand was 55 million at January 31, 2008 an increase of $9 million during the quarter. The company has approximately 98 million remaining on its stock recursive operisation.

In closing, we continue to believe that the company’s continued emphasis on improving the quality and breadth of its products and services and investing to drive future growth is the right course of action during this market downturn. We continue and manage the business with the objective of creating long-term value for our share holders. In so doing we continue to maintain all of our touch points for our customer facing jobs and maintain adequate manufacturing and field installation capacity to ensure adherence to our stated service levels. As we have previously stated we will let -- the company should generate sustainable gross margins in a range from 21% to 23%. Our performance in the third quarter of fiscal 2008 was far below this expectation. We are not satisfied with these results and continue to take steps to reduce our cost based and production capacity to reflect the current and expected level of market demand.

As we look forward to the remainder of fiscal 2008 we continue to see a housing market and a housing environment that is underpinned by sound macro economic and demographic fundamentals but continues to be over shadowed by the impacts of inventory over hang, falling home prices and the recent credit crunch. We believe that the impact of these factors and their associated media coverage have contributed to a reduced ability to obtain mortgage financing as well as to a negative bio psychology. We expect the outlook for the housing economy will remain uncertain until the credit crunch has resolved and housing prices have stabilized.

From our market perspective the remainder of our fiscal year we expect our remodeling customers will continue to experience weaknesses as compared with their prior comps. We expect that housing stocks will continue their recent trend of roughly 30% below prior year to approximately to 1.0 million level and more than 50% below the market peak. As mentioned earlier we have three new constructions customers file bankruptcy over the last three months. We continue to monitor several other customers on our credit watch list and it’s possible that some of them could also follow this same route.

During the quarter we continued to win a greater share of business from some of our existing national home builder customer that have solid credit worthiness. In addition we continue to gain market share at the national home centers because of our strong competitive position and focus on continuing to enhance and differentiate our value from that of competition. We believe that the market share gains our Company has achieved will continue for the foreseeable future. Our partnerships with the big box retailers each of them continue to grow their stock accounts and market coverage, position the company to capture a growing share of remodeling activity. Our market position of the provider of superior products and services at competitive price points is extremely competitive in a more challenging retail sales environment and most of our new construction customers expect to continue to gain market share. Our partnerships with these national and regional builders position us well for maintain and grow our market share in the future.

Regarding our policy of forward guidance the trajectory of the market and its resulting impact upon the company’s top line and bottom line have been difficult to anticipate with an acceptable degree of accuracy. As we have said and then subsequently refined our earnings guidance during the year, we have first did not foresee the credit crunch and then perceived it to underestimate its impact upon our customers and upon our Company. Because of these difficult conditions most of our customers have stopped providing both forward financial guidance and reliable volume projections to us. Accordingly to messing with this quarters earnings release the company ceased providing specific earnings and sales expectations until market conditions stabilized and an adequate degree of predictability returns to the housing industry. Although we will not be providing specific financial guidance we will continue to provide updates about the status of the business and our plans to improve results.

The company’s budget cycle for the upcoming fiscal year is well under way and we are focused on restoring profitability and continuing to generate positive cash flow even while the market environment is expecting to remain challenging for the next several quarters. This concludes our prepared remarks. We will be happy to answer any questions you have at this time.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Sam Darkatsh with Raymond James.

Sam Darkatsh - Raymond James

Good morning Kent, good morning John.

John Wolk

Good morning Sam.

Sam Darkatsh - Raymond James

Couple of questions here. First off John, the biggest outlier that I saw in the release was the accounts receivable. It is down about 50% both sequentially and year-on-year and if I understood the commentary correctly, it looks like you didn’t have any write-downs or changes to your reserves during the quarter. Can you help me understand why that big drop down on a sequential and year-on-year basis?

John Wolk

Well Sam, it’s not complicated at all. Unfortunately sales were down, sales were down quite a bit versus last year. Net sales were down for the three months, nearly $30 million below what they had been a year ago. At the same time, collections have been excellent. We have been working with our customers across all of our sales channels to make sure that we are up-to-date and current and for the most part, our new construction customers are paying according to the payment terms. So it’s really just the combination of those two factors.

Sam Darkatsh - Raymond James

Is this $20 million the run rate in the foreseeable future, gross receivables?

