Q4 2023 American Woodmark Corp Earnings Call
Speaker 1: That to.
Speaker 2: and welcome to the American Woodmark Corporation's fourth fiscal quarter 2023 conference call. Today's call is being recorded May 25, 2023. During this call, the company may discuss certain non-GAAP financial measures included in our earnings release.
Speaker 2: such as adjusted net income, adjusted EBITDA, adjusted EBITDA margin, free cash flow, net leverage, and adjusted EPS per deleted share.
Speaker 2: The earnings release, which can be found on your website, americanwoodmark.com, includes definitions of each of these non-GAAP financial measures, the company's rationale for their usage, and a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measure.
Speaker 2: We also use our website to publish other information that may be important to investors, such as investor presentations. We will begin the call by reading the company's safe harbor statement under the Private Securities Litigation Reform Act of 1995.
Speaker 2: All overlooking statements made by the company involve material risks and uncertainties and are subject to the 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. The company does not undertake to publicly update or revise its forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
Speaker 2: I would now like to turn the call over to Paul Johimchak, Senior Vice President and CFO . So his take.
Speaker 3: Good morning ladies and gentlemen and welcome to American Woodmarks fourth fiscal quarter conference call.
Speaker 3: Thank you all for taking the time today to participate. 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. Scott?
Speaker 3: Thank you, Paul, and thanks to everyone for joining us today for our fourth fiscal quarter earnings call.
Speaker 3: Our team delivered net sales of $481 million, a decline of 4.1% versus the prior year, and in alignment with our outlooks here in last quarter's call.
Speaker 3: Within new construction, our business grew 5.3% versus prior year.
Speaker 3: Builders are cautiously optimistic going forward as sales have improved since the start of the year.
Speaker 3: Sun builders are now projecting modest growth and starts in 2023, versus a 10-15% decline forecasted entering the year.
Speaker 3: Cancellation rates have been normalizing, and new home sales have begun to improve.
Speaker 3: The long-term fundamentals of the market remain strong, and there continues to be a deficit in the number of homes built falling short of household formations.
Speaker 3: We plan to grow our share with new and existing customers.
Speaker 3: Looking at our model, which includes our home center and independent dealer and distributed businesses.
Speaker 3: Revenue declined 9.9% versus the prior year.
Speaker 3: Within this, our home center business was down 12.4% versus the prior year.
Speaker 3: Our made-to-order kitchen business was down single digits with stock kitchen bath down double digits versus the prior year.
Speaker 3: Our stock business was impacted by our promo loss versus the prior year of the retailer, and the entire stock business was negatively impacted by inventory destocking efforts at our customers, the sell-through fell short of POS.
Speaker 3: In addition, in-store traffic was down over the past quarter for our home center customers.
Speaker 3: With regards to our daily distributor business, we were down 1.5% versus the prior year.
Speaker 3: Incoming water trends in both areas have improved in the last two months as consumers and builders take on activity for the spring and summer.
Speaker 3: Our adjusted EBITDA increased 46.7% to $65.3 million or 13.6% for the quarter.
Speaker 3: Reported EPS was $1.80 and adjusted EPS was $2.21. The improvement performance is due to pricing better matching inflationary impacts.
Speaker 3: mix, and improve deficiencies in the manufacturing platforms.
Speaker 3: Operational performance continued with stability in our labor and supply chain which enabled higher platform efficiencies.
Speaker 3: Our ops team continues to drive excellence in our plans.
Speaker 3: Our cash balance was $41.7 million at the end of the fourth fiscal quarter.
Speaker 3: and the company has access to an additional $323.2 million in its revolving credit facility.
Speaker 3: Leverage was reduced to 1.37x adjusted EBITDA as the company paid down $65 million in debt during the quarter.
Speaker 3: with a significant improvement in leverage versus prior fiscal year.
Speaker 3: Our capital allocation will be revised to include opportunistic share repurchases in fiscal year 24.
Speaker 3: As a reminder, a $75 million authorization remains available for use. We committed to restore profitability in fiscal year 23 and we delivered on that commitment.
