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.

Hi, this is Trevor Allison on for Truman. Thank you for taking my question. First, can you just bridge the year-over-year decline in gross margins for us in the quarter? You mentioned raw material inflation, logistical inflation, wage inflation. Just hoping you can maybe bucket out each of those different categories or maybe rank order them for us. And then also maybe some benefit from leverage in the quarter. Sure.

Yeah, I don't want to break it out into that level of detail, but I certainly can tell you that the material inflation is by far and away the number one challenge that we face. I would put freight secondary, and then I would put labor third. The way I would perhaps look at the quarter and think about inflation and pricing is if we had our pricing actions fully in place, we had realized inside the quarter what might that have done to our EBITDA margin, And I would say we would have likely finished in the 13% to 14% range without that. But that's the stack ranking I would give you on the elements.

Okay. Yeah, thank you for that. And then, yeah, jumping over to pricing then, you mentioned you expected to start going through in 1Q. Can you give us an idea of what kind of pricing you think you might be able to realize in 1Q and then maybe throughout the full year for your fiscal 2022? Sure.

I'll just say that our expectation is to get pricing to offset both the material logistics inflation within the year. I think it's going to take us the first half to be able to fully accomplish that. And that assumes the baseline doesn't keep moving. We've continued to see increasing inflation. That was predominantly the factor inside our fourth quarter and why we didn't meet our outlook that we had provided to the marketplace. So I think there's going to be multiple actions that will be taken as an enterprise. So our first round, uh, about complete. I will start to realize that, uh, in some channels today, uh, others, it'll be a little bit further out before we actually start to recoup those dollars, uh, with new orders coming in. So by the end of the second quarter, I would expect that to be complete, but we may be dealing with a second round at that point in time.

Okay. Got it. And then just another, just really quickly, um, jumping back to raw material inflation. Can you, um, Just give us an idea for how that trended from your fiscal 3Q to 4Q.

I would just say it accelerated from Q3 to Q4. Okay.

Got it. Thank you very much.

And our next question will come from with Loop Capital. Please go ahead.

Oh, hi. Thanks. Just to follow up on the margin question. You know, is it fair to assume that margins will continue to be depressed in the first half of the year and then by the time you get the pricing actions, is it reasonable to expect margin expansion year on year in the second half of the year? Or is there just too many moving parts at this point to make that call?

Yeah, I think there's too many moving parts today to go ahead and make that commitment for the second half. That's why we didn't provide the full year outlook and Paul walk through expectations around our first fiscal quarter. I think there's just too much uncertainty around labor, material availability, and shortages, as well as the transportation challenges we've already talked about. So at this point in time, your thesis, though, I think is sound. It's going to take us a couple of quarters to recover. If things are stable, then an expectation of, you know, obviously a trajectory of improving margin trends in the second half is expected. Okay.

No, thanks for that. And then, you know, this might be a tough answer as well, but just given the the backlog is exceeding your production capabilities and recognizing you're investing in new capacity. If you can speak to maybe how long you think it might take for your production to be able to catch up to backlogs, or is this going to be a challenge? I guess a good problem to have, but a challenge for the balance of the year.

Yeah, we often tell ourselves it's a good problem to have, but it is a problem nonetheless. So what can we do to be able to mitigate and offset that? I think six months ago, we thought we'd be past it at this point in time, and now we're looking forward six months out and saying we're still going to be challenged over the next couple of quarters. So I don't know yet if we see a significant improvement in backlog in the second half of our fiscal year. Again, as we're modeling things today, certainly the first couple of quarters, it's going to continue to be challenging. So It'll all depend on what the demand environment situation looks like throughout the next few quarters, as well as our ability to gain the labor needed, gain the material needed, and be able to increase production levels.

Okay, thanks. And then my last question is just with the increase in the CapEx and the growth initiatives, can you just speak to What kind of payback or what kind of opportunities you're looking at? You touched upon digital a little bit, some other initiatives, but any more color as to what the growth outlook beyond this year is looking like given the step up in CapEx?

