American Woodmark - Q4 2023

Transcript

Operator (participant)

Good day. Welcome to the American Woodmark Corporation fourth fiscal quarter 2023 conference call. Today's call is being recorded May 25, 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, 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. 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 (SVP and CFO)

Good morning, ladies and gentlemen, and welcome to American Woodmark's fourth 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 your questions. Scott?

Scott Culbreth (President and CEO)

Thank you, Paul, and thanks to everyone for joining us today for our fourth fiscal quarter earnings call. Our team delivered net sales of $481 million, a decline of 4.1% versus the prior year, and in alignment with our outlook shared on last quarter's call. With the new construction, our business grew 5.3% versus prior year. Builders are cautiously optimistic going forward as sales have improved since the start of the year. Some builders are now projecting modest growth and starts in 2023, versus a 10%-15% decline forecasted entering the year. Cancellation rates have been normalizing, and new home sales have begun to improve. 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 grow our share with new and existing customers. Looking at our model, which includes our home center and independent dealer and distributor businesses, revenue declined 9.9% versus the prior year. Within this, our home center business was down 12.4% versus the prior year. Our made-to-order kitchen business was down single digits, with stock kitchen bath down double digits versus the prior year. Our stock bath business was impacted by our promo loss versus the prior year to retailer, and the entire stock business was negatively impacted by inventory destocking efforts at our customers as sell-through fell short of POS. In-store traffic was down over the past quarter for our home center customers. With regards to our dealer distributor business, we were down 1.5% versus the prior year.

Incoming order trends in both areas have improved in the last two months as consumers and builders take on activity for the spring and summer. Our Adjusted EBITDA increased 46.7% to $65.3 million, or 13.6% for the quarter. Reported EPS was $1.80, and Adjusted EPS was $2.21. The improvement in performance is due to pricing better matching inflationary impacts, mix, and improved efficiencies in the manufacturing platforms. Operational performance continued with stability in our labor and supply chain, which enabled higher platform efficiencies. Our operations team continues to drive excellence in our plans. Our cash balance was $41.7 million at the end of the fourth fiscal quarter, and the company has access to an additional $323.2 million in its revolving credit facility.

Leverage was reduced to 1.37 times Adjusted EBITDA, as the company paid down $65 million in debt during the quarter. With a significant improvement in leverage versus prior fiscal year, our capital allocation will be revised to include opportunistic share repurchases in fiscal year 2024. As a reminder, a $75 million authorization remains available for use. We committed to restore profitability in fiscal year 2023, and we delivered on that commitment. Our outlook for fiscal year 2024 assumes market declines in both new construction and repair and remodel. We expect sales to decline in the low double digits. Decremental margins are targeted to be in the teens, and our Adjusted EBITDA expectations range from $205 million to $225 million. Our view on financial performance over the next five years remains unchanged.

Despite a near-term slowdown in demand, we believe a 4% to 5% CAGR in net sales is appropriate and that we will grow Adjusted EBITDA to over $350 million. Our team continues to execute against our strategy that has three main pillars: growth, digital transformation, and platform design. Growth will benefit from our upcoming summer launch and the expansion of our brands and availability of existing product into additional channels. As an example, we recently expanded the availability to our low SKU count, high-value, open price point cabinet line for our dealer network into the Southeast. Digital transformation efforts over the last fiscal quarter include the ongoing planning efforts for the next implementation area of ERP in our manufacturing operations, including global design and Monterrey location planning.

Our team has completed 6 of the 8 sprints of the build phase of our CRM project, which goes live this summer. We've also invested in our online capabilities, driving traffic and conversions through our home center dealer distributor partners. Specifically for home centers, we have placed emphasis on driving traffic and improving our SEO, which is leading to higher conversions within select made-to-stock programs. We've also committed to continued excellence in online content and best practices, including focusing on A+ Content for our product display pages, enhancing video, infographics, and 360-degree imagery. For dealer distributor, we've continued to partner on our lead generation program, which allows us to drive leads to our dealer network. We're also directly connecting those leads to our field sales team through our CRM. Additionally, we are committed to e-commerce expansion, allowing our company to grow through our valued partners.

