Glenn Eanes - Vice President and Treasurer Kent B. Guichard - Chairman of The Board and Chief Executive Officer.

David S. MacGregor - Longbow Research LLC Scott Rednor - Zelman & Associates, LLC Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division.

Good day, and welcome to this American Woodmark Corporation conference call. Today's call is being recorded. The company has asked us to read the following Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.

All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on factors that may be beyond the company's control. Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking 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. At this time, I would like to turn the call over to Glenn Eanes, Vice President and Treasurer. Please go ahead, sir..

Thank you. Good morning, ladies and gentlemen, and welcome to this American Woodmark conference call to review our first quarter and our fiscal quarter ending July 31, 2013. Thank you for taking the time to participate. Participating on the call today from American Woodmark will be Kent Guichard, Chairman and Chief Executive Officer; and myself.

Kent will begin with a review of the quarter, concluding with an outlook on the future. After Kent's comments, we will be happy to answer your questions.

Kent?.

Good morning, everyone, and again, thank you for joining us. This morning, as you all know, we released the results of our first fiscal quarter ended July 31, 2013 for our fiscal year 2014. The financial headlines for the quarter, net sales were $178 million, representing an increase of 20% over the same period last year.

Exclusive of after-tax restructuring charges, reported net income was $6.7 million or $0.43 per diluted share versus $1 million or $0.07 per diluted share last year.

Restructuring charges during the current year and the first quarter were negligible, really limited to the caretaking of the 2 closed facilities that remain up for sale if you adjust for restructuring charges last year, which were about $0.5 million.

So if you include all charges in both periods, our reported net income comparisons are $6.7 million or $0.43 per diluted share this year versus $0.6 million or $0.04 per share last year. During the quarter, the company increased cash and cash equivalents by $3.5 million ending the quarter with $100 million in cash and cash equivalents on hand.

Regarding market conditions and our first quarter sales performance, we'll start on the new construction side of the business first. Housing starts continue to grow, reflecting a recovering real estate market. Total starts were up 28% from calendar 2011 to calendar 2012.

That trend has continued into calendar 2013, with year-to-date starts through July up 23%. Single-family activity, which is most relevant to our customer base, has been running basically with the market.

Single-family starts were slightly below the market in calendar 2012, 24% for single-family versus 28% for the total market, but are running slightly ahead of the market through July in calendar 2013, with single-family running about 25% year-to-date versus 23% for the overall market.

In this environment, our new construction phase revenue increased over 40%, signaling significant share gains. Our total growth in new construction continues to be driven by the rise in the overall market activity, combined with our customers gaining share against other builders and with our share gains within those customers.

Moving over to the remodel side of the business. Overall remodel activities improved but still sluggish. Data on remodel activity is more difficult to gather and assess than housing starts is as an indicator of activity on the new construction side.

For several years now, maybe the best macro indicator is probably residential investment as a percent of GDP, which continues to improve if ever so slowly. Over the last 5 sequential calendar quarters, it has moved from 2.7% for the quarter ended June 2012 to 2.8% to 2.9% to 3.0% to 3.1% in the quarter ended June 2013.

Other often-cited indicators of remodeling activity, existing home sales over the most recent quarter were up approximately 10% from around 4.5 million units as an annual run rate this time last year to approximately 5.0 million units in the last few months.

Home prices continue to rise, as reflected by the Case-Shiller index, with both the 10 and 20 city composites up 11% to 12% on a year-over-year basis. And the unemployment index continues to drift downward, with the 7.4% reported for July, the lowest level since December 2008. All of these is reflective of a market that is improving.

The remodel side of the industry is probably up in the mid-single digits, which represents growth, but certainly not the rate of recovery we've seen to date on the new construction side. In this remodel environment, we basically reflected the market on that side of our business. Moving from sales to gross profit.

The company's gross profit margin for the first quarter of fiscal year 2014 was 18.9% of net sales, a 400-basis-point improvement over the 14.9% reported in the first quarter of last year.

