Q3 2021 American Woodmark Corp Earnings Call
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Good day and welcome to the American Woodmac Corporation's third fiscal quarter 2021 Conference call. Today's call is being recorded February 25 2021.
During this call of 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 earth.
Earnings release, which can be found on our website American Widmark Dot 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 of other information that made the important to investors such as Investor Pres.
And patients 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.
Differ materially from those expressed or implied in any such forward looking statements. Such factors include but are not limited to those described in the company's filings with the Securities and Exchange Commission and the annual reports to shareholders. The company does not undertake to publicly update or revise its forward looking statements, even if experience or future changes make it clear that.
Any projected results expressed or implied darin will not be realized.
I would now like to turn the call over to Paul Durham check Vice President and CFO. Please go ahead Sir.
Good morning, ladies and gentlemen, and welcome to American with Merck's third fiscal quarter Conference call.
Thank you for all for taking the time to participate.
Joining me today is Scott Culbreth, President and CEO.
Scott will begin with with the 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 third fiscal quarter earnings call I.
I hope that you and your loved ones continue to remain safe.
Our teams once again did an exceptional job of delivering sales growth in the quarter, but our margins were pressured by material logistics and labor inflation, which was partially offset by overhead and SG&A leverage.
Our third quarter sales were up nine 1%.
With the new construction of our business grew three 8% of versus prior year as install activity accelerated from prior months starts growth.
Our Timberlake direct business Comped positive low double digits on the units, while our Frameless Pcs business continued to comp negatively in southern California.
We've received a number of questions from the impact of the Pcs business from the total performance of new construction.
For the third fiscal quarter of the negative comps of approximately $4 5 million or two 9% of growth from the channel.
We believe that we have stabilized the pts business and returned to low or mid single digit growth in fiscal Q4.
Our national builders remain optimistic due to the strong order growth over the prior months.
Any of the manufacturing and trade base to keep up the demand rising prices of the potential COVID-19 related restrictions could slow future build rates and these factors have already increased the build cycle time lots.
Lot supply and community count growth are also key indicators, we're watching closely.
Our incoming order rates for the Timberlake business once again increased throughout the quarter moving backlog across from made order platform with incoming order rates in the mid teens.
As a reminder, we level load our production of maybe where the platform.
Last quarter that our incoming order rates across both the new construction and remodel businesses exceeded shipments for the quarter and then our teams are increasing production levels, which will drive incremental sales in the third fiscal quarter as we improve backlog levels.
Incoming orders again exceeded shipments in our third fiscal quarter, and we did not make progress as planned and reducing backlog as a result production levels will continue to increase and drive incremental incremental sales in our fourth fiscal quarter.
Looking at our remodel business, which includes our home center and independent dealer and distributor businesses revenue was up 12, 6% of prior year.
Within this our home center business was up 13, 2%.
Made the order remodel business continued to improve with double digit positive comps.
Our stock business was up low double digits pro and DIY demand increased.
Stock kitchens performed well with comps, 20% basked comp negative for the quarter due to promo timing.
Our frameless offering continued with strong double digit positive comps as well.
With regards to with regards to our dealer distributor business, we were up 10, 2% for the quarter.
Demand has remained strong with dealers and distributors across both of the remodel and new construction channel, especially within the value stock segment.
Our adjusted EBITDA grew seven 9% of 50, $154 $1 million with EBITDA margins of 12, 5% for the quarter.
<unk> of $1, one and adjusted EPS of $1 50.
Our cash balance ended at $91 8 million at the end of the third fiscal quarter and the company has access to the additional $93 million under its revolving credit facility.
Made of $40 million debt payment in the quarter, bringing the net leverage down to 186 times adjusted EBITDA.
Deleveraging remains a priority and I expect further improvement with the goal to remain at approximately one quarter to one five times adjusted EBITDA.
We also plan to restart share repurchases to offset dilution.
The new construction and remodel market remains strong and we anticipate that to continue throughout the remainder of our fiscal year.
