American Woodmark - Q4 2024

Transcript

Operator (participant)

Good day, and welcome to the American Woodmark Corporation fourth fiscal quarter 2024 conference call. Today's call is being recorded, May 23rd, 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 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 any 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 (Senior VP and CFO)

Good afternoon, and welcome to American Woodmark's fourth 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'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 teams delivered net sales of $453.3 million, representing a decline of 5.8% versus the prior year. This was better than the range provided during last quarter's call. Within new construction, our net sales declined 1.5% versus prior year. We continue to see improving demand with our customers, consistent with year-over-year growth in single-family housing starts. We remain strategically aligned with 19 of the top 20 national builders, key regional builders 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.

We see momentum in all markets as builders' confidence is increasing and their strategy to buy down rates is driving demand. Looking at remodel, which includes our home center and independent dealer and distributor businesses, revenue declined 8.6% versus the prior year. Within this, our Home Center business was down 10% 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 Dealer Distributor business, we were down 5% versus the prior year. Our adjusted EBITDA results were $54.7 million, or 12.1% for the quarter. Reported EPS was $1.69, and adjusted EPS was $1.70. Operational excellence efforts continue to drive progress across the enterprise, but were offset in the quarter by a one-time cost associated with the startup of our Monterrey and Hamlet facilities.

Our cash balance was $87.4 million at the end of the fourth fiscal quarter, and the company has access to an additional $322.9 million under its revolving credit facility. Leverage was at 1.14x adjusted EBITDA, and the company repurchased 171,000 shares in the quarter. Our outlook for the industry in fiscal year 2025 assumes the repair and remodel market will be down low- to mid-single digits and the new construction to be up mid-single digits. Our expectation is for the company's net sales to increase low single digits with growth in all channels.

Adjusted EBITDA expectations range from $235 million-$255 million, as we continue to make investments near term in digital transformation for ERP and CRM expansion and platform design through automation, along with additional engineering resources to execute those projects. Our view on financial performance over the next five years remains unchanged. Despite a near-term slowdown in demand, we believe a 5%-6% CAGR net sales is appropriate and that we will grow adjusted EBITDA to over $350 million. We are currently ahead of our long-term goals, with stronger EBITDA margin dollars realized in fiscal 2024. Our team continues to execute our strategy that has three main pillars: growth, digital transformation, and platform design. With a number of key accomplishments over the past fiscal year, I'd like to highlight.

Under growth, we launched a low SKU, high-value offering to home centers earlier this calendar year, targeting pros, and expanded the program nationally for our dealer and distribution network. In addition, we launched a new brand to serve our distribution customers, 1951 Cabinetry. Under digital transformation, we launched our CRM sales solution in the fall across all our channels. We also went live in our new Monterrey facility on our ERP cloud solution, and we've begun planning for the next implementation in our made-to-stock West Coast facilities, which will occur in fiscal 2025. Under platform design, we opened a new facility in Monterrey, Mexico, and expanded our Hamlet, North Carolina, facility. These investments established a component operation in Eastern Mexico and a stock and kitchen bath center of excellence footprint for the Eastern U.S. that delivers additional capacity.

Looking forward, growth is expected across all our channels in fiscal year 25. We will leverage our upcoming summer launch to grow our core, expand our distribution presence through our new distribution brand introduction, and win stock, bath, and kitchen opportunities to deliver this result. Digital transformation efforts will progress as the planning for the next phase of work continues for the CRM service modules, supporting our customer care organization and new construction service center operations, and the ERP for our made-to-stock facilities, which again, will go live later this fiscal year, as previously noted. Platform design work will continue as we ramp our Monterrey, Mexico, and Hamlet, North Carolina, facilities. Mill equipment continues to be installed on both sites and will continue to ramp through the first half of the year. Automation efforts will also continue across our mill, component, and assembly operations.

In closing, I couldn't be prouder of what this team accomplished in fiscal 2024, and I look forward to their continuing contributions during fiscal year 2025. I'll now turn the call back over to Paul for additional details on the financial results for the quarter.

Paul Joachimczyk (Senior VP and CFO)

Thank you, Scott. I'll first talk about our fourth quarter fiscal results and then transition to our full-year performance, and finally, close out with our outlook for fiscal year 2025. Net sales were $453.3 million, representing a decrease of $27.8 million, or 5.8% versus prior year. Remodel net sales, which combines home centers and independent dealer and distributors, decreased 8.6% for the fourth quarter versus prior year, with both home centers and dealer distributors decreasing 10% and 5%, respectively. New construction net sales decreased 1.5% for the quarter compared to last year.

