American Woodmark Corporation

Good day and welcome to the American Woodmark Corporation second fiscal quarter 2023 conference call. Today's call is being recorded November 22nd, 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. 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 Johinchak, Senior 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 today to participate 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 second fiscal quarter earnings call. Our team delivered net sales of $561.5 million, or growth of 23.9%. Our made-to-order frame backlog, represented by days of production, Decreased in the quarters, production levels exceeded our incoming order rate, and we still expect our backlog to normalize by the end of the calendar year. Our stock platform is stabilizing as overall demand returns to normal levels, and our current staffing is able to fully support. Within new construction, our business grew 33.3% versus prior year. Order growth remains strong across our markets as builders work to complete homes and their backlog. We are monitoring recent trends with interest rates, home prices, and declining single-family housing starts. We firmly believe the long-term fundamentals of the market are strong, as the deficit of homes built falls short of household formations, but a slowdown will occur in calendar year 23. Our teams will continue to pursue opportunities to grow our share with new and existing customers. Looking at our remodel business, which includes our home center and independent deal and distributor businesses, revenue grew 17.5% versus the prior year, Within this, our home center business was up 10.3% versus the prior year. With regards to our dealer-distributor business, we were up 46.2% versus the prior year. Our adjusted EBITDA increased 120% to $67.6 million, or 12% for the quarter. Reported EPS was $1.73, and adjusted EPS was $2.24. The improvement in performance is due to pricing better matching inflationary impacts, mixed and improved efficiencies in the manufacturing platforms. Our cash balance is $44.8 million at the end of the second fiscal quarter, and the company has access to an additional $239.4 million under its revolving credit facility. Leverage was reduced to 2.23 times adjusted EBITDA. We committed to restore profitability and are delivering on that commitment. We are facing additional headwinds as consumer behavior shifts, due to housing affordability and overall macroeconomic uncertainty. Rising interest rates are impacting single-family new construction starts, and R&R demand is slowing. 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. Our full-year outlook now reflects a low double-digit growth rate in net sales, with negative sales comps expected in fiscal Q4. Despite this revenue headwind, we are maintaining the expectation of low double-digit adjusted EBITDA margins for the fiscal year. Our team also continues 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 continues to perform well as exceeding internal targets. Digital transformation efforts over the last fiscal quarter include the planning efforts for the next implementation area of ERP, and our manufacturing operations, and we entered the design-build phase of our CRM project. Platform design work continues, and after a comprehensive review of our platform, we identified the need for additional capacity in our stock kitchen and bath cabinetry product lines. We announced last month a $65 million expansion in Monterey, Mexico, and Hamlet, North Carolina. By adding a fourth facility in Mexico and expanding our Hamlet location, which will strengthen our overall supply chain and allow for incremental capacity in both categories on the East Coast, which is one of the largest repair, remodel, and new construction markets. In closing, I'm proud of what this team accomplished in the second fiscal quarter and look forward to their contributions during the second half of 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 and year to date. Net sales for the second quarter of fiscal year 2023 were $561.5 million, representing an increase of 23.9% over the same period last year. And year-to-date, our net sales were $1.1 billion, representing an increase of $208.6 million, or 23.3%. Adjusted net income was $37.3 million, or $2.24 per diluted share, in the second quarter of fiscal year 2023, versus $10.4 million, or $0.62 per diluted share, last year. Adjusted net income for the second quarter of fiscal year 2023 increased $26.9 million due to higher sales, largely driven by price increases and partially offset by higher material and logistics costs. Year-to-date, our adjusted net income was $65.6 million compared to $22 million in the prior year representing a 43.6 million increase or close to 200% improvement. Adjusted