American Woodmark Corporation

Good day and welcome to the American Woodmark Corporation third fiscal quarter 2025 conference call. Today's call is being recorded, February 27, 2025. During this call, the company may discuss certain non-GAAP financial measures included in our earnings release, such as adjusted net income, adjusted EBITDA, adjusted EBITDA margin, free cash flow, net leverage, and adjusted EPS per diluted share. The earnings release, which can be found on our website, americanwoodmark.com, includes definitions of each of these non-GAAP financial measures, the company's rationale for their usage, and a reconciliation of the 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. 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 Jochemchuk, Senior Vice President and CFO. Please go ahead, sir.

Good morning, and welcome to America with Mark's third fiscal quarter conference call. Thank you all for taking the time today to participate. Joining me is Scott Culbreth, 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 any of 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 $397.6 million, representing a decline of 5.8% versus the prior year. This was below our expectations shared last quarter as we continued to experience softer demand in the remodel market and saw a decline in new construction single-family activity as inventories were reduced by builders. Interest rates continue to challenge affordability for new and existing homebuyers. The National Association of Realtors recently reported that existing home sales finished 2024 at the lowest annualized rate in almost 30 years, which has clearly slowed the demand for higher-ticket remodel projects, such as kitchen and bathroom models. For the quarter, our home center made order business was roughly flat versus the prior year, and our stock kitchen business was up mid-single digits. This was offset by negative comps in the stock bath and storage business. Our dealer business was also roughly flat with the prior year quarter, but our distribution business was down double digits as new construction activity slowed in the quarter. Single family housing starts experienced negative comps versus prior year in November and January. For our new construction direct business, our teams delivered growth in the Northeast and Northern California markets, but this was more than offset a double-digit decline in Atlanta, Florida, and Southern California. We continue to see a rotation down in our made-to-order new construction offering, resulting in an unfavorable mix impact on the business. Within our overall made-to-order business, our teams had to navigate a lower backlog. As demand slowed within the quarter, our teams adjusted production schedules to maintain an appropriate backlog. To accomplish this, we took several unscheduled production down days around the holidays, creating margin pressures within the quarter from deleverage. Longer term, our belief remains that as mortgage rates decline, consumer confidence increases, existing home sales increase, and the potential for higher ticket home projects increases. Mortgage interest rate relief and consumer confidence increase will also benefit the single-family new construction business as more consumers enter the home buying market. We have the products and platforms to win, and this will serve as a tailwind for our business. Our adjusted EBITDA results are $38.4 million, or 9.7% for the quarter. Reported EPS was $1.09. Operational excellence improvements. and SG&A spending benefits in the quarter were more than offset by lower sales and higher material and labor costs. Our cash balance was $43.5 million at the end of the third fiscal quarter, and the company has access to an additional $314.2 million under its revolving credit facility. Leverage was at 1.53 times adjusted EBITDA, and the company repurchased 132,000 shares, or approximately 1% of outstanding shares in the quarter. Demand trends are expected to remain challenging and our outlook is for a mid-single-digit decline in net sales for the full fiscal year in an adjusted EBITDA range of $210 to $215 million. Macroeconomic concerns for the remainder of the fiscal year include consumer sentiment declines, inflation risk that is growing, and we don't see interest rate relief in the near term. Recent data for January new construction single-family activity also indicates a slower start to the spring selling season, but there is still time for improvement. Tariffs have become a concern over the past few weeks. Unfortunately, there continues to be a tremendous amount of uncertainty regarding future policies. Given the focus on Chinese imports in the past, our sourcing team has significantly reduced our exposure over the past five years. Our overall spend is now less than $25 million, and we continue to evaluate the supply chain for those purchased items. Regarding our exposure in Mexico, the risk is considerably larger as those facilities support approximately 10% of our revenues. Should tariffs be in place for an extended period of time, our team will work to optimize our global supply chain, and we would need to consider pricing actions. Note that our current outlook does not include any tariffs beyond those in place for China. Our teams have adapted to tariff and regulatory changes in the past, and I remain optimistic that once the landscape settles, we will quickly make the necessary adjustments. Our team continues to execute our strategy that has three main pillars, growth, digital transformation, and platform design, with a number of accomplishments over the past quarter. Conversion activity is now complete with our distribution business customers converted to our new brand 1951 cabinetry. Our teams are actively pursuing a number of new accounts within that channel. Our upcoming summer launches are underway with a warmer paint stain made-to-order finish launching to complement existing finishes. New finishes and styles that stay on trend are also launching in our frameless and stock kitchen business. Finally, we're testing new collections within the stock bath category to further drive share gains. Digital transformation efforts continue with our ARP Go Live and our West Coast Made to Stock facility targeted during the first week of May. Platform design work continues with the recent announcement of a plant closure within our network. Our Orange Virginia team has been a key contributor to this company for over 50 years. Product mix and overall efficiency gains have allowed us to consolidate that production and to other facilities in our network, namely Monticello, Kentucky and Moorfield, West Virginia. Our transition will be completed next month, and I want to thank all of our team members for their many years of service. I also wanted to remind everyone that this is a component plan and does not impact our finished goods assembly capacity. In closing, I'm proud of what this team accomplished in the third fiscal quarter and look forward to their continuing contributions. I'll now turn the call back over to Paul for additional details on the financial results for the quarter.

