American Woodmark Corporation (NASDAQ:AMWD) Q4 2023 Earnings Conference Call May 25, 2023 11:00 AM ET

Company Participants

Paul Joachimczyk - SVP and CFO

Scott Culbreth - President and CEO

Conference Call Participants

Adam Baumgarten - Zelman

Garik Shmois - Loop Capital

Collin Verron - Jefferies

Tim Wojs - Baird

Julio Romero - Sidoti

Operator

Good day, and welcome to the American Woodmark Corporation Fourth Fiscal Quarter 2023 Conference Call. Today's call is being recorded, May 25, 2023.

During this call, the company may discuss certain non-GAAP financial measures included in our earnings release, such as adjusted net income, adjusted EBITDA, adjusted EBITDA margin, free cash flow, net leverage and adjusted EPS per diluted share.

The earnings release, which can be found on our website americanwoodmark.com, includes definitions of each of these non-GAAP financial measures. The company's rationale for their usage and a reconciliation -- I'm sorry, 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 the change based on factors that may be beyond the company's control. Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements.

Such factors include but are not limited to those described in the company's filings with the Securities and Exchange Commission and the annual report to shareholders. The company does not undertake to publicly update or revise its forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

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

Paul Joachimczyk

Good morning, ladies and gentlemen, and welcome to American Woodmark's fourth fiscal quarter conference call. Thank you all for taking the time to participate today.

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 fourth fiscal quarter earnings call.

Our team delivered net sales of $481 million, a decline of 4.1% versus the prior year and in alignment with our outlook shared in last quarter's call. Within new construction, our business grew 5.3% versus prior year. Builders are cautiously optimistic going forward as sales have improved since the start of the year. Some builders are now projecting modest growth in starts in 2023 versus a 10% to 15% decline forecasted entering the year.

Cancellation rates have been normalizing and new home sales have begun to improve. The long-term fundamentals of the market remain strong, and there continues to be a deficit in the number of homes built following short of household formations.

We plan to grow our share with new and existing customers. Looking at our model, which includes our home center and independent dealer/distributor businesses, revenue declined 9.9% versus the prior year. Within this, our home center business was down 12.4% versus the prior year.

Our made-to-order kitchen business was down single digits with stock kitchen and bath down double digits versus the prior year. Our stock bath business was impacted by promo loss versus the prior year to retailer, and the entire stock business was negatively impacted by inventory de-stocking efforts at our customers to sell through short of POS. In addition, in-store traffic was down over the past quarter for our home center customers.

With regards to our dealer/distributor business, we were down 1.5% versus the prior year. Incoming order trends in both areas have improved in the last two months as consumers and builders take on activity for the spring and summer.

Our adjusted EBITDA increased 46.7% to $65.3 million or 13.6% for the quarter. Reported EPS was $1.80, and adjusted EPS was $2.21. The improvement in performance is due to pricing, better matching inflationary impacts, mix, and improved efficiencies in the manufacturing platforms.

Operational performance continued with stability in our labor and supply chain, which enabled higher platform efficiencies. Our ops team continues to drive excellence in our plans. Our cash balance was $41.7 million at the end of the fourth fiscal quarter, and the company has access to an additional $323.2 million on its revolving credit facility.

Leverage was reduced to 1.37 times adjusted EBITDA as the company paid down $65 million in debt during the quarter. With the significant improvement in leverage versus prior fiscal year, our capital allocation will be revised to include opportunistic share repurchases in fiscal year '24. As a reminder, our $75 million authorization remains available for use.

We committed to restore profitability in fiscal year '23, and we delivered on that commitment. Our outlook for fiscal year '24 sees market declines in both new construction and repair and model. Our expectation is for sales to decline low double digits. Decremental margins are targeted to be in the teens and our adjusted EBITDA expectations to range from $205 million to $225 million.

