Glenn Eanes - VP and Treasurer Kent Guichard - Chairman and CEO Cary Dunston - President & Chief Operating Officer Scott Culbreth - SVP and Chief Financial Officer.

Scott Rednor - Zelman and Associates Rick Johnson - Thompson Research Group Mark Zikeli - Longbow Research Jonathan Sacks - Stonehill Capital Josh Chan - Robert W. Baird & Co.

Good day, everyone. And welcome to the American Woodmark Corporation Second Quarter 2015 Conference Call. Today's call is being recorded Tuesday, November 25, 2014. We will begin the call by reading the company's Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.

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

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

The company does not undertake to publicly update or revise its forward-looking statements and even as experienced or future changes make it clear that any projected results expressed or implied therein will not be realized. I would now like to turn the call over to Mr. 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 the financial results of the second fiscal quarter ending October 31, 2014. Thank you for taking time to participate.

Participating on the call today from American Woodmark Corporation will be Kent Guichard, Chairman and Chief Executive Officer; Cary Dunston, President and Chief Operating Officer and Scott Culbreth, Senior Vice President and Chief Financial Officer. Scott will begin with a review of the quarter and an outlook on the future.

And after Scott's comments, Kent, Cary and Scott will be happy to answer your questions.

Scott?.

Thanks, Glenn. Good morning, everyone. Today, we released the results of our second fiscal quarter ended October 31, 2014. Financial headlines for the quarter; net sales were $218 million [Technical Difficulty] in current fiscal year versus $5.3 million, or $0.34 per diluted share last year.

For the quarter, the company generated $9.4 million in cash from operating activities compared to $13.6 million for last year. Six months ended October, year-to-date net sales were $430 million representing an increase of 17% over the same period last year.

Net income was $16.9 million or $1.07 per diluted share in a current fiscal year versus $11.9 million, or $0.77 per diluted share last year. Excluding the one time benefit of research and experimentation credits from fiscal year 2011 and 2014, net income was $15.8 million or $1 per diluted share, an improvement of 30%.

For the current fiscal year the company generated $18.6 million in cash from operating activities compared to $15.8 million for last year. Some additional comments on sales performance starting with the new construction market. Single family housing starts impacting the company's new construction business were up 3.8% for the second quarter.

Single family starts during June, July and August of the prior period averaged 605,000. Starts over the same time period from the current year averaged 628,000. With the 60 to 90-day lag between start and cabinet installation, the overall market activity in single family homes was up 3.8% for the financial second quarter.

Our new construction based revenue increased over 20% for the quarter. We continue to over index the market due to our partnership with national and regional builders; they are gaining share of total starts, increasing share penetration with those builder partners, and the better-than-average health of the markets where we concentrate our business.

On the remodel side of the business, the picture continues to remain mixed. On the positive side, unemployment continues to improve. U3 unemployment rate dropped to 5.9%, U3 fell to 11.8% for the third calendar quarter of 2014, and further drop of the U3 rate now turned 5.8%, the lowest level seen in 2008.

Consumer sentiment is 86.9 in October, the highest rating since July 2007. All cash purchases sale fell versus the prior year, 24% of all transactions were paid in cash in September versus 33% last year. The August rate of 23% was the lowest level reported since December 2009.

This trend is significant since cash purchases signal investor activity and they are less likely remodel than owned occupy buyer. From the negative side, although unemployment is improved wages have not. Inflation adjusted average household income has declined and too many workers are in part time jobs seeking full time employment.

Residential investment as a percent of GDP for the third calendar quarter of 2014 remained flat at 3.1%. The index has remained flat for the last four calendar quarters and the index remains well below the historical average of 4.6% from 1960 to 2000. Existing home sales continued to decline through the third quarter of 2014.

Between July and September of 2013, existing home sales averaged 5.3 million units. That same period for 2014 averaged 5.1 million units, a decline of 3.8%. Home ownership rate also continue to decline. Percent of Americans who own their home in a third calendar quarter was 64.4%. This is the lowest reported level since the first quarter of 1995.

The share of first time buyers remains low. September reported rate is 29% which was well below the historical norm of 40% represent a 27 year low. Interest rate held steady in the quarter at 4.16% in September, but has still risen approximately 65 basis points in year 2013 from 3.5% to 4.1% for a 30 year fixed rate mortgage.

Combined with the 5.6% rise in average home prices for September, 31st straight month of year-over-year gains, the affordability index has declined, disqualifying first time buyers and reducing discretionary funds available, the major remodel activity in the part of successful buyer.

