Q2 2023 American Woodmark Corp Earnings Call
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Speaker 1: The.
Speaker 2: Good day and welcome to the American Woodmar Corporation second fiscal quarter 2023 conference call.
Speaker 2: Today's call is being recorded November 22nd, 2022.
Speaker 2: During this call, the company may discuss certain non-GAAP financial measures, including in our earnings release such as adjusted net income, adjusted EBITDA, adjusted EBITDA margin, free cash flow, net leverage, and adjusted EPS per diluted share. The earnings release, which can be found on our website, americanwoodmark.com, includes definitions of each of these non-GAAP financial measures, the company's rationale for their usage.
Speaker 2: and a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures.
Speaker 2: We also use our website to publish other information that may be important to investors, such as investor presentations.
Speaker 2: We will begin the call by reading the company's Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.
Speaker 2: All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on factors that may be beyond the company's control. Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statement.
Speaker 2: 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.
Speaker 2: 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 variance will not be realized.
Speaker 2: I would now like to turn the call over to Paul Johinczak, Senior Vice President and CFO . Please go ahead, sir.
Speaker 2: Good morning ladies and gentlemen and welcome to American Woodmarks second fiscal quarter conference call.
Speaker 3: Thank you for taking the time today to participate.
Speaker 3: Joining me is Scott Culworth, President and CEO .
Speaker 3: Scott will begin with a review of the quarter, and I'll add additional details regarding our financial performance.
Speaker 3: After our comments, we'll be happy to answer your questions.
Speaker 3: your questions. Scott?
Speaker 3: Thank you, Paul, and thanks to everyone for joining us today for our second fiscal quarter earnings call.
Speaker 3: Our team delivered net sales of $561.5 million or growth of 23.9%.
Speaker 3: Our made-to-order frame backlog, represented by days of production, decreased in the quarters, production levels exceeded our incoming order rate, and we still expect our backlog to normalize by the end of the calendar year.
Speaker 3: Our stock platform is stabilizing as overall demand returns to normal levels and our current staffing is able to fully support.
Speaker 3: Within new construction, our business grew 33.3% versus prior year.
Speaker 3: Order growth remains strong across our markets as builders work to complete homes and their backlog.
Speaker 3: We are monitoring recent trends with interest rates, home prices, and declining single-family housing starts.
Speaker 3: We firmly believe the long-term fundamentals of the market are strong. As the deficit of homes built fall short of household formations,
Speaker 3: but a slowdown will occur in County Year 23.
Speaker 3: Our teams will continue to pursue opportunities to grow our share with new and existing customers.
Speaker 3: Looking at our remodel business, which includes our home center and independent view and distributor businesses.
Speaker 3: Revenue grew 17.5% versus the prior year.
Speaker 3: Within this, our home center business was up 10.3% versus the prior year.
Speaker 3: With regards to our dealer distributor business, we were up 46.2% versus the prior year.
Speaker 3: Our JESD to DBA dye increased 120%.
Speaker 3: to $67.6 million, or 12% for the quarter.
Speaker 3: Reported EPS was $1.73 and adjusted EPS was $2.24.
Speaker 3: The improvement in performance is due to pricing that are matching inflationary impacts.
Speaker 3: mix, and improve deficiencies in the manufacturing platforms.
Speaker 3: Our cash balance was $44.8 million at the end of the second fiscal quarter, and the money has access to an additional $239.4 million under its revolving credit facility.
Speaker 3: Leverage was reduced to 2.23 times adjusted EVA-Dot.
Speaker 3: We committed to restore profitability and are delivering on that commitment.
Speaker 3: We are facing additional headwinds as consumer behavior shifts due to housing affordability and overall macroeconomic uncertainty.
Speaker 3: Rising interest rates are impacting single family new construction starts. And our demand is slowing.
Speaker 3: We are prepared to navigate short-term demand reductions and our product portfolio is positioned to win and attract customers in a more difficult economic environment.
