American Woodmark Corporation

Good day and welcome to the American Woodmark Corporation second fiscal quarter 2022 conference call. Today's call is being recorded November 23rd, 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 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 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 Johimchik, Vice President and CFO. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to American Woodmark's second fiscal quarter conference call. Thank you for taking the time to participate. Joining me today is Scott Culberth, President and CEO. Scott will begin with a review of the quarter, and I'll add additional details regarding our financial performance. After our comments, we'll be happy to answer your questions. Scott? Thank you, Paul, and thanks to everyone for joining us today for our second fiscal quarter earnings call. Our teams continue to navigate a challenging labor, logistics, and supply chain environment. Second quarter sales were up 1% with demand continuing to outpace production across all platforms. The ability to match demand remains limited by two factors, labor and material availability. Material shortages led to unplanned downtime and efficiency loss due to substitutions that were made to continue production. International shipping container challenges also persist with higher rates and longer delivery times due to poor congestion. Backlog increases slowed, but still represents an increase versus the prior quarter. Going forward, production levels continue to increase and drive incremental sales over the next two quarters. Our teams will continue to invest in production capability and capacity via outsourcing, staffing additions, and productivity improvements. Within new construction, our business grew 7.1% versus prior year. 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 continue to increase the build cycle time. We are monitoring lot supply, community count growth, the consumer price index, which has increased 6.2% over the past 12 months, interest rate trends, and declining consumer sentiment, which has been tied to inflationary concerns. Looking at our remodeled business, which includes our home center and independent dealer and distributor businesses, revenue was down 2.7% prior year. Within this, our home center business was down 3.5%. This was expected due to retailer stocking efforts in the prior year and timing of winter promo shipments coupled with labor challenges across the platforms. Our stock kitchen business performed well, as pro and DIY demands were positive comps. With regards to our dealer distributor business, we were up 0.4% for the quarter. Our adjusted EBITDA was $30.8 million, with EBITDA margins at 6.8% for the quarter. reported EPS of 12 cents, and adjusted EPS of 62 cents. This result fell short of our expectations for the quarter, as labor constrained our ability to increase production as quickly as planned, and we experienced $0.8 million of incremental costs related to a West Coast Particle Board manufacturing facility closure. Our traction and retention efforts have positively impacted our main-to-order facilities, and we have initiated manufacturing in several assembly cells that were idled over the summer due to labor shortages. After several months of decline, our October production rates improved to the highest levels seen since April and May. A similar increase in output from our stock facilities was realized in October as well. Our sourcing teams have secured particle board supply for these tests and are working to improve the logistics costs associated with those shipments. For the market, we expect both new construction remodel to grow for the remainder of our fiscal year. We will continue to take advantage of this growth, and should a short-term reduction in demand impact the market, Our backlog will allow us to maintain a higher production level. We will improve margins in fiscal year 22. I shared last quarter that we were announcing additional pricing actions, and those are now complete. After realizing approximately $3 million of impact in the first quarter of fiscal 2022 for pricing, that impact grew to approximately $14 million in the second quarter. At our current sales levels, we expect the impact of our confirmed pricing actions to increase to over $35 million in the third fiscal quarter, and over $50 million in the fourth fiscal quarter. Additional efforts will continue within our operations team to improve productivity and increase production levels. Sequential margin improvement is forecasted for each of the next two quarters, with our fiscal fourth quarter popping positively versus the prior year. Our team presented an exciting update of our strategic plan last week to the Board. The Board remains very engaged with our leadership team in shaping our strategy. Our focus areas have not changed from what I presented during our May earnings call, and we are working to accelerate key initiatives that will strengthen the business. Investments will continue in our digital online capabilities and product, where we focus our resources on the enablers of customer experience, platform design, talent, and ESG efforts. These will contribute to incremental revenue growth and improve adjusted EBITDA margins back to our target of 14% to 15%. In closing, I'm proud of our employees for what they've accomplished and the challenges they've overcome. I look forward to their continued contributions. 