Q1 2023 American Woodmark Corp Earnings Call
Good day and welcome to the American Widmark Corporation first fiscal quarter 2023 Conference call. Today's call is being recorded August 30th 2022 story.
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.
Earnings release, which can be found on our website American Widmark dotcom 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 measure. We also use our website to publish other information that may be important.
Do your investors such as Investor presentations.
We will begin the call by reading the Companys 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 maybe that may be beyond the company's control accordingly, the company's future performance.
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 there and will not be realized I would now like to turn the conference over to Paul Joe him check Senior Vice President and CFO . Please go ahead.
Good morning, ladies and gentlemen, and welcome to American <unk> first fiscal quarter conference call.
Thank you for taking the time today to participate joining me today is Scott <unk> President and CEO .
I 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 first fiscal quarter earnings call.
Our team delivered net sales of $542 $9 million or growth of 22, 7%.
The order backlog represented by days production decreased in the quarter as production levels improved and exceeded our incoming order rate.
We expect our backlog to normalize by the end of the calendar year.
Stock platform remains challenged with staffing levels and we saw a decline in units versus the prior year.
Our operations team continues to work on the actions that we will execute this fall to increase production capacity in stock kitchen, and bath, including footprint adjustments for Ya relocation. In addition, our production cells.
Within new construction, our business grew 27, 2% versus prior year.
Strong order growth remained across our markets as builders were to complete homes in our backlog.
We are monitoring recent trends with interest rates home price increases and declining single family housing starts.
We still believe in the long term fundamentals of the market is a deficit of homes built fall short of household formations and a slowdown would be relatively short lived.
Our teams will continue to pursue opportunities to grow our share.
Looking at our remodel business, which includes our home center and independent dealer and distributor businesses revenue grew 19, 6% versus the prior year.
Within this our home center business was up 15, 3%.
With regards to our dealer and distributor business, we were up 36% for the quarter.
Our adjusted EBITDA increased 76% to $56 5 million or 10, 4% for the quarter.
Reported EPS was $1 21, and adjusted EPS was $1 71.
The improvement performance as did pricing better matching inflationary impacts mix and improved efficiencies in our manufacturing platforms.
Our cash balance was $33 $7 million at the end of the first fiscal quarter and the company has access to an additional $239 $4 million under its revolving credit facility.
We paid down $20 $6 million in debt.
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For the remainder of fiscal year 'twenty, three we expect slowing incoming order rates to impact the second half of the year along with the recent declines in single family starts.
We will continue to reduce our backlog throughout the calendar year and improve in stock rates with our retail partners.
Price realization will contribute meaningful year over year, and we estimate a mid teens growth rate in net sales.
We are prepared to navigate short term demand reductions in our product portfolio is positioned to win and attract customers in a more difficult economic environment.
Cost of goods sold inflation expectations for fiscal year 'twenty three remains at approximately seven 5% for materials and logistics on top of what was realized in fiscal year 'twenty two.
We expect low double digit adjusted EBITDA margins for the fiscal year.
I've noted in the past few calls that our teams are committed to restoring profitability.
We are well on our way and delivering on that commitment and continue to execute against our strategy that has three main pillars growth.
Digital transformation and platform design.
From our most recent summer launch of four new finishes and several new door styles has been.
<unk> positively by the marketplace.
Digital transformation efforts over the last fiscal quarter include the launch of our ERP optimization teams in our planning efforts for the next implementation area and our manufacturing operations.
We also officially kicked off our CRM project last month.
Platform design work continues as we activated warehouse management solution tool and our Texas D C and began producing stock bath products and additional locations to increase capacity.
In closing I'm proud of what this team accomplished in our first fiscal quarter and look forward to all of their contributions in fiscal year 'twenty three.
I'll now turn the call back over to Paul for additional details on our financial results for the quarter.
Thank you Scott.
Headlines for the quarter.
Net sales were $542 9 million, representing an increase of 22, 7% over the same period last year.
Adjusted net income was $28 4 million or $1 71 per diluted share in the current fiscal year versus $11 7 million or <unk> 70 per diluted share last year.
