Glenn Eanes - Vice President and Treasurer Kent Guichard - Chairman, Chief Executive Officer.

Scott Rednor - Zelman & Associates Josh Chan - Robert W. Baird Garik Shmois - Longbow Research Josh Wilson- Raymond James.

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 are made by the company involve material risks and uncertainties and are subject to change based on factors that may be beyond the company's control. Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statement.

Such factors include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission and the annual report to shareholders.

The company does not undertake to publicly updated or revised (sic) 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. And at this time, I'd like to turn the call over to Glenn Eanes, Vice President and Treasurer.

Please go ahead..

Thank you. Good morning, ladies and gentlemen, and welcome to this American Woodmark conference call to review our financial results for our third fiscal quarter ending January 31, 2014. Thank you for taking time to participate. Participating on the call today from American Woodmark will be Kent Guichard, Chairman and Chief Executive Officer.

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

Kent?.

Thank you, Glen. Good morning everyone. As you know we released the results of our third fiscal quarter ended January 31, 2014. The quick financial headlines for the quarter, net sales were $169 million representing an increase of 12% over the same period last year.

And reported net income was $2.9 million or $0.18 per diluted share in the current fiscal year versus $2.1 million or $0.14 per diluted share last year. That brings us through nine months ended January of the current fiscal year to year-to-date net sales of $538 million, which is an increase of 17% over the same period last year.

Net income is $14.4 million or $0.95 per diluted share in the current fiscal year versus $4.6 million or $0.31 per diluted share last year. And for the first nine months of the current fiscal year, the company generated $23.5 million in cash from operating activities compared to $2.6 million for the first nine months of last year.

Underneath the headlines, let’s start with sales performance on the new construction side, single-family housing starts impacting the company’s new construction business were effectively flat for the period covered by our third quarter.

Single-family starts are going back a little bit to 2012; single-family starts during May, June and July of calendar 2012 averaged approximately 520,000. Starts increased to almost 15% in September and October of 2012 reaching 591,000 and 595,000 respectively. Jumping ahead to 2013, September and October starts in calendar 2013 averaged 590,000.

So if you apply a 60 to 90 day lag between housing start and the cabin installation, the overall market activity in single-family homes was effectively flat for the period covered by our financial third quarter.

In this environment, our new construction-based revenue increased over 25% for the quarter, a reduction from the over 40% growth in recent quarters due to a combination of the flattening of market activity on a comparative year basis and our efforts over the last 12 to 18 months to exit non-strategic low margin pieces of our business mix.

The planned exit of those features reduced total company growth in the quarter by an estimated 5%.

Our growth in excess of starts continues to be driven on the new construction side continues to be driven by our partnership with national and regional builders that are gaining share of total starts and by our increase in share penetration with those builder partners.

Moving on the remodel side of the business, the picture turned last quarter -- actually last couple of quarters we talked about the remodel side having a mixed picture, in our latest quarter – the third quarter the picture turned from mix to negative.

Residential investment as a percentage of GDP for the fourth calendar quarter of 2013 declined sequentially for the first time in well over a year reserving a consistent trend of improvement. The index had increased to tenth of a point from 2.7 for the quarter ended June 2012 to 3.2 for the quarter ended September 2013.

For the quarter ended, December 2013, the index declined to 3.0 is slightly above the 2.9 for the quarter ended December 2012, a year ago. Existing home sales also retreated at the end of calendar 2013 between January and August existing home sales increased almost 10% from 4.9 million annualized units to 5.4 million units.

By November existing sales dropped over 10% to under 4.9 million units and December 2013 was actually below December 2012.

In addition, the percentage of homes purchased for cash reached an all-time high signaling a significant increase in investor activity, this correspondence with a drop in residential improvement activity as investors are less likely to upgrade significant features in recently acquired properties.

42% of November purchases were all cash with several key markets well in excess of that level. Florida for example reported 63% of existing home sales in November were cash transactions. Georgia and Nevada reported 51%, South Carolina 50%.

