Q3 2020 Earnings Call
[music].
Okay and welcome to the American Woodmark Corporation third quarter 2020 Conference call. Today's call is being recorded today February 20, Fiveth 2020.
During this call the company may discuss certain non-GAAP financial measures, including our earnings release <unk> such as adjusted net income adjusted EBITDA adjusted EBITDA margin free cash flow that leverage and adjusted EPS per diluted share the earnings release, which can be found on our website Www Dot American Woodmark Dot com include Stephanie.
Issuance 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 such as an investor presentations.
Well begin the call by reading the company's Safe Harbor statement under the private Securities Litter Litigation Reform Act of 1990 fives.
All forward looking statements made by the company involved material risks and uncertainties and are subject to change based on factors that maybe beyond the company's control accordingly, the company's future performance and financial results may differ materially from these expressed or implied in such forward looking statements.
Such factors include but are not limited to those describing 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 the experience or future changes basically are there any projected results expressed or implied there. It will not be realized I would now like to turn the conference over to Scott Holbrooke's Senior Vice President and CFO. Please go ahead Sir.
Good morning, ladies and gentlemen, welcome to American Woodmark started fiscal quarter conference call. Thank you for taking town dissipate joining me today carry Dustin Chairman and CEO Carol together view of the quarter and I'll add additional details regarding our financial performance. After our comments, we'll be happy to answer your questions Gary.
Thank you Scott and good morning, you all although were pleased with their positive in Radnor concept third fiscal quarter naturals proved to be challenging as a margins when talking about cost headwinds and volatility within or channels market itself is undergoing change that we had been predicting for sometime now although the procedure what future reports dynamic you said at least we continue.
It's a mixed significant strides forward in a long term strategy remain very optimistic about the market and our future position as an industry leader.
It does actually net sales for the fiscal quarter, we were up 3% within your construction, which includes our current Blake MPC has businesses, we grew 5.3% over prior year.
Looking specifically at her Timberlake direct business revenue was reason why not look overall single family starts growth considering the like when they start to cabinet installation.
Regarding our unit growth outpaced our net revenue growth as we continue to gain share as expected as a percentage at opening price point homes continues its bringing you have seen it back on their average take for example.
Hi region, we saw strong growth in the southeast, Texas, Phoenix and Northern California.
Yes business in Southern California remains a challenge although the market has seen some recent broken starts pricing on recent business become so compared to the third business continues to negatively impact.
We are conducting their strategic analysis its market continues to make the right decisions for our business.
Overall within your construction remain optimistic on continued growth, particularly within our Kimbley direct business as we never got low power sports platform.
We remain strong and a large builder is continuing to invest increase their overall share of the U.S. Yoo multifamily market younger consumers are entering the market and what fuel the growth of the industry for years to come.
Looking at a remodel business, which includes our beauty distributor and home center businesses revenue was up 1.6 to prior year.
Our combined home center business was up 3% within notes, we continue to experience nice double digit growth in our home center kitchen, and Bath Soc business not only are we benefiting from getting a night to stock kitchen market as we communicated previously, but our entire business is compete favorably across the country as we see a shifting more affordable solution.
In addition.
We do believe we're seeing some impact of the Chinese tariffs on the stock kitchen business I will provide more commentary on the tariffs in a few minutes within our own center Brainless business. We also once again experienced double digit growth.
Designer series private simplistic and by you focused a reflection of how the market is transitioning.
Unfortunately, the higher price make order business within home center continues to be shown promotional activity remains very elevated and is favoring higher price competitors the opposite of where the market is going you're seeing from that promotions or not the solutions are driving younger consumers into the stores or to improving closure rates, it's very clear in our industry doesn't mean.
For more affluent baby boomers is declining within our north and younger generation will begin to backfill this demand over time.
Typically you recognize this new consumer group are requiring much less complex and affordable solution than what exists today and we remain committed to providing a competitive solution in alignment with the same thing environment.
Regarding our view a distributor business, we were down 3.3% for the quarter goodness, we grew our waypoint your their business over indexing the industry Perifosine. They data however, our distribution business comped negatively for the quarter part of the things is a conscious transition of some business from distribution through our direct Timberlake channel. However, we're also seeing.
The pricing challenge in southern California, and in a couple of localized area.
In summary, significant volatility continues between and within sandals.
Yes, absolutely see you next different price points in the industry as we had predicted for sometime now the challenge remains with regard to strategically helping or retail partners transition toward more simplistic and capable purchasing experience.
Hi, This is a piece of this however, the scope extends far beyond product as we must greatly enhancing the entire consumer purchasing process, including our digital interface.
We know the next couple of years, you'll be both though that means we firmly believe that would be clear winner within our industry. We are absolutely investing third surely you're not only a winner we're leading the change.