Platform design work is accelerating, with over 50% of the steel installed and initial wall panel installation underway in Monterrey, Mexico, and the pad is prepped for footers in Hamlet, North Carolina. This expansion will deliver additional capacity in our stock kitchen and bath cabinetry product lines. Automation efforts continue, and we've committed to over $75 million in automation investments over the next five years, with fiscal year 2024 projects focused on material handling, loading, unloading, inspection, and process automation. In closing, I'm proud of what this team accomplished in the fourth fiscal quarter and look forward to their contributions during fiscal year 2024. I will now turn the call back over to Paul for additional details on the financial results for the quarter. Paul?

Paul Joachimczyk (SVP and CFO)

Thank you, Scott. I will first talk about our fourth fiscal quarter results, then transition to our full year performance and close with our outlook for fiscal year 2024. Net sales for the fourth quarter of fiscal year 2023 were $481 million, representing a decrease of 4.1% over the same period last year. The combined home center and independent dealer and distributor net sales decreased 9.9% for the fourth fiscal quarter, with home centers decreasing 12.4% and dealer distributor decreasing 1.5%. New construction net sales increased 5.3% for the fourth fiscal quarter compared to the prior year.

The company's gross profit margin for the fourth quarter of fiscal year 2023 was 20.1% of net sales, versus 13.9% reported in the same quarter of last year, representing a 620 basis point improvement. Gross margin in the fourth quarter of the current fiscal year was positively impacted by our pricing actions, operational improvements in our manufacturing facilities, and the stability in the supply chain, partially offset by increased costs in our labor and domestic logistic expenses. We are returning to our normal performance cycles, where our fiscal Q4 and Q1 are at higher performance levels due to the seasonality of our industry.

Total operating expenses, exclusive of any restructuring charges, was 11.8% of net sales in the fourth quarter of fiscal year 2023, compared with 10.1% of net sales in the same period in fiscal year 2022. The ratio increased 170 basis points due to increases in our incentives, profit sharing, and digital spend, partially offset by controlled spending in the SG&A functions. Adjusted net income was $37.1 million, or $2.21 per diluted share in the fourth quarter of fiscal year 2023, versus $22.9 million, or $1.38 per diluted share last year.

Adjusted EBITDA for the fourth quarter of fiscal year 2023 was $65.3 million, or 13.6% of net sales, compared to $44.5 million or 8.9% of net sales for the same quarter in the prior fiscal year, representing a 470 basis point improvement year-over-year. Commerce is expected to make a final determination prior to the filing of our Form 10-K, and if the company's two Vietnamese plywood suppliers are included, we plan to vigorously appeal such determination. We estimate the maximum potential impact on net income for prior purchases related to those duties to be an additional charge of approximately $4 million, net of tax. For context, we have not placed an order since June of 2022. Our full-year performance.

Net sales were $2.1 billion, representing an increase of $209 million, or 11.3%, aligning with our full-year expectations of low double-digit growth rate. The combined home center and independent dealer distributor net sales increased 4.8% for the fiscal year, with home centers increasing 0.2% and dealer distributor increasing 22.2%. New construction net sales increased 21.1% for the fiscal year compared to the prior year. The company's gross profit margin for the fiscal year was 17.3% of net sales versus 12.2% reported last year, representing a 510 basis point improvement. This is a great testament of the hard work and the changes the teams have put into place to return to our historical operating performance metrics.

Total operating expenses, exclusive of any restructuring charges, were 10.6% of net sales in the current fiscal year, compared to 10.2% of net sales in the prior fiscal year. The 40 basis point increase was due to the increases in incentives and digital spend, partially offset by reduced spending across the SG&A functions and leverage created from the higher sales.

