Glenn Eanes - Vice President and Treasurer Cary Dunston - President and CEO Scott Culbreth - Senior Vice President and CFO.

Scott Rednor - Zelman & Associates Nick Coppola - Thompson Research Group Josh Chan - Robert W. Baird Mark Zikeli - Longbow.

Good day and welcome to the American Woodmark Corporation Second Quarter 2016 Conference Call. Today’s call is being recorded, November 24, 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 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 Glenn Eanes, Vice President and Treasurer. Please go ahead, sir..

Thank you. Good morning, ladies and gentlemen. Welcome to this American Woodmark conference call to review our second fiscal quarter of fiscal 2016 ended October 31, 2015. Thank you for taking time to participate.

Participating on the call today from American Woodmark Corporation will be Cary Dunston, President and Chief Executive Officer; and Scott Culbreth, our Senior Vice President and Chief Financial Officer. Cary will begin with an overview of the quarter and then Scott will provide a more detailed review of the quarter and the future outlook.

After Cary and Scott’s prepared remarks, Cary and Scott will be happy to answer your questions.

Cary?.

Thank you Glenn and good morning to you all. As you noticed, we are changing things up a bit, as I’m not going to provide an overview of the quarter prior to Scott getting into the details. But we’re half way through our fiscal year with solid performance on both revenue and earnings.

On the revenue side, we continued to experience volatility in the market but we are pleased with our incoming demand for the quarter as well as for the first half of the fiscal year. I mentioned on our last call that we came out of our first quarter with higher backlog than we had expected tied to elevated incoming demand.

As a result, we did ramp up our internal production and brought our backlog back down to more manageable levels as we move into our third quarter. Taking a look at our revenue by channel, we continued to over-index in the new construction market with 18% growth in both the first quarter and second quarters.

This is attributed to continued market share growth and the strength of our customer base. Two key variables in this market that we are monitoring closely are labor and land shortages. In my opinion, these two variables are having a significant influence on the additional critical factor of first time homebuyers.

In many key markets, the shortages are driving labor and land prices to rise, and ultimately our home price are being impacted. Although rising home prices have some favorability, it does create challenge with regards to the affordability for first time homebuyers.

In addition and potentially even more importantly with limited labor and land, we see builders continuing to make the choice to invest in higher end homes. Therefore, I believe construction and inventory of starter homes will remain at record lows for the foreseeable future.

However, despite this bottleneck on entry level homes, new construction growth in the $350,000 to $400,000 plus home is strong, and we believe will remain so into the future. And we are well-positioned to continue to leverage this growth with our Timberlake direct service model to the nation’s top builders.

Within home center, we were up 13% for the quarter and up 4% for the first half. The first half run rate of 4% is the better indicator of the overall growth we are seeing in this market.

From a market share perspective, despite continued strong competitive promotional activity, we have been able to maintain our strong share within home centers through continued invest in our total customer experience.

Unfortunately, however, we simply have not seen the return of the customer to this market at the same levels we are seeing within the dealer business. And within dealers, we grew a very healthy 40% in the second quarter and 32% in the first half.

Waypoint is approaching close to 10% of our overall business and continues to be our greatest growth opportunity, not only due to market share gains but overall growth of the dealer business.

Interestingly, we are seeing some labor shortages in this market as well with a few of our high growth dealers reporting that they are restraining incoming orders, simply due to a backlog on installations. However, I do not believe this is going to have any sustainable impact.

From a gross margin perspective, we were up slightly over first quarter coming in at 21.9%. We continued to leverage our sales growth as well as our operating efficiencies. And I’m pleased to say that the ramp up of our South Branch expansion is going very well. And we have already begun to effectively leverage this investment.

As we look forward, there are some tailwinds but also a number of headwinds that create continued uncertainty. The labor and land shortages I mentioned are the two examples as is the lack of the first time homebuyer in the market, wavering consumer confidence, global uncertainty and the list does go on.

Yes, we do remain confident in the overall market, both in the short and long-term in our continued strategy of market differentiation by creating value through superior service. With single-family stars sitting at roughly 700,000 units, tremendous growth opportunity remains within new construction.

And we are truly well-positioned as the leader in this market with our direct to builder strategy. Our service platform has aligned us with the best builders in the country which allows for continued strong growth. And with dealers, our Waypoint business is poised to continue to grow aggressively.