Adjusted net income for the first quarter of that fiscal year 'twenty three increased $16 7 million due to higher sales largely driven by price increases and operational efficiencies.
Actually offset by higher material and logistics costs combined with supply chain disruptions.
Adjusted EBITDA for the first fiscal quarter was $56 5 million or 10, 4% of net sales compared to $32 1 million or seven 3% of net sales for the same quarter in the prior fiscal year, representing a 310 basis point improvement year over year.
Looking at our sales channels for the quarter, the combined home center and independent dealer and distributor channel net sales increased 19, 6% for the quarter with home centers, increasing 15, 3% and dealer distributor increasing 36%.
New construction net sales increased 27, 2% for the first fiscal quarter with growth in both Timberlake units and dollars.
New construction sales channel outpatient market demand during the first quarter of fiscal year 2023.
Recognizing a 60 to 90 day lag between start and cabinet installation.
The overall market starts and single family homes were up 0.7% and their first.
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Looking at completions during our first fiscal quarter, we saw an 8% decrease year over year.
For the past year, plus we have seen a disconnect between starts and completions due to all the disruptions within the professions that support the new construction market.
Given the large separation between starts and completions, we are working starting to work into our backlog, which remains at elevated levels.
The company's gross profit margin for the first quarter of fiscal year 'twenty, three with 16% of net sales versus 12, 1% reported in the same quarter of last year.
Gross margin in the first quarter of the current fiscal year was positively impacted by the pricing actions and operational improvements offset by continued inflation in our input costs.
Total operating expenses were 10, 3% of net sales in the first quarter of fiscal year 'twenty three compared with 10, 6% of net sales for the same period in fiscal year 'twenty 2022.
Selling and marketing expenses were four 7% of net sales in the first quarter of fiscal year 2023, compared with five 2% of net sales for the same period in fiscal year 2022.
The ratio to net sales decreased 50 basis points, resulting from the controlled spending and leverage created from our higher sales in the first quarter of fiscal year 2023.
General and administrative expenses were five 6% of net sales in the first quarter of fiscal year 2023, compared with five 4% of net sales for the same period of fiscal year 2022.
The increase in the ratio was primarily driven by increases in incentives and profit sharing partially offset by the leverage created from higher sales.
Free cash flow totaled a positive $32 7 million for the current fiscal year compared to a negative $8 1 million in the prior year.
The increase was primarily due to changes in our operating cash flows specifically higher net income and higher accrued balances. In addition to lower capital spending which was partially offset by higher inventory positions.
Net leverage was two eight times adjusted EBITDA at the end of the first fiscal quarter.
During our first fiscal quarter, the company paid down $20 6 million of net debt.
The company's cash position and availability under our revolver as of July 31, 2022 was $273 1 million.
Shifting our focus to the remainder of fiscal year 2023, we expect mid 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 are in effect for the new construction and dealer distributor channels with home centers, taking effect during our fiscal second quarter.
Our adjusted EBIT margin expectations for fiscal year, 2023 is low double digit EBITDA percentage.
We are holding our capital outlook for fiscal year 2023, and we will continue our investment back into the business by increasing our capital investment rate to a range of three point.
Zero to three 5% of net sales.
As a reminder, these investments will range from the continuation of our ERP journey to get on the cloud.
Digital investments in our customer experience and reinvesting in our manufacturing facilities and platforms to help reduce labor dependencies improved quality and increase capacity.
We are choosing to make these additional investments into our core business, which will help improve our sales and enhance our margins in the future.
It is great to see all the hard work and efforts of our employees have put in the past two years start to show in the returns of our financial results.
<unk> resilience and ongoing contributions to the company's culture has set the stage for a strong start to our fiscal year.
I am grateful for what the teams have accomplished I want to thank all of our team members at American water Mark 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.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up the handset before pressing that Keith.
Withdraw from the question queue. Please press Star then two.
The first question is from Adam Baumgarten of Zelman. Please go ahead.
Hey, good morning, Thanks for taking my questions nice quarter.
Could you maybe talk about the split between price and volume in the quarter as we look at that 23% revenue growth.
