Good day, and welcome to the American Woodmark Corporation First Quarter 2016 Conference Call. Today's call is being recorded, August 20, 2015. 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 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 of 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 Scott Culbreth, Senior Vice President and CFO. Please go ahead, sir. .

Good morning, ladies and gentlemen. Welcome to this American Woodmark conference call to review our financial results for our first fiscal quarter ending July 31, 2015. Thank you for taking time to participate. Joining me today are Cary Dunston, President and Chief Operating Officer. .

The financial headlines for the quarter. Net sales are $231.2 million, representing an increase of 9% over the same period last year. Reported net income was $15.2 million or $0.92 per diluted share in the current fiscal year versus $9.2 million or $0.59 per diluted share last year.

For the quarter, the company generated $15 million in cash from operating activities compared to $9.3 million for last year. .

Some additional comments on sales performance starting with the new construction market. Recognizing a 60- to 90-day lag between start and cabinet installation, the overall market activity in single-family homes was up over 6% for the financial first quarter. Single-family starts during March, April and May for the prior period averaged 642,000.

Starts over that same time period from the current year averaged 683,000. Our new construction-based revenue increased over 18% for the quarter. As previously stated, we continue to over-index the market due to share penetration with our builder partners and the health of the markets where we concentrate our business. .

The remodel business continues to be challenging. From a positive side, unemployment continues to improve. The U3 unemployment rate dropped to 5.3%, and U6 fell to 10.5% for the second calendar quarter of 2015. Consumer sentiment remained high at 93.1 in July.

Existing home sales increased during the second calendar quarter of 2015, with June at its highest annual rate in over 8 years. Between April and June of 2014, existing home sales averaged 4.9 million units. That same period for 2015 averaged 5.3 million units, an improvement of 8.5%.

Interest rates remain low in the quarter with a 30-year fixed-rate mortgage at 3.98% in June, an improvement of approximately 18 basis points versus last year. All cash purchases fell versus the prior year. 22% of all transactions were paid in cash in June versus 32% last year. .

On the negative side, residential investment as a percent of GDP for the second calendar quarter of 2015 remained flat at 3.2%. The index has remained below the historical average of 4.6 from 1960 to 2000. Homeownership rates also continue to decline. The percent of Americans who own their own home in the second calendar quarter was 63.5%.

This is the lowest reported level since 1967. The share of first-time buyers remains low but is slowly improving. The June reported rate was 30%, which is well below the historical norm of 40%. The median existing home price rose 6.5% for June, the 40th straight month of year-over-year gains, which impacts our consumers' affordability index.

The average of $236,400 surpassed the previous peak in July 2006. .

Our combined home center and dealer remodel revenues were flat for the quarter. We continue to maintain our share in the home center channel, and the dealer channel over-indexed the remodel market due to the more fluent nature of their customer base. Waypoint represents over 9% of our overall revenue and grew greater than 20%.

Promotional activity was higher than the prior year for the fiscal first quarter as we responded to competitive positioning and market conditions. .

Including the new construction channel, incoming orders outpaced our shipments for the quarter, resulting in a healthy backlog as we head into the second quarter, key drivers associated with incoming demand exceeding our forecast for the quarter and the inherent delay in ramping up production. .

Regarding gross margin performance. The company's gross profit margin for the first quarter of fiscal year 2016 was 21.7% of net sales versus 17.5% reported in the same quarter of last year. The company generated a year-over-year incremental gross margin rate of 67% for the first fiscal quarter.

Gross margin was positively impacted in the quarter by higher sales volume, customer management, product mix, pricing and improved operating efficiency as we generated favorable leverage on our semi-fixed and fixed overhead with additional volumes. .

Regarding operating expenses. Total operating expenses increased slightly from 11.3% of net sales in the first quarter of the prior year to 11.4% this fiscal year. Selling and marketing expenses were 6.8% of net sales in the first quarter of this year compared with 7.3% in the prior year.

We generated leverage in selling and marketing costs through expense management and lower product launch costs. General and administrative expenses were 4.6% of net sales in the first quarter of fiscal year 2016 compared with 4% in the prior year.

The increase in our operating expense ratio was a result of increased pay-for-performance compensation costs. .

With respect to cash flows. The company generated net cash from operating activities of $15 million during the first quarter of fiscal year 2016 compared with $9.3 million during the same period in the prior year. The improvement in the company's cash from operating activities was driven primarily by higher operating profitability.

Net cash used by investing activities was $15.3 million during the first quarter of the current fiscal year compared with $3.3 million during the same period of the prior year due primarily to increased investment in property, plant and equipment. We have spent approximately $18 million for our South Branch plant expansion.