Speaker 3: Our full year outlook now reflects a low double digit growth rate in net sales, with negative sales comps expected in fiscal Q4.
Speaker 3: Despite this revenue headwind, we are maintaining the expectation of low double-digit adjusted EBITDA margins for the fiscal year.
Speaker 3: Our team also continues to execute against our strategy that has three main pillars.
Speaker 3: growth.
Speaker 3: digital transformation, and platform design.
Speaker 3: Growth from our most recent summer launch of four new finishes and several new door styles continues to perform well as exceeding internal targets.
Speaker 3: Digital transformation efforts over the last fiscal quarter include the planning efforts for the next implementation area of ERP and our manufacturing operations.
Speaker 3: and we entered the design-build phase of our CRM project.
Speaker 3: Platform design work continues and after a comprehensive review of our platform, we identified the need for additional capacity in our stock kitchen and bath cabinetry product lines.
Speaker 3: We announced last month a $65 million expansion in Monterey, Mexico and Hamlet, North Carolina.
Speaker 3: By adding a fourth facility in Mexico and expanding our hamlet location, we will strengthen our overall supply chain and allow for incremental capacity in both categories on the East Coast.
Speaker 3: which is one of the largest repair remodel in new construction markets.
Speaker 3: In closing, I am proud of what this team accomplished in the second fiscal quarter and look forward to their contributions during the second half of fiscal year 23.
Speaker 3: I will now turn the call back over to Paul for additional details on the financial results for the quarter.
Speaker 3: Thank you, Scott.
Speaker 3: financial headlines for the quarter and year to date.
Speaker 3: Net sales for the second quarter of fiscal year 2023 were $561.5 million, representing an increase of 23.9% over the same period last year.
Speaker 3: And year-to-date, our net sales were $1.1 billion, representing an increase of $208.6 million, or 23.3%.
Speaker 3: Adjusted net income was $37.3 million, or $2.24 per diluted share in the second quarter of fiscal year 2023, versus $10.4 million, or $0.62 per diluted share last year. Adjusted net income for the second quarter of fiscal year 2023 increased $26.9 million due to higher sales.
Speaker 3: largely driven by price increases, and partially offset by higher material and logistics costs.
Speaker 3: Year-to-date, our adjusted net income was $65.6 million compared to $22 million in the prior year, representing a 43.6 million increase or close to 200% improvement.
Speaker 3: Adjusted EBITDA for the second quarter fiscal year 2023 with 67.6 million, or 12% of net sales, compared to 30.8 million, or 6.8% of net sales for the same quarter of the prior fiscal year, representing a 520 basis point improvement year over year.
Speaker 3: Adjusted EBITDA year-to-date is $124.1 million compared to $62.9 million prior year-to-date, representing close to a 100% increase. Looking at our sales channels for the quarter, the combined home center and independent dealer distributor channel net sales increased 17.5% for the second fiscal quarter, with home centers increasing 10.3% and dealer distributor increasing 46.2%. New construction net sales increased 33.3% for the second fiscal quarter compared to the prior year.
Speaker 3: with growth in both Timberlake units and dollars.
And the first question will be from Adam Baumgarten from Zelman <unk> Associates. Please go ahead.
Hey, good morning, everyone nice results.
I guess, maybe to kick off just on the home Center business can you maybe talk to what Youre seeing or what you expect going forward from a promotions perspective.
With regard to promos, we've not seen a significant change in cadence Adam it's been plateaued for probably the last three quarters, which was down versus the prior year. So no significant change there I will pivot, though until you then in the dealer space. We are starting to see a bit of an increase from a competitive standpoint with regards to promos.
Not taken any specific actions yet there.
Okay got it thanks, and then just a couple of others. One just maybe on what youre seeing on raw material costs.
Cost if they are deflating at all at least on a sequential basis and then just to confirm your youre still expecting capex to be $3 to three 5% of revenue for 2000 fiscal 'twenty three.