Yes, we won't break it down in detail there, Adam but specifically across the platform is what I can tell you is our made to order business and our Pcs Frameless business were both up in units and then obviously price benefited both of those platforms are stock business as I mentioned earlier in my prepared remarks units were down that's not a function. However.
The demand that was a function of our production capacity, which was throttled by by labor availability.
Okay got it thanks, and then it doesn't sound like you have any additional pricing actions planned I know you mentioned in the home Center price increase goes effective in in the second fiscal quarter, but are there any other price increases in the works that we should be aware of.
We'll always be monitoring that based on the input costs, but we're not seeing anything at this juncture that would indicate we need to move if we were to see inflation continue and start to hit our trigger points for additional pricing action of course, we would do such but we don't see that today.
Okay, Great and then just lastly for me just on the input cost basket just it seems like a lot of moving pieces, maybe if you could just walk through what you're seeing certain raw materials, whether they've you know you've seen some relief in the logistics side too I think was called out so maybe just the moving parts within your input costs.
Sure on the logistics side, it'll be a function of fuel. So we've seen a little bit of a tick down on fuel so that'll start to benefit some of the fuel surcharges that we incur on the raw side I guess that would use the word maybe plateauing as maybe a way to frame some things specifically I'll talk about hardwood.
We've plateaued, it's still an all time high in that space.
I'll point out that that plateau point is higher than the point, we were paying when we took our life pricing action. So it's not that we're seeing deflation, we're seeing price come down, but we've really seen it plateau at a high point so no relief at this juncture, but at least the pace of increasing has slowed.
Great. Thanks, a lot.
Okay.
The next question is from Steven Ramsey Thompson Research Group. Please go ahead.
Good morning on the F. F Y sales guide I believe last quarter, you said mid to high teens now, saying mid teens is that the slower second half expectations or what other factors are driving that.
It's tied to the uncertainty about the second half when we gave that outlook in may certainly the mid to high teens was pretty solid as we fast forward 90 days to it throughout the quarter I mean, we basically delivered what we expected in the first quarter.
And really don't have any questions about our second quarter as we move into the end of the calendar year. The first part of the next calendar year. There are some questions and as questions. Obviously rely on new construction and what exactly is going to happen with single family housing starts and then what happens with the repair remodel business and time his comments, Steve and principally to our NATO.
Order business, our stock business, we expect to be resilient I don't have a lot of concerns in that space, but it's how does how does the MTO play out in the second half.
Okay helpful. And then a couple of questions on labor I guess overall, you've been building up labor to improve production and then you're coming up on a potentially slower demand period do you expect to adjust labor downward in anticipation of that and then.
Secondly.
The labor issues around stock, how do you see that evolving in the coming quarters.
Yeah. So I'll take the second question first so the labor challenges persist in the stat platform.
Ways, we're trying to address that as I mentioned in the last quarter call and reaffirmed today is we are shifting some of our sales and production capacity between plants, where we have a better market for labor. So we're trying to be aggressive in that space find opportunities to use the existing pool of labor, we've got an AD markets, where it's available.
Overall to the to the first part of your question around labor availability as I think about from a platform standpoint, we're in relatively good shape on our made to order business.
We are always going to be aggressive in navigating upticks in downturn. So you know our goal is to level load the platform as long as we can we don't want to be chasing spikes or big gets across the platform. So we use that backlog that we've talked about for the better part of last year and a half typically didnt navigate in man.
That we typically would see a slower season around the holidays, but we don't want to see a big reduction in our output all of a sudden December and then have to ramp up in January so we'll navigate that each month as we go forward and rightsize that.
Unfortunately, it retention attrition continues to be a high across really all of our platforms. So should we need to right size our platform.
We'd be able to accomplish that really with the attrition rates.
Helpful. Thank you.
The next question is from Colin Baron of Jefferies. Please go ahead.
Good morning. Thank you for taking my questions I just wanted to start on the order rates and the backlogs can you just give a little bit more color as to what youre seeing in order rates in August .
And what is in your backlog currently and just how much visibility that gives you into the rest of your fiscal year 'twenty three.
