American Woodmark Q3 2024 Earnings Call Transcript

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February 29, 2024

There are 7 speakers on the call.

Operator

Good day, everyone, and welcome to the American Woodmark Corporation Third Fiscal Quarter 20 24 Conference Call. Today's call is being recorded February 29, 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.

Operator

We'll 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 stock 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.

Operator

I would now like to turn the floor over to Paul Jymczak, Senior Vice President and CFO. Please go ahead, sir.

Speaker 1

Good afternoon and welcome to American Woodmark's 3rd 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 2

Thank you, Paul, and thanks to everyone for joining us today for our 3rd fiscal quarter earnings call. Our team delivered net sales of $422,100,000 representing a decline of 12.2% versus the prior year. Within new construction, our net sales declined 11% versus prior year. Recent data points such as housing starts and NAHB's measure builder sentiment point to improving demand as we head into the spring. We remain 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 benefit from 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 13.1% versus the prior year. Within this, our home center business was down 14.1% versus the prior year. Demand trends remain under pressure due to lower in store traffic rates and consumers choosing smaller sized projects. With regards to our Devo distributor business, we were down 10.3% versus the prior year.

Speaker 2

Our adjusted EBITDA decreased 0.7 percent to $50,600,000 but our adjusted EBITDA margin percentage increased to 12% for the quarter. Reported EPS was $1.32 and adjusted EPS was 1.66 dollars The improvement in performance is due to product mix and improved efficiencies in the manufacturing platforms. Our team continues to drive operational excellence in our plants. Our cash balance was $97,800,000 at the end of the 3rd fiscal quarter, and the company has access to an additional $322,900,000 under its revolving credit facility. Leverage was reduced to 1.05x adjusted EBITDA and the company repurchased 216,000 shares in the quarter.

Speaker 2

Our net sales outlook for fiscal year 'twenty four remains unchanged with our expectation of a low double digit decline with fiscal Q4 sales down high single digits. Due to the strong fiscal third quarter performance, our adjusted EBITDA expectations for the full fiscal year is increasing and narrowing to a range of $247,000,000 to $253,000,000 Our team continues to execute against our strategy that has 3 main pillars: growth, digital transformation and platform design. Growth will benefit from the launch of a low SKU high value offering in the home centers targeting pros and a new brand that will serve our distribution customers 19 51 Cabinetry. Our made to order business will also benefit from the upcoming summer launch featuring new on trend styles and finishes. Digital transformation efforts over the last fiscal quarter include the go live of ERP in Monterey, the go live of WMS in Hamlet, North Carolina and the go live of website enhancements for our home center business.

Speaker 2

The planning for the next phase of work continues and includes the CRM service modules supporting our customer care organization and new construction service center operations and ERP for our May to Stock facilities. Platform design work continues with our 1st shipment of components from Monterrey, Mexico in January and shipments of bath products from our Hamlet, North Carolina location in February. We will continue equipment installations in the coming months along with the training and hiring of new teammates to support our ramp plan. In closing, I'm proud of what this team accomplished in the 3rd fiscal quarter and look forward to their continuing 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. Reviewing our Q3 results for fiscal year 2024. Net sales were $422,100,000 representing a decrease of 58 point $6,000,000 or 12.2 percent versus prior year. Remodeled net sales, which combines home centers and independent dealer and distributors, decreased 13.1% for the Q3 versus prior year, with both home centers and independent dealer distributors decreasing 14.1% and 10.3%, respectively. New construction net sales decreased 11% for the quarter compared to last year.

Speaker 1

Our gross profit margin for the Q3 of fiscal year 2024 improved 3 50 basis points to 19.2% of net sales versus 15.7% reported in the same period last year. Gross margin benefited from favorable product mix and pricing matching inflationary costs impacts along with operational improvements in our manufacturing facilities combined with the stability in our supply chain. Total operating expenses excluding any restructuring charges for the Q3 of fiscal year 2024 was 12.6 percent of net sales versus 10.4 percent for the same period last year. The 220 basis point increase is due to increases in our incentives and profit sharing for all employees and lower sales. Adjusted net income was $26,800,000 or 1.66 dollars per diluted share in the Q3 of fiscal year 2024 versus $24,400,000 or $1.46 per diluted share last year.

