American Woodmark Corporation

Good day and welcome to the American Woodmark Corporation third fiscal quarter 2023 conference call. Today's call is being recorded February 28th, 2023. 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, AmericanWoodlock.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 on 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, 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 call over to Paul Johinchik, Senior Vice President and CFO. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to American Woodmark's third fiscal quarter conference call. Thank you 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 third fiscal quarter earnings call. Our teams delivered net sales of $481 million or growth of 4.6%. Our made-to-order frame backlog normalized as planned at the end of the calendar year. In addition, demand trends softened throughout the quarter within remodel, and as a result, we took several unscheduled production down days around the holidays. Recent trends, however, have improved, and we remain confident in delivering our four-year forecast shared last quarter. Within new construction, our business grew 19.7% versus prior year. Order growth is slow due to the decline in single-family housing starts that began last summer and fall. Builders are optimistic going forward as January sales have improved. We continue to monitor recent trends with interest rates, home prices, household formations, and consumer confidence. The long-term fundamentals of the market remain strong. There continues to be a deficit in the number of homes built, falling short of household formations, but we acknowledge a slowdown will occur in calendar year 23. Opportunities remain to grow our share with new and existing customers. Looking at remodel, which includes our home center and independent dealer and distributor businesses, revenue declined 4.9% versus the prior year. Within this, our home center business was down 9.8% versus the prior year. Our stock and made-to-order kitchen business was down single digits, with stock bath down double digits versus the prior year. Our stock bath business was impacted by a promo loss versus the prior year at a retailer along with inventory destocking efforts at our customers. With regards to our dealer distributor business, we were up 14.4% versus the prior year. Our adjusted EBITDA increased 66.8% to $51 million or 10.6% for the quarter. Reported EPS was $0.88, and adjusted EPS was $1.46. The improvement performance is due to pricing better matching inflationary impacts, mixed and improved efficiencies in the manufacturing platforms. Our cash balance was $45.8 million at the end of the third fiscal quarter, and the company has access to an additional $277.6 million under its revolving credit facility. Leverage was reduced to 1.81 times adjusted EBITDA as the company paid down $46.1 million in debt during the quarter. As I shared in the prior two quarterly earnings calls, we committed to restore profitability and are delivering on that commitment. A slowdown in demand will present a near-term headwind, but 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 remains unchanged from the prior quarter as we continue to reflect a low double-digit growth rate in net sales, with mid-single-digit negative sales costs expected in fiscal Q4. Despite this revenue headwind, we are maintaining the expectation of low double-digit adjusted EBITDA margins for the fiscal year. We released an updated investor relations deck in January that shared our view on financial performance over the next five years. Despite a near-term slowdown in demand, we believe that 45% CAGR in net sales is appropriate and that we will grow adjusted EBITDA over $350 million. The key driver of margin expansion is tied to our platform design work that I will cover in a moment. Our team continues to execute against our strategy that has three main pillars, growth, digital transformation, and platform design. Growth will benefit from our upcoming summer launch of two new finishes and several new door styles. Digital transformation efforts over the last fiscal quarter include the planning efforts for the next implementation area of ERP and our manufacturing operations, including global design, and Monterey location planning. We also completed the first two sprints of the build phase of our CRM project, which goes live this summer. Platform design work is accelerating as groundbreaking events occurred within the quarter for our expansion in Monterey, Mexico and Hamlet, North Carolina that will deliver additional capacity in our stock kitchen and bath cabinetry product lines. Automation efforts continue and we have committed over $75 million in automation investments over the next five years. In closing, I'm proud of what this team accomplished in the third fiscal quarter and look forward to their contributions during the fourth fiscal quarter of fiscal year 23. I will now turn the call back over to Paul for additional