Our view is that the cabinet remodeling market grew in the high single digit during the quarter. Our combined big box and dealer remodel revenue grew in mid single digit during the quarter. Our sales gross rate was below the market gross rate due to a higher share sale, the big box home -improvement retailers.

We maintained our share to big box channel and the dealer channel over index through remodel market, largely due to the more affluent nature of their customer base. Our Waypoint brand continues to gain share and we grew our dealer business at a faster rate in both the overall remodel and dealer channel. Regarding gross margin performance.

The company's gross profit margin for the second quarter of fiscal year 2015 was 17% in net sales versus 16.9% reported in the same quarter of last year. The company generated year-over-year incremental gross margin of $4.7 million on incremental net sales of $27.1 million, resulting in an incremental gross margin rate of 17%.

This is still below our target of 25% but improvement versus our Q1 rate of 10%. Year-to-date gross profit margin was 17.2% compared to 17.9% for the same period in the prior year.

Year-to-date the company has generated year-over-year incremental gross margin of $8.1 million on incremental net sales of $61 million, resulting in incremental gross margin rate of 13%. Starting gross margin versus the prior year for the second quarter.

Gross margin was negatively impacted in the quarter by both material inflation and costs associated with accruing and infrastructure to support higher levels of sales and installation activity. But the impact was to a lesser degree versus prior quarters. Averaging the material cost increase almost 9%.

Although increases have slowed, we anticipate the material inflation will continue to impact in the future. Gross margin was also negatively impacted by inventory write-offs associated with the September product launch through discontinued certain lines and higher employee benefit expenses for workers comp and healthcare.

In total, all of these items negatively impacted the quarter by approximately 190 basis points. Negative impact from rise in material cost, additional infrastructure, employee benefit cost, product launch cost is more than offset by customer management, product mix, pricing, operating efficiencies and leverage on fixed and semi fixed overhead.

Company generated leverage on overhead was spending increasing 8% on the 14% increase in sales. Regarding operating expenses. Total operating expenses improved from 12.2% of net sales in the second quarter of the prior year to 11.3% this fiscal year. With six months SG&A improve from 12.5% in net sales to 11.2%.

Selling and marketing expenses were 7.5% of net sales in the second quarter of this year, compared with 8.2% in the prior year. Improvement ratio was generated by favorable leverage from increased sales and ongoing expense control.

General and administrative expenses were 3.8% of net sales in the second quarter of fiscal year 2015 compared with 4% in the prior year. Improvement in our operating expense ratio is a result of leverage from higher volume.

With respect to cash flows, the company generated net cash from operating activities of $18.6 million during the first half of fiscal year 2015 compared with $15.8 million during the same period in prior year.

Improvement in company's cash from operating activities was driven primarily by higher operating profitability, partially offset by changes in working capital which included increases inventory levels to support higher sales.

Net cash used by investing activities was $26 million during the first half of the current fiscal year or $8 million excluding the $18 million investments [indiscernible] deposit. The increase compared to $5.8 million during the same period of the prior year due to higher investment in property, plant and equipment.

Those significant spending occurred in the second quarter for our South Branch plant expansion. The company expects to spend $30 million in the second half of the fiscal year for the project. The remaining $15 million spend in the first half of fiscal year 2016.

Net cash provided by financing activities decreased $9 million during the first half of current fiscal year compared to the same period in the prior year the company repurchased 163,326 shares of common stock, at a cost of $5.1 million and proceeds from the exercise of stock options decreased $3.6 million.

Board authorized an additional $25 million stock repurchase program. Our plan is to continue to repurchase our burn rate annually which is approximately $10 million. And use the additional $15 million authorization for opportunistic repurchases. In closing, remodel market continues to struggle.

The dealer channel continues to outperform the market with their affluent customer base, while the home center channel continues to lose share with middle income consumers. New construction market remains flat in single family housing starts averaging 600,000.

Confidence in the middle income consumer's appetite to purchase a new home or began big ticket discretionary home improvement project remains a concern. We believe we will continue to be faced with difficult market conditions for the remainder of the fiscal year, but our performance will continue to outpace the market.

With respect to cost, inflation is easing; its hardwood lumber pricing appears to be stabilized. We continue to generate favorable leverage on our semi fixed and fixed overhead with traditional volume. We delivered gross margin approving year-over-year and sequentially after adjusting for higher launch cost and employee benefit cost.

As stated last quarter, we believe the company has established a three or four year trend of improvement which mirrors the improving housing market. Some quarters have been below the trend line and some been above the trend line. The first quarter was a good quarter once above the trend line. The second quarter was also above the trend.