Our company is well positioned to take advantage of the strong market as consumers invest in their homes and existing home sales and single family starts growth.
Lot supply and overall price appreciation of new construction may impact demand short term the long term growth remains solid.
Our focus has not changed and we will take advantage of these trends are permanently improving efficiencies across our footprint and investing wisely in product technology and labor.
We're almost complete with our winter launch and have shifted to our fall launch that will continue to introduce new finished colors and door styles, along with needed discontinuance of that will allow us to refresh and simplify our lives. Our goal remains to offer industry, leading products and unparalleled customer experience has targeted the value segment, the compelling and relevant styles will be needed to ensure cash.
<unk> of consumers see an offer for their specific needs.
Technology investments within the ERP cloud solution provider of on track of the finance procurement functions, which will allow us to operate as one company and become a more efficient go live for these functions of November one we.
We will also be improving the efficiency of our sales and customer care organizations through our sales force implementation in calendar year 'twenty two.
Our new distribution center in Dallas is operational and efficiency improvements will be of focus of the team going forward.
The terrible storm that impacted Texas, and the Midwest last week disruption of operations as we had to close facilities in our stock and maybe where the platforms due to power outages are unsafe driving conditions thankfully are.
<unk> of remain safe and we believe we will recover those sales within the quarter.
Looking forward, we expect demand trends to remain strong and margin pressures to continue with recent increases in hardwood lumber plywood particleboard packaging materials components and frame where.
Taking pricing actions in the current quarter to help mitigate the keep in mind, there will be a lag from the effective date of the price change to recognition of the revenue in the water shift.
In closing I am proud of our employees for all they have done to increase our capacity during the strong demand environment I appreciate their contributions in making it happen I will now turn the call back over to Paul for additional details on the financial results for the quarter.
Thank you Scott.
Headlines for the quarter.
The net sales were $432 million, representing an increase of nine 1% over the same period last year.
Adjusted net income was $25 5 million of $1 50 per diluted share in the current fiscal year versus $22 million or $1 30 per diluted share last year.
Adjusted net income was positively impacted by higher sales of.
Offset by higher material and logistics costs. Additionally, we completed the sale of our Humboldt manufacturing facility within the quarter and incurred a net positive restructuring charge of <unk> 8 million due to the gain on the building sale in the current quarter.
Adjusted EBITDA was $54 1 million or 12, 5% of net sales compared to $50 1 million or 12, 7% of net sales for the same quarter of the prior fiscal year.
The combined home center and independent dealer distributor channel net sales increased 12, 6% for the quarter with home centers, increasing 13, 2% and dealer distributor increasing 10, 2%.
The remodel business continued showing strong signs of recovery as people remain comfortable allowing access into their homes to install cabinets as well as the increased demand from the DIY and pro customers.
The new construction sales channel like market demand during the third quarter of fiscal 2021.
The recognizing a 60 to 90 day lag between start and cabinet installation. The overall market starts and single family homes was up 26, 2% for the fiscal third quarter.
When looking at the start date of that extends the right time to 90 to 120 days, we saw an actual increase of 15, 6% and starts normalize for the impact of lag shift.
Shifting focus to completions during our third fiscal quarter, we saw zero, 8% increase year over year, which further supports the timing impacts.
New construction net sales increased three 8% for the quarter.
Timberlake direct business Comped positively in units, which was offset by a mix shift to lower priced products and negative comps in our Frameless business. This is the last quarter that our frameless business will negatively impact our comparisons year over year.
The company's gross profit margin for the third quarter of fiscal year 2021 was 17, 6% of net sales versus 18, 3% reported from the same quarter last year.
Gross margin in the third quarter of the current fiscal year were negatively impacted by the higher material and logistics costs investments made in establishing our distribution center in Texas as well as wage programs.
These costs were partially offset by the increases in sales, creating leverage of our fixed costs and our operating platforms.
Total operating expenses were 11, 1% of net sales in the third quarter of fiscal 2021 compared to 12, 2% of net sales from the same period in fiscal 2020.
