American Woodmark Corporation

Welcome to the American Woodmark Corporation second fiscal quarter 2021 conference call. Today's call is being recorded, November 24, 2020. During this call, the company may discuss certain non-GAAP financial measures included in our earnings release, such as adjusted net income, adjusted EBITDA, adjusted EBITDA margin, free cash flow, net leverage, and adjusted EPS per diluted share. Earnings release, which can be found on our website, AmericanWoodmark.com, includes definition of each of these non-GAAP financial measures, the company's rationale for their usage, and a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures. We also use our website to publish other information that may be important to investors, such as investor presentations. We will begin the call by reading the company's safe harbor statement under the Private Security Legation Act of 1995. All forward-looking statements made by the company involve material risk and uncertainties and are subject to change based on factors that may be beyond the company's control. According to 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 SEC 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'd now like to turn the call over to Mr. Paul Johimchik, Vice President and CEO. Please go ahead, sir.

Good morning, ladies and gentlemen. Welcome to American Woodmark's second fiscal quarter conference call. Thank you for taking the time to participate. Joining me today is Scott Caldreth, President and CEO. Scott will begin with a review of the quarter, and I'll add additional details regarding our financial performance. After our comments, we'll be happy to answer your questions. Scott? Thank you, Paul, and thanks to everyone for joining us today for our second fiscal quarter earnings call. I hope that you and your loved ones continue to remain safe. Our teams did an exceptional job of delivering results in the quarter. Our second quarter sales were up 4.8%. Within new construction, our business declined 7.4% versus prior year as we felt the impacts from COVID related restrictions on prior period starts. Our Timberlake direct business comp positive low single digits on units, while our frameless PCS business continued to comp negatively in Southern California. Our national builders are optimistic for the remainder of our fiscal year, due to strong order growth over the prior months. Capacity of the manufacturing and trade base to keep up with demand, rising prices, and potential COVID-related restrictions could slow future build rates. Lot supply and community account growth are also key indicators we're watching closely. Our incoming order rates for the Timberlake business increased throughout the quarter, building backlog across our MTO platform. As a reminder, we level load our production on the MTO platform. Our incoming order rates across both the new construction and remodeled businesses exceeded shipments for the quarter. Our teams have been increasing production levels, which will drive incremental sales in our next fiscal quarter and improve backlog levels. Looking at our remodeled business, which includes our home center and independent deal and distributor businesses, revenue was up 14.1% the prior year. Within this, our home center business was up 18%. Our made-to-order remodel platform recovered during the quarter, and delivered a low single-digit positive comp. Our stock business was up over 25% as pro and DIY demand increased. Our frameless offering also returned to strong double-digit positive comps as well. With regards to our dealer-distributor business, we were up 0.6% for the quarter, with our core waypoint offering up double digits. Demand has improved with dealers and distributors reporting elevated consumer and builder interest, especially within the value stock segment. The ability of dealers and manufacturers to support the demand in the quarter has created a backlog I previously noted that we'll take into account in year 21 to relieve. Our adjusted EBITDA margins were 14.5% for the quarter, with EPS of $1.31 and adjusted EPS of $1.97. Our cash balance improved from $97.1 million at the end of the prior fiscal year to $112.6 million at the end of the second fiscal quarter, and the company has access to an additional $93 million under its revolving credit facility. We made a $40 million debt payment in the quarter, bringing net leverage below two times adjusted EBITDA at 1.98. In addition, our teams modified our credit agreement to allow for $100 million of unrestricted cash to be utilized in our covenant calculations. As I stated last quarter, the company remains well-positioned to take advantage of the favorable housing environment. Consumers are spending more time at home, Consumers have additional discretionary funds to spend at home, and existing home sales and single-family starts have improved. I do have some concerns about price appreciation in new construction impacting demand short-term, but the long-term fundamentals for growing single-family starts remain intact. Our focus will be to take advantage of these trends by permanently improving efficiencies across our footprint and investing wisely in the future. Investments are being made in product, technology, and labor. New finished colors and door styles will launch in February, along with needed discontinuances that will allow us to refresh and simplify our lines. Technology investments with an ERP cloud solution provider have begun in the finance procurement functions, allowing us to operate as one company and become more efficient. Ongoing investments in labor wages, retention, and absenteeism programs will continue, allowing us to meet our customers' needs. With respect to COVID-19, recent vaccine development should allow for the nation to get back to a level of normalcy in calendar year 2021. But in the meantime, we have to navigate surging case counts or restrictions by states that could impact demand and labor. In closing, I couldn't be prouder of our employees and what they've accomplished. We are executing on our vision and strategy for American Woodmark, and our teams are making it happen. I will now turn the call back over to Paul for additional details on the financial results for the quarter. Thank you, Scott. The financial headlines for the quarter. Net sales were $449 