American Woodmark Q2 2024 Earnings Call Transcript

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Provided by Quartr
November 30, 2023

There are 9 speakers on the call.

Operator

Good day, everyone, and welcome to the American Woodmark Corporation Second Fiscal Quarter 2024 Conference Call. Today's call is being recorded November 30, 2023. During this call, the company may 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 these non GAAP financial measures to the most comparable GAAP financial measures. We also use our website to publish other We will begin the call by reading the company's Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

Operator

All forward looking statements made by the company involving 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 under 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'd now like to turn the floor over to Paul Jhymczak, Senior Vice President and CFO.

Operator

Please go ahead, sir.

Speaker 1

Good afternoon and welcome to American Woodmark's 2nd fiscal quarter conference call.

Speaker 2

Thank you all for taking

Speaker 1

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 your questions.

Speaker 2

Thank you, Paul, and thanks to everyone for joining us today for our 2nd fiscal quarter earnings call. Our teams delivered net sales of $473,900,000 representing a decline of 15.6% versus the prior year. Within new construction, our business declined 11.1% versus prior year. Macroeconomic factors, including interest rates and Housing affordability continues to account for the slowdown in new construction. These short term factors are being partially mitigated by builders through rate buydowns and We are strategically aligned with 19 of the top 20 national builders And key regional builders.

Speaker 2

With our best in class direct service model, we plan to continue to grow our share with new and existing customers and take advantage of the share gains our partners are realizing in the marketplace. Looking at remodel, which includes our home center and independent dealer and distributor businesses, revenue declined 18.8% versus the prior year. Within this, our home center business was down 18.3% versus prior year. Demand trends declined due to lower in store traffic rates Consumers choosing smaller sized projects. With regards to our dealer distributor business, we were down 20% versus the prior year.

Speaker 2

Our adjusted EBITDA increased 7 percent to $72,300,000 or 15.3% for the quarter. Reported EPS was $1.85 and adjusted EPS was $2.36 The improvement in performance is due to mix and improved efficiencies in the manufacturing platforms. Our team continues to drive operational excellence in our plants. Our cash balance was $96,400,000 at the end of the 2nd fiscal quarter, and the company has access to an additional $323,200,000 under its revolving credit facility. Leverage was reduced to 1.05 times adjusted EBITDA and the company repurchased 394 Our Board has authorized a new $125,000,000 share repurchase program that replaces our current authorization that only had $22,900,000 remaining.

Speaker 2

Our outlook for fiscal year 'twenty four remains unchanged with our expectations for sales at a low double digit decline. Due to the strong fiscal second quarter performance, our adjusted EBITDA expectation increasing to a range of $235,000,000 to $250,000,000 Our team continues to execute against our strategy that has 3 main pillars: Growth, digital transformation and platform design. Growth will benefit from an upcoming launch of a low SKU, high value offering in the home centers, Charging Pros and a new brand to serve our distribution customers. Digital transformation efforts over the Last fiscal quarter include the final planning of ERP for Monterrey go live next quarter and website enhancements for our home center business we will launch in February. In addition, we completed the implementation of our CRM sales solution across the new construction channels field sales organization and we initiated the planning for the next phase of work, which includes the CRM service module supporting our customer care organization and new construction service center operations.

Speaker 2

Platform design work continues with occupancy in Monterrey, Mexico in November and Hamlet, North Carolina in December. We will continue infrastructure and equipment installations in the coming months as well as training and hiring new teammates to support the initial ramp plan. As a reminder, this expansion will deliver additional capacity in our stock kitchen and bath cabinetry product lines. In closing, I'm proud of what this team accomplished in the second quarter and look forward to their continuing contributions during fiscal year 'twenty four. I'll now turn the call back over to Paul for additional details

Speaker 1

Thank you, Scott. Reviewing our Q2 results for fiscal year 2024. Net sales were $473,900,000 representing a decrease of $87,600,000 or 15.6% versus the prior year. Remodel net sales, which combines home centers and independent dealers and distributors, decreased 18.8% for the Q2 versus prior year. With both home centers and dealer distributors decreasing 18.3% 20% respectively.