details on the financial results for the quarter. Paul? Thank you, Scott. Financial headlines for the quarter and year to date. Net sales for the third quarter of fiscal year 2023 were $481 million, representing an increase of 4.6% over the same period last year, In year-to-date, our sales were $1.6 billion, representing an increase of $229.6 million, or 16.9%. Adjusted net income was $24.4 million, or $1.46 per diluted share in the third quarter of fiscal year 2023, versus $9.9 million, or $0.60 per diluted share last year. Adjusted net income for the third quarter of fiscal year 2023 increased $14.5 million due to higher sales largely driven by price increases and improvements in our operations. Year-to-date, our adjusted net income was $90 million compared to $32 million prior year, representing a $58 million increase. Adjusted EBITDA for the third quarter of fiscal year 2023 was $51 million, or 10.6% of net sales, compared to 30.6 million or 6.6% of net sales for the same quarter in the prior fiscal year, representing a 400 basis point improvement year over year. Adjusted EBITDA year to date is 175.1 million compared to 93.5 million the prior year, representing an 81.6 million increase. Looking at our sales for the quarter, The combined home center and independent dealer and distributor net sales decreased 4.9% in the third fiscal quarter, with home centers decreasing 9.8% and dealer distributors increasing 14.4%. New construction net sales increased 19.7% in the third fiscal quarter compared to the prior year. New construction sales outpaced market demand during the third quarter fiscal year 2023. Recognizing a 60-90 day lag between start and cabinet installation, the overall market starts in single-family homes were down 24.6% for the fiscal third quarter. Looking at completions during our third fiscal quarter, we saw an 8.1% increase year-over-year. Given the decline in starts and a large separation between starts and completions, our backlog returned to normal levels within the first part of this quarter. The company's gross profit margin for the third quarter of fiscal year 2023 was 15.7% of net sales versus 11.3% reported in the same quarter of last year, representing a 440 basis point improvement. Year to date, our gross margin is 16.5% compared to 11.6% of net sales in the prior year. Gross margin in the third quarter of the current fiscal year and year to date was positively impacted by the pricing actions and operational improvements offset by increases in labor and domestic logistics costs. Total operating expenses were 10.4% in net sales in the third quarter of fiscal year 2023, compared with 10.2% in net sales for the same period in fiscal year 2022. Selling and marketing expenses were 4.4% in net sales in the third quarter of fiscal year 2023, compared with 5.1% in net sales for the same period in fiscal year 2022. The ratio to net sales decreased 70 basis points, resulting from decreased spending and lower commission plan expenses, combined with leverage created from higher sales in the third quarter of fiscal year 2023. General administrative expenses were 6% of net sales in the third quarter of fiscal year 2023, compared with 5.1% 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 leverage created from higher sales. Free cash flow totaled a positive $91.5 million for the current fiscal year, compared to a negative $48.8 million in the prior year. The $140.3 million increase in free cash flows was primarily due to changes in our operating cash flows, specifically higher net income, lower accounts receivable balances, and lower capital spending. Net leverage was $1.18 or 1.81 times adjusted EBITDA at the end of the third fiscal quarter, representing a 1.72 times improvement from the 3.53 times at the end of the fiscal year 2022. As of January 31, 2023, the company had $45.8 million of cash and cash equivalents on hand, plus access to $277.6 million of additional availability under the revolving facilities. The company paid down 67.3 million of debt during the first nine months of the current fiscal year. Shifting our focus to the remainder of 2023, our full-year outlook remains unchanged, and we expect low double-digit growth rate in our net sales versus fiscal year 2022. To achieve this, our fourth quarter sales are expected to be mid-single-digit decline. The growth rate is highly dependent upon overall industry economic growth trend, material constraints, labor impact, interest rates, and consumer behaviors. Our EBITDA margin for the fiscal year 2023 remains low double-digit EBITDA percentages. It is great to see the commitment, hard work, and efforts our employees invest into the company to achieve our results and react to the changing dynamics in the macroeconomic environment. I am grateful for what the teams accomplish and 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.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. 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. Please go ahead.

