American Woodmark Corporation

Good day, and welcome to the American Woodmark Corporation fourth fiscal quarter 2022 conference call. Today's call is being recorded, May 26, 2022. During this call, the company may discuss certain non-GAAP financial measures, including 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 conference over to Paul Johimchik, 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 today to participate. Joining me 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 fourth fiscal quarter earnings call. Our teams delivered fourth fiscal quarter net sales of $501.7 million, a growth of 6%. Our made-to-order backlog, represented by days of production, decreased slightly versus the prior quarter, but remains elevated. Our April made-to-order production levels were at all-time highs as staffing levels and performance of our supply base continues to improve as we ramp up our new assembly line and our gas city plant. Our stock platform was challenged with staffing levels, leading to a decline in units versus the prior year. Our operations team has developed a number of actions we will execute by the fall to increase capacity of stock kitchen and bath production via footprint adjustments as sales are being shifted to other locations within our network, along with the addition of new sales. We're also implementing new compensation plans to improve attraction and retention of employees. Within new construction, our business grew 8.5% versus prior year. Strong order growth remained across our markets. Interest rate increases and home price increases create a concern in the market that a slowdown is possible. We monitor many factors when assessing the strength of the market and note that although mortgage rates are at 12-year highs, rents have been increasing and housing inventory remains low. Our backlog is healthy and should buffer any short-term disruptions in demand. Looking at our remodel business, which includes our home center and independent dealer and distributor businesses, revenue grew 4.5% versus the prior year. Within this, our home center business was up 2.5%. Our made-to-order business and stock kitchen business delivered above-average comps for the period. With regards to our dealer distributor business, we were up 11.9% for the quarter as remodel demand remained strong. Our adjusted EBITDA was $44.5 million with EBITDA margins at 8.9% for the quarter with reported EPS of 87 cents and adjusted EPS of $1.38. This result fell short of our expectations for the quarter due to additional inflation as fuel costs surged as a result of the war in Ukraine and material costs continued to increase. Our teams have captured incremental pricing going forward to mitigate fuel increases and have finalized July 1 increases across new construction, dealer, and distributor channels. We're in the process of communicating price increases to the home centers. Our cash balance is $22.3 million at the end of the fourth fiscal quarter, and the company has access to an additional $237.5 million under its revolving credit facility. We repurchased $25 million or 300,000 shares of stock during the fiscal year, and paid down $15.5 million in debt. Regarding fiscal year 23, we expect both new construction and remodel to grow for the fiscal year. We will continue to reduce our backlog throughout the fiscal year, and pricing will contribute meaningfully year over year, yielding a mid-teens to high-teens growth rate in net sales. Cost of goods sold inflation expectations for fiscal year 23 include an additional approximate 7.5 percent for materials and logistics on top of what was realized in fiscal year 22. We will be able to recover inflation via confirmed and announced price increases, but note there's a lag between incurred inflation and realized pricing, delaying sequential EBITDA expansion into Q2 through Q4. Although profitability goals were not fully realized in fiscal year 22, our strategy remains intact, and profitability will improve into fiscal year 23 and beyond. As previously shared, our strategy has three main pillars, growth, digital transformation, and platform design. Growth for our business will be realized via product and channel expansion. We will continue to evolve our offering to meet our customer needs while ensuring we maintain a relevant lean product line. E-commerce capabilities remain under development to assist our partners, drive consumers from inspiration to purchase. Digital transformation to bring our company together as one via Oracle and Salesforce, are well underway. As mentioned last quarter, our finance and procurement functions went live February 1. We will continue to optimize the system and begin planning for the next implementation area in manufacturing. Salesforce should be live by the spring of 2023. Platform design, which includes our overall manufacturing and distribution footprint, OPEX, and automation efforts to improve margins, will also improve our customers' experience. Our commitment to ESG continues, and I hope you've been able to review a number of our disclosures made over the past few months that highlights our path to sustainability, environmental stewardship policy, human rights policy, and supplier code of conduct. Safety remains our number one priority, and we again delivered a strong OSHA rate of 1.42. Investments have also been made in talent. I recently announced a new leader over our new construction business, and additions have been made in key operations roles like SIOP and final model delivery materials. Our culture and people will drive profitability through each of these efforts. Margins will expand sequentially throughout the year as our price realization grows and efficiencies with the platform improve. EBITDA dollar growth of over $90 million is included in our plan for fiscal year 23 at the upper range of the net sales growth range previously shared. In closing, I'm proud of what this team has accomplished and look forward to all their contributions in