Thank you, Scott. I'll begin by discussing our third quarter results and then provide our outlook for the rest of the fiscal year. Net sales were 397.6 million, representing a decrease of 24.5 million, or 5.8% versus the prior year. The net sales change by channel is as follows. New construction net sales were down 10.4%. Repair and remodel net sales were down 2.3%. with home centers being down 0.6% and independent dealer distributors down 6.8%. While we believe the long-term fundamentals of the housing industry are still sound, current consumer confidence and spending is lower, primarily on higher-ticket remodeled projects, and that has adversely impacted our current results. Gross profit as a percent of net sales for the third quarter decreased 420 basis points, to 15% versus 19.2% reported last year. Lower sales volumes impacted our manufacturing leverage in our facilities, combined with increased product input costs around raw materials, labor, and consumer freight rates. However, these impacts were partially offset by our sustained operational excellence efforts. Selling, general, and administrative expenses, including any restructuring charges, were 9.6% in net sales versus 12.6% last year. The 300 basis point decrease is due to the roll-off of our acquisition-related intangible asset amortization that ended December 2023. Lower incentive compensation and controlled spending across all functions helped lead to that decline. Adjusted net income was $15.9 million, or $1.05 per diluted share in the third quarter, versus $25.1 million, or $1.56 per diluted share last year. Adjusted EBITDA was 38.4 million or 9.7% of net sales versus 50.6 million or 12% of net sales last year, representing a 230 basis point decline year over year. Within the quarter, we did announce the closure of our Orange, Virginia manufacturing location. These are never easy decisions or ones that we take lightly, but as Scott stated earlier, this was a strategic move for the organization as operational efficiencies, specifically within our dimensional operations have improved. In addition, current market trends are moving towards more alternative materials, and our platform moves will help enable and align us to those trends. Free cash flows totaled a positive $31.5 million for the current fiscal year to date, compared to $131.7 million in the prior year. The approximate $100 million decrease was primarily due to changes in our operating cash flows, specifically higher inventory, higher digital transformation costs, and lower accrued compensation and related expenses balances offset by lower capital expenditures. Net leverage was 1.53 times adjusted EBITDA at the end of the third quarter compared with 1.05 times last year. As of January 31st, 2025, the company had $43.5 million in cash plus access to $314.2 million of additional availability under our revolving facility. Under the current share repurchase program, the company purchased 69.1 million or 752,000 shares in the first nine months of the fiscal year, representing about 5% of the outstanding shares being retired. We have 145.4 million of share repurchase authorization remaining. Shifting to our outlook for fiscal year 2025, net sales are expected to be down mid-single digits versus fiscal year 2024. This is driven by the new construction market slowing down, as well as the softening repair and remodel market, resulting from the sustained lower higher ticket remodel projects across the retailers. However, these assumptions are highly dependent upon overall industry and 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 $210 to $215 million, driven primarily by the softening sales volumes and the increased manufacturing deleverage of our facilities. We continue to evaluate our pricing monthly and are contemplating pricing actions to help mitigate the inflationary impacts on logistics, raw materials, labor, and the potential new tariff impacts. Please note that this outlook does not include any impact for the changes to tariffs given the current policy environment. Our capital allocation priorities for fiscal year 2025 remain unchanged. We remain committed to investing back into the business in automation and digital efforts. Any excess capital will be used to repurchase shares. And as a reminder, we have repurchased 156.8 million since the start of fiscal year 2024. In conclusion, I am proud of our team's resilience as the market conditions continue to change. We are currently at historic lows in existing home sales and maintaining slower growth rates in new construction markets. Our operational leaders are doing a great job at flexing our platforms, making the right choice to help keep our operational footprint sound, all while keeping our customers at top of mind in making a quality product. We remain committed to our long-term strategy around automation and operational efficiency gains that will help support the long-term growth and profitability targets. Throughout all the macroeconomic challenges, our team is dedicated to making it happen every day. This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Trevor Alexen with Wolf Research. Please go ahead.