Speaker 3: Our outlook for fiscal year 24 assumes market declines in both new construction and repair in the model.
Speaker 3: Our expectation is for sales to decline low-double digits.
Speaker 3: Decremental margins are targeted to be in the teens, and our adjusted EBITDA expectations range from $205 million to $225 million.
Speaker 3: Our view on financial performance over the next five years remains unchanged. Despite a near-term slowdown in demand, we believe a 4-5% cagre of net sales is appropriate and that we will grow adjusted EBITDA at over $350 million.
Speaker 3: Our team continues to execute against our strategy that has three main pillars.
Speaker 3: growth, digital transformation, and platform design.
Speaker 3: Growth will benefit from our upcoming summer launch and the expansion of our brands and availability of existing product into additional channels.
Speaker 3: As an example, we recently expanded the availability of our low skew count, high value open price point cabinet line for our dealer network in the southeast.
Speaker 3: Digital transformation efforts over the last fiscal quarter include the ongoing planning efforts for the next implementation area of ERP and our manufacturing operations, including global design and Monterey location planning.
Speaker 3: Our team has completed six of the eight sprints of the build phase of our CRM project, which goes live this summer. Our team has completed six of the eight sprints of the build phase of the CRM project, which
Speaker 3: We have also invested in our online capabilities driving traffic and conversion through our home center and dealing with your partners.
Speaker 3: Specifically for home centers, we have placed emphasis on driving traffic and improving our SEO, which is leading to higher conversions than select made to stock programs. We have also committed to continued excellence in online content and best practices, including focusing on A-plus content for our product display pages, enhancing video, infographics, and 360-degree imagery.
Speaker 3: For Dublo Distributor, we continue to partner on our lead generation program, which allows us to drive leads to our Dublo network. We are also directly connecting those leads to our field sales team through our CRM.
Speaker 3: Additionally, we are committed to ecommerce expansion allowing our company to grow through our valued partners.
Speaker 3: Platform design work is accelerating with over 50% of the steel installed and initial wall panel installation underway in Monterey, Mexico.
Speaker 3: and a pad is prepped for footers in Hamel, North Carolina. This expansion will deliver additional capacity in our stock kitchen and bath cabinetry product watch.
Speaker 3: Automation efforts continue and we've committed over $75 million in automation investments over the next five years.
Speaker 3: with fiscal year 2024 projects focused on material handling, loading, unloading, inspection, and process automation.
Speaker 3: In closing, I am proud of what this team accomplished in the fourth fiscal quarter and look forward to their contributions here in fiscal year 24.
Speaker 3: I will now turn the call back over to Paul for additional details on the financial results for the quarter. Paul? Thank you, Scott. I will first talk about our fourth fiscal quarter results, then transition to our full year performance, and close with our outlook for fiscal year 2024.
Speaker 3: Net sales for the fourth quarter of fiscal year 2023 were $481 million, representing a decrease of 4.1% over the same period last year.
Speaker 3: The combined home center and independent dealer and distributor net sales decreased 9.9% for the fourth fiscal quarter, with home centers decreasing 12.4% and dealer-distributor decreasing 1.5%.
Speaker 3: New construction net sales increased 5.3% for the fourth fiscal quarter compared to the prior year.
Speaker 3: The company's gross profit margin for the fourth quarter of fiscal year 2023 was 20.1% of net sales vs. 13.9% reported in the same quarter of last year.
Speaker 3: representing a 620 basis point improvement.
Speaker 3: Gross margin in the fourth quarter of the current fiscal year was positively impacted by our pricing actions, operational improvements in our manufacturing facilities, and the stability in the supply chain.
Speaker 3: partially offset by increased costs in our labor and domestic logistic expenses.
Speaker 3: We are returning to our normal performance cycles where our fiscal Q4 and Q1 are at higher performance levels due to the seasonality of our industry.