Our view on financial performance over the next five years remains unchanged. Despite a near-term slowdown in demand, we believe a 4% to 5% CAGR on net sales is appropriate and that we will grow adjusted EBITDA to over $350 million. Our team continues to execute against our strategy that has three main pillars; growth, digital transformation, and platform design.

Growth will benefit from our upcoming summer launch and the expansion of our brands and availability of existing product into additional channels. As an example, we recently expanded the availability of our low SKU count, high-value open price point cabinet line for our dealer network in the Southeast.

Digital transformation efforts over the last fiscal quarter include the ongoing planning efforts for the next implementation area of ERP in our manufacturing operations, including global design and Monterrey location planning. Our team has completed six of the eight sprints of the build phase of our CRM project, which goes live this summer.

We have also invested in our online capabilities, driving traffic and conversion through our home center and dealer/distributor partners. Specifically for home centers, we have placed emphasis on driving traffic and improving our SEO, which is leading to higher conversion within select made-to-stock programs.

We have also committed to continued excellence in online content and best practices including focusing on A-plus content for our product display pages, enhancing video, infographics, and 360-degree imagery. For dealer/distributor, we've continued to partner in our lead generation program, which allows us to drive leads to our dealer network while also directly connecting those leads to our field sales team through our CRM. Additionally, we are committed to e-commerce expansion, allowing our company to grow through our value partners.

Platform design work is accelerating with over 50% of the steel installed and initial wall panel installation underway in Monterrey, Mexico, and a pad is prepped for footers in Hamlet, North Carolina. This expansion will deliver additional capacity in our stock kitchen and bath cabinetry product lines. Automation efforts continue, and we've committed over $75 million in automation investments over the next five years, with fiscal year 2024 projects focused on material handling, loading, unloading, inspection, and process automation.

In closing, I'm proud of what this team accomplished in the fourth fiscal quarter and look forward to their contributions during fiscal year '24.

I will now turn the call back over to Paul for additional details on the financial results for the quarter. Paul?

Paul Joachimczyk

Thank you, Scott.

I will first talk about our fourth fiscal quarter results, then transition to our full year performance and close with our outlook for fiscal year 2024. Net sales for the fourth quarter of fiscal year 2023 were $481 million, representing a decrease of 4.1% over the same period last year.

The combined home center and independent dealer and distributor net sales decreased 9.9% for the fourth fiscal quarter, with home centers decreasing 12.4% and dealer/distributor decreasing 1.5%. New construction net sales increased 5.3% for the fourth fiscal quarter compared to the prior year.

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

Total operating expenses, exclusive of any restructuring charges was 11.8% of net sales in the fourth quarter of fiscal year 2023 compared with 10.1% of net sales in the same period in fiscal year 2022. The ratio increased 170 basis points due to increases in our incentives, profit sharing and digital spend, partially offset by controlled spending in SG&A functions.

Adjusted net income was $37.1 million or $2.21 per diluted share in the fourth quarter of fiscal year 2023 versus $22.9 million or $1.38 per diluted share last year. Adjusted EBITDA for the fourth quarter of fiscal year 2023 was $65.3 million or 13.6% of net sales, compared to $44.5 million or 8.9% of net sales for the same quarter in the prior fiscal year, representing a 470 basis point improvement year-over-year.

Commerce is expected to make a final determination prior to the filing of our Form 10-K. And if the company's to beat the needs of plywood suppliers are included, we plan to vigorously appeal such a termination. We estimate the maximum potential impact on net income for prior purchases related to those duties to be an additional charge of approximately $4 million net of tax. For context, we have not placed an order since June of 2022.

Our full year performance. Net sales were $2.1 billion, representing an increase of $209 million or 11.3%, aligning with our full year expectations of low double-digit growth rate. The combined home center and independent dealer/distributor net sales increased 4.8% for the fiscal year, with home centers increasing 0.2% and dealer/distributor increasing 22.2%.

New construction net sales increased 21.1% for the fiscal year compared to the prior year. The company's gross profit margin for the fiscal year was 17.3% of net sales versus 12.2% reported last year, representing a 510 basis point improvement. This is a great testament of the hard work and the changes the teams have put into place to return to our historical operating performance metrics.