fiscal year 23. I'll 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 $501.7 million, representing an increase of 6% over the same period last year. Adjusted net income was $22.9 million, or $1.38 per diluted share in the current fiscal year, versus $22.5 million, or $1.32 per diluted share last year. Adjusted net income for the fourth quarter of fiscal year 2022 increased $0.4 million due to higher sales and a one-time tax benefit, partially offset by higher material and logistics costs combined with supply chain disruptions. Adjusted EBITDA for the fourth fiscal quarter was $44.5 million, or 8.9% of net sales, compared to $48.2 million, or 10.2% 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 $1,857 million, representing an increase of $113.2 million, or 6.5% from the prior fiscal year. Adjusted net income was $54.8 million, or $3.30 for diluted share in the current fiscal year, versus $111.4 million, or $6.54 per deleted share for the prior fiscal year. The adjusted EBITDA for the current fiscal year was $138 million, or 7.4% of net sales, compared to $226.5 million, or 13.0% of net sales for the prior fiscal year. Just a reminder that our prior year financials were restated due to the change in accounting methodologies from LIFO to FIFO for our inventories. Looking at our sales channels for the quarter, the combined home center and independent dealer and distributor channel net sales increased 4.5% for the quarter, with home centers increasing 2.5% and dealer and distributor increasing 11.9%. New construction net sales increased 8.5% for the fourth fiscal quarter. Timberlake direct business grew both in units and dollars as demand continued to be strong throughout the quarter. New construction sales channel outpaced market demand during the fourth quarter of fiscal year 2022. Recognizing a 60 to 90-day lag between start and cabinet installation, the overall market starts in single-family homes was up 3% for the fiscal fourth quarter. Looking at completions during our fourth fiscal quarter, we saw a 4.3% increase year-over-year, which further supports timing impacts that are occurring in the market today. represent a 120-day plus lag between starts and completions. The company's gross profit margin for the fourth quarter of fiscal year 2022 was 13.9 percent of net sales versus 15.6 reported in the same quarter of last year. Gross margin in the fourth quarter of the current fiscal year was negatively impacted by continued higher material and logistics costs combined with disruptions in our supply chain. These costs were partially offset by the increase in sales creating leverage of our fixed costs in our operating platforms. Total operating expenses were 10.1% of net sales in the fourth quarter of fiscal 2022 compared with 11% of net sales for the same period in fiscal 2021. Selling and marketing expenses were 4.9% of net sales in the fourth quarter of fiscal 2022 compared with 5.5% of net sales for the same period in fiscal 2021. The ratio to net sales decreased 60 basis points, resulting from controlled spending and leverage created from the higher sales in the fourth quarter of fiscal 2022. General administrative expenses were 5.2% of net sales in the fourth quarter of fiscal 2022, compared with 5.5% of net sales for the same period of fiscal 2021. The decrease in the ratio is primarily driven by the leverage from higher sales and lower spending. Free cash flow totaled negative 27.1 million for the current fiscal year, compared to 105.4 million in the prior year. The decrease was primarily due to the changes in our operating cash flows, specifically lower net income, higher customer receivables, and inventory balances, which were partially offset by higher accounts payable and accrued expenses as a result of our increased sales. Net leverage was 3.43 times adjusted EBITDA at the end of our fourth fiscal quarter, For the fiscal year, the company paid down 15.5 million of debt and we repurchased 25 million or 300,000 shares. The company's cash position and availability under a revolver as of April 30, 2022 was 237.5 million. Shifting our focus to fiscal 2023, we expect mid-teens to high-teens growth rate in net sales versus fiscal year 2022. The growth rate is highly dependent upon overall industry economic growth trends, material constraints, labor impacts, interest rates, and consumer behaviors. Our price increases will take effect at various stages throughout fiscal 2023, with pricing being realized first in our new construction channel, followed by dealer-distributor, and then home centers. Our outlook for adjusted EBITDA margin percent for the fiscal year ending 2023 will range from high single-digit to low double-digit EBITDA. Inflationary pressures for raw materials, fuel, and logistics will continue through the first half of fiscal year 2023, and margins will expand sequentially throughout the year as our price realization grows and efficiencies with the platform improve. We continue our investment back into the business by increasing our capital investment rate to a range of 3.0% to 3.5% of net sales. These investments will range from a 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. We are choosing to make these additional investments into our core business, which will help improve sales and enhance our margins in the future. Reflecting on all the challenges and uncertainties within the market and global economy during our fiscal 2022 year, the American Woodmark team members have performed to deliver top-line growth. They have been resilient in their efforts to achieve and meet the ever-increasing demands of our customers. This has taken personal efforts and sacrifices from every team member to achieve. I am grateful for what the teams have accomplished and want to thank all of our team members at America 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 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then 2. The first question is from Julio Romero of Sedoti & Company. Please go ahead.