The company generated year-over-year incremental gross margin of $11.7 million on incremental net sales of $29.8 million, resulting in an incremental gross margin rate of 39%. The improvement in gross margin was driven by improvement in both labor and overhead cost.

Regarding labor, during the first quarter of last year, we experienced significant labor inefficiencies related to the closure of 2 plants and the relocation of production to our remaining facilities while at the same time, we were increasing overall production levels to meet the growth in new construction.

The inefficiencies continued into our second fiscal quarter, moderated during the third quarter and were resolved by the fourth quarter of fiscal 2013.

Results in the fourth quarter of fiscal 2013 and the first quarter of fiscal 2014 are reflective of the labor efficiencies associated with our operating platform after the restructuring actions announced at the end of calendar 2011 and implemented in 2012 were completed.

Regarding overhead, the first quarter results of the current year reflect the benefit of favorable leverage in the overhead component of cost of goods sold from the combination of the favorable impact of higher volume on fixed and semi-fixed cost and from cost savings due to our restructuring actions last year.

The improvements in labor and overhead were partially offset by rising material cost across a broad range of inputs, including hardwood lumber, particle board, plywood, linerboard and finishing materials.

Regarding operating expenses, total operating expenses were improved from 13.6% of net sales in the first quarter of the prior year to 12.8% this fiscal year. Breaking that down between selling and marketing expenses and G&A, selling and marketing expenses were 8.1% in net sales in the first quarter of this year, down from 9.8% in the prior year.

In terms of dollars, selling and marketing costs were flat year-over-year on a sales increase of 20%, which generated the leverage. General and administrative expenses were 4.7% of net sales in the first quarter of fiscal 2014 compared with 3.8% in the prior year.

G&A cost increased by $2.8 million, driven primarily by accruals related to the company's performance-based compensation plans. Regarding the company's capital spending and cash flows, the company generated operating cash flow of $2.3 million during the first quarter of fiscal 2014, an improvement of $6 million over the prior year.

The improvement in operating cash flow was driven by higher profitability and timing associated with tax payments. These improvements were partially offset by increased accounts receivable due to both higher sales activity and timing associated with payments from customers.

Free cash flow was a negative $0.7 million in the first quarter of fiscal 2014, an improvement of $4.9 million from the prior year.

In addition to the components of operating cash flow, the change in free cash flow year-over-year was impacted by proceeds from the sale of assets held for sale in the prior year, which were not repeated in the current year. The company increased cash by $3.5 million during the first quarter of fiscal 2014.

In addition to the components of free cash flow, the company generated $4.2 million of proceeds from the exercise of stock options under the company's long-term incentive plan for employees. From a balance sheet perspective, the company's financial position remains outstanding.

Again, the company ended the quarter with a total of $100.4 million in cash, cash equivalents compared with long-term debt of $23.6 million. Long-term debt-to-capital was 13.0% at July 31, 2013. Those are kind of the headlines.

Just kind of in -- before I take questions, in closing, to summarize, we are pleased with the progress demonstrated by our first quarter results.

We continue to gain share in an improving market, and the decisions we made during the course of the down cycle have put us in a position to capitalize on the current opportunities and generate meaningful positive financial leverage.

The challenges in the period ahead are difficult than those of the past several years, namely, supporting compound growth in an efficient manner while facing the reality of inflationary pressures on raw materials.

But we continue to believe we are, on balance, well prepared to meet those challenges in a way that is beneficial to our long-term shareholders. Those are my prepared remarks. I'd be happy to answer any questions you have at this time..

[Operator Instructions] We'll take our first question from David MacGregor with Longbow Research..

Kent, very nice quarter. I guess, just to start off with a big picture question here. You're heading into a cyclical recovery here. Presumably, things continue to get better.

With all the changes that you've executed upon here over the course of the past year or 2 or even longer through the downturn, I guess, what do you think of right now as kind of being your peak revenue-generating capability and your peak EBIT margins?.