John Wolk

No, I would expect it’s going to tick up seasonally in the fourth quarter, because we will sell more than we collect in the fourth quarter and it tends to be seasonal. I mean, receivables always drop in the third quarter because sales are always lower than what they have been in the second quarter. In the third quarter, you are busy collecting the second quarter’s receivable and you are selling less than the third quarter, so it always drops.

Sam Darkatsh - Raymond James

Right, but I see the normal seasonal impact but it’s still -- normally it has ranged in the low 20s from a DSO standpoint. Is it now going to be in the mid-teens or does the sales levels, the overall sales volume levels go to the point where that historical low 20s DSO range hold true?

John Wolk

Sam, I wouldn’t expect the DSO to decrease in this environment. I think it’s just purely a circumstance where the way that timing of cash collections worked out and the timing of sales for this particular quarter.

Sam Darkatsh - Raymond James

So, not to belabor it but sales in the last month or so of the quarter were down almost 50%?

John Wolk

Sales in December and January were very weak as Kent alluded to in his comments to start off with, particularly in the new construction sector. So, I don’t think I will go with the 50 % decline in those months but certainly sales were well below what they had been in the prior year.

Sam Darkatsh - Raymond James

Okay. Second question, you mentioned that you were running generally a break-even run rate and then in the last couple of months degraded. So even though you are not giving guidance, we should then kind of intimate from there that it would be below break-even your expectations for this quarter even though seasonally it does pick up a little bit?

John Wolk

Well, we are not going to give specific guidance for the fourth quarter as I’ve just explained but traditionally the fourth quarter is certainly a much better season than the third quarter.

Sam Darkatsh - Raymond James

You mentioned that your expectations ultimately for gross margins are the 21% to 23% range or so. At this point, given your utilization and given the labor content of your cost structure, what sales volume do you think you need right now in order to see that 21% to 23% gross margin level?

John Wolk

We are working out our planning right now and it’s hard to mention that we are going to hit it in the near future, but I think that if you look back to a year ago at this time, the fourth quarter a year ago, we had 21% gross margin even in that quarter. So I think that you can look back to sales volumes from a year ago roughly and certainly we could be hitting margins in that realm.

Sam Darkatsh - Raymond James

So right now as it stands, if you are between a 160 million and 170 million in sales, you think you would be hitting gross margin at around 21% or so?

John Wolk

In that vicinity, in the first quarter of this year. It wasn’t that long ago, it’s the first quarter that ended in July we had north of 20% and our sales were in that vicinity. So I think approximately at those levels, yes.

Sam Darkatsh - Raymond James

The share repurchase activity began to step up a little bit here because you didn’t buy as much stock in this past quarter as in quarters prior. What was that, a market timing issue? Was it a cash flow issue? What are your thoughts in terms of your guidance of share repurchase activity going forward?

John Wolk

Our policy has been that we want to maintain a consistent amount of cash on our balance sheet and the cash that we have today is a little bit more than the absolute minimum that we feel we need to have and I think we are also looking out to the next several quarters and trying to make sure that we feel really good about the continued strength of our balance sheet and that we don’t have any unpleasant surprises. So, I think that you will see us do some share repurchasing activity. I'm not going to comment or predict exactly how much but I would expect it will step up some.

Sam Darkatsh - Raymond James

Okay, thank you.

Operator

Your next question comes from Eric Bosshard - Cleveland Research.

Eric Bosshard - Cleveland Research

Good morning.

Kent Guichard

Good morning Eric.

Eric Bosshard - Cleveland Research

Two things; one on the gross margin issue and I understand that relative to 2Q, the differences of sales have been much softer than expected and the gross margin was softer than expected. Is there anything outside of sales volumes that is influencing the gross margin degradation of business we are seeing right now?

Kent Guichard

This is Kent. One is factor backing from John’s comments what we have released. Make sure regarding that really is the severance and closure cost for that small facility but basically what’s driving it is the lower volume, it’s just fixed and semi-fixed cost and it was as I said in my comments, normally we get -- particularly on the remodel side, we get another slug orders that comes in early December. You really get -- the fall selling season really had, kind of had traditionally has two peaks to it. One is mid-November and then the other one is after people settle down Thanksgiving and between Thanksgiving and Christmas. We just never saw the second bump and so we went into the second half of December and first part of January with pretty low backlog and we just weren’t able to run the plants and so when that happens to you, the fixed cost, the de-leverage on fixed costs is pretty significant. So it really is -- at this point, it really is a volume, almost exclusively a volume driven situation.