Yeah, so maybe let's peel that apart into a couple of different questions. One that you had in there is the outlook maybe longer term. you'll see that in the investor relation deck that we'll release next week. We'll give you a perspective over the next five years from sort of a sales EBITDA standpoint, think mid to high single-digit growth around both of those particular components. So that was one of the questions I think you had wedged in there with respect. And I apologize, I forgot the second one. You had two or three that was wedged in there. Capital and payback. Sorry, that was the other one. Yeah, capital. So with respect to capital, we have our core capital that we put back into our manufacturing facilities. That's typically been in the 2% to 2.5% range. Yes, we have payback modeling that we drive off of that. At times, there could be a strategic investment that maybe doesn't pass the threshold we may choose to pursue. But we're very much focused on positive MPV, strong payback, year cycle type investments. And we will model inside our planning both the capital spend as well as the savings expectations that comes with that overall. The other area from a capital standpoint would just be sort of displays and selling centers. So having our product available in the outlets so consumers can look at that. That can be lumpy. So as you do new launches and you have to spend the dollars to put that into the store, the sales that you generate for that can be a bit of a lag. So that's sort of a different dynamic there. The next big bucket I would pick is around digital. So we've talked over the last, I think, three calls around our investments in an ERP solution, also in Salesforce.com. So similarly, you make the investment, you have to make the conversion and put the systems in place. And then you do model an expectation of efficiencies on the backside of that as you go forward. So The way I would frame it is we do have a bit of an investment cycle around some of those choices as a company, but it's setting us up for longer-term potential, both growth from a sales standpoint as well as growth from a margin standpoint.

Got it. Okay. Thanks again, and best of luck.

And our next question will come from Colin Verone with Jefferies.

Please go ahead. Hi, guys. Thanks for taking my question. In your prepared remarks, you called out that you're investing in production to alleviate some constraints. Can you just dive a little bit more into these initiatives, such as the outsourcing, how quickly they'll ramp up and the margin impact in the near term and over the long term?

Yeah, so specifically around outsourcing, that's activity that's underway as we speak. We've been working on that for the past few quarters. That'll provide some relief for more of our component and dimension facilities over the next several months. So that'll be in place. With respect to capacity, it depends on where you're at in the manufacturing processes. So it does vary where the capacity bottlenecks might be. Specifically, we have some flat stock capacity. investments that we're making that will be able to get us out of outsourcing so we actually bring some product back in-house to be able to supply to our assembly operations. When I think about our assembly facilities, quite frankly, it's not a machining capacity and our investment in equipment capacity question. It's typically more focused on labor and can we identify and capture enough labor to be able to run the cells efficiently. and the operations we've got. So it varies depending on where we are in the overall manufacturing platforms, and it's different from make-to-order versus the made-to-stock. But we have a process we run through our materials team where we perform analysis and sensitivity work around overall capacity, what we think the next five years' demand looks like. From that, we build a plan, and it's a multi-year plan. where we're going to attack those bottlenecks, and we're employing that strategy on all of our platforms today.

Great. That's a very helpful caller. And then you highlighted some supply chain issues in your remarks. Can you dive a little bit more into where you're seeing some of those pinch points and when you believe these things will start to improve?

Yeah, Colin, this is Paul. The supply constraints really exist really in the lumber space that's out there. You've got limited resources around the hidewoods, the plywoods, particle board. You know, you're seeing glue shortages across there with the Texas issues that were there. Really, it's across a multitude of areas. We expect those kind of constraints to be lifted up by kind of halfway through the year to be realistic that's out there. But now that is assuming that, you know, we kind of return to some state of normal. There could be things that could still interrupt it as well, too. Our sourcing team believes the next couple quarters will continue to be challenging. Our suppliers have the same challenges we have that we just highlighted and framed for you. So labor availability, and then they've got challenges being able to supply the parts they need to be able to produce the product that we're purchasing from them as well.

All right. Thank you, and good luck.

Thanks.

And our next question will come from Stephen Ramsey with Thompson Research Group. Please go ahead.

Hi, good morning. Maybe to think about the delta between dealer-distributor growth being a good bit less than home center growth, what is driving this delta, and do you anticipate this closing in the next couple quarters?

Yeah, I think there's just been significantly more strength inside the home center around PRO. and we've seen growth on that stock platform as well as our made-to-order platform. It's exceeded our expectations here in the near term. So why would that be happening? I think post-COVID, or sorry, let me step back and talk pre-COVID. So pre-COVID, I believe there was an assumption that the home centers might struggle in gaining new customers, especially younger customers, into their stores, especially when you think about going and doing a kitchen and bath project. I believe post-COVID what we've seen is that paradigm has shifted and been adjusted, and we've seen consumers flock back to the home centers of all ages, and we're seeing those consumers that were sort of a question mark pursue those jobs now in the home centers. The big question I think for the home center going forward is, their ability to hang on to that consumer as things start to normalize, the economy starts to open back up, we sort of get past some of the COVID challenges we've had. So I think that's been a factor, and you've seen that overall if you follow up either of the home centers, you've seen the strong POS growth that they've highlighted over the last four quarters. They've gained some share in the marketplace, and the real question is can they maintain that going forward. Specifically around dealer-distributor, we still feel really good about that sector for our business. Of course, it's less than 15% of our total footprint, so we want to continue to drive disproportionate growth into that space and have that be a bigger percentage of the mix overall for the organization. But I don't see anything that's driving any big behavioral differences other than just the pushback into home centers over this last year.

