American Woodmark Corporation (NASDAQ:AMWD) Q1 2020 Results Earnings Conference Call August 27, 2019 11:00 AM ET

Company Participants

Scott Culbreth - Senior Vice President and Chief Financial Officer
Cary Dunston - Chairman and Chief Executive Officer

Conference Call Participants

Justin Speer - Zelman & Associates
Jeffrey Stevenson - Longbow Research
Timothy Wojs - Robert W. Baird & Co.
Julio Romero - Sidoti & Company, LLC

Operator

Good day and welcome to the American Woodmark Corporation First Quarter 2020 Conference Call. Today's call is being recorded August 27, 2019.

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, www.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'll begin the call by reading the company's Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on factors that may be beyond the company's control.

Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission and the annual reports 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'd now like to turn the call over to Scott Culbreth, Senior Vice President and CFO. Please go ahead, sir.

Scott Culbreth

Good morning, ladies and gentlemen. Welcome to American Woodmark's first fiscal quarter conference call. Thank you for taking time to participate. Joining me today is Cary Dunston, Chairman and CEO. Cary 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. Cary?

Cary Dunston

Thank you, Scott. And good morning to you all. Our first quarter proved to be positive despite some significant headwinds and challenging revenue comps. We are very pleased with our financial performance particularly related to our adjusted EBITDA and earnings per share.

Net sales for the fiscal quarter were down 0.4% for the business as a whole with continued volatility by channel. Within new construction, we grew our business 4.5% over prior year. Our Timberlake direct business comped very favorably, while our frameless PCS business in Southern California experienced a year-over-year decline.

Our Timberlake direct business once again outperformed the market and our competition, in alignment with our strategic expectations. Our success is even more evident in comparing our growth to the 7.5% market decline when considering the 60 to 90 day lag between the start of a home and moving to install our cabinets.

Our ability to continue to gain share even in the current market is a reflection of our direct-to-builder service platform and our recently expanded offering with our lower price point Origins product.

Although the movement to opening price point homes remains a challenge for builders, we are definitely beginning to see a shift towards the lower price point.

Consensus among builders remains fairly strong towards first-time homebuyers, particularly with lowering mortgage rates. As reported last quarter, we are experiencing volatility by region within Timberlake.

Comps remain strong in the Northeast, Texas, Atlanta, the Southwest and Northern California. We have experienced some softening in Florida, but continue to believe it's temporary as builders remain confident, particularly as they head into the second half of their fiscal year.

With regards to our new construction PCS business that is concentrated in Southern California market, we continue to experience a decline in housing starts.

On the positive, the comps did trend more favorably throughout the quarter. Housing affordability remains a critical issue in this region, driven by land, labor, materials and overall infrastructure cost. We do expect comps to continue to improve in this market as we head into the fall, with the hopes of restoring our business to positive comps in the second half of our fiscal year.

It is also important to note that, despite our negative comps, starts data in Southern California shows we overindexed in this market as we did on the Timberlake side.

Looking at the remodel business, which includes our dealer distributor and home center businesses, revenue was down 3.4% to prior year. Our combined home center business was down 3.1%, with positive comps within our stock business and negative comps within made-to-order.

We're pleased with the positive comps in our stock business, particularly bath and vanity. Within made-to-order, it continues to be a challenge for all suppliers and our home center partners. Unfortunately, along with the lower comps, we have seen an increase in promotional activity. We do not believe elevating promotions within made-to-order to even higher levels will be effective.

Although affordability is a challenge to consumers wanting to remodel, so too is the inherent complexity that a consumer experiences during the ideation and purchasing process.

An indication of how important attacking this complexity is can be seen in our designer series platform. Not only did we relaunch it with a new and much simpler program at one of our key partners, it is also a frameless product that is more appealing to the younger consumer.

We continue to experience strong double-digit growth on this platform and expect it to remain so into the future. As such, we are very focused on our strategy within made-to-order to remove complexity that will not only offer superior customer experience, but will improve the cost structure of the business.