Eric Bosshard - Cleveland Research

Secondly, understanding the revenues of the company this year will end up being I think almost $230 million less than they were in your peak in 2006 -- and I admire your focus on the long-term plan in terms of managing your capacity -- but what is the thought process in not saying “boy the revenues are down this much from where they were at the peak, why not take some meaningful capacity off line?” can you just help us understand again some of the thinking behind that decision?

Kent Guichard

Well, one is if you go over it, it’s the peak, whatever it is you needed to take in-stock out of there. In-stock is over 50% of the decline from the peak if you will if you just take the delta and that’s a very different animal, very, very different flows, that’s not really what takes all of our capacity in terms of SOS. So that’s the first thing; is make that adjustment, so it doesn’t look like -– so in reality, from our perspective from running the network of plants, we are not really seeing that magnitude of downturn because you are really talking more about special order.

The second thing is we basically go through continuous reviews and we just don’t look at the capacity of the plants, we look at the total cost it delivers. So the trade-off particularly in this environment with diesel fuel and some other things that happened on the freight side, there is a trade-off calculation you need to go through between closing a facility and the cost that you would save there and the additional transportation costs and those types of things, but generally speaking as we have talked about before, what we look out is we look out over a period of years, in terms of where we are making stuff, what our capacity is, we also look at where our customer base is and the projected growth in that customer base and we run some calculations to make sure that we can maintain service levels, cost effective service levels to support our customers and at the moment in this environment, we think that generally speaking our core line plants, when we look at a couple or three years and we look at what’s going to happen to our core customer base, is that we think that the footprint we have right now is an appropriate footprint to service the market.

Eric Bosshard - Cleveland Research

In terms of the decision on guidance, can you just give us a little bit more of the history of what’s going on? I am assuming that previously when you were giving guidance, you were also giving guidance on order rates and order flows from your customers and you suggest that that process from your customers has now changed. Is this something that is simply reflective of what’s going on at the business? Does this make the business more difficult to run going forward? I know you never had that much visibility on lead times but can you just talk a little bit more about what changed within this practice?

Kent Guichard

Yeah, I mean I will give a shot and I just, I think that when John and I talked and we went through it is that when we put out forward guidance there is certainly not only a sense of pride but a sense of responsibility when we put forward guidance out to the external community and the reality is in this environment, the fluidity of the environment, the inability to get good information from the field and from our customers in terms of what their plans are and then have those plans even be anywhere near the realm of what actually happens is that there just isn’t -- in our feeling, there just isn’t enough data out there for us to give guidance to you that we feel comfortable with and as I said, if you go back on the new construction side and John I actually looked at it yesterday.

If you go from really almost over a ten-month period prior to this fall, if you really go from last December, through this December of ’06 through November of ’07, we had very, very -– on a unit basis we had very, very consistent inbound order rates and we got into December and we thought -- that’s why we had used the term bouncing on the floor from the last couple of conference calls and the floor kind of gave way and the industry fell into the basement. So we are just in a situation where the fluidity in the market and the inability of anybody to predict what’s going to happen means that we would end up really taken a lot of guesses in terms of what’s going to go on in the market and we just didn’t feel that it was in the best interest of our shareholders or the external community to put something out there that we didn’t find had a real strong basis in data and so that’s why we decided to pull back this quarter.

Eric Bosshard - Cleveland Research

Okay and then last question and I know there is some moving parts between SG&A and gross margin with the promotional spend but it appears that you are spending less money on incentives and a bit on SG&A in total and I guess first of all is that accurate and second, do you believe at some point that this can compromise your ability to continue to gain share as you had been doing?

Kent Guichard

Well, I will take the first part of that question. Certainly, as you rightly point out Eric and I alluded to in my discussion, most of the G&A reduction is because the people on this telephone call are going to earn more or less if any incentive compensation this year as compared to the previous year. So that’s the first answer to your question in terms of the ongoing.

