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.

Hi, this is Jeff Stevenson on for Garrick. Thanks for taking my questions. Can you provide some more color on your sales growth expectations by categories and your fourth quarter guidance?

Yeah. So Jeff wrote, you know, good morning. Kind of our guidance right now is we're talking about double-digit growths. We're thinking and we're expecting in the mid to upper-digits growths in that area. So it would be double digits for sure. As far as the growth in the categories out there, we expect it to be strong growth rates across all of the repair, remodel, and the home centers and in our new construction channels as well. And then also we won't have the drag of our PCS business in our fourth quarter. Yeah, just to clarify, mid to high teens is what we're expecting from net sales growth.

Got it, got it. And then what is the timing of your new capacity initiatives to be fully online? And then following up on that, also, how is your capacity right now set up to meet the recent inflection and lagged housing starts?

So our teams are always evaluating capacity across our entire platform. We've been adding shifts and personnel really since the summertime period across both the MTO and stock platforms. We'll continue to do that as we push forward. We are increasing the overall output across both of those platforms. With respect to capacity in general across all aspects of the manufacturing footprint, we are making investment decisions in capital equipment as needed along with those labor investments and believe that we'll be well positioned for growth as we start to think about fiscal year 22.

And then lastly, can you talk about the levers you have to manage cost inflation moving forward? I know you mentioned the pricing actions in this quarter, but any more color there would be helpful.

So pricing, obviously, is the one that we started our conversation about. We've already taken actions in several of the channels. We'll continue to pursue that. I'd tell you over the long haul, Jeff, we tend to get back pricing for commodity-based material inflation. When it comes to other aspects of inflation, when we think about things like labor, that's really up to us to manage, and it comes down to productivity projects. It could be introduction of alternate materials, substitutions. It could be investments in automation of equipment. These are all solutions that we'll always be driving to try to offset increases.

Thank you.

As a reminder, if you would like to ask a question, you can press star then 1 to join our queue. Our next question comes from Tim Boyce with Baird.

Hey, guys.

Can you hear me?

We can hear you. Good morning. Good morning, Tim.

Great. Good morning. Glad you guys are all well. I guess first question I had was just on pricing. Is there any way to just maybe quantify the types of increases that you're taking in terms of just magnitudes and which channels those have maybe gone into already and kind of maybe what might be kind of there in the future? Sure.

Yeah, rather than provide specifics just because we're in that process, Tim, I'll just kind of lay out the framework of how it typically functions. We will typically collect the input cost to understand what the likely percentage increase is that we need to apply to the products. We will typically first address our dealer-distributor segment. That's usually followed by new construction, which is then followed by home center. And I think we've talked about this in past years, you know, some of the unique situations either around contracts or other restrictions that prevent just doing a blanket increase across the board, certainly in new construction and home centers. So that's typically the way we'll roll that out. We have already started those conversations and announcements inside the current quarter. That's why Paul's guidance was we won't see much lift as it relates to price inside Q4. We'll start to pick up some of that advantage as we shift into the first quarter of fiscal year 22.

Okay. Okay. And, you know, are you kind of thinking kind of, you know, Q1, Q2 is when you start to see, you know, price at least kind of offset, you know, inflation, or is it just hard to know at this point?

I'd still say it's hard to know. And the reason I'll say that, Tim, is what happens from this point forward with respect to these commodities and input costs. Are they going to start to plateau with the new levels we've got, or do we see a continued acceleration, and then you're continually chasing that uptick? So, At this point in time, if things were to stabilize, I think that's a fair representation that inside the first, second quarter of the next fiscal year is when we start to get some recovery against that. If they keep moving up, then we'll be chasing another cycle potentially of pricing as well and have to pursue it that way.

Okay. Okay. That's helpful. And then on PCS, just a factual question. Thanks for the detail and the color on just the pressure there. I think it was, what, $4.5 million this quarter on a year-over-year basis. Is that similar to what you've seen over the last three quarters? I'm just trying to think of, as you're annualizing that, what that impact has been maybe over the prior three quarters outside of this one.

Yeah, I don't have that annual number here in front of me, Tim, but I would tell you that that impact was likely higher in the first and second quarters. But you're right, $4.5 million. is what we just disclosed specifically around the fiscal third quarter. But more importantly, inside the fourth quarter, our plans are for low to mid-single-digit growth on that platform and new construction.