Overall, we are confident in our ability to continue to win by investing in our core competencies and driving long-term, sustainable, competitive advantage in the market. With that, I’ll turn it over to Scott for the detailed financials..

Net sales were $256.3 million, representing an increase of 18% over the same period last year. Reported net income was $18.2 million or $1.10 per diluted share in the current fiscal year versus $7.7 million or $0.48 per diluted share last year.

For the quarter, the Company generated $24.3 million in cash from operating activities compared to $9.4 million for last year. For the six months ended October, year-to-date net sales were $487.5 million, representing an increase of 13% over the same period last year.

Net income was $33.3 million or $2.03 per diluted share in the current fiscal year versus $16.9 million or $1.07 per diluted share last year. For the current fiscal year, the Company generated $39.4 million in cash from operating activities compared to $18.6 million for last year.

Additional comments on sales performance, starting with the new construction market. Recognizing a 60-day to 90-day lag between start and cabin installation, the overall market activity in single-family homes was up over 15% for the financial second quarter. Single-family starts during June, July and August of the prior period averaged 632,000.

Starts over that same time period from the current year averaged 728,000. 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.

Remodel business continues to be challenging. On the positive side, unemployment continues to improve. The October U3 unemployment rate dropped to 5%, U6 fell to 9.8%. Consumer sentiment remained high at 90 in October. Existing home sales increased during the third calendar quarter 2015, have reported 12 consecutive months of year-over-year gain.

Between July and September 2014, existing home sales averaged 5.1 million units. That same period for 2015 averaged 5.5 million units, an improvement of 8.3%. Interest rates remained low in the quarter with a 30-year fixed mortgage at 3.8% in October, an improvement of approximately 24 basis points versus last year.

All cash purchases remained flat with prior year at 24%. On the negative side, the median existing home price rose 6.1% for September, 43rd straight month of year-over-year gain, impacting our consumers’ affordability index. The share of first time buyers remained low.

September reported rate was 29% which is flat to last year and remains well below the historical norm of 40%. Home ownership rates improved slightly. Percent of Americans who owned their home in the third calendar quarter was 63.7%.

Although this is a 0.3% improvement from the second quarter rate of 63.4%, keep in mind that figure was a lowest reported levels since 1967. Our combined home center and dealer remodel revenues were up 17% 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 more fluent nature of the customer base. Waypoint represents over 9% of our overall revenue and grew 40% in the quarter.

Promotional activity remained higher than the prior year for the fiscal second quarter, as we responded to competitive positioning and market conditions. The Company’s gross profit margin for the second quarter of fiscal year 2016 was 21.9% of net sales versus 17% reported the same quarter last year.

Company generated a year-over-year incremental gross margin rate of 49% for the second fiscal quarter. Gross margin was positively impacted the quarter by higher sales volumes, customer management, product mix, pricing, and improved operating efficiency as we generated favorable leverage on our semi-fixed and fixed overhead with additional volume.

Year-to-date gross profit margin was 21.8% compared to 17.2% for the same period in prior year. Year-to-date, the Company generated a year-over-year incremental gross margin rate of 66% [ph]. Total operating expenses decreased from 11.3% of net sales in the second quarter the prior year to 10.7% this fiscal year.

Through six months, SG&A improved from 11.2% of net sales to 11.1%. Selling and marketing expenses were 6.5% of net sales in the second quarter of this year compared with 7.5% the prior year. We generated leverage in selling and marketing costs through expense management and lower product launch costs.

General and administrative expenses were 4.2% of net sales for the second quarter of fiscal 2016 compared with 3.8% the prior year. The increase in our operating expense ratio is a result of increased pay for performance compensation cost.

With respect to cash flows, the Company generated net cash from operating activities of $39.4 million during the first half of fiscal year 2016 compared with $18.6 million during the same period in the prior year.

Improvement in Company’s cash from operating activities was driven primarily by higher operating profitability, lower increases in inventory levels and higher accrued expenses.

Net cash used by investing activities was $25.8 million during the first half of the current fiscal year compared with $26 million during the same period of the prior year due to a $16.5 million reduced investment in short-term certificates of deposit, which was partially offset by increased investment in promotional displays, property, plant and equipment of $16.4 million.

Company expects to spend approximately $3 million during the third fiscal quarter to complete its South Branch plant expansion.