This is actually Paul Schabilsky on for Trevor. I guess first, you know, you discussed a slower R&R environment and the builders reducing, you know, inventory. Can you talk about what portion of your reduced guide, you know, was attributed to each of those components?

Those were both key contributors. That's what drove the overall comp rate that we posted for the quarter. And if you look at our full year outlook guide of bid single digits, it basically assumes we're going to have a similar operating environment in Q4 from a comp standpoint.

Okay, thank you. And then I guess in the past you've talked about, you know, hurricanes being a potential needle mover for you all. Have you begun to see any, you know, positive impacts from the hurricanes last fall or potentially the fires in Southern California?

Nothing specific to the fires in Southern California, but I would say in Florida we have seen some positive comps in the stores in the areas that were impacted from the hurricanes last quarter. Not material on the overall quarter result, but there was some positive comp rates there.

Thank you. I appreciate it.

The next question comes from Steven Ramsey with Thompson Research Group. Please go ahead. Good morning.

Maybe to start with on pricing considerations, I'm curious just the different options you're contemplating. I know you're not committing to anything. Just how you're thinking about maybe the surcharge route or actual price moves and just considerations you're thinking as you work through that part of the environment.

Yeah, I think regardless of the approach taken, the end result is if tariffs do come through and we're not able to fully mitigate, there's likely going to be pricing action. As you know, it varies by channel. So inside our dealer distributor channel, it's basically just do a list price change. So I think we would just roll it through that way. With regards to our home center accounts, there's typically a cost justification process that each of the retailers have that you have to follow and provide notice when you've seen the cost increase and then go through a justification process. We've had some internal discussion around whether it should be a surcharge. You've heard that term used for fuel surcharges in the past as an example. That could be a mechanism, but the process is still going to be the same in which you have to justify to go get the actual price increase. I'd say it'd be a similar environment in the builder channel that we would see in the home center channel as well. So we don't have a final path because we need to first have a solid answer on what we're actually gonna see as a market environment and is it gonna be long-term or short-term? So yes, we're having lots of conversations on that. That's certainly not the first route we wanna take, but if we can't mitigate, and I'd say specifically with Mexico, I don't think we can fully mitigate that, we'd likely have some pricing discussions with our customers.

Okay, that's helpful. And then on dealer being flattish, which I think you called out was very different than the distributor channel, maybe first to confirm that I heard that right, but then maybe pulling back, would you say that dealer demand is bottoming or R&R generally big ticket remains tough, but do you get any sense that there could be bottoming or stabilization in that part of the demand world?