Hey, everyone. Good morning. Hey, good morning, Adam. On the quarter, can you break down the revenue growth by volume and price overall?

We don't break it down to that level of degree, Adam, but I can tell you that clearly units were down in the quarter. And then I think maybe more importantly is that there's been no activity to roll back pricing.

Okay, got it. That's helpful. And then just on the input cost basket as we think about, you know, heading into fiscal 24, maybe how you're seeing trends today and how that may play out as we move forward.

Make sure I heard that question correctly. Were you asking about input costs?

Yes, or what you're seeing today and how you think that flows through into next year.

Yeah, what we're seeing right now is hardwood lumber prices have started to come down for several species, not all. But we are still seeing other commodity purchases that continue to show elevated purchase prices, things like particle board, plywood, paint. And then certainly I don't think there will be a slowdown in pressure on labor costs and likely not a slowdown on domestic transportation as I think forward into the remainder of calendar year 23.

Okay, got it. And then just last one for me just on CapEx. It seems like it's you know, pretty well below the three to three and a half percent range that you talked to for the year. Is that range still intact or is that pushed out a bit and should we think about that range as a good level for next year?

Yeah, Adam, definitely the range is pushed out and we kind of, for this year, return back to normal historical levels, primarily due to alcohol constraints on our suppliers for equipment and manufacturing, but capital is suppressed. And so going forward, we'll give you that full year FY24 outlook when we do our annual And Adam, it's not a lack of great projects. Our team has a whole host of fantastic projects to either improve capacity or safety or overall cost positions. It's just the market is tight, and the ability to get the suppliers to meet the initial timelines has proved difficult. So a lot of those projects continue to push.

Got it. Makes sense. Best of luck.

Thank you, Adam. Thanks.

And the next question is from Garrick Schmois from Loop Capital. Please go ahead.

Oh, hi. Thanks for taking my question here today. I'm wondering if you could quantify the downtime that you have taken the quarter. How much did that impact EBITDA and is production back to more normalized levels right now?

Yeah, I don't necessarily have a value that I want to attribute to that, Garrick. I'll just tell you that we didn't expect to have the number of down days going into the quarter when we gave our perspective in the last quarter earnings call. So that was a change due to the softening demand. What we chose to do initially was to take days out of the schedule. Then as we got through the holidays into the January timeframe, we let attrition adjust our staffing levels. Unfortunately, that didn't fully accomplish it, and then we wound up having to take some targeted reductions in force at the end of January. So at this stage, we now have right-sized our labor force with the overall demand and production plans that we have in front of us.

Okay, great. I wanted to ask my follow-up question with respect to a comment you made in the prepared remarks. You said that recent trends have improved. Is that related to just some of the commentary coming out of the the builder channel, or are you seeing an improvement in your orders as well?

It would be both. So certainly we see the same commentary that you see from the marketplace. So we're seeing that, but then we also are obviously monitoring our incoming order trends on a daily, weekly, monthly basis, and we've seen those trends improve from where they were mid-prior quarter.

Great. Thanks for that, and I'll pass it on.

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

Hi, good morning. Maybe wanted to learn a little bit more on the retail decline. You talk about kind of the cadence of that decline through the quarter, maybe the sell-in, sell-out impact, and if there's any color to add on how that's unfolded year-to-date.

I would just say the trends were most unfavorable in November, December, and then as we got back into the January timeframe is where we saw things start to improve overall.

Great. And then on company inventories, which had been increasing since the fourth quarter of 2020 but declined sequentially this quarter, is that expected to continue? And can you talk about how much of that was less purchasing or how much of that was finished goods being delivered, whatever other factors were involved there.

Yeah. Stephen, so really kind of an emphasis on inventories is during COVID there was that stock up, but they have just-in-case inventories, and we are refocusing all of our efforts to be more back in just-in-time. We are seeing our suppliers' lead times and everything start to normalize and stabilize throughout the period's So that is something you'd say is we're going to be hyper-focused on our inventory levels just around the working capital plays that are out there and making sure that that trend will continue for us and stabilize our balances internally as well. And to your question about where it's coming from, our teams are focused on raw, whip, and finished goods. So we're looking at all areas to find opportunities to improve cash flow.