Total operating expenses, exclusive of any restructuring charges were 10.6% of net sales in the current fiscal year compared to 10.2% of net sales in the prior fiscal year. The 40 basis point increase was due to the increases in incentives and digital spend, partially offset by reduced spending across the SG&A functions and leverage created from the higher sales. Adjusted net income for the fiscal year 2023 increased $72.3 million due to higher sales, largely driven by price increases and improvements in our operations, offset by increases in our incentive and profit-sharing expenses.

Adjusted EBITDA for fiscal year 2023 was $240.4 million, or 11.6% of net sales, compared to $138 million or 7.4% of net sales for the prior fiscal year, representing a 420 basis point improvement year-over-year, achieving the high end of our expected range.

The strong performance this year is a direct result of the hard work and efforts our teams have put into reestablishing our operating efficiencies, stabilizing our supply chain, and controlling our spending in the SG&A functions, offset by increases in incentive compensation and profit sharing.

Free cash flow totaled a positive $153.5 million for the current fiscal year, compared to a negative $27.1 million in the prior year. The $180.6 million increase in free cash flows was primarily due to changes in our operating cash flows, specifically higher net income, lower accounts receivable, and lower capital spending.

Net leverage was 1.37 times adjusted EBITDA at the end of the fiscal year, representing a 2.16 times improvement from the 3.53 times at the end of fiscal year 2022. As of April 30, 2023, the company had $41.7 million of cash and cash equivalents on hand, plus access to $323.2 million of additional availability under its revolving facility. The company paid down $130.5 million of its term and revolving credit facilities in fiscal year 2023.

Our outlook for fiscal year 2024. We expect low double-digit declines in net sales versus fiscal year 2023. The change in net sales is highly dependent upon overall industry, economic, trends, material constraints, labor impacts, interest rates, and consumer behaviors.

Our EBITDA margin expectation for fiscal year 2024 is targeted in the range of $205 million to $225 million. Looking forward in the fiscal year, we will not be providing quarterly outlooks. I want to emphasize that our business is back to normal operating cycles, or performance is at its highest levels in our fiscal Q1 and Q4 with lower expectations in our fiscal Q3, as we will be incurring a significant portion of the one-time charges related to the platform expansion of Monterrey, Mexico and Hamlet, North Carolina. The total impact of these charges is approximately $8.1 million in the full fiscal year 2024.

Our capital allocation priorities for fiscal year 2024 will first be focusing on investing back into the business for the plant expansions in Monterrey, Mexico; Hamlet, North Carolina, continuing our path on our digital transformation with investments in Oracle and Salesforce and investing in automation.

Next, we'll be opportunistic in our share repurchases. And lastly, we have our debt position at a leverage ratio we wanted to achieve, and we will be de-prioritizing paying down debt in fiscal year 2024. One additional item. For our earnings calls in fiscal year 2024, we will be adjusting the timing of the call to be after trading hours and will occur at 4:30 p.m. Eastern standard time.

In closing, the progress made throughout the fiscal year have been great, and to see those results fully read through to our financial performance. This is a testament to the commitment, hard work, and efforts of our employees that they invest in the company to achieve our results, and react to the changing dynamics in the macroeconomic environment. I'm grateful for what the teams have accomplished and thank all of our team members at America Woodmark for their continued efforts. They are the ones who make it happen daily.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Adam Baumgarten of Zelman. Please go ahead.

Adam Baumgarten

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

Scott Culbreth

Sure. Thanks, Adam. We're likely to see declines, I think, throughout calendar year '23 in both remodel and new construction. Most of the projections that are in the market have single-family starts down mid-teens. I think there's maybe a little upside of that now based on the Q1 activity. And then on the remodel side, that mid-single-digit range, and I think you saw that validated with the home center reports over the last two weeks. We obviously expect to perform better than the market. And historically, on the margin side, we've targeted decrementals of roughly 25%. I think we'll beat that as well as we indicated with our outlook for fiscal year '24.