Hey, good morning. Thanks very much for taking my questions. Hey, good morning, Julio.

Hey, good morning.

I guess to start on the quarter, can you talk about how much price dollars you realized in the fourth quarter?

I'll just share that we didn't come in quite at what we had expected, primarily due to a function of lower shipments. A quarter ago, we had predicted and communicated approximately $55 million. We did come in below that, again, more of a function of units, not a function of price capture.

Got it. Okay, that's very helpful, I guess. Thinking about the more recent price increases, I was hoping you could put a finer point on how much incremental price capture you expect from the, I believe, third round of price that started flowing through in April and maybe how much dollars you expect from the fourth round of July increases.

Yeah, I'll just say, Julio, that's all built into the overall guidance for the year. I'm hesitant to get into the details specifically on that because we've not finalized all the communication. of each of those elements of this most recent price increase. So the one you're referring to is the fourth is all effective July 1 for our new construction dealer distributor business. The timeline and effective percent for home centers is, of course, going to be something that we'll be working on over the coming weeks. But it's built into the overall guidance of both mid-teens to high-teens growth overall for the year, as well as the EBITDA range that Paul shared with you.

Okay, very good. I guess The last one for me is just based on the prepared commentary. I guess you expect the price lag to delay sequential EBITDA margin expansion until Q2 to Q4. I guess how do we think about Q1 EBITDA margins? Do you expect, you know, in the same range as the fourth quarter or a step down from the fourth quarter EBITDA margin? My expectation is it will be comparable to Q4. Okay. Thanks very much for taking the questions. I'll hop back in Q3. Thank you.

The next question is from Garrick Schmois of Loop Capital. Please go ahead.

Oh, hi. Thanks for taking my question. I just wanted to be clear on the sales guidance as it relates to volumes. Are you anticipating volume growth in fiscal 23? And just how should we think about that in the context of the labor additions that you're shooting for?

So our guidance does include unit growth inside fiscal year 23. Of course, price is a major driver of that mid-teens to high-teens, but we do have volume growth factored in as well.

Okay. Is it fair to assume that the volume growth should be, you know, a little bit more weighted as you move through the fiscal year?

I'm sorry, could you repeat that question?

Yeah, just the follow-up was, should we – assume the volume growth will be to the extent that it occurs a bit more back half-weighted given the timing of the labor additions?

No, I don't think that's how it will necessarily play out when you're thinking about quarterly comps. We would expect likely stronger overall sales growth, I believe, in the first half and second half.

