American Woodmark Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 27, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the American Woodmark Corporation First Fiscal Quarter 2025 Conference Call. Today's call is being recorded August 27, 2024. During this call, the company may discuss certain non GAAP financial measures, including 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 the usage and reconciliation of these non GAAP financial measures to the most recent, 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 Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. All forward looking statements may be made by the company involve material risks and uncertainties and are subject to change based on factors that may be beyond company's control. Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in such forward looking statements. Such factors include, but 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 publicity, update or revise its forward looking statements, even if experience or future changes may make it clear that the projected results expressed or implied therein not be realized.

Operator

I would now like to turn the call over to Mr. Paul Johimchak, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Speaker 1

Good morning 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 will add additional details regarding our financial performance. After our comments, we will be happy to answer your questions.

Speaker 1

Scott? Thank you, Paul and thanks to everyone for joining us today for our 1st fiscal quarter earnings call. Our teams delivered net sales of $459,100,000 representing a decline of 7.9% versus the prior year. This was below our expectations provided during last quarter's call due to weaker demand during the summer in the remodel channel. Year over year growth in single family housing starts have slowed over the past 3 months, putting downward pressure on cabinet installations in future quarters.

Speaker 1

The focus remains on future rate cuts from the Fed, which could drive stronger demand in calendar 2025. Our home center customers have noted higher interest rates and macroeconomic pressures leading to weaker spending on projects. This has been more significant for higher priced discretionary projects like kitchen and bath. We are not experiencing a loss of share with our customers, but we do expect weaker demand versus our expectations at the start of the fiscal year. Our teams remain focused on growing share to our accounts and have realized recent awards in our stock kitchen and bath business that will benefit the remainder of the fiscal year.

Speaker 1

Our belief is that as interest rates decline, consumer confidence increases, existing home sales increase and the potential for home projects increases. This should serve as a tailwind for our business in calendar year 'twenty five. Our adjusted EBITDA results were $62,900,000 or 13.7% for the quarter. Reported EPS was 1.89 dollars Operational excellence efforts continue to drive progress across the enterprise, but were offset in the quarter by lower volumes. Our cash balance was $89,300,000 at the end of the 1st fiscal quarter and the company has access to an additional $322,900,000 its revolving credit facility.

Speaker 1

Leverage was at 1.19x adjusted EBITDA and the company repurchased 271,000 shares in the quarter. Our outlook for the industry in fiscal year 'twenty five assumes the repair and remodel market will be down mid single digits and new construction to be up mid single digits. Within R and R, larger discretionary projects will trend worse than the overall market and are projected to be down high single digits. As a result of the softer R and R demand and the recently reported slowdown in new construction single family housing starts, our expectation for the company's net sales is being adjusted to a low single digit decrease versus fiscal year 2024. Adjusted EBITDA expectations are targeted in the range of $225,000,000 to $245,000,000 Our teams continue to execute our strategy that has 3 main pillars: growth, digital transformation and platform design, with a number of key accomplishments over the past quarter.

Speaker 1

Our summer launch has been well received in the market and conversion activity continues within our distribution business in 1951 and a number of new accounts are being pursued. As previously noted, our teams have won several stock bath and kitchen opportunities over the past quarter. Digital transformation efforts continue with our teams planning for ERP go live and our West Coast made to stock facility later this fiscal year. Platform design work continues as we ramp our Monterey, Mexico and Hamlin, North Carolina facilities. Mill equipment continues to be installed at both sites and will ramp over the coming months.

Speaker 1

Automation efforts are progressing in our mill, component and assembly operations. In closing, I'm proud of what this team accomplished in the 1st fiscal quarter and look forward to their continuing contributions during fiscal year 'twenty 5. I'm now going to 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 Q1 results and then provide our outlook for the rest of the fiscal year.

Speaker 1

Net sales were $459,100,000 representing a decrease of $39,100,000 or 7.9% versus the prior year. We saw a softening in large ticket items that primarily impacted our remodel business. We still believe in the long term fundamentals of the housing industry and they are being impacted currently by consumer confidence and higher interest rates. Gross profit as a percent of net sales for the Q1 decreased 180 basis points to 20.2% versus 22 percent reported last year. Lower sales volumes impacted our manufacturing leverage in our new facilities with combined price increases in our input costs around logistics, raw materials and labor, but those impacts are partially offset by our sustained operating efficiency efforts.

Speaker 1

Operating expenses excluding any restructuring charges were 10% of net sales versus 12% last year. The 200 basis point decrease is due to the roll off of our acquisition related intangible asset amortization that ended in December 2023, lower incentive compensation and controlled spending across all functions offset by our lower sales. Adjusted net income was $29,600,000 or $1.89 per diluted share in the Q1 versus $46,200,000 or $2.78 per diluted share last year. This was impacted by an unfavorable mark to market adjustment on our foreign currency hedging instruments of $4,700,000 net of tax. Adjusted EBITDA was $62,900,000 or 13.7 percent of net sales versus $75,200,000 or 15.1 percent of net sales last year, representing a 140 basis point decline year over year.