I would like to take a moment to comment on the anti dumping lawsuit and associated impact Congress has ruled on the final rates pending approval by the ITC.
No not to snippets, Scott will provide the details on the extension to change from the initial ruling regarding the overall and talk to the tariffs as I mentioned previously we believe we're seeing some transition from the importer all private construction cabinets to the stock business.
However, based on placing the data is also clearly that the overall in fact on the special order business within Americas is minimal at best as I mentioned on our call US last call snuck in inventory was built prior to the anti dumping penalty taken effect.
This inventory is certainly being depleted however is difficult to know the remaining levels on the positive we do have cleared out as it shows a very significant decline in Chinese cabinet imports at the same time, we're seeing that very aggressive ramp up of cabinet enforce our countries like Vietnam, and Malaysia, and the past year. These two companies alone that transition from a relatively insignificant cabinet line.
Exporting over 30% of the volume that trying to goes producing part there is.
It's not clear what components were actually being produced within these countries versus almost a legal certain assumptions being achieved we do expect a certain sections of the senior wherever thereby greatly reducing the overall impact of yet Garcia only time will tell however, we do remain committed to find the domestic solution that can successfully compete against imports keeping manufacturing in the matter.
Okay, and expanding our core competitor advantage of service last thing on China about many would be interested in any potential impact from their experience from the Corona virus and the positive we had previously got their inventory as part of the Chinese new year shutdown.
Sure in contact with our time to suppliers and have confirmed they have all reopen but they are currently operating at less than four capacities. At this time based on the virus many great mitigation process and supply ramp up plans, we are not anticipate east and that's been in that.
We will continue to monitor the situation very closely.
Moving on to our gross margin for the quarter became an 18.3% versus 20% in prior year internal operations continue to run well and we further capitalize on cost synergies yet we were challenged by some inefficiency due to the number of downgrades, we got that schedule in the quarter. We typically always experience our lowest income. We can then rates for the year and then winter.
So that third fiscal quarter to better bouncer system and thing anything backlog at appropriate levels from schedule down based on our system, although benefits. The overall they feel introduce some efficiency into the system.
Worsened definitely the cost of tariffs particleboard supply disruptions in the moves our facility facility in California are simply season, that's going to overcome three one parents are well understood by most in the industry. Although we have managed to minimize most of the impact there are some products that are very difficult to source outside of China. Our teams continue to work on options to.
The minimize the impact with regard to the Barclays Park aboard supply. Unfortunately, the impact as the prolonged it's been starts by the new facilities being open in the U.S. fish and it's been amount of capacity was removed within the U.S. by GP and Unfortunately, we got more dependent on the supply than our competitors, we managed to successfully resource material.
However has come a price and logistic screaming significant capacity is wrapping up as I speak with in U.S. However, the manufacturers are slightly behind schedule. Our team is working very closely with our partners. However, we expect to continue to experience at cost headwind into the near future Scott will provide specifics to this in his comments well actually the majority of the cross the Brooklyn.
Relocation in California was incurred in the third fiscal quarter on the positive and who is now complete and finished ahead of our plan on call.
Moving onto our adjusted EBITDA margin, we finished the quarter at 12.7% versus 13.6% from prior year. The key drivers for the cost headwind and efficiency in Pasadena gross margin as I previously discussed in addition to the mix impact of lower than expected sales within our made to order or in our business I think our testing a navy they continue to positive leverage.
Business, and that's going up and that's what Scott will provide details on our cash position. However, we are extremely pleased with our indefinitely, we have picked on or debt following the acquisition.
Cash generation allows us to now I pay down debt that make important strategic investments for the future.
In summary was a challenging quarter on margins as well it made to order volume within home center and or the cost headwinds are pressuring say at least however remain committed to continue to mitigate the impact of both the tariffs and particle board disruption more importantly is recognizing a changing dynamics of our industry. We truly believe our industry is going to be disrupted over the next five years.
This disruption will come in the form of training consumer expectations third quarter hats off for much more affordable solutions and the need to greatly simplified enhance overall remodeled in experience. These changes will require tremendous strategic thought disruptive innovation and extensive understanding of systems.
Our new vision and related strategies are aggressively moving us forward and all aspects of this gradually require investment over the next three to four years and we are well positioned to make these investments continues to wind in our history and provide strong financial return for our investors remain excited about the future in a very confident in our ability to nominally disruption but to create true competitive.
Space within our industry with that thank you and I'll now turn it back over to Scott for the detailed financials.
Thanks, Karen.
The financial headlines for the quarter net sales were $396 million, representing an increase of 3% over the same period last year. Adjusted net income was $22 million or $1.30 per diluted share in the current fiscal year versus 24.1 million dollar for dollar 40 per diluted share last year.
