American Woodmark Corporation (NASDAQ:AMWD) Q1 2025 Earnings Conference Call August 27, 2024 8:30 AM ET

Company Participants

Paul Joachimczyk - Senior Vice President and Chief Financial Officer
Scott Culbreth - President and Chief Executive Officer

Conference Call Participants

Adam Baumgarten - Zelman & Associates
Garik Shmois - Loop Capital
Trevor Allison - Wolfe Research
Tim Wojs - Baird
Kathryn Thompson - Thompson Research Group

Operator

Good day, and welcome to the American Woodmark Corporation First Fiscal Quarter 2025 Conference Call. Today's call is being recorded, August 27, 2024.

During this call, the company may discuss certain non-GAAP financial measures including in our earnings release such as adjusted net income, adjusted EBITDA, adjusted EBITDA margin, free cash flow, net leverage and adjusted EPS per diluted share. The earnings release, which can be found on our website, americanwoodmark.com, includes definitions of each of these non-GAAP financial measures, the company's rationale for the usage and reconciliation of these non-GAAP financial measures to the most 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 may be 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 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 publicly update or revise its forward-looking statements even if experience or future changes may make it clear that the projected results expressed or implied therein will not be realized.

I would now like to turn the call over to Mr. Paul Joachimczyk, Senior Vice President and CFO. Please go ahead, sir.

Paul Joachimczyk

Good morning and welcome to American Woodmark’s first 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'll add additional details regarding our financial performance. After our comments, we'll be happy to answer your questions. Scott?

Scott Culbreth

Thank you, Paul, and thanks to everyone for joining us today for our first fiscal quarter earnings call. Our teams delivered net sales of $459.1 million, representing a decline of 7.9% versus the prior year. This was below our expectations provided during last quarter's call due to weaker demand during the summer in the remodel channel.

Year-over-year growth in single-family housing starts have slowed over the past three months, putting downward pressure on cabinet installations in future quarters. The focus remains on future rate cuts from the Fed, which could drive stronger demand in calendar 2025. Our home center customers have noted higher interest rates and macroeconomic pressures leading to weaker spending on projects. This has been more significant for higher price discretionary projects like kitchen and bath.

We are not experiencing a loss of share with our customers, but we do expect weaker demand versus our expectations at the start of the fiscal year. Our teams remain focused on growing share to our accounts and have realized recent awards in our stock kitchen and bath business that will benefit the remainder of the fiscal year.

Our belief is that as interest rates decline, consumer confidence increases, existing home sales increase, and the potential for home projects increases. This should serve as a tailwind for our business and calendar year ’25.

Our adjusted EBITDA results were $62.9 million, or 13.7% for the quarter. Reported EPS was $1.89. Operational excellence efforts continue to drive progress across the enterprise, but we're offset in the quarter by lower volumes. Our cash balance was $89.3 million at the end of the first fiscal quarter, and the company has access to an additional $322.9 million under its revolving credit facility. Leverage was at 1.19 times adjusted EBITDA and the company repurchased 271,000 shares in the quarter.

Our outlook for the industry in fiscal year ‘25 assumes the repair remodel market will be down mid-single-digits and new construction to be at mid-single-digits. Within R&R, larger discretionary projects will trend worse than the overall market and are projected to be down high-single-digits. As a result of the softer R&R demand and the recently reported slowdown in new construction single-family housing starts, our expectation for the company's net sales is being adjusted to a low-single-digit decrease versus fiscal year 2024.

Adjusted EBITDA expectations are targeted in the range of $225 million to $245 million. Our teams continue to execute our strategy that has three main pillars: growth, digital transformation, and platform design. With a number of key accomplishments over the past quarter. Our summer launch has been well received in the market, and conversion activity continues within our distribution business to 1951, and a number of new accounts are being pursued.