The company expects to spend $7.5 million in the second fiscal quarter and $2.5 million in the third fiscal quarter. We remain on time for preproduction equipment runoff during the second quarter. .

Net cash provided by financing activities was $3.8 million during the first quarter of the current fiscal year compared with a $3.6 million use of cash during the same period of the prior year.

The company repurchased 30,555 shares of common stock at a cost of $1.8 million, a $2.3 million reduction from the prior year and realized increased proceeds from the exercise of stock options of $3 million. .

In closing, the remodel market continues to be a challenge, with the dealer channel continuing to outperform the market with a more fluent customer base, while the home center channel continues to lag the market with their middle-income consumer.

The new construction market appears to be improving, with single-family housing fiscal year starts growing approximately 13% versus prior year to over 700,000 units. Consumer confidence has improved, but the middle-income consumer's willingness to spend on a new home or begin big-ticket discretionary home improvement projects remains low.

Although the market remains uncertain, we continue to be pleased with our progress. Our gross margin rate improved sequentially for the third straight quarter, and we delivered solid sales and earnings growth. Looking forward, we maintain our expectations we shared in our last call. We will increase margin rates and grow net income in fiscal year 2016.

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This concludes our prepared remarks. We'd be happy to answer any questions you have at this time. .

[Operator Instructions] We'll go to Nick Coppola with Thompson Research Group first. .

This is Steven Ramsey on for Nick.

Can you guys talk or just give any more details about your market share gains in the dealer channel?.

Yes, we're -- as you know, Waypoint, we -- Scott talks a lot about the dealer channel and how we over-index. For the first time, we gave you a little bit more detail this time with regards to some share growth or some revenue growth. It's, we still say, is an important market for us.

It's, let's say, of all the channels, they were still a lower part of our business. So it's one that has a lot of opportunistic growth ahead of us and one of our biggest investment opportunities, I think, as well to continue to grow.

If you look at the market as a whole from a remodel perspective, the dealer channel makes up roughly about 75% of it compared to what we typically refer to as a home center. And we're still -- even though we're growing, we're still a smaller player.

But when you consider the market share, the opportunity that's out there, that's what really makes it the biggest growth opportunity for us. So it's one that we're going to continue to grow, continue to invest in.

And where it takes us strategically is something we spend a lot of time talking about, and it's one where we're going to continue to invest in. So I can't really give you any specific share numbers. It's a very, very diversified market, a lot of small players out there. Certainly, all the big players are in it, but there's a lot of regional players.

In fact, when you get to certain regional markets, some of the #1 competitors we might have could be very small regional players that deal in semi-custom and custom sides of the market. So it's really hard to go out and give you a specific market share. But it's a huge opportunity for us.

We're a disruptor in the market right now, to be very honest with you. Based on -- it's our core competency that we talk about in every one of our channels, which is service, and we brought a model to that business on the dealer side that is winning. And it's resulting in a very aggressive share growth for the company. .

Excellent. And then a follow-up there on that market, my last question.

Is the dynamic, the competitive dynamics of that market changing much with activity from bigger players and peers in the cabinet market?.

Not really. I mean, there are some larger players that, once again, I think, because they -- we are considered a pretty significant threat to the market, you're seeing some promotional activity that's targeting our Waypoint business.

We're not really seeing it being very effective out there, once again, just because dealers, they will -- they want the standard market conditions and they want competition within their dealers, and we provide a model that, like I said before, is winning, that both the dealers are happy with, the designers are happy with and customers are happy with.

So yes, I think there's always different strategies that competitors are taking to try to slow our growth or even knock us out of certain dealers. And obviously, up to now, it really has not been effective, and we see more opportunity ahead than not. .

Our next question comes from Tim Wojs with R.W. Baird. .

I guess just on gross margins. There were 4 or 5 things, Scott, that you had listed in the prepared comments as being benefits. And I was wondering if there is a way to kind of think about how each of those pieces actually impacted gross margin this quarter. .

Yes. So I know that's a question we've had in the past trying to break down the key elements and the drivers there. We've not typically given that level of disclosure. What I can tell you is there's a number of factors, obviously, that impact our performance. And in the period, we had a good result.

The factors that impact us are things like yields on lumber scrap throughout the manufacturing process; fuel prices are, of course, an impact; our material input costs. And then do we have operational projects in place to reduce cost.