Regarding our dealer distributor business, we were down 4.8% for the quarter. Dealer was relatively flat, while distribution comped negatively. In accordance with the KCMA data, overall dealer and distributor sales, particularly within semi-custom, continued to show strong declines.

The story in the dealer channel is very similar to what we're seeing within home center. Demand by the more affluent consumer for higher-end, special order cabinets has been trending down over the past year.

At the same time, we're seeing a shift downward in price point by new consumers. Unfortunately, as consumers move into the lower price point space within dealer, the industry is seeing more of an impact from the Chinese imports.

Albeit with a lower SKU count, this product comes standard with all prior construction and other features only found on a higher-level, American-made cabinets. And their price point is well below what American manufacturers can achieve.

Although the cost of this product has been impacted by tariffs, the cost delta was so significant that, even with the tariff increases thus far, they're still selling at a price point below local manufacturers. This is the whole premise of The American Kitchen Cabinet Alliance anti-dumping lawsuit.

The initial countervailing duty was successful earlier this month. However, the most significant duty will be tied to the antidumping findings in October.

Within American Woodmark, we believe the AKCA will be successful and, as a result, feel there is potential upside to our current revenue outlook. We have the right product at the lower price point to be successful.

In summary on revenue, quite a bit of variation by channel and within geographical regions. Although the housing market has certainly slowed, we remain confident in continued growth this year and the long-term outlook for the industry.

Building affordable homes remains a key bottleneck. The good news is that, with lowering interest rates, affordability is improving. However, inflationary drivers with material, labor and land cannot be overlooked in the housing industry as well as the overall macro and micro factors impacting our economy and consumer confidence.

The good news is that single-family starts turn positive on year-over-year growth in July. We expect a favorable trend going forward, with the industry growing at a low-single digit rate for our fiscal year. We believe we will continue to gain share and overindex the industry with our direct platform.

As within new construction, the kitchen remodel industry will continue to see a move down in price point. Future growth in the industry is dependent upon the ability for us all to adapt and change.

We're beginning to undergo what I believe to be a major shift in buyer demographics. This change will have a very significant impact on our targeted customer, how they shop, where they shop, what attributes are important to them and the price point they're willing to pay.

Personally, I look forward to this change. We believe we're very well-positioned to make this shift to the next generation buyer, both within remodel as well as new construction. We have the right products and systems today and are working diligently on innovative solutions for tomorrow.

However, we must also work closely with our retail partners to ensure we significantly shift the current model. Minimizing complexity within the value stream and the consumer buying experience will be critical as well as leveraging future state product and the digital space to deliver a superior customer experience.

Moving on to gross margin, despite very significant cost headwinds, we finished the quarter at 22.1%. I mentioned last quarter that our teams continued to do an outstanding job of leveraging our operations to drive efficiency improvements. This work continued and had a significant impact on our first quarter.

We managed to offset much of the costs associated with tariffs, the loss of overhead absorption, costs associated with beginning to relocate one of our California facilities and the particleboard supply disruption.

Regarding particleboard supply, we previously reported that a major supplier experienced a significant fire that shuttered one of their large particleboard plants. Shortly thereafter, they made the unexpected decision to also close two remaining particleboard plants in the US. This left the industry with a capacity shortage within particleboard.

As our customers have always come to expect, our teams did a simply amazing job of very quickly finding alternative supplies, including product substitution where appropriate.

Although we have a material variance impact, we avoided what could've been a very detrimental impact on our customers, and thus our company. Scott will provide you with more details on the expected cost impact shortly.

We are currently working with our insurance carrier to recover as much of the cost as we can. However, the final net impact is yet to be determined and remains a potential headwind.

Scott will also provide you with some detailed cost data related to the tariffs and the countervailing duty. As a reminder, we have not taken any pricing action related to tariffs.