Speaker 1

New construction net sales decreased 11.1% for the quarter compared to last year. Our gross profit margin for the Q2 of fiscal year 2024 improved 420 basis points to 21.8 percent of net sales versus 17.6% reported in the same period last year. Gross margin benefited from a favorable product mix and sustained pricing matching inflationary cost impacts, continued operational improvements in our manufacturing facilities and an increased stability in our supply chain. Total operating expenses excluding any restructuring charges for the Q2 of fiscal year 2024 was 12.2 percent of net sales versus 10.1% for the same period last year. The 210 basis point increase is due to increases in our incentives and profit sharings for all employees.

Speaker 1

Adjusted net income was $38,800,000 or $2.36 per diluted share in the Q2 of fiscal year 20 versus $37,300,000 or $2.24 per diluted share last year. Adjusted EBITDA for the Q2 of fiscal year 2024 was $72,300,000 or 15.3 percent of net sales versus 60 $7,600,000 or 12 percent of net sales reported in the same period last year. This represents a 330 basis point improvement year over year. Despite facing the year to date volume headwinds, our continued strong earnings performance this year is a direct result of hard work and efforts our teams have put in to reestablish our operating efficiencies, stabilize our supply chain and control spending in the SG and A functions. These earning gains are partially offset by increases in incentive compensation, profit sharing and our digital transformation costs.

Speaker 1

Free cash flow totaled a positive $109,900,000 for the current fiscal year to date compared to $44,400,000 in the prior year. The $65,400,000 increase was primarily due to changes in our operating cash flows, specifically higher net income and lower inventory, partially offset by our increased capital expenditures. Net leverage was 1.05 times adjusted EBITDA at at the end of the Q2 fiscal year 2024 representing a 1.18 times improvement from the 2.23 times as of last year. As of October 31, 2023, the company had $96,400,000 of cash and cash equivalents on hand, plus access to $323,200,000 of additional availability under our revolving facility. Under the current share repurchase program, the company purchased $30,000,000 or 394,000 shares in the 2nd quarter, representing about 2% of the outstanding shares being retired.

Speaker 1

The Board of Directors has approved and authorized a new $125,000,000 share repurchase plan. We are retiring the remaining $22,900,000 on the old share repurchase authorization and rolling it into this new authorization. Our outlook for fiscal year 2024 remains unchanged from a sales perspective and we continue to expect low double digit declines in net sales versus fiscal year 2023. The change in net sales is highly dependent upon overall industry, economic growth trends, Material constraints, labor impact, interest rates and consumer behaviors. Given our strong performance For the first half of the year, we are increasing our adjusted EBITDA expectation for the full fiscal year 2024 to a range of $235,000,000 to $250,000,000 The increase in our expected outlook is due to our strong operational performance and execution we have achieved in the first half of our Year 2024.

Speaker 1

Reiterating our outlook from the past quarter, we are still on track for starting our new operational locations in Hamlet, North Carolina to Monterrey, Mexico this fiscal year. This will negatively impact the results as we continue incurring the operational expenses without the offsetting full revenue The total impact of these charges is approximately $8,000,000 in the full fiscal year 2024. Our capital allocation priorities for fiscal year 2024 remain unchanged. We will first be focused on investing back into the business for the plant expansions Monterrey, Mexico and Hamlet, North Carolina, continuing our path forward in our digital transformation with investments in our ERP and CRM solutions and investing in automation. Next, we will continue our share repurchasing and given our current We will be de prioritizing paying down debt in fiscal year 2024.

Speaker 1

In closing, The business continues to build off the progress made throughout the past year. We fully expect these improvements to carry through the financials through the remainder of the fiscal year. This is a testament to the commitment, hard work and efforts our employees invest in the company to achieve our results and the direct alignment to the GDP strategy. I'm grateful for what the teams have accomplished and thank all of our team members at American Woodmark for their continued efforts. They are the ones who truly make it happen Daily.

Speaker 1

This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.

