American Woodmark Corporation

Good day, everyone, and welcome to the American Woodmark Corporation third fiscal quarter 2022 conference call. Today's call is being recorded February 24th, 2022. 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'd now like to turn the conference call over to Paul Jehimchik, Vice President and CFO. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to American Woodmark's third fiscal quarter conference call. Thank you all for taking the time to participate today. Joining me 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 third fiscal quarter earnings call. As shared during the past few quarters, our teams continue to navigate a challenging labor, logistics, and supply chain environment. Despite those challenges, our third quarter sales were up 6.4%. Labor absenteeism negatively impacted our quarter as Omicron variant cases grew in late December and early January. Material shortages led to unplanned downtime and efficiency loss due to substitutions that were made to continue production and were primarily related to plywood, beach, and sourced door and drawer face components. International shipping container challenges also persisted, with higher rates and longer delivery times due to port congestion and driver shortages, and finally, weather events in January across the Southeast and Midwest impacted our platforms. Despite all those challenges, our backlog decreased slightly versus the prior quarter, but is still at record highs. Going forward, production levels will continue to increase and drive incremental sales. Our teams will continue to invest in production capability and capacity, the outsourcing, staffing additions, and productivity improvements. Within new construction, our business grew 10.3% 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. Looking at our remodel business, which includes our home center and independent VOM distributor businesses, revenue grew 4.1% versus prior year. Within this, our home center business was up 3.8%. Our stock kitchen business performed well as pro and DIY demand drew positive comps. With regards to our dealer distributor business, we were up 5.5% for the quarter as remodel demand began to rebound post-holidays. Our adjusted EBITDA was $30.6 million with EBITDA margins of 6.6% for the quarter. Reported EPS of negative $2.97 and adjusted EPS of 60 cents. Paul will provide additional details, but note reported EPS was impacted by a one-time pre-tax pension settlement charge of $69.5 million. This result fell short of our expectations for the quarter due to our inability to increase production as quickly as planned due to the previously noted issues with Omicron-related labor absenteeism and supplier shortages. Currently, our traction and retention efforts are having a positive impact, and our production rates are increasing across all of our platforms as staffing levels improve. A new assembly sale started in February in our gas city plan, and expansion efforts to increase output at our flat stock facility continue. For the market, we expect both new construction and remodel to grow for the remainder of our fiscal year. We will continue to take advantage of this growth and are targeting reductions in our backlog and lead times as production increases. After realizing approximately a $30 million plus of pricing impact in the third quarter of fiscal 2022, we have announced or finalized additional actions that will benefit our business, beginning in April. At our current sales level, we expect the impact of our confirmed quarterly pricing actions to increase by an additional $25 million versus the third fiscal quarter to over $55 million in the fourth fiscal quarter. Additional efforts will continue within our operations team to improve productivity and increase production levels. We expect significant margin improvement to be realized sequentially in the fourth fiscal quarter. You may ask why we expect significant expansion in the fourth quarter versus the previous period. Two key drivers, staffing levels and pricing. With Omicron cases declining rapidly, our absenteeism levels improved, and our focused efforts in retention have assisted in attracting and retaining more team members. As we have communicated the past three quarters, pricing to recover inflation has a considerable lag. Our expectation has always been for a better price-inflation match in the fourth fiscal quarter. As a reminder, we shared pricing in Q1 was approximately $3 million. in Q2 was approximately $14 million, and in Q3 was approximately $30 million. That grows to over $55 million in the fourth quarter and only partially includes additional pricing actions our teams are executing. That doesn't mean supplier issues are behind us, but the number of variables that compensate for declining and drives our optimism. We remain committed to our strategy and mitigation efforts to offset the impacts COVID has had on our business. We continue to invest in our digital online capabilities, and product while we focus our resources on the enablers of customer experience, platform design, talent, and ESG efforts. These efforts will contribute to incremental revenue growth and improve adjusted EBITDA margins. I'm happy to share that we're now live on Oracle for finance and procurement, and our digital tools continue to grow, allowing for increased engagement with homeowners and professionals across the purchase journey. In closing, the last few quarters have been very challenging for our team, as they continue to navigate supply chain disruption, labor shortages, and logistical challenges. We remain positive about the future and are excited about the margin expansion we will realize this quarter. I'm proud of what the team has accomplished and the challenges they've overcome. 