Interest rates have also risen, they are up 4 points since the beginning of calendar 2013 from 3.5% to 4.5% for a 30-year fixed rate mortgage combined with an over 10% rise in average home prices, the affordability index has declined both disqualifying many first time buyers and reducing discretionary funds available for major remodel activity on the part of the successful buyer.

Unemployment has improved marginally, the U3 employment rate dipped below 7% for the first time in six years. U6 also declined but remains problematic at 13%.

When you look at all of that our overall evaluation of the remodel side of the industry is that we are experiencing something of a bifurcation in the consumer with the upper part of the market sustaining a positive trend line and the middle of the market demonstrating skittishness and reluctance to pull the trigger on big ticket discretionary remodel projects.

We are seeing this tale of two consumers through the channels of distributions with dealers who tend to have more affluent customers with household incomes over 100,000 per year outperforming big box and distributors with remodel operations, we tend to have a more mid-level consumers with household incomes in the $50,000 to $60,000 range.

Our Waypoint dealer business continues to gain momentum, but we still over index versus the industry, the big-box distribution. As a result, in this environment, we lag the industry in overall growth on the remodel side with a small decline in units more than offset by mix and pricing.

As a transition to discussing gross profit performance, from our perspective it really comes down to a question of your interpretation and conclusion from the decline and virtually all of the relevant market drivers at the end of 2013.

Specifically, do you believe that lower demand in October, November and December was an aberration from the trend line and hence we will return to the recovery or a fundamental altering of the trend line in which case the period ahead is on a different trajectory.

Our view as we sit here today that it is most likely the former, an aberration from the trend line. In our opinion, the government impasse that led to the government shutdown in October had a deep impact on the consumer. Consumer sentiment rose from the low 70s in January of 2013 to the mid-80s in June, July and August.

Even in September has the political fight was beginning to unfold sentiment remained in the low 80s. In October it dropped to 77, in November to 73. And consumer sentiment remained in that range at about 75 in December.

The timing was particularly impactful on our industry as it coincided with both the traditional year-end push by builders and the fall remodel selling season. In support of our view that the last few months as an aberration consumer sentiment has rebounded to the low 80s in both January and February.

The choice then that we faced having built the crewing and other infrastructure to support the trend line is what to do during the hole created in the aftermath of the shutdown. In our opinion and from our perspective the answer was quite clear, you simply can’t take out the crewing and infrastructure only to put it back in 90 days later.

As a result, we held on to the crewing and infrastructure during the third fiscal quarter with a negative impact on short-term gross margins. The company’s gross profit margin for the third quarter of the fiscal year 2014 was 15.4% of net sales versus 15.5% reported in the same quarter of last year.

On a year-to-date basis gross profit margin is 17.1% compared to 15.3% for the same period in the prior year. Year-to-date, the company has generated year-over-year incremental gross margin of $21.6 million on incremental net sales of $78.3 million resulting in an incremental gross margin rate of 28%.

For the latest quarter, gross margin versus the prior year, gross margin was negatively impacted by both material inflation and cost associated with crewing and infrastructure to support higher levels of sales and installation activity.

We continue to experience inflationary pressure across a broad range of direct material inputs that continued during the third quarter, particularly on all species of hardwood lumber. Our average unit material cost increased almost 10%.

While the higher material cost was partially offset through customer management, product mix and some pricing relief, gross margin was still adversely impacted by continuing increases in material costs. We anticipate that material inflation will continue in the periods ahead.

Based on the previous discussion, gross margin was also negatively impacted by our decision to retain crewing and infrastructure necessary to support higher volumes which we believe will accompany a return to the trend line in place prior to the government shutdown in October of last year.

To the extent it may take longer than anticipated to return to the trend line either due to economic shocks which impact consumer confidence or other factors such as the severe weather across much of the country in recent weeks. These higher costs may continue to negatively impact margins for the period ahead.

Should we conclude that the industry will not return to the trend line, we will move to reduce these costs in line with the anticipated volume. The negative impact from rising material cost and additional infrastructure was offset by a lower labor costs and leverage on fixed and semi-fixed overhead.

Direct manufacturing labor cost improved as a result of higher productivity and reduced benefit expenses primarily from lower medical claims and changes to our retirement programs. In addition, the company generated leverage on overhead, overhead spending increased 4% on the 12% increase in sales.