Speaker 3: Total operating expenses, exclusive of any restructuring charges, was 11.8% of net sales in the fourth quarter of fiscal year 2023, compared with 10.1% of net sales in the same period of fiscal year 2022. The ratio increased 170 basis points due to increases in our incentives, profit sharing, and digital spend, partially offset by controlled spending in the S and T and A functions.
Speaker 3: Adjusted net income was $37.1 million or $2.21 per diluted share in the fourth quarter of fiscal year 2023.
Speaker 3: versus $22.9 million or $1.38 per delicious year last year. Adjusted EBITDA for the fourth quarter of fiscal year 2023 was $65.3 million or 13.6% of net sales compared to $44.5 million or 8.9% of net sales for the same quarter in the prior fiscal year.
Speaker 3: representing a 470 basis point improvement year over year. Commerce is expected to make a final determination prior to the filing of our Form 10-K .
Speaker 3: And if the company's two Vietnamese plywood suppliers are included, we plan to vigorously appeal such determination.
Speaker 3: We estimate the maximum potential impact on net income for prior purchases related to those duties to be an additional charge of approximately $4 million net of tax.
Speaker 3: For context, we have not placed an order since June of 2022.
Speaker 3: Our full year performance. Net sales were $2.1 billion, representing an increase of $209 million or 11.3%.
Speaker 3: aligning with our full year expectations of low double digit growth rate.
Speaker 3: The combined home center and independent dealer distributor net sales increased to 4.8% for the fiscal year, with home centers increasing 0.2%.
Speaker 3: and dealer distributor increasing 22.2%.
Speaker 3: New construction net sales increased 21.1% for the fiscal year compared to the prior year.
Speaker 3: The company's gross profit margin for the fiscal year was 17.3% of net sales versus 12.2% reported last year.
Speaker 3: representing a 510 basis point improvement.
Speaker 3: This is a great testament of the hard work and the changes the teams have put into place to return to our historical operating performance metrics.
Speaker 3: Total operating expenses exclusive of any restructuring charges were 10.6% in net sales in the current fiscal year compared to 10.2% in net sales in the prior fiscal year.
Speaker 3: The 40 basis point increase was due to the increases in incentives and digital spend partially offset by reduced spending across the SG&A functions and leverage created from the higher sales.
Speaker 3: Adjusted Net Income for the fiscal year 2023 increased $72.3 million due to higher sales, largely driven by price increases and improvements in our operations, offset by increases in our incentive and profit sharing expenses.
Speaker 3: Adjusted EBITDA for fiscal year 2023 was $240.4 million or 11.6% in net sales.
Speaker 3: compared to $138 million or 7.4% net sales for the prior fiscal year.
Speaker 3: representing a 420 basis point improvement year over year, achieving the high end of our expected range.
Speaker 3: The strong performance this year is a direct result of the hard work and efforts our teams have put into re-establishing our operating efficiencies, stabilizing our supply chain, and controlling our spending in the SG&A functions.
Speaker 3: offset by increases in incentive compensation and profiteering. Pre-cash flow totaled a positive $153.5 million for the current fiscal year compared to a negative $27.1 million in the prior year.
Speaker 3: The $180.6 million increase in free cash flows was primarily due to changes in our operating cash flows, specifically higher net income, lower accounts receivable, and lower capital spending.
Speaker 3: Net leverage was 1.37 times adjusted EVADA at the end of the fiscal year, representing a 2.16 times improvement from the 3.53 times at the end of fiscal year 2022.
Speaker 3: As of April 30, 2023, the company had $41.7 million of cash and cash equivalents on hand, plus access to $323.2 million of additional availability under its revolving facility.
Speaker 3: The company paid down $130.5 million of its term and revolving credit facilities in fiscal year 2023.
Speaker 3: Our outlook for fiscal year 2024. We expect low double digit declines in net sales versus fiscal year 2023.
Speaker 3: The change in net sales is highly dependent upon overall industry, economic trends, material constraints, labor impacts, interest rates, and consumer behaviors.
Speaker 3: Our EBITDA margin expectation for fiscal year 2024 is targeted in the range of $205 million to $225 million.