Okay, helpful. And then one other quick one on the dealer distributor channel, kind of one near term, one long term. Can you talk about what's driving the growth in that segment in such an outsized way? And then thinking long term on this segment, your lowest market share segment, can you talk about success year to date in gaining share and what you see for gaining share in the potentially slowing environment over the next 12 months?

Maybe start with the latter part of that particular question. As you noted, that's where we're the most underrepresented from a share position standpoint. Again, we didn't even have a product line to sell into the dealer space 10 years ago until we launched the Waypoint brand. We believe we can continue to drive share gains in both the dealer and distributor channel. We expect that to over-index the company average, if you will, as we go forward. So we want to continue to gain share in that space. Why do we think we can do that and why have we done that? We think we bring a really good offering in the marketplace. It's a value price play with the quality that many dealers and distributors are excited about to serve either their remodel or their new construction customers. We've been able to bring some new product to that space as well. So we talked about SimpleTrends a couple of quarters ago that we launched in the northeast. We've done that. We're starting to look at expansion of that to other markets. And then, you know, other opportunities and categories such as BAT that perhaps we could bring into the space.

Okay, excellent. Thank you.

And the next question is from Tim Rhodes from Baird. Please go ahead.

Hey, guys. Good morning. Hey, good morning. Maybe more of a theoretical question, Scott or Paul. If you do see sales declines, you know, kind of start in the April quarter and then maybe continue into fiscal 24, what types of, like, volume decrementals would you normally expect to see on a sales decline kind of from a theoretical perspective? And then I guess what levers do you think are available to you internally to maybe offset some of that volume-based decremental?

Sure. We've historically talked, and I know you've followed this for quite some time, of a decremental gross margin of approximately 25%. And we've certainly had periods where we've performed better than that and then also periods where we've performed worse than that. As we start our planning cycle, and just as a reminder, we're just now doing that now to get our full budget and plan set for fiscal year 24. As we start to do that work, we do think there will be pressure on the top side. As we think about our gross margin and EBITDA margin performance, we believe we'll perform better than the historical norm. I don't have an exact number to deliver to you today, Tim, but that's what we're working through as we start to build out our budget plans. but we'll be better than the 25% as we go into next year. So why, which is the other part of your question, what are the things that we have as levers? Well, we have a lot of great projects that we put in place this year, OPEC savings that'll carry forward. And then we've got a robust deck of projects that we'll continue to execute on as we shift into fiscal year 24 that'll drive savings. We've got the platform work that we mentioned as well that'll start to help us more towards the end of 24, but set us up really nicely into 25 as well.

Okay. Okay, good. That's good to hear. And then I guess from your discussions with any of your builder customers or other channel partners, I mean, it doesn't sound like there's been any real push on price, but I mean, has there been any change to how they kind of think about mix as they think about, you know, future communities or, you know, kind of future shelf space?

Nothing substantial around mix other than opportunities that we bring to the table where we can maybe put in origins versus the core Timberlake offering. So that is our typical mix management offering that we'll bring to a builder. And we certainly want to continue to drive origins growth in the space. It's a benefit for the builder as well as the enterprise. So we've done mixed management by driving more and more origins. We've not rolled back pricing, but there's certainly a lot of price chatter in the marketplace, to your point. Okay.

Okay, good. And then just the last piece on the facility expansions, I mean, is there any sort of startup cost or any sort of expenses that kind of run through the P&L over the next 12 to 18 months that we should just be aware of?

There will definitely be some startup expenses that we'll have inside fiscal year 24 as we get the operations ready. Again, we're just finalizing again, starting to actually work. I shouldn't use finalize for Paul, but we're starting to work on our budget process right now. And as we do start to finalize that, we'll have a better line of sight as to those startup costs. Don't expect any of those really to impact the current fiscal year, but certainly we'll have some expense and exposure in the next fiscal year.