Regarding our operating expenses, total operating expenses improved from 13.0% of net sales in the third quarter the prior year to 12.4% this fiscal year. Through nine months SG&A improved from 13.4% of net sales to 12.5%.

Breaking that down between selling and marketing expenses in G&A, selling and marketing expenses were 8.5% of net sales in the third quarter this year compared with 8.6% in the prior year. Our selling and marketing cost generally flexed with activity.

General and administrative expenses were 3.9% of the net sales in the first quarter of fiscal 2014 – the third quarter compared with 4.4 in the prior year. The improvement in our operating expense ratio is the result of leverage from higher volume and lower pay per performance employee cost.

Briefly on capital spending and cash flow, the company generated operating cash flow of $23.5 million through the first nine months of fiscal 2014, an improvement of $21.3 million over the same period in the prior year.

The improvement in operating cash flow was driven by higher profitability, more efficient inventory management; timing associated with the payment of various accrued liabilities and lower pension contributions.

Our net cash used by investing activities was $8.3 million during the first nine months of the current fiscal year compared with $4.2 million during the same period of the prior year. The increase year-over-year was due primarily to proceeds from asset sales in the prior year which did not reoccur in the current fiscal year.

The company has increased cash by $29.1 million during the first nine months of fiscal 2014 and ended the third fiscal quarter with $126.1 million in cash on hand.

In closing, the third fiscal quarter presented some different challenges than we faced over the last few years most notably the adverse impact, the government shutdown had on confidence and the middle income consumers appetite to purchase a new home or begin a big-ticket discretionary home improvement projects.

We made progress in stemming the tide of material inflation heading the year-over-year drag on gross margins in half from the previous quarter and securing partial recovery from the market for increases absorbed in early 2013.

We also made progress in returning direct labor efficiency to higher levels, a significant improvement from both the same quarter of the prior year and from the second quarter of the current year. And we generated favorable leverage on our semi-fixed and fixed overhead with additional volume.

Our financial results for the quarter were however, negatively impacted by crewing and other infrastructure we put into place during the late summer and early fall to support the trend line.

When the industry fell short of that trend line, we made the decision to maintain the higher level of infrastructure and thereby cost believing that the industry would return to the trend line this spring.

At the end of last quarter’s call, I commented that the return to normalcy will not be linear and that one of our two biggest challenges would be balancing our cost structure with demand in an extremely fluid environment made even more volatile by the dysfunction in Washington and the negative impacts successive rounds of artisan ship behavior have had on consumer confidence.

During the third fiscal quarter, we were out of balance. As we shared with you over the years, we were always there on the side of making sure we can continue to provide superior service and support to our long-term partners. And this results on occasion with short-term excess costs.

As we get into the spring, we will see if our channels of distribution return to the trend line as we suspect, or if the government shutdown and the successive events has altered that trend line. If it has been altered, we will move to adjust our infrastructure in line with demand. That concludes my prepared remarks.

At this point, I would be happy to answer any questions you have..

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions) Our first question comes from Scott Rednor from Zelman & Associates..

Hi. Good morning, Kent..

Good morning..

Two questions for you on the gross margin, I guess there is a lot of puts and takes and I could appreciate that you guys kept labor but yet also the offset from existing lower margin business.

So when we see some of your peers out there who have similar or even weaker growth and are posting margin improvement and your margins are pretty flattish year-over-year, can you help us explain the disconnect there?.

Well, I won’t speak to anybody else in the industry, they have different cost structures, they are in different channels, they make different choices. I will just speak to our performance.

And I kind of mentioned in the call, our top line was 12%, if we hadn’t taken the actions that we took over the last year and year-and-a-half to get out of some of the business that wasn’t sustainable at when you have to carry full cost. I mean you are not running the business kind of an incremental basis as we were through the recession.

That would have added about 5% to the growth, so would have been about 17% as supposed to the 12%. Longer term we still think that those are good decisions, but in the short-term those things did have positive incremental contribution, they couldn’t carry the full load of fixed cost but they did make a contribution.

