American Woodmark Corporation

Good day and welcome to the American Woodmark Corporation's 3rd Fiscal Quarter 2021 Conference Call. Today's call is being recorded February 25, 2021. 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. The earnings release, which can be found on our website, AmericanWoodmark.com, includes definitions 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 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 statement. Such factors include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission and the annual reports 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 Paul Jochemczak, Vice President and CFO. Please go ahead, sir.

Good morning, ladies and gentlemen. Welcome to American Woodmark's third fiscal quarter conference call. Thank you for all for taking the time to participate. Joining me today is Scott Culbreth, 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 third fiscal quarter earnings call. I hope that you and your loved ones continue to remain safe. Our teams once again did an exceptional job of delivering sales growth in the quarter, but our margins were pressured by material, logistics, and labor inflation, which was partially offset by overhead and SG&A leverage. Our third quarter sales were up 9.1%. With the new construction, our business grew 3.8% versus prior year, as install activity accelerated from prior month starts growth. Our Timberlake direct business comps positive low double digits on units, while our frameless PCS business continued to comp negatively in Southern California. We've received a number of questions on the impact of the PCS business on the total performance in new construction. For the third fiscal quarter, the negative comps were approximately $4.5 million, or 2.9% of growth from a channel. We believe that we have stabilized the PCS business and will turn to low or mid-single-digit growth in fiscal Q4. Our national builders remain optimistic 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, and these factors have already increased the build cycle time. Lot supply and community account growth are also key indicators we're watching closely. Our incoming order rates for the Timberlake business once again increased throughout the quarter, building backlog across our made-to-order platform with incoming order rates in the mid-teens. As a reminder, we level-load our production on the made-to-order platform. I mentioned last quarter that our incoming order rates across both the new construction and remodel businesses exceeded shipments for the quarter, and that our teams are increasing production levels, which would drive incremental sales in our third fiscal quarter as we improve backlog levels. Incoming orders again exceeded shipments in our third fiscal quarter, and we did not make progress as planned in reducing backlog. As a result, production levels will continue to increase and drive incremental sales in our fourth fiscal quarter. Looking at our remodel business, which includes our home center and independent dealer and distributor businesses, revenue was up 12.6% the prior year. Within this, our home center business was up 13.2%. Our made-to-order remodel business continued to improve with double-digit positive comps. Our stock business was up low double-digit as pro and DIY demand increased. Our stock kitchens performed well with comps 20-plus percent, bad comp negative for the quarter due to promo timing. Our frameless offering continued with strong double-digit positive comps as well. With regards to our dealer-distributor business, we were up 10.2% for the quarter. Demand has remained strong with dealers and distributors across both the remodel and new construction channels, especially within the value stock segment. Our adjusted EBITDA grew 7.9% to $54.1 million, with EBITDA margins at 12.5% for the quarter, EPS of $1.01, and adjusted EPS of $1.50. Our cash balance ended at $91.8 million at the end of the third 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 down to 1.86 times adjusted EBITDA. De-leverage remains a priority, and I expect further improvement with a goal to remain at approximately 1.25 to 1.5 times adjusted EBITDA. We also plan to restart share repurchases to offset dilution. The new construction and remodel market remains strong, and we anticipate that to continue throughout the remainder of our fiscal year. Our company is well-positioned to take advantage of the strong market as consumers invest in their homes and existing home sales and single-family starts grow. While supply and overall price appreciation in new construction may impact demand short-term, the long-term growth remains solid. Our focus has not changed, and we will take advantage of these trends by permanently improving efficiencies across our footprint and investing wisely in product technology and labor. We are almost complete with our winter launch and have shifted to our fall launch that will continue to introduce new finished colors and door styles, along with needed discontinuances that will allow us to refresh and simplify our lines. Our goal remains to offer industry-leading products and unparalleled customer experiences targeted to value segments. Compelling and relevant styles will be needed to ensure customers and consumers see an offer for their specific needs. Technology investments with an ERP cloud solution provider are on track in the finance and procurement functions, which will allow us to operate as one company and become more efficient. Go live for these functions on November 1st. We will also be improving the efficiency of our sales and customer care organizations by through a Salesforce implementation in calendar year 22. Our new distribution center in Dallas is operational, and efficiency improvements will be a focus of the team going forward. The terrible storm that impacted Texas and the Midwest last week did disrupt our operations, as we had to close facilities in our stock and made to other platforms due to power outages or unsafe driving conditions. Thankfully, our associates have remained safe, and we believe we will recover those sales within the quarter. Looking forward, we expect demand trends to remain strong and margin pressures to continue, with recent increases in hardwood lumber, plywood and