Our gross profit margin for the fourth quarter of fiscal year 2024 decreased 150 basis points to 18.6% of net sales versus 20.1% reported in the same period last year. Gross margin was impacted by the one-time startup costs for our Monterrey and Hamlet locations, partially offset by our operational improvements in our manufacturing facilities, combined with the stability in our supply chain. Total operating expenses, excluding any restructuring charges for the fourth quarter of fiscal year 2024, were 10.1% of net sales versus 11.8% for the same period last year.

The 170 basis point decrease is due to our deal costs, amortization costs ending in December 2023, offset by increases in our incentives and profit sharing for all of our employees, combined with our lower sales. Adjusted net income was $26.9 million, or $1.70 per diluted share in the fourth quarter of fiscal year 2024, versus $37.1 million, or $2.21 per diluted share last year. Adjusted EBITDA for the fourth quarter of fiscal year 2024 was $54.7 million, or 12.1% of net sales, versus $65.3 million, or 13.6% of net sales reported in the same period last year, representing a 150 basis point decline year-over-year. Our full-year performance.

Net sales were $1.8 billion, representing a decrease of $219 million, or 10.6%, aligning with our outlook from fiscal Q3 of the low double-digit declines. The combined home center and independent dealer distributor net sales decreased 12.6% for the fiscal year, with home centers decreasing 13.9% and dealer distributors decreasing 9.1%. New construction net sales decreased 7.7% for the fiscal year compared to the prior year. The company's gross profit margin for fiscal year was 20.4% of net sales versus 17.3% reported last year, representing a 310 basis point improvement. In the first half of the year, we observed improved leverage of our fixed cost base due to the higher volumes.

Additionally, operational enhancements and better alignment of input costs, matching pricing contributed to this positive trend. However, during the second half of the year, we faced our one-time startup cost alongside with lower volumes. Total operating expenses, exclusive of any restructuring charges, were 11.7% of net sales in the current fiscal year, compared with 10.6% of net sales in the prior fiscal year. The 110 basis point increase was due to increases in our incentives and digital spend, deleverage created for the lower sales, offset by reduced spending across our SG&A functions. Adjusted net income for fiscal year 2024 increased to $11.6 million due to improvements in our operations, offset by increases in our incentives and profit sharing expenses.

Adjusted EBITDA for fiscal year 2024 was $252.8 million, or 13.7% of net sales, compared to $240.4 million, or 11.6% of net sales for the prior fiscal year, representing a 210 basis point improvement year-over-year, achieving the high end of our expected range. Despite facing year-to-date volume headwinds, our continued strong earnings performance this year is a direct result of all the hard work and efforts our team have put into reestablishing and maintaining our operating efficiencies, stabilizing our supply chain, and controlling our overall spending. These earnings gains are partially offset by increases in incentive compensation, profit sharing, and digital transformation costs.

Free cash flow totaled a positive $138.5 million for the current fiscal year, compared to $153.5 million in the prior year. The $15 million decrease is primarily due to increased capital expenditures, offset by changes in our operating cash flows, specifically lower inventory and an increased accrued balances. Net leverage was 1.14 times adjusted EBITDA at the end of the fourth quarter of fiscal year 2024, representing a 0.23 times improvement from the 1.37 times as of last year. As of April 30th, 2024, the company had $87.4 million in cash, plus access to $322.9 million of additional availability under its revolving facility.

Under the current share repurchase program, the company purchased 15.9 million, or 171,000 shares in the fourth quarter, representing about 1.1% of outstanding shares being retired. For the full year, we have repurchased 87.7 million of the company's common shares, representing 7.1%, and have 89.5 million of share repurchase authorization remaining. Our outlook for fiscal year 2025, from a net sales perspective, we expect to grow across all channels, with the total company being low single-digit increases versus fiscal year 2024. The change in net sales is highly dependent upon overall industry, economic growth trends, material constraints, labor impacts, interest rates, and consumer behaviors.