Net cash provided by financing activities of $1.9 million decreased $0.6 million during the first half of the current fiscal year compared to the same period in prior year as the Company repurchased 108,787 shares of common stock at a cost of $7 million, a $1.9 million reduction from the prior year, and proceeds from the exercise of stock options decreased $1.9 million.

The Board authorized an additional $20 million stock repurchase program which will be used to offset our annual burn rate.

In closing, 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 the middle income consumer.

New construction market continues to improve with single family housing starts growing versus prior year, remaining above 700,000 units. Consumer confidence has improved. The middle income consumers’ 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 fourth straight quarter, and we delivered solid sales and earnings growth.

Looking forward, we maintain our expectations we shared in the last call that we will increase margin rates and grow net income in fiscal year 2016. This concludes our prepared remarks. We would be happy to answer any questions you have at this time..

[Operator Instructions]. And we will take our first question from Scott Rednor with Zelman & Associates..

Hey, good morning. Nice quarter, guys. A question on the top-line.

Now that you are about four weeks into the quarter, are your incoming orders tracking with the revenue growth that you posted the 18% in 2Q or Cary, shall I interpret some of the comments that you made that you’re seeing some of the slowdown based on some of the shortages in the market?.

Yes, I’m not sure exactly referencing as shortages. I mean, we do at seasonality obviously. So, we tend to look at as comps compared to last year and our expectation is we’ll continue to comp favorably to prior year. The forecasting is I mentioned is always a challenge. So, we have good plans.

And like I mentioned, we have good backlog and what the quarter holds we’ll see. But, we expect a good continued comps compared to prior year on revenues as whole..

I guess are the labor shortages that you referenced, are those in any way easing?.

I think it’s obviously a market decision. So what we’re seeing builders do, they’re certainly going to have to pay more for labor; there’s going to be a lag there. Ultimately I think what it is driving is a more of a reference and that they’re going to continue to make those investments in the higher level type home.

We do have some of the builders talking about getting some starts going on the entry level home, first time homebuyer but we don’t see a lot of action there. And I just feel that that really is the ultimate outcome of the shortage in labor. Yes, it does temper growth a little bit.

But when you’re talking growth of -- you say low teens or low to mid teens on the new construction market, I still feel that’s healthy growth. And it’s actually at a nice price point just because of the price of the home..

And then on the gross margins side, I guess Scott, you’d previously talked to 25% for the full year, clearly tracking ahead of that here.

But with the plant now up and running, are your gross margin incrementals going to still be in positive territory in the back half of the year?.

Hey Scott, good to talk to you again. Just to clarify that question or to clarify that answer from prior call, the 25% is our incremental gross margin rate target long-term. And as we’ve discussed, there will be some quarter where it will trend higher than that and some quarters will trend lower than that.

Certainly the last four quarters have been strong, and we’ve been over-indexing against that result. Our guidance we gave is that we expected to be able to deliver to on that 25% number for the foreseeable future. And that was going to be our continuing goal. So, we’re on line with that.

We’ve certainly gotten ahead through the first two quarters, but don’t really provide guidance on the back half of the year. So, I can’t give you a prescriptive answer as to what exactly those results will be at this point in time..

And we’ll now go to Nick Coppola with Thompson Research Group. .

So, looking at the home center growth you experienced in the quarter, losing 13% year-over-year.

Can you talk more about the key drivers there of improvement; was there any kind of low float-in or was it more reflective of the demand in that channel?.

That’s what I referenced. We really -- we had good growth in Q2 but as I mentioned on the call last quarter, we had stronger incoming, and therefore we were not able to produce and thus it in our revenue line with regards to what the real incoming was in Q1. So you really have to look at as a balance over the first half.

And yes, it’s a favorable comp to prior year; it just lags what we talk about when we talk about comps and the dealer business and so forth. So, it’s growing and home center is growing, just at really low to mid single-digit level. And that’s really what we expected to continue to going at least in the near future.

Scott mentioned that middle income consumer. When you look at medium home income levels or consumer confidence, it’s just not a lot out there, that’s almost that middle income consumer is really back in the market. I think it’s -- personally it feels pretty aligned with first time homebuyers.

It’s a domino impact and we need to get first time homebuyers back in the market and that will have a domino impact and start to flow with that consumer. And that consumer is important; it’s important. They’re important to us, very important to us, just kind of our bread and butter.

