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.