As previously noted, our teams have won several stock bath and kitchen opportunities over the past quarter. Digital transformation efforts continue with our teams planning for ERP Go Live and our West Coast Made to Stock facility later this fiscal year. Platform design work continues as we ramp our Monterey, Mexico and Hamlet, North Carolina facilities. Mill equipment continues to be installed at both sites and will ramp over the coming months. Automation efforts are progressing in our mill, component, and assembly operations.

In closing, I'm proud of what this team accomplished in the first fiscal quarter and look forward to their continuing contributions here in fiscal year ‘25.

I'm now going to turn the call back over to Paul for additional details on financial results for the quarter.

Paul Joachimczyk

Thank you, Scott. I'll begin by discussing our first quarter results and then provide our outlook for the rest of the fiscal year.

Net sales were $459.1 million, representing a decrease of $39.1 million, or 7.9% versus the prior year. We saw a softening in large ticket items that primarily impacted our remodel business. We still believe in the long-term fundamentals of the housing industry, and they are being impacted currently by consumer confidence and higher interest rates.

Gross profit as a percent of net sales for the first quarter decreased 180 basis points to 20.2% versus 22% reported last year. Lower sales volumes impacted our manufacturing leverage in our new facilities with combined price increases in our input costs around logistics, raw materials, and labor. But those impacts are partially offset by our sustained operating efficiency efforts.

Operating expenses excluding any restructuring charges were 10% of net sales versus 12% last year. The 200 basis point decrease is due to the roll-off of our acquisition-related intangible asset amortization that ended in December 2023, lower incentive compensation, and controlled spending across all functions offset by our lower sales.

Adjusted net income was $29.6 million or $1.89 per diluted share in the first quarter versus $46.2 million or $2.78 per diluted share last year. This was impacted by an unfavorable mark-to-market adjustment on our foreign currency hedging instruments of $4.7 million net of tax.

Adjusted EBITDA was $62.9 million or 13.7% of net sales versus $75.2 million or 15.1% of net sales last year, representing a 140 basis point decline year-over-year. Free cash flow totaled a positive $29.4 million for the current fiscal year-to-date, compared to $72.5 million in the prior year. The $43.1 million decrease was primarily due to changes in our operating cash flows, specifically higher inventory.

Net leverage was 1.19 times adjusted EBITDA at the end of the first quarter, compared with 1.09 times last year. As of July 31, 2024, the company had $89.3 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 24 million or 171,000 shares in the first quarter representing about 1.8% of outstanding shares being retired. We have 65.4 million of share purchase authorization remaining.

Our outlook for fiscal year 2025. Net sales are expected to be down low-single-digits versus fiscal year 2024. This is a result of the softer repair and remodel market and a decline in larger ticket remodel purchases across the retailers, partially offset by the continued growth in new construction during the back half of the year. However, these assumptions are highly dependent upon overall industry, economic growth trends, material constraints, labor impacts, interest rates, and consumer behaviors.

Our projected EBITDA margin for the fiscal year 2025 is being targeted in a range of $225 million to $245 million, driven primarily by sales volumes retracting and the increased manufacturing de-leverage of our facilities during the last nine months of the fiscal year. We will continue to optimize our manufacturing and service platforms. In addition, we evaluate our pricing monthly and will continue to do so on a go-forward basis to mitigate the inflationary impacts on logistics, raw materials, and labor.

Our capital allocation priorities for fiscal year 2025 remain unchanged. We will first be focused on investing back into business by continuing our path for our digital transformation with investments in ERP and CRM and investing in automation. Next, we will be opportunistic in our share repurchasing and lastly, with our debt position and a leverage ratio we want to achieve, debt repayments will be deprioritized.

In conclusion, our team is dedicated to making it happen every day. Our operational improvements that have been put in place over the past year have helped us mitigate the volume declines affecting the broader repair remodel industries. Investments automation will drive future operational efficiencies and enable our long-term targets from both a growth and margin perspective. We remain steadfast in our GDP strategy and confident in the long-term investment opportunities within the housing market, including both new construction and the repair remodel sectors.

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

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Adam Baumgarten with Zelman & Associates. Please go ahead.

