American Woodmark Corporation

Good day and welcome to the American Woodmark Corporation fourth fiscal quarter 2021 conference call. Today's call is being recorded May 27, 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 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 on the companies involve material risks and uncertainties and are subject to change based on 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 such any 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 put, does not undertake to publicly update or revise its forelooking statements even if the experience or future changes may make it clear that any projected results expressed or implied therein will not be realized. And now, I would like to turn the call over to Paul Joachimczyk, Vice President and CFO. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to American Woodmark's fourth fiscal quarter conference call. Thank you for taking the time to participate today. And joining me today is Scott Caldreth, President and CEO. Scott will begin with a review of the quarter, and I will 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 fourth fiscal quarter earnings call. I hope that you and your loved ones continue to remain safe, as the country begins to reopen. Our team did an exceptional job of delivering sales growth in the quarter, but our margins continue to be pressured by material, logistics, and labor inflation. We also incurred some additional costs in the quarter for approximately $1.6 million that were not EBITDA adjustments related to our new debt issuance and inventory adjustments obsolescence. Pricing actions have been announced and will deliver margin improvement in the first half of our fiscal year 2022. Proactively working to keep our employees safe has been critical throughout the pandemic, and our efforts are now focused on vaccine availability and access. Our teams have held on-site events at a number of locations across our network, and we continue to see increasing rates of vaccination among our employees. Our fourth quarter sales were up 18.6%. Demand once again continued to outpace production in the quarter across all platforms. Our ability to match demand continues to be limited by two factors, labor and material availability. Labor was impacted by the ability to attract and retain employees as the American Rescue Plan negatively impacted the available pool of employees. Reported manufacturing job openings soared to 706,000 in March, a new record. Material shortages led to unplanned downtime and efficiency loss and substitutions were made when available to continue production. Backlog increased across our made-to-order platform with incoming order rates over 20% plus. 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 were increasing production levels, which would drive incremental sales in our fourth fiscal quarter as we improved backlog levels. Incoming orders again exceeded shipments in our fourth fiscal quarter, and we did not make progress as planned in reducing backlog. In fact, backlog increased by over 20%. As a result, production levels will continue to increase and drive incremental sales over the next few quarters. Our teams will continue to invest in production capability via outsourcing, staffing additions, and productivity improvements. Within new construction, our business grew 13.2% versus prior year. Our Timberlake direct business comped positive high teams, while our frameless PCS business comped negatively. Last quarter, I shared that we've stabilized the PCS business and would return to lower mid-single-digit growth in fiscal Q4. Our incoming order rate did in fact deliver growth, but material availability limited our ability to produce, and we fell short of prior year shipments by approximately $1 million. However, overall backlog grew from the prior quarter by a larger amount. Strong order growth is expected to continue across our markets. Capacity of the manufacturing and trade base to keep up with demand and rising prices could slow future build rates, and these factors have already increased the build cycle time. We are monitoring lot supply and community account growth closely. Some builders have begun to put sales caps in place in markets to allow production to catch up and reduce backlogs. Looking at our remodel business, which includes our home center and independent dealer and distributor businesses, revenue was up 22.1% the prior year. Within this, our home center business was up 24.6%. Our made-to-order remodel business continued to improve with 25% comps. Our stock business performed well as pro and DIY demand increased with comps at 25% plus as well. Our frameless offering did experience negative comps for the quarter as our Texas operations were down several days due to the winter storm. Backlog grew, and had we shifted, we would have experienced double-digit comps. With regards to our dealer-distributor business, we were up 13.4% for the quarter. Demand has remained strong with dealers and distributors across both the remodel and new construction channel, especially within the value stock segment. Our adjusted EBITDA was $47.2 million, with EBITDA margins at 10% for the quarter, reported EPS of 17 cents, and adjusted EPS of $1.28. Our cash balance was $91.1 million at the end of the fourth fiscal quarter, and the company has access to an additional $236 million under its new revolving credit facility. Our teams restructured our debt, providing increased flexibility and significant reduction in interest expense during the quarter. We also repurchased $20 million, or