American Woodmark - Earnings Call - Q3 2025
February 27, 2025
Executive Summary
- Q3 FY2025 underwhelmed internal expectations: revenue $397.6M (-5.8% y/y), GAAP EPS $1.09, Adjusted EPS $1.05, and Adjusted EBITDA $38.4M (9.7%). Margin pressure stemmed from softer remodel demand, weaker new construction activity, unfavorable mix, higher input costs, and unscheduled down days around the holidays.
- Guidance cut: FY2025 net sales now expected to decline mid-single digits (from low-single digits), and Adjusted EBITDA reduced to $210–$215M (from $225–$235M previously).
- End-market color: repair & remodel down 2.3% y/y; new construction down 10.4% y/y with rotation to lower-end products; home center made-to-order roughly flat; stock kitchen up mid-single digits; distribution channel down double digits.
- Strategic actions/capacity: Orange, VA component plant closure (pre-tax restructuring costs $6.0–$8.5M) consolidates into Monticello, KY and Moorefield, WV; distribution rebrand conversion to “1951 Cabinetry” completed; ERP go-live at West Coast made-to-stock facility targeted for first week of May; continued buybacks (Q3: ~132k shares, $12.6M).
- Potential stock catalysts: guidance reduction and tariff risk (China exposure < $25M spend, Mexico supports ~10% of revenue) likely force pricing decisions; management evaluating list price changes vs surcharges by channel if impacts cannot be mitigated.
What Went Well and What Went Wrong
What Went Well
- SG&A leverage improved: total SG&A including restructuring dropped to 9.6% of net sales vs 12.6% last year, helped by amortization roll-off, lower incentives, and cost control.
- Channel bright spots: home center made-to-order roughly flat; stock kitchen up mid-single digits; dealer channel roughly flat, suggesting share stability amidst weak demand.
- Strategic/operational execution: 1951 Cabinetry brand conversion completed; ERP go-live targeted early May; CEO: “our teams continue to execute and have built a platform to deliver profitable growth when macroeconomic conditions improve”.
What Went Wrong
- Gross margin compression: gross margin fell 420 bps to 15.0% (from 19.2%) on volume deleverage, higher raw materials, labor, and freight; Adjusted EBITDA margin dropped to 9.7% (from 12.0%).
- New construction softness and unfavorable mix: new construction down 10.4% y/y with rotation from “best” to “better/good” and fewer cabinets per home as builders optimize affordability.
- Production scheduling impact: unscheduled down days around holidays to manage backlog contributed to deleverage and margin pressure.
Transcript
Operator (participant)
Good day and welcome to the American Woodmark Corporation Third Fiscal Quarter 2025 conference call. Today's call is being recorded, February 27, 2025. During this call, the company may discuss certain non-GAAP financial measures included in our earnings release, such as Adjusted Net Income, Adjusted EBITDA, Adjusted EBITDA Margin, Free Cash Flow, Net Leverage, and Adjusted EPS per diluted share. The earnings release, which can be found on our website, americanwoodmark.com, includes definitions of each of these non-GAAP financial measures, the company's rationale for their usage, and a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures. We also use our website to publish other information that may be important to investors, such as investor presentations. We will begin the call by reading the company's safe harbor statement under the Private Securities Litigation Reform Act of 1995.
All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on factors that may be beyond the company's control. Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission and the annual report to shareholders. The company does not undertake to publicly update or revise its forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. I would now like to turn the call over to Paul Joachimczyk, Senior Vice President and CFO. Please go ahead, sir.
Paul Joachimczyk (CFO)
Good morning and welcome to American Woodmark's Third Fiscal Quarter conference call. Thank you all for taking the time today to participate. Joining me is Scott Culbreth, President and CEO. Scott will begin with a review of the quarter, and I'll add additional details regarding our financial performance. After our comments, we'll be happy to answer any of your questions. Scott?