John Wolk

Yeah, and I know we have it’s not just. I mean that we have a paper performance plan that covers all employees, if you are an employee here, you are on an incentive plan and the big trigger is the company has to be profitable for any plan to pay out and certainly it won’t in the third quarter. So that’s really the biggest difference when you look at those adjustments. Again, going back to my opening comments, some of John’s comments not only this call, but previous calls, one of the things we really have been focused on is this idea of projecting the organization and the core asset of the organization and part of that we define as relationships certainly with customers.

So as we have made our decisions about where we spend money during the time like this is that we are -- the first priority is to maintain contact points with our customers. We are not pulling back from the market, we are not pulling back from the customers, we are certainly trying to think of new and innovative ways to maintain those contact points, but share really comes from the combination of maintaining contact with your customer and keeping your service levels, your quality and service levels up and those are our top two priorities and certainly in the environment that we are in now, we don’t see a circumstance where we would have to pull back on any of that. So I don’t think any of the things that we are doing are going to negatively impact our ability to either maintain or even in those areas we target increased share.

Eric Bosshard - Cleveland Research

Okay. Thank you very much.

Operator

Thank you. We’ll take our next question from Joel Havard with Hilliard Lyons

Joel Havard - Hilliard Lyons

Thank you and good morning everybody.

Kent Guichard

Good morning, Joe.

Joel Havard - Hilliard Lyons

I think you answered it before but want to make sure I understood your comment. The volume pull-back ex-lows or I should say ex-lows that was half the volume change in Q3, is that correct?

Kent Guichard

No, my comment I believe was it was from peak to where we are today, we have lost a couple of hundred million. My comment was more than half of the revenue from peak to where we are today related to our -- now we are in stock program. If you remember, we are also on the new construction site, pulled back from some low-margin business. So well over half of that peak if you go back a few years in terms of revenue and where we are today related to in stock and the low-margin business on the new construction site.

Joel Havard - Hilliard Lyons

Okay, that helps, and I guess any little bit more of a remainder here. Were you out of the low promo line in Q2 or Q3 last year? Are we fully anniversaried to be out of there?

Kent Guichard

No, there was still in Q3 of last year -- back to John’s comments, there was still some revenue. We were basically done in March, the one year anniversary, excuse me. We had some trickle on into the fourth quarter but the last real significant revenue on a year-over-year basis was in the third quarter.

Joel Havard - Hilliard Lyons

Okay, I guess that’s where I should get them and that’s…

Kent Guichard

If you go again back to John’s comment, the revenue is down 18 core is what basically excludes that stuff was down 14, so about 4% of the 18% drops still related to in-stock.

Joel Havard - Hilliard Lyons

That clarified it for me. Thank you for holding my hand on that. Finally do you have a preliminary figure for the unit and pricing trends that you normally discuss in the queue?

John Wolk

At this point, Joel, we are not going to provide that data. On future quarters will revisit that and discuss exactly what kind of data we will provide, since we are not providing overall financial guidance but we don’t have specifics for you right now.

Joel Havard - Hilliard Lyons

Alright well right now are you saying John that you don’t want to or don’t plan to include that in the quarterly ND&A.

John Wolk

We are not going to have forward-looking data, no.

Joel Havard - Hilliard Lyons

Well this you specifically discussed.

John Wolk

I misunderstood your question, I apologize. We don’t typically provide on the call but it will be in the Q.

Joel Havard - Hilliard Lyons

In the Q, alright thanks that all I need. Appreciate it guys, good luck.

Operator

Thank you. We’ll take our next question from Mukul Kochhar with Oppenheimer & Co.

Mukul Kochhar - Oppenheimer & Co

Hi guys, good morning.

Kent Guichard

Good morning

Mukul Kochhar - Oppenheimer & Co

On the plant closure, are you expecting some gross margin benefit going forward in the future quarters or near term you expect some of that to be cancelled by inefficiencies as you rescheduled some of production?

Kent Guichard

Well, in the near term it will be muted by the on going transition cost that will last for a quarter or two, but as we get out into the future it should save us a couple of million dollars a year.

Mukul Kochhar - Oppenheimer & Co

Right and you are looking more in the [inaudible] timeframe for that right?

Kent Guichard

Yes.

