American Woodmark Q1 2024 Earnings Call Transcript

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August 29, 2023

There are 7 speakers on the call.

Operator

Good day, and welcome to the American Woodmark Corporation First Fiscal Quarter 2024 Conference Call. Today's call is being recorded August 29, 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, americanwoodmark.com, includes definitions of each of these non GAAP financial measures and 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.

Operator

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 I would now like to turn the call over to Paul Jochencek, Senior Vice President and CFO.

Operator

Please go ahead, sir.

Speaker 1

Good afternoon and welcome to American Woodmark's 1st fiscal quarter conference call. Thank you 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 your questions.

Speaker 1

Thank you, Paul, and thanks to everyone for joining us today for

Speaker 2

our 1st fiscal quarter earnings call. Our teams delivered net sales of $498,300,000 representing a decline of 8.2% versus the prior year. Within new construction, our business declined 6.4% versus prior year. Builders continue to buy down rates to drive sales and are shifting to a ready to move and build strategy. Cancellations are holding in more historic norms in the 14% to 16% range.

Speaker 2

The long term fundamentals of the market remain strong and there continues to be a deficit in the number of homes built falling short of household formations. We plan to continue to grow our share with new and existing customers. Looking at remodel, which includes our home center Demand trends have slowed for our made to order in stock kitchen business due to lower in store traffic rates That was more than offset by inventory destocking efforts at our customers. With regards to our dealer distributor business, we were up 0.1% versus the prior year. Incoming order trends improved at the end of the prior fiscal quarter, allowing for stronger shipments in the fiscal Q1.

Speaker 2

Our adjusted EBITDA increased 33 percent to $75,200,000 or 15.1% for the quarter. Reported EPS was $2.28 and adjusted EPS was $2.78 The improvement in performance is due to pricing, better matching inflationary impacts, mix and improved efficiencies in the manufacturing platforms. Our ops team continues to drive excellence in our plants. Our cash balance was $89,700,000 at the end of the 1st fiscal quarter, and the company has access to an additional $323,200,000 under its revolving credit Leverage was reduced to 1.09 times adjusted EBITDA and the company repurchased 328,000 shares in the quarter. Our outlook for fiscal year 'twenty four assumed market declines in both new construction and repair and model, and our view has not changed, But we do view repair and model demand as softer versus our original outlook with slightly better demand in new construction.

Speaker 2

Our expectation for sales remains unchanged with a low double digit decline. Due to the strong fiscal first quarter performance, our adjusted EBITDA is increasing to a range of $225,000,000 to $245,000,000 Our team continues to execute against our strategy 3 main pillars, growth, digital transformation and platform design. Growth is benefiting from our summer launch that included Digital transformation efforts over the last fiscal quarter include the conclusion of our global design workshops for the next implementation area The ERP in Monterrey go live. Our CRM tool went live in August across the remodel channel and will be followed by the new construction channel in September. Platform design work is accelerating with over 70% of the wall panels installed in Monterrey, Mexico And all of the wall panels are installed in Hamlet, North Carolina.

Speaker 2

We expect both sites to be under roof in the next 60 days. 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 our team has accomplished in the 1st fiscal quarter and I look forward to their continued contributions during fiscal year 'twenty four. I will now turn the call back over to Paul for additional details on the financial results for the quarter.

Speaker 1

Thank you, Scott. Net sales for the Q1 of fiscal year 2024 were $498,300,000 representing a decrease of 8.2% over the same period last year. The combined home center and independent dealer and distributor net sales decreased 9.5% for the 1st fiscal quarter with home centers decreasing 12.8% and dealer distributor increasing 0.1%. New construction net sales decreased 6.4% in the 1st fiscal quarter compared to the prior year. The company's gross profit margin for the Q1 of fiscal year 2024 was 22% of net sales versus 16% reported in the same quarter of last year, representing a 600 basis point improvement.