Scott Culbreth (CEO)
Thank you, Paul, and thanks to everyone for joining us today for our Third Fiscal Quarter earnings call. Our teams delivered net sales of $397.6 million, representing a decline of 5.8% versus the prior year. This was below our expectations shared last quarter as we continued to experience softer demand in the remodel market and saw a decline in new construction single-family activity as inventories were reduced by builders. Interest rates continue to challenge affordability for new and existing homebuyers. The National Association of Realtors recently reported that existing home sales finished 2024 at the lowest annualized rate in almost 30 years, which has clearly slowed the demand for higher-ticket remodel projects such as kitchen and bath remodels. For the quarter, our home center made-to-order business was roughly flat versus the prior year, and our stock kitchen business was up mid-single digits.
This was offset by negative comps in the stock bath and storage business. Our dealer business was also roughly flat with the prior year quarter, but our distribution business was down double digits as new construction activity slowed in the quarter. Single-family housing starts experienced negative comps versus prior year in November and January. For our new construction direct business, our teams delivered growth in the Northeast and Northern California markets, but this was more than offset by double-digit declines in Atlanta, Florida, and Southern California. We continue to see a rotation down in our made-to-order new construction offering, resulting in an unfavorable mix impact on the business. Within our overall made-to-order business, our teams had to navigate a lower backlog. As demand slowed within the quarter, our teams adjusted production schedules to maintain an appropriate backlog.
To accomplish this, we took several unscheduled production down days around the holidays, creating margin pressures within the quarter from deleverage. Longer term, our belief remains that as mortgage rates decline, consumer confidence increases, existing home sales increase, and the potential for higher-ticket home projects increases. Mortgage interest rate relief and consumer confidence increase will also benefit the single-family new construction business as more consumers enter the home buying market. We have the products and platforms to win, and this will serve as a tailwind for our business. Our Adjusted EBITDA results are $38.4 million, or 9.7% for the quarter. Reported EPS was $1.09. Operational excellence improvements and SG&A spending benefits in the quarter were more than offset by lower sales and higher material and labor costs.
Our cash balance was $43.5 million at the end of the third fiscal quarter, and the company has access to an additional $314.2 million under its revolving credit facility. Leverage was at 1.53 times Adjusted EBITDA, and the company repurchased 132,000 shares, or approximately 1% of outstanding shares in the quarter. Demand trends are expected to remain challenging, and our outlook is for a mid-single-digit decline in net sales for the full fiscal year in an Adjusted EBITDA range of $210 to $215 million. Macroeconomic concerns for the remainder of the fiscal year include consumer sentiment declines, inflation risk that is growing, and we don't see interest rate relief in the near term. Recent data for January new construction single-family activity also indicates a slower start to the spring selling season, but there's still time for improvement. Tariffs have become a concern over the past few weeks.
Unfortunately, there continues to be a tremendous amount of uncertainty regarding future policies. Given the focus on Chinese imports in the past, our sourcing team has significantly reduced our exposure over the past five years. Our overall spend is now less than $25 million, and we continue to evaluate the supply chain for those purchased items. Regarding our exposure in Mexico, the risk is considerably larger as those facilities support approximately 10% of our revenue. Should tariffs be in place for an extended period of time, our team will work to optimize our global supply chain, and we would need to consider pricing actions. Note that our current outlook does not include any tariffs beyond those in place for China. Our teams have adapted to tariff and regulatory changes in the past and are remaining optimistic that once the landscape settles, we will quickly make the necessary adjustments.
Our team continues to execute our strategy that has three main pillars: growth, digital transformation, and platform design, with a number of accomplishments over the past quarter. Conversion activity is now complete with our distribution business customers converted to our new brand 1951 Cabinetry. Our teams are actively pursuing a number of new accounts within that channel. Our upcoming summer launches are underway with a warmer paint stain made-to-order finish launching to complement existing finishes. New finishes and styles that stay on trend are also launching in our frameless and stock kitchen business. Finally, we're testing new collections within the stock bath category to further drive share gains. Digital transformation efforts continue with our ERP Go Live at our West Coast made-to-stock facility targeted during the first week of May. Platform design work continues with the recent announcement of a plant closure within our network.