EBITDA for the second quarter fiscal year 2023 was 67.6 million or 12% of net sales compared to 30.8 million or 6.8% of net sales for the same quarter of the prior fiscal year representing a 520 basis point improvement year over year. Adjusted EBITDA year to date what is 124.1 million compared to 62.9 million prior year-to-date, representing close to a 100% increase. Looking at our sales channels for the quarter, the combined home center and independent dealer-distributor channel net sales increased 17.5% for the second fiscal quarter, with home centers increasing 10.3% and dealer-distributor increasing 46.2%. New construction net sales increased 33.3 percent for the second fiscal quarter compared to the prior year, with growth in both Timberlake units and dollars. New construction sales channel outpaced market demand during the second 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 down 15.8 percent for the fiscal second quarter Looking at completions during our second fiscal quarter, we saw a 7% increase year-over-year. Given the decline in starts and the large separation between starts and completions, we are reducing our backlog, which is expected to return to normal levels this calendar year. The company's gross profit margin for the second quarter of fiscal year 2023 was 17.6% in net sales versus 11.4% reported in the same quarter of last year. representing a 620 basis point improvement. Year-to-date, our gross margin is 16.8 percent compared to 11.7 percent of net sales in the prior year. Gross margin in the second quarter of the current fiscal year and year-to-date was positively impacted by the pricing actions and operational improvements, offset by inflation and our input costs, which are starting to stabilize. Total operating expenses were 10.1% of net sales in the second quarter of fiscal year 2023 compared to 10.2% of net sales for the same period in fiscal year 2022. Selling and marketing expenses were 4.4% of net sales in the second quarter of fiscal year 2023 compared with 4.7% of net sales for the same period in fiscal year 2022. The ratio to net sales decreased 30 basis points, resulting from controlled spending and leverage created from higher sales in the second quarter of fiscal year 2023. General and administrative expenses were 5.7 percent of net sales in the second quarter of fiscal year 2023, compared with 5.4 percent of 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 44.4 million for the current fiscal year compared to a negative 37.3 million in the prior year. The 81.7 million increase in free cash flows was primarily due to the changes in our operating cash flows, specifically higher net income, higher accrued expenses, and lower capital spending, which was partially offset by higher inventory positions. Net leverage was 2.23 times adjusted EBITDA at the end of the second fiscal quarter, representing a 0.57 times improvement from the 2.80 adjusted EBITDA times at the end of the fiscal first quarter. The company's cash position and availability under a revolver as of October 31, 2022, was $284.2 million, and we paid down $21.2 million of debt in the first six months of fiscal year 2023. Shifting our focus to the remainder of fiscal year 2023, we expect a low double-digit growth rate in our net sales versus fiscal year 2022. The growth rate is highly dependent upon overall industry, economic growth trends, material constraints, labor impact, interest rates, and consumer behaviors. Our price increases are in effect for all of our sales channels. Our EBITDA margin expectation for fiscal year 2023 remains a low double-digit EBITDA percentage. We are holding our capital outlook for fiscal year 2023 and will continue our investment back into the business by increasing our capital investment rate to a range of 3.0 to 3.5% in 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. Specifically, the expansion of our Hamlet, North Carolina facility, a new manufacturing plant in Monterey, Mexico, along with automation efforts to help reduce labor dependencies, improve quality, and increase capacity. We are choosing to make these additional investments into our core business, which help position the company for improved sales opportunities in our stock platform and enhance our margins in the future. It is great to see the commitment, hard work, and efforts our employees invested the past two years to show the returns and the financial results. Our employees' resilience and their 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 that make it happen daily. This concludes our prepared remarks, and 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 key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And the first question will be from Adam Baumgarten from Zellman & Associates. Please go ahead.