Speaker 1

Gross margin in the Q1 of the current fiscal year was positively impacted by our pricing better matching inflationary impacts, Operational improvements in our manufacturing facilities and stability in the supply chain, partially offset by The $4,900,000 tariff charge incurred within the quarter. As we discussed in our previous earnings call, We are returning to our normal performance cycles where our fiscal Q1 and Q4 are at higher performance levels due to the seasonality of our industry. Total operating expenses, exclusive of any restructuring charges, was 12% of net sales in the Q1 of fiscal year 2024, compared with 10.3% of net sales for the same period in fiscal year 2023. The ratio increased 170 basis points due to increases in our incentives, Profit sharing and digital spend. Adjusted net income was $46,200,000 or $2.78 per diluted share in the Q1 Adjusted EBITDA for the Q1 of fiscal year 2024 was $75,200,000 or 15.1 percent of net sales compared to $56,500,000 or 10.4 percent of net sales for the same quarter of the prior fiscal year, representing a 4 70 basis point improvement year over year and matching the performance gain that we had in our 4th fiscal quarter of fiscal year 2023.

Speaker 1

Commerce made a final determination in the plywood case and the company's 2 Vietnamese plywood suppliers were included. Within the quarter, we took a $4,900,000 pre tax charge. We plan to vigorously appeal the determination. However, this will take time to recover. For context, our last order with either supplier was placed in June of 2022.

Speaker 1

The strong performance this year is a direct result of the hard work and efforts team have put into reestablishing our operating efficiencies, stabilizing our supply chain and controlled spending in the SG and A functions, offset by increases in our incentive compensation, profit sharing and the $4,900,000 pre tax tariff charge. Free cash flow totaled a positive $72,500,000 for the current fiscal year compared to $32,700,000 in the prior year. The $39,800,000 increase in free cash flows was primarily due to changes in our operating cash flows, specifically higher net income and lower inventories. Net leverage was 1.09x adjusted EBITDA at the end of the 1st fiscal quarter 2024 representing a 1.71 times improvement from the 2.8 times in the prior fiscal year. As of July 31, 2023, the company had $89,700,000 of cash and cash equivalents on hand, plus access to $323,200,000 of additional availability under its revolving facility.

Speaker 1

Under the current share repurchase program, the company purchased $22,100,000 or 328,000 shares in the Q1, representing about 2% of outstanding shares being retired. The remaining share repurchasing authorization is 52,900,000. Our outlook for fiscal year 2024 remains unchanged from a net 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 impacts, interest rates and consumer behaviors. Our EBITDA expectation for fiscal year 2024 is being increased 20,000,000 from our prior outlook to a range of $225,000,000 to $245,000,000 The increase in our Reiterating our outlook from the past quarter, we are still on track for starting our new operational locations in Hamlet, North Carolina and Monterrey, Mexico this fiscal year.

Speaker 1

This will negatively impact the results as we have as we will be incurring the operational expenses without offsetting full revenue performance of those locations. The total impact of these charges is approximately $8,100,000 in the full fiscal year of 20 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 in Monterrey, Mexico, Hamlet, North Carolina and continuing our path on our digital transformation with investments in our ERP and CRM solutions and lastly, investing in our automation efforts. Next, we'll continue our share repurchasing. As a reminder, we still have $52,900,000 remaining.

Speaker 1

And lastly, we have our debt position at a leverage ratio we wanted to achieve and we will be deprioritizing paying that debt in fiscal year 2024. In closing, the business continues to build off the progress made through the past fiscal year. We fully expect these improvements to read through the financials throughout this 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 team has accomplished and thank all of our team members at America Woodmark for their continued efforts.

Speaker 1

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.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Julio Romero with Sidoti and Company. Please go ahead.

Speaker 3

Thanks and hey, good afternoon everybody. So I guess, can you maybe start on the sales guide? You talked about a little bit better new construction outlooks, but a little bit R and R outlook, can you just talk about the repair and remodel side? You mentioned Smaller size projects, does that just mean you're selling less volume per home remodel and maybe just talk about what's driving lower in store traffic rates?

Speaker 2

Sure. I'll take just a couple of questions in there. Let's first talk about our expectations as we think about calendar year 'twenty three. I don't want to step into 'twenty four yet at But certainly, we're expecting to see sales decline in both channels. I would say the range for single family starts It has widened from high single digits to low double digits depending on the source.

Speaker 2

And they're looking at starts data that just came out January July, we averaged down 17%, nationally with July up 10%, and then remodel has been trending in that mid single digit range. Home Centers just reported in the last two weeks. They shared an outlook of down mid single digits and in their most The quarter showed that our particular category was performing below the average store comp. They did attribute that to two factors. 1, slowing traffic In the outlets and then also just smaller jobs.