Our projected EBITDA margin for fiscal year 2025 falls within the $235 million-$255 million range, driven primarily by higher year-over-year fixed operating cost base on our decisions to increase capacity with our new facilities in anticipation of longer-term volume growth. Our commitment to operational excellence, automation, and continuous improvement positions us well for maintaining competitive margins. Our long-term expectations remain unchanged, with a 5%-6% sales compounded annual growth rate and EBITDA growth exceeding $350 million by fiscal year 2028. Our capital allocation priorities for fiscal year 2025 will first be focused on investing back into the business by continuing our path of 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. One additional item for our earnings calls in fiscal year 2025, we will be adjusting the timing of the call to be prior to the trading hours and will occur at 8:30 A.M. Eastern Standard Time. 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 through the next fiscal year. This success stands as 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, and they are the ones who make it happen daily. 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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, you may press star, then two. Today's first question comes from Steven Ramsey with Thompson Research Group. Please go ahead.

Brian Biros (Senior Equity Research Analyst)

Hey, good morning. This is actually Brian Biros on for Steven. Thank you for taking my questions.

Paul Joachimczyk (Senior VP and CFO)

Yeah, good afternoon.

Brian Biros (Senior Equity Research Analyst)

Good afternoon. Maybe to start with on the revenue guidance, can you just help us with the kind of expected cadence through the four quarters going forward, kind of given the comps that are out there and how you see the different channels kind of ramping throughout the year?

Paul Joachimczyk (Senior VP and CFO)

So we don't really want to get into a situation where we're providing quarterly guidance. We stopped doing that several years ago, so our focus is on the full-year outlook that, you know, Paul and I have already previously shared. I would tell you that the second half, we do expect to be stronger than the first half, which I think is pretty consistent with what we've seen from our customer base as well as our peer set.

Brian Biros (Senior Equity Research Analyst)

That's helpful, at least directionally. Thank you. Maybe at a higher level, I guess, can you maybe touch on how your outlook has changed over the past few months, even internally, kind of just in regards to new construction or in our activity, kind of given where rates are, how builders are reacting? You mentioned buying down rates and all of this, you know, industry in flux and changing almost every day. I guess just how you're currently seeing it versus maybe how you were thinking about it three months ago, would help kind of directionally gauge where we're going. Thank you.

Paul Joachimczyk (Senior VP and CFO)

Sure. To your point, you can't get too caught up in the day-to-day data points and swing too far in one direction versus the other. We start our budget process back in the, you know, January, February timeframe. Ultimately, you know, try to wrap that up in the April timeframe and take it to our board of directors in May for approval. I would tell you that our outlook from a sales perspective and our expectations from a channel view really haven't altered inside that same timeframe. It's held pretty consistently our viewpoint on each. We think we'll see stronger growth in new construction. That's been pretty consistent as a message and a theme.

Repair and remodel has certainly been softer, and we expect that to perform a little bit better in the back half of the year.

Brian Biros (Senior Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. The next question comes from Garik Shmois with Loop Capital. Please go ahead.

Zach Pacheco (Equity Research Analyst)

Good afternoon. It's actually Zach Pacheco on for Garik. Thanks for taking my question. I guess to start on the full year guide, you guys are talking a lower EBITDA margin despite low single-digit sales growth. So I was wondering, could you provide any more color on this decrease in the margin? I know you mentioned the tech and digital initiatives, so I guess really, how much are these costs impacting the fiscal 2025?

Scott Culbreth (President and CEO)

Sure. We can go into a little bit more depth there. So, just taking a step back, looking at fiscal year 2024, you know, let's recognize we, we did experience a sales decline of almost $220 million, yet we did grow EBITDA in that fiscal year by 5%, almost $253 million. I'll pause there and say I am proud of this team's execution in delivering on that result when it was such a difficult demand environment. As we start to look in 2025, we've, of course, said that we expect to grow in each channel. Despite doing that, we don't think there's a significant impact overall on our profitability. Now, why would that be? That's due to choices we're actively making to continue to invest in the future of our business. A couple of examples of that.

We've certainly added capacity on the East Coast for our stock, bath, and kitchen business, and our current commercial teams are out there working to gain that share back and utilize the capacity. That, of course, takes time, and we'll have to bear those incremental fixed costs for that capacity until it's utilized. We're also making a choice to implement ERP in our West Coast operations. There's costs clearly that are associated with such a decision. There'll be some inefficiencies after go live. We'll have hypercare as well to be able to manage any issues that come our way. We view those costs as investments, right? To get our company on one operating platform. We also chose to invest in engineering resources to help us drive our automation efforts across our facilities, which is gonna help reduce the demand for labor in future periods.