Adjusted net income for the fiscal year 2023 increased $72.3 million due to higher sales, largely driven by price increases and improvements in our operations, offset by increases in our incentive and profit sharing expenses. Adjusted EBITDA for fiscal year 2023 was $240.4 million, or 11.6% of net sales, compared to $138 million, or 7.4% of net sales for the prior fiscal year, representing a 420 basis point improvement year-over-year, achieving the high end of our expected range. The strong performance this year is a direct result of the hard work and efforts our teams have put into reestablishing our operating efficiencies, stabilizing our supply chain, and controlling our spending in the SG&A functions, offset by increases in incentive compensation and profit sharing.

Free cash flow totaled a positive $153.5 million for the current fiscal year, compared to a negative $27.1 million in the prior year. The $180.6 million increase in free cash flows was primarily due to changes in our operating cash flows, specifically higher net income, lower accounts receivable, and lower capital spending. Net leverage was 1.37 times Adjusted EBITDA at the end of the fiscal year, representing a 2.16 times improvement from the 3.53 times at the end of fiscal year 2022. As of April 30, 2023, the company had $41.7 million of cash and cash equivalents on hand, plus access to $323.2 million of additional availability under its revolving facility.

The company paid down $130.5 million of its term and revolving credit facilities in fiscal year 2023. Our outlook for fiscal year 2024: we expect low double-digit declines in net sales versus fiscal year 2023. The change in net sales is highly dependent upon overall industry, economic trends, material constraints, labor impacts, interest rates, and consumer behaviors. Our Adjusted EBITDA expectation for fiscal year 2024 is targeted in the range of $205 million to $225 million. Looking forward in the fiscal year, we will not be providing quarterly outlooks.

I want to emphasize that our business is back to normal operating cycles, where performance is at its highest levels in our fiscal Q1 and Q4, with lower expectations in our fiscal Q3, as we will be incurring a significant portion of the one-time charges related to the platform expansion of Monterrey, Mexico, and Hamlet, North Carolina. The total impact of these charges is approximately $8.1 million in the full fiscal year 2024. Our capital allocation priorities for fiscal year 2024 will first be focusing on investing back into the business for the plant expansions in Monterrey, Mexico, Hamlet, North Carolina, continuing our path on our digital transformation with investments in Oracle and Salesforce, and investing in automation. We'll be opportunistic in our share repurchases.

Lastly, we have our debt position at a leverage ratio we wanted to achieve, we will be deprioritizing paying down debt in fiscal year 2024. One additional item. For our earnings calls in fiscal year 2024, we will be adjusting the timing of the call to be after trading hours and will occur at 4:30 P.M. Eastern Standard Time. In closing, the progress made throughout the fiscal year has been great, and to see those results fully read through to our financial performance. This is a testament to the commitment, hard work, and efforts of our employees, that they invest in the company to achieve our results and react to the changing dynamics in the macroeconomic environment. I'm grateful for what the teams have accomplished and thank all of our team members at American Woodmark for their continued efforts.

They are the ones who make it happen daily. This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.

Operator (participant)

We'll now begin the question-and-answer session. To ask a question, you may press Star, then One on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw from the question queue, please press Star then Two. The first question is from Adam Baumgarten of Zelman. Please go ahead.

Adam Baumgarten (Managing Director)

Hey, good morning, guys. Nice results. Just maybe just to start on the revenue outlook, maybe just some additional specifics on your assumptions for new residential versus that the remodel piece in that double-digit, decline outlook.

Paul Joachimczyk (SVP and CFO)

Sure. Thanks, Adam. you know, we're likely to see declines, I think, throughout calendar year 2023 in both remodel and new construction. Most of the projections that are in the market have single family start down mid-teens. I think there's maybe a little upside of that now based on the Q1 activity. On the remodel side, that mid-single digit range, and I think you saw that, validated with the home center reports over the last 2 weeks. We obviously expect to perform better than the market. Historically, you know, on the margin side, we've targeted decrementals of, you know, roughly 25%. I think we'll beat that as well, as we indicated with our outlook for, fiscal year 2024.