Hey, good morning, everyone. Nice results. I guess maybe to kick off just on the home center business, can you maybe talk to what you're seeing or what you expect going forward from a promotions perspective?

With regards to promos, we've not seen a significant change in cadence, Adam. It's been plateaued for probably the last three quarters, which was down versus the prior year, so no significant change there. I will pivot, though, and tell you that in the dealer space, we are starting to see a bit of an increase from a competitive standpoint with regards to promos, but we've not taken any specific actions yet there.

Okay, got it. Thanks. And then, Just a couple others. One, just maybe on what you're seeing on raw material costs, you know, costs if they're deflating at all, at least on a sequential basis. And then just to confirm, you're still expecting CapEx to be 3% to 3.5% of revenue for fiscal 23?

Yeah, I'll take the inflation comment and have Paul speak about CapEx. So on inflation, what we have seen is a bit of relief on some of the species of hardwood lumber. So the index has started to move down. But at the same time, we continue to see increases in the index specific to commodities such as plywood, particle board, and other inputs. Paul, on capital? On capital, Adam, really we are maintaining that outlook for the 3% to 3.5%. And we're running up a little bit late in the first half of the year, but remember we are doing those plant expansions for in Hamlet, North Carolina, and Monterey, Mexico, which will have somewhat of a capital-intensive position into the back half of the year. Okay, guys, thanks a lot.

And our next question is from Tim Loges with Baird. Please go ahead.

Hey, guys. Good morning. Nice job. Hey, Tim. Good morning. Thanks. Hey, maybe just to start, could you just kind of pop around your business a little bit and talk about what you're seeing from an order rate perspective by channel maybe, where you're seeing maybe some of the strongest activity and some of the weakest activity, and just maybe give us a an idea of what the order rate activity looks like relative to some of the shipments you're seeing right now?

So, Tim, my earlier remarks, certainly on the MTO platform, we were seeing incoming order rates decline, and we were able to outproduce that, which is allowing us to bring down the backlog, which is something we want to accomplish. We're still on track to be able to do that by the end of the calendar year. When I think about the different channels, we continue to see strong performance in new construction, dual distributor. I think last quarter I signaled we started to see some slowdown in incoming order rates in the home centers around our NTO platform. As I pivot over to our frameless business and PCS, that's continued to be strong. We continue to see strong unit shipments and strong order rates on that platform. And then on the stock business specifically, that's starting to normalize. We've been chasing inventory restocking positions with our retailers. We're almost well against the specific goals that we've got with our retailers, so we'll get to a better position of matching POS as we go forward in that platform. Last comment I'll make is on the unit side, NTO and PCS units were up for us in the quarter, so it wasn't just purely price driving the sales result, but we did see units down on the stock platform.

Okay. Okay, that's helpful. Thanks a lot. And then I guess with the expectation to see a slower environment, I guess, in the fourth quarter, I mean, what levers could you pull internally to kind of offset the decremental margins? And I guess what would you kind of help us with in terms of what a decremental margin on lower volumes would look like?

Tim, specific to the forecasting, we've held our EBITDA forecast for the year, even with the softer Q4, so we'll be able to still deliver on expectations there. What are the things that we'll do as we see volume slow? Well, the first thing we'll do is we'll right-size and adjust where we need to inside our factories. We're able to do that relatively easily through attrition at this stage. But that's the current thought process as we go forward. We'll continue to tightly manage and control our SG&A spending, which we've always historically done. So we'll throttle that as appropriate to ensure we can deliver the results we need to. I don't have an exact decremental number I want to quote for you at this particular point in time because I don't think it's a big story for Q4. I think that will matter more as we start thinking about 24, but we've not started our planning process for that yet. As you know, we'll kick that off in the January, February timeframe.

Okay, good. That's helpful. And then just like a bigger picture question, just how is Woodmark investing or I guess positioning themselves in two areas? The first I was thinking about was e-commerce and if that could be a kind of a growing channel for cabinets over time. And then the second, I guess, would just be alternative materials, maybe using things that are more composite relative to what I'm just kind of curious how you're thinking of those two, you know, types of opportunities and maybe the receptivity of those on the part of the consumer?