Yes, I'll take the inflation comment then have Paul speak about Capex. So on inflation, what we have seen is a bit of relief on some of the species of hardwood lumber. So the index has started to move down but at the same time, we continued to see increases in the index specific to commodities, such as plywood particleboard and other inputs.
Paul on capital on capital, Adam really we're maintaining that outlook for the three to three 5% and were running up a little bit late in the first half of the year, but remember we are doing those plant expansions for in hamlet North Carolina in Monterrey, Mexico, which will have somewhat of a capital intensive position into the back half of the year.
Hey, guys. Thanks, a lot.
And our next question is from Tim <unk> with Baird. Please go ahead.
Hey, guys. Good good morning, Nice job, Hey, Tim Good morning. Thanks.
Hey, maybe just to start could you just kind of kind of pop around your business, a little bit and talk about what youre seeing from an order rate perspective bye bye.
By channel, maybe where youre seeing maybe some of the strongest activity in some of the weaker activity and just maybe give us.
What the order rate activity looks like relative to some of the shipments youre seeing right now.
So Tim My earlier remarks, certainly on the MTO platform, we were seeing incoming order rates decline and we were able to help produce out which is allowing us to bring down the backlog, which is something we want to accomplish we're still on track to be able to do that by the end of the end of the calendar year when I think about the different channels, we continue to see.
The strong performance in new construction dealer distributor I think last quarter I said.
We started to see some slowdown in incoming order rates and the home centers around our <unk> platform.
As a pivot over to our Frameless business at Tcs, that's continued to be strong.
We need to see strong unit shipments and strong order rates on that platform and then on the stock business, specifically, that's starting to normalize we've been chasing inventory restocking positions with our retailers, we're almost well.
Against that specific goals that we've got with our retailers. So you will get to a better position of matching.
POS as we go forward in that platform last comment I'll make is on the unit side MTS MTO and Tcs units were up for us in the quarter. So it wasn't just purely price driving the sales result, but we did see units down on the stock platform.
Okay. Okay. That's helpful. Thanks, a lot and then I.
I guess.
What's the expectation.
You see a slower environment I guess in the fourth quarter I mean, what what levers could you pull internally to kind of offset the.
The decremental margins and I guess, what would you kind of help us with in terms of what a decremental margin on lower volumes would look like.
So Tim specific to the.
Forecasting we've held our EBITDA forecast for the year, even with the softer Q4, so we'll be able to still deliver on expectations. There and what are the things that we'll do as we see volume slow will the first thing. We'll do is you will right size and adjust where we need to it's out of our factories were able to do that relatively easily through <unk>.
Christian at this stage.
But thats the current thought process as we go forward, we will continue to tightly manage and control our SG&A spending, which we've always historically done. So we will throttle that as appropriate to ensure we can deliver the results we need to I don't have an exact decremental number on a quote for you at this particular point in time, because I don't think it's a big story for Q4, I think that will matter more as we start thinking about.
24, but we have not started our planning process for that yet as you know we will kick that off in the January February timeframe, okay. Okay. Good.
Thats helpful. And then just a bigger picture question just.
How is would mark investing or I guess positioning themselves in two areas.
The first I was thinking about with e-commerce, and if that could be a kind of a growing channel for cabinets overtime and then.
Second I guess would just be alternative materials, maybe using things that that are more composite relative to what I'm just kind of curious how youre thinking of those two types of opportunities and maybe the receptivity of those on the part of the consumer.
Sure I'll take the second one first so with respect I'll turn materials, we have introduced an all MDF door into the marketplace.
Been very well received we've been producing that for quite some time.
But right now.
A nice substrate from a finished standpoint with regards to pain tightened up some of the joint lines that we sometimes have quality concerns about so we have done quite a bit of work in the alternate materials and we've launched those in the marketplace and they've been well received specific to E. Commerce, we do engage in e-commerce today through our retail partners. So we do.
About 5% of our business now online through our retail partners. So our work in that space is continuing to drive asset rich content, so whether it would be.
360 views or visuals.