Our purchasing team continues to work hard on mitigating our exposure on the material side of the business. The announced expansion of the 301 tariffs on September 1 to include such items as hardware and glides has a direct impact on our cost and would be difficult to offset simply due to limited sourcing options.

However, we remain focused on driving internal efficiency improvements and we will continue to evaluate the need for pricing action.

Moving on to adjusted EBITDA margin, we finished the quarter at 16.3% versus 15.9% from prior year. As I mentioned previously, considering the cost headwinds we experienced, we are very pleased with this performance.

The key driver once again is the operating efficiency of integrated platform as well as lower SG&A costs. We're extremely proud of the work we accomplished and how united the team has been on driving operating results.

On adjusted net income, we generated $36.1 million in the quarter, up slightly from $36 million in prior year. And our adjusted earnings per diluted share was $2.13 versus $2.04 prior year.

Lastly, we continue to be very pleased with our cash flow, generating $56 million of free cash flow versus $41.4 million in prior year. We paid down $42 million of our term loan and reduced our net leverage to 2.35.

In summary, although we are disappointed in overall market growth and our corresponding revenue growth, we overcame significant cost headlands in the quarter and generated a strong financial return.

We remain confident in our ability to operate at a high level of efficiency in our platform and to continue to capitalize on cost synergies from the acquisition. However, cost headwinds will continue, most notably the impact of tariffs, the relocation of our facility in California and the net impact of the particleboard supply issue.

Regarding revenue, the market is volatile. We expect new construction to improve as we head into the fall. Our low-cost platform is performing very well, yet our revenue synergies are running at a rate lower than expected due to the slowdown in the market.

The transition to lower price point homes is accelerating, however, and we remain well-positioned to continue to gain share with our Origins product.

Home center is challenging. We remain very focused on our strategic relationships with our partners. I am concerned with the increasing level of promotions with both home centers as well as within dealers.

As stated previously, I firmly believe that this is not the best investment to impact consumers. We're focusing on making strategic investments that will reduce complexity and connect with the next generation consumers.

Within our stock business, we do expect to continue to see growth. We are confident in our ability to grow both the bath and kitchen businesses as we capitalize on revenue synergies and the strength of our platform.

Overall, we know that trying to predict our industry in the short term will be increasingly difficult. Yet, we also accept that this makes it even more important that we get the longer-term future right.

On this, I'm extremely confident. Our new vision we recently launched is already challenging our teams and generating thoughts and ideas never before imagined. Not only will we be ready for the future, we will be driving the future.

With that, I thank you and I will now turn it back over to Scott for the detailed financials.

Scott Culbreth

Thanks, Cary. The financial headlines for the quarter. Net sales were $427.4 million, representing a decrease of 0.4% over the same period last year.

Adjusted net income was $36.1 million or $2.13 per diluted share in the current fiscal year versus $36 million or $2.04 per diluted share last year. Net income was positively impacted by lower selling and marketing expenses and lower interest expenses.

Adjusted EBITDA was $59.6 million or 16.3% of net sales compared to $68.1 million or 15.9% of net sales for the same quarter of the prior fiscal year. The increase during the first fiscal quarter is primarily due to improved operating efficiencies and lower selling and marketing expenses.

The new construction market remained challenging during the quarter. Recognizing a 60 to 90-day between start and cabinet installation, the overall market activity in single-family homes was down 7.5% for the financial first quarter. Single-family starts during March, April and May averaged 838,000 units. Starts over that same time periods in prior year averaged 906,000 units.

Our builder channel net sales increased 4.5% for the quarter despite a continued slowdown in the Southern California market.

The remodel business continues to be challenging. On the positive side, unemployment remains low. The July U3 unemployment rate was 3.7% and U6 was 7%. Both measures were lower than the July 2018 reported figures.

Interest rates decreased in the quarter, with 30-year fixed-rate mortgage at 3.77% in July, a decrease of approximately 76 basis points versus last year.