So that exiting those businesses in the short-term had a little bit of an impact. But the real drivers of the two, one we talked about for quite some time now which is material inflation.

And the other is that based on the trend line, we had put crewing and other infrastructure in place particularly out in the field to deal with installations and those types of things supporting a lot of our builder customers. And the business just didn’t come in.

And again, it goes back to the real question is, is it temporary on the back half of the shutdown or is it something that’s really changed the trajectory.

But from that perspective the materials basically what we’ve been struggling with for a while although we did make some progress, the other one is or decision to keep those people in place believing that its an aberration to the trend line that we saw in the quarter not a permanent change in the direction of the trend line..

So just based on those comments there, in your backlog are you seeing that improvement of that demand starting to come through?.

Well, we’re seeing some seasonal improvement with the demand. We are kind of through the dark period, the old kind of adages in the industry is between December 15th and January 15th, you try not to make any decisions if you don’t have to, when it’s darkest its really dark and that’s just really the low point for the industry.

So we are starting to see as we come out of January half-way through February here, we are starting to see some of the seasonal change in terms of coming out.

Now, it’s a little bit difficult to gauge the extent of that change certainly the weather, the successive rounds of weather that have rolled through the country particularly that have hit the Midwest, the Northeast has really been hit hard on successive waves. It’s difficult to actually quantify what impact that has.

We did see, if you look at November and December starts, they did jump up. We ran that kind of that 590, 600 for September and October. They jumped up to over 700 in November and retreated a little bit to about little under 670 in December.

Wait 60 to 90 days is when those investments start to come through our system in terms of the cabinet install, so I'm hopeful and encouraged that that start number went up although that would not have really hit our backlog yet. So we are seeing a little bit of an increase just based on it being February as opposed to December and January.

But in terms of actually getting back on the trend line that we saw prior to the government shutdown, I think it’s a little bit too early to call whether we’re actually going to be back on that trend line for the spring selling season..

Okay. Thanks for that. And just last one from me.

Can you just talk about the balance between – if you thought about it on a net basis between the raw materials and the incremental pricing, it seems like your past comments have stated that if there is sustained inflation the industry will take price and that certainly seems to be what’s going on this calendar year? So how should we think about the net impact in terms of going forward?.

Yes. Go back to the last couple of calls. We’ve talked about the impact on gross margin over 200 basis points 220, 240 in that range.

And for the quarter but not all of that was pricing some of it was customer and product mix, but generally on the material side, if you look at it, we about cut that decrement in half in the third quarter on a year-over-year basis.

So we made some progress but we’re still behind that well over 100 basis points on a year-over-year basis in terms of the impact of material inflation..

Okay. Thanks Kent..

Sure..

We’ll now go to Peter Lisnic from Robert W. Baird..

Hi. Good morning. This is Josh Chan filling in for Pete.

Kent just going back to the previous comment about raw material inflation, I guess is it the expectation to be able to offset some of the inflation by the fourth quarter or do you think that it might take a little bit longer than that?.

Well, I think it’s kind of like, if inflation had stopped and there was an end date to it then I could probably give you a better idea about how long it would take us to recover. But, inflation continues to kind of march along.

And so we’ve recovered a good chunk of it, as I said in my comments of the inflation that we saw in early 2013, but since that time since we put together those pricing structures and the market has gone out to recover that. We’ve had additional inflation.

If you just go out and look at the hardwood market reports, you can see that hardwood continues to increase at a rather significant rate pretty much all of the hardwood that we use. So we’re kind of in a catch up and until it slow stops or even slows down significantly we’re always going to be in a little bit of a catch up.

As I’ve said on the calls over the years, don’t exactly remember which one we talked about most recently, but our industry is not an industry over time that has been able to get anticipatory price increases.

They had been more, once the inflation is here we go out and recover it and so we’re always going to be as long as inflations goes up we’re always going to be a little bit behind the curve in terms of recovering all of it.

When we do have enough of it out there in the market goes out to get it generally as we talked about before that’s a six to nine month lag. So that’s kind of a long explanation but is a way of setting up in the fourth quarter I would anticipate we would continue to feel something of a drag.