Selling and marketing expenses were five 1% of net sales in the third quarter of fiscal 2021, compared with five 4% of net sales for the same period in fiscal 2020 the.
The ratio of net sales improved 30 basis points, resulting from the leverage created from higher sales in the third quarter fiscal 2021, and delayed expenses related to our third quarter launch.
General and administrative expenses were six 1% of net sales in the third quarter of fiscal 2021, compared with six 8% of net sales for the same period of fiscal 2020.
The decrease in the ratio was primarily driven by leverage from higher sales lower spending and the impact of our actions taken in the first quarter of fiscal 2021.
Free cash flow totaled $74 3 million for the nine months of the current fiscal year compared to $80 2 million in the prior year.
The decrease was primarily due to changes in our operating cash flows specifically cash outflows from customer receivables and inventories as a result of the increased sales demand.
Net leverage was 186 times adjusted EBITDA at the end of the third fiscal quarter as a result of our strong cash balance and declining debt position.
The company paid down $40 million of our term loan facility during the quarter, which brings the fiscal year to date total to $80 million. As a reminder, there are no term loan debt maturities due until December of 2022.
Turning our focus onto the fourth quarter of fiscal 2021, we expect double digit net sales growth versus the prior year.
Which was negatively impacted by COVID-19 shutdowns the growth rate is very dependent upon overall industry economic growth trends and consumer behaviors, including the impact of the ever changing COVID-19 environment.
We are announcing price increases in our fourth quarter, but given the lag from announcements to the effective date, we will not see of benefit in this fiscal year.
Gross margins will continue to be pressured, but our expectations are that they will increase over our Q3 results based on the increased sales volume that will create leverage within our operating platforms.
Offset by increasing material and logistics costs.
We will continue to invest back into our business through wage programs finalizing the launch of our new products and building the foundation of our journey on our financial and procurement system consolidation as part of our first phase of our ERP implementation.
We expect adjusted EBIT margins for the fourth quarter of fiscal 2021 to be similar to our fiscal third quarter.
The company had very strong operating cash flows for the year, which led to an $80 million paydown of our term loan facilities free cash flow generation continues to be of strength of the company.
We ended the quarter with our cash position as of January 31, 2021 at $91 8 million of cash on hand, and access to $93 million of additional availability under our revolver.
With the current corporate debt rates at historic lows. The company, we will be evaluating the current debt structure during our fourth fiscal quarter to possibly take advantage of any benefits of the company. We received from these low rates of liquidity and margin management of our priorities for our teams.
I want to thank all of our team members at American with Marc for the continued efforts as they are the ones who truly can make it happen.
This concludes our prepared remarks, we'll be happy to answer any questions you have at this time.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the Keith.
To withdraw your question. Please press Star then two.
Our first question today will come from Garik <unk> with loop capital.
Hi, This is Jeff Stevenson on for Gary Thanks for taking my questions.
Can you provide some more color on your sales growth expectations by categories in your fourth quarter guidance.
Yeah, So Jeff good.
Our kind of our guidance right now is were talking about double digit growth, we're thinking and we're expecting in the mid to upper digits growth in that area. So it would be double digits for sure.
As far as the growth in the category is out there we expect it to be strong growth rates across all of the the repair remodel and the home centers and in our new construction channels as well and then also we won't have the drag of our Pts business in our fourth quarter, Yes, just to clarify mid to high teens is what we're expecting from a net sales growth.
Got it got it.
And then what is the timing of your new capacity initiatives to be fully online and then following up on that and also how is your capacity right now set up to meet the recent of collection of lagged housing starts.
So our teams are always evaluating capacity across our entire platform, we've been adding shifts and personnel.
Really since the summer time period across both the <unk> and stop platforms will continue to do that as we as we push forward. We are increasing the overall output across both of those platforms with respect to.
The capacity in general across all aspects of the manufacturing footprint, we are making investment decisions and capital equipment as needed along with those labor investments and believe that we'll be well positioned for growth as we start to think about fiscal year 'twenty two.