The share of first-time buyers increased. The June reported rate was 35% versus 31% reported last June. Keep in mind, the share remains well below the historical norm of 40%.

All cash purchases in June were 16%, down from 22% last year. Consumer sentiment increased to 98.4 July versus 97.9 reported July 2019.

On the negative side, existing home sales decreased during the second calendar quarter 2019. Between April and June 2019, existing home sales averaged 5.28 million units. The same period for 2018 averaged 5.41 million units, a decrease of 2.3%.

The median existing home price rose 4.3% to an all-time high of $285,700 for June, impacting our consumers' affordability index.

Homeownership rates remained low versus historical averages. The percent of Americans who owned their home in the second calendar quarter was 64.1%, which is slightly lower than last year's rate.

Our combined home center and independent dealer and distributor channel net sales were down 3.4% for the quarter, with home centers decreasing 3.1% and dealer/distributor decreasing 4.8%.

The company's gross profit margin for the first quarter of fiscal year 2020 was 22.1% of net sales versus 22.3% reported in the same quarter of last year. Gross margin in the first quarter was unfavorably impacted by lower sales volumes, tariffs, cost impacts related to our particleboard supply disruption of approximately $1.6 million and duplicate rent costs related to our California facility move of $400,000. These impacts were partially offset by improved operating efficiencies.

Total operating expenses were 11.7% of net sales in the first quarter of fiscal 2020 compared with 12.3% of net sales for the same period in fiscal 2019.

Selling and marketing expenses were 4.8% of net sales in the first quarter of fiscal 2020 compared with 5.3% of net sales for the same period in fiscal 2019. The decrease in ratio is a result of ongoing expense controls and lower personnel costs.

General and administrative expenses were 6.9% of net sales in the first quarter of fiscal 2020 compared with 7% of net sales for same period in fiscal 2019. The decrease in ratio is driven by lower incentive compensation costs.

Free cash flow totaled $56 million for the current fiscal year compared to $41.4 million in the prior-year. The increase is primarily due to additional net income generated in the period and lower capital spending.

Net leverage was 2.35 times adjusted EBITDA at the end of the first fiscal quarter and the company paid down $42 million of its term loan facility during the quarter.

On August 22, 2019, the board authorized a stock repurchase program of up to $50 million.

In closing, although sales performance was lower than expected due to continued weakness in the remodel channel, we are pleased with our adjusted EBITDA performance during the quarter.

Regarding our previously disclosed synergy targets of $30 million to $40 million within three to four years, we have realized our cost synergy targets and continue to make progress in sales synergy capture. For the end of fiscal 2020, we will realize roughly half of the total anticipated synergies.

With respect to the preliminary countervailing duty determination announcement on August 6 of 16.41%, we could be exposed to approximately $5.5 million of potential annual direct cost increases in addition to 301 tariffs.

Our teams are working to mitigate the impact through supplier negotiations, supply chain repositioning, internal productivity measures and pricing actions needed.

Should the tariff changes communicated on August 23, 2019 go into effect, we would have an annual exposure of approximately $2 million to $2.5 million, which is included in our outlook for fiscal year 2020.

We believe particleboard board supply disruption will continue to have a negative impact on at least our second and third quarters and our cost could be negatively impacted by approximately $2 million to $5 million per quarter until fully resolved.

We continue to work with our insurance carrier on this matter and expect to recover a portion of the losses incurred, but there will be a lag.

As a result of the slowing trends in the remodel channel, the company expects it will grow sales at a low-single digit rate in fiscal 2020. This growth rate is very dependent upon overall industry and economic growth.

Margins will be challenged, with increases in labor costs, raw materials, tariffs and transportation rates. The company will also be negatively impacted by the move of one of our California facilities and incremental merchandising expenses.

The company expects adjusted EBITDA margins to decrease slightly or remain flat with prior-year results depending upon the outcome of our insurance recovery related to particleboard supply disruptions.