Visualizes et cetera to be able to see what's inside the cabinet to really get folks excited about our purchase.
Also how do we continuing to engage with consumers maybe they start off on our website and go to a retailer's website get to a purchase so how do we keep them engaged from the onset of inspiration all the way through to purchase so yes, thats enacted piece of our business, it's something we partner along with our retailers and we're going to continue to drive more sales through that overall channel.
Yeah.
Okay, Okay, great well good luck on the rest of the year guys. Thanks for the time.
Thanks, Tom Thanks, Tim.
The next question is from Colin <unk> with Jefferies. Please go ahead.
Hey, good morning, Thank you for taking my questions.
So I appreciate the high level commentary on volumes with product category, but can you quantify the price versus volume in the quarter and just give us a little bit of guardrails on how youre thinking about the magnitude and cadence of volume declines in the back half of the year just to get to that down sales in the fourth quarter that you guided to.
Yes, Colin I think we've probably hit this a couple of quarters now, but we're not breaking out the price versus quantity beyond what we've already disclosed.
Okay.
And then I guess just in terms of the capacity addition, can you just walk us through the rationale here for the additional capacity just given the weakened weakening macro backdrop and just any color on the timing of this capacity coming online.
Would be helpful.
Yes, So first let me hit the timing when the capacity comes online. So we're targeting is the March April 2024 timeframe. So I think the fourth quarter of that fiscal year into the into the first quarter of fiscal year 'twenty. Five is when we'll really be able to utilize that capacity to drive incremental sales growth to.
To the first part of your question why do it and the why now.
My first response would be that.
We're in this for the long game not the short game. So short term disruptions macroeconomic uncertainty going into 'twenty three that's a factor, but that doesn't affect our five year strategy and what we're looking to accomplish and achieve between now and fiscal year 'twenty eight so.
So we believe we need this capacity to be able to meet the overall demand needs and sales growth goals that we've got as an organization, we're presenting our strategic plan to our board next week.
And then we plan to release within the quarter and updated Investor Relations deck, which will give you some perspective on what those five year goals would be from a revenue and profitability standpoint, but this project will be critical to allow us to achieve that.
Alright, Thats really helpful color and then just last one you called out in lumber prices hardwood lumber prices coming down in certain species I guess any way you could help us understand the magnitude of those declines and then is that enough to offset cost inflation that you're seeing in other areas or are you still expecting to see.
Pressures from a from a cost perspective going forward. Thank you. So the decline in lumber is not significant enough to warrant a pricing reset with any of our accounts. So we still are at a point in time, where we're balanced. So we're not seeing enough rollback to go engage in any of the channels with any kind of price reduction so although hardwood lumbers come down we're continuing.
See increases again in many of the other categories.
Such as plywood and part of the board.
Great. Thank you for all the color.
And the next question will be from Steven Ramsey from Thompson Research Group. Please go ahead.
Good morning wanted to hear a little bit more on the share gain opportunities you've mentioned for 2023, maybe talk about buy by channel and market and how it works to gain share in periods of slower demand.
Yes, so Stephen good morning that specifically was tied to new construction as we're thinking about it so as we see a slowdown there is there opportunity to go grab share I can tell you over the last year year and a half we've had accounts come to us looking for incremental volume capacity, we were tight and didn't habit. So we were having to say no.
So now we're able to release our sales teams to re engage in those conversations and explore opportunities to either convert existing communities were established new communities with our product.
Okay helpful. And then a quick follow on to that does the recent Capex announcement I assume this doesn't maybe help the near term, but does it help you gain share in new construction more than repair and remodel.
It will benefit both channels because that platform services, both both new construction and repair remodel.
Okay helpful. And then last one for me on the 2023 guidance.
Following a very strong first half how much for the second half does this.
Reflect just purely lower volumes or is pricing coming through more slowly anything to add there.
Our outlook is really about volumes, it's not a pricing conversation, we don't anticipate any price rollbacks and.
In fiscal year 'twenty three.
