Cary Dunston - President and CEO Scott Culbreth - SVP and CFO.

Scott Rednor - Zelman & Associates Tim Wojs - Baird Jeffrey Stevenson - Longbow Research.

Good day and welcome to the American Woodmark Corporation First Quarter 2018 Conference Call. Today’s call is being recorded, August 22, 2017. We will begin 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 maybe 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 Scott Culbreth, Senior Vice President and CFO. Please go ahead, sir..

Good morning, ladies and gentlemen. Welcome to American Woodmark’s first fiscal quarter conference call. Thank you for taking time to participate. Joining me today is Cary Dunston, President and Chief Executive Officer.

Cary will begin with a review of the quarter and an update on our strategy and I will add additional details regarding our financial performance. After our comments, we will be happy to answer your questions.

Cary?.

Thanks, Scott, and good morning to you all. Our first quarter of the new fiscal year was not without a few challenges and despite these challenges, we grew revenue by 7%, continuing to outperform our key competition and the industry.

Our new construction and dealer business has outpaced both the industry and competition, while home center continued to lag.

Looking specifically at new construction, for the quarter, we grew our Timberlake direct business 13% and our overall builder business by 12% over prior year, outpacing single family home start growth of closer to 9% over the same period. We continue to invest in and strengthen our direct-to-builder competitive advantage.

I did want to touch briefly on the news that is circulating related to one of our direct builder customers making the decision to shift business to another cabinet company. The reality is, given our success and significant market share, we recognize that competition will always be aggressively pursuing our business.

Although we’re extremely confident in our competitive advantage based on a direct service model, there will be times such as this when we lose the contract.

With this specific customer, which we have the utmost respect for, in the coming months, we are going to ensure they have the smoothest and most professional transition possible and we’ll always appreciate the opportunity to supply them again in the future.

From a revenue impact perspective, it is important to know that strategically in the markets in which we operate, we have been very careful over the past several years to properly balance our aggressive growth with our need to continue to provide an exceptional customer experience.

As such, opportunity typically exists for us to pursue additional direct business when deemed strategically appropriate. Our team has been very aggressive at successfully backfilling this impending loss in volume and as a result, we do not expect any change in our fiscal year ’18 top line growth forecast within new construction.

Looking at single family market as a whole, industry messaging continues to be very mixed. The industry growth was a bit slower than expected in the first half, however, stronger growth is expected going forward. Although land cost continues to impact home pricing, significant land development is underway in key markets.

Regarding entry level homes, we continue to hear that more builders are beginning to make the transition, however, the data related to first time homebuyers shows a percentage of total starts still lags historical averages. Headwinds remain with regards to labor shortages, aggressive home price inflation and credit availability.

Long term, few will argue with the remaining industry growth, but how the market actually trends quarter to quarter and how bumpy of a ride it will be is open to much debate. Taking a look at our dealer channel, we grew the business a very healthy 20% over prior year. Our messaging remains consistent around the dealer business.

Dealers, as a whole, continue to outpace the home center market due to the more affluent consumer and we continue to gain market share and outpace industry growth. Regarding our home center business, we unfortunately saw a decline of 3% for the quarter.

We have been predicting that due to our increase in promotional spend, share levels will return to more normalized levels. The reality is, although we moved up, promotional levels continue to escalate at both the home center and competitive levels.

As with all strategic levers, we're very focused on those that create the greatest maneuverability and return on our investment. As such, I simply do not feel that the existing high levels are sustainable and I remain hopeful that promotional costs will trend back down.

As I state every quarter, our home center customers remain a vital part of our business and will do so in the future. We remain committed to make strategic investments with our home center partners that will allow us to leverage our industry leading service platform and drive additional customers into the store.

Looking forward, our sales and marketing teams are fighting hard to restore share without sacrificing margin. From a gross margin perspective, we finished the quarter at 21.1%. Margin was impacted by higher healthcare, logistics and material costs compared to prior year.

Operationally, our team continues to manage our strong growth very efficiently through our entire system. Looking forward, logistics costs will continue to be a challenge in all the industries, however, our logistics team remains very focused on driving system efficiency to help offset some of the cost increases.