Adjusted net income was positively impacted by higher sales, which is more than offset by tariffs that cost impacts related to our park will supply disruption and duplicate rent costs related to our California facility.
Adjusted EBITDA was $50.1 million or 12.7% in that sales compared to $52.2 million or 13 versus 15.6% of net sales for the same called the prior fiscal year.
For the nine months ending January you today net sales were 1 billion turned $51 million, representing an increase of 1.1% or the same period last year.
Adjusted net income was $89.2 million or $5 in 27 cents per diluted share and the current fiscal year versus $8.2 million or $5.05 per diluted share last year.
Adjusted EBITDA was $182.6 million were 14.6% in net sales compared to $181.1 million or 14.6% or net sales for the same period for the prior fiscal year.
The new construction market improved during the quarter.
Recognizing a 60 to 90 day language from start in cabinets situation. The overall market activity in single family homes was up 8.1% for the financial third quarter.
A builder channel net sales increased 5.3% for the quarter. The made order frame, Greg daughter business exceeded starts on a unit basis, and this was offset by price mix and negative comps in or frame most business.
Your model business continues to be challenging deposit side unemployment interest rates remain low and existing home sales increase during the fourth calendar quarter of 2019.
Well the negative side, the median existing home price rose, 7.8% the $274500 for December impacting our consumers affordability index and the share first time buyers decreased to 31% in December.
Our combined home center and independent dealers distributor channel net sales grew 1.6% for the quarter.
Centers, increasing 3% and dealer distributor decreasing 3.3%.
The company's gross profit margin for the third quarter fiscal year, 2020 was 18.3% or net sales versus 20% reported the same quarter of last year.
Gross margin in the third quarter was unfavorably impacted by tariffs.
By $1.8 million net cost impacts related to our particleboard supply disruption the point $5 million and duplicate rent move costs related to our California facility and it is a $1.6 million.
Our facility move is complete and I want to thank our operations team for successfully transitioning facility without disruption.
Leverage from higher sales was offset by the cost ended along with operating inefficiencies.
Year to date gross profit margin was 20.3% compared to 21% for the same period in prior year.
Gross margin for the first nine months of the current fiscal year was unfavorably impacted by tariffs the $5.4 million net cost impacts related to our particleboard supply disruption $3 million and duplicate rent costs related to our California facility news of $2.4 million.
These impacts were partially offset by leverage from higher sales and operating efficiencies.
Total operating expenses were 12.2 person net sales in the third quarter fiscal 2020, compared with 12.9% in net sales for the same period in fiscal 2019.
Selling and marketing expenses were 5.4 person that sells in the third quarter fiscal 2020, compared with 5.8% in net sales for the same period in fiscal 2019. The decrease in ratio was driven by lower spending and leverage from higher sales.
General and administrative expenses or 6.8% in that sales third quarter fiscal 2020, compared with 7.2% in that sales for the same period of fiscal 2019.
The decreasing ratio was driven by lower spending levels from higher sales.
Free cash flow totaled $80.2 million for the current fiscal year compared to $106.2 million in the prior year.
The decrease is primarily due to onetime tax benefit received in the prior year related to the acquisition.
Timing of inventory and accounts receivable.
Net leverage was 2.26 times adjusted EBITDA up into the third fiscal quarter and the company pay down $18 million in his terminal facilities during the quarter.
In closing I wanted to share recent update on the aka trade case.
Apartment important commerce announced its affirmative fall terminations yesterday and international Trade Commission and schedule heard hold a final day by April six.
If approved the countervailing duty rate would increase from 16.4% to 20.93%.
And the anti dumping duty cash deposit rate would increase from 28.71% to 37.96%.
For the quarter, we were pleased that would deliver positive comps and repair remodel and new construction for the first time this fiscal year.
Margins were challenged during the quarter with lower than expected sales in the made water framed home center distributor channel and the cost related to the needs of our California facility.
Regarding the previously disclose particle board supply disruption the company could be negatively impacted by higher pricing and incremental transportation cost, but the $1.5 million to $1.9 million per quarter until fully resolved.
The company maintains property insurance, including business interruption dependent property coverage with Illumina $5 billion.
The company realize the $5 million reimbursement during the nine month period, ending January 30, Onest 2020 on that $5 million 11.
So.
And it continues to believe it it will grow sales at a low single digit rate for fiscal 2020.
This growth rate continues to be dependent upon overall industry and economic growth.
The company's margins were negatively impacted the nine month period ended January 31st 2020 about 2.4 million $2.4 million for the new one of our California facilities and $3 million to the net due to the net particleboard supply disruption cost.
Due to ongoing tariff costs to particle pricing transportation cost the company expects adjusted EBITDA margins for fiscal 2020 decreased slightly compared to prior year results.
This concludes our prepared remarks, we'd be happy to answer your questions you have at this time.