This concludes our prepared remarks. We'd be happy to answer any questions you have at this time.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And we'll take our first question today from Justin Speer with Zelman & Associates.

Justin Speer

Thank you, guys. Really appreciate it. Thanks for the color also on the RSI path and the tariffs. I wanted to unpack the competitive dynamics in the repair/remodel channel. Any perspective you can provide, what's taking place and how your performance compares to underlying market growth? And the change in promotional cadence across the landscape, just context around what you're seeing and whether or not you think that's going to be an ongoing aim for the balance of the year.

Cary Dunston

Hi, Justin. It's a big question with regards to how the R&R market from a competitive landscape is really shaping up. Obviously, with home centers, primarily us and two other key competitors. So, it is down. We mentioned our negative comps. Our competition mentioned negative comps in home centers themselves. To talk about negative comps, just the move down in price point, I think the challenge our home centers are having in making sure they can make that transition and attract the next generation into the stores, we're confident they can do that. We're just going through a transition here. And, unfortunately, that transition, with the pressure to try to improve comps, we're seeing an increasing level of promotional activity.

It definitely concerns me because it's not where we feel the investment should be made. Is it going to last? I don't know. Obviously, it's been ongoing now for, what, three years, four years with a steadily increasing level of promotional activity in that channel. I keep saying every quarter, every six months, every year that at some point it has to stop, you can't keep taking promotional activity up and up and up. At some point, there has to be a resolution to it. So, we're continuing to make a lot of investments in those channels, but more on the strategic side. We're not really willing to take our promotional levels up to any higher significant levels. It's just not a good ROI on that. But at the same time, we are willing to work with our partners and make some strong business decisions. So, home centers, a little unknown right now on the MPO side.

When you're getting to the stock side of the business, more encouraging, more promising. As I mentioned, we do expect to achieve positive comps going forward within the stock business. And I think part of that is you're seeing a move down in price point and just the overall success of the model that we offer. So, we're confident in that space. As I mentioned, the designer series, which is one of our business partners, it's growing very, very well. So, obviously, a lower revenue platform right now, but they've been growing very strong for a number of quarters now. So, we feel strong about that.

When you get to dealer/distributor, as the KCMA data shows and as I commented, we're definitely seeing that move down in price point, which is impacting overall comps within the dealer/distributor world. I think in the comment I made about the future state consumer, next-generation consumer, the consumer walking into the door that's not willing to pay the levels that I think the more affluent consumer has really led us to enjoy the past seven to eight years, we'll see how that impacts the business. We're definitely seeing a more prominent impact even on our business. Obviously, dealers much less. From a proportional size of our business, it's less prominent than home center and our new construction business. But we certainly still feel the impact and we're starting to see some of that Chinese impact now. And we'll see where it goes with tariffs and so forth.

With or without tariffs, we remain very, very focused on creating a very competitive solution at that lower price point and we've now had the platform to do it. So, we're working on expansion opportunities. We're working on our frameless opportunities and so forth. And so, we continue to feel very confident in our ability to grow within the dealer/distributor world.

Overall, from a market share perspective, obviously, it's pretty clear, we're continuing to gain market share in new construction. I think when you really look at remodel, it's hard because it gets pretty diluted out there. But right now, basically, we feel we're in alignment. We're not losing share anywhere. We're basically indexing with the market within the remodel space, but, obviously, that will be dependent somewhat on where the – where are we going home center with regards to all the promotions – where promotions go.

So, we'll see. But, right now, we're holding share.

Justin Speer

So, that's good color across the different pieces of the business there. And then, there's this other element. There are so many moving parts, one of the other elements, you mentioned tariffs and antidumping duties. Can you run through your thoughts on the impact to the industry and, more specifically, more pertinent to your business, with these elements in the background, what's taking place near term in reaction to those tariffs and how you think – it sounds like you think they'll be successful, but how you think that will manifest itself in your business model?