Sure. I'll take the second one first. So with respect to alternative materials, we have introduced an all-India door into the marketplace. That's been very well received. We've been producing that for quite some time. It provides a nice substrate from a finished standpoint with regards to paint, tights up some of the joint lines that we sometimes have quality concerns about. So we have done quite a bit of work in alternate materials, and we've launched those in the marketplace, and they've been well received. Specific to e-commerce, we do engage in e-commerce today through our retail partners. So we do about 5% of our business now online through a retail partner. Our work in that space is continuing to drive asset-rich content, so whether it be 360 views or visualizers, et cetera, to be able to see what's inside the cabinet to really get folks excited about a purchase. It's also how do we continue to engage with consumers? Maybe they start off on our website and go to our retailer's website, get to a purchase, so how do we keep them engaged from the onset of inspiration all the way through to purchase? Yes, that's an active piece of our business. It's something we partner on with our retailers, and we're going to continue to drop more sales through that overall channel.

Okay. Okay, good. Well, good luck on the rest of the year, guys. Thanks for the time. Thanks, Tim. Thanks, Tim.

The next question is from Colin Varon with Jefferies. Please go ahead.

Hey, good morning. Thank you for taking my questions. So I appreciate the high-level commentary on volumes or product category, but can you quantify the price versus volume in the quarter and just give us a little bit of guardrails on how you're thinking about the magnitude and cadence of volume declines in the back half of the year, just to get to that down sales in the fourth quarter that you guided to?

Yeah, Colin, I think we've probably hit this a couple of quarters now, but we're not breaking out the price versus quantity beyond what we've already disclosed.

Okay. And then I guess just in terms of the capacity addition, can you just walk us through the rationale here for the additional capacity, just given the weakening macro backdrop, and just any color on the timing of this capacity coming online would be helpful.

Yeah. So, you know, first let me hit the timing when the capacity comes online. So what we're targeting is the March-April 2024 time frame. So think the fourth quarter of that fiscal year into the first quarter of fiscal year 25 is when we'll really be able to utilize that capacity to drive incremental sales growth. To the first part of your question, you know, why do it and the why now, you know, my first response would be that, you know, we're in this for the long game, not the short game. So short-term disruptions, macroeconomic uncertainty going into 23, that's a factor, but that doesn't affect our five-year strategy and what we're looking to accomplish and achieve. between now and fiscal year 28. So we believe we need this capacity to be able to meet the overall demand needs and sales growth goals that we've got as an organization. We're presenting our strategic plan to our board next week, and then we plan to release within the quarter an updated investor relation deck, which will give you some perspective on what those five-year goals would be from a revenue and profitability standpoint. But this project will be critical to allow us to achieve that.

All right, that's really helpful, Collar. And then just last one, you called out lumber prices, hardwood lumber prices coming down in certain species. I guess any way you could help us understand the magnitude of those declines, and then is that enough to offset the cost inflation that you're seeing in other areas, or are you still expecting to see pressures from a cost perspective going forward? Thank you.

So the decline in lumber is not significant enough to warrant a pricing reset with any of our accounts. So we still are at a point in time where we're balanced. So we're not seeing enough rollback to go engage in any of the channels with any kind of price reduction. So although hardwood lumber has come down, we're continuing to see increases again in many of the other categories, such as plywood and particle board.

Great. Thank you for all the color.

And the next question will be from Steven Ramsey from Thompson Research Group. Please go ahead.

Good morning. Wanted to hear a little bit more on the share gain opportunities you've mentioned for 2023. Maybe talk about by channel and market and how it works to gain share in periods of slower demand.

Yes, Stephen, good morning. That specifically was tied to new construction as we're thinking about it. So as we see a slowdown there, is there an opportunity to go grab share? I can tell you over the last year, year and a half, we've had accounts come to us looking for incremental volume capacity. We were tight and didn't have it, so we were having to say no. So now we're able to release our sales teams to reengage in those conversations and explore opportunities to either convert existing communities or establish new communities with our product.

Okay, helpful. And then a quick follow-on to that. Does the recent CapEx announcement, I assume this doesn't maybe help the near term, but does it help you gain share in new construction more than repair and remodel?

It will benefit both channels because that platform services both new construction and repair and remodel.

Okay, helpful. And then last one for me on the 2023 guidance, following a very strong first half, how much for the second half does this reflect just purely lower volumes, or is pricing coming through more slowly? Anything to add there?