Operator

Ladies and gentlemen, at this time, we'll begin the question and answer session. Our first question today comes from Gary Moi from Loop Capital.

Speaker 3

Within R and R, I was wondering if you could go into some more color on what you were seeing on both in stock and made to order categories.

Speaker 2

Yes. Thanks, Gerrick. So specifically in R and R at the home center side, when you talk about in stock and MTO, we've seen Negative trends in both categories, but MTO has been more severely impacted overall when you think about the price points. We've always said that we felt the stock category would be a bit more resilient and a slowdown. But even in this environment today, we are seeing Unfavorable trends, but not to the degree we see in special order.

Speaker 3

Got it. I think you spoke to favorable mix. I think that was more related to R and R, but I think we were hearing from a competitor that they were seeing trade down effects more on the new construction side. Curious to see if you were seeing The same negative trade down pressures and just maybe speak to pricing trends more broadly?

Speaker 2

So, yes, we're not seeing that same trend. We've also not got the high end of the price continuum, so we're not Selling custom or high end semi custom product to trade down against. In the value space that we've in, we've seen Very much a maintenance mode and some positive mix depending on the customer and the product category.

Speaker 3

Got it. Thanks for that. Best of luck. I'll pass it on.

Speaker 2

Thanks.

Operator

Our next question comes from Steven Ramsey from Thompson Research Group, please go ahead with your question.

Speaker 4

Good evening. Maybe to start with on the raised EBITDA guidance, A very strong first half. Can you clarify if any of that is the second half outlook being any better?

Speaker 1

Stephen, I guess maybe rephrase your question about the second half outlook being better. Sure.

Speaker 4

On the EBITDA guidance being raised, was that solely the first half or does the second half of the year have anything to do with that?

Speaker 2

Yes, it's primarily the first half performance that we've seen because there's still so much uncertainty as we think about the second half from a demand profile standpoint. And as we've signaled over the past couple of quarters, we do have those start up costs that Paul referenced of roughly $8,000,000 That's all back half loaded for Monterey and Hamlet.

Speaker 4

Okay, helpful. And then if you think about stocking levels by channel and customer type, do you feel That they're at a healthy level or do you think given the slowdown broadly and then big ticket, do you think that Some customer channel partners have taken stock down too low.

Speaker 2

So, yes, just as a reminder, The vast majority of our portfolio was not stocked at a retailer or at a builder or at a dealer. So You really are only talking about our stock kitchen and bath business that sits inside the home centers. Now over the last couple of quarters, we've had some discussion around some destocking that had occurred that was impacting the business. I feel we're roughly behind that. There's always some opportunities to get Any better in store positions and we continue to pursue those with the retailers, but nothing of significance that I would highlight in that space.

Speaker 4

Okay, helpful. Thank you.

Operator

And our next question comes from McLaren Hayes from Zelman and Associates. Please go ahead with your question.

Speaker 5

Hey, good evening, guys. I was curious if you could talk a little bit about input costs and how they're trending at this point?

Speaker 2

Yes, certainly. When you think about the raw materials that we're purchasing, those have stabilized. So that's a positive. On the flip side, we do continue to see upward pressure in the labor markets as well as domestic transportation.

Speaker 5

And has any of that relief, I guess, on the hardwood lumber side or any discussion around pricing rollbacks Across any of your 3 channels?

Speaker 2

I certainly wouldn't use the term rollbacks when we talk about pricing. We do monitor those input Austin, we do have some arrangements that are tied to those particular indices. But our general philosophy and approach and discussion that we've shared even in this call over the last couple of quarters is that any pricing reductions would have to be driven by deflation first, but also there'd be an evaluation of the profitability of that Conversations around price and those continue to be ongoing with our customers.

Speaker 5

Okay, thanks. And I guess one last one. Could you Just elaborate a bit on some of those website changes you alluded to in the home center channel?

Speaker 2

Yes, it's basically just a reskin and a refresh, More relevant content, as well as ways to drive consumers through the purchase journey that ultimately helps drive them into the store to Make a purchase decision.

Speaker 5

Awesome. Well, thank you.

