American Woodmark Corporation

Good day and welcome to the American Woodmark Corporation first fiscal quarter 2023 conference call. Today's call is being recorded August 30th, 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 statement. Such factors include that 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, Senior Vice President and CFO. Please go ahead.

Good morning, ladies and gentlemen, and welcome to America with Mark's first fiscal quarter conference call. Thank you for taking the time today 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 first fiscal quarter earnings call. Our team delivered net sales of $542.9 million, a growth of 22.7%. Our made-to-order backlog, represented by days of production, decreased in the quarter as production levels improved and exceeded our incoming order rate. We expect our backlog to normalize by the end of the calendar year. Our stock platform remains challenged with staffing levels, and we saw a decline in units versus the prior year. Our operations team continues to work on actions that we will execute this fall to increase production capacity of stock kitchen and bath, including footprint adjustments for relocation and addition of production sales. Within new construction, our business grew 27.2% versus prior year. Strong order growth remained across our markets as builders worked to complete homes in their backlog. We are monitoring recent trends with interest rates, home price increases, and declining single-family housing starts. We still believe in the long-term fundamentals of the market, but the deficit of homes built falls short of household formations And then a slowdown would be relatively short-lived. Our teams will continue to pursue opportunities to grow our share. Looking at our remodel business, which includes our home center and independent deal and distributor businesses, revenue grew 19.6% versus the prior year. Within this, our home center business was up 15.3%. With regards to our deal and distributor business, we were up 36% for the quarter. Our adjusted EBITDA increased 76% to $56.5 million, or 10.4% for the quarter. Reported EPS was $1.21, and adjusted EPS was $1.71. The improvement performance is due to pricing better matching inflationary impacts, mixed and improved efficiencies in the manufacturing platforms. Our cash balance was $33.7 million at the end of the first fiscal quarter, and the company has access to an additional $239.4 million under its revolving credit facility. We paid down $20.6 million in debt and leveraged reduced to $2.8 million. For the remainder of fiscal year 23, we expect slowing incoming order rates to impact the second half of the year along with the recent declines in single-family starts. We will continue to reduce our backlog throughout the calendar year and improve in-stock rates with our retail partners. Price realization will contribute meaningfully year-over-year and we estimate a mid-teens growth rate in net sales. We are prepared to navigate short-term demand reductions, and our product portfolio is positioned to win and attract customers in a more difficult economic environment. Cost of goods sold and inflation expectations for fiscal year 23 remained at approximately 7.5% for materials and logistics on top of what was realized in fiscal year 22. We expect low double-digit adjusted EBITDA margins for the fiscal year. I've noted in the past few calls that our teams are committed to restoring profitability. We are well on our way in delivering on that commitment and continue to execute against our strategy that has three main pillars, growth, digital transformation, and platform design. Growth from our most recent summer launch of four new finishes and several new door styles has been received positively by the marketplace. Digital transformation efforts over the last fiscal quarter include the launch of our ERP optimization teams, and our planning efforts for the next implementation area and our manufacturing operations. We also officially kicked off our CRM project last month. Platform design work continues as we activated the warehouse management solution tool in our Texas DC and began producing stock bath products in additional locations to increase capacity. In closing, I'm proud of what this team accomplished in the first fiscal quarter and look forward to all of their contributions in fiscal year 23. 