Okay, great. And then maybe to follow on, I'm not sure if I missed this, discussed already, but as retailers kind of start to hit the tougher comps, Mark, yet demand being good, are you seeing any discounting pressures ramp back up? It seemed like that had eased in the past year or so during the pandemic.

Yeah, I'd say we're still in the same place. It's been slightly lower than the most recent periods. I've I'm an advocate that it should be lower. The demand environment is very strong, not just America Woodbark, but most manufacturers are struggling being able to match the overall demand. So why promote heavily or even at all in that environment I think is a question worth asking and challenging. But we've continued to see that down year over year. Okay, great. Thank you.

And our next question will come from Justin Spear with Zeltman. Please go ahead.

I appreciate it, guys. One question for me is how we should think about maybe gross margin or EBITDA margin for this fiscal quarter, for fiscal 22. Is your comment on that pro forma 13% to 14% EBITDA on 4Q, if you had that pricing in hand for the whole quarter, is that suggesting that you'll be in that range for the first quarter?

I think back to the earlier question we got from one of the earlier analysts, is not ready yet to make a call, Justin, on the full year. I think there's still so much uncertainty that that would be unfair. At this point in time, you know, Paul gave you a perspective on what we think the first quarter looks like. We've certainly framed up the first half as going to be the price recapture period, and then there should be an improvement in the second half, assuming things normalize. But I think there's too many questions still today.

Well, I guess what I'm trying to get at, you have that price in hand. I guess it implies roughly, I don't know what the percentage is, but maybe 3% or 4% pricing for the full year or for the full quarter. If you'd had that, you would be in that low teens kind of range for the quarter. So my question is, is that already in hand or is that something that's in motion still?

The pricing is in hand for two of our three channels, and the third channel we're very close to having that complete. And when you think about the longer term, the issue would be if inflation accelerates, pick a period, the next 90 days, well, then we have to go back and go through another pricing action. So you always have this lag that you're chasing in a couple of our channels. So that's why the hesitation to commit to that second half number.

Right. And I know it's tough to kind of glean right now, but I know that we look at the import data. I know there's been some allegations of some illegal circumvention, particularly pointing, I guess, one of your competitors pointing at Malaysia as potentially doing some illegal things. Is that something you guys are paying attention to? And let's say that there is maybe a case. How does that affect dynamics in the industry and potentially pricing power, if at all, for you?

Yeah, so we do closely monitor this. We have an executive from our team that sits on the KCMA and is very close to the various trade case issues and topics. We've not felt pricing pressure that's creating any concerns for us from a share standpoint with respect to the imports and then some of the domestic challenges, if you will, from an inflationary standpoint. So I don't yet see concerns there. The notion of circumvention, yes, in place, and I know there are some some filings specifically around that to pursue and investigate. You mentioned Malaysia. I think Vietnam sometimes comes up in that particular discussion as well. So we do closely monitor it. I know some of the anti-dumping and countervailing duties do come up for review this year, so there's sort of an annual review cycle. We don't expect a change, but it is in process, and we'll closely monitor that as well.

Okay, and then lastly, on your 2025 vision, I know you talked a little bit, maybe alluded to some of the CapEx investments, but how should we think about the P&L investments and some of those strategies that may be ongoing? And if these comparisons that are going to be really tough in the coming quarters, as we look out maybe a year or more, if things started to unwind and maybe go the other way, where there may be some difficult comparisons, would you be able to ratchet back on that spend?

So I think your question is if we started to get into a difficult cycle, can we manage our estimated spending? And I would say yes, we've historically demonstrated the ability to do that. If things happen that are somewhat outside of our control, we can't manage via the pricing conversation we've had. We've got the ability to flex up or down in both of those cases. Thanks, guys. And Justin, I can add a little bit to that too. You can look at our SG&A spend and how much we've leveraged year over year it is an area of kind of extreme focus. We do have the ability to flex there as well, and that is something Scott mentioned. We monitor very closely and have the ability to really control that spend and the way it goes out.

Perfect. Thank you, guys.