particle board, packaging materials, components, and freight. We are taking pricing actions in the current quarter to help mitigate, but keep in mind there will be a lag from effective date of the price change to recognition of revenue when the order is shipped. In closing, I am proud of our employees for all they have done to increase our capacity during a strong demand environment. I appreciate their contributions in 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. Financial headlines for the quarter. Net sales were $432 million, representing an increase of 9.1% over the same period last year. Adjusted net income was $25.5 million, or $1.50 per diluted share in the current fiscal year versus $22 million, or $1.30 per diluted share last year. Adjusted net income was positively impacted by higher sales, offset by higher material and logistics costs. Additionally, we completed the sale of our Humboldt manufacturing facility within the quarter and incurred a net positive restructuring charge of $0.8 million due to the gain on the building sale in the current quarter. Adjusted EBITDA was $54.1 million or 12.5% of net sales compared to $50.1 million or 12.7% of net sales for the same quarter of the prior fiscal year. The combined home center and independent dealer-distributor channel net sales increased 12.6% for the quarter, with home centers increasing 13.2% and dealer-distributor increasing 10.2%. The remodel business continued showing strong signs of recovery as people remained comfortable allowing access into their homes to install cabinets as well as increased demand from the DIY and pro customers. The new construction sales channel lagged market demand during the third quarter of fiscal 2021. Recognizing a 60 to 90-day lag between start and cabinet installation, the overall market starts in single-family homes was up 26.2% for the fiscal third quarter. When looking at the start data that extends the lag time to 90 to 120 days, we saw an actual increase of 15.6% in starts, normalized for the impact of lag. Shifting focus to completions during our third fiscal quarter, we saw a 0.8% increase year over year, which further supports timing impacts. New construction net sales increased 3.8% for the quarter. Timberlake direct business comps positively in units, which was offset by a mixed shift to lower priced products, and negative comps in our frameless business. This is the last quarter that our firmless business will negatively impact our comparisons year over year. The company's gross profit margin for the third quarter of fiscal year 2021 was 17.6% of net sales versus 18.3% reported for the same quarter last year. Gross margins in the third quarter of the current fiscal year were negatively impacted by the higher material and logistics costs, investments made in establishing our distribution center in Texas, as well as wage programs. These costs were partially offset by the increases in sales, creating leverage of our fixed costs in our operating platforms. Total operating expenses were 11.1% of net sales in the third quarter of fiscal 2021, compared to 12.2% of net sales in the same period in fiscal 2020. Selling and marketing expenses were 5.1% of net sales in the third quarter of fiscal 2021, compared with 5.4% of net sales for the same period in fiscal 2020. The ratio to net sales improved 30 basis points, resulting from the leverage created from higher sales in the third quarter of fiscal 2021 and delayed expenses related to our third quarter launch. General and administrative expenses were 6.1% of net sales in the third quarter of fiscal 2021, compared with 6.8% of net sales for the same period of fiscal 2020. The decrease in the ratio is primarily driven by leverage from higher sales, lower spending, and the impact of our actions taken in the first quarter of fiscal 2021. Free cash flow totaled 74.3 million for the nine months of the current fiscal year, compared to 80.2 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 1.86 times adjusted EBITDA at the end of the third fiscal quarter as a result of our strong cash balance and declining debt position. The company paid down $40 million of our term loan facility during the quarter, which brings the fiscal year to date total to $80 million. As a reminder, there are no term loan debt maturities due until December 2022. Switching our focus onto the fourth quarter of fiscal 2021, we expect double-digit net sales growth versus the prior year, which was negatively impacted by COVID-19 shutdowns. The growth rate is very dependent upon overall industry, economic growth trends, and consumer behaviors, including the impact of the ever-changing COVID-19 environment. We are announcing price increases in our fourth quarter, but given the lag from announcements to effective date, we will not see a benefit in this fiscal year. Gross margins will continue to be pressured, but our expectations are that they will increase over our Q3 results based on the increased sales volumes that will create leverage within our operating platforms, offset by increasing material and logistics costs. We will continue to invest back into our business through wage programs, finalizing the launch of our new products, and building the foundation of our journey on our financial and procurement system consolidation as part of our first phase of our ERP implementation. We expect adjusted EBITDA margins for the fourth quarter of fiscal 2021 to be similar to our fiscal third quarter. The company had very strong operating cash flows for the year, which led to an 80 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 January 31st, 2021 at $91.8 million of cash on hand and access to $93 million of additional availability under our revolver. With the current corporate debt rates at historic lows, the company will be evaluating the current debt structure during our fourth fiscal quarter to possibly take advantage of any benefits the company may receive from these low rates. Liquidity and margin management are priorities for our teams. I want to thank all our team members at American Windmark for their continued efforts, as they are the ones who truly make it happen. This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Our first question today will come from Garrick Schmois with Loop Capital.