So those are main contributors. I guess the final thought I would share is, the prior question around uncertainty. There's still a lot of uncertainty in the marketplace, day-to-day at times. There's also an impending election, which may have an impact on our economy. That election occurs in the middle of our fiscal year, as opposed to many other calendar year companies. So all those variables together led us to the outlook guide around EBITDA.

Zach Pacheco (Equity Research Analyst)

Awesome. That's great color. I really appreciate it. And then maybe one more on, just pricing and promotion. Any change you're seeing here that you can speak on? Thanks.

Scott Culbreth (President and CEO)

No. Yeah, no real change in that space, which is been a positive. So promotional activity and cadence for repair and model was pretty consistent for us, year over year.

Zach Pacheco (Equity Research Analyst)

Okay, makes sense. I'll pass it on. Thanks.

Scott Culbreth (President and CEO)

Okay, thank you.

Operator (participant)

Thank you. As a reminder, to ask a question, you may press star, then one. The next question comes from Collin Verron with Jefferies. Please go ahead.

Collin Verron (Equity Research Analyst)

Hi. Yeah, thanks for taking my questions. I guess, just want to sort of, you called out that the demand environment is beginning to improve. Can you just provide a little bit more color and perspective on what you saw within the quarter that drives that optimism? Did you see sales trends sort of pick up within the quarter ahead of what you would normally see seasonally? And any comment as to, like, how those continued into May?

Scott Culbreth (President and CEO)

Yeah, the bulk of that comment is gonna be tied to new construction, Collin. As you look back and think about the starts activity that began to pick up year-over-year, even at the end of the calendar year, continuing into the first part of this year, recognizing the delay for us as to when the cabinets actually go into the home as opposed to the actual start, we would typically expect to see a strong summer, coming out of that, spring selling season. So we've seen that activity pick up. You see it in the starts data as translating to order demand, in our new construction business.

Collin Verron (Equity Research Analyst)

That's helpful color. Then I think you talked about some expected wins in the stock category. Have you seen those wins already, or is that something you're expecting because of your product introductions? Just curious as to what was driving that comment.

Scott Culbreth (President and CEO)

Yeah, I would go back over the last couple of years, coming into the COVID cycle, where demand was so high, and we were limited in our ability to actually be able to, you know, achieve all of the demand in the marketplace, whether it was a function of, you know, supplier challenges or labor challenges, et cetera. We wanted to get past that and add some capacity to our network. So that's what led to the project last year, to put that capacity in play. Until we had that, we were not very aggressive in the marketplace on trying to take share. Now that we have the capacity, we're being much more aggressive, and our commercial teams are out there working to gain share in both of those categories for our business.

Collin Verron (Equity Research Analyst)

Great. It's a really helpful color. And I guess my last one, there was a transaction in the space that was recently announced. Can you just talk about your guys' appetite for M&A? I know you didn't list it on your capital allocation priority, so I guess, just any commentary on M&A and for American Woodmark.

Scott Culbreth (President and CEO)

Sure. It's a great question. You know, our strategic focus over the last few years has been certainly focused around organic growth, and that continues throughout the strategic plan and cycle that we've even got out on our higher deck over the next five years. I'd tell you, acquisitions are not a priority, but with that said, we're gonna look at assets as they become available. In the particular case you're mentioning, we didn't see a strategic fit, primarily around the product line. The dealer channel aspect of that business was interesting, but the price points are well outside the range in which we participate and just not a fit overall.

Collin Verron (Equity Research Analyst)

Great. Thank you, and good luck.

Scott Culbreth (President and CEO)

Thank you.

Operator (participant)

Thank you. The next question is from Tim Wojs with Baird. Please go ahead.

Tim Wojs (Senior Equity Research Analyst)

Hey, good afternoon, guys. Maybe just start, Scott, on the ERP piece. Is that once you get that live out west, is everything kind of on one system after that? I guess, is this kind of the last piece, or there are kind of more conversions you need to do?