Okay.
And then lastly can you talk about the levers you have the manage cost inflation moving toward I know you mentioned the pricing actions in this quarter, but any more color there would be helpful.
So pricing obviously is the one that we started our conversation of al we've already taken actions in several of the channels will continue to pursue that I would tell you over the long long haul, Jeff we tend to get back.
Pricing for commodity based material inflation when it comes to other aspects of inflation. When you think about things like labor, that's really up to us to manage and it comes down to the productivity projects. It could be introduction of alternate materials substitution it could be.
Investments in automation of equipment. These are all solutions that will always be driving to try to offset increases.
Thank you.
Okay.
Yes.
Okay.
As a reminder, if you'd like to ask a question you can press Star then one to join our Q.
Our next question comes from Tim Boyd with Baird.
Hey, guys can you hear me.
We can hear you good morning, good morning, Greg Good morning.
Go ahead, you guys are all well.
I guess first question I had was just on pricing.
Is there any way can you just maybe quantify the types of increases that you're taking in terms of just magnitude and where.
Which channels those just maybe gone into already and kind of maybe what might be kind of kind of there in the future.
Yes, rather than provide specifics just because we are in that process, Tim I'll, just kind of lay out the framework of how it typically functions.
We typically collect the input cost to understand.
What the likely percentage increases that we need to apply to the products.
We will typically first address our dealer distributor segment.
That's usually followed by new construction, which is then followed by home center.
And I think we've talked about this in past years, some of the unique situations either around contracts or other restrictions that prevent just doing a blanket increase across the board certainly in new construction and home center. So that's typically the way we will roll that out we have already started those conversations and announcements inside the current quarter, that's why Paul.
<unk> guidance was we won't see much lift as it relates to price inside of Q4, we will start to pick up some of that advantage as we shift into the first quarter of fiscal year 'twenty two.
Okay. Okay.
Are you kind of thinking kind of.
Q1, Q2 is when you start to see price at least kind of offset inflation or is it just the hard to know at this point.
I'd still say, it's hard to know and the reason I will say that Tim is what happens from this point forward with respect to these commodities and input costs are they going to start to plateau at the new levels, We've got or do we see of continued acceleration and then you are continually chasing that uptick. So at this point in time of things were to stabilize.
I think that's a fair representation that inside of the first second quarter of the next fiscal years, when you're starting to get some recovery against that if.
If they keep moving up then we'll be chasing another cycle potentially of pricing as well and have to pursue it that way.
Okay. Okay. That's helpful and then on Pts just just the factual question. Thanks for the detail and the color on just the pressure there.
I think it was worth $4 $5 million this year on a year of this quarter on the year over year basis.
That is simple.
Similar to what you've seen over the last three quarters I'm just trying to think of as your annualized net what that impact has been maybe over the prior three quarters outside of this one yes.
Yes, I don't have that annual number here in front of me, Tim but I would tell you that net impact was was likely higher in the first and the second quarter, but you are right $4 5 million is what we just disclosed specifically around the fiscal third quarter, but more importantly inside the fourth quarter.
Our plans are for.
The low to mid single digit growth of that platform and new construction.
Okay could see that stabilized and.
I guess the last one just on maybe the order rates and the unit kind of shipment rates in Timberlake relative to maybe the revenue contribution what's the what's the gap between.
Unit shipments and it gets revenue.
You kind of think about mix and is that really just just structurally more of the origin product and what kind of entry level shipments that are impacting that or are you seeing any sort of change in kind of the overall kind of builder mix.
The price point.
Specific basis, yes.
Yes. It was more of your latter comment around rotation to origin. So as you rotate Timberlake historical business too and origins platform that will be at a lower price point, but a better margin profile for the enterprise.
Okay, Okay, great well good.
Look on the the rest of the year here guys. Thanks for the color. Thank you.
Thank you Tim.
And our next question will come from Justin Speer with Zelman <unk> associates.
Hi, Good morning, guys. Thank you I guess a couple of questions from me just.