So specifically on dealer distributor, I know it's not an exact ratio I'm going to provide to you, but I would say typically our dealer business is a bit more tied to R&R performance and distribution is tied a bit more to new construction. So that's why I did want to delineate those and talk about them. Are we bottoming? Certainly would hope so. I think that's been our message over the last couple of quarters that we've seen you know, a pullback in R&R demand. That's not just in the dealer channel. I would also attribute that to the home centers as well. They both move in a similar fashion. So, yes, our belief is we're bottoming out. And then the expectation is we would see an increase off of the floor. The question is, what is it that's going to trigger and accelerate that increase going forward? And certainly a lot of players in this space, building products specifically, have talked about a second half 25 recovery. I think we have a similar sentiment. There doesn't seem to be anything that's going to break loose a surge in demand near term, but certainly in the back half, if we can get through some of this stage of uncertainty in the marketplace and regulatory environment, perhaps things could then lift second half.

Okay, that's helpful.

Thank you.

Again, if you have a question, please press star then one. The next question comes from Tim Wojcic with Baird. Please go ahead.

Hey, guys. Good morning. Hey, good morning, Tim. Hey. Can you just talk a little bit about – so, Scott, you mentioned some mixed headwinds, you know, within it sounds like the new construction business. Is there a way to kind of quantify, you know, what the impact of that is? And then just is that – smaller square footage, you know, type homes? Is that, you know, kind of a trade down, you know, to different product lines? Just maybe a little bit of what you're seeing on the mixed side in the new construction offering.

Yeah, a bit of both, Tim. So we definitely see a rotation down in the product offering itself. So if you think about just our Timberlake made-to-order product offering, we do have a good, better, best approach. And we are seeing a move from what you'd classify as best to better and sometimes, you know, better to good. So We've seen that play out as builders are trying to get price points down to impact affordability and attract new consumers. To your point around homes, certainly we're seeing the square footage shrink on houses. We are monitoring the number of cabs that go into homes. And I would say sequentially, we are seeing a downward trend in the number of cabinets going to a home. Why would that be? It's also a cost equation. So builders are trying to find ways to improve the affordability to attract consumers. And one way they may do that is let's pull the cabinets over the refrigerator out of the design as an example. So that could be an impact that plays out. We are starting to see some of that in the marketplace.

Okay. Okay. And then I guess, is there a way to quantify just kind of what the input cost headwind, I guess, was, you know, in the quarter or what the expectation is for the year?

Nothing specific to call out around input cost other than we continue to see some pressure there that's rolled through our margins. We haven't been ready to trigger any pricing action, quite frankly, because we're trying to ascertain the impact on tariffs and the timing around that. So we'd like to get that topic closed out and whether or not we need to take action. And if we do, we would incorporate where appropriate, if any, inflationary considerations for pricing as well.

Okay. Okay. So, I mean, it sounds like you'd want to take price, but you don't want to dribble it out into the market. You really want to kind of go out with one increase as opposed to, you know, kind of several. Is that kind of the message?

That's exactly the message. You said it well.

Okay. Okay, great. And then I guess just on, you know, closing orange, what would be kind of the annual benefit of, from closing the facility just in terms of, you know, in terms of, you know, EBITDA, gross margins, those types of things.

Yeah, we'll have that incorporated into our outlook in fiscal year 26. I know our cycle is always a bit more challenging versus some of the other companies you follow. So we're wrapping up our budget cycles now. And in our next call, we'll give a full year fiscal year 26 outlook that certainly would incorporate all of our guide around market and share gains that we would expect on net sales. Also, EBITDA and inside that certainly would be a consideration for the orange impact on the business.

Okay. Okay. Sounds good. Thanks, Mr. McCullough, guys. Good luck on this year. All right. Thanks.

Again, if you have a question, please press star then 1. As I do not see that there's anyone else waiting to ask a question, I would like to turn the line over to Mr. Joachim Cech for any closing comments. Please go ahead, sir.

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

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