Well, I'll start with the revenue first.

I mean, I'm not sure which -- the peak in terms of relation to capacity or what's out there in the marketplace?.

Well, presumably, you're going to reinvest capital. You've got a substantial cash position so that you'll support -- continue top line growth. I guess I'm just trying to get a sense of your kind of a stock player as opposed to a semi-custom player.

Based on the channels where you're situated, you probably got some sense of what that might represent in terms of peak revenues. I guess I'd just like to tap into your thoughts on that..

Yes, I mean, what I would point you to is, I mean, the last peak of the cycle, when you go back to, say, '05 or '06, we didn't quite hit $1 billion in terms of total of revenue. We got up to $850 million to $900 million, a little over $900 million on a gross revenue basis. And since that time, we've gained significant share.

So if you get a market that's back to -- people talk about a normalized market. I'm not sure if there's such a thing as a normalized market housing anymore.

But a normalized market of, say, you're building 1.5 to 1.6 new units and your -- you got a turnover rate of, call it, the low to mid-5s, call it 5.4, maybe 5.5 on existing house market -- housing market. And then you kind of roll our share gains on top of that.

I certainly think the revenue potential for us at the top of the next cycle is over $1 billion. To what degree, again, there are a lot of variables in that equation.

But certainly, if you look at how we're positioned today from both the product pricing and you laid out our service platform, which has gained a lot of share for us, and you get that to the next cycle, I certainly think it's in excess of the last peak, certainly.

From a pre-tax margin or operating margin, and again, if you go back, kind of take the last 5 years out of the equation because of the extreme environment we're in, we kind of ran consistently there in a good market, about 8% to 10% pre-tax as a percentage of sales. And that's a band that we're targeting, that 8% to 10%.

You get higher in that, the more the market recovers and the more of your capacity utilized. You're at the lower end of that band if the market is taking a bit of a stall on you or you've had to just make a significant reinvestment in capacity. So we're looking at that kind of 8% to 10% band..

Can you just talk about the 3 or 4 main buckets that gets you to that 8% to 10%? Presumably, one of them is just the operating leverage as you get more volume. But there's -- I would imagine, some relief from the promotional environment might be a contributing factor or cost savings. I wonder if you can just walk us through that..

Yes, I mean, there are a lot of components that you can imagine. We talk about it. I mean, there's just more market activity. During the downturn, we saw rotation down, particularly on the new construction side. We saw a lot of rotation down in the price points for a lot of reasons.

Part of it is people were trying to get into a house, but on a limited budget. A lot of it had to do with appraisals. The way the appraisal system kind of worked, that industry worked during the downturn, it was virtually impossible to get upgrades appraised on the new construction side.

And we didn't see as much on the remodel side, but we saw some of it there on a like-versus-like basis. And now we offset that to a degree with some of our new product introductions at the higher end of our price points.

But certainly, the overall activity in terms of number of units, I would expect, is on the up cycle to see more upgrades, particularly on the new construction side, people using their discretionary dollars to upgrade key features of a home, which they did not do during the downturn. We'll see that.

Along with that mix and some other things, I would expect that we would see promotional activity to moderate. So that would kind of be in that bucket. That's a pretty big bucket.

Then the other one is we certainly get leverage, but also the improvements we made in terms of efficiency and our Lean and 6 Sigma programs and some of those type of things about how efficient we are at actually producing products. I think that's where the -- both of those is where the real leverage is going to come from kind of as we go forward.

Did I answer your question?.

Yes.

And then just on the operating leverage, what should we be thinking about from a contribution margin, if you can just update us on your incremental gross margin thoughts?.

Yes, I mean, clearly, the last couple of quarters, we've been in the high 30s, 40%. I think more of that has to do with low comps than anything else. I mean, if you look, for example, this quarter, if I talk about that 8% to 10% pre-tax band, we're back to 6%. So we're still not really back where -- within the band where we want to be.