Our Orange, Virginia team has been a key contributor to this company for over 50 years. Product mix and overall efficiency gains have allowed us to consolidate that production into other facilities in our network, namely Monticello, Kentucky, and Moorefield, West Virginia. Our transition will be completed next month, and I want to thank all of our team members for the many years of service. I also wanted to remind everyone that this is a component plant and does not impact our finished goods assembly capacity. In closing, I'm proud of what this team accomplished in the third fiscal quarter and look forward to their continuing contributions. I'll now turn the call back over to Paul for additional details on the financial results for the quarter.
Paul Joachimczyk (CFO)
Thank you, Scott. I'll begin by discussing our Third Quarter results and then provide our outlook for the rest of the fiscal year. Net sales were $397.6 million, representing a decrease of $24.5 million, or 5.8% versus the prior year. The net sales change by channel is as follows. New construction net sales were down 10.4%. Repair and remodel net sales were down 2.3%, with home centers being down 0.6% and independent dealer distributors down 6.8%. While we believe the long-term fundamentals of the housing industry are still sound, current consumer confidence and spending is lower, primarily on higher-ticket remodel projects, and that has adversely impacted our current results. Gross profit as a % of net sales for the Third Quarter decreased 420 bps to 15% versus 19.2% reported last year.
Lower sales volumes impacted our manufacturing leverage in our facilities, combined with increased product input costs around raw materials, labor, and consumer freight rates. However, these impacts are partially offset by our sustained operational excellence efforts. Selling, general, and administrative expenses, including any restructuring charges, were 9.6% of net sales versus 12.6% last year. The 300 bp decrease is due to the roll-off of our acquisition-related intangible asset amortization that ended December 2023. Lower incentive compensation and controlled spending across all functions helped lead to that decline. Adjusted Net Income was $15.9 million, or $1.05 per diluted share in the third quarter, versus $25.1 million, or $1.56 per diluted share last year. Adjusted EBITDA was $38.4 million, or 9.7% of net sales, versus $50.6 million, or 12% of net sales last year, representing a 230 bp decline year-over-year.
Within the quarter, we did announce the closure of our Orange, Virginia manufacturing location. These are never easy decisions or ones that we take lightly, but as Scott stated earlier, this was a strategic move for the organization as operational efficiencies, specifically within our dimensional operations, have improved. In addition, current market trends are moving towards more alternative materials, and our platform moves will help enable and align us to those trends. Free cash flows totaled a positive $31.5 million for the current fiscal year to date, compared to $131.7 million in the prior year. The approximate $100 million decrease was primarily due to changes in our operating cash flows, specifically higher inventory, higher digital transformation costs, and lower accrued compensation and related expenses balances offset by lower capital expenditures. Net Leverage was 1.53 times Adjusted EBITDA at the end of the third quarter, compared with 1.05 times last year.
As of January 31st, 2025, the company had $43.5 million in cash, plus access to $314.2 million of additional availability under our revolving facility. Under the current share repurchase program, the company purchased $69.1 million, or 752,000 shares in the first nine months of the fiscal year, representing about 5% of the outstanding shares being retired. We have $145.4 million of share repurchase authorization remaining. Shifting to our outlook for fiscal year 2025, net sales are expected to be down mid-single digits versus fiscal year 2024. This is driven by the new construction market slowing down, as well as the softening repair and remodel market, resulting from the sustained lower higher-ticket remodel projects across the retailers. However, these assumptions are highly dependent upon overall industry and economic growth trends, material constraints, labor impacts, interest rates, and consumer behaviors.
Our projected EBITDA margin for fiscal year 2025 is being revised to a targeted range of $210 million-$215 million, driven primarily by the softening sales volumes and the increased manufacturing deleverage of our facilities. We continue to evaluate our pricing monthly and are contemplating pricing actions to help mitigate the inflationary impacts on logistics, raw materials, labor, and the potential new tariff impacts. Please note that this outlook does not include any impact for the changes to tariffs given the current policy environment. Our capital allocation priorities for fiscal year 2025 remain unchanged. We remain committed to investing back into the business in automation and digital efforts. Any excess capital will be used to repurchase shares, and as a reminder, we have repurchased $156.8 million since the start of fiscal year 2024. In conclusion, I am proud of our team's resilience as the market conditions continue to change.
