American Woodmark Corp Q4 FY2022 Earnings Call

Good day and welcome to the American Woodmark Corporation Fourth Fiscal Quarter 2022 Conference Call. Today's call is being recorded, May 26, 2022. During this call, the company may discuss certain non-GAAP financial measures included in our earnings release, such as adjusted net income, adjusted EBITDA, adjusted EBITDA margin, free cash flow, net leverage and adjusted EPS per diluted share. The earnings release, which can be found on our website americanwoodmark.com, includes definitions of each of these non-GAAP financial measures, the company's rationale for their usage and a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures. We also use our website to publish other information that may be important to investors, such as investor presentations. We will begin the call by reading the company's Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on factors that may be beyond the company's control. Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include but are not limited to those described in the company's filings with the Securities and Exchange Commission and the annual report to shareholders. The company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. I'd now like to turn the conference over to Paul Joachimczyk, Vice President and CFO. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to American Woodmark's fourth fiscal quarter conference call. Thank you all for taking the time today to participate. Joining me is Scott Culbreth, President and CEO. Scott will begin with a review of the quarter and I'll add additional details regarding our financial performance. After our comments, we'll be happy to answer your questions. Scott?

Thank you, Paul, and thanks to everyone for joining us today for our fourth fiscal quarter earnings call. Our teams delivered fourth fiscal quarter net sales of $501.7 million, a growth of 6%. Our made-to-order backlog represented by days of production decreased slightly versus the prior quarter but remains elevated. Our April made-to-order production levels were at all-time highs. The staffing levels and performance of our supply base continues to improve, and we ramp up our new assembly line in our Gas City plant. Our stock platform was challenged with staffing levels, leading to a decline in units versus the prior year. Our operations team has developed a number of actions we will execute by the fall to increase capacity of stock kitchen and bath production via footprint adjustments being shifted to other locations within our network along with the addition of new sales. We're also implementing new compensation plans to improve attraction and retention of employees. Within new construction, our business grew 8.5% versus prior year. Strong order growth remained across our markets. Interest rate increases and home price increases created a concern in the market that a slowdown is possible. We monitor many factors when assessing the strength of the market and note that although mortgage rates are at 12-year highs, rents have been increasing and housing inventory remains low. Our backlog is healthy and should absorb any short-term disruptions in demand. Looking at our remodel business, which includes our home center and independent dealer distributor businesses, revenue grew 4.5% versus the prior year. Within this, our home center business was up 2.5%. Our made-to-order business and stock kitchen business delivered above-average comps for the period. With regards to our dealer distributor business, we were up 11.9% for the quarter as remodel demand remained strong. Our adjusted EBITDA was $44.5 million, with EBITDA margins at 8.9% for the quarter with reported