Okay, good. Well, good luck on the rest of the year, guys. Thanks for the color. All right, thanks. Thanks, Tim.

And again, if you have a question, please press star, then one. The next question is from Colin Barron from Jefferies. Please go ahead.

Good morning. Thank you for taking my questions. In the prepared remarks, I believe you mentioned some destocking headwinds in the retail channel in the quarter. Can you help quantify the destocking that you're seeing in the retail channel and And at this point, do you think your retail customers' inventory levels are in a good spot, or do you think you could see some additional sales headwinds for American Boardmark in the retail channel going forward from this dynamic?

Yeah, in the prepared remarks, that was pretty specific to the stock bath category. And really, again, two points inside the current quarter. We had a promo loss that we had realized the year prior, so that gave us a headwind as we looked at the overall quarter. and then we saw efforts to reduce inventory levels by the key retailers. We have not yet seen substantial movement back in building back those particular inventory levels, but the feedback we're getting is that is likely in the next 30 to 45 days. So we believe, and data shows us that we're below optimal levels in that category at the retailers, and we would look to continue to drive inventory back in their stores to drive POS.

Great. That's helpful, Kolar. And then you guys saw some really strong incremental growth in EBITDA margins in the quarter. Can you help walk us through sort of what the price costs look like and then how much of the margin improvement was from those increased efficiencies that you guys called out?

I'll just go back to the prepared remark. Price obviously is a key contributor and has been the last couple of quarters as we took the actions to offset the inflation. But also operating efficiencies have been really important. We spent the better part of two years dealing with labor challenges, inflation challenges, volume challenges, and our teams have done a much more effective job of stabilizing the operating footprint. And when we do that, we're able to drive efficiency throughout the entire process. So that's been a key contributor for us in the quarter as well.

Okay, thank you. Good luck in the next quarter.

Thanks, Kyle.

And once again, if you'd like to ask a question, please press star and 1. The next question is from Julio Romero from Sedoti. Please go ahead.

Hi, good morning. This is Stephane Guillaume on for Holy Oil Mail. Thank you for your time. Good morning. Good morning. My first question is, given the current macro environment, have you been approached on price from builders?

Yes, we've been asked about pricing, but we've taken no action.

Thank you. And what was the exit rates in January by channel?

I'm sorry, could you restate the question?

What was the exit rate in January by channel?

I believe you're asking me the exit rate. I'm not quite sure I understand the question.

Like, I guess the way I'm asking is just, like, let's say if you, let's say something goes up this month, you lose 10 pounds the next month, like, you lose 15 pounds. So that's why I'm asking, like, what was the exit rate? So is it trending upward or downward, I guess? I don't know.

Yeah, I think the terminology we typically use when we talk about the demand, Stephan, is incoming order rates. So back to the earlier questions in that space, we definitely saw a decreasing incoming order rate throughout the quarter. We saw January then start to rebound, and we've seen that sustain. So we've seen an improving incoming order rate recently.

All right, thank you. And the last one for me is, can you talk about your operating efficiency initiatives?

Sure. I mean, what we're going to be focused on is making sure we've right-sized our operations to the demand. So again, you know, we had some attrition activities and reduction in force efforts inside the quarter. Our teams are focused on, you know, taking cost out of the process regardless of where it is. So that could be materials-driven. It could be logistics, transportation related. It could be manufacturing related. We continue to make investments in equipment such as automation. And we want to target that to be able to reduce the demand for labor, which drops the benefit to the enterprise, but also makes the work easier for our employees. If we're able to do that, we're able to attract and retain the labor force more effectively. And just having less turnover, inside the quarter has been a huge benefit for the enterprise as well.

Thank you so much for taking my questions.

Yep, thank you.

Ladies and gentlemen, at this time I see there's another waiting to ask a question, so I'd like to turn the call back over to Mr. Johinch for any closing comments. Please go ahead, sir.

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

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