Operator

Our next question comes from Giulio Romero from Sidoti and Company. Please go ahead with your question.

Speaker 6

Thanks. Hey, good afternoon. Can you maybe just dig a little bit more into the operational efficiencies and the stabilization of the supply chain and how much more runway you have for each of those?

Speaker 2

I think on the supply chain stability, that's pretty much secured in which we've kind of lapped that. So we've had a couple of quarters of that performance being very strong. So we're not seeing the disruption that we were experiencing over the last couple of years. I would say that we always have ongoing opportunity in the operations side. We talk about operational across the business, not just in the manufacturing facilities, but all of our functional cost areas, and we'll continue to drive Projects to take cost out of those particular areas as we go forward.

Speaker 6

Okay, really helpful there. And then I guess, In the Q2, you had a very tough year over year comparable on the volume side. Just how would you have us think about the Q3 and the Q4 as the year over year comps It's a little bit easier from a volume perspective.

Speaker 2

Yes, I think Q3 is unfortunately going to be fairly similar to Q2. We've now got softer demand environment that you're obviously seeing in the marketplace. We will put a couple of extra down days in around the holidays as well. But as we push into Q4, we think the comps do start to improve. At this time, still think they're likely negative, but not nearly to the rate we've seen in Q2

Operator

Our next question comes from Tim Wojs from Baird. Please go ahead with your question.

Speaker 7

Hey guys, good afternoon.

Speaker 6

Hey, good afternoon.

Speaker 7

Nice job. Maybe just the first one, Scott. Just how when you look when you're talking to your builder customers, Where do you feel like in terms of affordability they are in kind of adjusting kind of square And if it trends lower to try to create a more affordable product, I mean, how does that kind of impact Woodmark, if at all?

Speaker 2

Yes. So the first thing I will remark on is what are we seeing, hearing from the builder customers around Price points and then let's bring interest rates into that discussion. The pricing has not really been the bigger challenge. The interest rates have been the higher priority. So Many builders have done buy down strategies to keep those rates in the sub-five percent or just north of 5 percent rate to keep folks interested in going into the homes.

Speaker 2

I do think there'll be a rotation down in home size and folks are starting to model that. We experienced that a couple of years ago. That was part of our strategy, as you recall, when we did the acquisition. It allowed us to bring Origins to bear and be a product offering to take in those homes I guess when I step back and think about homes though as they do get spec smaller, the most important space Typically defined in those homes is the kitchen. And usually those spaces are protected.

Speaker 2

So I don't I'm not alarmed or worried that Would be unfavorable for the amount of cabinetry we would sell into a kitchen space. Where you may have some impacts is perhaps some mudroom gets dropped off The space is taken out, but there's certainly still going to be a bathroom, bathroom space. There's still an opportunity to bring product into those areas.

Speaker 7

Okay. Okay. That's really helpful. And then on the kind of the wallet share opportunity, Where do you I know you're not going to tell us like what exactly it is, but I mean, maybe just how much runway Could there be from a wallet share perspective with some of your top kind of national regional builders?

Speaker 2

Yes. So it's a difficult question to answer because it is very much regional and market specific. So there's going to be some markets where we're pretty mature with our partners and have a very high share position. So it's definitely going to be a maintain and maybe target some regionals in that And then we've got some markets where we think there's a much more sizable opportunity to go get share with players. So we target those particular markets

Speaker 7

I can't go after those

Speaker 2

particular accounts. Sorry, I can't add a lot more detail beyond that.

Speaker 7

Yes. No, but there still are opportunities. I mean, it's Point for wallet share to improve?

Speaker 2

Absolutely.

Speaker 7

Yes. Okay. And then maybe just the last one, kind of first half, You guys did about 15% EBITDA margins. There's a little bit of variability here, but in the back half, it's going to be something that's maybe closer to 12. I know that you get $8,000,000 from the start ups, that's about 100 basis points, January seasonally weaker.

Speaker 7

Like Is there anything else just to call out why there would be that kind of maybe step down first half to second half outside of those kind of discrete items?