Okay, good to see that stabilized. And I guess the last one, just on maybe the order rates and the unit kind of shipment rates in Timberlake relative to maybe the revenue contribution, what's the gap between you know, unit shipments and, I guess, revenue, you know, as you kind of think about mix. And is that really just, you know, structurally, you know, more of the origin product and more kind of entry-level shipments that are impacting that? Or are you seeing any sort of change in kind of the overall kind of builder mix on maybe a price point specific basis?

Yeah, it was more your latter comment around rotation to origin. So as you rotate Timberlake historical business to an origins platform, that will be at a lower price point, but a better margin profile for the enterprise.

Okay. Okay. Great. Well, good luck on the rest of the year here, guys. Thanks for the call.

Thank you. Thank you, Tim.

And our next question will come from Justin Spear with Zellman & Associates.

Good morning, guys. Thank you. I guess a couple questions for me. Just If maybe you could provide some of your thoughts or commentary with regards to the import dynamics, the import situation, seeing a surge in the non-Chinese imports over the last year, pretty much filling the void left by when the Chinese vacated. But I guess as you think about your pricing, is there any risk to pricing power or your market position from those dynamics, in your opinion? Yeah.

Yeah, I'll answer the second question first. Justin, I don't think there's any risk from a pricing profile perspective as it relates to the imports. I think the inflation impacts are not unique to American Woodmark. I think our competitors are going to feel that both domestically as well as internationally. So I'm not concerned there. To the first question, specifically around the import data, I'm sure you saw the information that came out through December. China down roughly 50% on the calendar year. Shows totals down, I think, roughly 3.5%, you know, $40-odd million because we've seen Vietnam and Malaysia both come back with, you know, substantial increases year on year. Those products are coming in, though, at a higher cost versus what they were historically out of China. So we definitely see that uptick on that product. But I'd say probably even more important here is of late just logistics and transportation challenges. You know, if you follow any of the information certainly on the West Coast as it relates to the ports and just product entry challenges. We're feeling it for some of the components that we buy, but certainly our international competitors as well, they're dealing with some lead-down challenges. So that continues to give us an advantage in the marketplace.

Okay. So going back to Tim's question, just in regards to the input cost and the pricing required, to offset those costs. Can you quantify how much of a drag, just from all those buckets, how much of a drag that was in the quarter? And I guess, is the price increase announcement enough? If we snap the line on what you see today, is it enough to at least offset or more than offset what you're experiencing in terms of cost input inflation?

Yeah, so rather than get into specifics of exactly what the amount was associated with those impacts and, again, what that's going to translate into pricing, I'll take you back to prior quarter and when we talked about what our forecast and projections were going into fiscal Q3, what our EBITDA margin expectations were. And we obviously fell short of those. And the reason we fell short of those is material inflation. And it was predominantly increasing throughout the quarter. It started in December and accelerated into January. So that's why we We missed the mark by, what, 70 to 100 basis points from an estimate perspective. So you can do some math if you'd like around that, but I don't want to get any more specific than that at this point.

Got it. Got it. And then I guess the other dynamic is the PCS business. What led to the improvement there? Is it that the comps, you've kind of run-rated, or did you improve ahead of expectations? Because I was thinking you were going to see more pressure into this quarter.

Yeah, so we're starting to lap the tough comps, so that's obviously going to be a factor. But our teams have done a nice job going out and winning business. I think I mentioned last quarter as well, we are introducing more relevant styles. We've gotten stale in that portfolio, so we launched some new colors here in February that will help us as we go forward. We've got another round of introduction of product as well in the next launch bucket, which will be the August-September timeframe. So it's a combination of easier comps, sales team really driving growth, and product relevance.

Lastly, for me, just big picture, broadly, what is, you know, in this kind of environment where you're seeing incredible top line growth and it's married with inflation, is I guess, how do you feel about your midterm margin targets, and are they achievable as we think about this next kind of fiscal year that's coming up? Do you think that you can get to that mid-teens with the strength that we're seeing, or do you think it's a tougher call given the inflation?

Yeah, I think it is a tougher call with the inflation. At this point in time, we're actually in the middle of our budgetary cycle, so we'll do that throughout the February timeframe with closure in early April. and give you all a perspective on our next call of how we see fiscal year 22 shaken out. Obviously, sales growth is going to be strong. The question around margin profile is going to be really dependent upon these input costs and ultimately what the pricing power is back against that. So do I think we're going to jump to that long-term target next year? That's going to be challenging, but that still is our target. That's still what we're striving to drive forward and achieve. Obviously, in this environment, with it being such a strong sales environment, share capture has been a big part of the story for us, so we want to make sure we capture as much of that as we can. But now let's be a little bit more disciplined around pricing, knowing that we've got escalating material costs.