Speaker 2

So we're taking all that into consideration as we look at our business and projections going forward. We just think it's a reallocation between the two channels for us, but ultimately the same sales guide we had last quarter.

Speaker 3

Okay. I appreciate the color there. And then just wanted to ask about the free cash flow figure, which was pretty impressive for the Q1. What's your sense of inventory levels today? Should they continue to trend lower?

Speaker 3

And just how do you think about free cash flow overall for the rest of the year?

Speaker 1

Yes. Julio, really, we have our inventories kind of starting to get stabilized. We still have room for improvement in that and we're not going to continue our efforts on those avenues. Free cash flow started off much stronger than we anticipated in the 1st part of the year, primarily due to our outperformance, but also we have some delays still in regards to our manufacturing Facilities coming online with the OEMs, not from a lack of desire to do these projects, but just timing of that. But we will have a strong free cash flows for the year.

Operator

Our next question comes from Adam Baumgarten with Zelman. Please go ahead.

Speaker 2

Hey, good afternoon.

Speaker 3

I guess just on the input cost side, I don't know if you guys touched on that, but just kind of what you're expecting for the balance of the fiscal year?

Speaker 2

Yes, on the inflation side at this point, we are seeing relief in hardwood lumber specifically. So we've seen declines there, But we still see upward pressure on other categories from a year over year standpoint, such as plywood, paint, hardware. Certainly labor, right, continues to be an increasing input cost along with domestic transportation. Don't see that changing materially between now and the end of the calendar year, even really the end of our fiscal year.

Speaker 3

Okay, got it. And then just on the softness in the on the R and

Speaker 1

R side, just kind of maybe talk about promotional activity and how that's trending?

Speaker 2

Yes, we've seen a slight uptick in promo activity. I think we messaged the same last quarter, again, principally in the remodel channel, so both And the dealer distributor space as well as the home center. So slight uptick, but nothing of concern.

Speaker 3

So like kind of back to normal is a good way to think about it?

Speaker 2

I still would say it's below the historic norm.

Operator

Our next question comes from Steven Ramsey with Thompson Research Group. Please go ahead.

Speaker 4

Hi, good evening. On gross margins being strong again for the 2nd consecutive quarter, you called out the drivers There, could you maybe walk through the order of magnitude on the drivers helping gross margin in the quarter? And then maybe Just order of magnitude, how you see that evolving going through the rest of the year on those drivers?

Speaker 1

Yes, Stephen, good question. Really, we We talked about pricing better matching inflation. So we really have caught up to that kind of commentary that's out there. So from our first from a magnitude perspective, that is the 1st and foremost that's And you look at the other opportunities that were out there, operational efficiencies really matching better from what we did the stability of supply chain. Those 2 work hand in hand.

Speaker 1

So as our supply chain really stabilized, it does allow our operations to get back to their normal operating cadences, which increases our overall plant efficiencies. Those are the, I'd say, kind of stack 1 and then 2 with those 2 being combined together.

Speaker 3

And then the only thing

Speaker 2

I would add to that is just on the pricing piece. I would tell you that we've really lapped The increases that we put into the business a year ago. So we're not expecting additional gains in pricing to benefit year over year going forward.

Speaker 4

Okay, helpful. And then on the new facilities cost of about $8,000,000 this year, is that a pressure that steps down or goes away completely as the markets normalize over the next year or so or Maybe kind of talk to the outlook on that spend.

Speaker 2

Yes, it's basically the ramp up in start up cost. You start paying a lease and you don't have it Fully utilized. So we'll take that charge this year as an impact and then our expectation is that we do start to better utilize and leverage both of those

Operator

The next question comes from Colin Byrne with Jefferies. Please go ahead.

Speaker 5

Great quarter and thanks for taking my questions. I just wanted to start with the guide back into some numbers back into a 100 basis Can you just give some more detail around what's driving the increase in the margin guide? Is it all operational improvements or are you seeing that depends or is it going to be lower raw material costs? Just looking for some more color on the drivers of that.