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 $453 million, inclusive of $14 million of price, representing an increase of 1% over the same period last year. New construction net sales increased 7.1% for the second fiscal quarter compared with the same period in the prior year. Timberlake direct business comps positively for the quarter and the first half of fiscal year 2022. We continue to experience growth in our origins line related to the ongoing mix shift occurring towards lower priced products in the market. Delays from the builder and their ability to receive our cabinets improve slightly within the quarter. However, we continue to build a finished goods backlog higher than historical trends, which is impacting our inventory levels. Our frameless business continues to grow and has built the backlog of orders during the past two quarters, primarily due to logistical and supply constraints on the West Coast. New construction sales were above market completions during the second quarter of fiscal 2022. We are experiencing a 90 to 120 day plus lag between start and cabinet installation. The overall market starts in single family homes were up 14.8% for our fiscal second quarter. Looking at completions during our second fiscal quarter, we saw a 3.4% increase year-over-year, which further supports timing impacts the market is experiencing and our continued growth in the new construction channel. The combined home center and independent dealer-distributor channel net sales decreased 2.7% for the quarter, with home centers decreasing 3.5% and independent dealer and distributor increasing 0.4% for the quarter. Within both the new construction and recurring remodel markets, We continue to see consumers focusing on larger investments within their homes, whether it is kitchens or baths. We expect this trend to be extended as the time to complete projects have been impacted due to the global supply chain and labor challenges in the building product space. Net income was $2 million or $0.12 per diluted share in the second quarter fiscal year 2022 versus $23.1 million or $1.36 per diluted share last year. and income for the second quarter of fiscal 2022 decreased $21.1 million due to the rapidly evolving inflationary pressures outpacing the pricing actions taken across all our channels. Given the increased backlog of our products, there is an inherent lag in the realization of our pricing actions that we have executed to offset the inflationary pressures we experienced late in fiscal 2021 and continued into fiscal 2022. Adjusted EBITDA for the second fiscal quarter of 2022 was 30.8 million or 6.8% of net sales compared to 66.1 million or 14.7% of net sales for the same quarter of the prior fiscal year. The company's gross profit margin for the second quarter of fiscal 2022 was 11.4% of net sales versus 20.2% recorded in the same quarter of last year. Gross margins in the second quarter of the current fiscal year was negatively impacted by the rapidly evolving inflation and material and logistic input costs combined with the labor challenges that impacted our production capabilities. Total operating expenses were 10.2% in net sales in the second quarter of fiscal 2022 compared with 11.5% in net sales for the same period of fiscal 2021. Selling and marketing expenses were 4.8% in net sales in the second quarter of fiscal 2022 compared with 4.8% of net sales for the same period in fiscal 2021. General and administrative expenses were 5.4% of net sales in the second quarter of fiscal 2022, compared with 6.7% of net sales for the same period of fiscal 2021. The decrease in the ratio is primarily driven by lower employee incentive costs and controlled spending in the second quarter of fiscal 2022. Free cash flow was negative, totaling $37.3 million for the current fiscal year, compared to a positive free cash flow of $57.4 million in the prior year. The decrease was primarily due to changes in our operating cash flows, specifically lower net income, higher inventory balances, and lower accrued expenses. Our inventory balances have grown our raw materials in efforts to build additional safety stock of key critical components. Net leverage was 3.02 times adjusted EBITDA as of the end of the second fiscal quarter. For the fiscal year, the company paid down $19.7 million of net debt and we repurchased 25 million or 300,000 shares. The company's cash position as of October 31st, 2021 was $8 million of cash on hand and access to $233 million of additional availability under our revolver. In fiscal 2022, our first half performance impacted our normal expectation of free cash flow for the fiscal year. We plan to continue our investment back into the business by maintaining our prior outlook on our capital investment rate of approximately 3.5% of net sales for the full fiscal year. We expect the full year fiscal 2022 sales to be high single-digit growth over the prior fiscal year. The growth rate is highly dependent upon overall industry, economic growth trends, material, logistic, and labor constraints, as well as consumer behaviors that can be impacted by the ever-changing COVID-19 environment. Margins will continue to be challenged in the next two quarters due to continued inflationary logistics and labor challenges. However, our expectation is that margins will improve sequentially through the remainder of the year. Our pricing actions will be fully realized by the fourth fiscal quarter, representing $50 million plus of total pricing completed across all sales channels, that were completed within our second fiscal quarter, 2022. Given the lag on pricing realization, it takes on average three to six months to realize price increases to fully offset the cost impact of the inflationary pressures. The trend of higher inflation could pose a future risk to this outlook as the macroeconomic factors remain unstable. In closing, a tremendous thanks to our team members that continue to deliver the extra efforts to make it happen in this challenging environment. This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question will come from Gary Schmois from Loop Capital. Please go ahead.