Thank you at this time, if you do have a question. Please send off by pressing star one again that will be star one for questions.
We'll hear first today from Gary <unk> with <unk> capital.
Oh, Thanks first talk to Florida has switched on the comments you made around <unk>.
<unk> growth outpacing fills growth.
No. If you look out over the next several quarters ago seems like this was the ongoing change.
The industry.
Moving down in price points. So can you kind of size up the delta between units and sales and maybe switching to margins is there any margin implications.
From this.
I guess trade down pricing.
Hey, I want to get this was Kerry.
Thats really difficult to say quantify.
The delta between New unit.
Revenue growth.
Really varies by channel even varies greatly.
Region.
By channel. So the primary pointed my comment there's yeah, new construction, obviously as we see a transition now into the first time homebuyer.
Naturally it's going to be a smaller home and you're going to you're going to see a trend down in the price points to quantify that's going to be difficult I think as we get more no gain more knowledge with regards to the how aggressive that first time homebuyer enters the market and aggressively builders make that trigger the transition versus a ratio of existing.
Loans, because obviously, where we are seeing some transition down but those are continuing to both from nicer homes out there as well as well so that mix is going to be very importantly, with regard to that form so well continue to keep an eye on it you know with regards to margin.
Particularly in the Boulder side, we committed all along as the one the key rationalizations of the acquisitions and bringing in the low cost ordinance product and and we've been committed to us to maintain our margins.
Albeit at lower price point, that's and maintain our margin percentage that those price points.
You're getting Barnard it gets a extremely difficult market as a sort of dynamic right now, particularly with the impact of the tariffs.
Really seen what others are done.
Regarding imports and and then through on the the transition that we're all trying to figure out is how much of the intact Casey made out right now is driven by.
The terrorists versus just the move down and the message to slow down the the baby Boomer population than there are Norton and the pickup in the younger generation that certainly is starting but that paces, it's really difficult to assess right now just because a number of variables that we're all being is basically so I think over next six months, we'll probably get a much better.
Picture us and everybody else again, much better picture, how the industry is shaping up and but it's something we have to keep a close eye on right. Now we are roughly committed to try to maintain a relatively close margins, albeit scott's going on at least of these headwinds are a little bit of challenge right now, but it's been our stated goal to maintain or a margin percentages.
As a as we continue to grow.
Okay. Thanks for that just wanted to follow up on the on the margin outlook seems like.
You took down your your fiscal 20 margin guidance about working now for a slight decline, which I guess makes sense given.
The factors have you identified.
If you look out into the fourth quarter, maybe into fiscal 21 here just wanted to be clear.
Or some of these cost margin headwinds.
Expected to continue moving forward or is it just you know you kind of your your dog draft in your your margin outlook really a function of.
Headwinds that you saw.
The third quarter, so that's kind of whether it be clear I've covered the change over time.
Yes, sure so let's talk about the three buckets again, so the first one to be the facility news, which is now complete and behind US. So we won't have any of those onetime costs associated going forward into the fourth quarter or in the future fiscal year of course, we're not yet releasing any type of outlook perspective on our fiscal year 21, we're just in the process.
Starting our budget cycle and it will certainly have a lot more to offer around that next quarter or we get together, but the next bucket. We will talk about is tariffs, which continue to impact the business inside Q3, certainly expecting that into Q4 as Carey mentioned, our teams are working to mitigate and shift where possible the light.
We continue to see some headwinds on tariffs continuing into fiscal year 21, and the mill. The last bucket is around the particle board. So.
Just to get the nuance of bad as we had a significant impact each quarter. However, we were getting reimbursed from our coverage in each of the last two quarters. So the net impact was being reduced pretty considerably in our fiscal Q2 in Q3.
And soft fiscal Q4 were fully exposed and that's what my earlier comment was that could be a million 510 million nine assuming the capacity comes online is currently plan that will reduce significantly as we shift into the Q1 time period of fiscal year 21, but it's very dependent upon that capacity coming online by the other suppliers.
Yeah.
Okay. That's helpful. Thanks, so much I'll turn it over.
Thanks.
Well hear next from Stephen Ramsey Thompson Research group.
Good morning, I want to store with a starts and you said bids.
Making it talk more challenging to win business. There can you maybe put this in context from from the recent past it and as you look at options.
Implants to hold share or are we gained share what options do you have and how quickly will you be making the decisions and changes from kind of you're shifting strategy.
Yes, so the the pricing that I referred to it really to isolate areas ones in southern California is it's tied to our Pts business and then we also have actually have Pts both within the new construction and we do have some distribution business in southern California. So both of those are being impacted by some pricing and then you got a couple it.
Very localized markets out there that that primarily within multifamily that were out there doing some bidding and.
