American Woodmark Corporation

Good day everyone and welcome to the American Woodmark Corporation's second fiscal quarter 2025 conference call. Today's call is being recorded November 26, 2024. 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 the 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'll begin today's 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, 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 Jahimchak, Senior Vice President and CFO. Please go ahead, sir.

Hey, good morning, 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 teams delivered net sales of $452.5 million, representing a decline of 4.5% versus the prior year. This was in line with the expectations we shared last quarter. The year-over-year decline was due to continued softer demand in the remodel market, along with a slowdown in new construction single-family starts over the summer. Despite Fed rate cuts, mortgage rates are up 60 basis points from the low achieved in late September. which continues to put pressure on existing home sales and new construction activity. In addition, sales of existing home sales fell to a 14-year low last month in October, according to the National Association of Realtors, slowing the demand for remodel projects. Single-family housing starts comped positively in August and September, but declined in October due to a slowdown in the southeast that was impacted by weather. We believe that the Southeast will rebound in future months and that the impacts from favorable starts activity should benefit cabinet installations in future quarters. Although net sales were negative for the quarter versus prior year, unit growth for the new construction channel was positive, but was more than offset by price mix. Our home center customers continue to be impacted by our interest rates and macroeconomic pressures that lead to weaker spending on projects. This remains more significant for higher price discretionary projects like kitchen and bath. We are not experiencing loss of share with our customers, and our teams remain focused on growing share of our accounts. Our belief is that as mortgage rates decline, consumer confidence increases, existing home sales increase, and the potential for home projects increases. This should serve as a tailwind for our business in the future. Our adjusted EBITDA results were $60.2 million, or 13.3% for the quarter. The reported EPS was $1.79. Operational excellence improvements and SG&A spending benefits in the quarter were more than offset by lower sales, restructuring costs to right-size our operations, debt refinancing costs, and a mark-to-market entry for Peso hedging that Paul will cover in his remarks. Our cash balance was $56.7 million at the end of the second fiscal quarter, and the company has access to an additional $313.2 million under its revolving credit facility. Leverage was at 1.4 times adjusted EBITDA, and the company repurchased 349,000 shares, or 2.3% of shares outstanding, in the quarter. Our teams did an excellent job of refinancing the company's debt with a slight increase to our interest rate exposure. Our outlook for the industry in fiscal year 2025 assumes the repair and remodel market will be down mid-single digits and new construction to be up low single digits. Within R&R, larger discretionary projects will trend worse than the overall market and are projected to be down high single digits. Our expectation for the company's net sales is unchanged at a low single digit decrease versus fiscal year 2024. Adjusted EBITDA expectations are targeted in the range of $225 million to $235 million. Our team continues to execute our strategy that has three main pillars, growth, digital transformation, and platform design with a number of key accomplishments over the past quarter. Conversion activity continues with our distribution business as almost 80% of customers have moved to our new brand, 1951 Cabinetry. Our teams are also actively pursuing a number of new accounts within the channel. Load-ins are almost complete for the stock bath and kitchen wins I shared last quarter. Digital transformation efforts continue with our teams optimizing the use of Salesforce for our sales teams and completing the planning for our ERP Go Live at our West Coast Maidstock facility next year. Platform design work continues with the continued ramp of our Monterey, Mexico and Hamlet, North Carolina facilities, and automation efforts are progressing well in our mill component and assembly operations. In closing, I'm proud of what this team accomplished in the second fiscal quarter and look forward to their continuing contributions during fiscal year 25. I'll now turn the call back over to Paul for additional details on financial results for the quarter.