So the gross margin -- the incremental, I think, is still driven a lot by the low comps.

As we think about it going forward, we think -- again, I'll give you a band -- that when you have reasonable comps in your base, we're talking 25% to 30%, now as this thing starts to moderate and we get higher comps, but we're not in that 8% to 10% operating income band, we would expect to be at the higher range of that 25% to 30%.

When we have tougher comps or we're doing some other things, particularly, again, like a big investment in capacity for the future, we might tend to see that in the lower range of that band. But certainly, 25% to 30%, I think is, longer term, what's realistic for us.

But again, the last couple of quarters have been helped a lot just by a lower-comp period..

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

Kent, just to clarify, the 25% to 30% is on the gross margin or EBIT line in terms of the incremental drop down?.

Well, I mean, it's -- the way we've kind of -- what happens in a lot of our SG&A and G&A accounts, it's not that much different. You're not going to see that much difference between kind of those 2. I [indiscernible] you're thinking about it more at the gross margin line.

But I would think that all the way down, because of the -- of what's in our G&A accounts, the thing that really moves that, as you saw this quarter, is our pay-per-performance wellness programs. We have a tendency to moderate and balance over time. As we perform better, we actually up the targets on a relative basis.

So those things, when you're going from a low performance period to a better performance period, they can come in. But generally, that 25% to 30% band is going to be on pretty much either one of those..

Got it. That's helpful.

And when you're referring total the 8% to 10% pretax that you guys historically done, why could that not be better given that you guys are going to be a bigger company as you've gained share, the restructurings that you took from a capacity standpoint and that I believe at that time you were still in some low-end product categories that you guys subsequently got out of and you've moved mix up in that time? So why could you not do better from a margin standpoint in a recovery scenario?.

No, I mean, I think there's -- primarily, there are a lot of other parts of the equation that have changed as well. To go back to my remarks, there's a lot of pressure on material costs, as an example. And while the promotional environment, go back to previous question, I think the promotional environment will moderate going forward.

I'm not sure that, once that genie's out of the bottle, that you're ever going to get to promotional costs back down to where they were in the prior environment. So there's a lot of things -- you use kind of "all other things being equal." Well, all things are never equal, so there are a lot of other fundamental changes.

I think the industry -- the basic margin structure of the industry supports that. And if you start to get over that, I have 2 concern -- on a consistent basis, I have 2 concerns. One of them is we are basically harvesting market share.

Because the -- our industry is willing to live and has good reinvestment returns at that 8% to 10% level when you go through the math. And so if we tried to drive it above that, I think we're going to, in essence, be liquidating some of our market share.

The other thing is once we get over that, we also start to question about whether we're reinvesting appropriately in the business, whether it's capacity, whether it's product, whether it's other elements of the organization, whether or not we're really reinvesting properly.

So at least when we run through the math, that 8% to 10% keeps us competitive, helps us maintain or even -- maintain share and even grow it based on our service platform, gives appropriate return and still gives us margin to do things to reinvest in the future..

I appreciate that, very helpful. And then one last question.

Can you give us an update for what your CapEx plans are going to be or what your budget is for this year and kind of what you guys are sorting out, I believe, in prior quarters, there was given that the recovery has come a little bit faster, you guys are reconsidering what you might put to work in terms of a footprint standpoint?.

Yes, first of all, I'll kind of split it, and you'll see that in the Q when we file it, and kind of consistent is we expect for just kind of the day in and day out, the basics of the business, whether it's CapEx in our plants, our investment in displays.

We expect it to be a little bit above last year, maybe mid-teens as a baseline in terms of our outlay. On top of that, which I think you're referring to, particularly our call last quarter, is what we're going to do about capacity.

And I mentioned last quarter that we were working very hard on our capacity plans, and we hope to have something pretty much decided at this point.