In addition, although not completely definitive, the anti-dumping suit filed by Chinese plywood manufacturers will impact most within the cabinet industry with material inflation. On operating margin, we remain pleased with our performance of 11.1%, the highest sustained levels in the company's -- history of the company.

The most significant impact versus prior year was related to the previously mentioned healthcare cost. On net income, we generated 22.3 million in the quarter, up 3% from prior year.

Regarding our strategic growth work that is underway, we continue to be extremely focused on viable options to expand our product offering, both below and above our current positioning. As expected, the funnel of potential M&A opportunities within our industry is narrowing, but not yet closed.

As such, in conjunction with evaluating all potential M&A opportunities, we are very focused on organic growth solutions, particularly in the lower price point area. Our operations team is diligently working on Greenfield and Brownfield investment solutions. The question is not if we will expand, it is how we will do it.

We look forward to communicating our decision in the near future. In summary, although forecasting our market remains as challenging as ever, overall industry outlook remains very favorable.

Our first quarter has some challenges, but we remain optimistic about our ability to continue to profitably grow our business and over-index the industry and our competition. We firmly believe that both the industry growth and our ability to continue to expand our market share warrant strong investment.

As such, we remain extremely confident in our long-term strategy. With that, I'll turn it over to Scott for the detailed financials..

Thanks, Cary. The financial headlines for the quarter. Net sales were $276.8 million, representing an increase of 7% over the same period last year.

Net income was $22.3 million or $1.36 per diluted share for the first quarter of the current fiscal year compared with $21.7 million or $1.32 per diluted share for the first quarter of the prior fiscal year.

The company benefited $0.13 per diluted share in the first quarter of the current fiscal year and $0.06 per diluted share in the first quarter of the prior fiscal year from a lower tax rate due to a benefit from stock-based compensation transactions.

For the quarter, the company generated $26.6 million in cash from operating activities compared to $32.9 million for last year. The new construction market continues to perform well, recognizing a 60 to 90-day lag between start and cabinet installation, the overall market activity in single family homes was up over 9% for the financial first quarter.

Single family starts during March, April and May of the prior period averaged 749,000 units. Starts over that same time period from the current year averaged 815,000 units. Our new construction based revenue increased 12% for the quarter.

As we've stated on prior calls, 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. On the positive side, unemployment continues to improve.

The July U3 unemployment rate dropped to 4.3%, U6 dropped to 8.6%. Both measures were lower than the July 2016 reported figures. Existing home sales increased during the second calendar quarter 2017, but a slowing pace as inventory remains low. Between April and June of 2016, existing home sales averaged 5.48 million units.

At same period for 2017 averaged 5.57 million units, an improvement of 1.6%. All cash purchases in June were 18% down from 22% from last year. On the negative side this year, first time buyers declined. The June reported rate was 32%, down from the prior year rate of 33%.

The median existing home price rose 6.5% to $263,800 for June, impacting our consumers’ affordability index. Interest rates increased in the quarter with the 30-year fixed rate mortgage at 3.97% in July, an increase of approximately 53 basis points versus last year.

Consumer sentiment dropped to 93.4% in July versus the 98.5% recorded at the beginning of the calendar year and 97.1% recorded in May. Home ownership rates remained low versus historical averages. The percent of Americans that owned their own home in the second calendar quarter was 63.7% or 0.8% above last year's rate.

Our combined home center and dealer remodel revenues were up 1% for the quarter with home centers declining 3% and Waypoint growing 20%. Promotional activity remained higher than the prior year for the fiscal first quarter as we responded to competitive positioning and market conditions.

The company's gross profit margin for the first quarter of fiscal year 2018 was 21.1% of net sales versus 23% reported in the same quarter of last year. Gross margin was negatively impacted in the quarter by our healthcare costs, material inflation and transportation cost.

You may recall during last year's first fiscal quarter call, we noted a drop in healthcare costs that contributed 100 basis points of operating margin improvement. During our second quarter call, we noted a return to a normalized trend that was higher than the prior year.