Speaker 1

Adjusted EBITDA for the Q3 of fiscal year 2024 was $50,600,000 or 12% of net sales versus $51,000,000 or 10.6 percent of net sales reported in the same period last year and represents a 140 basis point improvement year over year. Despite facing year to date volume headwinds, our continued strong earnings performance this year is a direct result of the hard work and efforts our teams have put into reestablishing and maintaining our operational efficiencies, stabilizing our supply chain and controlling overall spending. These earning gains are partially offset by increases in incentive compensation, profit sharing and digital transformation costs. Free cash flow totaled a positive $131,700,000 for the current fiscal year to date compared to $91,500,000 in the prior year. The $40,200,000 increase was primarily due to changes in our operating cash flows, specifically higher net income and lower inventory, partially offset by increased capital expenditures.

Speaker 1

Net leverage was 1.05 times adjusted EBITDA at the end of the Q3 of fiscal year 2024, representing a 0.76 improvement from the 1.81 times as of last year. As of January 31, 2024, the company had $97,800,000 of cash and cash equivalents on hand, plus access to $322,900,000 of additional availability under our revolving facility. Under the current share repurchase program, the company purchased $19,600,000 or approximately 216,000 shares in the 3rd quarter, representing about 1.3% of outstanding shares being retired. For the 1st 9 months, we have repurchased $71,800,000 of the company's common shares and have $105,400,000 of share repurchase authorization remaining. Our outlook for the fiscal year 2024 from a net sales perspective, we continue to expect low double digit declines in net sales versus fiscal year 2023 with high single digit declines in the 4th fiscal quarter.

Speaker 1

The change in net sales is highly dependent upon overall industry, economic growth trends, material constraints, labor impacts, interest rates and consumer behaviors. Given our strong performance for the 1st 9 months of the year, we are increasing and narrowing our adjusted EBITDA expectation for the full fiscal year 2024 to a range of $247,000,000 to $253,000,000 The increase in our expected outlook is due to the strong operational performance and the execution we have achieved in the 1st 9 months of our fiscal year 2024. Reiterating our outlook from the past quarter, we have begun operations in our new locations in Hamlet, North Carolina and Monterrey, Mexico and will continue to ramp up production throughout the remaining calendar year. This will negatively impact our results and we will be incurring operational expenses without the offsetting full revenue performance of those locations. The total impact of these charges is approximately $8,000,000 to $9,000,000 in the full fiscal year 20 24, with more than half of these charges occurring in the 4th fiscal quarter.

Speaker 1

In closing, our business continues to capitalize on the strides achieved over the past year. We anticipate that these enhancements will positively impact our financials throughout the remainder of the fiscal year. This success stands as a testament to the unwavering commitment, diligence and contributions of our dedicated employees, all in alignment with our GDP strategy. I extend my heartfelt gratitude to every team member at American Woodmark. They are the driving force behind our daily accomplishments.

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

At this time, we'll begin the question and answer session. Our first question today comes from Derek Schmois from Loop Capital. Please go ahead with your question.

Speaker 3

Hi, thanks and congrats on the quarter. I was hoping you can go into a little bit more detail on what you're seeing on the remodel side, in particular, if you can provide some detail around in stock versus semi custom?

Speaker 2

Yes, Garik. Good afternoon. So when we look at the remodel business, we're not seeing any major differences across the categories from a sell through rate standpoint. So in stock as well as the special order and the home centers performed comparably inside the period.

Speaker 3

Got it. Wondering if you could go into some more detail. I think you talked about an improvement in product mix. What was driving that?

Speaker 2

That would be mix across our channels, 1st and foremost. So what we sold through in each of the respective channels that we've got, we've seen really an ability to hang on to the overall mix. I know there was some speculation going into this most recent fiscal year, perhaps rotation down. We've really not experienced that across the new construction channel. We've seen a little bit of that inside remodel, but in totality, a favorable mix equation for us inside the quarter.