Cary Dunston

It's a good question. Up to this point, I can't say other than from a cost impact. It's, obviously, impacted the industry as a whole. We communicated early on there was less of an impact on our businesses because we were not that dependent on Chinese imports. We certainly have some supply over there. Some things like glides and a lot of the hardboard you get in our history, basically China is it for source. So, when we talked about limited sourcing options with regards to the expanded 301 tariff, that impacts the industry as a whole. But once again, we're much less dominant on that supply chain. So, obviously, with the low cost and a Mexico base, we have fared fairly well and we continue to fare very well with regards to move down in price point. With our service model, we're very competitive in new construction. So, the Chinese tariffs and the impact of Chinese product really has not impacted single-family new construction.

We do see it in multifamily. We go up against it in some of the bidding we're out there doing now. But, once again, service is also important to that industry where you really tend to see the impacts in the dealer world. And, I guess, in the home center, made-to-order, you don't see much of an impact either other than just a little bit of the cost side.

Where the industry has greatly been impacted is in dealer and I think we'll see how that plays out. It's been – obviously, it's important to us from the channel perspective, but it makes up a lower percentage of our total revenues. So, you've not seen us impacted as significantly as some of the others.

With regards to what we feel the future holds, obviously, with the tariffs, the 301 tariffs, they have a big impact on the Chinese imports. And now, obviously, with the AKCA and the countervailing duty and then the ruling with regards to the antidumping in October, that will have a significant impact on the cost of those Chinese imports.

Our goal, and stated goal, all along and I know others have tried to express this as well, is we're very conscious of price elasticity. Our goal is to not go out there and just take prices up in the industry. We have been extremely focused on trying to offset the tariffs. We are resourcing, particularly bringing a lot of that internal into our Mexico supply chain, as well as some other resourcing options we have and then offsetting it with efficiency. So, we're very proud at this point we have not passed any price increases on and we feel we can remain very competitive with those lower price points.

So, it's dependent on what the antidumping tariff comes in at. We do expect that there could be some opportunity and upside to our revenue as we head into particularly our third quarter. We're starting to see more – I'll say more calls and more interest from potential partners out there and potential retailers in the dealer world. But they're asking a lot of questions and do have some concerns with regards to that Chinese product. But I think that's good for us. That's good for American cabinet companies. And our goal once again is not to just go out and take prices up. It's to be competitive and create a level playing field at that lower price point. We have the right product. We just have to change some minimum models with regards to the fact that all plywood construction would value it bringing it at a lower price point. It's not necessary. We can produce a very high quality cabinet and a beautiful kitchen at that lower price point with our product and other American-made products. And that's really the message of the AKCA.

Justin Speer

Perfect. Thank you, guys. Appreciate the time.

Cary Dunston

Thanks, Justin.

Operator

Next, we hear from Truman Patterson with Wells Fargo.

Unidentified Participant

Actually, this is Paul Shibolsky [ph] on. I was wondering if you could give any color on how sales trended on a monthly basis through the quarter overall and then by channel.

Cary Dunston

Not a whole lot of detail on that other than – I mentioned on the single-family starts, we do trend – as you watch single-family starts trend, we do trend fairly in line with that, although we're having lot of volatility by region. But in general, we're trending more favorable within single-family new construction. We expect to do that going into the fall as we feel single-family new starts will improve.

When you get into the remodel side, it's just been pretty volatile out there. So, it's hard to really talk about month to month. Right now, there are no indications in the remodel word that anything exists that's going to turn remodel around. I think we've got to get that younger consumer into the, I'll say, the existing home market. I've been saying for many, many, many quarters now that getting first-time homebuyers or getting existing homes out there at a price point that younger folks can afford is very critical. So, inventories remain very, very low with existing homes at the right price point. It's really driven by baby boomers aging in place and just that move down and move up process has not happened. So, I think you're going to start to see that as time goes on. It will improve the remodel market. It's just a question of timing. Right now, I think most out there are saying flat to low-single digit is really what you're looking at in remodel.