Speaker 3: Looking forward in the fiscal year, we will not be providing quarterly outlooks.
Speaker 3: I want to emphasize that our business is back to normal operating cycles where performance is at its highest levels in our fiscal Q1 and Q4 with lower expectations in our fiscal Q3.
Speaker 3: as we will be incurring a significant portion of the one-time charges related to the platform expansion of Monterey, Mexico and Hamlet, North Carolina.
Speaker 3: The total impact of these charges is approximately 8.1 million in the full fiscal year 2024.
Speaker 3: Our capital allocation priorities for fiscal year 2024 will first be focusing on investing back into the business for the plant expansions in Monterey, Mexico, Hamlet, North Carolina, continuing our path on our digital transformation with investments in Oracle and Salesforce, and investing in automation.
Speaker 3: Next, we'll be opportunistic in our shared purchases.
Speaker 3: And lastly, we have our debt position at a leverage ratio we wanted to achieve, and we will be deprioritizing paying down debt in fiscal year 2024.
Speaker 3: One additional item. For our earnings calls in fiscal year 2024, we will be adjusting the timing of the call to be after trading hours and will occur at 4.30pm EST.
Speaker 3: In closing, the progress made throughout the fiscal year has been great and to see those results fully read through to our financial performance.
Speaker 3: This is a testament to the commitment, hard work, and efforts of our employees that they invest in the company to achieve our results.
Speaker 3: and react to the changing dynamics in the macroeconomic environment.
Speaker 3: I am grateful for what the teams have accomplished and thank all of our team members at American Woodmark for their continued efforts.
Speaker 3: They are the ones who make it happen daily.
Speaker 3: This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.
Speaker 2: We will now begin the question and answer session. To ask a question you may press star then one on your touch tone phone. If you are using a speaker phone please pick up your handset before pressing the keys. To withdraw from the question queue please press star then two. The first question is from Adam of Delman.
Speaker 3: Thanks Adam. You know we're likely to see declines I think throughout calendar year 23 in both remodel and new construction. Most of the projections that are in the market have single-family starts down mid teens. I think there's maybe a little upside of that now based on the Q1 activity. And then on the remodel side that mid single-digit range, and I think you saw that validated with the home center reports over the last two weeks.
Speaker 3: We obviously expect to perform better than the market, and historically, on the margin side, we've targeted decrementals of roughly 25%. I think we'll beat that as well as we indicated with our outlook for fiscal year 24. Got it. Thanks. And maybe just on that decremental outlook, which is better than historical, I guess, what are the main offsets in fiscal...
Speaker 4: for the year.
Speaker 3: No, at this point in time we've lapped the pricing and we've not taken any pricing actions in any of the channels at this point in time.
Speaker 3: Okay, great. Best of luck.
Speaker 2: The next question is from Garak of Luke Capital. Please go ahead. The next question is from Abilities let's flip it over and
Speaker 3: Oh hi thanks and congratulations on the quarter. I wanted to just follow up on pricing if you've seen any change in pricing just given the weaker sales environment or if there's been any change to the promotional environment as well.
Speaker 3: Yeah, so we'll take each of those separately. So first on the pricing side, again, we've not taken any pricing actions in any of the channels. I would remind you that our profitability is now returning to the levels we were achieving prior to the inflationary impacts we've all experienced throughout the pandemic. Certainly we've seen some improvement in lumber, but I would also counter that by saying we continue to see increases in other categories like...
Speaker 3: an increase in promotional activity principally in the dealer distributor space and I think most folks are going to go to that category first as opposed to the opening pricing.
Speaker 3: I'm wondering if you could provide a little bit more color as to when the capacity is going to be fully online in North Carolina and Mexico and just your level of confidence in filling the capacity when it does come online. Yeah, the first comment I'd make is there's typically always a mismatch between the demand for food and it can't feel good but still having my Blessings wasn't very important. We answered that it makes a difference, we weren't getting paid for your food, if we didn't buy the same thing as well as your other food? Well, I think that the salad I looked for was instructors Lindsey, friends, I don't know enough age people to be here but I think it was because of the place that was in your
Speaker 3: We should have them online starting to ramp by the end of our fiscal year. So most of the benefit and expectations from microbial capacity really push into the next fiscal year.