EPS of $0.87 and adjusted EPS of $1.38. This result fell short of our expectations for the quarter due to additional inflation as fuel costs surged as a result of the war in Ukraine and material costs continued to increase. Our teams have captured incremental pricing going forward to mitigate fuel increases and have finalized July 1 increases across new construction, dealer, and distributor channels. We're in the process of communicating price increases to the home centers. Our cash balance was $22.3 million at the end of the fourth fiscal quarter, and the company has access to an additional $237.5 million under its revolving credit facility. We repurchased $25 million or 300,000 shares of stock during the fiscal year and paid down $15.5 million in debt. Regarding fiscal year '23, we expect both new construction and remodel to grow for the fiscal year. We will continue to reduce our backlog throughout the fiscal year and pricing will contribute meaningfully year-over-year, yielding a mid-teens to high-teens growth rate in net sales. Cost of goods sold inflation expectations for fiscal year '23 include an additional approximate 7.5% for materials and logistics on top of what was realized in fiscal year '22. We will be able to recover inflation to be confirmed and announced price increases, but note there's a lag between the incurred inflation and realized pricing, delaying sequential EBITDA expansion into Q2 through Q4. Although profitability goals were not fully realized in fiscal year '22, our strategy remains intact and profitability will improve in fiscal year '23 and beyond. As previously shared, our strategy has three main pillars; growth, digital transformation and platform design. Growth for our business will be realized via product and channel expansion. We will continue to evolve our offering to meet our customer needs while ensuring we maintain a relevant lean product line. E-commerce capabilities remain under development to assist our partners, drive consumers from inspiration to purchase. Digital transformation to bring our company together as one via Oracle and Salesforce is well underway. As mentioned last quarter, our finance and procurement functions went live on February 1. We will continue to optimize the system and begin planning for the next implementation area in manufacturing. Salesforce should be live by the spring of '23. Platform design, which includes our overall manufacturing and distribution footprint, OpEx and automation efforts to improve margins will also improve our customers' experience. Our commitment to ESG continues, and I hope you've been able to review a number of our disclosures made over the past few months that highlights our path to sustainability, environmental stewardship policy, human rights policy and supplier code of conduct. Safety remains our number one priority, and we again delivered a strong OSHA rate of 1.42. Investments have also been made in talent. I recently announced a new leader over our new construction business and additions have been made in key operations roles like SIOP and final mile delivery materials. Our culture and people will drive profitability through each of these efforts. Margins will expand sequentially throughout the year as our price realization grows and efficiencies with the platform improve. EBITDA dollar growth of over $90 million is included in our plan for fiscal year '23 at the upper range of the net sales growth range previously shared. In closing, I'm proud of what this team has accomplished and look forward to all their contributions in fiscal year '23. I will now turn the call back over to Paul for additional details on the financial results for the quarter.