We are currently at historic lows in existing home sales and maintaining slower growth rates in new construction markets. Our operational leaders are doing a great job at flexing our platforms, making the right choice to help keep our operational footprint sound, all while keeping our customers at top of mind and making a quality product. We remain committed to our long-term strategy around automation and operational efficiency gains that will help support the long-term growth and profitability targets. Throughout all of the macroeconomic challenges, our team is dedicated to making it happen every day. This concludes our prepared remarks, and we'll be happy to answer any questions you have at this time.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Trevor Allinson with Wolfe Research. Please go ahead.
Paul Szymborski (Analyst)
This is actually Paul Szyborski on for Trevor. I guess first, you discussed a slower R&R environment and the builders reducing inventory. Can you talk about what portion of your reduced guide was attributed to each of those components?
Paul Joachimczyk (CFO)
Those were both key contributors. That's what drove the overall comp rate that we posted for the quarter, and if you look at our full year outlook, guide at mid-single digits, it basically assumes we're going to have a similar operating environment in Q4 from a comp standpoint.
Paul Szymborski (Analyst)
Okay. Thank you. And then I guess in the past, you've talked about hurricanes being a potential needle mover for you all. Have you begun to see any positive impacts from the hurricanes last fall or potentially the fires in Southern California?
Paul Joachimczyk (CFO)
Nothing specific to the fires in Southern California, but I would say in Florida, we have seen some positive comps in the stores in the areas that were impacted from the hurricanes last quarter. Not material on the overall quarter result, but there was some positive comp rates there.
Paul Szymborski (Analyst)
Thank you. Appreciate it.
Operator (participant)
The next question comes from Steven Ramsey with Thompson Research Group. Please go ahead.
Steven Ramsey (Analyst)
Good morning. Maybe to start with on pricing considerations, I'm curious just the different options you're contemplating. I know you're not committing to anything, but just how you're thinking about maybe the surcharge route or actual price moves and just considerations you're thinking as you work through that part of the environment?
Paul Joachimczyk (CFO)
Yeah. I think regardless of the approach taken, the end result is if tariffs do come through and we're not able to fully mitigate, there's likely going to be pricing action. As you know, it varies by channel. So inside our dealer distributor channel, it's basically just do a list price change. So I think we would just roll it through that way. With regards to our home center accounts, there's typically a cost justification process that each of the retailers have that you have to follow and provide notice when you've seen the cost increase and then go through a justification process. We've had some internal discussion around whether it should be a surcharge. You've heard that term used for fuel surcharges in the past as an example.
That could be a mechanism, but the process is still going to be the same in which you have to justify to go get the actual price increase. I'd say it'd be a similar environment in the builder channel that we would see in the home center channel as well, so we don't have a final path because we need to first have a solid answer on what we're actually going to see as a market environment, and then is it going to be long-term or short-term, so yes, we're having lots of conversations on that. That's certainly not the first route we want to take, but if we can't mitigate, and I'd say specifically with Mexico, I don't think we can fully mitigate that. We'd likely have some pricing discussions with our customers.
Steven Ramsey (Analyst)
Okay. That's helpful. And then on dealer being sluggish, which I think you called out was very different than the distributor channel, maybe first to confirm that I heard that right, but then maybe pulling back, would you say that dealer demand is bottoming or R&R generally big ticket remains tough, but do you get any sense that there could be bottoming or stabilization in that part of the demand world?
Paul Joachimczyk (CFO)
So specifically on dealer distributor, I know it's not an exact ratio I'm going to provide to you, but I would say typically our dealer business is a bit more tied to R&R performance, and distribution's tied a bit more to new construction. So that's why I did want to delineate those and talk about them. Are we bottoming? Certainly would hope so. I think that's been our message over the last couple of quarters that we've seen a pullback in R&R demand. That's not just in the dealer channel. I would also attribute that to the home centers as well. They both move in a similar fashion. So yes, our belief is we're bottoming out, and then the expectation is we would see an increase off of the floor. The question is, what is it that's going to trigger and accelerate that increase going forward?