If you could provide some of your thoughts or commentary with regards to the import dynamics of the import situation.
Surge in the non Chinese imports over the last year compared of pretty much filling the void left by the <unk>.
When the Chinese vacated.
I guess as you think about your pricing is there any risk to pricing power of your market position from from those dynamics in your opinion.
Yes, I'll answer the second question for Justin.
Justin I don't think Theres any risks from a pricing profile perspective as it relates to the imports I think the inflation impacts are not unique to American with Mark I think our competitors are going to feel that both both domestically as well as internationally. So I'm not concerned there to the first question specifically around the important data I'm sure you saw.
The the information that came out through December China down roughly 50% on the calendar year shows total down I think roughly three 5% 40 odd million dollars, because we have seen in Vietnam and Malaysia, both come back with substantial increases year on year those products are coming in though at a higher cost versus what the.
Where historically out of China, So we definitely see that uptick on that on that product, but I'd say, probably even more important here as of late just logistics and transportation challenges. If you follow any of the information certainly on the west coast as it relates to the to the ports and just product entry challenges.
We're feeling it for some of the components that we buy but certainly our international competitors as well are dealing with some lead time challenges. So that continues to give us an advantage in the marketplace.
Okay.
Back to Tim's question, just in regards to the input cost and the pricing required.
To offset the Scott can you quantify how much of a drag just from all of those buckets, how much of a drag that was in the quarter.
I guess as the price increase announcement of enough.
If we snap the line on what you see today is it enough to at least offset or more than offset.
What youre experiencing in terms of cost input inflation.
So rather than get into specifics of exactly what the amount was associated with those impacts and again, what thats going to translate into pricing I'll take you back to prior quarter and when we talked about what our forecast and projections were going into the fiscal Q3, what our EBITDA margin expectations were and we obviously felt.
Short of those and the reason we fell short of as material inflation and it was predominantly increasing throughout the quarter. It started in December of accelerated in the January. So that's why we we missed our missed the mark by almost 70% of 100 basis points from an estimate perspective. So you can do some math, if you'd like around that but I don't want to get anymore specific from.
At this point.
Got it got it and then I guess the other I guess the other dynamic is.
The Tcs business, what led to the improvement there is it that the comps you have kind of run rate in or did you improve ahead of expectations, because I was thinking youre going to see more pressure into the into this quarter.
Yes, so we're starting to lap the tough comps. So that's obviously going to be of factor, but our teams have done a nice job going out and winning business I think I mentioned last quarter as well. We are we are introducing more relevant styles, we have gotten stale in that portfolio. So we launched the new colors here in February that will help us as we go forward, we've got another round of inter.
Reduction of product as well and the next launch bucket, which would be the August September timeframe. So it's a combination of easier comps sales team really driving growth and product relevance.
Lastly from me.
Big picture broadly.
What is.
And this kind of environment, where you are seeing incredible top line growth.
And it is married with inflation.
I guess, how do you feel about your mid term margin targets and are they achievable as we think about this next kind of fiscal year. That's coming up is do you think that you can get to that mid teens with the strength that we're seeing or do you think that it's a.
Tough tougher call given the inflation.
Yes, I think it is a tougher call it the inflation at this point in time, we're in the we're actually in the middle of our budgetary cycle. So we'll do that throughout the February timeframe with closure in early April and give you I'll give you all of perspective of our next call of how we see fiscal year 'twenty two shaken out obviously sales growth to be strong the question around margin profile.
<unk> is going to be really dependent upon the input cost and ultimately what the pricing powers back against that so do I think we're going to jump to that long term target next year, that's going to be challenging but that still is our target. That's still what we're striving to drive forward and achieve obviously in this environment with it being such a strong sales.
On the share capture has been a big part of the story for US. So we want to make sure we capture as much of that as we can but now let's be a little bit more discipline around pricing knowing that we've got escalating material costs.
Thank you guys I appreciate it.
Yes.
Is there any further questions. Please press star and then one at this time.
Yes.