million representing an increase of 4.8% over the same period last year. Adjusted net income was $33.5 million or $1.97 per diluted share in the current fiscal year versus $31.2 million or $1.84 per diluted share last year. Adjusted net income was positively impacted by higher sales leveraging of our fixed costs and benefits from our actions taken in the first quarter. Additionally, we incurred restructuring charges related to the closure of our Humboldt manufacturing facility for $2.8 million that were partially offset by an unrealized gain on foreign exchange forward contracts of $0.6 million. Adjusted EBITDA was $65 million, or 14.5% of net sales compared to $63 million, or 14.7% of net sales for the same quarter of the prior fiscal year. The combined home center and independent dealer and distributor channel net sales increased 14.1% for the quarter with home centers increasing 18% and dealer distributor increasing 0.6%. The remodel business is showing strong signs of recovery as people are more comfortable allowing access into their homes to install cabinets as well as the increased demand from the DIY and pro customers. The new construction sales channel lagged market demand during the second quarter of fiscal year 2021, recognizing a 60 to 90 day lag between start and cabinet installation. The overall market activity in single family homes was up 9.5% for the fiscal second quarter. Looking at the start data that extends the lag time to 90 to 120 days, we saw a 2% increase in starts during that same period. Shifting focus to completions During our second fiscal quarter, we saw a 0.7% decline year over year, which further supports timing impacts. New construction net sales decreased 7.4% for the quarter. Timberlake Direct Business comped positively in units, which was offset by a mixed shift to lower-priced products and negative comps in our frameless business. The company's gross profit margin for the second quarter of fiscal year 2021 was 20%. of net sales versus 20.3 reported in the same quarter of last year. Gross margin in the second quarter of the current fiscal year was negatively impacted by higher material and logistic costs, investment made in our locations for PP&E, and safety measures combined with wage and retention programs. These costs were offset by increased sales creating leverage of our fixed costs in our operating platforms and a one-time benefit received in the quarter related to an employee retention credit of $0.8 million. Keeping our employees safe during these unprecedented times remains a key focus for everyone at the company. Total operating expenses were 11.6% of net sales in the second quarter of fiscal 2021, compared with 11.8% of net sales for the same period in fiscal 2020. Selling and marketing expenses were 4.8% of net sales in the second quarter of fiscal 2021, compared with 4.8% of net sales for the same period in fiscal 2020. The ratio in net sales remained flat as a result of higher launch costs and incentive expenses offset by leverage created from higher sales in the second quarter of fiscal 2021 and a one-time benefit received in the quarter related to an employee retention credit of $1.7 million. General and administrative expenses were 6.7% of net sales in the second quarter of fiscal 2021 compared with 7% of net sales for the same period of fiscal 2020. The decrease in the ratio was primarily driven by the leverage from higher sales, lower spending, and the impacts of our actions taken in the first quarter of fiscal 2021. There was some pressure on our general administrative expenses related to a one-time legal charge of $1.5 million, offset by an employee retention credit of $0.4 million. In total, for the company, we received an employee retention credit of $2.9 million. Both of these discrete events were one-time in nature. Free cash flow totaled $57.4 million for the six months of the current fiscal year compared to $66.1 million in the prior year. The decrease was primarily due to changes in our operating cash flows, specifically cash outflows from customer receivables and inventories as a result of the increased sales demand. Net leverage was 1.98 times adjusted EBITDA at the end of our second fiscal quarter as a result of our increasing cash balance and declining debt position. The company paid down $40 million of our term loan facility during the quarter. As a reminder, there are no term loan debt maturities due until December 2022. Due to the impacts of COVID-19 and the evolving macroeconomic uncertainty in the current remodeling and homebuilding environment, we are unable to provide a full fiscal 2021 outlook. Shifting our focus onto the third quarter of fiscal 2021, we expect mid to upper single digit net sales growth versus the prior year. This growth rate is very dependent upon overall industry, economic growth trends, and consumer behaviors. Margins will improve based on the increased sales volume that will create leverage within our operating platforms. We will continue to invest back into business through wage programs, continue to launch new products, and start our journey on our financial and procurement system consolidation with one of the leading software providers, We expect adjusted EBITDA margins for the third quarter of fiscal 2021 to increase versus prior year results, but remain below our current second fiscal quarter. The company had very strong operating cash flows for the year, which led to a $40 million pay down of our term loan facilities. Free cash flow generation continues to be a strength of the company. We ended the quarter with our cash position as of October 31, 2020, at $112.6 million of cash on hand, and access to 93 million of additional availability under its revolver. Liquidity and margin management are priorities for our teams. In closing, the strong performance that was executed in our second fiscal quarter was a direct result of the hard work of all of our employees who make it happen every day. This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.

We'll now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If any time your question has been addressed and you'd like to withdraw your question, please press star, then 2. This time we'll pause momentarily to assemble the roster. First question comes from Garrick Schmoes of Loop Capital. Please go ahead.