Mukul Kochhar - Oppenheimer & Co

Secondly on the gross margin, are you seeing it more pronounced in fact on the new residential construction side, which is more than what sales volume would dictate? Are you seeing some pricing pressure also there?

Kent Guichard

Yeah, this is Kent. There is very, very different -- these levels of volume, it’s very, very difficult to draw conclusions because a lot of what’s happening quiet frankly is just happening on paper and it’s kind of back to my comment about gaining share. We have been awarded -- we think we are gaining share in terms of awarded new subdivisions. The problem is at this level of market activity nobody is actually building anything, so is that really gaining shares or not gaining share. I mean its gaining share once they start to build out those subdivisions, it’s not gaining share in the sense that to generating revenue for you now.

So when you are doing that and going through on those competitions certainly an element of those competitions are price, but what is that actually going to end up being when you get there, who knows? We are seeing in the activity that is going on. We are actually seeing pricing holding up relatively well and I think it’s primarily because the lower end of the price points, there just is no -- where you expect to see most competitions, especially price competitions there just is no lot of activity. You get down to those levels and because of the credit situations primarily what happened was sub-prime. As you are really at the lower end of the building price points, from what we have seen is a very inelastic demand curve and so taken -- if you got a $200,000 house or $190,000 house taken $10,000 or $20,000 off for that for a builder just isn’t going to generate anymore activity because there is in the customs not a question of price between 180 and 200, there just isn’t anybody participating in that market.

So most of the building that we’re seen is still going on in the mid to higher range of price points where people have a tendency to be less price sensitive, they are more interested in features and looks and up grades and those types of things, service levels all that kinds of stuff. So it’s very difficult I think to draw any conclusions from the market place in terms of at the end of this, what’s likely to happen to the mix of business, so within price points and those types of things. So hopefully that gives you a little bit more color on it, but we are not seeing in terms of the work, the houses that are actually getting built. Not the ones that are being bit on paper or those types of things, but the houses that are actually getting built, is that the average kitchen size and value is pretty constant.

Mukul Kochhar - Oppenheimer & Co

Could it be because the actual, the houses that are getting built today, they were bid upon may be three or four months back?

Kent Guichard

No not particularly. I mean I think even the ones that are you seeing there is -- it’s not like there is not any sales activity, there is some sales activity, but even the ones that are getting built today and whomever comes in and inspects out their house, I think that you are dealing with a buyer that’s more interested in upgraded features and they are in the market because they do have the financial where with all they’ll be able to get it and really what’s happened is where you think you will get all the pricing pressure at the lower end there just aren’t any buyers out there. There is just no activity of those opening price point and first upgrade houses. Those are the peoples that are really locked at the market based on the credit situation.

Mukul Kochhar - Oppenheimer & Co

Got it thanks a lot. Then on typically you have paved a way from acquisitions and correctly focused on organic growth, but at this time are you seeing acquisition opportunities which may just allow you to enter a newer channel which you are having been targeting so far.

Kent Guichard

No

Mukul Kochhar - Oppenheimer & Co

Alright and lastly bad debts provisioning, is it now higher than before what are your thoughts on that?

John Wolk

We didn’t adjust the bad debt provision in this particular quarter as I sad earlier in my comments.

Mukul Kochhar - Oppenheimer & Co

Got it and thank you very much for you help. Appreciate it.

Kent Guichard

Sure.

Operator

Your next question comes from Robert Kelly - Sidoti & Co.

Robert Kelly - Sidoti & Co

Good afternoon gentleman.

John Wolk

Hey Bob.

Kent Guichard

Hello.

Robert Kelly - Sidoti & Co

You covered everything nicely so far. Just mean to quickly on the seasonal pick up you expect in 4Q, have you started to see that materialize or we still down kind of like we were in December, January.

Kent Guichard

I mean it’s certainly isn’t December, first part of January. What we are starting to enter now, there was a little bit at the in the last two weeks of January. What we are starting to enter now is really the promotional period on the big box retail side. That really started Valentines Day, that was really when the too big box retailers started their spring promotional schedule that was in the last week. So it’s a little bit too early but we certainly expect that because they hadn’t run promotions particularly through the kitchen departments for quiet sometime. That’s going to start to drive some business through. People are out and about again. They can see the longer days and the warmers days coming, so we haven’t actually seen it hit the order book yet but the information at least that we are getting from the field is that activity is up from certainly from where it was in December and January.