Thank you, Scott. I'll begin by discussing our second quarter results and then provide our outlook for the rest of the fiscal year. Net sales were 452.5 million, representing a decrease of 21.4 million, or 4.5% versus the prior year. We believe the long-term fundamentals of the housing industry are still sound, but they are currently dampened by persistently high interest rates and lower consumer confidence. This led to the continued softness in the large ticket purchases, primarily impacting our remodel business. Gross profit as a percent of net sales for the second quarter decreased 290 basis points to 18.9% versus 21.8% reported last year. Lower sales volumes impacting our manufacturer leverage in our facilities combined with increasing product input costs around raw materials, labor, and customer freight rates However, these impacts were partially offset by our sustained operating excellence efforts. Operating expenses excluding any restructuring charges were 9.3% in net sales versus 12.2% last year. The 290 basis point decrease is due to the roll-off of our acquisition-related intangible amortization that ended in December 2023, lower incentive compensation, and controlled spending across all functions offset by our lower sales. Adjusted net income was 32 million or $2.08 per diluted share in the second quarter versus 41.1 million or $2.50 per diluted share last year. Within this quarter, we changed our definition of adjusted EPS to exclude the mark-to-market adjustments on our foreign currency hedging to be aligned with our industry and match our adjusted EBITDA definition for exclusions. Adjusted EBITDA was 60.2 million or 13.3% of net sales versus 72.3 million, or 15.3% of net sales last year, representing a 200 basis point decline year over year. Free cash flow totaled a positive 30.1 million for the current fiscal year to date, compared to 109.9 million in the prior year. The 79.8 million decrease was primarily due to changes in our operating cash flows, specifically higher inventory and lower accrued expense balances. Net leverage was 1.4 times adjusted EBITDA at the end of the second quarter compared with 1.05 times last year. Please note that we entered into a new senior secured debt facility on October 10th, 2024. The new agreement provides for 500 million revolving loan facility and a 200 million term loan facility. As of October 31st, 2024, the company had 56.7 million in cash, plus access to 313.2 million of additional availability under its revolving facility. Under the current share repurchase program, the company purchased 56.5 million or 620,000 shares in the first half of the fiscal year, representing about 4.1% of the outstanding shares being retired. We have 33 million of share repurchase authorization remaining on our old authorization, plus an additional $125 million that the Board approved this quarter. Our outlook for fiscal year 2025 remains unchanged. Net sales are expected to be down low single digits versus fiscal year 2024. Reiterating what Scott said before, this assumes the repair-remodel market will be down mid-single digits and new construction will be up low single digits. This is a result of the software repair and remodel market and decline in larger ticket remodel purchases across the retailers, partially offset by continued growth in new construction during the back half of the year. Although we don't provide quarterly guidance, I did want to remind you that our Q3 sales are impacted by fewer sales days within the quarter due to the number of holidays that fall within and will be the lowest sales quarter of the fiscal year. However, these assumptions are highly dependent upon overall industry, economic growth trends, material constraints, labor impacts, interest rates, and consumer behaviors. Our projected EBITDA margin for fiscal year 2025 is being revised to a targeted range of $225 million to $235 million, driven primarily by sales volumes retracting and the increased manufacturing due leverage of our facilities. We evaluate our pricing monthly and will continue to do so on an on-go-forward basis to mitigate our inflationary impacts on logistics, raw materials, and labor. Our capital allocation priorities for fiscal year 2025 remain unchanged. We'll first be focused on investing back into the business by continuing our path for our digital transformation with investments in ERP and investing in automation. Next, we'll continue our share repurchasing. And lastly, with our debt agreement in place and a leverage ratio we want to achieve, debt repayments will be deprioritized. In conclusion, our team is dedicated to making it happen every day. Our operational improvements that have been put in place over the past year plus have helped us mitigate the volume declines affecting the broader repair and remodel industry. I'm excited with the investments that we are making in automation that will drive future operational efficiencies and enable our long-term targets from both a growth and margin perspective. The long-term thesis in the housing market is still very strong, and we will be positioned nicely when it recovers. This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the numbers to ensure the best sound quality. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Trevor Allenson from Wolf Research. Please go ahead with your question.

Hey, good morning. Thank you for taking my questions. First, just given the post from Trump last night calling for 25% tariffs on all imports from Mexico, can you guys quantify your supply chain exposure to Mexico? I'm appreciating you guys have a couple of facilities there.