We would hop that it would be reduced as it was in the third quarter versus what it was in the second quarter. But again that just depends on what happens on the raw material markets..

Right. That makes sense, okay.

And then if I shift over to your comment about the crewing being out of balance with the current volume, I guess is there a way for to ballpark sort of how much volume growth you need to see before you’re able to sort of absorb bring that back into balance if you will?.

Yes. I mean if we – if you go in and look at where we are on trend line through the third quarter we had expected and kind of put in the infrastructure to deal with volume that was a good 10% to 15% probably closer to 10% but 10% to 15% higher than we actually experienced and so you kind of do that math.

And if we had 10% to 15% more in demand we would have been able to cover those costs so that’s about what the number is..

Okay.

And then last question, I think previously you had mentioned potentially needing some capacity expansions in calendar 2015, have you made any decision on that in terms of whether to go forward with those kind of projects?.

Yes. We have not, our forecast -- our longer term forecast has suggested that we needed some capacity in the spring of 2015. Now, we’ve been able to pull that or move that out just a bit because we have done some things such as getting out of some of the lower margin business non-strategic lower margin business.

We’ve set up a few more outsourcing arrangement. So we may have moved that out a little bit. But, generally speaking we still think that it’s probably in that range. And we have to start may be a year ahead of that.

And so in terms depending on the option that we choose a greenfield would be a full year, if we decide to do an expansion of an existing site, you’re probably more nine or 10 months.

So the decision point for us is really the spring, we have all the work done in terms of what our options are and the one that we would recommend to the Board that we pursue. But we’re going to wait as we get into the spring here. And again, see if we are back on that trend line or if there has been some longer term change to trajectory.

If there has been a longer term change to the down side then obviously our need for capacity moves out if we’re back on the trend line then we would look in the spring or early summer to go ahead and start that project present it to the Board and start that project and at that time we would communicate it..

Great. Thank you for your time..

Sure..

We’ll now go to Garik Shmois from Longbow Research..

Hi. Thank you. This first question is on mix.

It didn’t seem like there is much of an impact on mix as there has been in prior quarters, but just wondering if you could call out some of the puts and takes around mix in the quarter where you saw potential headwinds or benefits?.

Mix from what perspective?.

Both from a customer standpoint and from a product standpoint..

Okay. Yes. Our product mix has been pretty stable on a year-over-year basis just improved but it’s been pretty stable. Generally speaking, we do the big launches in the fall and they usually have an impact in the spring. So the product launches we did last fall wouldn’t have really changed our mix a whole lot.

So generally the mix certainly sequentially and even last year, I mean, sequentially they have been pretty stable over the last year, there is still bit of an improvement.

If you look at it between channels nothing significantly different it’s just that we kind of continue now we’ve had several quarters of the new construction business growing significantly.

Now, we’re off to 40% that we ran for a few quarters but 25% on the new construction side over 25% is still that business is still growing and recovering faster than the remodel side is.

So we kind of continue on the trend of reweighting the business more towards the new construction side than the remodel side just based on the growth trends in the end markets..

Okay. And then you mentioned that by exiting some of the new construction business, it was about 500 basis point impact to revenues in the quarter.

Is the strategy to continue to exit some robust profitable new construction customers in that you may end up underperforming the prior trend or was this a one-time strategic change? And then I guess secondly, if you could provide may be a little bit more color with respect to the gross margin I guess net benefit from that move in the quarter may be what we should expect moving forward?.

Yes. I mean it’s a process that when the industry start recovering everybody was looking at using up their capacity quickly as I mentioned on a few calls ago.

We kind of looked at that and said that we have taken on some business during the recession that made sense during the recession because it added incremental dollars with the capacity that we had.

When we start to look at having to add new capacity with business having to carry full cost as opposed to just incremental contribution there were certain pieces of business that we took on during the recession that didn’t make sense in an environment where your at full capacity and you’re looking at adding -- having to justify the addition of capacity.