Just giving a hunting just given the downturn little bit announcing you've seen or slow down as some others are getting very aggressive on pricing. So yeah, we're going through a multi stage approach. There. There's two aspects of this obviously, we we've been faced with a lot of the headwinds that we talked about terraces existed for sometime and remind everybody. We've never take maybe pricing really.
Is that nor do we plan to.
So where we're in relatively good position, our stock product and our origins product is positioned very well and within Timberlake. So it's really isolated through our Pts and I'll say, 95% Thats in southern California, So strategically.
Whereby we had both from a just a cost benefit analysis and.
How do we further address that market you know from or I guess two aspects wrong was how how no are we willing and do we want to go for another price perspective, a bit perspective, and secondly is how much more efficient can we make our operations in southern California.
Really can make ourselves more competitive most of the data that we had right now shows that you know that pricing is getting to the such a low level that nobody's really making money.
So it's something that we hope is short term, but it isn't impacting right now that it is definitely impact or a revenue and we're making some conscious decisions not to bid on certain businesses just because it has gotten so low so well continue to run analysis for right. Now I think is keep talking on our call about a lot of.
Forward looking strategic change and part of that changes removing a lot of complexity within our operations.
Both on our made to order platforms as well as our stock and our frame those platforms, we have a significant operation or improvements underway really both analyze and remove a lot of complexity in our business and that complexity not only creates a much better customer experience, but also removes a lot of costs from the system.
So it's a it's not an easy transition because complexity creeps in over years and and you have to go after it and big chunks, but that is a process we're going through right now so we're doing that in southern California in our operations every just moved Riverside I would estimate we took the opportunity to make some changes during the transition, but we also have a lot of work underway to really.
Look at the product platform simplify and take cost out of the system.
To sum it to a lot of set to be a bit more aggressive but same time, because we've always communicated that we differentiate ourselves on service.
It's pretty rare we're willing to go down and just buying business because we offer a competitive advantage to service and that's true and Pts and Thats true on on Timberlake.
So that's part of strategic now so they're going through so more to come in the future as we learn more im just kind of see other market shapes up.
Excellent and that kind of leads into.
My next question.
Over the long term industry disruption.
It is going to be is this accelerated or stepped up from what we've seen it this is purely that millennials.
Being the prime customer going forward versus tumors are in our and you know would.
What is kind of the timeline or do you have a rough timeline on increased investments brought me through your system needed to address this change maybe just seeing more detailed that gives us some color on the long term.
Great Great Great question.
Yes, I think we're learning every day as I mentioned before it's really hard to go out and collect data today, specifically to the cabinetry and.
That really identified as the transition that were undergoing with regards to our consumer base. The baby Boomers are certainly still on the mix and and we've heard for sometime now that they're agent in place and Thats had a positive impact on our and our personally and that sort of my personal opinion as we do believe that's pet slowing down.
And over time that we'll be back filled by I'll, just say the younger generation. So it's not just the millennial there's certainly a younger action as well as a millennial population that you continue to hear that millennials have a the largest spending power out there today does not not as relevant in our space in your cabinetry is very discretionary as well.
All the fact that there's really been a big Lake factor in the younger folks are being able to get into a single family housing.
Not really tied more to existing than than new.
We've said that once I get to existing there, they're going be faced with some very old kitchens, and and so forth and personally we feel that will be a high priority for them certainly they're gonna have to replace groups and if certain.
Aspects of the home that are required to do our neurons us because it's a it's leaking or has prepared they're going to prioritize at first but that kitchen will come we believe relatively quickly just because of the age of the home. So in the age of the kitchens within those loans. So I think the transition is happening I don't think gets as aggressive.
It is what.
Probably the market would indicate right now just because there's so many other factors that are impacting the market, including just overall slowdown in baby boomers the impact of the tariffs.
And so for that that I definitely believe there they're in and they're they're coming.
I think when they really start to ramp up is when we're really going to see the impact on the industry and when I talked about disruption that is that true disruption that I think where we may face with and a good things we talked about it internally we've been talking about three years now we clearly expect the air generation the to come in with a much different set of expectations anyway.
It appears that they value they run a much different experience.
The average number of visits a consumer has to go back into a retail space today to two really finalize the kitchen process would be mindblowing for most and if you ask younger generation, how many times it'd be willing to go back and forth it might be one at most obviously, they're going to interface and much more digitally.
They're going to their breath willing to make transactions on work directly with designers via chapter are alive or email.
So I think we're going to have multiple point to entry for that that consumer or you have to be willing and able to connector that consumer in the ideation phase and to really manage that entire process for them. Because today is very disjointed, yeah, it's very difficult for a consumer to go from ideation, two cabin and installation.
And one step process, our what's with the one specifier one facilitator that process. So I think thats going to be in high demand and I think where we're in a prime positioned or leverage our builder center platform. We have out there to expand our service and really start to offer some opportunities within the our in our space that we've never done before.