Yes, so it does depend on the platform. So I want to make sure we talk about where backlogs are really relevant and thats our made to order business.
So specifically in that area, we've had elevated backlogs for the better part of a year to the tune of two X plus what it historically would be we're starting to see those come down and by the end of this calendar year expectation would be that we'd be back to a normal state. So we've got very good line of sight as to what our production plan and output needs to be between now and.
December did you start to move into the January four timeframe that'll be a function of incoming order rates. So you asked specifically about the rates. We're seeing in August I would say they were fairly similar to July we've seen slowing order rates in our repair and remodel business, we're not yet seeing that new construction as our builders are looking to aggressively closeout the homes they've sold by.
The end of their fiscal year.
Backlog I think of as a different description across our stock platform. It's not that we have backlog per se, but we do have stocking opportunities with our retail partners and we are still not at targeted in stock levels at our retailers. So we've got the opportunity to continue to meet the existing demand as well as backfill the inventory in the stores.
As well so that gives us line of sight really as well into the first part of next year from a production platform standpoint.
Okay. That's really helpful color. Thank you and then just on your EBITDA margin in the first quarter.
It came in above what I think most people were expecting I think what your commentary was last quarter as well. So what factors came in better there and then just going forward how should we think about the cadence of EBITDA margin progression through the remainder of the year to get you to that low double digit EBITDA margin guide.
Yes, so in the first quarter versus our expectations that we had modeled as SG&A as a little bit better and then price and mix was a little bit better. So those are the kind of three big buckets that help drive over delivery from what our internal expectations were and what we guided.
We don't want to get into a method or approach of guiding quarterly on EBITDA. So we want to just take you back to our full year view.
We last spoke with you all back in May we were thinking high single to low double with.
Our performance in the first quarter and our expectations for the remainder of this year. We revise that we took it up and said we expect to be in low double digits as we go forward there.
There are some incremental pricing actions that will come our way as Paul highlighted so that'll benefit us. So yes, I would expect to see similar EBITDA margins here in the near term with the opportunity for progression as we go forward.
Great. Thank you very much and good luck for the rest of the year.
I appreciate that.
The next question is from Tim more of.
Please go ahead.
Hey, guys. Good good good morning, and nice job.
Thank you I appreciate it thanks, Tim.
Maybe just kind of starting out on on mix.
As you kind of look at the mix of of I guess the mix within kind of the incoming orders are you seeing any.
Any changes over the last six to nine months in terms of either positive or negative mix versus your expectations.
Not across price points inside the platforms I think you're probably asking specifically in made to order right are you seeing any kind of rotation up or down nothing that stands out at this point in time.
I'd say truly been each channel what are we seeing as rates and as I mentioned to the previous question, we are seeing slowing rates and repair remodel right. We're feeling that first so that's our home center dealer distributor business. So we're experiencing that and made to order, but not yet a new construction.
Okay.
Or the order volume rates still positive or have you actually seen those kind of kind of moderate even more than that.
Make sure I understand your question. So on the incoming order rates are we seeing a dip.
Declining pattern, you said, yeah, sure and I guess, when we say orders.
I don't know if you guys are thinking about it in dollar terms or in unit volume numbers. So I guess on a unit volume basis.
That's my in my remarks, where units based gotcha, Okay perfect yes.
And then I guess, just just from a longer term perspective, when you look at kind of the 16% gross margin rate that you were able to post this quarter and you go back a couple of years and you guys were doing upwards of 20% gross margins. I mean is there a pathway to getting back to that kind of longer term gross margin level over the next couple of years.
I think the way we've kind of framed this this business for the last two to three years, Tim is let's focus on the EBITDA margin. So I don't want to necessarily get into the specific ranging in target around gross margin other than it clearly can improve further from the 16% we just delivered.
So I would take us back to the EBITDA.
And we always talked about that mid teens rate net pricing is distorted a bit as to what's going to happen in the business. We've had significant price actions that.
Right.
Out of the gate is going to dilute what your EBITDA percentages, even with the same dollars. So our goal is to get back to the EBITDA dollar targets that we had prescribed.