approximately 200,000 shares of stock, in a quarter. Net leverage was 1.93 times adjusted EBITDA. Regarding fiscal 2022, the new construction and remodel markets are projected to remain strong, and we anticipate growth to continue. We are positioned to take advantage of the strong market as consumers invest in their homes, and existing home sales and single-family starts remain strong. Lot supply, interest rates, and overall price appreciation of new construction may impact demand in early calendar year 2022, but long-term growth remains solid. Cost of goods sold inflation expectations include an additional approximately 2.5% to 3% for material logistics on top of what was realized in fiscal year 21. We will be able to recover inflation via price increases, but note there is a lag between incurred inflation and realized pricing. We will be closely monitoring ongoing inflation in case additional pricing action is needed. Looking further into the future, we have finalized and communicated internally on our strategy and its link to the company vision. We firmly believe we can accelerate growth beyond the market rates with incremental investment resourcing the following areas. Digital online capabilities by expanding our online offering, adding A-plus content for those SKUs, building our digital marketing team, and simplifying the buying experience. Launching a low SKU, high low skew count, high value opening price point cabinet line for our dealer network regionally, and then expanding nationally across channels. The Northeast region began taking orders for this new product on May 24th. Growing our frameless business in Southern California and Phoenix. And by continuing to grow our origins by Timberlake line and new construction. We have also identified several key enablers that will be our focus over the next five years and help support our 2025 vision. Those enablers are customer experience, platform design, talent, and ESG. Customer experience is a key differentiator. We must exceed our customer expectations with respect to packaging, damages, overall star ratings, and response time. Consistent lead times are also required, and we believe we can leverage all of these attributes to gain share, including growing our presence with pros. Our platform design must meet the needs of our commercial programs, which includes capacity, improving our supply chain resiliency, and lowering our overall cost. Talent needs will require us to hire additional resources as we grow, develop the right skill sets to meet our needs for growth, and remain competitive with pay and benefits. With respect to ESG efforts, we will continue our commitment to our employees, communities, and other stakeholders with additional focus, commitment, and investments to build a stronger company for the future. We will begin enhancing our disclosures in this year's proxy, and updates will be made to our website later this year. As part of this work, we've reset our long-term goal for EBITDA margins to a range of 14% to 15%. Growth will drive leverage of our fixed cost and will offset normal inflation. Over the long term, pricing should offset material logistics inflation. Incremental investments that are underway will lead to efficiency gains. A primary concern that negatively impacts our margin expectations is overall labor availability and labor wages. I believe we are in an extended period of labor shortages, and increasing costs will be an issue for our industry. Free cash flow generation will remain strong, allowing us to further reduce our debt, invest in the business, and repurchase shares. As a reminder, we have reduced our overall net position since the acquisition by over $300 million, and our net leverage has fallen from approximately three times adjusted to the dollar 1.93. Due to that deep leveraging, we were able to restructure our debt, which reduces our overall interest expense, by roughly $12 million per year and positively impact CPS by approximately 50 cents per share. Finally, our board authorized $100 million for share repurchases earlier this week as additional support for the long-term potential for the company. An investor relation deck will be posted on our website next week summarizing this work. In closing, I'm proud of our employees for what they have accomplished this fiscal year and I look forward to all of their contributions in fiscal year 22. 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 $473 million, representing an increase of 18.6% over the same period last year. Adjusted net income was $21.8 million, or $1.28 per diluted share in the current fiscal year, versus $22.5 million, or $1.33 per diluted share last year. Adjusted net income for the fourth quarter of fiscal 2021 decreased $0.8 million due to higher material and logistics costs, which was partially offset by an increase in net sales. Adjusted EBITDA for the fourth fiscal quarter was $47.2 million or 10% of net sales compared to $53.4 million or 13.4% of net sales for the same quarter of the prior fiscal year. Financial results for the fiscal year ended April Net sales for the current fiscal year were $1,744,000, representing an increase of $93.7 million, or 5.7% from the prior fiscal year. Adjusted net income was $109 million, or $6.40 per diluted share in the current fiscal year, versus $111.8 million, or $6.59 per diluted share for the prior fiscal year. Adjusted EBITDA for the current fiscal year was $223.2 million, or 12.8% of net sales, compared to $236 million, or 14.3% of net sales for the prior fiscal year. Shifting to our sales channels