Adam Baumgarten (Managing Director)

Got it. Thanks. Maybe just on that, you know, decremental outlook, which is, you know, better than historical, I guess, what are the main offsets in fiscal 2024 to the volume deleverage that you'll be seeing?

Paul Joachimczyk (SVP and CFO)

Operating performance, automation, and just overall OpEx initiatives within our teams.

Adam Baumgarten (Managing Director)

Okay, got it. Just lastly, just in that revenue outlook, is price still expected to be a positive contributor for the year?

Paul Joachimczyk (SVP and CFO)

No, at this point in time, we've lapped the pricing, and we've not taken any pricing actions in any of the channels at this point in time.

Adam Baumgarten (Managing Director)

Okay, great. Best of luck.

Operator (participant)

The next question is from Garik Shmois of Loop Capital. Please go ahead.

Garik Shmois (Managing Director and Senior Equity Analyst)

Hi. Thanks, and congratulations on the quarter. Wanted to just follow up on pricing, if you've seen any change in pricing, just given the weaker sales environment or if there's been any change to the promotional environment as well?

Scott Culbreth (President and CEO)

We'll take each of those separately. First, on the pricing side, again, we've not taken any pricing actions in any of the channels. I would remind you that our profitability has not returned to the levels we were achieving prior to the inflationary impacts we've all experienced throughout the pandemic. Certainly, we've seen some improvement in lumber, I would also counter that by saying we continue to see increases in other categories like labor, final mile delivery, and some other raw materials. Our belief is if we continue to see or see additional deflation in the marketplace, there's some expectation around pricing as a result of that, it'd be offset by the reduced spend.

On the promo side, we have seen an increase in promotional activity, principally in the dealer distributor space, and I think most folks are gonna go to that category first as opposed to deal with any pricing.

Garik Shmois (Managing Director and Senior Equity Analyst)

Understood. thanks for that. I'm wondering if you could provide a little bit more color as to when the capacity is gonna be fully online in North Carolina and Mexico, and just your level of confidence in filling the capacity when it does come online.

Scott Culbreth (President and CEO)

Yeah. Now, the first comment I'd make is there's typically always a mismatch between the demand and capacity coming online. We certainly have desire and plans to be able to fill that capacity as we push forward. We'll need it, by the way, to meet our five-year plan that we put out in our investor relation deck back in January. Our current timeline is on track for both the facilities. We should have them online and starting to ramp by the end of our fiscal year. Most of the benefit and expectations from incremental capacity really push into the next fiscal year.

Garik Shmois (Managing Director and Senior Equity Analyst)

Okay. Got it. All right, thanks for that. I'll pass along.

Operator (participant)

The next question is from Steven Ramsey of Thompson Research Group. Please go ahead.

Brian Biros (Senior Equity Analyst)

Hey, good morning. This is actually Brian Biros on for Steven. Thank you for taking my questions. On the guidance, I think it applies EBITDA margins hold roughly flat. Can you just kind of touch on how much that implies for gross margins, if that's flattish, or if it's more on reduced CapEx or reduced marketing spend? I guess, are there additional levers you can pull throughout the year as the year progresses with the different outlooks?

Scott Culbreth (President and CEO)

Brian, thanks for the question. Really, it does account for there will be some gross margin expansion in fiscal year 2023. Some of that increased spend is gonna come into the SG&A levers that are out there. There could be, I'll call it, additional facets that we could do and adjust if the market demands change out there to really help overall drive and meet our expectations of the EBITDA that's out there.

Brian Biros (Senior Equity Analyst)

Got it. Thank you. Follow-up, I guess, just on in the slower demand environment here, I think you touched on the prepared remarks a little bit, but can you talk again about plans for rolling out automation capabilities and if that's being accelerated or decelerated in this slower demand environment? Any more additional color, that would be helpful, and impactful, the quantity impact.