Those outlooks.
Okay. Okay. Good and then from a free cash flow perspective, any any color on expectations for the full year.
Yes, it's really looking at free cash flow, we did perform strong in Q1 here without a doubt.
Some of the drags that are on there you can see on the inventories we have some opportunities for improvement, but we are going to continue to invest back into the business as we've talked about the three to three 5% of net sales. So that really is will be kind of our driving force. That's out there. So you kind of tie back to their EBIT percent that we're going to tie into and our sales growth. So really overall free cash flow.
Should be strong for the year in comparison to last year.
Okay. Okay. Good.
A nice start and good luck on the rest of your guys.
Thanks, Dan appreciate it.
The next question is from Gary Smalley.
With capital. Please go ahead.
Oh, hi, Thanks nice.
Nice quarter I wanted to ask.
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Pricing.
In promotions, if I could have one more price increase here to come in the second quarter, you put in a pricing earlier.
End of the year as well, but just given the potential slowdown in the market are you seeing any signs of the change in the competitive landscape any signs of returns two to promotions at all.
Not at the current time, we continue to see promos at similar rates to the prior quarters down slightly versus prior year. So nothing to indicate a change we'll be mindful of monitoring and watching that to see if competition or retailers look to go back to that our hope is not our belief for many many years and we've been vocal about this is that.
Promos are not necessarily driving new consumers into the outlets. Its basically just bundling the orders up into a shorter period of time, which creates order entry in manufacturing and delivery challenges. So our goal will be not to get back into a heavy promo cadence and let's try to maintain the current rates.
Got it okay. That's it from me thanks again.
Thank you.
Again, if you have a question. Please press Star then one the next question is from Julio Romero of Sidoti <unk> Company. Please go ahead.
Alright, Mr Prime deal in parochial Romero.
Hi, good morning.
Good morning can you talk about like the amount of price increases.
Taken in the quarter and what is embedded in your <unk>.
Full year revenue guidance and I guess the follow up.
<unk>.
Ah versus your own expectations.
Sorry could you repeat the last part of that question your second part.
What does it mean to elasticity versus your own expectations.
Yeah. So the first question you asked on the pricing not going to disclose specific price percentages from competitive standpoint, I don't think it's appropriate we don't see that in the marketplace from from others in the industry will.
We will just continue to tell you that the price is fully embedded in our outlook, we will realize the prices we've taken up to this point and then we're finalizing this last round with inside the home center a made to order business. So that's really going to close the loop there around elasticity.
I guess, it's tough to answer that question because theres. So many other circumstances that are on top of that so as the macroeconomic issue is it interest rates what exactly is driving it I'll just go back to the <unk>.
<unk>, we've been asked several times around incoming order rates, we have seen a slowdown in repair and remodel.
On our made to order business is that purely a function of pricing and as elasticity related to that or is it consumer confidence. So I don't think we have enough data yet to point to price elasticity I'll keep defaulting to.
Confidence quite frankly at this point in time being a question Mark and folks perhaps pausing.
But longer term home price appreciation drives home improvement demand and prices are still quite high even if they were to reset as some are suggesting there's still going to be quite high and I think when folks have that they have a willingness and an appetite to invest in their homes. So I'm not yet worried around elasticity.
Alright, thank you.
I guess my second question would be how should we think about inventory levels maybe.
Maybe stay at the same level now or maybe come down as a part of change.
So I'm going to use my views.
Yes, so really if you go back to kind of uncovered was at its peak.
So increased focused on supply chain resiliency really stockpiling inventory. So we wouldn't have shortages, we are going to go back to normal operating procedures. When the supply chain does come back to full I'll call stability, it's still not 100% there sorry inventory levels still do remain higher.
Normal, but we are working actively to bring those down to call back to more of a normal trends that are out there.
Alright, Thank you for taking my questions.
Thank you.
Again, if you have a question. Please press Star then one.
Yes.
I do not see there is anyone else waiting to ask a question I would like to turn the line over to Mr. Joe <unk> for closing remarks.
Since there are no additional questions. This concludes our call.
Thank you all taking the time to participate today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.