Yeah, Trevor, I guess I'd start by just saying there's a lot of uncertainty regarding future policies on tariffs. And quite frankly, it could be a daily or weekly tweet that could change the tone on that. Looking back, I guess I'd point to the focus previously on Chinese imports. Our sourcing team was able to significantly reduce our exposure for those purchases over the last five years. And the other potential import exposures, whether it's Mexico or Canada now, that are recently noted, I would say that our teams have adapted to any kind of tariff or regulatory change that's come our way. And our belief is that Whatever the final policy is that's put in place, our teams will be able to make the adjustments necessary to be able to mitigate that. That could look like resourcing and shifting things to other markets. It could also lead to potential price impacts in the marketplace. Those could be offset.

Yeah, it makes a lot of sense. I appreciate there's still a lot of uncertainty about what actually ends up happening. Second question then. On the last call, you had indicated you announced a price increase in your dealer channel. It's typically the first channel to get pricing for you guys. In your prepared remarks today, you talked about reviewing your pricing monthly. Have you guys announced any incremental pricing in any other channels in addition to the dealer channel? Thanks.

Yeah, nothing additional at this point in time. You're right. We did announce last quarter an increase in the dealer channel. That went effective 10-1, so that's in place. As Paul mentioned, we evaluate all of our input costs on a monthly basis. And once those reach what we believe is an appropriate trigger point, we would start negotiations and actions in those channels. Keep in mind that it depends on the channel and the timeframe as to when we had our last increase and when a future increase may be necessary.

Appreciate all the color. Good luck moving forward.

Thanks, Trevor.

Our next question comes from Derek from Loop Capital Markets. Please go ahead with your question.

Oh, hi, thanks. First question is just on the sales outlook. It looks like you kept your view of low single-digit sales declines for the fiscal year, but if you're looking at your And market commentary, if I remember correctly, I think you did moderate some of your new construction observations. So just wondering kind of what the offset is in the maintain sales guidance. Is it maybe stronger share gains or fully baked pricing actions? Just any additional comment would be great.

Sure. When you look at the second half versus the first half, we do expect better performance from a sales comm standpoint. Why would that be? You just hit one of the points. Pricing clearly in the dealer channel would be a tailwind as we go into the second half. The other areas that I would look at is the stock kitchen and bath business. We had signaled last quarter some wins there, that that will benefit our second half. We only got some partial benefit for that in the first half of the year. And then the other one I would point to is in our made-to-order business specifically, our home center business, we do have easier comps in the back half than we experienced in the first half. So that goes into our guidance outlook for the year.

Okay. That's helpful. And then I guess tariffs aside, but I was wondering if you could speak to what you're seeing on the cost side for the second half of the year.

Yeah, we had mentioned last quarter that we were seeing some increases in particle board. That continues. Paul's planned remarks he shared continued increases in labor and final mile delivery specifically as a call out. So we continue to see input costs move in those particular areas. I think liner board would be the other one I'd call out where we've seen some recent inflation.

Okay, very good. Thanks for the help. I'll pass it on.

Okay, thank you.

Our next question comes from Stephen Ramsey from Thomson Research Group. Please go ahead with your question.

Hi, good morning. I was looking at trailing 12-month sales in the last few quarters, hovering in that $1.8 billion range in the midst of the market, as you said, incrementally weakening or staying weak despite rates. I'm curious if you kind of look at this zone of sales as a bottoming, are you pontificating on any incremental risks or issues that could pressure it further aside from the macro, or do you think it's pretty macro-driven at this point?

I still think it's pretty macro-driven. You had a lot baked into that remark. Could there be other things that perhaps could negatively impact even our outlook? Certainly there are. We've gotten past the election, so For quite some time, there was a lot of uncertainty as it relates to that. Now that we've gotten past that, now there's policy uncertainty. So what specifically do we expect to see with tariffs? We've already remarked a couple of times on that in this call. Immigration policies and what that means with respect to employment, especially our overall industry of building products and home building. So there are some variables out there that we're not exactly sure what the policy mandates will be and what those will do from an impact on consumers and consumer spending.

Okay, that's helpful. And then secondly, I was thinking about volume, sales down 4.5%. You've got some better pricing flowing through in the dealer channel. I'm curious a little bit on retail promotions in the quarter and expectations for the second half. all trying to get a directional sense of how you expect volumes to unfold in the second half.

Yeah, the good news on the promos, we continue to see consistent activity and behavior with prior years. So we've not seen any substantial ramp up in promotional activity nor a decline. It's been pretty consistent year over year. So don't expect any additional impacts there.