Adam Baumgarten

Got it, thanks. And maybe just on that decremental outlook, which is better than historical. I guess, what are the main offsets in fiscal '24 to the volume deleverage that you'll be seeing?

Scott Culbreth

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

Adam Baumgarten

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

Scott Culbreth

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

Adam Baumgarten

Okay, great. Best luck

Operator

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

Garik Shmois

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

Scott Culbreth

Yes. So we'll take each of those separately. So first on the pricing side, again, we've not taken any pricing actions in any of the channels. I would remind you that our profitability has not returned to the levels we were achieving prior to the inflationary impacts we've all experienced throughout the pandemic. Certainly, we've seen some improvement in lumber, but I would also counter that by saying we continue to see increases in other categories like labor, final mile delivery, and some other raw materials.

Our belief is, if we continue to see or see additional deflation in the marketplace, and there's some expectation around pricing as a result of that, it'd be offset by the reduced spend. On the promo side, we have seen an increase in promotional activity, principally in the dealer/distributor space. And I think most folks are going to go to that category first as opposed to dealing with any pricing.

Garik Shmois

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

Scott Culbreth

Yes. Now the first comment I'd make is there's typically always a mismatch between the demand and capacity coming online. But we certainly have desire and plans to be able to fill that capacity as we push forward. We'll need it, by the way, to meet our five year plan that we put out in our investor relations deck back in January.

Our current timeline is on track for both the facilities. We should have them online and starting to ramp by the end of our fiscal year. So most of the benefit and expectations from incremental capacity really pushed into the next fiscal year.

Garik Shmois

Okay, got it. All right. Thanks for that. I'll pass the line.

Operator

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

Unidentified Analyst

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

Paul Joachimczyk

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

Unidentified Analyst

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

Scott Culbreth

So we continue to focus on automation. That's not a new topic for us. I think what's different is we've made a bit more of a declaration around the investments that we're targeting in that. So again, we're shooting for $75 million over the next five year cycle. That's substantially more than what we would have spent in the prior five years. So we've got a whole host of initiatives that I already mentioned in the prepared remarks that we're focused on specifically inside fiscal year '24.

Unidentified Analyst

Thank you.

Operator

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

Collin Verron

Hi guys. Thanks for taking my question. And a great quarter. Maybe a little bit more longer term. I guess you're expecting that low double-digit decline in sales in fiscal '24. But can you just talk about how you're thinking about the timing and the pace of recovery baked into your five year sales target of $2.6 billion? I mean at least $350 million in EBITDA. Do you see things bottoming out here in fiscal year '24 before returning to growth? Or could this sort of decline kind of linger into fiscal year '25? Just any color on how you're thinking about the recovery would be great.

Scott Culbreth

Yes. Thanks for the question, and I'll start by saying whatever assumption I have or statement I make, I know I'll be wrong. So let's lead with that as a factor. When we gave our five year projection back in January at that particular point in time, we had always assumed a recessionary impact. We weren't exactly sure when that was going to happen, would it be '24, '25, but we modeled a down case and then we would grow back up off of that.

So at this point in time, we see most of that impact happening in '24. My crystal ball says that we would recover and start to see growth again in '25. But there's a lot of question marks that go into that analysis.

Collin Verron

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

Scott Culbreth

I think we've gotten through the de-stocking efforts, and we're starting to see a little bit better uptick on incoming orders inside our fiscal Q1 for fiscal year '24. So I think we're somewhat past that. I don't have an exact value to be able to assign to that over the last quarter.

Collin Verron

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

Scott Culbreth

Okay Thank you.

Operator

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

Tim Wojs

Hi guys. Good afternoon and good morning, or whatever it is.

Scott Culbreth

Great. Good morning, Tim.