Speaker 1

Free cash flow totaled a positive $29,400,000 for the current fiscal year to date compared to $72,500,000 in the prior year. The $43,100,000 decrease was primarily due to changes in our operating cash flows, specifically higher inventory. Net leverage was 1.19x adjusted EBITDA at the end of the Q1 compared with 1.09x last year. As of July 31, 2024, the company had $89,300,000 in cash plus access to $322,900,000 of additional availability under its revolving facility. Under the current share repurchase program, the company purchased $24,000,000 or 171,000 shares in the Q1, representing about 1.8% of outstanding shares being retired.

Speaker 1

We have $65,400,000 of share repurchase authorization remaining. Our outlook for fiscal year 2025. Net sales are expected to be down low single digits versus fiscal year 2024.

Speaker 2

This is

Speaker 1

a result of the softer repair and remodel market and a decline in larger ticket remodel purchases across the retailers, partially offset by the continued growth in new construction during the back half of the year. However, these assumptions are highly dependent upon overall industry, economic growth trends, material constraints, labor impacts, interest rates and consumer behaviors. Our projected EBITDA margin for the fiscal year 2025 is being targeted in a range of $225,000,000 to $245,000,000 driven primarily by sales volumes retracting and the increased manufacturing deleverage of our facilities during the last 9 months of the fiscal year. We will continue to optimize our manufacturing and service platforms. In addition, we evaluate our pricing monthly and we'll continue to do so on a go forward basis to mitigate the inflationary impacts on logistics, raw materials and labor.

Speaker 2

Our

Speaker 1

capital allocation priorities for fiscal year 2025 remain unchanged. We will first be focused on investing back in the business by continuing our path for our digital transformation with investments in ERP and CRM and investing in automation. Next, we will be opportunistic in our share repurchasing. And lastly, with our debt position at a leverage ratio we wanted to achieve, debt repayments will be deprioritized. In conclusion, our team is dedicated to making it happen every day.

Speaker 1

Our operational improvements that have been put in place over the past year have helped us mitigate the volume declines affecting the broader repair and model industries. Investments in automation will drive future operational efficiencies and enable our long term targets from both a growth and margin perspective. We remain steadfast in our GDP strategy and confident in the long term investment opportunities within the housing market, including both new construction and the repair, remodel sectors. This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.

Operator

We will now begin the question and answer session. And the first question will come from Adam Baumgartner with Zelman and Associates. Please go ahead.

Speaker 3

Hey, good morning guys.

Speaker 4

Just

Speaker 3

on Q1, could you maybe give some color on how revenue trended by channel in the fiscal Q1?

Speaker 1

Yes. For new construction, we were up single digits and for repair and model down double digits.

Speaker 3

Okay, got it. And then just thinking about the updated outlook for the year, it looks like it assumes flat year over year revenue over the balance of fiscal 2025. Maybe help us think about how you expect that to trend over the next three quarters? Should we expect some pressure in the coming quarter and then maybe a bit of growth in the back half of the fiscal year? Maybe just a bit more color on how you expect it to phase?

Speaker 1

Yes, Adam, we don't want to get into a quarterly forecast and projection outlook. We'd rather provide just a full year basis. There's still a lot of uncertainty as to what will play out over the next couple of quarters with the rate cuts, but we feel confident in the full year projection that we provided.

Speaker 3

Okay. And then just lastly on the input costs, I mean, it sounds like there's some pressure there and you guys are considering pricing. Maybe just an update on how the pricing typically works? I know it's different by channel and how much would potentially be needed if the input costs stay elevated here?

Speaker 1

Sure. And you're right. The pricing actions will be variable depending on the channel. The timing could move around based on we also had our last increase in the respective channel. Historically, what you would typically see is first actions in dealer distributor followed by new construction followed by home center just because of the lag time on getting those prices input into the process.

Speaker 1

I can tell you at this particular point in time, we have been active in dealer and we have announced a price increase in that channel.

Speaker 3

Okay, got it. Thanks. Best of luck.

Speaker 1

Thank you. Thanks, Adam.

Operator

The next question will come from Garik Shmois with Loop Capital. Please go ahead.

Speaker 4

Hi, thanks. Just on the new construction side, if I remember correctly, it sounds like you held your outlook, but you also talked to some of the weaker trends, just given the housing start environment that slowed over the last 90 days. So just curious as to what's underpinning some of the new construction view for you? Is it share gains? Is it some interest rate assumptions you're making for the back half of the year?

Speaker 4

Just any color on new construction would be great.