Yeah, our outlook is really about volumes. It's not a pricing conversation. We don't anticipate any price rollbacks in fiscal year 23, but we do see the units slowing.

Great. Thank you.

And the next question is from Julio Romero with Sidoti & Company. Please go ahead.

Thanks. Hey, good morning. So on that last question about the guidance, it sounds like the change to the revenue guide, no change to the price, but it implies somewhat sharper expected slowdown in 4Q volumes. Is that largely led by what you're hearing on the builder side and what you expect from new construction units, or Or has there been a worsening in demand trends on the MTO side relative to three months ago?

It was primarily a function of new construction as we've looked at the last 90 days to start data, which you see as well. It certainly implies that five to six months out from now is when we'll see some of those impacts roll through our business. So we're expecting a softer Q4 in new construction.

Got it. Makes sense. And I guess just if you could talk about inventory, where you are with regards to normalizing the inventory levels and you know, what you're targeting either from a days on hand or an inventory turns basis.

Yeah, Julio, with our inventory position, we're still elevated from where we want to be as an organization. Some of that still has, I'll call it the leftover effects of COVID of having just-in-case inventory. We are definitely shifting to more of what I'll call just back and just-in-time as supply chains are starting to improve. We are going to target inventory reduction, obviously tied to the lower sales that are there as well, but just even from a working capital perspective of the organization. As part of kind of our investor presentation, we'll give a little bit more color of what that working capital will look like. But right now, we're not giving a target or guidance for the rest of the year.

Okay, great. Thanks very much for taking the questions. Yeah, thanks.

And again, if you have a question, please press star and 1. The next question comes from Joe Allersmeyer with Deutsche Bank. Please go ahead.

Hey, guys. Thanks for taking the questions. Hey, good morning. Good morning, Joe. Morning. You just mentioned not expecting price rollbacks. There was some commentary earlier in earnings season from larger builders about negotiating cost reductions on starts going forward. Just wondering if that's something that you've been hearing or seeing, and if not, maybe why you're business or your category is not subject to that?

We've not seen that specifically, Joe. We've had a couple of builders ask about some price reductions, but we go back to the indices. And, again, the indices are not indicating that we're at a point in time where there would be a reason for a price reduction.

Okay, great. What about the multifamily business on the new construction side? I know it's sort of limited regionally for you guys. to the Southwest, but is there an opportunity for you to participate in that backlog, given that now it's actually larger than the single-family backlog?

Most of that shows up in our PCS business, which I mentioned earlier. That's a frameless application or platform, and that's been strong for us. As you noted, it is regional. It's mostly a Southern California and a Phoenix or Southwest region play for us. It's been strong. The backlog is high. We've not made as much progress bringing that down, so that will particularly be something we'll be focused on in the back end as normalizing the production platform in PCS.

All right. Thanks for the questions, guys. Thanks, Joe.

And the next question will come from Garrick Schmos with Loop Capital. Please go ahead.

Hi. This is Jeff Stevenson. I'm for Garrick. Thanks for taking my questions today. I just wanted to dive more into the home center business and the trends you're seeing there and expectations moving into your back half of your fiscal year.

I guess nothing really incremental to add beyond the earlier remarks, Jeff. Again, our MQO business, it softened. We referenced that last quarter. That's been maintained. We project that going forward to be a similar income and order rate pattern. And then on the stock side, We made progress in recovering inventory stocking efforts necessary in the retailer, so we're not going to have that extra inventory build that we need to accomplish. We'll be focused on POS as we go forward.

Okay, great. And then regarding EBITDA margin, you've been kind of firmly in the low teen margins range you guided to, but How should we think about the cadence moving into the back half of the year?

I guess you're asking, is there going to be disruption maybe quarter to quarter? I would just say that, you know, go back to our guidance, low double digits. So my expectation is to be in low double digits in the back half.

Understood. Thanks.

Ladies and gentlemen, this does conclude our question and answer session. I would like to turn the line back over to Mr. Johinchik 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.