Speaker 3

Got it. And then I know we're not in your fiscal 'twenty five yet, but if you're able to share any thoughts on how you think perhaps maybe calendar 'twenty four, just maybe a longer term view of the market. I think we heard from a competitor anticipating low single digit market growth declines over the next, say, 4 quarters. Just curious if you have any similar observations or any deviation off of that?

Speaker 2

Sure. And you're right. We're not ready to share an outlook beyond fiscal year 2024. Our cycle is we're really starting our budgetary meetings internally now. We'll be ready to give you a full fiscal year 2025 outlook in our next call.

Speaker 2

With that said though, what are we hearing and seeing in the market? Certainly, there was a number of recent releases in the building product space across competitors, other categories, customers and then of course the show out in Vegas this week. So if I take all of those inputs together, I think what we're seeing and hearing is that the range for single family starts is still a bit mixed. We're seeing analysts talk about low to mid single digit growth for the calendar year. Think remodel is the one that continues to remain a bit under pressure.

Speaker 2

Estimates there from low to mid single digits on the negative side. Home centers again just reported their figures for the year and their outlook on calendar year 'twenty four, both signaled negative comps

Operator

in

Speaker 2

the calendar year. And certainly for the last two quarters, they both signaled that our category was performing worse than that. So if I was to take all of that together, I would say that in totality repair and model, call it download mid to single and then new construction up mid single. I think it's sort of the market view. Our perspective and this would be the same as it's been for many years is that we should perform better than that in both new construction and recurring models.

Speaker 2

So I'm not yet ready to give you what that translates into an outlook, but that's at least the market view and our expectation is that we'll gain share and perform better than that.

Speaker 3

No, that makes sense. All right. Thanks for all of that. I'll pass it on.

Speaker 2

Okay. Thank you.

Operator

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

Speaker 4

Hi, good evening. Wanted to think about looking out over the next 12 months and with the new facilities now up and running, curious how adaptable you are to run those and ramp production up or down as the demand profile rolls in and how that potentially impacts gross margins as going forward with the new facilities coming online?

Speaker 2

Yes. Specifically to the first part of the question on our ability to adapt and ramp up or ramp down production, our operations team has historically done a fantastic job of being able to do that. During COVID, our biggest barrier would have been labor. We certainly have seen a better labor environment, but our beliefs internally is that that will continue to always be a challenge. So we've done a lot of work over this past year to make sure we've got more flexibility and capability to ramp up as needed.

Speaker 2

Of course, ramping down is quite frankly a little bit easier in that scenario. Specific to that capacity, our commercial teams are doing a great job working in the market on finding opportunities for us to be able to fill that capacity. I don't know exactly when we'll get to a full ramp from that perspective and that'll be part of our outlook conversation that we'll

Speaker 4

thinking about signals you're maybe looking at for repair and remodel and a potential recovery there, do you look first at trends through the dealer channel, through home centers? Just curious if there's anything in the marketplace that you're looking for that may not be publicly stated from others in their outlook?

Speaker 2

Nothing that's really different from what you see in the marketplace. I would say that we're looking at other data points outside of those outlets first. So what's happening with existing home sales, of course, that creates an opportunity for a transaction. What's happening with consumer sentiment, their willingness to invest back in the home and spend dollars, are they going to shift away from experiences back to an investment in an asset they own, what's happening with interest rates. So the same things you're viewing are the things that we're going to look at there.

Speaker 2

Depending on the cycle, we've seen difference we've seen different channels come back faster. So I don't want to point to dealers as a leading indicator and I don't want to point to home center as a leading indicator because they both have varied over the years. So we look at the outside factors and then keep our eye around both of those particular outlets as the type of activity and jobs they're bidding.

Speaker 4

Okay. That's helpful. And then last quick one for me. The margin outlook raised, just to make sure that's from already produced results year to date or is there anything in the Q4 outlook that helps to bolster that full year guide?

Speaker 1

Yes. Stephen, I'm not tracking your question. So, the outlook that we're going to give for the full year doesn't include everything that we've achieved through the 1st 9 months of the year. And we're trying to give you a range of exactly where it's going to be within that last quarter.