Great. Thank you.

And once again, if you would like to ask a question, please press star and then one using a touchtone telephone. Our next question comes from Adam Baumgarten from Zellman. Please go ahead with your question.

Hey, good morning, everyone. Just curious in the quarter, sales down 4.5%. Maybe if you could break that out by the three main channels that you guys suffer.

Yeah, I don't have the breakout, Adam, for each of the channels. I'll just tell you each of the channels were down in the period. The one thing that I did have a specific note on was new construction unit growth in the quarter, but price mix shifted it just a slightly negative for the quarter.

So units were up in new construction, but price mix was down? Correct. Got it. Okay. And then just thinking about the maintained guidance, it implies kind of flattish trends in the back half of the year. I think Scott, you mentioned some of the tailwinds. I guess, does that outlook assume a continuation of the current trends you're seeing across end markets, or are you assuming some kind of pickup outside of the easier comparisons?

Yeah, we're not assuming any kind of major macro improvement or any substantial change in rates that would lead to an increase in consumer demand. So kind of steady as it goes with this most recent quarter outlook as we think about the next two quarters. Okay, got it. Thanks a lot.

And again, if you would like to ask a question, please press star and one. Our next question comes from Tim Woos from Baird. Please go ahead with your question.

Hey, guys. Good morning. Hey, good morning. Hey, maybe just kind of on that last question, Scott. I guess when you're thinking about low single digits, you know, down for the year, I guess there's a little bit of a range there. But Would you expect the top line to kind of turn back positive, at least as you kind of get into the fourth quarter, you know, this fiscal year, just given the comps and kind of the implications in the guide?

I think it's too early for me to declare that it'll absolutely go positive. I think we modeled still down slightly in Q4. I think we need to get through some of these policy positions at the start of the calendar year and then see what the Fed actions are here in December and into January before we would get to a point of claiming that we'll go positive in that quarter. Certainly, as we think about 26, our view is 26 should be a positive growth year for the business fiscal year 26.

Okay. Okay. And is the kind of tweak lower on the EBITDA guide? I mean, is that just a little lower volume? Is it price-cost? I guess what are the drivers of kind of that modest reduction in the EBITDA kind of midpoints?

Yeah, we wanted to tighten it up now that we're halfway through the year. We've got better line of sight as to where we see overall performance. To your point, specifically with some of the inflationary impacts, some of those picked up on us inside the last quarter. And then the volume impacts overall. So as we modeled that out, we said, look, let's tighten this up. This is a better range as to being a $20 million spread for just half a year open. Okay.

Okay, good. And then Any idea or any kind of guidance on free cash flow expectations, maybe relative to just EBITDA for the year?

Yeah, Tim, on the free cash flows relative to it, we'll be consistent with how we perform. We're still repurchasing, so we've got a lot of excess cash that's out there. We will have constraints around our inventory, some of the pressures there, along with the port strikes and the Chinese New Year. We wanted to make sure we had all the available goods that are out there. So If anything, we have just a little bit of pressure on our working capital related to inventory that's out there.

Okay. Okay. And then just the last one, did you guys experience any kind of hurricane impacts in the new construction business in the southeast in the second quarter?

Yeah, we saw some impacts there. Certainly there were some down days where we weren't able to actively get out to the job sites. We typically make those up with weekends and overtime. I think the question maybe to explore is do we expect to see any benefit going forward for that? Specifically around new construction, no. It's just a timing issue. But when we think about our stock kitchen business, sometimes we'll see a little bit of benefit for that. The stores in which we had the largest impact with respect to the hurricanes, we work with our customers to make sure we've got the appropriate inventory levels there in case there is. an increase in demand, but we don't expect anything material to impact our Q3.

Okay. Okay. Sounds good. Thanks, guys, for your time.

Thanks, Tim.

And, ladies and gentlemen, at this time, and seeing no additional questions, I'd like to turn the floor back over to Mr. Jahimchak for closing comments. Please go ahead, sir.

Thank you again. This concludes our conference for today, and we thank you for your participation.

And ladies and gentlemen, with that, we'll be concluding today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.