Adam Baumgarten

Hey, good morning guys. Just on the fourth quarter, could you maybe give some color on how revenue trended by channel in the fiscal first quarter?

Scott Culbreth

Yes, for new construction, we were up single-digits and for repair remodel down double-digits.

Adam Baumgarten

Okay got it. And then just thinking about the updated outlook for the year, it looks like it assumes flat year-over-year revenue over the balance of fiscal ’25. Maybe help us think about how you expect that to trend over the next three quarters. Should we expect some pressure, you know, in the coming quarter and then maybe a bit of growth in the back half of the fiscal year, maybe just a bit more color on how you expect it to face?

Scott Culbreth

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

Adam Baumgarten

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

Scott Culbreth

Sure, and you're right. The pricing actions will be variable depending on the channel. The timing could move around based on we also had our last increase in a respective channel. Historically, what you would typically see is first actions in dealer distributor followed by new construction followed by home center just because of the lag time on getting those prices input into the process. I can tell you at this particular point in time we have been active in dealer and we have announced a price increase in that channel.

Adam Baumgarten

Okay, got it. Thanks best of luck.

Scott Culbreth

Thank you.

Paul Joachimczyk

Thanks, Adam.

Operator

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

Garik Shmois

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

Scott Culbreth

Sure. On new construction, I would tell you that out of the gate for our first fiscal quarter, we exceeded what our original planning expectations were from a demand standpoint and feel pretty good about our second quarter. Our concern became the second-half, as we saw starts to decline over these last 90-days. So we start to model that forward as to when cabinet installation will occur and our expectations will see a little bit softer. Cabinet install in the back half.

To your comment on interest rates, let's assume the Fed takes action in September. It feels like that's almost a guarantee at this particular point in time. I don't think one move makes a big change, because everyone's expecting it, but as subsequent moves start to take place, we think that will unlock more homeowners interested in buying a new home or also on the repair remodel side, investing in their home and doing a project in the kitchen or bath area.

So we think that could drive incremental demand in new construction, but that starts to play out into mid-calendar year ’25, which starts to cross into our next fiscal year.

Garik Shmois

Okay, is that comment pretty consistent with remodel as well that, you know, your view would be that it would -- we need to see several rate cuts before, you know, that end market starts to accelerate as well?

Scott Culbreth

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

Garik Shmois

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

Scott Culbreth

Yes, the first would be the comment earlier around some pricing actions as necessary. So as we already mentioned, we've taken some actions in dealer. If input costs continue to move in the other channels, we'll certainly be looking at conversations in those as well. So we'll continue to manage that. And then just overall operating efficiencies, our teams are focused on operational excellence, not just in the manufacturing side, but our service platform and new construction managing SG&A spending wisely. We'll continue to do that despite the pullback and demand and you know our goal is to manage that EBITDA number to the range that was provided.

Garik Shmois

Understood. Alright thanks for all that.

Scott Culbreth

Okay, thank you.

Operator

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

Trevor Allison

Hi. Good morning. Thank you for taking my questions. First, you all mentioned some awards in stock kitchen and bath. It's going to benefit you guys. Can you provide some color on those? Perhaps how large of a benefit they could be? Is there any load-in and what the timing looks like on those?

Scott Culbreth

Yes, I want to get into the specifics around load-in and maybe exact timing, but I'll just share with you that it's in our full-year outlook that we just provided. It's some permanent placement on the kitchen side, and then on the bath side, it's more of a promotional nature. So roughly $30 million from a net standpoint and business annualized and starting to shift in the current quarter.

Trevor Allison

Okay, got it. That's very helpful. And then I want to follow-up again on input cost trends. You've mentioned a few pieces of that, that's a bit inflationary. You've got some pricing going into the market? What are you guys assuming for input cost inflation embedded in your full-year EBITDA guidance?