But we do see the units slowly.
Great. Thank you.
Yeah.
And the next question is from Julio Romero with Sidoti <unk> Company. Please go ahead.
Thanks, Hey, good morning.
So on that last question about the guidance it sounds like the changes the revenue guide.
And no change to the price, but it implies somewhat sharper expected slowdown in <unk> volumes is that largely led by what you're hearing on the builder side and what you expect from new construction units or or has there been a worsening in demand trends on the MTO side relative to three months ago.
Yeah. It was primarily a function of new construction as we've looked at the last 90 days the start data, which you see as well certainly implies that five to six months out from now is when we will see some of those impactful to our business that we're expecting a softer Q4.
New construction.
Got it makes sense and I guess, just if you could talk about inventory, where you are with regards to normalizing inventory levels.
What youre targeting either from a days on hand, or an inventory turns basis.
Yes, Julio with our inventory position, we're still elevated from where we want to be as a organization. Some of that still has a I'll call. It the leftover effects of a pivot of having just in case inventory, we are definitely shifting to more what I'll call.
Just back on just in time as supply chains are starting to improve we're going to target inventory reduction obviously tied to the lower sales under there as well, but just even from a working capital perspective of an organization.
Part of our kind of our investor presentation, we will get a little bit more color what that working capital will look like but right now, we're not giving a target or guidance for the rest of the year.
Okay, great. Thanks, very much for taking the questions.
Yes. Thanks.
And again, if you have a question. Please press Star then one.
The next question comes from Joe <unk> with Deutsche Bank. Please go ahead.
Hey, guys. Thanks for taking the questions.
Hey, good morning, good morning, Joe.
Good morning.
You just mentioned not expecting price rollbacks, there was some commentary earlier in earnings season from larger builders.
Negotiating cost reductions on starts going forward just wondering if that's something that you've been hearing or seeing and if not maybe why your business or your category is not subject to that.
We have not seen that specifically, Joe we've had a couple of builders ask about some price reductions, but we go back to the indices and again the indices are not indicating that we're at a point in time or would there be a reason for a price reduction.
Okay great.
The multifamily business on the new construction side I know, it's sort of limited regionally for you guys.
To the southwest but is there an opportunity for you to participate in that backlog given that now it's actually larger than the single family backlog.
Most of that shows up in our Pts business, which I mentioned earlier, that's a frameless application or a platform and that's been strong for US as you noted it is regional it's mostly a southern California.
Phoenix or southwest.
Our southwest region play for US it's been strong the backlog is high we have not made as much progress, bringing that down so that will continue to be something we'll be focused on in the back half is normalizing the production platform of BCS.
Alright, thanks for the questions guys.
Thanks, Joe.
And the next question will come from Garik <unk> with loop capital. Please go ahead.
Hi, This is Jeff Stevenson on for Gary Thanks for taking my questions today.
Just wanted to dive more into the home center business in the <unk>.
Trends youre seeing there and.
And expectations moving on to your back half of your fiscal year.
I guess, nothing really incremental to add beyond the earlier remarks, Jeff again, our <unk> business has softened we referenced that last quarter.
Been maintained.
Reject that going forward to be the similar incoming order rate pattern and then on the stock side.
We made progress in recovering inventory stocking efforts necessary in the retailer. So we're not going to have that extra inventory build that we need to accomplish will be focused on PCF I'm sorry Pos.
Yes, but as we go forward.
Okay, Great and then regarding EBITDA margin.
And kind of firmly in the low teen margins range, you guided to but how should we think about the cadence moving into the back half of the year.
I guess you are asking is there going to be disruption may be quarter to quarter I would just say that.
Go back to our guidance low low double digit to my expectations would be in low double digit in the back half.
Understood. Thanks.
Ladies and gentlemen, this does conclude our question and answer session I would like to turn the line back over to Mr. Joe him check for any closing comments. Please go ahead Sir.
Since there are no additional questions. This concludes our call. Thank you for taking the time to participate.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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