Thank you, Scott. Financial headlines for the quarter. Net sales were $501.7 million, representing an increase of 6% over the same period last year. Adjusted net income was $22.9 million or $1.38 per diluted share in the current fiscal year versus $22.5 million or $1.32 per diluted share last year. Adjusted net income for the fourth quarter of fiscal year 2022 increased $0.4 million due to higher sales and a one-time tax benefit, partially offset by higher material and logistics costs, combined with supply chain disruptions. Adjusted EBITDA for the fourth fiscal quarter was $44.5 million or 8.9% of net sales compared to $48.2 million or 10.2% of net sales for the same quarter of the prior fiscal year. Financial results for the fiscal year ended April, net sales for the current fiscal year were $1.857 billion, representing an increase of $113.2 million or 6.5% from the prior fiscal year. Adjusted net income was $54.8 million or $3.30 per diluted share in the current fiscal year versus $111.4 million or $6.54 per diluted share for the prior fiscal year. Adjusted EBITDA for the current fiscal year was $138 million or 7.4% of net sales compared to $226.5 million or 13.0% of net sales for the prior fiscal year. Just a reminder that our prior year financials were restated due to the change in accounting methodologies from LIFO to FIFO for our inventory. Looking at our sales channels for the quarter, the combined home center and independent dealer and distributor channel net sales increased 4.5% for the quarter, with home centers increasing 2.5% and dealer and distributor increasing 11.9%. New construction net sales increased 8.5% for the fourth fiscal quarter. Timberlake direct business grew both in units and dollars as demand continued to be strong throughout the quarter. New construction sales channel outpaced market demand during the fourth quarter of fiscal year 2022. Recognizing a 60- to 90-day lag between start and cabinet installation, the overall market starts in single-family homes was up 3% for the fiscal fourth quarter. Looking at completions during our fourth fiscal quarter, we saw a 4.3% increase year-over-year, which further supports timing impacts that are occurring in the market today to represent a 120-day-plus lag between starts and completions. The company's gross profit margin for the fourth quarter of fiscal year 2022 was 13.9% of net sales versus 15.6% reported in the same quarter of last year. Gross margin in the fourth quarter of the current fiscal year was negatively impacted by continued higher material and logistics costs, combined with disruptions in our supply chain. These costs were partially offset by the increase in sales, creating leverage of our fixed costs and our operating platforms. Total operating expenses were 10.1% of net sales in the fourth quarter of fiscal 2022 compared with 11% of net sales for the same period in fiscal 2021. Selling and marketing expenses were 4.9% of net sales in the fourth quarter of fiscal 2022 compared with 5.5% of net sales for the same period in fiscal 2021. The ratio to net sales decreased 60 basis points, resulting from controlled spending and leverage created from the higher sales in the fourth quarter of fiscal 2022. General and administrative expenses were 5.2% of net sales in the fourth quarter of fiscal 2022 compared with 5.5% of net sales for the same period of fiscal 2021. The decrease in the ratio is primarily driven by the leverage from higher sales and lower spending. Free cash flow totaled negative $27.1 million for the current fiscal year compared to $105.4 million in the prior year. The decrease was primarily due to the changes in our operating cash flows, specifically lower net income, higher customer receivables and inventory balances, which were partially offset by higher accounts payable and accrued expenses as a result of our increased sales. Net leverage was 3.42x adjusted EBITDA at the end of our fourth fiscal quarter. For the fiscal year, the company paid down $15.5 million of debt, and we repurchased $25 million or 300,000 shares. The company's cash position and availability under our revolver as of April 30, 2022, was $237.5 million. Shifting our focus to fiscal 2023, we expect mid-teens to high-teens growth rate in net sales versus fiscal year 2022. The growth rate is highly dependent upon overall industry, economic growth trends, material constraints, labor impacts, interest rates and consumer behaviors. Our price increases will take effect at various stages throughout fiscal 2023, with pricing being realized first in our new construction channel, followed by dealer/distributor and then home centers. Our outlook for adjusted EBITDA margin percent for the fiscal year ending 2023 will range from high single-digit to low double-digit EBITDA. Inflationary pressures for raw materials, fuel and logistics will continue through the first half of fiscal year 2023, and margins will expand sequentially throughout the year as our price realization grows and efficiencies with the platform improve. We continue our investment back into the business by increasing our capital investment rate to a range of 3.0% to 3.5% of net sales. These investments will range from a continuation of our ERP journey to get on the cloud, digital investments in our customer experience and reinvesting in our manufacturing facilities to help reduce labor dependencies, improve quality and increase capacity. We are choosing to make these additional investments into our core business, which will help improve sales and enhance our margins in the future. Reflecting on all the challenges and uncertainties within the market and global economy during our fiscal 2022 year, the American Woodmark team members have performed to deliver top line growth. They have been resilient in their efforts to achieve and meet the ever-increasing demands of our customers. This has taken personal efforts and sacrifices from every team member to achieve. I am grateful for what the teams have accomplished and want to thank all of our team members at American Woodmark for their continued efforts. They are the ones who make it happen daily. This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.