Got it. Okay, that's helpful. I wanted to ask just one bigger picture question, just how you're thinking about revenue growth moving forward just considering some of the weaker housing data points of late are you seeing any change at all in you know whether it's kind of order rates or the rate of kind of the backlog just any kind of big picture color that you have around the the macro environment would be helpful

Sure. A couple of thoughts I can share there. Obviously, home price appreciation is a factor that we're all seeing and experiencing. We certainly have a thesis that that drives home-improved demand, specifically back on the repair and model side. And I think consumers are going to continue to invest in their homes. On the new construction side, we continue to be underbuilt. There's still demand there, even at higher prices and at higher rates. And our belief is new construction is going to continue to be strong, certainly for us, throughout the remainder of this calendar year. Other data points that we, you know, take a look at is, you know, CPI, which is, you know, we've seen increases there that have been significant, and they're starting to erode consumer confidence, the interest rates, which we already touched on, obviously, in fact, the affordability for new homebuyers. But rents are also increasing at record rates. So if you're looking for a place to live, both are increasing. How do you navigate both of those particular situations? Recently looking at the backlog of single-family homes under construction, you know, significant growth in the most recent reported period, 26% growth, and now at the highest level since November 2006. Starts still grew. Authorized starts started in the month of April by 9%. We continue to see very tight supply. So we're still pretty bullish on new construction. We're not seeing anything slow down with our customers. Switching over to repair and model, a bit of a foot traffic lag in the month of May. I'll tell you that May was our highest comp period specifically in some of our repair and model customers. So we were expecting a slowdown. It came in a little light to that, so that's what we're keeping our eye out is exactly what the trends will be over the summer months in repair and remodel.

Great. Thanks for the color and best of luck.

Thank you.

The next question is from Stephen Ramsey of Thompson Research Group. Please go ahead.

Good morning. Maybe to continue with this line of thought, the bookends of your sales guidance on the low or high side of that, is that most dependent on units delivered, and are those units – is that more dependent on incoming orders or shipments of the existing backlogs?

It's more dependent on the price action that we've communicated and will be realizing in fiscal year 23, as well as shipments through the backlog.

Okay, helpful. And then on the EBITDA guidance and the sequential expansion through the year, is there a cadence to that, or will it be pretty steady coming off of Q1?

I don't want to give exact percentages by quarter, but we would expect it to continue to improve each quarter as we push throughout the year. Certainly be positive from a year-over-year standpoint each quarter.

Okay, helpful. And then last quick one for me, the dealer-distributor growth far outpacing the home centers. Can you go into what factors drove that growth? delta there, and if you expect dealer-distributor to continue at a pace that is superior to the home centers.

Yeah, a bit of that was just the overall strength of our made-to-order business. And as I mentioned earlier, we were able to get the output across that platform certainly in the month of April. And the dealer-distributor business took a larger percentage share of that shipment volume in that particular period. So that was one of the key drivers. Helpful. Thank you.

The next question is from Josh Chan of Baird. Please go ahead.

Good morning, Scott and Paul. Thanks for taking my questions. I guess from a price-cost perspective, by the end of fiscal 23, do you expect to have sort of caught up of all the inflation in 22 and 23 combined? Is that how we should think about sort of price versus cost next year?

Absolutely. That's how we've modeled it with the assumptions both on the price side as well as, you know, future inflation that we're expecting.

Okay. Okay. That's fair. And then I think, Scott, you had mentioned like a $90 million kind of number in your prepared remarks. Can you kind of contextualize for us like how you meant, you know, what you meant to communicate there? Because I think you mentioned something about that being associated with the high end. So, Is it the case that your EBITDA should grow by something less than 90, all the way up to 90 million? Is that the right way to think about it?

So, you know, compare that with Paul's remark. He indicated EBITDA margin percentages on the full year would be high single to low digit. At the high teens growth rate, you know, 90 million would put you in that low double digit. So I'm basically just walking it towards the high end of the range that Paul communicated.