And the answer is when you net those together, we did have a favorable result in the period, but operational projects has been one of the key drivers for us. So our manufacturing team has done an excellent job of attacking material cost, labor cost, overhead cost and getting efficiency gains there.

We've also been able to get some improvements in yield. Input cost, we've seen some relief. I'd say it's a more stable environment than what we were experiencing in prior periods. .

Okay. Okay. And I guess that was going to be my next question. It was just in terms of input, kind of wood costs, I mean, have we seen -- it sounds like there might have been some benefits, but it's more -- the input costs aren't necessarily down, it's just that they're more stable. .

Yes. One of the things we have as a challenge is based on the species you're buying as well as the grade that you're buying. If you look, a 50,000-foot level, oak and hard maple, you look at the industry and we're seeing some drift down in pricing there.

But on the flip side, we've seen cherry and soft maple be flattish, really, from a period-to-period standpoint. And then within each of those species, again, you start looking at the grades, you get a different answer. But I would say, it's definitely been more stable.

It's not been on an increasing slope, it's been on a -- more of a flattish slope over the last couple of quarters. .

Okay. Great. That's helpful.

Then I guess just in general, I mean, as you kind of look at the quarter and you look at the outlook, was there anything in the quarter that surprised you relative to plan? And I guess as you look forward over the last couple of months, is there anything that has changed either macro-related or company-specific that would make you change how you think of the full year?.

Nothing specific really internally that we would step back and say it was a surprise. And we've talked a lot about our 2019 vision and we've got some key initiatives. And Scott mentioned, we are very, very focused on those variables that we can control.

And even though we got a lot of fluctuation in raw materials, we have a lot of projects focused on those improved efficiency and so forth. But Scott did mention the healthy backlog, a little bit of a surprise, but a positive one.

We have a good amount of backlog just based on the incoming demand that we have and we operate our manufacturing platform, as most do in our industry, that provide SOS cabinets on a backlog to level-load production. So it takes time to ramp up production because you're out hiring in labor and so forth. So we had a good incoming really in all channels.

And we are over-indexing, as we mentioned, in the dealer and new construction as we have been for many quarters now. And so that was a good pleasant surprise, and -- but it's volatile. We sat here a year ago, looking forward and hoping we're going to have a good fall selling season.

And we're sitting here now trying to figure out what's going to happen in the fall. So it's inaccurate, nor has anybody been accurate, I think, for many years now in trying to guess what's going to happen. But right now, we're sitting with a healthy backlog. .

[Operator Instructions] We'll go to Scott Rednor with Zelman & Associates. .

How much is the backlog up year-over-year? If you could help us quantify that versus what you reported in revenue growth for the quarter. .

Yes. We typically don't get down to that level of disclosure on backlog because I know you can start putting a lot of numbers together and look to the future. But it's -- we just say it's favorable.

And it's really hard to, for me, to even get a definitive number because that's all misleading because there's so many other variables that go into that formula with regards to our production and how we set a production plan together that actually results in the output or the revenue piece of it.

So I don't want to really mislead anybody and go out and give you a specific number and people start guessing on [ph] form those to figure out where our future production and net sales will be. But it has improved, it's healthy, and we don't even look at it too much.

We do look at it year-over-year, but it's really more from our internal forecast and ability and how we schedule our production looking forward. And as I mentioned, we are ramping up our production right now based on backlog and based on the current outlook. The new construction market is looking very favorable.

It -- I know it depends on what paper you pick up, but the -- particularly out west in the Phoenix regions and out in California and so forth, it's growing pretty well. And even down in Florida, it's looking good too. So we see strong favorability ahead. You're starting to see builder confidence is the highest it's been in many, many years.

And so we look at all those indicators. So that, combined with our backlog right now, we are ramping up production, but I'm really not willing to give you a definitive number there. .

Fair enough.

Was there an associated margin lift in the quarter because you -- with that favorable backlog or favorable incoming orders, Scott?.

No, I wouldn't say that, that had any significant impact on the margin in Q1. .

Okay. And when we think about for the full year, I believe, last quarter, you had said that you thought you could get pretty close to that 25% incremental gross margin target even with the plant coming on in the back half of the year. So I'm just kind of curious to get your updated thoughts there.

Do you feel better or worse about hitting that target as we sit here today?.

Yes. So I wouldn't change my full year outlook, but certainly, after 1 quarter being a good result, you got to feel a little bit about the ability to hit the full year results. .

As I do not see that there is anyone else waiting to ask a question, I'd like to turn the call back over to Mr. Culbreth for any closing remarks. Please go ahead, sir. .

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. .

Thank you. And again, ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation. You may now disconnect..