Speaker 2

Yes. I'd really take it back to Paul's comment a moment ago. Certainly, the impact of our Q1 being better than what we had modeled and assumed When we gave that outlook a year ago would be a contributor. And as he mentioned pricing was a key piece of that as well as how we were running the factories. As we go forward, We expect to continue to run our factories well.

Speaker 2

So we think we've got some upside for that and we've got that factored in to the overall equation. We do expect softer demand as a bit as an offset as we go forward. But when we take all of those considerations together, we're confident with the increase that we've put

Speaker 5

Okay. That's helpful. And then in terms of the margin performance through the rest of the year, any help in thinking about that as the Shape of the year and where you see EBITDA margins bottoming?

Speaker 2

So I don't want to get into a quarterly outlook view on really quite Sales or EBITDA, that's all we give the full year view. The only thing I will comment on specifically is Just recall that Q2 a year ago was by far and away our strongest sales comp in the prior year. Why was that? We made considerable headway in reducing our Backlog a year ago. So just as a reminder, that will be a bit of a tailwind as we think about this upcoming quarter in fiscal year 'twenty four.

Speaker 5

Great. That's helpful color. And then

Speaker 4

just the last one here

Speaker 5

for me. You talked about some destocking at the home centers. Can you just talk about how much of a headwind that was for you guys in the quarter? And where you guys think that channel is from an inventory perspective after this quarter?

Speaker 2

On the specific amount I'll call out for that, Collyn, but we believe there's an opportunity at both of our key accounts to see Increases in in store inventory levels to help both the bath, kitchen and quite frankly even storage category. So Our teams work hand in hand with our customers on driving that improvement in stock rates so that we can assure that we get our In consumers product to be able to purchase.

Speaker 5

Great. Thank you and good luck with the rest of the year.

Speaker 2

Okay. Thank you. Thank you,

Operator

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

Speaker 6

Hey, guys. Good afternoon, Hessian. Maybe just my first question just on that one of your last answers to Scott, did you say I think you said a tailwind, did you mean a headwind from inventory kind of your backlog kind of conversion In the prior year last year?

Speaker 2

So we had a sorry, to clarify that comment, when you compare Q2 to Prior year had the benefit of being able to chew through a pretty substantial amount of backlog. We will not have This year. So it was a tailwind last year that doesn't repeat itself this year, thus it's a headwind. Sorry for not being clear that first time.

Speaker 5

No, no. Yes, just want to make sure

Speaker 6

I heard that. Okay, got that. And then I guess within your builder business, I mean, is there are you seeing any differences in terms of Kind of order activity or just kind of the confidence that your builders have based on the size of the builder. Just trying to think, I know you do a lot of work with the larger kind of builders, but how would you kind of compare and contrast some of the larger builders to some of the smaller ones?

Speaker 2

Yes. All the statements you made are all accurate. So there's a wide range. And it's not only a factor of the builder Specifically, Tim, but also the region. So we've seen some weakness out west as of late.

Speaker 2

That was sort of the last Area of the country to start to rotate down, we expect that to come back. So it varies depending on the account, but I would say the larger builders are pretty bullish On their expectations now for the year as opposed to where they were 3 6 months ago.

Speaker 6

Okay, good. And then would you think From a lead time perspective or how we think about kind of lagging starts or kind of comparing to completion, I know with The supply chain that had kind of got out of the whack over the last couple of years. But would you kind of revert back to that kind of 90 to 100 day lag relative It starts now as we kind of think about the new construction market?

Speaker 2

I wouldn't go all the way back to that historic norm. We certainly saw the increase and I know Paul would quote that moving up, I think, roughly 30 days to 60 days over the past couple of years. We certainly hear about that coming down. You even see some of the builders report on that specifically that that time to build has shrunk, but I don't think we're back to the historic norms yet. We get still pockets of labor challenges, again, market by market that's creating some difficulty on builders being able to get their homes to a completed status.

Speaker 2

Then you get weather, things like out west and Southern California that also creates some disruptions in that cycle time.

Speaker 6

Okay, very good. Thanks for the time guys. Good luck.

Speaker 2

Thank you, Tim.

Operator

As I do not see that there is anyone else waiting to ask a question, I would like to turn the line over to Mr. Jim check for any closing comments. Please go ahead, sir.

Speaker 1

Since there are no additional questions, this concludes our call.

Operator

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

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American Woodmark Q1 2024
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