Speaker 1

Sure. On new construction, I would tell you that out of the gate for our 1st fiscal quarter, we exceeded what our original planning expectations were from a demand standpoint and feel pretty good about our Q2. Our concern became the second half as we saw starts to decline over these last 90 days. So we start to model that forward as to when cabinet installation will occur and our expectations will see a little bit softer cabinet install in the back half. To your comment on interest rates, let's assume the Fed takes action in September, feels like that's almost a guarantee at this particular point in time.

Speaker 1

I don't think one move makes a big change because everyone's expecting it. But as subsequent moves start to take place, we think that will unlock more homeowners interested in buying a new home or also on the repair and model side investing in their home and doing a project in the kitchen or bath area. So we think that could drive incremental demand in new construction, but that starts to play out into mid calendar year 'twenty five, which starts to cross into our next fiscal Okay.

Speaker 4

Is that comment pretty consistent with remodel as well that your view would be that it would we need to see several rate cuts before that end market starts to accelerate as well?

Speaker 1

Yes, absolutely. I think it's going to take a couple of reductions and then there's going to be a lag effect before consumers get confident and then start to engage in our project. In the planning horizon as well as the actual project timelines, pretty significant on the kitchen remodel. So I also don't think that's a huge boost for us in our second half, but it starts to set us up for a nice 26.

Speaker 4

Okay. And then just lastly, if my math was right, it looks like you held your EBITDA margin guidance despite the slower sales. So I was wondering if you can go into any more detail as to some of the offsets and some of the benefits you're seeing on the margin side?

Speaker 1

Yes. The first would be the comment earlier around some pricing actions as necessary. So as we already mentioned, we've taken some actions in dealer. If input costs continue to move in the other channels, we'll certainly be looking at conversations in those as well. So we'll continue to manage that.

Speaker 1

And then just overall operating efficiencies, our teams are focused on operational excellence, not just in the manufacturing side, but our service platform and new construction, managing SG and A spending wisely. We'll continue to do that despite the pullback in demand and our goal is to manage that EBITDA number to the range that we just provided.

Speaker 4

Understood. All right. Thanks for all that.

Speaker 1

Okay. Thank you.

Operator

The next question will come from Trevor Allison with Wolfe Research. Please go ahead.

Speaker 3

Hi, good morning. Thank you for taking my questions. First, you all mentioned some awards in stock kitchen and bath is going to benefit you guys. Can you provide some color on those? Perhaps how large of a benefit they could be?

Speaker 3

Is there any load in? And what the timing looks like on those?

Speaker 1

Yes, I don't want to get into the specifics around load in and maybe exact timing, but I'll just share with you that it's in our full year outlook that we just provided. It's some permanent placement on the kitchen side and then on the bath side, it's more of a promotional nature. So roughly $30,000,000 from a net standpoint and business annualized and starting to shift in the current quarter.

Speaker 3

Okay, got you. That's very helpful. And then, I want to follow-up again on input cost trends. You've mentioned a few pieces of that that's a bit inflationary. You've got some pricing going into the market.

Speaker 3

What are you guys assuming for input cost inflation embedded in your full year EBITDA guidance?

Speaker 1

Yes, we've seen some impacts in lumber as well as particleboard, more so recently on the particleboard side, But labor is just going to always be an ongoing input cost increase as we push forward to the final mile. So we've got a good handle on what those have been trending. We've got those modeled in our outlook and then we've built in pricing as appropriate to be able to offset and mitigate to hit the EBITDA numbers.

Speaker 3

Okay, great. And then one more quick one if I could. You guys previously had mentioned potentially being more aggressive with the new capacity you have available to win some share there. Can you provide more color on that? Is that more aggressive on pricing?

Speaker 3

Is that more marketing dollars? How exactly are you thinking about that?

Speaker 1

Not more aggressive on pricing and marketing dollars, but more aggressive in sharing our capability, making sure the market understands and our customers understand the capacity we've got and our ability to serve that demand. So that's the focus and the energy. As a reminder, when we went through COVID and we saw such a large surge in demand, we really had difficulty keeping up with that. And we had issues around employment, etcetera, that was a barrier. So we invested despite a recent market downturn.

Speaker 1

We invested in capacity. We wanted to make sure we were ready to take advantage of demand when it comes back. So we've made that investment and we're ramping that investment up. So instead of our teams having to pull back on being aggressive in the marketplace on taking share, now we can turn them loose. So we've done that and we've had some success up to this point.

Speaker 2

Makes a lot of sense.

Speaker 3

All right. Thank you very much. Good luck moving forward.

Speaker 1

Okay. Thank you.

Operator

Our next question will come from Tim Wojs with Baird. Please go ahead, sir.

Speaker 2

Hey, guys. Good morning.

Speaker 1

Hey, good morning, Tim.