Scott Culbreth (President and CEO)

We continue to focus on automation. That's not a new topic for us. I think what's different is we've made a bit more of a declaration around the investments that we're targeting in that. Again, we're shooting for $75 million over the next 5-year cycle. That's substantially more than what we would have spent in the prior 5 years. We've got a whole host of initiatives that I already mentioned in the prepared remarks that we're focused on specifically inside fiscal year 2024.

Brian Biros (Senior Equity Analyst)

All right. Thank you.

Operator (participant)

The next question is from Collin Verron of Jefferies. Please go ahead.

Collin Verron (SVP)

Hi, you guys. Thanks for taking my question, and great quarter. Maybe a little bit more longer term. I guess you're expecting that low double-digit decline in sales in fiscal 2024, but can you just talk about how you're thinking about the timing and the pace of recovery baked into your 5-year sales target of $2.6 billion and at least $350 million in EBITDA? Do you see things bottoming out here in fiscal year 2024 before returning to growth, or could this sort of decline kind of linger into fiscal year 2025? Just any color how you're thinking about the recovery would be great.

Scott Culbreth (President and CEO)

Thanks for the question, and I'll start by saying whatever assumption I have or statement I make, I know I'll be wrong. Let's lead with that as a factor. When we gave our five-year projection back in January, at that particular point in time, we had always assumed a recessionary impact. We weren't exactly sure when that was going to happen, whether it would be 2024, 2025, but we modeled a down case, and then we would grow back up off of that. At this point in time, we see most of that impact happening in 2024. My crystal ball says that we would recover and start to see growth again in 2025. There's a lot of question marks that go into that analysis.

Collin Verron (SVP)

Great. That's helpful. I guess more near term, you talked about some destocking, in the stock remodeling business. Any sense of the magnitude of what that destocking was and your expectations for any further destocking going forward in that channel?

Scott Culbreth (President and CEO)

I think we've gotten through the destocking efforts, and we're starting to see a little bit better, uptick on incoming orders, inside our fiscal Q1 for fiscal year 2024. I think we're somewhat past that. I don't have an exact value to be able to assign to that, over the last quarter.

Collin Verron (SVP)

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

Scott Culbreth (President and CEO)

Okay. Thank you.

Operator (participant)

The next question is from Timothy Wojs of Baird. Please go ahead.

Timothy Wojs (Senior Research Analyst)

Hey, guys. Good, good afternoon or good morning or whatever it is.

Scott Culbreth (President and CEO)

Good morning, Tim. Still morning here.

Timothy Wojs (Senior Research Analyst)

Thanks. Yeah, yeah. Yeah, nice job.

Maybe just a bigger picture, kind of conceptual question. Just within your builder customers, I mean, is there any way to kind of think generally about what the runway there from a penetration perspective is? I know it's not uniform across the customers, but just maybe give us an idea of maybe where kind of generally wallet share is today and maybe what's kind of possible over time.

Scott Culbreth (President and CEO)

The first thing I'd say is that the builders that we've partnered with are taking share and will continue to take share. The fact that we partnered with them just naturally leads to a better sell-through rate for our business. I think we've talked in the past that, you know, we do business with the vast majority of the top 20 national builders, but that doesn't mean we have a position with each builder in each market. The first thing our team always spends time focused on is, there are new opportunities, new markets that we can explore to try to get incremental share gains with a particular account. That's throughout that entire list of top 20 national builders. I don't have an exact value to quote to you around the overall business.

We tend not to be a sole supplier except in limited cases. Our belief is we'll continue to get share, really with the vast majority of those builders. Again, they're gonna take share in the marketplace and have been demonstrating that certainly over the last couple of years.

Timothy Wojs (Senior Research Analyst)

Okay. Is there a way to think, how big is the national kind of top 20 relative to, you know, your total builder business or builder direct business?

Scott Culbreth (President and CEO)

Let me, maybe let me restate that. How much of our builder business goes to the top 20?

Timothy Wojs (Senior Research Analyst)

Yeah, yeah. Basically, I'm just trying to think about how much, you know, yeah, how much of your builder business is going to the top 20 versus the other builders?