I think in the next month or so we will be able to see how that transitions into actual order rates. What that foot traffic actually produces in terms of real hard sales. On the new construction side, again there is still not a lot out there in terms of activity. I have heard and seen some speratic reports or some dirt moving in some places, why they are doing that I don’t know. We again are seeing what you would normally expect as a little more activity with the spring particularly in the cold weather climates, but we are not seeing anything significant on the new construction side. We are seeing the pre-closure activity on the remodel side.

Robert Kelly - Sidoti & Co

Great and then in the gross margin comments you talked about direct labor fall in -- over the past few years, 35%. At a certain sales level you start to see some product efficiencies improve. Care to share where that level is?

John Wolk

Well our expectation as I said Bob or tried to indicate in my comments was that we think that productivity will start to resume an upward trend certainly in this quarter which is a better seasonal quarter for us, but now that we have been making this reductions in force, our expectation is that productivity should be higher in the next fiscal year then it has been in this year.

Robert Kelly - Sidoti & Co

Okay got you. Thanks guys.

Kent Guichard

Sure.

Operator

We will go next to Peter Lisnic - Robert W. Baird.

Peter Lisnic - Robert W. Baird

Good morning gentleman.

Kent Guichard

Good morning Peter.

Peter Lisnic - Robert W. Baird

Your last comments on 10-Q disclosures you have something in there about fuel cost and what that might have cost you in the quarter.

John Wolk

We will lead to that, sure.

Peter Lisnic - Robert W. Baird

Okay, and then it seems like you are talking about share gain opportunities and execution of the new home front and on the home center channel, is there anything that prevent you from going or looking at the dealer distributor channel as an opportunity for growth during this difficult end market environment.

Kent Guichard

This is Kent. I suppose a couple of way to answer that question. I mean this clearly is a channel that we have not participated in historically, primarily because the channel we are in were given us all we could handle. Wasn’t that long ago that we were over sold, I know it seems like it but so traditionally we haven’t gone there. In terms of entering any new significant channels of distribution such as the dealer, we would do that only a strategic basis because we think it’s the right place to be for the long tern and that our business model would be competitive in that arena and would bring something to customers that maybe they don’t get someplace else. In terms of how we can service, support and service the business, our price point, our value proposition those types of things.

We do studies, regular studies in terms of new channel and those types of things. I think they are talking about getting into a new channel as easier said that done. You have to get in and figure out what products you need, whether you need branding or what’s the actually service platform. Its not just as simple as going out and putting some people and cars on the road and starting to sign up customers, so we would only do something like that form a long term strategic move that we are committed in.

Generally speaking our experience -- its been a long time since we’ve done it, but certainly our historical experience and from what we know and people we talk to in other business is that you start talking about launching an effort and do a major new channel distribution, your going to loose money as opposed to make money for some period of time. You have got to invest in the channel to build it before you get critically mass.

So I don’t think that in this particular window that we are taking about specifically if your mentioning a couple of quarters, it’s a tough time in a couple of quarters that launching into a new channel is going to help you that much.

Peter Lisnic - Robert W. Baird

Okay, alright fair enough. And then on the, just John, he talked about potentially stepping up the buy back activity, any color comments on what the dividend might look like going forward?

John Wolk

I can’t comment for our board of directors, but I think we feel pretty confident with the dividend of level were it is in the foreseeable further. It was a as you know aggressively increased the dividend over the last couple of years when the business was doing much better from the cash flow generation perspective, we are still doing well from the cash flow generation perspective, but I think my recommendation would be to maintain the divined at current levels for the foreseeable future until we see signs that it will pick up

Peter Lisnic - Robert W. Baird

Okay, that sound good. Thank you for your time, gentleman.

Kent Guichard

Thank you.

Operator

At this time it appears there are no further questions. I’d like to turn this program back to Mr. Eanes for any additionally or closing comments.

Glenn Eanes

I’d just like to take the time to thank everybody for participating in this conference call and speaking on behalf of the management of American Wookmark, we appreciate your continuing support. Thank you and good day.

Operator

That does conclude today conference. You may disconnect your lines at this time.

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Source: American Woodmark Corporation F3Q08 (Qtr End 01/31/08) Earnings Call Transcript
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