Our preferred -- we went through all that work, and our preferred operational capacity expansion, once we costed it out -- there's been an extreme run-up in construction costs, both buildings for steel and concrete, other things, as well as equipment cost.

By the time we costed out our prepared operational option, quite frankly, it just wasn't financially attractive. So we're kind of regrouping and deciding what we're going to do. We have enough capacity to last us at these growth rates probably another 18 months.

And so we are working with our vendor partners to increase that -- to push that out probably another 6 to 12 months while we continue to analyze our other options in terms of increasing capacity. So again, last quarter, I'd hoped to have an answer for you on this call.

But we priced that and we were, quite frankly -- there's a little bit of sticker shock in terms of what buildings and equipment costs. Everybody's getting in line. There's a shortage. The lead times are going out for these things and the cost, as you would imagine, is going up pretty significantly.

So what we're going to do is we're going to continue to work on that as quickly as we can. Depending on how we come out there, if we do a new facility, if we do an expansion or a partial expansion of a different facility, of course, those CapEx numbers would be on top of kind of that baseline in the mid-teens.

And as soon as we have decided the course of action during the following -- that quarter during the call is when we'd kind of share that with you all..

[Operator Instructions] We'll go to Peter Lisnic with Robert W. Baird..

Kent, just on the CapEx question.

Can you maybe reframe that a little bit and help us understand exactly what you might need to put in the ground to get to that $1 billion or $1 billion-plus revenue target as you kind of look to the peak?.

No. Actually, I can't. And the reason is because we really haven't decided on a complete course of action. And there is a wide range between options in -- particularly as it relates to our capital requirements, the biggest being outsource versus in-source. But even in-source, we have a lot of different options.

Greenfield sites are more expensive, obviously, than expansions or partial expansions. And so there really is, at this point, if you look at all the options that we're analyzing, there is a really wide range of capital requirements. And I wouldn't want to give you an average number and have it either way below or way above.

And I don't feel comfortable giving you the range. What we're going to do is we're going to work that as quickly as we can so that we can not only just get going, tell you and get going. But it also is going to kind of be an indicator for us.

When you look at our $100 million cash on hand, in terms of how much of that we're going to redeploy in the business and how much of that, in addition to a safety cushion, how much of that we're willing to really kind of go forward a little bit more aggressively with repurchase program.

So that really is the $64 question and I, quite frankly, at this point -- and I can talk for a while, but I probably wouldn't say anything. And if I threw something out there, what I'm concerned about is we would get information that would ultimately turn out to be something different..

Okay. No, I understand. I've -- I guess the other way I was going to ask it -- and you're probably going to come up with the same answer -- is there a rule of thumb to think about let's say you want to hit $100 million of revenue, that equals x of CapEx, but probably not..

Yes. It depends -- yes, again, it depends on where and how..

Okay. Yes, no problem. So switching gears, just on the remodel market and that being around mid-single digit growth in the quarter and your growth kind of matching the market.

Can you give us a little color as to what happened in the various pieces of that business? Obviously, dealer is not a big piece of that yet but presumably growing versus home center.

Was there anything from a share perspective or anything odd from a growth perspective in those 2 channels that you can call out for us?.

Yes, not really. I mean, I think that some of the trends that we've seen in the last, call it 6 to 12 months thereabouts, is that the -- if you break down the remodel, our sense is that the dealer business has a bit higher growth rate than the big-box side of it.

And we can talk about -- speculate about why that is, but if you kind of try and break down the numbers, we think that the dealer business is coming back a little bit stronger. The big boxes are growing, but I think they're kind of a little bit on the downside of the average, and I think the dealers are a little bit on the upside.

Nothing dramatic, but I think there is a tiny bit of a shift there. And I think there are a couple of reasons. Certainly they're a model, they're a high-touch model. But they've also become more aggressive on promotions. For a long time, they just, for a variety of reasons, they weren't in the promotional game.