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 $459.7 million, inclusive of approximately $30 million of price. representing an increase of 6.4% over the same period last year. New construction net sales increased 10.3% for the third fiscal quarter compared with the same period in the prior year. Timberlake direct business counts positively for the quarter and year-to-date fiscal 2022. Our origins product line continues to grow, primarily related to the ongoing mixed shift occurring towards lower-priced products in the market and its simplified product offerings. Delays from the builders and their ability to receive our cabinets increased within the quarter, and as a result, we built finished goods backlog higher than historical trends, which is impacting our overall inventory levels. Our frameless business continues to grow and has built a strong backlog of orders during the past three quarters, primarily resulting from logistical and supply constraints on the West Coast. New construction sales were above market completions during the third quarter of fiscal 2022, and we are experiencing a 90- to 120-day-plus lag between start and cabinet installation. The overall market starts in single-family homes were down 2.5% for our fiscal third quarter, and looking at completions during our third fiscal quarter, we saw a 0.3% decrease year-over-year. The combined home center and independent dealer-distributor channel net sales increased 4.1% for the quarter, with both channels increasing, specifically home centers by 3.8%, and independent dealer and distributor by 5.5% for the quarter. Within both the new construction and the repair and 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 global supply chain and labor challenges in the building product space. This has resulted in our backlog reaching historic levels. Net loss for the quarter was $49.3 million, or a negative $2.97 per deleted share in the third quarter of fiscal year 2022, versus $18.4 million, or $1.08 per deleted share last year. Net income for the third quarter of fiscal year 2022 decreased $67.7 million, primarily due to a one-time pre-tax charge related to our pension termination of $69.5 million, and the challenges we encountered with our labor force, supply chain, and two days of weather impacts across several of our locations. Adjusted EBITDA for the third fiscal quarter of 2022 was $30.6 million, or 6.6% of net sales, compared to 55.7% or 12.9% of net sales for the same quarter of the prior fiscal year. The company's gross profit margin for the third quarter of fiscal 2022 was 11.3% of net sales versus 17.9% recorded in the same quarter of last year. Gross margin in the third quarter of the current fiscal year was negatively impacted by the labor and supply chain challenges combined with inclement weather conditions that impacted our production capabilities. Total operating expenses were 10.1% of net sales in the third quarter of fiscal 2022, compared with 10.9% of net sales for the same period in fiscal 2021. Selling and marketing expenses were 5.1% of net sales in the third quarter of fiscal 2022 and fiscal 2021. General and administrative expenses were 5.1% of net sales in the third quarter of fiscal 2022, compared with 6.1% 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 third quarter of fiscal 2022. Free cash flow is negative, totaling $48.8 million for the current fiscal year, compared to a positive free cash flow of $74.3 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 in our raw materials in an effort to build additional safety stock of key critical components and finished goods due to customer limitations on ability to receive product. Net leverage was 3.61 times adjusted EBITDA at the end of our third fiscal quarter. For the fiscal year, the company paid down $15.3 million in net debt, and we repurchased 25 million, or 300,000 shares. The company's cash position and availability under our revolver as of January 31, 2022, was $227.9 million. In fiscal 2022, our first nine months of performance has impacted by our normal expectations on some pre-class flows for the fiscal year. We stay committed to our investment back into the business by maintaining our current rate of capital investment for the remainder of the fiscal year. We expect the full fiscal year 2022 sales to be mid-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 and macroeconomic environment. Our fourth fiscal quarter EBITDA margins will return to similar levels of the prior year and will improve significantly over our fiscal third quarter. Our pricing actions will represent approximately $55 million plus of total pricing completed at our current projected volumes in our fiscal fourth quarter. Incurred inflationary costs are mostly offset with these price increases across all of our sales channels, which were previously executed. As a reminder, the lag on pricing realization on average takes three to six months to fully offset the inflationary cost impact pressures. the trend of higher inflation could pose a future risk to this outlook as the macroeconomic factors remain unstable. I am confident that the work that the team has done in the prior quarters around pricing, investing in more production capabilities, and strengthening our workforce have set American Woodmark up for a significant EBITDA margin improvement in our fourth fiscal quarter. A tremendous thanks to all of our team members that continue to deliver 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.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the numbers to ensure the best sound quality. Once again, that is star and then one to ask a question. We'll pause momentarily to assemble the roster. And our first question comes from Adam Baumgarten from Zellman. Please go ahead with your question.