Looking forward we are cautiously optimistic, maintain our expectations we shared in a last call, it will increase margin rate and grow net income in fiscal year 2015. This concludes our prepared remarks. We will be happy to answer any questions you may have at this time. .

[Operator Instructions] And we will go first to Scott Rednor with Zelman and Associates. .

Hi, good morning, guys.

Nice quarter, Scott, I was hoping on the gross margin on the 190 basis points, did that include the unit cost? And then I was hoping you could provide more color on how we should think about the launch cost and the inventory write-off? Should that continue in the back half of the year or is that going away?.

The launch cost were essentially a one time item it occurred in a quarter that was about 20 basis points. That would not repeat in Q4. .

And then as you guys think about getting back to that target rate of the 25% incremental, can you get there this year or given that you are trending above trend line on the sales line?.

I thought as we look at the second half of the year that we should be able to aspire to get our target rate of 25%. It is always open questions around what's going to happen around volume and inflation. But our projections are we believe we can get there in the near term..

Great.

And then on the repo, when you guys talk about separating the 25 between the $10 million annually and then an opportunistic, what's going into consideration to say that -- what's the hurdle rate for that $15 million as you think about opportunistically going forward?.

Yes, that's how it is important question. And we want a clear strike price and what that target would be for us. We would just continue to say it would be opportunistic. That we will continue to monitor the market, if we think there is a good time to go in and jump and buy, we got additional $15 million to do that way. .

Okay, great. And then just one last one. Any comments on the promotional environment, particularly at the home centers? Thanks. .

Hi, Scott. This is Cary Dunston. Fairly flat from what we are seeing from ourselves and competitors. Market as we typically hope to see in the fall selling season, you see a little bit of ramp up and promotional spend in the fall.

We saw a little bit effort, leveled off pretty quickly as this would not generate return what we hope would see in home center markets. So basic consistent with where we've been running. .

Thank you. We will take our next question from Rick Johnson with Thompson Research Group..

Yes, hi, good afternoon, guys or actually good morning, I am calling in for Nick Coppola. Couple of quick questions. You mentioned expansion and I think you talked last quarter about outsourcing or subcontracting.

Any more color you can provide there?.

This is Cary. We continue with the expansion plan that Scott mentioned is our expansion of our South Branch facility that we announced last quarter. That proceeding on plan due to -- I would say the lead time associated with the equipment, the spending associated with that expansion to spread out over really next six months.

And our plan is roughly nine months from now would be have that up and running. Outsourcing is always a give and take. I mean we monitor -- it depends on the incoming volume and our current internal capacity, right now we are basically we are running very consistent with where we were prior two quarters on outsourcing. .

Next question.

You talked about last time about growing sales into the dealer channel, any more color you can provide there?.

We are -- it is -- as we said in the call, we are continuing to outpace the market, the dealer business we see as a very important growth opportunity for us. It is grown for us and also become a significant part and we are looking to the future, we want to continue to grow and be a much more significant piece of our pie.

And right now that mark is where we see more growth compared to the home center market, just because of there are more affluent customers that shops there. So we are continuing to focus a quite bit on dealer market and focused on growing it. .

And another question. And you talked about raw material prices. What part is, can you break out what part of that is transportation? We are hearing a lot from other vendors about trucking costs to really adding into material pricing.

Any color you guys can add on that? Moving product?.

Nothing that would highlight a significance in the current period. Our primary increase in the material line and the actual raw material item is not in the freight charges coming our way. Fuel has certainly eased a bit, nothing that I could really add significantly around freight as being an impact. .

And follow up question, is there any expectation sort of any color on expectations for 2015?.

With respect to freight?.

Yes, general color where -- your outlook?.

Nothing beyond what I ended the planned remarks on at this point in time. Our expectations are that we will continue to see sales growth remainder of the year and deliver that on 2015 and we would expand margin as well as income. So we don't give specific guidance around EPS sales results for the year. .

We will go next to Garik Shmois with Longbow Research..

Hey, good morning. This is Mark Zikeli on the phone for Garik today. Just wondering if you can talk about the sales cadence as the quarter progressed here.

I think you said in the last call, you did have tailwind on the comp aside from the government shutdown; can you try to quantify that at all?.

Yes, I can tell you that our growth rate did accelerate throughout the quarter. We were in below teens in August and then accelerated to the high teens by the time we got October..

Okay.

Any commentary on the start of November here?.

Yes, coming on that I mean that's true, as Joe mentioned we got a pretty low comp out there because of the impact of the shutdown and it is different by channel. The activity on the new construction side is pretty steady and with the lead times there we can kind of see the starts that are coming and specifically with our customers.