Unidentified Participant

Okay. And then, gross margin was better than expectations. Any chance that inflects on a quarterly basis in 2020?

Cary Dunston

I'm sorry. I didn't quite catch your question there.

Unidentified Participant

Yeah. Gross margin was better than expectation. I was wondering if there was any chance that that might inflect year-over-year on a quarterly basis this year?

Scott Culbreth

So, we really don't want to talk about quarterly guidance as we look forward. We provide the perspective on the outlook over full year. So, I'll just take you back to those remarks are variable at this point in time. It's really around the particleboard expense recovery. And depending on how that plays out, either we'll be flat with prior year from an EBITDA margin perspective or down just slightly.

Unidentified Participant

Okay, thank you.

Operator

Next, we hear from Garik Shmois with Longbow Research.

Jeffrey Stevenson

Hi. This is Jeff Stevenson on for Garik. My first question is, how quickly to expect some of the antidumping benefits to drive upside revenue potential you talked about earlier if that October thing goes through?

Cary Dunston

Like I said, we're starting to get some calls in the matter of actually making the decision and pulling the trigger. I think folks are going to – a little bit more of a wait-and-see mode to see what happens, but they also recognize that, if that antidumping takes place, it's instantaneous. So, I think over the next three to four months, we're definitely going to start to see opportunity and potential. The big question is how much potential is there. It's very difficult for us and everybody else in the industry to really kind of pinpoint what that is and what that will be. We're not willing to put a number out there. Obviously, it's just too difficult. I think it's going to be a slow trend upward. If October antidumping hits, then we certainly will start to see that pickup much more quickly. But it's very, very dependent on what the antidumping tariff comes in at. If it's too low, there is a chance it may not have a drastic impact. So, it really is very dependent upon what the ruling is on antidumping.

Jeffrey Stevenson

Okay, great. And can you give a little bit more color on the timing and execution of the $50 million buyback program?

Scott Culbreth

So, we've got the authorization in play. And the way we're going to look at that is it's going to be opportunistic repurchase. So, no specifics we'll offer other than we'll evaluate what appropriate price is to repurchase that we believe drives a good value for shareholders and then we would execute. But purely opportunistic. Debt paydown continues to be our primary focus.

Jeffrey Stevenson

Okay, thank you.

Operator

Our next question will come from Tim Wojs with Baird.

Timothy Wojs

Hi, gentlemen. Good morning.

Cary Dunston

Good morning, Tim.

Timothy Wojs

So, maybe my first question, just kind of some clarification around guidance. On the EBITDA line, Scott, did the duties of $5.5 million – is that in the guidance now? I'm just trying to understand what exactly is in and what might have changed or not?

Scott Culbreth

So, all of the tariff impacts that we're currently aware of, including the announcements on Friday with the increases of 5% on the two different buckets, those are all fully incorporated and captured in the outlook.

Timothy Wojs

And really, the only deviation is that the particleboard – you have the particleboard cost impact and then it's really just the timing around if you'd get that insurance recovery in fiscal 2020 or if it would fall into 2021?

Scott Culbreth

It's actually twofold there, Tim. First is the timing recovery. So, there will be a lag when we get it. And then, secondly, will we fully recover all of the expenses associated with it? That's the piece which is still open and that's what drives the variability in the guidance.

Timothy Wojs

Okay. Okay, got you there. And then, second, any way to think about an updated expectation for the cash flow for the year?

Scott Culbreth

We did not work through that from a modeling standpoint for the year. Obviously, we started off with a pretty strong Q1 result, but I'm not ready to change any of the outlook at this stage.

Timothy Wojs

Okay. And then, Cary, maybe kind of following on with one of your prior comments, what level of kind of antidumping tariffs would kind of narrow the gap or kind of swing the pendulum towards the domestic manufacturers? Just maybe for some context.