And that nobody in industry has a capacity your capability to do so we see is a great opportunity I think like I said, that's that's going to be a challenge and we're all learning and are gonna have to really reshaped the company in some regardless of the super exciting for us and and and we've been looking forward to the which had better answers on exactly when and how that I think thats the.
Fund or I.
I think we're all in this and we're going to see other than the air generation shakes up.
Excellent and does this mean that that kind of as you get further into the that.
Do you expect to hold the company margins and go forward incremental margins it it.
Similar to the similar pace in place or or do you think on the other side of this thing that there could be maybe a stepped down as barges that you can.
Make up for the volumes.
Got it when you talk margin dollars versus margin percent. Obviously its has come a different story on margin percent, we've been committed and and we know there's going to be some volatility industry is I think we've.
I go back to come out of recession. This industry has been pretty volatile quarter to quarter, I think you're going to continue to see volatile, but long term, we remain committed to our long term margins and and they'll they'll be periods of time, we've got to make some investments in the business, but we do feel comfortable with our ability to continue to grow and.
And and do it at a margin rate is it's acceptable.
Long term, we did commit and let's go back to the you acquisition days, we did commit to that fixing that the 16 long term.
Yes, I think long term will be the question, but I think as we come out. The other ended this what I what I am term is disruption in the industry. As we are absolutely working on solutions and its its product solutions that very creative and innovative product solutions, it's taking complexity out of the system.
And that's a much different approach to the consumer than Weve really ever gone after in history. The company that I truly believe we can you maintain those long term commitments on margin.
Excellent. Thank you.
Okay.
And again for questions, let us start one at this time well hear next from Baird Tim Walsh.
Hey, Hey, guys good morning.
Good morning.
Just on Kerry just kind of your commentary on some of the.
Kind of reducing complexity internally and thank the Minnesota.
Kind of a normal.
It is it's kind of a normal course of kind of kind of planning for you or do you feel like there's some stepped up.
Opportunities done on the internal cost base that that you're looking at kind of kind of simplify.
It sounds like it's the latter I just want to kind of understand I understand that better.
No actually say if not normal.
I think that see.
Both the challenge of Us and the excitement of it is we're truly looking at the end of term as assessed the phrasing, we use and currently is that.
We really can't go after and do what we do better we have to do what we do totally differently.
That's really how we're approaching this is actually be step changes and what we do how we do it and the cost of how we do and so when we talk about taking complexity out. It's not just you don't really approach it from a cost perspective your approach it from the assistant and process complexity and then it's not just manufacturing is true throughout the entire system because of the.
Ultimate angle for us it kind of the Bulls either we have this out in front of this is this entire customer experience and being able to successfully manage that and create such a clear.
Sustainable competitive advantage in that space.
Really forced us to step back and map out the entire process and then I understand the complexities and realize how big of these kinds of complexity, we have to take out so.
The net benefit and I'll say, there's all the case studies out there with regards to assist in complexity and.
You have to make some tough decisions along the way the with the net vision of improving that customer experience holes in the doing that gaining share and you come out as a clear winner so.
It is it's going to take the company places we've never been before it's a it's a very exciting time, but it is going to take time to get there at same time.
Okay. Okay, and then just just on that on the new construction market how is that how for your builder direct business, how they're performing relative to your expectations, maybe six months ago.
I'd say, it's in line with our expectations that the market because everybody is trying to get for the market's going and you've seen.
Growth estimates all over the place both for this past the past the year in calendar year, and then for the size of the current calendar year end you have growth estimates are all over the place.
We are in line Yeah, we're certainly very pleased with our performance with our transitions. The origins business. Yeah. We stated go back a year and after a year ago. We stated that was not ramping up as quickly as we had hoped that had nothing to do with our internal capabilities. It was just the the move the builders is realistic start that transition into opening price point.
We're seeing that.
Well there is continuing to make a strong investments in gain new improve their overall share in America, and obviously, given our shared with them that helps us and then we actually because the origin. We are actually out bidding on business that historically, we would not a bit on so it's a it's been very strong positive for us and and like we mentioned as we are maintaining good margins.
On that business and.
It's a continued aggressive growth than planned for US you think about how many quarters, we cannot announce results in timberlake, stating that we over index the industry and.
Yes, we have gained a lot of market share within new construction because of our directed by other platforms. We're very very pleased with them.
Okay. Okay, and then and then just on on the margin Scott. So just to make sure I I've kind of got the pieces right. So the facility. The facility cost was completely go away and you know next quarter and into 2021 particle board will kind of continue to be mitigated headwind.
But the insurance, it's just kind of been been used up and that could be kind of Q4 and eat a little bit into the first quarter and then wait when do tariffs to the unmitigated impact of tariff flat for you guys.