Yeah.
And our next question will be a follow up from Tim Weiss with Baird.
Hey, Thanks, guys for the extra questions just just two things on the balance sheet.
I guess, when you think about the potential to refinance here.
What are the kind of the targets I guess you guys are looking at in terms of the visit just extending maturities is there an opportunity to lower rates and just kind of curious where you kind of see that and then secondly, it sounds like youre going to restart the buyback and should we just think of that as offsetting dilution or is there going to be an opportunity to maybe take some of the the overall share count out.
Yeah, So Tim I'll answer the first of all around the debt first and really what we're doing is as we evaluated all of the physicians that are out there. We're seeing the historic low rates that are out there today currently and that is our main goal is to really maximize kind of are and take advantage of those rates reduce our interest costs and kind of return some of that benefit back to our shareholders.
So that is really our priority as far as the total deal structure of what it's going to look like we're still evaluating that we're going through that process now and we will definitely give you more color as we go through that and explore that the share repurchase right. Now too is what we're doing is we definitely want to be anti dilutive against anything that we're going to do from a future perspective.
As an opportunity to be more accretive there we will look at that throughout the fourth quarter and more guidance to come as we go through there.
Okay, Okay, and then and then I'll sneak one last one of it.
The made to order business.
Within the home centers.
How do you kind of think of that trending over the next year or two just in terms of I know thats been a copper channel just just for the industry over the last five years I mean is there any.
<unk> focus there by the home centers could could drive traffic into the meet the order platform or how would you kind of think about conceptually what made the order can look like over a couple of year period.
Yeah, I think it's tough to go out multiple years at this point in time, clearly depot and Lowes, if you've followed their earnings release over the last few days, they're going to struggle with some comp issues because of the outstanding comp results they've had over the last three quarters of reporting wise.
Still believe there's an opportunity to grow our business in that particular category and both retailers and that's how we'll set our targets and goals as we push forward with that level of the growth is.
Probably the question Mark over the next couple of years, we've certainly seen consumers flock to the home centers with this COVID-19 environment can the hang on to those consumers as we get past some of the restrictions and we get more of the population vaccinated I think is probably the largest wildcard as to what exactly their footprint will be as we go for.
For many categories, including ours.
The thesis for many years, the millennials wouldn't shop at home centers that they were going to shop elsewhere, when they got into the home buying or home improvement.
Model and I think we've we've modified the thinking around that obviously over the last 12 months.
And now that they've got those consumers in the stores, we all need to work together on making sure we keep them and we keep new ones coming in so we can continue to drive growth in that category.
Okay. Okay. That's helpful. Appreciate the color thanks, guys.
And our next question is the follow up from Justin Speer with Zelman <unk> associates.
I just wanted to sneak one more and just from the free cash flow side guys.
What are you thinking from the free cash conversion.
I'm looking at the payables I know you kind of bucket them together in the release with the.
Some of the of crews, but what was the payables contribution and how should we think about the X I think that's been a pretty good tailwind here, thus far of the year.
Yes, just on looking at our free cash flow, we still expect this year to be relatively strong from us.
We did the actions of their debt Paydowns net kind of re emphasizes our position about because they will be strong given the share repurchase kind of reiterate that too.
Regardless of the payables, you're seeing the increase in inventories and payables kind of comps.
Comparable rate that's out there as well so youre seeing of really the offset there, but I'd say what are the challenges that we had in this quarter was around our customer receivables and our air balances and it's not concerns around collectability.
<unk> of the payments that were received in the within the quarter. So we showed a little bit of I would say performance degradation in Q3, but we will expect to pick that up in Q4.
Excellent thanks, guys I appreciate it.
Yes. Thank you.
As I do not see anyone else waiting to ask a question I'd like to turn the line over to Mr. Johannes Roth for any closing remarks.
Okay.
One second thank you.
As of since there are no additional questions. This concludes our call. Thank you all for taking the time to participate.
Yes.
The conference has concluded. Thank you for attending today's presentation you may now disconnect.