Speaker 5: Okay, got it. All right, thanks for that. I'll pass it on.
Speaker 2: The next question is from Steven Ramsey of Thompson Research Group. Please go ahead.
Speaker 6: Hey good morning this is actually Brian Biroz on for Steven. Thank you for taking my questions.
Speaker 6: I think the on the guidance I think it applies even to margins hold roughly flat He's kind of touched on how much that implies for gross margins if that's flattish or if it's more on
Speaker 6: reduce top X or reduce marketing spend, I guess, are there additional levers you can pull throughout the year as the year progresses with a different outlook.
Speaker 3: Yeah, Brian , thanks for the question. Really it does account for there will be some gross margin expansion in fiscal year 2023. Some of that increased spend is going to come into the SG&A levers that are out there. There could be, I'll call it additional facets that we could do and adjust if the market demands change out there to really help overall drive and meet our expectations of the EBITDA that's out there.
Speaker 6: Got it, thank you. And I'll follow up, I guess, in the slower demand environment here.
Speaker 6: I think you touched on the prepared remarks a little bit, but can you talk again about plans for rolling out automation capabilities and if that's being accelerated or decelerated in this lower demand environment?
Speaker 3: any more additional color that would be helpful, and impactful, a quantity impact. So we continue to focus on automation. That's not a new topic for us. I think what's different is we've made a bit more of a declaration around the investments that we're targeting in that. So again, we're shooting for $75 million over the next five-year cycle.
Speaker 3: that's substantially more than what we would have spent in the prior five years. So we've got a whole host of initiatives that I already mentioned in the prayer remarks that were focused on specifically inside fiscal year 24.
Speaker 3: substantially more than what we would have spent in the prior five years. So we've got a whole host of initiatives that I already mentioned in the prayer remarks that we're focused on specifically inside fiscal year 24. Thank you. Thank you.
Speaker 2: The next question is from Colin of Jeffries. Please go ahead. Is K Severi as Sour phenomenon or dim primarily OMG
Speaker 7: Hi guys, thanks for taking my question in the great quarter. Maybe a little bit more longer term. I guess you're expecting that low double-digit decline in sales in fiscal 24 but can you just talk about how you're thinking about the timing and the pace of recovery baked into your five-year sales target of 2.6 billion and at least 350 million dollars into Utah. Do you see things bottoming out here in fiscal year 24 before returning to growth or it could taste like this.
Speaker 7: sort of decline kind of linger into fiscal year 25. Just any color, how you're thinking about the recovery would be great.
Speaker 3: Yeah, thanks for the question and I'll start by saying whatever assumption I have or statement I make I know I'll be wrong. So let's lead with that as a factor. When we gave our five year projection back in January that particular point in time, we had always assumed a recessionary impact. We weren't exactly sure when that was going to happen. It'd be 24, 25.
Speaker 3: But we modeled a down case and then we would grow back up off of that. So at this point in time we see most of that impact happening in 24. My crystal ball says that we would recover and start to see growth again in 25. But there's a lot of question marks that go into that.
Speaker 3: analysis.
Speaker 7: Great, that's helpful. And I guess the more near term, you talked about some destocking in the stock remodeling business. Any sense of the magnitude of what that destocking was and your expectations for any further destocking going forward in that channel? I think we've gotten through the destocking efforts and we're starting to see a little bit better uptick on.
Speaker 8: Okay, thank you.
Speaker 2: The next question is from Kent Wolf of Baird. Please go ahead.
Speaker 6: Hey guys, good afternoon or good morning or whatever it is. Good morning Tim. Nice job. Maybe just a bigger picture.
Speaker 6: Kind of conceptual question, just within your builder customers. I mean, is there any way to kind of think generally about what the runway there from a penetration perspective is? And I know it's not uniform across the customers, but just maybe give us an idea of, of, of maybe where kind of generally wallet share is today and maybe what's kind of possible over time.