And we’ve been able to effectively move up and take care of the higher end consumer as well. But we also are very strategically focused on that future middle income consumer that x and y gent and where they’re going to shop and what they’re going to be willing to spend. .

Along those same lines, I mean you talked about the dealer segment and the more affluent part of the market over-indexing, but again it’s just really strong growth over the last couple quarters.

Is a lot of that just about coming off of a low base; and maybe can you talk a bit about higher winning volume there?.

Yes, I mean that’s our Waypoint business. We started that business about six years ago. And so, it’s anytime you are new in the market and you come in with the experience we have and the winning formula with regards to our customer experience, we have delighted, truly delighted the dealers out there with our ability to serve that market.

As a result, it’s driven pretty high market share gains. Obviously when you’re looking at starting with nothing and you build it up over six years, you’re going to have pretty favorable comps. And we do expect to have very strong comps going forward because we are gaining market share. We expect to continue to gain market share.

In addition, that market is growing, just the dealer business as a whole is growing at a higher level space than the rest of the remodel industry..

Okay. That makes sense. And then just my last question here, assuming you’ve got a little bit more color about the promotional activities on the quarter. You talked about that being up year over year.

So, primarily where is that happening and kind of talk a little bit about the competitive environment out there?.

We see it really in primarily o course in the remodel world and in home center and the dealer business. So, it’s really fairly aggressive in all fronts on all competitors. It’s I’d say with the demand rising and folks, some I guess all depends on where the capacity situation is.

But what we’ve seen is competitors are willing to go out and spend some money on really promos and so forth to try to get volume. And we’ve managed it fairly effectively. We are not going -- long term, we are not going to lock competitors to buy margin or to buy volume.

So, we’re -- we go out, we make competitive decisions to go out and maintain share and so forth. But, it has driven some of our promotional cost up.

We are not being as aggressive as what competition is in either one of those markets, both home center or the dealer business but we are being competitive in that to really maintain share in the home center and just because of our service model we are continuing to gain share in the dealer business. But in dealer we’re kind of a target right now.

I mean grow as aggressive as we have. It’s kind of become the target. So, we people have taken notice of us. And the dealer business is very fragmented from very large players to very small regional players. And we are really at the front of most people’s windows right now when they really look at competition and with the share we’ve gain.

So, we’ve kind of become a target with regards to folks’ promotional activity..

And we will now go to Josh Chan with Robert W. Baird. .

Hi, good morning. Congrats on a very good quarter.

I wanted to ask about any potential raw material tailwinds that you are expected to have in the second half? And with those potentially have being in place, is there any possibility that you could meaningfully exceed your 25% incremental gross margin target for the year, just wondering how all that adds together?.

Yes, so with respect to raw material prices, I guess there is always the possibility that they can drift up or drift down over time. They’ve been fairly stable as of late. We have seen some recent increases in items like particleboard and we will start to see that reach to our P&L but they’ve not been severe.

So, at this point in time today, I don’t have anything in front of me that’s alarming, as it relates to this input cost. To your question on the incremental gross margin, really, I’ve referenced back the same answer that I give to Scott, a little bit earlier in the call. 25% is our long term goal.

We are going to have quarters that are better and quarters that presumably will be worse, but we want to be able to average and consistently deliver that over the long term. Certainly trending higher than that over the trailing 12 months. And we will continue to keep you updated on our progress on a quarterly basis as we go forward..

Alright, that sounds good.

And if I can ask about the Waypoint business is there a certain portion or segment of the dealer market that you’re specifically targeting in terms of penetration or would you view the entire dealer market which is fairly large as the opportunity set for the Waypoint brand?.

Yes, I mean I’d say it’s folks can segment the dealer business quite differently depending on how you go after it. It’s really in the Sunbelt but we are in dealers across the country. It’s really a more of a matter of aligning with dealers that are aligned with our service models, so those obviously that have a desire to grow.

We definitely approach our dealers from a business partnership perspective are what we call our TBMs, our territory business managers, or sales reps are little more sophisticated with regards to ability to walk in and really work with dealers with regards to their marketing strategy and promotional campaigns and product strategies and so forth.

And certain dealers are -- really appreciate that and take advantage of it and some don’t. So, really it comes down to more aligning ourselves with the dealers that we feel we can grow with. So that presents a very wide open range for us to go out and talk to dealers. We avoid conflicts.