It takes a while to exit out of those businesses and really fold the tent. We don’t leave customers in the lurch. We work with them to transition them to another supplier. So that’s been an ongoing process for 12 to 18 months. We really kind of stopped that process at this point.

Now, because its been an ongoing process for a few quarters from now we’ll continue to kind of have that if you will reduction or drag on the growth rate because until we get out – until the end of this calendar year early in the calendar 2015, you’ll still have some of that in the comp period.

So it will continue but it will kind of decline as we go forward from here in terms of its impact on the growth rate. In terms of its margin in the current quarter, I mean the current quarter would hurt margins. I kind of alluded to that in one of the previous questions.

It would have hurt margins because that business did contribute and we didn’t run at capacity and so we gave up some incremental dollars during the third quarter because we had to exit out of those businesses.

We still think that that was a good decision because as this thing gets back on trend line at some point and the industry continues its recovery.

And remember we’re still well below the long-term average and requirement to build 1.4 million to 1.5 million houses per year and there is private residential investment as a percentage of GP still have to recover back into the mid -- low to mid 4s where it’s been historically.

So as we get -- that comes back and we get back to capacity we think the business that we replaced that with will be at higher margin but in the third quarter it actually hurt margins..

Okay. Thanks. And then just last question with respect to inventories at home centers as far as you can tell.

Is there any risk that they are carrying higher levels of inventory relative to seasonality and then if you come back and start to see the trend line improve that the rate of volume recovery for you may take a while as inventories kind of balance downstream or are you not seeing much of an impact with respect to inventory stocking right now in the customer base?.

Well, all of our on the home center side, we don’t -- there are no inventories, we’re not a stocking distributor. We’re -- entirely all of our business is special order. So we basically make two order and ship it. So everything we make as a customer name on it. So there is no pipeline expansion or contraction through the distribution channel.

We really don’t carry any finished goods what you see on the every one of our balance sheets for finished goods is really intransient material is final passes upon delivery. So that’s our intransient material but all of our finished goods has a customer name on it and in essence it’s been paid for or will be paid for.

So there is no inventory we don’t have a pipeline there is no inventory in the system. So we’re pretty close to real demand..

Okay. Thank you..

Sure..

(Operator Instructions) And we’ll now go to Sam Darkatsh from Raymond James..

This is Josh filling in for Sam. Thanks for taking my questions..

Sure..

First I want to clarify, make sure I heard correctly, you said 100 basis points of year-over-year headwind to gross margin from raw materials that was net of price and mix offsets, correct?.

Yes. I mean you’ve got a several things in there. I mean as I alluded to you, you do have some changes in customer mix, you do have some change in product mix and you do have some recovery of some of the inflation that we saw in early 2013.

The last couple of calls we’ve talked about the margin drag being well over 200 basis points and effectively in the third quarter we cut that in half..

Okay.

And assuming we return to trend line going forward what should we be looking at for your incremental margin given that you’ve already stepped up some of the crew capacity?.

Well, again, we go through on an individual quarter obviously things can happen. Our target remains gross margin of 25% to 30% incremental on revenue growth that we were above that at the beginning of the fiscal year we’re obviously below that in the third quarter.

But, we are still kind of in that range 28% little bit around there for the first nine months. So over time, if you look at over, call it, a rolling year or whatever it is, we would look to still deliver that 25% to 30%, some quarters being above that and some quarters being below that..

And you talked about the dealer channel tending to perform stronger than big-box, could you give us a sense of how big that business has become for you now and what traction are you gaining and expanding that part of your business?.

Yes. It continues to roll along. We started about three – little over three years ago, last year – late last year, last fiscal year it became 10% of our business. It’s continuing to roll along. It’s approaching the mid teens of our total remodel business. So it continues to grow very rapidly, we continue to do well.

Now, we are signing up new dealers, but penetrating shares within those dealers, but versus the industry we still over-indexed the box. So on the weighted average basis, we still have – we still be behind the curve if you will just because of that mix. But, we continue to do pretty well, we are pretty happy with that business..

Thank you..

And it appears there are no further questions. I'll turn the conference back over to our presenters for any additional or closing remarks..

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

This concludes today’s presentation. Thank you for your participation..