Scott Culbreth

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

Trevor Allison

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

Scott Culbreth

Not more aggressive on pricing and marketing dollars, but more aggressive in sharing our capability, making sure the market understands and our customers understand the capacity we've got and our ability to serve that demand. So that's the focus and the energy. As a reminder, when we went through COVID and we saw such a large surge in demand, we really had difficulty keeping up with that. And we had issues around employment, et cetera. That was a barrier. So we invested despite a recent market downturn. We invested in capacity. We wanted to make sure we were ready to take advantage of demand when it comes back. So we've made that investment, we're ramping that investment up. So instead of our teams having to pull back on being aggressive in the marketplace on taking share, now we can turn them loose. So we've done that and we've had some success up to this point.

Trevor Allison

Makes a lot of sense. All right. Thank you very much. Good luck moving forward.

Scott Culbreth

Okay. Thank you.

Operator

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

Tim Wojs

Hey, guys. Good morning.

Scott Culbreth

Hey, good morning, Tim.

Tim Wojs

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

Scott Culbreth

The feedback we're getting is there's not a structural reduction in demand. It really is consumers just kind of holding back and waiting on the sideline. They want to see what's going to play out with rates, to some extent the election as well, and get on the other side of that. And as consumer confidence comes back, obviously folks are going to want to look to invest in their home. We've seen the price appreciation. We've seen the value creation that folks have had in holding that asset. They're staying in them longer and that's going to create an opportunity to invest. So we don't think there's a structural reduction in demand. We think it's there.

In fact, our board meeting last week, one of the analogies used to him was a beach ball being held underwater, and we used it to describe the demand environment, perhaps, for both new construction and remodel, and these macroeconomic factors are keeping it underwater. Eventually, those will dissipate, and that'll come back, and we just want to make sure that we're ready for that from a capacity and from a people standpoint and operating efficiency standpoint.

Tim Wojs

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

Scott Culbreth

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

Tim Wojs

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

Paul Joachimczyk

Yes. No, Tim, we remain very confident in the share repurchase program and efforts for our organization.

Tim Wojs

Okay.

Scott Culbreth

Yes, nothing near-term that would change that, Tim.

Tim Wojs

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

Scott Culbreth

Yes, thank you.

Paul Joachimczyk

Thank you.

Operator

[Operator Instructions] Our next question will come from Kathryn Thompson with Thompson Research Group. Please go ahead.

Kathryn Thompson

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

Scott Culbreth

Yes, thanks for the question, Kathryn. I haven't seen anything that's pointed to a change in the return philosophy or approach for investing in the home as to how that may compare with an outdoor project. I guess I have a middle model, I don't necessarily have facts in front of me, but I still think a large-scale kitchen project is going to be more costly than an outdoor project in general. But the return metrics continue to be there for us. So, you know, the price points between the two can certainly influence an impacted demand trajectory, but I still think folks are passionate about that indoor space. Folks are passionate about hosting, to your point. Some of that's moved outdoors, but the indoors is still going to be relevant, and we think folks are going to continue to want to beautify those spaces.

Kathryn Thompson

Okay, great. And then in terms of share gains, what is the typical lag time to win the financial benefit? You know, in some other words, you know, what historically has been the effect on your financials?

Scott Culbreth

So it would depend on the type of share gain and when. So typically, you know, a new construction, it's going to be a longer lag. You're going to be awarded the business, say, for a particular community, and that community is going to have to be developed. So is the dirt already ready or are they starting to build, et cetera? So it could be short to long, depending on that specific project. If you're converting an existing community, that could be a little bit faster, because you just simply need to change out the model home, and then you could presumably start selling as the next customers come in and start making selections.

In home centers, it's essentially the shelf positions of kitchen or bath. Again, it's going to depend a bit on what their timeline is, when can they bring their store labor in to do a reset and a change out. So it could be upwards of a couple of quarters before you fully realize all the benefit associated with some choices and decisions that you're realizing.

Kathryn Thompson

Okay, finally, any color on the M&A market?

Scott Culbreth

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

Kathryn Thompson

Okay, great. Thanks very much.

Scott Culbreth

Okay, thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Paul Joachimczyk for any closing remarks. Please go ahead, sir.

Paul Joachimczyk

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

Operator

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