Speaker 2

Yes. The 3 things we talked about last quarter would be the same items that we'd hit this quarter. You hit on 2 of them. So Monterey and Hamlet, we've already discussed the $8,000,000 in the back half. Certainly, softer demand environment as we think about back half.

Speaker 2

And then mirror cycle was the other one we mentioned. So some of our fixed costs You do move our timeline on that as the August, September timeframe. So we'll roll through some incremental costs for that. But nothing substantial outside of those three areas.

Speaker 7

Okay. Okay, very good. Good luck on the rest of your guys. Thank you for the time.

Speaker 2

Thanks, Tim.

Operator

Our next question comes from Colin Barron from Jefferies. Please go ahead with your question.

Speaker 8

Hi, good afternoon guys. Thank you for taking my question. I guess just building off of that last question on the incremental costs that you're going In the back half of this year, I guess any color as to how long you expect those start up costs to linger into fiscal year 2020 5, should we be expecting to see some margin compression, I guess, in the first half of the year from these strong 15% margins going forward because of those costs staying in the business?

Speaker 2

So we're not yet ready to start providing an outlook Typically on our fiscal year 'twenty five, but I think you've hit the key point there. We are going to have a ramp period. We're not going to open those factories and they're all of a sudden going to be full overnight. So there's going to be a ramp period. I can't disclose necessarily how long it'll Take us to fill that, but there will be some continued pressure as we go into the early part of 'twenty five.

Speaker 8

Great. And I don't know if you're going to be willing to comment on this either, but I guess some of the larger builders are still fairly optimistic around their ability for volumes in 2020 for calendar year 2024. I guess any early read as to how you guys are feeling about the full year 2020 Given the strength in what the builders are saying and then any color about what you're feeling for the repair and remodel market More broadly?

Speaker 2

Yes. On the builder side, what we're seeing and hearing is a pretty wide range of expectations. There are some analysts projecting low single digit growth in starts for calendar year 'twenty four. We have some builders that are pretty bullish and then others that are concerned. We haven't started our official kind of budget cycle process.

Speaker 2

We'll start that at the beginning of 2024 and then I'll give us a better perspective. But There does seem to be some energy to perhaps some slight growth as we move into 'twenty four. I think remodel is going to continue to be under pressure. We've certainly heard from the home centers in the last couple of weeks their overall results and their outlook of kind of mid single digits down our Category, both of the retailers certainly performing worse than that as they've messaged over the last couple of quarters. So I think we'll continue to be challenged there.

Speaker 2

And then we'll just have Need to monitor new construction. I think every builder will tell you, now is not the best time to ask as we go through the winter months. But as we get into the spring selling season, That will dictate how the back half of 'twenty four looks.

Speaker 8

Great. I appreciate the color and good luck going forward.

Speaker 2

Thanks.

Operator

And at this time, as I do not see that there is anyone else waiting to ask a question, I'd like to turn the floor back over to Mr. Jyhymczak for any closing comments.

Speaker 1

Thank you again for joining us today. That does conclude our conference. We thank you all for your participation.

Operator

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

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Key Takeaways

  • American Woodmark reported Q2 net sales of $473.9 million, down 15.6% year-over-year, with new construction down 11.1% and remodel channels declining 18.8%.
  • Adjusted EBITDA rose 7% to $72.3 million (15.3% margin) and adjusted EPS increased to $2.36, driven by favorable mix and manufacturing efficiencies.
  • Free cash flow reached $109.9 million YTD, cash on hand was $96.4 million, net leverage improved to 1.05x, and a new $125 million share repurchase program was authorized.
  • The company maintains a full-year FY24 sales outlook of a low double-digit decline but raised adjusted EBITDA guidance to $235 million–$250 million, factoring in ~$8 million of startup costs for new plants.
  • Strategic priorities include growth via new product launches, digital transformation (ERP go-live, CRM rollout, website enhancements), and platform expansion in Monterrey (Mexico) and Hamlet (NC).
AI Generated. May Contain Errors.
Earnings Conference Call
American Woodmark Q2 2024
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