They've started to do I think more promotions, which has put them back in the market for some of the business that's in play, some of the business in the middle where people would like the high touch, high service, but they're also cost conscious. So I think that's potentially some of that.

Other than that, particularly if you look sequentially versus the last couple of quarters, things are pretty stable. The promo environment is pretty stable. And so, there really isn't a lot of difference between the two.

Certainly, based on the fact that I think that dealers are growing a little bit faster than the big-box and we started at such a low base a few years ago is our remodel -- our dealer business, excuse me, is over indexing versus our big-box business.

And it's really started -- we've got to the point now where our dealer business is probably about 10% of our total remodel business. And so we've been pretty happy with the growth and the penetration there. But between the 2 different channels, the distribution within remodel, we're not seeing a lot of different things.

I think what it is, is just you just have a consumer that's very cautious. Now one of the things I will say, kind of kind of add to that, maybe, is we're encouraged. First of all, historically, you've heard us say that new construction leads us into a housing cycle and brings us out. And new construction is clearly bringing us out.

And so if you kind of look back, historically, remodel would follow 12 to 24 months, which means we would expect remodel to kick in here sometime between this fall and the fall of 2014. So it really isn't time, if you look historically, for remodel to kick in.

Some of the other indicators that encourage me is the automobile industry is having a very, very good run. And I don't know what we got up to. I think we got up to the average age of a car was over 10 years, I think.

And so what that tells me potentially is that people now have discretionary dollars for large big-ticket items, and they're willing to part with those because they're signing automobiles, and it's just that their 10-year-old car was higher on the priority list than their 20-year-old kitchen.

But I think we're starting to see some consumer behavior that might lead us to believe that the big-ticket, somewhat-discretionary items are on their way. They're just not here yet..

Okay. Okay, that makes sense and it's helpful. Just the quick follow-up there, I guess, would be just on the home center side.

Safe to say that you're kind of holding your own from a share perspective in that channel?.

Yes, I mean, it ebbs and flows, obviously, with when you run promos, when the competitors run promos, when the accounts actually decide to do things to provide incentives for the consumers. And as we've talked about now for some time, we kind pick our spots. Sometimes we participate, sometimes we don't.

Sometimes we participate at not quite the full level that some other people do. So normally, in and out, you may see that, but if you look at over, say, a rolling 4 quarter or something like that, we're basically with the market on home center side. We've basically held our share, and at the moment, we're pretty happy with that..

We'll go to David MacGregor with Longbow Research..

Kent, just a follow up, can you just talk about possible M&A activity? And if you were to pursue an acquisition, how do you think about your priorities?.

Yes, that's not -- again, it goes back a ways since we've kind of had that conversation, but we're not acquisitive. We're not really interested in M&A activity. We've looked at it over the years, and for us, for a variety of reasons, it just doesn't make any sense.

Our growth is going to be organic for a lot of reasons, but -- so we don't put a lot of energy into what it might look like or the category just isn't -- it doesn't really fit with the business model we've built and the way we go-to-market. It's much more efficient, it's much cheaper. There's a much a higher return when we do things organically.

So we're not really pursuing any M&A..

Okay. And then secondly, just on the -- you mentioned the raw material cost inflation, but you didn't quantify that. I wondered if I could just get you to talk a little bit about -- I think you got a price increase going through on the second half this year.

Net-net, how do you expect to end sort of calendar 2013 in terms of price versus commodity inflation?.

Well, again, I mean, there's 5 months left in the year, 5.5 months left in the year, and so we continue to see pressure on the material side. And sometimes, it gets pretty intense. Sometimes it backs off a little bit. Lumber is particularly problematic. Hard maple, domestically sourced hard maple, is particularly problematic.

You'll see in the Q, I mean, the impact on the quarter of material increase was about 140 basis points. That does not reflect all of the price increases that have been passed through to the manufacturers from our upstream sources. It's a little bit more than that.