Speaker 3: that we do business with the vast majority of the top 20 national builders, but that doesn't mean we have a position with each builder in each market.
Speaker 3: So the first thing our team always spends time focused on is their new opportunities new markets that we can explore to try to get incremental share gains with a particular account and that's through throughout that entire list of top 20 national builders I don't have an exact value to quote to you around the overall business
Speaker 3: We tend not to be a sole supplier except in limited cases, so our belief is we'll continue to get share really with the vast majority of those builders, and again, they're going to take share in the marketplace and have been demonstrating that certainly over the last couple of years.
Speaker 6: Okay. Is there a way to think how big is the national kind of top 20 relative to your total builder business or builder direct business?
Speaker 3: Maybe let me restate that. How much of our builder business goes to the top 20?
Speaker 6: Yeah, yeah, basically I'm just trying to think about how much, you know, if your builder business, how much of your builder business is going to the top 20 versus the other filters. Yeah, not an exact percentage to give to you, but it would be a high percentage.
Speaker 3: I'm just trying to think about how much if your builder business, how much your builder business is going to the top 20 versus the other builders? Yeah, not an exact percentage to give to you, but it would be a high percentage. I don't know about that. Okay.
Speaker 6: Okay, okay good. And then I guess from just a mixed perspective, I mean is there anything
Speaker 6: within the business from a mixed perspective that has changed over the last three to six months?
Speaker 6: No, nothing substantially changed on the mixed side. The last one, on inflation and deflation, thinking about fiscal 24, it does seem like materials have come down a little bit, whether that's plywood or particle board or maybe some of the hardwoods. The last one, on inflation and deflation, thinking about fiscal 24, it does seem like materials have come down a little bit, whether that's plywood or particle board or maybe
Speaker 6: Do you model or think about explicitly in fiscal 24 seeing some material deflation?
Speaker 3: When we go and put together our budgets and plans to try to figure out an outlook to be able to share with the investment community, we look at a number of different scenarios. One includes an inflationary environment and one that also includes a deflationary environment. I'll go back to the comments a few questions ago, though. So if we do see more deflation in model than assumed, there's likely some aspect of it coming our way on pricing, but we would be.
Speaker 6: to kind of offset, but it could kind of push the margins around from a timing perspective. You get it. You got it. Exactly. Okay. Okay. Gotcha. Good. Awesome. Well, thanks guys and good luck on the air.
Speaker 2: Thanks, Deb. Okay, and if you have a question, please press star, then one. The next question is from Julio Romero of Fidoti. Please go ahead.
Speaker 3: Thanks. Hey, good morning. Wanted to ask about the gross margin performance in the quarter. Just wondering if there's any way to put a finer point on how much of a benefit was the operational efficiencies in the streamlining you did in late calendar 22.
Speaker 3: Yeah, Julio won't dial in exactly, but a lot of the benefits that we received in our fiscal fourth quarter were due to some of the operational improvements that were out there. Not only are our plants running at our historical normal operating performances kind of pre-COVID levels, we're seeing improvements across our supply chains that are out there as well too. And then just, you know, we talked about automation. Some of those efforts are now starting to take hold and really kind of...
Speaker 3: about the balance sheet and your capital allocation priorities. Just how much more aggressive should we expect you to be with opportunistic repurchases in twenty four, just given the free cash generated in fiscal twenty three and the debt reduction you guys just did in the fourth quarter? I would just say we're going to be opportunistic.
Speaker 3: I would focus on that word. Obviously, we didn't do any repurchasing in 23. Our focus was on the leverage and debt, so we've done that. We've gotten below one and a half times, which is a fantastic result for this business. So we'll now look at our purchases, and Paul walked you through the various things that we'll focus on. We've got a plant expansion we're dealing with. We've got the automation we've talked about, and then we'll look at shares. Really helpful. I'll hop back into the queue. Thanks.
Speaker 3: Since there are no additional questions, this concludes our call. Thank you all for taking the time to participate.
Speaker 2: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.