Tim Wojs

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

Scott Culbreth

Yes. The first thing I'd say is that the builders that we've partnered with are taking share and will continue to take share. So the fact that we partnered with them just naturally leads to a better sell-through rate for our business. I think we've talked in the past that we do business with the vast majority of the top 20 national builders, but that doesn't mean we have a position with each builder in each market.

So the first thing our team always spends time focused on is, there are new opportunities, new markets that we can explore to try to get incremental share gains with a particular account, and that's throughout that entire list of top 20 national builders. I don't have an exact value to quote to you around the overall business.

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

Tim Wojs

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

Scott Culbreth

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

Tim Wojs

Yes, yes. Basically, I'm just trying to think about how much -- if your builder business -- how much of your builder business is going to the top 20 versus the other builders?

Scott Culbreth

Yes, not an exact percentage to give to you, but it would be a high percentage. I don't know about that.

Tim Wojs

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

Scott Culbreth

No, nothing substantially changed on the mix side.

Tim Wojs

Okay. And then the last one, just on inflation and kind of deflation, thinking about fiscal '24, it does seem like materials have kind of come down a little bit, whether that's kind of plywood or particle board or maybe some of the hardwood. Do you model or kind of think about explicitly in fiscal '24 seeing some material deflation?

Scott Culbreth

When we go and put together our budgets and plans to try to figure out an outlook to be able to share with the investment community, we look at a number of different scenarios, one that includes inflationary environment and one that also includes a deflationary environment. I'll go back to the comments a few questions again though.

So if we do see more deflation than modeled and assumed, there's likely -- it's going to cascade and come our way on pricing, but we would view those as being offsetting. Similar to the uptick, right, when we saw inflation going up, you basically are going to gain pricing for those inflationary impacts. We had a lag on the front end. We'll try to ensure there's a similar lag on the down slope as well.

Tim Wojs

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

Scott Culbreth

You got it. Exactly.

Tim Wojs

Okay. Okay, got you. Good. Awesome. So, thanks guys, and good luck on the year.

Scott Culbreth

Thanks, Tim.

Paul Joachimczyk

Thanks, Tim.

Operator

[Operator Instructions] The next question is from Julio Romero of Sidoti. Please go ahead.

Julio Romero

Thanks. Hey, good morning. I wanted to ask about the gross margin performance in the quarter. Just wondering if there's any way to put a finer point on how much of a benefit was the operational efficiencies and the streamlining you did in late calendar '22?

Paul Joachimczyk

Yes. Julio, won't dial in exactly, but a lot of the benefits that we received in our fiscal fourth quarter were due to some of the operational improvements that are out there. Not only are our plants running at our historical normal operating performance is kind of pre-COVID levels, we're seeing improvements across our supply chains that are out there as well, too.

And then just -- we talked about automation. Some of those efforts are now starting to take hold and really kind of, say, setting us up for success in FY '24 as well, too. So I know it's not an exact answer. I know you're looking for a percent or a dollar amount, but those things are actually taking hold and are going to carry forward for our performance in the future.

Julio Romero

Got it Thank you for that. The commentary is helpful there. And then just thinking about the balance sheet and your capital allocation priorities, just how much more aggressive should we expect you to be with opportunistic repurchases in '24, just given the free cash generated in fiscal '23 and the debt reduction you guys just did in the fourth quarter?

Scott Culbreth

I would just say we're going to be opportunistic. I would focus on that word. Obviously, we didn't do any repurchasing in '23. Our focus was on deleveraging debt, so we've done that. We've gotten below 1.5 times, which is a fantastic result for this business. So we'll now look at opportunistic repurchases. And Paul walked you through the various things that we'll focus on. We've got a plant expansion we're dealing with. We've got the automation that we've talked about, and then we'll look at shares.

Julio Romero

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

Scott Culbreth

Thanks, Julio.

Operator

[Operator Instructions] As I do not see that there is anyone else waiting to ask a question, I would like to turn the line over to Mr. Joachimczyk for closing comments. 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.