When today when do they laugh.
It's probably going to be in Q2 will continue to see impacts, but it's it's the items, we had to be able to resource which is principally around hardware glides at a particular top so those are likely going to continue but.
There will be some relief when you do the year over year comparison versus the items resource.
Okay, Okay, and then I'll sneak one more and just.
You're close to your targeted leverage ratio now of about two times any change and I'm kind of a bill for basis over the next 12 to 18 months and how you how you think about capital deployment.
Yeah, I mean longer term.
As you pointed our key a commitment has been to get back to low two but longer term.
I think to grow our business. The good thing I mentioned on cash as a we absolutely plan to invest cash for a for long share our long term shareholder return lots of opportunities to do that and we have a internal organic opportunities to invest in our business and everything I just mentioned previously with regards to transforming our business.
Okay, great opportunity to continue to invest.
In addition, as the I'll say opportunistic acquisitions. We you offices last one was a very very significant one we don't plan to do anything that large, but as we look forward and we think about extending our leverage particularly within new construction and the fact that we enter a very large percentage of a new construction homes in America to do that.
Cabinets, so have you leverage that potentially in other areas or the potential acquisition that we could to conduct too to leverage our our direct to build their platform and offer other products are there opportunities when you get into sort of seen as opportunity to begin in smart technology that much can leverage is what we do so we're going to be very open we went to continue to grow the business.
And.
I think I've personally we believe there's a lot of opportunity there again exist for us to do that.
Great.
Good luck a good luck on the rest of your guys.
Okay. Thanks.
Well here now from David Macgregor with Longbow Research.
Hi, good morning, Thanks for taking the questions are you seeing limited distillation capacity as a growth constraints.
You said installation.
Listen capacity, just your ability to have not really we've.
Knock on wood is we've maintained a very very good business out there and I think when the key differentiators, we have with our Timberlake direct businesses.
As we are so consistent.
So we've gained market share were very consistent and the insulation business and the folks that we have out there.
Are really dedicated to our business and so no. We we have not had any restrictions we had a couple of geographical markets.
I have grown very quickly in the past year that might add little operational constraints, but we've got those back on track and so at this time nowhere, we're continuing to move along do you feel to source a competitive advantage for you it sounds like you're very confident enough.
Absolutely the whole platform as right. Once again, just because the fact that were national around all the key markets and who we are as a company. Our bill that we have yet as you know we have physical locations and out there. We have the seven main 11 satellite facilities that offer a very localized servicing and it just makes a big difference are.
Reputation in the market.
As a big impacts in our ability to hire people as well and you can attract people that know the industry, obviously, where its installers are service tax or service reps the folks to most of folks if any industry for quite some time and and they love to work for Timberlake. It just really makes a difference it is absolutely a clear competitive advantage for us.
Second question, just with regard to the built to order segments. What are you seeing the way it promotional activity will then be show and how do you expect that's changed if at all in the next few quarters.
I'm sorry, good MTO promotional cadence next couple of what order.
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Well say, we were very I'll, just say, we're very very engaged with our key retail partners on the promotional activity and and I think there's been a lot of.
Lets say trialing over the past past several years of past mix six months is continuing as as merchants are trying different.
Promotional approaches and and so forth and yeah, I think we've been pretty adding all along with regards to our belief and promotion certainly are not driving new contributors in the door and where we recognize is kind of a double edged sword is obviously were very cautious on going out and buying business and setting precedence parts.
Equally and and the retail space when it comes to conditionally designers and condition consumers on promotions and.
Yeah, we differentiate ourselves based on service not necessarily price, but same time, you have to be willing to compete so whereas or continue to work with them. We think it's a we think some hopefully some worst strategic decisions were made in the coming months that that not necessarily take promotional activity down that shifted into much much more productive buckets.
But I will just have to wait and see you know it's something that our team is working very aggressively on and we had very very good relationships with our retail partners. Obviously, we'll continue to level leverage and have these types of discussions with.
Thank you get back to growth in the build to order by just winning share or do you think there's hope for the category.
Oh, you Big thing there's category right. So you know the retail space and I'll just speak Casey made that obviously special orders than negative for a number of quarters now and.
When it goes back to the question as previously on the younger generation and where the younger generation is going to shop, and how they're going to shop, and where they walk in the door the existing retail spaces and we certainly believe a certain percentage and then will that same time, we believe that the retail spaces are going up and make some changes to to make themselves more and biding for the younger consumers.
So we're very focused on helping our retailers with that in a lot of the statements I need previously about investing in the digital platform and overall customer experiences that is designed to help retailers better manage that customer experience and we'll we'll actually manage allow that customer experience for them.
We'll be a win win for them and so that's our goal.
Thanks very much.
Thank you.
Again for any other questions at this time that will be star one.
Well hear next from Justin spare with Zelman and associates.