Scott Culbreth (President and CEO)

That, that's a fantastic question, Tim. So I would tell you, this is the start, from a manufacturing standpoint. If you were to go back a couple of years ago when we first started down this journey, we turned on finance and procurement. So that was the first area that we tackled. Now we're moving into the manufacturing footprint. We had a great opportunity with the opening of our facility in Monterrey, to treat that basically as a pilot. So we went live on the solution, in Monterrey. It was much lower risk. Our team has been in the planning phase, all of this calendar year. It'll continue as we go forward, and we'll hit those West Coast operations next. We will then have a sequence beyond that and beyond that to cycle through the remaining operations, and it's a multi-year journey.

We're at the start as opposed to the end when it comes to that effort.

Tim Wojs (Senior Equity Research Analyst)

Okay. Okay, I gotcha. And then I guess from a long-term perspective, like, what would the benefits be that you guys don't have today? Is it just the ability to kind of seamlessly push stuff between plants?

Scott Culbreth (President and CEO)

I would also actually say that it should be efficiencies in every aspect of our business, because of the complexities we have on still having multiple platforms across different businesses, you know, post-acquisition. So allowing us to get all of those systems onto one integrated system, having those be up to date, better reporting, better information should lead to better decision making. You could translate that into margin, you can translate that into labor efficiency, et cetera. Those are the types of areas we expect to see benefits, inclusive of balance sheet. When it comes to forecasting and SIOP and how much inventory we're holding in the network, we would expect some cash flow working cap and capital benefits as well.

Tim Wojs (Senior Equity Research Analyst)

Okay. Okay, great. And then, I guess explicitly, it doesn't sound like it's much of an impact, but how are you guys kind of thinking about price and kind of raw material costs in fiscal 2025?

Scott Culbreth (President and CEO)

Yeah, really no change from our message over the last couple of quarters. You know, most of our actions in that space were tied to inflation and indices, and if we've seen things move down and it's appropriate and justified, we'll have conversations with accounts around that. But it's got to be in check and in balance with deflation.

Tim Wojs (Senior Equity Research Analyst)

Okay. Okay. And then I guess the last one, just, you know, we've heard instances across the space about mix down, especially in bigger ticket categories. I guess just given kind of your price points and kind of position in the marketplace, I guess first, do you see mix down? And then second, could that technically be a benefit for you guys if that's happening?

Scott Culbreth (President and CEO)

So I would... I'll start with the end conclusion there. It should be a benefit because that's rotation down into the value price points in which we participate.

Tim Wojs (Senior Equity Research Analyst)

Right.

Scott Culbreth (President and CEO)

So we've not seen the level of mix degradation that you're highlighting, perhaps from other players in building products. Within our business, though, what I would call out specifically, you think about our new construction business overall and what we offer there. We have our Timberlake brand, and then we have an Origins by Timberlake brand as well. We do see builders making choices to move out of Timberlake into Origins. That was part of the acquisition strategy that we put in place over six years ago, so we expected that to come. So we're seeing some of that. What is the result? Well, the cabinet price per box will be lower, but the margin percentage should be acceptable or better. So we are seeing a little bit of that impact top line equation for us.

And also the other one I'd mention is, even inside our new construction business, there is a good, better, best strategy. Most of that business has always been in the middle and the better. We had a little bit sitting up top in the best category. We've seen that start to move down a little bit as builders are making choice around price points of their offering. So a little bit in new construction, but we really haven't seen much in repair and remodel when it comes to to mix, mix degradation.

Tim Wojs (Senior Equity Research Analyst)

Okay. I lied, I have one more. Just on content, I mean, have you seen with smaller homes or with smaller jobs, I mean, have you seen a big impact on, like, the number of cabinets or the content per job? Or have cabinets been kind of, I don't know if spared is the right word, but, has that kind of been not a big deal for you guys?

Scott Culbreth (President and CEO)

Yeah, that's not really been a big deal for us. Even though the homes are going smaller, we're still okay with cabinet count. Typically, builders as well as consumers, are trying to protect that kitchen space, so they're still looking for, you know, a nice area and plenty of storage. Even if the kitchen was to shrink, what we're also seeing is a lot of consumers are maybe wanting a small house, but, feature-rich. So now you may have cabinets that are showing up in a laundry room, you may have them a drop room when you come in off the garage. So we've still been pretty, you know, pretty comfortable with the overall cabinet count per home.

Tim Wojs (Senior Equity Research Analyst)

Okay. Okay, great. Well, good luck on the year, guys. See you next week.

Scott Culbreth (President and CEO)

Great. Thank you. Appreciate it.