Speaker 4

Got you. Yes, I just wanted to make sure is there for the raised EBITDA outlook, is that mostly attributable to year to date results or is there is Q4 shaping up better than what you thought from the prior outlook?

Speaker 1

Yes. I'd say it's a combination of both. Throughout the year, we're performing a lot better. So in essence, gives us the confidence to raise our outlook for the full year.

Speaker 4

Okay, great. Thank you.

Operator

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

Speaker 5

Hey, guys. Good afternoon. Maybe just to start, Scott, on the new the 19 51 brand. Could you just maybe give us a little bit of color of kind of where kind of the market strategy behind the introduction of the new brand and then maybe kind of what your 3 to 5 year targets might be for growth related to that business?

Speaker 2

Hey, good afternoon, Tim. So, yes, 1951 prior to us launching that brand, our strategy when we thought about the new construction market was to serve it with 1 brand and that brand Timberlake. And that was regardless of how that particular builder wanted to really go about obtaining their cabinetry product. So what we've done now with 1951 is we've been able to consolidate all of our various platforms that we've got underneath the Woodmark umbrella. We're able to now provide to principally distributors, but also to some dealers a brand that will be specifically focused on their business requirements.

Speaker 2

We want to make sure we give a choice to whether it's a builder or a contractor or remodeler, the right product and the right service model that they want to actually utilize. So, we're excited about it. The actual go live is March 4. So it's we're a week before, but it'll be live March 4. It's already up on the website and available.

Speaker 2

And our commercial team is already out pre selling and talking obviously to our distributors. So we think it will be a great opportunity to perhaps take away from some potential channel conflict that's existed in the past and gives us an opportunity to drive more growth in that channel. As far as specific goals, I don't have a goal that I want to put out in the market today specific to that. I'll just tell you that's part of the strategy and the overall outlook that we shared in our Investor Relations deck. We did a refresh on that back in January and posted that on the website.

Speaker 2

So that's factored into that financial model.

Speaker 5

Okay. Okay. Very good. Maybe just on the start up costs, the $8,000,000 to $9,000,000 this year. I know you're kind of you don't want to talk too much about next year, but is there any kind of, I guess, start up cost tail we should kind of think about that leads into next year or the first half of next year?

Speaker 2

Yes, it's not necessarily a startup cost tail. So I would say that the startup costs go away, right? That's a lot of the costs we had prior to being ready for production and ramping. It will now shift to being deleveraged. So we'll have some fixed costs associated with those facilities.

Speaker 2

If we're not fully utilizing and absorbing those, there'll be some deleverage that would through the results there. But you're right, we haven't modeled that fully out yet to give you a look, but we won't have this ramp cost to get ready like we had in fiscal year 'twenty four.

Speaker 5

Okay. And then the last one for me just on mix.

Speaker 1

There's been some other kind

Speaker 5

of building product industries and categories that have talked about some negative mix kind of impacting whether it's consumer trade down in the R and R market or maybe it's smaller homes in new construction. Are you guys seeing that? Or is it a situation where your portfolio is kind of built around some of those mix changes and it's actually a benefit to American Woodmark in terms of just how the market's evolved?

Speaker 2

Yes, you got it, Tim. It's the latter part. When you think about our portfolio and the price points that we go after, we're not sitting in the semi customer, custom range where you might see folks move down in our category or even other categories of building products. So, we go after the value price point offering. That's what we've been focused as a company for decades.

Speaker 2

And that's where the market is shifting. So, we're not dealing with a rotation down at a higher price points. We're already at the value price points. And I shared earlier in the call, we really haven't seen much rotation even inside our

Speaker 3

inside our

Operator

portfolio down.

Speaker 5

Okay. Okay, very good. Good luck on the rest of the year. Thank you.

Speaker 2

Yes. Thanks, Tim. Thanks, Tim.

Operator

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

Speaker 6

I guess I just want to start on the R and R market. It looks like it will probably be like a second half story in calendar year 'twenty four just based on commentary from other building product manufacturers and the sentiment at the builder show this week. But I was curious if you had any thoughts on what needs to happen for the R and R market to really come back, whether that be a certain mortgage rate level or some other factor? And just how quickly you think demand can snap back when that happens?