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 $542.9 million, representing an increase of 22.7% over the same period last year. Adjusted net income was $28.4 million, or $1.71 per diluted share in the current fiscal year, versus $11.7 million, or $0.70 per diluted share last year. Adjusted net income for the first quarter of the fiscal year 23 increased $16.7 million due to higher sales, largely driven by price increases and operational efficiencies, partially offset by higher material and logistics costs combined with supply chain disruptions. Adjusted EBITDA for the first fiscal quarter was $56.5 million, or 10.4% of net sales, compared to 32.1 million or 7.3% in net sales for the same quarter in the prior fiscal year, representing a 310 basis point improvement year over year. Looking at our sales channels for the quarter, the combined home center and independent dealer and distributor channel net sales increased 19.6% for the quarter, with home centers increasing 15.3% and dealer distributor increasing 36%. New construction net sales increased 27.2% for the first fiscal quarter with growth in both timber lake units and dollars. New construction sales channel outpaced market demand during the first quarter of fiscal year 2023. Recognizing a 60 to 90 day lag between start and cabinet installation, the overall market starts in single family homes were up 0.7% in their first fiscal quarter. Looking at completions during our first fiscal quarter, we saw an 8% decrease year over year. For the past year plus, we have seen a disconnect between starts and completions due to all the disruptions within the professions that support the new construction market. Given the large separation between starts and completions, we are starting to work into our backlog, which remains at elevated levels. The company's gross profit margin for the first quarter of fiscal year 23 with 16% of net sales versus 12.1% reported in the same quarter of last year. Gross margin in the first quarter of the current fiscal year was positively impacted by the pricing actions and operational improvements offset by continued inflation in our input costs. Total operating expenses were 10.3% of net sales in the first quarter of fiscal year 23, compared with 10.6% of net sales for the same period in fiscal year 2022. Selling and marketing expenses were 4.7% of net sales in the first quarter of fiscal year 2023, compared with 5.2% of net sales for the same period in fiscal year 2022. The ratio to net sales decreased 50 basis points, resulting from the controlled spending and leverage created from the higher sales in the first quarter of fiscal year 2023. General administrative expenses were 5.6% of net sales in the first quarter of fiscal year 2023, compared with 5.4% in net sales for the same period of fiscal year 2022. The increase in the ratio is primarily driven by increases in incentives and profit sharing, partially offset by the leverage created from higher sales. Free cash flow totaled a positive $32.7 million for the current fiscal year, compared to a negative $8.1 million in the prior year. The increase is primarily due to changes in our operating cash flows, specifically higher net income, and higher accrued balances in addition to lower capital spending, which was partially offset by higher inventory positions. Net leverage was 2.8 times adjusted EBITDA at the end of the first fiscal quarter. During our first fiscal quarter, the company paid down $20.6 million of net debt. The company's cash position and availability under our revolver as of July 31, 2022, was $273.1 million. Shifting our focus to the remainder of fiscal year 2023, we expect mid-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 are in effect for the new construction and dealer-distributor channels, with home centers taking effect during our fiscal second quarter. Our adjusted EBITDA margin expectation for fiscal year 2023 is low double digit EBITDA percentage. We are holding our capital outlook for fiscal year 2023, and we'll 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. As a reminder, 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 and platforms 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 our sales and enhance our margins in the future. It is great to see all the hard work and efforts our employees have put in the past two years start to show in the returns of our financial results. The employees' resilience and ongoing contributions to the company's culture have set the stage for a strong start to our fiscal year. I'm 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 touchtone phone. If you're using a speakerphone, please pick up the handset before pressing the key. To withdraw from the question queue, please press star then two. The first question is from Adam Baumgarten of Zellman. Please go ahead.