Speaker 2

Maybe just first question, Scott, I mean, as you talk to like your channel partners and your dealers, just on the R and R environment, do you feel or you get the feedback that this is just an interest rate situation at this point that there is some level of kind of deferred demand that's out there that's just kind of waiting for lower interest rates? Or is there something else? I'm just trying to understand if like there is a pocket of kind of projects that are out there that are just waiting for financing to come down to kind of stimulate demand?

Speaker 1

The feedback we're getting is there's not a structural reduction in demand. It really is consumers just kind of holding back and waiting on the sideline. They want to see what's going to play out with rates to some extent the election as well and get on the other side of that. As consumer confidence comes back, obviously folks are going to want to look to invest in their home. We've seen the price appreciation.

Speaker 1

We've seen the value creation that folks have had in holding that asset. They're staying in them longer and that's going to create an opportunity to invest. So we don't think there's a structural reduction in demand. We think it's there. In fact, our Board meeting last week, one of the analogies used, Tim, was a beach ball being held underwater.

Speaker 1

And we used it to describe the demand environment perhaps for both new construction and remodel. And these macroeconomic factors are keeping it underwater. Eventually those will dissipate and that will come back and we just want to make sure that we're ready for that from a capacity and from a people standpoint and operating efficiency standpoint.

Speaker 2

Okay. Okay. And then I guess when you think about just kind of the expectations for share gains kind of this fiscal year, how has that tracked relative to kind of your initial expectations? I know you secured some wins, but I'm just kind of curious if there's the opportunity to exceed that or if things are kind of tracking as you expected?

Speaker 1

I'd say at this point in time, Tim, our teams are tracking as we expect. We expected to have some wins and we've delivered on those up to this particular point in time.

Speaker 2

Okay, great. And then I guess the last thing just on capital deployment. I mean you guys have repurchased probably close to 10% of your stock over the past 5 quarters. I mean anything that would kind of change that trajectory especially when you kind of look at some of those longer term targets that you have out there?

Speaker 1

Yes. No, Tim, we remain very confident in the share repurchase program and efforts for our organization. Okay. Nothing near term that would change that, Tim.

Speaker 2

Okay. Sounds good. Good luck on the rest of you guys.

Speaker 1

Yes. Thank you. Thank you.

Operator

Our next question will come from Kathryn Thompson with Thompson Research Group. Please go ahead. Hi.

Speaker 5

Thank you for taking my questions today. Great analogy on the beach ball from earlier in the call. I wanted to follow-up on that pent up demand because with our universe coverage, we what we're finding is the kind of the balance between outdoor projects providing a greater return for homeowners, particularly in the wake of COVID versus kind of your traditional kitchen and bath. And so there are some stats that some companies have bandied about that. But based on your experience and based on what you're seeing in the market, have you seen any change in terms of the return metrics for a kitchen remodel versus the outdoor which has been so prevalent since COVID?

Speaker 5

Thank you.

Speaker 1

Yes. Thanks for the question, Catherine. I haven't seen anything that's pointed to a change in the return philosophy or approach for investing in the home as to how that may compare with the outdoor projects. I guess I have a middle model and I don't necessarily have facts in front of me, but I still think a large scale kitchen project is going to be more costly than an outdoor project in general, but the return metrics continue to be there for us. So the price points between the two can certainly influence and impact the demand trajectory, but I still think folks are passionate about that indoor space.

Speaker 1

Folks are passionate about hosting. To your point, some of that's moved outdoors, but the indoors are still going to be relevant and we think folks should continue to want to beautify those spaces.

Speaker 5

Okay, great. And then in terms of share gains, what is the typical lifetime to win the financial benefit? In other words, what historically has been the effect on your financials?

Speaker 1

So it would depend on the type of share gain win. So typically, a new construction, it's going to be a longer lag. You're going to be awarded the business, say, for a particular community and that community is going to have to be developed. So is the dirt already ready or are they starting to build, etcetera. So it could be short to long depending on that specific project.

Speaker 1

If you're converting an existing community, that could be a little bit faster because you just simply need to change out the model home and then you could presumably start selling as the next customers come in and start making selections. In home centers, it's essentially the shelf positions of of kitchen or bath. Again, it's going to depend a bit on what their timeline is, when can they bring their store labor in to do a reset and a change out. So it can be upwards of a couple of quarters before you fully realize all the benefit associated with some choices and decisions that you're realizing.

Speaker 5

Okay. Finally, any color on the M and A market?

Speaker 1

Nothing specific to add there. I know we had a question around that last quarter. There had been some activity. We shared our commentary at that particular point in time. Nothing that we're currently pursuing or looking at this point in time.

Speaker 5

Okay, great. Thanks very much.

Speaker 1

Okay. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Paul Johemchak 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

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

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American Woodmark Q1 2025
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