Speaker 2

Yes, I'll take the latter part first on the equation. So how fast it comes back, I'm not sure. We talk a lot internally about it will come, it will come quicker than we probably are anticipating. We just want to make sure we're ready for it. We believe there's some pent up demand there.

Speaker 2

And when consumers get comfortable again, they're going to come back in a pretty meaningful fashion in what are new projects. We do think about the second half being stronger. What are the things that we're going to keep focused on that we think will help drive that? Interest rates are going to be at the top of the list. What's really going happen.

Speaker 2

I know we've pushed out a March potential reduction to now June. Even then, I think it's a 60% somewhat estimate on actually bringing it down 25 basis points. But we're looking to see interest rates move. We think that helps new construction as well as repairing model. And then the last one would be existing home sales.

Speaker 2

We need to see existing home sales numbers increase, all time lows over the last, I think, 25 years this last calendar year. We need to see those numbers move back up. As they do, that creates an opportunity on both sides of the transaction of the sale for a remodel, and that's usually when we see our business pick up. So those would be the 2 big indicators we're focused on.

Speaker 6

Great. That's really helpful color. And then can you just comment on how your unit cost trended in the most recent quarter? And just how you're thinking about cost inflation or deflation as you look out into calendar year 2024

Speaker 2

here? Yes. The 2 things I would well, I guess a couple of things I'd call out for you. So one on input cost, we have seen some of the hardwood lumber start to move up. So maple is an example specifically we saw that move up a little bit towards the end of the quarter.

Speaker 2

And then also particleboard has recently seen some announcements around price increases. So keeping an eye on those. Labor, of course, is always going to be an item that will continue to progress and move. That's not going to stop. And then final mile delivery, that's another box we've seen.

Speaker 1

So couple of the raws

Speaker 2

and then labor and final mile would be the key ones, not too different from what we've seen the past couple of quarters.

Speaker 6

Okay. That's helpful. And then I guess just any colors how you're thinking about price mix in the current quarter? Are you seeing any more price competition or pressure from your customers to reduce pricing just given the lower demand environment? Just any thoughts there?

Speaker 2

Yes. Demand is not really a driver of the pricing conversation for us. What sometimes you'll see is maybe promotional activity being factored in because of lower demand. We've seen a little bit of an uptick in repair and remodel, but not a considerable increase in promotional activity really throughout all of our fiscal year. As far as pricing, we've had conversations with folks starting last year, again, not volume driven, but deflation driven.

Speaker 2

So if we've seen deflation on specific input costs and it's appropriate to make adjustments, we'll have those conversations.

Speaker 6

Great. I really appreciate all the color.

Speaker 2

Okay. Thank you.

Operator

And at this time, as I am not seeing any additional questions, I'd like to turn the floor back over to Mr. Jychimchak for any closing remarks. Please go ahead, sir.

Speaker 1

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

Operator

Ladies and gentlemen, that concludes today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

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Key Takeaways

  • American Woodmark reported net sales of $422.1 million, down 12.2% year-over-year, with new construction sales falling 11% and remodel (home center and distributor) sales down 13.1% due to softer housing starts and lower in-store traffic.
  • Adjusted EBITDA was $50.6 million (12% margin), nearly flat year-over-year, while adjusted EPS rose to $1.66 driven by a 350 bps gross margin improvement from favorable product mix and manufacturing efficiencies.
  • The company ended Q3 with $97.8 million in cash, $322.9 million available on its revolver, generated $131.7 million of free cash flow YTD, reduced net leverage to 1.05×, and repurchased $19.6 million of shares.
  • For fiscal 2024, net sales are expected to decline low double digits (Q4 down high single digits), and adjusted EBITDA guidance was raised and narrowed to a range of $247 million–$253 million based on strong operational execution.
  • Strategic priorities—growth, digital transformation and platform design—are advancing with a new low-SKU home center line, the launch of the 1951 Cabinetry brand, ERP/WMS go-lives and capacity ramps in Monterrey, Mexico and Hamlet, North Carolina.
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Earnings Conference Call
American Woodmark Q3 2024
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