Hey, good morning. Thanks for taking my questions. Nice quarter. Can you maybe talk about the split between price and volume in the quarter as we look at that 23% revenue growth?

Yeah, we won't break it down in detail there, Adam, but specifically across the platforms, what I can tell you is our made-to-order business and our PCS frameless business were both up in units, and then obviously price benefited both of those platforms. Our stock business, as I mentioned earlier in my prepared remarks, units were down. That's not a function, however, of demand. That was a function of our production capacity, which was throttled by labor availability.

Okay, got it. Thanks. And then It doesn't sound like you have any additional pricing actions planned. I know you mentioned the home center price increase goes effective in the second fiscal quarter, but are there any other price increases in the works that we should be aware of?

We'll always be monitoring that based on input costs, but we're not seeing anything at this juncture that would indicate we need to move if we were to see inflation continue and start to hit our trigger points for additional pricing action. Of course, we would do such, but we don't see that today.

Okay, great. And then just lastly for me, just on the input cost basket, just seems like a lot of moving pieces. Maybe if you could just walk through what you're seeing, certain raw materials, whether they've, you know, you've seen some relief and the logistics side too, I think was called out. So maybe just the moving parts within your input costs.

Sure. On the logistics side, it'll be a function of fuel. So we've seen a little bit of a tick down on fuel. So that'll start to benefit some of the fuel surcharges that we incur. On the raw side, I guess I would use the word maybe plateauing is maybe a way to frame some things. Specifically, I'll talk about hardwood. We've plateaued. It's still an all-time high in that space. I'll point out that that plateau point is higher than the point we were paying when we took our last pricing action. So it's not that we're seeing deflation and we're seeing price come down, but we're at least seeing it plateau at a high point. So no relief at this juncture, but at least the pace of increasing has slowed. Great, thanks a lot.

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

Good morning. On the FY sales guide, I believe last quarter you said mid to high teens, now saying mid-teens. Is that the slower second half expectations or what other factors are driving that?

Yeah, it's tied to the uncertainty about the second half. When we gave that outlook in May, Certainly the mid to high teens was pretty solid. As we fast forward the 90 days throughout the quarter, I mean, we basically delivered what we expected in the first quarter and really don't have any questions about our second quarter. It's as we move into the end of the calendar year, the first part of the next calendar year, there's some questions. And those questions obviously rely on new construction, what exactly is going to happen with single-family housing starts, and then what happens with the repair and model business. And I'm tying those comments. Stephen, principally to our made-to-order business. Our stock business, we expect to be resilient. I don't have a lot of concerns in that space, but it's how does MTO play out in the second half?

Okay, helpful. And then a couple questions on labor. I guess overall, you've been building up labor to improve production, and then you're coming up on a potentially slower demand period. Do you expect to adjust labor costs? downward in anticipation of that? And then secondly, the labor issues around stock, how do you see that evolving in the coming quarters?

Yes, I'll take the second question first. So the labor challenges persist in the stock platform. The ways we're trying to address that, as I mentioned in the last quarter call and reaffirmed today, is we are shifting some of our sales and production capacity between plants. where we have a better market for labor. So we're trying to be aggressive in that space, find opportunities to use the existing pool of labor we've got and add markets where it's available. Overall, to the first part of your question around labor availability, as I think about from a platform standpoint, we're in relatively good shape on our made-to-order business. We are always going to be aggressive in navigating upticks and downticks. So our goal is to level load the platform as long as we can. We don't want to be chasing spikes or big dips across the platform. So we use that backlog that we've talked about for the better part of the last year and a half, typically to navigate and manage that. We typically would see a slower season around the holidays, but we don't want to see a big reduction in our output all of a sudden in December and then have to ramp up in January. So we'll navigate that. each month as we go forward and right-size that. Unfortunately, retention, attrition continues to be a high across really all of our platforms. So should we need to right-size a platform, we'd be able to accomplish that really with attrition rates.

Hopeful. Thank you.

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

Good morning. Thank you for taking my questions. I just wanted to start on the order rates and the backlogs. Can you just give a little bit more color as to what you're seeing in order rates in August and what is in your backlogs currently and just how much visibility that gives you into the rest of your fiscal year 2023?