So the growth rate there continues to do pretty solid. On the remodel side, we don't have as much visibility but the fall season selling season was above last year because of the impact of the shutdown last year.

It didn't come quite back to where everybody wanted to, so it was not a terribly strong fall selling season and if you look at on a sequential basis it was probably a bit disappointing, if you look at on year-over-year basis which is kind of what's Scott was alluding to because of the shutdown it looks pretty good..

Okay, that's helpful. Just wondering if you could talk a little bit about consumer behavior especially at the big boxes. I think previously you said middle income household are still reluctant to pull a trigger on that, big R&R purchase. I am just wondering if you are seeing any changes or new development here over last couple of months. .

Unfortunately not really, the middle income America you see I think they are buying cars and appliances and so forth from the discretionary spend perspective and our category we doesn't not seen them return to the market yet. .

Thank you. We will go next to Jonathan Sacks with Stonehill Capital. .

Hi, thanks for taking my questions.

Can you update us as to your approximate mix of sales by channel in terms of home center versus dealer channel etcetera?.

Yes. From a high level standpoint remodel business is still about 53% of the total. And within that the Waypoint business is about 15% of remodel..

And what portions of sales are to big box customers? Or I guess I was thinking more by distribution channel as opposed to by purpose..

By default of those percentage is home center would you get to about 45%, remodel say 53% of the total and you got 85:15 split between home center and Waypoint which is our dealer business..

Okay, great.

And then can you give a sense of your approximate capacity utilization now? Obviously you are expanding your capacity but I am curious as to how full you are running now?.

Obviously since we are -- we go from driving number and the way to assembly in cabinet, it varies greatly by plan so it is kind of hard to give you holistic view, but we do enough capacity and both between internal as well as our purchasing -- house purchase plan we are in good shape. .

Okay. And then I recall you have an annual pension, a catch- up contribution on your pension payments.

Can you tell us what that is expected to be for the year?.

We don't have any kind of catch-up payment per se. Our Q that will be filed here shortly you will see that our annual contribution is now approximately $4.3 million for this fiscal year. It was $2.3 million last year. But there is no catch up requirement. .

Yes, that's what I was referring to.

And doe that one through the income statements?.

Yes..

Okay, great. And then I guess last question about your cash balance which is thankfully large and growing due to the great free cash flow generation of the business.

You are obviously doing a plant expansion which will use some cash and you authorized the stock buyback, which will use some cash, but you'd still have pretty significant cash balance after that especially as the business continues to generate cash.

Any other thoughts on use of excess cash?.

This is Cary. Nothing specific we are going to outline today. Obviously the management, we continue to assess a lot of strategic options and we are very encouraged despite some of the ups and downs we are seeing in the market today.

With the past couple of years even we are very, very encouraged about the long -term outlook of our industry and feel that property investments will be required in the future. So the question now is strategically where do we make those investments and what timing, so at this point that's really about all we could say..

Thank you. We will take our next question from Josh Chan with Robert W. Baird & Co. .

Hi, good morning. Just a couple of questions. As you look at your outlook for both the new construction and remodel market over the second half, I was just wondering if your outlook for these markets has changed over the last three months.

I don't want to read between the lines too much so I just wanted to clarify if anything has changed in these markets. .

Yes. It has come down from where we initially thought. We were going to come out, the home center market as Kent mentioned was not quite as strong this fall. And what that translates into spring is anybody's guess, we are anticipating once again the spring selling season for the remodel market.

On a new construction remember though if you look pretty much all the industry analysis have-- analysts have brought down their expectations on the new construction. But we do anticipate that we will continue outpace some of the numbers that are out there today. .

Okay and then my other question is as we think about your capacity increase with respect to the new plant, how should we think about the timing of P&L cost starting to hit the income statement?.

Yes. From cash flow perspective we will start to procure assets over the back half of the fiscal year so bring $30 million. We will start to have some expense associated with the project that will likely happen in the next fiscal year as we bring in the remaining $15 million.

Then we will go live with the project approximately this time a year from now. There is certainly will be some margin impact initially until we are able to ramp up that capacity to effective state from standpoint. Having got a model result here to share with you that I know we have conversation over the couple of quarters.

There will be a drag initially until we are able to fill that line..

As I do not see if there is anyone else waiting to ask a question, I would like to turn the line back over to Eanes for any additional or closing comments. Please go ahead. .

Thank you. 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. .

That does conclude today's call. Thank you for your participation..