So, we are very sensitive with regards to signing up dealers that could conflict with others. But for the most part, it’s been really the single to maybe some dealers might own two to three stores.

So, there is a large growth opportunity in the future as you start to align yourself with perhaps larger regional players that might own multiple dealerships or might distribute into geographical areas and so forth. So, we are pretty open to.

We’ve got a very aggressive growth strategy and we continue to refine it, learn, and utilize our targeted approach to the dealers. But I can’t really tell you, it’s a very specific other than just aligning with our strategy..

Thank you for that one. And my last question is, the balance sheet continues to be very strong and obviously the end market is improving or has been improving.

So, any changes in terms of how you are thinking about utilizing the balance sheet for growth or cash returns or any other purposes?.

I think it goes back to what I mentioned before, we’re doing a lot of research into the market that really that middle income, we always call it kind of the western side of the product offering. And that middle income consumer that appears to not really -- they are coming back slowly but not really back aggressively.

I think the future for us really rests in defining the ultimate solution for that consumer, recognizing it is going to be and x and y gen consumer that’s going to drive this business into the future. I mean we have a strong platform today that really serves the current consumer and I’ll call obviously the baby boomer consumer.

So, we are doing a lot of research. And any large future investments you may see us do in the future really going to be designed to make sure we establish a platform that will carry this Company forward for many, many years into the future. So, I think there’s lots of an opportunities out there.

It’s just a matter of choosing the right one and then moving forward with it. And we are certainly progressing with that strategy..

[Operator Instructions] And we will now go to Garik Shmois with Longbow..

Hey guys, good morning. This is Mark Zikeli on for Garik.

Just on the quarter, the 18% new construction comp, just curious how that varies by region; if you could just call out any stronger or weak market that would be pretty helpful?.

Yes, I mean we are -- it does vary by quarter. We are seeing regionality and we are seeing volatility even by quarter. We talked about the Sunbelt, the lots of the Southwest, Phoenix; you’ve heard quite a bit of positives out of that region.

They were -- went through a big growth spurt last spring and actually lot of -- even lot of our customers and lot of the experts out there thought it would level off in early summer and it just kept right ongoing, it’s continued to go; it’s growing strong.

So, it’s really being hit by the bottleneck, I talked about with regards to labor and land shortages. They are continuing to work through it. So, when we talk about throttling back, it throttles back from very high growth levels to manageable levels, but it’s still growing pretty aggressively. California is up and down.

It’s a little bit tougher market to serve. It is growing. We are starting to see pretty decent growth down, I am going to say the Southeast; it’s in kind of the Carolinas and Georgia. Florida remains strong and the Northeast. A little more volatility in Northeast, but the Northeast is strong as well.

So, it’s really that Sunbelt that drives a lot of our growth..

Just looking out to 2016 as well, just curious how increased interest rate environment likely change your thoughts on new housing starts to just your overall top-line expectations? Thank you..

Yes, I will take one piece and Scott may have something to add to that as well. But it’s all relative, for those of us that have seen really high interest rates, we think of a small interest rate -- high, it’s been significant, there is a pretty strong emotional tie to it. And realty is it will impact the affordability for first time homebuyers.

Given the fact that they are really absent today, I don’t expect any significant impact on that percentage of first time homebuyers in the market. It may further delay it.

I think it really depends not only in this percentage but it’s against a steady year-over-year increase in interest rates, it will go into impact affordability and the emotional context of the first homebuyer. One impact it will have, it’s hard to really understand the emotions; I think it will be short-term.

I think there is bigger economic factors in the play like median household income and so forth is a big factor along with a number of others. So I think it will have an impact. I don’t think it’s going to be significant though. At least in the market that exists today, I don’t think it’s going to be significant.

I think it could delay, further delay the return of the first time homebuyer though..

Alright. As I do not see there are any -- there is anyone else waiting to ask a question, I would now like to turn the line over to Mr. Eanes for any closing remarks. Please go ahead, sir..

Well, thank you all for taking time to participate on our second quarter conference call. Since there are no additional questions, this concludes our call. Speaking on behalf of management of American Woodmark, we appreciated your continuing support. Thank you and have a good day..

Ladies and gentlemen, this does conclude today’s presentation. We thank you for your participation..