The first question is from Julio Romero of Sidoti & Company. Please go ahead.

Hey. Good morning. Thanks very much for taking the questions.

Hey. Good morning, how are you?

I guess to start on the quarter, can you talk about how much price dollars you realized in the fourth quarter?

I'll just share that we didn't come in quite at what we had expected, primarily due to a function of lower shipments. A quarter ago, we had predicted and communicated approximately $55 million. We did come in below that. Again, more of a function of units and not a function of price capture.

I guess thinking about the more recent price increases. I was hoping you could put a finer point on how much incremental price capture you expect from the, I believe, third round of price that started flowing through in April and maybe how much dollars you expect from the fourth round of July increases?

Yes. I'll just say, Julio, that's all built into the overall guidance for the year. I'm hesitant to get into the details specifically on that because we've not finalized all the communication of each of those elements of this most recent price increase. So the one you're referring to is the fourth as all effective July 1 for our new construction dealer distributor business. The timeline and effective percent for home centers is, of course, going to be something that we'll be working on over the coming weeks. But it's built into the overall guidance of both mid-teens to high-teens growth overall for the year as well as the EBITDA range that Paul shared with you.

I guess the last one for me is just based on the prepared commentary. I guess, you expect the price lag to delay sequential EBITDA margin expansion until Q2 to Q4. I guess how do we think about Q1 EBITDA margins? Do you expect in the same range of the fourth quarter or a step down from the fourth quarter EBITDA margin?

My expectation is it will be comparable to Q4.

Okay. Thanks very much for taking the questions. I'll hop back in queue.

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

Thanks for taking my question. I just wanted to be clear on the sales guidance as it relates to volumes, are you anticipating volume growth in fiscal '23? And just how should we think about that in the context of the labor additions that you're shooting for?

So our guidance does include unit growth inside fiscal year '23. Of course, price is a major driver of that mid-teens to high-teens, but we do have volume growth factored in as well.

Okay. Is it fair to assume that the volume growth should be a little bit more weighted as you move through the fiscal year?

I'm sorry, could you repeat that question?

Yes. Just a follow-up was, should we assume the volume growth will be to the extent that it occurs, a bit more back half weighted given the timing of the labor additions?

No, I don't think that's how it will necessarily play out when you're thinking about quarterly comps. We would expect likely stronger overall sales growth, I believe, in the first half than the second half.

I wanted to ask just one bigger picture question, just how you're thinking about revenue growth moving forward, just considering some of the weaker housing data points of late? Are you seeing any change at all in whether it's kind of order rates or the rate of kind of the backlog? Just any kind of big picture color that you have around the macro environment would be helpful.

Sure. I can share a couple of thoughts. Home price appreciation is something we're all noticing. We believe this will drive demand for home improvement, particularly in repairs and remodels. Consumers are likely to keep investing in their homes. In terms of new construction, we are still underbuilt, and demand remains strong despite higher prices and interest rates. We anticipate that new construction will continue to thrive for us through the rest of the year. Another important factor is the consumer price index, which has seen significant increases that are beginning to undermine consumer confidence. Interest rates are affecting affordability for new homebuyers, and rents are also rising at unprecedented rates. This creates a challenge for those seeking housing as both options are becoming more expensive. Recently, the backlog of single-family homes under construction has shown considerable growth, with a 26% rise recently recorded, marking the highest level since November 2006. Authorized starts also grew by 9% in April. The supply remains tight, and we are optimistic about new construction, as we do not see any slowdown from our customers. In terms of repair and remodel, we experienced a slight lag in foot traffic in May, although it was our highest comparable period, especially among some of our pre-model customers. While we expected a slowdown, it turned out to be less pronounced than anticipated. We are closely monitoring trends in repair and remodel as we move into the summer months.

Great. Thanks for the color and best of luck.

Thank you.

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

To continue with this line of thought, is the range of your sales guidance primarily determined by the number of units delivered, and are those units more influenced by incoming orders or the shipment of the existing backlog?

It's more dependent on the price actions that we've communicated, and we'll be realizing in fiscal year '23 as well as shipments through the backlog.

And then on the EBITDA guidance and the sequential expansion through the year, is there a cadence to that? Or will it be pretty steady coming off of Q1?

Yes, I don't want to give exact percentages by quarter, but we would expect it to continue to improve each quarter as we push throughout the year, certainly will be positive from a year-over-year standpoint in each quarter.

And then last quick one for me. The dealer/distributor growth far outpacing the home centers, can you go into what factors drove that delta there? And if you expect dealer distributor to continue at a pace that is superior to the home centers?

Yes. A bit of that was just the overall strength of our major order business. And as I mentioned earlier, we were able to get the output across that platform certainly in the month of April and the dealer/distributor business took a larger percentage share of that shipment volume in that particular period. So that was one of the key drivers.

Helpful. Thank you.

The next question is from Josh Chan of Baird. Please go ahead.

Hi. Good morning, Scott and Paul. Thanks for taking my questions. I guess from a price/cost perspective, by the end of fiscal '23, do you expect to have sort of caught up all the inflation in '22 and '23 combined? Is that how we should think about sort of price versus cost next year?