Hi, Good afternoon, guys. Thank you very much I just wanted to drill.
Unpack the if these onetime items are discreet items, I guess I'm, not one time, but the discrete items and before quarter can you remind.
Scott can you tell me how much the particle board.
Net impact was and what what the insurance recovery work.
Yes, so the net impact inside the quarter or was it was 500 Kay.
Okay, and then for the full year 3 million net of insurance or product gross number.
It's 3 million net year to date.
Fully recovered the full 5 million and then you get exposure pushing into Q4 between 1 million and a half a million nine.
Okay. So.
If you think about four year drag from the discrete items on fiscal 20.
How does that look on a kind of a margin headwind basis and then.
How should we think about that as we look for next year in terms of somebody maybe becoming greater werent really for offsets or ER positive next year for online.
Yes, I'll reflect back just on the earlier comments on that particular point, so that facility to be onetime costs, certainly won't repeat as we go forward.
Particle Board certainly continues in fact Q4, our expectation again as the capacity comes online and we will see relief against that going forward. We still believe there will be transportation risk just because of the location that facilities as we go into fiscal year 21, but we don't have that completely dialed in and finalized as again, we're pulling together.
Budgets as we speak.
And then tariffs continue or increase or decrease unfortunately that all depends on the right political climate exactly how that shakes out, but we do expect that to still be somewhat of an issue as we go into the ended the first part of fiscal year 21.
But.
Just following up on it if I look at these discrete items that you're calling out for at least the third quarter. It was like Q and a half million Oh.
Incremental items.
What I look at the gross margin gross margins down 170 basis point, it's closer to like six and a half 7 million kind of implies that there is about 4 million of other drag in there that that as I, maybe you can help account for.
You mentioned from taking from inventory downtime or some collection downtime, maybe help us understand the balance over a year over year Dragon as it pertains for margin pressure.
Sure, we won't get into Dollarizing each of those respective items, but you heard carry talked earlier about died down days, we did have an incremental down day from a year over year perspective, which creates some disruption. We also had some inefficiencies inside the period our facilities along with freight.
And health care was a bit of a drag on its inside the period.
The other thing I would encourage you to do is don't necessarily just focus on a gross margin change focus on the EBITDA change. We do have some dollars that have swapped between the categories year over year. So I don't like getting buried in the nuances of that but operating inefficiencies the freight piece, we talked about.
The incremental down Bay, where the other key items.
Okay, and then Sunday.
Just a little highlight on operating efficiencies as part of that Saddam day part is that some of our operations were actually ramping up so I thought product growth bond.
On the stock side has been very positive for us, but when you ramp up as quickly as we're ramping up it does drive some inefficiency in the system that that really is more could be short term because we are a much those operations our ramp up and.
We do expect continued growth in that but it's been a very nice growth for us, but you grow as quickly as we have seen on the that's talks about it does create some challenges.
Okay that makes sense and last question for me it's just.
We were to rewind back 510 years with Cabot category was one that was able to obtain price that was a there was a promote industry standpoint from up about building products categories reasonably do reasonably well position from a pricing power standpoint, now we have to anti dumping duties ROIC for Chinese imports have collapsed.
Do you think to the nature of the industry rollout at least maybe some price power in parts of the portfolio that maybe otherwise wasn't there before anti dumping duties.
Yeah, I think you have to define pricing power, though relative to the market itself and yeah. I think the if we are still writing on the baby Boomer growth and that was the key point of our growth going forward. I think you would absolutely continue to see some some pricing power.
The challenges while this is incurring we're seeing younger generation come into is driving the market down. So the market speaking very clearly out there and you know where it's a transition into to opening price point homes ours younger generation starts to get an existing homes, absolutely they will not be able to afford to the level.
The kitchen purchases that are the baby boomers haven't had been doing for the past 10 years. So I think thats as more of a market question not once once you start to bounce at out you get done so specific price points and you come up with solutions that you find or competitive in the market I do believe you'll you'll be able to see pricing power within those but the first step that that folks really need to understand into dry.
Towards is being able to offer.
Just a man.
The ability to offer a a affordable solution. It's been a lot for affordable solution that that offers a clear competitive advantage. Once you don't want to become as a commodity business, where based Ivan all their capacity down to a lower price point and we know how that shakes out for industries and do that so theres apps are they going to via the ability with the new generate.
Question to create a competitive advantage.
I think thats whats going to differentiate folks. So once you have that clear competitive and has then you start to differentiate yourself on price because people are willing to pay for that value.
Thank you.
Thank you.
And with no other questions Mr. Cobra I'd like to turn things back to you for closing remarks.
Since there are no additional questions. This does conclude our call. Thank you for all thank you all second town participate.
Yes.
And again that does conclude today's conference. Thank you for joining us.
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