Yeah, so it does depend on the platform. So I want to make sure we talk about where backlogs are really relevant. And that's our made-to-order business. So specifically in that area, we've had elevated backlogs for the better part of a year to the tune of, you know, 2X plus what it historically would be. We're starting to see those come down, and by the end of this counter, your expectation would be that we'd be back to a normal state. So we've got a very good line of sight as to what our production plan and output needs to be between now and December. As you start to move into the January 4 timeframe, that'll be a function of incoming order rate. So you asked specifically about the rates we're seeing in August. I'd say they were fairly similar to July. We've seen slowing order rates in our repair and model business. We're not yet seeing that in new construction as our builders are looking to aggressively close out the homes they've sold by the end of their fiscal year. Backlog I think of as a different description across our stock platform. It's not that we have backlog per se, but we do have stocking opportunities with our retail partners. And we are still not at targeted in stock levels at our retailers. So we've got the opportunity to continue to meet the existing demand as well as backfilled inventory in the stores as well. So that gives us line of sight really as well into the first part of next year from a production platform standpoint.

Okay. That's really helpful color. Thank you. And then just on your EBITDA margin in the first quarter, It came in above what I think most people were expecting, I think what your commentary was last quarter as well. So what factors came in better there? And then just going forward, how should we think about the cadence of EBITDA margin progression through the remainder of the year to get you to that low double-digit EBITDA margin guide?

Yeah, so in the first quarter versus our expectations that we had modeled, SG&A is a little bit better, and then price and mix was a little bit better. So those were the kind of three big buckets that helped drive over delivery from what our internal expectations were and what we guided. We don't want to get into a method or approach of guiding quarterly on EBITDA, so we want to just take you back to our full year view. When we last spoke with you all back in May, we were thinking high single to low double with our performance in the first quarter and our expectations for the remainder of this year. We revised that. We took it up and said we expect to be in low double digits as we go forward. There are some incremental pricing actions that will come our way, as Paul highlighted, so that will benefit us. So, yeah, I would expect to see, you know, similar EBITDA margins here in the near term with the opportunity for progression as we get forward.

Great. Thank you very much, and good luck for the rest of the year.

Thank you. Appreciate that.

The next question is from Tim Wolf of Baird. Please go ahead.

Hey, guys. Good morning and nice job.

Thank you. Appreciate it. Thanks, Tim.

Maybe just kind of starting out on mix. As you kind of look at the mix of, I guess, the mix within kind of the incoming orders, are you seeing any changes over the last six to nine months in terms of either positive or negative mix versus your expectations?

Not across price points inside the platform. So I think you're probably asking specifically in made to order, are we seeing any kind of rotation up or down? Nothing that stands out at this point in time. I would say truly been, you know, each channel, what are we seeing is rates. And as I mentioned to the previous question, you know, we are seeing slowing rates in repair and model, right? We're feeling that first. So that's our home center dealer distributor business. So we're experiencing that in made to order, but not yet in new construction.

Okay. And are the order volume rates still positive, or have you actually seen those, you know, kind of moderate, you know, even more than that?

Let me make sure I understand your question. So on the incoming order rates, are we seeing a declining pattern? You said the word moderate. Yeah.

I guess when we say orders, you know, I don't know if you guys are thinking about it in dollar terms or in unit volume numbers. So I guess on a unit volume basis, is that the order?

My remarks were units-based.

Gotcha. Okay, perfect. And then I guess just just from a, you know, a longer term perspective, you know, when you look at, you know, kind of the 16% gross margin, you know, rate that you're able to post this quarter, and you know, you go back a couple years, and, you know, you guys are doing upwards of 20% gross margins. I mean, is there a pathway to getting back to that kind of longer term gross margin level over the next couple of years?

I think the way we've kind of framed this business for the last two to three years, Tim, is let's focus on the EBITDA margin. So I don't want to necessarily get into the specific ranging and target around gross margin, other than it clearly can improve further from the 16% we just delivered. So I would take us back to the EBITDA. And we always talked about that mid-teens rate. Now, pricing has distorted a bit as to what's going to happen in the business. We've had significant price actions that out of the gate, it's going to dilute what your EBITDA percentage is, even with the same dollars. So our goal is to get back to the EBITDA dollar targets that we had prescribed in those outlooks. Okay. Okay, good.