Thank you, guys. I really appreciate it.

If there are any further questions, please press star and then 1 at this time. Our next question will be a follow-up from Tim Royce with Baird.

Hey, thanks, guys, for the extra questions. Just two things on the balance sheet. I guess when you think about, you know, the potential to refinance here, you know, what are kind of the targets I guess you guys are looking at in terms of is it just extending maturities? Is there an opportunity to lower rates? I'm just kind of curious where you kind of see that. And then Secondly, it sounds like you're going to restart the buyback, and should we just think of that as offsetting dilution, or is there going to be an opportunity to maybe take some of the overall share count out?

Yeah, so Tim, I'll answer the first one around the debt first. And really what we're doing is we evaluated all the positions that are out there. We're seeing the historic low rates that are out there today currently, and that is our main goal is to really maximize and take advantage of those rates, reduce our interest costs, and kind of return some of that benefit back to our shareholders. So that is really our priority as far as the total deal structure, what it's going to look like. We're still evaluating that. We're going through that process now. We'll definitely give you more color as we go through that and explore that. The share repurchase right now, too, is what we're doing is we definitely want to be anti-dilutive against anything that we're going to do from a future perspective. If there's an opportunity to be more creative there, we will look at that throughout the fourth quarter and more guidance to come as we go through there.

Okay. Okay. And then I'll speak one last one. And just The made-to-order business within the home centers, how do you think of that trending over the next year or two? I know that's been a tougher channel just for the industry over the last five years. Is there any renewed focus there by the home centers to drive traffic into the made-to-order platform, or how would you think about conceptually what made-to-order can look like over a couple-year period?

Yeah, I think it's tough to go out multiple years at this point in time. Clearly, Depot and Lowe's, if you followed their earnings release over the last few days, they're going to struggle with some comp issues because of the outstanding comp results they've had over the last three quarters reporting-wise. I still believe there's an opportunity to grow our business in that particular category in both retailers, and that's how we'll set our targets and goals as we push forward. What that level of growth is, is probably the question mark over the next couple of years. We've certainly seen consumers flock to the home centers with this COVID environment. Can they hang on to those consumers as we get past some of the restrictions and we get more of the population vaccinated, I think is probably the largest wild card as to what exactly their footprint will be as we go forward for many categories, including ours. There was a thesis for many years that millennials wouldn't shop at home centers, that they were going to shop elsewhere when they got into the home buying or home improvement model. And I think we've modified the thinking around that, obviously, over the last 12 months. And now that they've got those consumers in the stores, we all need to work together on making sure we keep them and we keep new ones coming in so we can continue to drive growth in that category.

Okay. Okay, that's helpful.

Appreciate the color. Thanks, guys.

Our next question is a follow-up from Justin Spear with Zellman & Associates.

I just wanted to sneak one more in just on the free cash flow side, guys. What are you thinking for the free cash conversion? I'm looking at the payables. I know you kind of bucket them together in the release with some of the accrues, but what was the payables contribution, and how should we think about that? Because I think that's been a pretty good tailwind here, at least thus far in the year.

Yeah, Justin, I'm looking at our free cash flows. We still expect this year to be relatively strong from us. We did the actions with our debt paydowns, and that kind of reemphasizes our position about that they will be strong. Even the share repurchase kind of reiterates that, too. In regards to the payables, you know, you're seeing the increase in inventories and payables kind of at a comparable rate that's out there as well. So you're seeing really the offset there. I'd say where the challenges that we had in this quarter was around our custom receivables and our AR balances. And it's not concerns around collectability. It's just timing of the payments that were received within the quarter. So we showed a little bit of, I would say, performance degradation in Q3, but we'll expect to pick that up in Q4.

Excellent, thanks guys, I appreciate it. Yep, thank you.

As I do not see anyone else waiting to ask a question, I'd like to turn the line over to Mr. Johimcek for any closing remarks.

One second, thank you. Since there are no additional questions, this concludes our call. Thank you all for taking the time to participate.

The conference has concluded. Thank you for attending today's presentation. You may now disconnect.