And so we'll see what comes the rest of the year, but certainly, kind of on a roll forward basis, I think we've got an impact we need to offset that's probably a couple of hundred basis points. If we get more inflation, material inflation in the last back half of the year, we'll, obviously, be on top of that.

In terms of recovering out from the marketplace, kind of split again. We kind of have to split these things. But we are starting to see pricing move up on the new construction side and it's -- I feel comfortable that there will be some pricing that goes through the new construction side that sticks. How much of it, I'm not sure at this point.

The remodel side, we have seen some movement in the marketplace to try to recover price. I think it's a little bit early in my judgment to determine whether or not the remodel side will hold in the marketplace and, also, again, whether or not it'll be significant to recover both the current and future cost increases.

So certainly, our goal is to have it net to 0 during the fiscal year.

I'm not sure because of the time delay between when we actually receive cost increases, as we've talked about before, again, and pass it through while we're -- whether we'll accomplish that or not, but that's really our goal is to be able to recover certainly the material piece of inflation through the marketplace.

And again, we're seeing some early signs throughout the industry. We price to market, as you know, and so we've seen some early signs that the industry is moving in that direction, recover some of that, but I also think it's a bit too early to call..

And then last question. Just a follow up, I guess, on an answer you gave me earlier when I was asking you about peak margins and you walked through the various drivers behind that. One of the things you noted was the promotion -- a kind of abatement in the promotional environment could be a -- it was kind of a big deal.

I think you noted it was a big number. Can you quantify that for us? I mean, is that 300 or 400 basis points of gross margin? Or will it be more than that? I mean....

Well, again, I guess it depends on what do you think it should go back to. I mean, if you go back prior to -- go back to '06 or whatever versus the peak, which was probably 2 to 3 years ago, we saw -- wouldn't be because you got to blend it for our because.

But in the remodel channel alone, the industry probably saw about a 600 basis points increase in promotional costs. And as we've talked about for the last couple of call, that's moderated. It certainly isn't back all out in the system.

So the question becomes to what degree do you get back to some historical level? My kind of sense is that where we are now is kind of baked into people's psyche, and it's kind of baked in to the system, and we're kind of at that elasticity.

So I would expect it continue to drift down in the next couple of years, particularly if volume comes back and people start filling up their plants. But I would not anticipate a significant drop in the near term.

So when I talk about getting those margins back, I think we'll get a little on the promo side, but I certainly don't think that you're going to go back to life like it was in, say, 2006..

What do you -- what's your best guess on capacity utilization for the industry today?.

Oh, for today? Oh, wow, I'm not sure. My guess for the industry, you're probably in the mid-70s, would be my guess. I think yes, I think it maybe a little low -- call it 70%, 70%, 75%. But I think in certain areas, you're much, much higher than that because a lot of that capacity can't get to market.

If you have a regional player in Southern California and the demand is in Florida, that capacity just can't hook up with the demand. So there are some regions of the company -- of the country, excuse me. There are some regions of the country that are, I think, extremely tight, Florida being one of them.

The rebound in Florida in terms of building has been significant and ongoing. And we see a lot more capacity constraints, industry capacity constraints servicing the Southeast in Florida than, say, we do out West..

What percentage of your revenues are generated from those markets, from those fast-growth markets?.

Oh, I mean, if you take -- the biggest cabinet market on a remodel basis, is the Northeast, always has been. And the second business has generally been out West. And on a new construction side, it's those markets that are coming back. It's the Mid-Atlantic, Carolina, it's Florida, it's Texas and it's the Southwest.

So on the new construction side, the majority of our volume is going to come from those markets. On the remodel side, it's mitigated a little bit because of the volume in the Northeast..

[Operator Instructions] And there are no other questions in the queue at this time..

All right. Well, since there are no additional questions, this will conclude our call. And again, thank you for taking the time to participate. Speaking on behalf of the management of American Woodmark, we appreciate your continuing support. Thank you, and have a good day..

That does conclude the conference. Thank you for your participation..