Scott Culbreth (President and CEO)

Not an exact % to give to you, but it would be a high %. I don't know off the top of my head.

Timothy Wojs (Senior Research Analyst)

Okay. Okay, good. Then I guess from just a mix perspective, I mean, is there anything within the business from a mix perspective that has changed over the last 3-6 months?

Scott Culbreth (President and CEO)

No, nothing substantially has changed on the mix side.

Timothy Wojs (Senior Research Analyst)

Okay. The last one, just on inflation and kind of deflation, thinking about fiscal 2024, it does seem like materials have kind of come down a little bit, whether that's kind of plywood or particle board or, you know, maybe some of the hardwoods. Do you model or kind of think about explicitly in fiscal 2024, seeing some material deflation?

Scott Culbreth (President and CEO)

Yeah, when we go and put together our budgets and plans to try to figure out an outlook to be able to share with the investment community, we look at a number of different scenarios. One includes an inflationary environment and one that also includes a deflationary environment. I'll go back to the comments a few questions ago, though. If we, if we do see more deflation than modeled and assumed, there's likely, you know, some asks that are going to come our way on pricing, but we would view those as being offsetting. Similar to the uptick, right? When we saw inflation going up, you basically are going and getting pricing for those inflationary impacts. We had a lag on the front end.

You know, we'll try to ensure there's a similar lag on the down slope as well.

Timothy Wojs (Senior Research Analyst)

Okay. Okay, the main point would be, from a dollars perspective, you would expect those things to kind of offset, but it could kind of push the margins around from a timing perspective.

Scott Culbreth (President and CEO)

You got it, exactly.

Timothy Wojs (Senior Research Analyst)

Okay. Okay, gotcha. Good. Awesome. Well, thanks, guys, and good luck on the year.

Scott Culbreth (President and CEO)

Thanks, Tim.

Operator (participant)

Again, if you have a question, please press Star, then One. The next question is from Julio Romero of Sidoti. Please go ahead.

Julio Romero (Equity Analyst)

Thanks. Hey, good morning. wanted to ask about the gross margin performance in the quarter. Just wondering if there's any way to put a finer point on how much of a benefit was the operational efficiencies and the streamlining you did in late calendar 2022.

Scott Culbreth (President and CEO)

Yeah, Julio, won't dial in exactly, but a lot of the benefits that we received in our fiscal fourth quarter were due to some of the operational improvements that were out there. Not only are our plants running at our historical normal operating performances, kind of pre-COVID levels, we're seeing improvements across our supply chains that are out there as well, too. Just, you know, we talked about automation. Some of those efforts are now starting to take hold and really kind of, I'll say, setting us up for success in FY 2024 as well, too. I know it's not an exact answer. I know you're looking for a % or a dollar amount, but those things are actually taking hold and are going to carry forward for our performance in the future.

Julio Romero (Equity Analyst)

Got it. Thank you for that. The commentary is helpful there. Just thinking about the balance sheet and your capital allocation priorities, just how much more aggressive should we expect you to be with opportunistic repurchases in 2024, just given the free cash generated in fiscal 2023 and the debt reductions you guys just did in the fourth quarter?

Scott Culbreth (President and CEO)

I would just say we're going to be opportunistic. I would focus on that word. Obviously, we didn't do any repurchasing in 2023. Our focus was on deleveraging debt. We've done that. We've gotten below one and a half times, which is a fantastic result for this business. We'll now look at opportunistic repurchases. Paul walked you through, you know, the various things that we'll focus on. We've got a plant expansion we're dealing with. We've got the automation we've talked about. We'll look at shares.

Julio Romero (Equity Analyst)

Really helpful. I'll hop back at the queue. Thanks very much.

Scott Culbreth (President and CEO)

Thanks, Julio.

Operator (participant)

Again, if you have a question, please press Star, then One. 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 closing comments. Please go ahead, sir.

Paul Joachimczyk (SVP and CFO)

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

Operator (participant)

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