for the quarter, the combined home center and independent dealer-distributor channel net sales increased 22.1% for the quarter, with the home centers increasing 24.6% and dealer-distributor increasing 13.4%. The remodeled business continues showing strong signs of recovery, and both are made-to-order and made-to-stock lines. People remain confident about investing back into their homes in the quarter, as demonstrated by the increased demand from the DIY and pro customers. New construction net sales increased 13.2% for the fourth fiscal quarter, with Timberlake business counting positively in units, as there is still a mixed shift occurring towards lower-priced products as our origin line continues to gain momentum in the markets. Our frameless business is recovering and has built a backlog of orders during the quarter due to logistic and supply constraints on the West Coast. New construction sales channel matched the market demand during the fourth quarter of fiscal 2021. While recognizing a 60-90 day lag between start and cabin installation, the overall market starts in single-family homes was up 15.3% for the fiscal fourth quarter. Looking at completions during our fourth fiscal quarter, we saw an 11% increase year over year, which further supports the timing impacts. The company's gross profit margin for the fourth quarter fiscal year 2021 was 15.6% of net sales versus 18.9% reported in the same quarter of last year. Gross margins in the fourth quarter of the current fiscal year was negatively impacted by the continued higher material and logistics costs, and charges related to obsolete inventory of $1.2 million. These costs were partially offset by the increase in the sales creating leverage of our fixed costs in our operating platforms. Total operating expenses were 11% of net sales in the fourth quarter of fiscal 2021 compared to 12.1% of net sales for the same period of fiscal 2020. Selling and marketing expenses were 5.5% of net sales in the fourth quarter of fiscal 2021 compared to 5.3% of the net sales for the same period in fiscal 2020. The ratio to net sales increased 20 basis points resulting from the increased launch costs partially offset by the leverage created from the higher sales in the fourth quarter of fiscal 2021. General and administrative expenses were 5.5% of net sales in the fourth quarter of fiscal 2021 compared with 6.8% in net sales for the same period of fiscal 2020. The decrease in the ratio is primarily driven by the leverage from higher sales, lower spending, and the impacts of our actions taken in the first quarter of fiscal 2021. Free cash flow totaled $105.4 million for the current fiscal year, compared to $136.8 million in the prior year. The decrease was primarily due to changes in our operating cash flows, specifically higher customer receivables and inventory balances, which were partially offset by higher accounts payable and accrued expenses as a result of our increased sales demand. Net leverage was 1.93 times adjusted EBITDA at the end of the fourth fiscal quarter. The company paid down 80 million of our term loan facility during the year and successfully restructured our debt position to take advantage of the lower interest rates. This will lead to roughly $12 million of annual savings. During the fourth quarter, By fiscal year 2021, we repurchased $20 million in shares. Shifting our focus to Q1 of fiscal year 2022, we expect mid- to upper-teens net sales growth versus fiscal year 2021. The growth rate is highly dependent upon overall industry, economic growth trends, material constraints, labor impacts, and consumer behaviors, including the impact of the ever-changing COVID-19 environment. Our price increases will take effect at various stages throughout fiscal 2022, with pricing being realized first in our dealer-distributor channels, followed by the new construction, and then our home centers. Given the pressures we previously mentioned, our outlook is that our adjusted EBIT margins for Q1 fiscal year 2022 will improve sequentially from Q4 fiscal year 2021. We will continue our investment back into the business by increasing our capital investment rate to approximately 4% of net sales. These investments will range from the continuation of our ERP journey to get on the cloud, digital investments in our customer experience, and reinvesting in our manufacturing facilities to help reduce labor dependencies, improve quality, and increase capacity. This will impact our normal expectation on free cash flow for the fiscal year. Strong free cash flow remains a core strength of the company. We are choosing to make these additional investments into our core business to enhance our margins in the future and return to our long-range EBITDA target of 14% to 15%. In addition, the board approved a new $100 million share repurchase program, which will replace the original $50 million share repurchase program that had $30 million remaining. We are continuously investing back into the business. Seeing the impressive top line growth of the company, recognizing all the sacrifices and additional efforts our team members have put in this entire fiscal year, I am continually impressed and grateful for what the teams have accomplished and want to thank all of our team members at American Woodmark for their continued efforts. They are the ones who make it happen daily. 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 one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble the roster. Our first question today will come from Truman Patterson with Wolf Research. Please go ahead.