Okay. Okay, that's fair. And then I guess the last question for me is, you know, are you seeing any kind of continued push-outs in terms of the builder cadence because of supply chain issues or labor or any other combination? Is there any risk that the builder schedules need to be kind of further reduced from where we are now, or are you seeing sort of improvement on that front?

I would say it's been similar. No significant improvement or deterioration. So we've been in that mode for quite some time. The category moves around that typically drives the delay, specifically on the completion of the home. For us, getting the home dry and getting windows on, pretty important before you can start getting the sheetrock up and getting the cabinets on. So we've adjusted to that over the last fiscal year. So we understand extended cycle times from when a home starts to when the cabinet installs. is going to begin, and we've not really seen a significant change in the last 90 days. Great.

Thanks, Scott, and good luck for the rest of the year. All right. Thanks, Josh.

The next question is from Colin Barron of Jefferies. Please go ahead.

Hi. Thanks for taking my question. I was just wondering if you could touch on what sort of magnitude of cost inflation you guys have baked into your 2023 EBITDA margin guide and sort of walk through the cost buckets where you're seeing the most pressure and where you're starting to see maybe some relief.

Yeah, so in my remarks, approximately 7.5% above and beyond on COGS versus what we experienced in fiscal year 22. Line share, that's in materials, and it's across the main commodities we buy. So whether that be MDF, particle board, plywood, hardwood, You know, you name the commodity, we've got ongoing carryover inflation as well as some new inflation modeled into that percentage.

That's helpful. And then just in terms, you touched on some of the pressures that the consumer is feeling from rising costs. Have you guys started to see any changes in your product mix that's being ordered because of these dynamics? Any color there would be helpful.

We've not yet seen any significant movement in mix across our customer base. The one exception might be, as I think about our new construction customers, our origins offering, which is more tailored to opening price point. If builders start to shift more towards that as part of their overall offering, we may see some mix shift into that category versus our Port Timberlake offering, but it's not been significant to date.

Great. Thank you for the color, and good luck with the fiscal year.

Thank you.

Again, if you have a question, please press star, then 1. The next question is from LeClaire Hayes of Bellman & Associates. Please go ahead.

Hey, how's it going? I was just wondering if you could provide a little bit more detail on the backlog conversion, you know, in your stock business. It was good to see that improve in the made-to-order, but what are the challenges in stock, and I guess what are some of your action plans to address that?

Yeah, so specifically on the stock side, our issue has been around labor as well as availability of materials into the platform. The material availability has improved, so our real challenges of weight has been around staffing levels. So we've put a number of changes into place on our three major stock assembly plants around compensation as well as attraction and retention programs in those facilities. But maybe more meaningfully, we're doing some things to move around across the network. So when you think about our stock plants, we're principally producing stock kitchens and bath in those particular facilities. We're moving bath cells to other destinations where labor is a bit more available, and that will allow us to redeploy the existing labor in those stock plants back in the kitchen. So we're executing those plans throughout the summer, and by fall we expect to have some capacity gains in both our bath and kitchen business, which will allow us to ship Touching on the notion of backlog, backlog is really a commentary specific to our made-to-order business. Our stock business doesn't have what I call sort of a classic backlog definition. We're basically selling into the home centers, meeting their inventory needs. So where you would see that is we're not at the appropriate inventory levels inside the retailer. So that's how we're managing what the overall backlog is in that business, and we've got opportunity to make improvement against that.

That's really helpful. Thanks. And then just lastly, any supply disruptions, you know, related to like Russian birch or the geopolitical conflict that you guys have had to manage around?

Nothing significant. We don't buy anything directly. We did have some secondary and tertiary supply that came through some of our vendors, and they've been navigating that with alternate solutions to mitigate the risk. Okay. Thank you.

Again, if you have a question, please press star, then 1. As I do not see there's anyone else waiting to ask a question, I would like to turn the line over to Mr. Johimchik for any closing comments. Please go ahead, sir.

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

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