Absolutely. That's how we've modeled it with the assumptions both on the price side as well as future inflation that we're expecting.

Scott, you mentioned a number around $90 million in your prepared remarks. Can you clarify what you meant by that? You mentioned it being related to the high end. Should we interpret that to mean your EBITDA could grow by an amount less than $90 million up to $90 million?

So compare that with Paul's remark, he indicated EBITDA margin percentages on the full year would be high single to low double digit. At the high teens growth rate, $90 million would put you in that low double digit. So basically just walking you towards the high end of the range that Paul communicated.

My last question is whether you are experiencing any continued delays in builder schedules due to supply chain issues, labor challenges, or any other factors. Is there a possibility that builder schedules might need to be further adjusted from their current status, or are you noticing improvements in that area?

I would say it's been similar. No significant improvement or deterioration. So we've been in that mode for quite some time. The category moves around. It typically drives the delay, specifically on the completion of the home. For us, getting the home dried and getting windows on is pretty important before you can start getting the sheetrock up and getting the cabinets on. So we've adjusted that over the last fiscal year. So we understand extended cycle times from when a home starts to when the cabinet install is going to begin, and we've not really seen a significant change in the last 90 days.

Great. Thanks guys and good luck for the rest of the year.

Thanks Josh.

The next question is from Collin Verron of Jefferies.

I was just wondering if you could touch on what sort magnitude of cost inflation you guys have baked into your 2023 EBITDA margin guide and sort of walk through the cost buckets where you're seeing the most pressure and where you're starting to see maybe some relief?

Yes. So in my remarks, approximately 7.5% above and beyond on COGS versus what we experienced in fiscal year '22. A lion's share of that's in materials, and it's across the main commodities we buy. So whether that be MDF, particleboard, plywood, hardwood, you name the commodity. We've got ongoing carryover inflation as well as some new inflation modeled into that percentage.

Have you noticed any changes in the types of products being ordered due to the pressures that consumers are feeling from rising costs? Any insights on this would be appreciated.

We've not yet seen any significant movement in mix across our customer base. The one exception might be, as I think about our new construction customers. Our origins offering, which is more tailored to opening price point. If builders start to shift more towards that as part of their overall offering, we may see some mix shift into that category versus our core Timberlake offering, but it's not been significant to date.

Great. Thank you for the color and good luck with the fiscal year.

Thank you.

The next question is from McClaran Hayes of Zelman & Associates. Please go ahead.

Hey, how is it going? I was just wondering if you could provide a little bit more detail on the backlog conversion in your stock business, it was good to see that improve in the mid to order. But where are the challenges in stock? And I guess what are some of your action plans to address that?

Yes. So specifically on the stock side, our issue has been around labor as well as availability of materials into the platform. The material availability has improved. So our real challenges of weight has been around staffing levels. So we've put a number of changes into place on our three major stock assembly plants around compensation as well as attraction and retention programs in those facilities. But maybe more meaningfully, we are doing some things to move capacity around across the network. So when you think about our stock plants, we're principally producing stock kitchen and bath in those particular facilities. Moving bath cells to other destinations where labor is a bit more available, and that will allow us to redeploy the existing labor in the stock plants back in the kitchen. So we're executing those plans throughout the summer. And by fall, we expect to have some capacity gains in both our bath and kitchen business, which will allow us to ship. Touching on the notion of backlog, just the backlog is really a commentary specific to our made-to-order business. Our stock business doesn't have what I call sort of a classic backlog definition. We're basically selling into the home centers, meeting their inventory needs. So where you would see that is we're not at the appropriate inventory levels inside the retailer. So that's how we're managing what the overall backlog is in that business, and we've got opportunity to make improvement against that.

And then just lastly, any supply disruptions related to like Russian birch or the geopolitical conflict that you guys have had to manage around?

Nothing significant. We don't buy anything directly. We did have some secondary and tertiary supply that came through some of our vendors, and they've been navigating that with alternate solutions to mitigate the risk.

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

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

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