Cary Dunston

When you look at the antidumping, I think I've heard anywhere from 50% to 100% as being kind of they'd hope to achieve. Obviously, it's very dependent upon a lot of things. But I think a minimum of 50% would probably be required to really start to see some closure of that cost delta.

Timothy Wojs

Okay. Okay, that's helpful. And then, maybe just the last one from me, any update to kind of how you're thinking about material costs and freight for the year, Scott? I think the four, you'd expect them maybe flat to up slightly. I'm just kind of curious if that's changed at all.

Scott Culbreth

Yeah. Obviously, the particleboard is a factor where we're seeing increases. And until all that capacity comes online, that likely continues. Plywood, paint and steel would continue to be elevated. We have seen lumber prices start to tip the other way. It's also declined from inside the quarter, primarily around cherry and oak. So, still think it's an inflationary environment. Fuel came down for us in the period. But we still do see elevated carrier rates overall because we're contracted predominantly. So, we still expect that to continue as we push forward. Now, those contracts come up to renewal, we'll have the opportunity to even more closely align with market rates and perhaps get adjusted for that time.

Timothy Wojs

Okay, sounds good. Thanks, guys. Nice job on the margins.

Cary Dunston

Thanks, Tim.

Operator

[Operator Instructions]. We'll now hear from Julio Romero with Sidoti & Company.

Julio Romero

Yes, hi. Good morning, everyone.

Cary Dunston

Good morning, Julio.

Julio Romero

I wanted to ask a little more about particleboard supply disruption. You mentioned that you were able to find a product substitute pretty quickly. So, that $2 million to $2.5 million of incremental cost a quarter, would that be just, I guess, primarily due to incremental transportation cost? Is that the right way to think about that?

Cary Dunston

No, it's actually material cost associated. There is some transportation. And so, it's all in. But it's primarily actual material cost on the material itself. Some of it is transportation. Some of it is actually you had to go out on the spot market. Also, we had to move away from contracts and go out on the spot market and buy, which drives up material cost. And then, there's some actual price delta based on the substitution that we had used. It's actually a superior product material, but we had to pay more for it.

Julio Romero

Got it. And you said you expected, at this point, to affect at least your second and third quarter. What's kind of the puts and takes there that would potentially push that out to maybe the fourth quarter and beyond?

Cary Dunston

We don't expect much risk there. I think, basically, what's very dependent upon is there is – actually there are several companies in the process of bringing on capacity in America as we speak. So, our plan is very dependent upon their timeline and get that capacity up on plan. Right now, everything looks fine. We don't expect any issues. But, obviously, there are a few unknowns there, few risks there based on their ability to get started. But, right now, everything appears to be coming up on plan.

Julio Romero

Okay, very good. And just my last one here is, on the RSI synergies, I think you had said you expect half of your annual run rate achieved by end of year fiscal 2020. Would that maybe mean that you expect about a third of your expected revenue synergies by that time or is there a different way to kind of think about that? Thank you.

Scott Culbreth

Yeah. I will just take you back to the remarks. So, we believe we'll have the cost component captured by the end of the fiscal year and then the remaining delta will be related to the sales synergy. Cary has talked at length really the last couple of quarters on that's coming slower than expected on the sales side, with the cost coming a little bit faster. But, again, we expect to be about half realized by the end of this fiscal year.

Julio Romero

Okay. So, that's, what, half all in revenue and costs?

Scott Culbreth

That's correct.

Julio Romero

Okay, great. Thanks a lot. Appreciate it.

Cary Dunston

Thank you.

Operator

I do not see that there is anyone else waiting to ask a question. I would like to turn the line over to Mr. Culbreth for any closing comments. Please go ahead, sir.

Scott Culbreth

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

Operator

That does conclude today's conference call. Thank you for your participation. You may now disconnect.