Our current fiscal year quarter was impacted by approximately 140 basis points due to the comps just noted. Total operating expenses decreased from 10.6% of net sales in the first quarter of the prior year to 10% this fiscal year. Selling and marketing expenses were 6.6% of net sales in the first quarter this year compared with 6.4% in the prior year.

The increase in selling and marketing costs is a result of launch cost timing and higher customer display cost. General and administrative expenses were 3.4% of net sales in the first quarter this year compared with 4.2% in the prior year.

The decrease in our operating expense ratio is a result of leverage from increased sales, reduced incentive compensation and ongoing expense controls.

With respect to cash flows, the company generated net cash from operating activities of $26.6 million during the first quarter of fiscal year 2018 compared with $32.9 million during the same period in the prior year.

The decline in the company's cash from operating activities was driven primarily by higher inventories to support increased sales and lower increases in accounts payable.

Net cash used by investing activities was $21.2 million during the first quarter of the current fiscal year compared with $40.6 million during the same period of the prior year, due to a $25.5 million reduced investment and certificates of deposit, which was partially offset by increased investment in property, plant and equipment.

Net cash used by financing activities of $6.8 million increased $2.5 million during the first quarter of the current fiscal year compared to the same period in the prior year as the company repurchased 56,700 shares of common stock at a cost of $5.6 million, a $0.5 million increase from the prior year and proceeds from the exercise of stock options decreased 0.8 million.

In closing, our new construction and dealer business continues to over-index the market. Our homes center market share declined, promotional environment remains heavy, but we are committed to recovering and maintaining our historical share position. The company still expects that it will grow its total sales at a high single digit rate in fiscal 2018.

Despite material inflation and transportation rate increases, the company also expects to improve margins for fiscal 2018. This concludes our prepared remarks. We'll be happy to answer any questions you have at this time..

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

I just wanted to clarify, given the comments on the one customer loss and the no change to your fiscal ’18 outlook, just hoping you guys could get a little bit more specific, within the high single digits, what's assumed for new construction and do you consider the 1Q growth above or below the high single digit guidance as we think about the balance of the year?.

If you recall, going back to the end of last year, we basically said the single family growth would be around 8% to 10% and we would over index that. We continue to feel that. So the growth we experienced in the first half was a bit lighter than we anticipated.

Most of what you're hearing from the industry right now out in the field particularly is that it has picked up. So we do expect the growth to rebound in the second half. And ultimately, we just -- like I said on my notes, are not expecting any long term impact or even a fiscal year impact from the loss of that customer.

We've been able to manage to backfill that..

And on the gross margin side, Scott, would you say the healthcare -- can you maybe just give us a sense, does that headwinds, it sounds like it goes away in 2Q, but was that consistent with your expectations here in 1Q? I just wanted to maybe clarify if you have visibility on the variability of that cost item..

Yes. So as we said and we went through our planning cycle, we did expect to have an increase to be unfavorable in the first quarter. So that was anticipated. The degree to which we felt the increase was, it was elevated.

So, it was higher than our planning projections were, but we were expecting that to come through because it was such an artificially low period in the first quarter last year..

And then just lastly, Cary, for you.

The commentary on, we will expand, it's not if, it's how, were you trying to signal that you might go at this 100% organically, is that incremental or are you just reiterating that maybe something didn’t get done this quarter, but it hasn't changed your strategic outlook?.

Nothing has really changed strategically. We've been approaching that in two parallel paths, one through M&A analysis and secondly, we have been working hard internally.

Obviously if something does not pan out externally is that we also want to have an internal solution that is a very viable option that allows us to profitably grow in that opening price point category..

[Operator Instructions] We'll take our next question from Tim Wojs with Baird..

I guess maybe just on, I guess one of the questions I have is really more centered on mix and maybe what you're seeing within the new construction channel, maybe how to think about the impact of maybe the first time home buyer coming back and how the move to maybe a little bit more of an opening price point might help you guys protect gross margins in that scenario?.