Certainly a lot of players in this space, building products specifically, have talked about a second half 2025 recovery. I think we have a similar sentiment. There doesn't seem to be anything that's going to break loose a surge in demand near term, but certainly in the back half, if we can get through some of this stage of uncertainty in the marketplace and regulatory environment, perhaps things could then lift second half.
Steven Ramsey (Analyst)
Okay. That's helpful. Thank you.
Operator (participant)
Again, if you have a question, please press star, then one. The next question comes from Timothy Wojs with Baird. Please go ahead.
Timothy Wojs (Analyst)
Hey, guys. Good morning.
Paul Joachimczyk (CFO)
Hey. Good morning, Tim.
Hey.
Timothy Wojs (Analyst)
Can you just talk a little bit about so Scott, you mentioned some mixed headwinds within, it sounds like, the new construction business. Is there a way to kind of quantify what the impact of that is? And then just is that smaller square footage type homes? Is that kind of a trade down to different product lines? Just maybe a little bit of what you're seeing on the mixed side in the new construction offering.
Paul Joachimczyk (CFO)
Yeah. A bit of both, Tim. So we definitely see a rotation down in the product offering itself. So if you think about just our Timberlake made-to-order product offering, we do have a good, better, best approach, and we are seeing a move from what you'd classify as best to better and sometimes better to good. So we've seen that play out as builders are trying to get price points down to impact affordability and attract new consumers. To your point around homes, certainly we're seeing the square footage shrink on houses. We are monitoring the number of cabs that go into homes, and I would say sequentially we are seeing a downward trend in the number of cabinets going into a home. Why would that be? It's also a cost equation.
So builders are trying to find ways to improve the affordability to attract consumers, and one way they may do that is, "Let's pull the cabinets over the refrigerator out of the design," as an example. So that could be an impact that plays out. We are starting to see some of that in the marketplace.
Steven Ramsey (Analyst)
Okay. Okay. And then I guess, is there a way to quantify just kind of what the input cost headwind, I guess, was in the quarter or what the expectation is for the year?
Paul Joachimczyk (CFO)
Nothing specific to call out around input cost other than we've continued to see some pressure there that's rolled through our margins. We haven't been ready to trigger any pricing action, quite frankly, because we're trying to ascertain the impact on tariffs and the timing around that. So we'd like to get that topic closed out and whether or not we need to take action, and if we do, we would incorporate, where appropriate, if any, inflationary considerations for pricing as well.
Steven Ramsey (Analyst)
Okay. Okay. So I mean, it sounds like you'd want to take price, but you don't want to dribble it out into the market. You really want to kind of go out with one increase as opposed to kind of several. Is that kind of the message?
Paul Joachimczyk (CFO)
That's exactly the message. You said it well.
Steven Ramsey (Analyst)
Okay. Okay. Great. And then I guess just on closing Orange, what would be kind of the annual benefit from closing the facility just in terms of EBITDA, gross margins, those types of things?
Paul Joachimczyk (CFO)
Yeah. We'll have that incorporated into our outlook in fiscal year 2026. I know our cycle is always a bit more challenging versus some of the other companies you follow. So we're wrapping up our budget cycles now, and in our next call, we'll give a full year fiscal year 2026 outlook that certainly would incorporate all of our guide around market and share gains that we would expect on net sales. Also, EBITDA and inside that certainly would be a consideration for the Orange impact on the business.
Steven Ramsey (Analyst)
Okay. Okay. Sounds good. Thanks for your time, guys. Good luck on the rest of your.
Paul Joachimczyk (CFO)
All right. Thanks.
Operator (participant)
Again, if you have a question, please press star, then one. 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. Joachimczyk for any closing comments. Please go ahead, sir.
Paul Joachimczyk (CFO)
Since there are no additional questions, this concludes our call, and thank you for taking the time to participate today.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.