And then from a free cash flow perspective, any color on expectations for the full year?

Yeah, Tim, really looking at free cash flow, we did perform strong in Q1 here, without a doubt. And Some of the drags that are on there you can see on the inventory, so we have some opportunities for improvement. But we are going to continue to invest back into the business, as we've talked about, the 3% to 3.5% of net sales. So that really would be kind of our driving force that's out there, so you kind of tie back to our EBITDA percents that we're going to tie into and our sales growth. So really, overall, free cash flow should be strong for the year in comparison to last year.

Okay. Okay, good. Well, nice start, and good luck on the rest of the year, guys.

Thanks, Dan. Appreciate it.

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

Oh, hi. Thanks. Nice quarter. I wanted to ask on pricing and promotions, if I could. I know you have one more price increase here to come in the second quarter. You put in pricing earlier in the year as well, but just given the potential slowdown in the market, are you seeing any Any signs of the change in the competitive landscape? Any signs of returns to promotions at all?

Not at the current time. We continue to see promos at similar rates to the prior quarters, down slightly versus prior years, so nothing's indicated a change. We'll be mindful of monitoring and watching that to see if competition or retailers look to go back to that. Our hope is not. Our belief for many, many years, and we've been vocal about this, is that the promos are not necessarily driving new consumers into the outlets. It's basically just bundling the orders up into a shorter period of time, which creates order entry and manufacturing and delivery challenges. So our goal will be not to get back into a heavy promo cadence, and let's try to maintain the current rates.

Got it. Okay, that's it for me. Thanks again. Thank you.

Again, if you have a question, please press star then one. The next question is from Julio Romero of Sedogian Company. Please go ahead.

Hi, this is Stefan Guillaume for Julio Romero. Hi, good morning. Good morning. Can you talk about like the amount of price increases like taken in the quarter and what is embedded in your full year revenue guidance? And I guess to follow up, what has been the elasticity? versus your own expectations?

Sorry, could you repeat the last part of that question, your second part?

What has been the elasticity versus your own expectations?

Yeah, so the first question you asked on the pricing, not going to disclose specific price percentages from a competitive standpoint. I don't think it's appropriate. We don't see that in the marketplace from others in the industry. We'll just continue to tell you that the price is fully embedded in our outlook. We'll realize the prices we've taken up to this point, and then we're finalizing this last round with inside the home center and our made-to-order business. So that's really going to close the loop there. Around elasticity, I guess it's tough to answer that question because there's so many other circumstances that are on top of that. So is it the macroeconomic issue? Is it interest rates? What exactly is driving it? I'll just go back to the question that we've been asked several times around incoming order rates. We have seen a slowdown or repair remodel on our made to order business. Is that purely a function of pricing and is it elasticity related to that or is it consumer confidence? So I don't think we have enough data yet to point to price elasticity. I'll keep defaulting to confidence quite frankly at this point in time being a question mark and folks perhaps pausing. But longer term home price appreciation drives home improvement demand. Home prices are still quite high, even if they were to reset, as some were suggesting, they're still going to be quite high. And I think when folks have that, they have a willingness and an appetite to invest in their home. So I'm not yet worried around elasticity.

All right. Thank you. And I guess my second question would be, how should we think about inventory levels, like maybe stay at the same level as now or maybe come down as supply chain challenges like ESOP?

Yeah, so really, if you go back to kind of when COVID was at its peak, there was an increased focus on supply chain resiliency and really stockpiling inventory so we wouldn't have shortages. We are going to go back to normal operating procedures when the supply chain does come back to full occult stability. It's still not 100% there, so our inventory levels still do remain higher than normal, but we are working actively to bring those down to call back to more of our normal trends that are out there.

All right. Thank you for taking my questions. Thank you.

Again, if you have a question, please press star then one. As I do not see there is anyone else waiting to ask a question, I would like to turn the line over to Mr. Johimcek for closing remarks.

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

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