There's a lot in there. Strategically, I’ve been talking for some time as really the mix does start to shift towards more of an opening price point consumer. Overall big picture is much better for the industry. I think it will unleash some pent-up demand, both in R&R as well as new construction, move up and move down buyers and so forth.

So I think for the industry as a whole, it’s very positive. For us, it will be very positive.

Also from a mix shift perspective, as you move down towards the opening price point, you're going to see your take -- move down and that can be a challenge for most in our industry with regards to the margin, which is why we're very focused on that opening price point solution.

So I think the bigger question is, right now, we're just not seeing a big shift towards that. The good thing is we, like I said earlier is we can, I will say, control our mix. We do have influence over our mix on obviously what we bid. Pricing is still very high out in the market right now. The average square footage home is still very high.

We're seeing some markets that are expanding on the opening price point, but it's fairly limited really with regards to the impact on mix.

We're seeing -- still continue to see a favorable mix in our industry from a pricing point perspective, but it will come, it has to come and that's just why we're very strategically focused on finding a solution for that lower price point and if it means, we do it organically, we do it organically, but we absolutely are going to find a solution..

Okay.

And does that just really mean like a different manufacturing process just to make it a little more efficient?.

Yeah. Our platform today is really designed for that stock and stock plus. So it's a higher price point that you’d consider for opening price point. We can cover it and we do that today. I mean, certain mix of our business is opening price point today.

But to get extremely efficient at high volume, yeah, you want to open really a different platform that's got a, I’ll say less complex with regards to the SKU count, running a higher volume lower SKU operation. And it also opens the door for us like we've communicated to potentially get another market such as multifamily.

We've got a wonderful service platform out there that we can leverage. We just need a product to go out there and really go after that business and take market share..

And then Scott, maybe just to clarify, you said that margin should still be up in fiscal ’18, is that both gross and EBIT?.

Correct..

Okay. And then last question just competitively, some of your competitors have exited the builder direct market over the last three or four years, are you seeing any more re-entrants into that market? I'm just curious if growth is faster in new construction over the next couple of years.

Do you see some of your competitors maybe reentering that market in a bigger way?.

No, I mean they're still in it. It’s just a different model, so they've moved out of the direct [indiscernible] market. And no, I've not seen a shift in that.

We are really the only one that still remains with a heavy direct model, particularly on a national level and I don't foresee that changing just because of the capital investment required to go out and do that..

[Operator Instructions] We’ll go next to Garik Shmois with Longbow Research..

Hi. This is Jeff in for Garik. I had a question on gross margin first.

Kind of moving forward, what is your updated guidance on raw material inflation? And on top of that, outside of the increased logistics cost that you mentioned during the call, is there anything else we should be taking into account?.

So there are a couple things in there. Nothing else that I would say you need to be thinking about beyond the transportation arena, fuel and then core input costs and we've seen increases in liner board and plywood that Cary referenced earlier. As we look forward, we're not seeing anything that indicates any major change in hardwood pricing.

So we think those are the only elements that are facing us today and really the question for our organization that we're evaluating is what we do from a pricing standpoint and we are finalizing plans as we speak on exactly how we want to address that forward-looking..

And then it sounds like promotions have picked up at the home center channel.

Can you talk about how the competitive environment moved throughout the quarter and as we head into the holiday season moving forward, do you expect them to further pickup?.

Yes.

The first part of the question on competitive, as we have seen an uptick, it's really just more with regards to the percentage of the promotional cost that they're willing to fund themselves versus really where we're coming in and the return on that investment is where, I think, we're struggling the most with regards to how high we’re willing to go.

There is a chance. I guess I continue to remain hopeful that promotional costs will level out and eventually come back down. I think we need to see R&R increase in our category, just in general to get consumers out there and get them buying remodeling their kitchen or get back in the home center.

Until that happens, it's really hard to predict what promotional costs are going to do, particularly going into the holiday season. I'd like to hope that they don't elevate, but we've not accurately predicted promotional cost for quite some time now to be honest with you. So I can't really give you a solid answer there..

That does conclude today's question-and-answer session. At this time, 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. Thank you for taking time to participate..

This does conclude today's conference. Thank you for your participation. You may now disconnect..