And our next question will come from Josh Chan with Baird. Please go ahead.

Hi. Good morning, Scott and Paul. Morning. Thanks for breaking out the inflation impact. So I guess, are you thinking about completely offsetting that inflation headwind with just price? Or for you, is it a combination of price and productivity? Just wanted to kind of get the color of that.

Yeah, it's always a combination of both of those, Josh.

Okay, so price is only a component offsetting some of the inflation is how you're thinking about it.

Yeah, when I think about the buckets, I mean, material and freight, I'm expecting that to all be via price. Labor, that becomes more typically a productivity conversation and somewhat a price conversation.

Okay. All right. And then just on the timing of those price actions, you talked about having two out of the three channels in hand. Does the price start at the beginning of the fiscal year in Q1, or are you – kind of gradually realizing that as we go on for the two channels that we have in place.

Yeah, so you gradually realize it as you go throughout the quarter.

Okay. All right. So I guess on the margins, you mentioned the 300 to 400 basis points of headwind that you saw in Q4 with no price. Does that mean that we cut slightly into that headwind as we go into Q1 and then cut more into that in Q2, and hopefully you're at parity by the second half? I mean, is that the right way to read between the lines there?

Yeah, that's the right way to think about it. I don't know yet if I'm – I haven't stated parity yet in the second half. I know we've talked a lot about the second half today, but certainly as you think about Q1 and Q2, the way you frame that is correct.

Okay. Okay, that's fair. Thanks for the time and good luck in the next year.

All right. Thanks, Josh.

And our next question will come from Julio Romero with Sedoti. Please go ahead.

Hey, good morning, Scott. Good morning, Paul. Morning. Good morning. So I guess most of my questions have been asked here, but maybe if I could talk about some other subjects here. On the new repurchase authorization, The $100 million you announced as an authorization is not inclusive of the $20 million of repurchases you did in Q4. Is that correct?

Correct, yes. Julio, the way to think of it is we had the original $50 million authorized that was out there. We used $20 million of that $50, so that left the $30 million remaining on that. We expired that whole share repurchase that is out there and then issued a new $100 million share repurchase authorization that's in effect going forward.

Got it. And I assume what you did in the fourth quarter in terms of repurchases kind of sets you up to offset any dilution over the next couple of years or so. So I guess just given the new $100 million authorization, is the inference that you're going to be more opportunistic or even more aggressive in repurchases than you have been in the past, or just how to think about that?

Yeah, Julio, we really will be opportunistic in the way that we look at and approach it. We want to make sure that we give our best return back to our shareholders and our key investors that are out there. So that would be the stance that we would take on a go-forward basis. We do want to offset. We do want to manage dilution, though, so each year we want to have that in place. And then beyond that, it's more of an opportunistic play.

Got it. But the $20 million you did in the fourth quarter, is it fair to say that kind of takes care of any dilutive impacts over the next one to two years? Yes.

I think of that more of the prior deletion looking back, because we hadn't done any repurchases throughout the year. So just going forward, as stock grants are issued, et cetera, we want to make sure we're offsetting that effect each year in the future.

Okay, got it. And just switching gears to some of your cash flow commentary, one thing that kind of stuck out to me was the receivables. I think on a dollar basis it was flat sequentially. Just any additional commentary regarding the receivables? I know last quarter you mentioned receivables. Do you expect some improvement on that? And maybe how to think about your DSOs to trend in fiscal 22?

Yeah, Julio, good question. You know, when you think about the accounts receivable, a lot of it has to do with timings from some of our bigger customers when we actually get those payments out there. None of our customers are at risk for any default or bad debt reserves. It actually came down a little bit in some of our channels. So really strong position. It just really had to do with the timing when we actually collected the cash at the end of the year.

Got it. I mean, do you think your DSOs kind of stay at the current level they are now, or they revert towards fiscal 2020 DSO range? You know, just thinking about fiscal 22 and how that should trend.

Yeah, actually, really, it's a little bit more complicated around that, too, because each of our channels have a different DSO target that's out there. And then as the sales flex up or down in those channels, the DSO will move a little bit that's there. So holistically, though, we don't see any issues. Probably, you know, we're putting pressure on our teams to actually increase or improve our DSO targets always, but really it's highly volatile with the mix of our customers that are in each of our channels.

Got it. Appreciate the commentary on the mix. That makes sense. Thanks very much. Yep, thanks.

And as I see there are no further questions, I would like to turn the conference back over to Mr. Joe Himchek for any closing remarks.

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

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.