Q1 2020 Earnings Call
Please standby.
Good day welcome to the American Woodmark Corporation first quarter 2020 Conference call. Today's call is being recorded August 27 2019.
During 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 still net leverage and adjusted EPS per diluted share.
The earnings release, which can be found on our website at www Dot American Woodmark Dot com. It's those definitions of each of these non-GAAP financial measures of the company's rationale for the usage and a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures. We also use our web site to publish the information that may be important to investors such as an investor presentations will begin the call by reading the Companys Safe Harbor statement under the private Securities Litigation Reform Act of 95.
All forward looking statements made by the company involve material risks and uncertainties 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 statements.
Such factors include but are not limited to those described in the Companys 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 I know I would like to turn the call over to Scott Caldwell Senior Vice President and CFO . Please go ahead Sir.
Good morning, Ladies and gentlemen, welcome to America landmarks first fiscal quarter conference call.
Thank you for taking time to participate joining me today is Cary Dunston, Chairman and CEO Caryl begins her view of the quarter and I'll add additional details regarding our financial performance. After our comments, we'll be happy to answer your questions Gary.
Thank you Scott and good morning to you all first quarter proved to be positive. Despite some significant headwinds and challenging revenue comps. We are very pleased with our financial performance, particularly related to our adjusted EBITDA and earnings per share.
Net sales for the fiscal quarter were down 8.4% for the business as a whole this continued volatility by channel.
Within new construction, we grew our business 4.5% over prior year.
Our Timberlake direct business come very favorably well off brainless P.C.S. business in southern California experienced a year over year decline.
Our Timberlake direct business once again outperformed the market and our competition in alignment with our strategic expectations. Our success is even more evident in comparing our growth to the 7.5% market decline when considering the 60 to 90 day lag between the start of a home and movie install our cabinets.
Our ability to continue to gain share even in the current market is a reflection of our direct to builder service platform and our recently expanded offering with our lower price point Orange product.
Although the movement to opening price point homes remains a challenge for builders, we are definitely beginning to see a shift towards a lower price point.
Consensus among builders remains fairly strong towards first time, homebuyers, particularly with lowering mortgage rates as reported last quarter, we are experiencing volatility by region, but then turned Blake.
Oh, it's remained strong in the North East, Texas, Atlanta, the southwest and Northern California, We have experienced some softening in Florida that continue to believe this temporary as builders remain confident particularly as they head into the second half of their fiscal year.
With regards to our new construction piece, yes business that is concentrated in southern California market. We continue to experience a decline in housing starts and the positive the comps did trend more favorably throughout the quarter housing affordability remains a critical issue in this region driven by land labor materials and overall infrastructure costs, we do expect comps to continue to improve in this market as we head into the fall with the hopes of restoring our business to positive comps in the second half of our fiscal year.
It is also important to note that despite or negative comps starts data in southern California and shows we over index in this market as we did on our Timberlake side.
Looking at a remodel business, which includes our dealer distributor and home center business as revenue was down 3.4% per year, our combined home center business was down 3.1% with positive comps within our stock business and negative comps within made to order. We were pleased with the positive comps in our stock business, particularly Bath and Vanity within made to order. It continues to be a challenge for all suppliers in our home Center partners. Unfortunately, along with a lower comps we have seen an increase in promotional activity. We do not believe elevating promotions with a made to order to even higher levels will be effective although affordability is a challenge to consumers wanting to remodel. So too is the inherent complexity that consumer experiences during the ideation and purchasing process an indication of how important attacking this complexity is can be seen in our designer series platform not only did we launch it with a new and much simpler program at one of our key partners. It is also a frame this product as more appealing to the younger consumer we continue.
We experienced strong double digit growth on this platform and expect it to remain so into the future as such we are very focused on our strategy within made to order to remove complexity that will not only offer a superior customer experience or improve the cost structure of the business.
Regarding our dealer distributor business, we were down 4.8% for the quarter do you there was relatively flat while distribution comp negatively in accordance with casein may data overall dealer and distributor sales, particularly within semi custom continued to show strong declines the story in the dealer channel is very similar to what we are seeing within home center demand by the more affluent consumer for higher end special order cabinets has been trending down over the past year at the same time, we are seeing a shift downward in price point by new consumers.
Fortunately as consumers move into the lower price point space within dealer the industry is seeing more of an impact from the Chinese imports, albeit with a lower skew count. This product comes standard with all private construction and other features only found a higher level American make cabinets ended at price points as well below what American manufacturers can achieve.
Although the cost of this project has been impacted by terrorists. The cost Delta was so significant that even with the tariff increases thus far they're still selling at a price point below local manufacturers.
This is a whole premise of the American kitchen Cabinet alliance anti dumping lawsuit.
The initial countervailing duty was successful earlier this month.
However, the most significant duty will be tied to the anti dumping finding then find use in October .
Within American Woodmark, we believe the AK CA will be successful and encourages all field there is potential upside to our current revenue outlook, we have the right product at the lower price point to be successful.
In summary on revenue quite a bit of variation by channel and within geographical regions. Although the housing market has certainly slowed we remain confident and continued growth this year and the long term outlook for the industry.
Building affordable homes remains a key bottleneck. The good news is that with lowering interest rates affordability is improving.
However, inflationary drivers with material labor and land cannot be overlooked in the housing industry as well as the overall macro and micro factors impacting our economy and consumer confidence. So good news is that single family starts to turn positive on year over year growth in July .
We expect a favorable trend going forward with the industry growing at a low single digit rate for our fiscal year.
We believe we will continue to gain share in over indexing industry with our direct platform.
As within new construction, the kitchen remodel industry will continue to see it move down and price point.
Future growth in the industry is dependent upon the ability for us all to adapt and change we're beginning to see two excuse me are beginning to undergo what I believe to be a major shift in buyer demographics. This change will have a very significant impact on our targeted customer how they shop, where they shop, what attributes are important to them and the price point. They are willing to pay personally I look forward to this change.
We believe we're very well positioned to make the shift to the next generation buyer, both within remodel as well as new construction, we have the right products and systems today and are working diligently on innovative solutions for tomorrow. However, we must also work closely with our retail partners to ensure we significantly shift the current model minimizing complexity within the value stream and the consumer buying experience will be critical as well as leveraging future state product and the digital space to deliver superior customer experience.
Moving on to gross margin despite very significant cost headwinds. We finished the quarter at 22.1% I mentioned last quarter that our teams continued to do an outstanding job of leveraging our operations to drive efficiency improvements. This work continued and a significant impact on our first quarter, we managed to offset much of the cost associated with terrorists the loss of overhead absorption cost associated with beginning to read though relocate one of our California facilities and the Particleboard supply disruption.
Regarding particleboard supply, we previously reported a major supplier experienced a significant fire that shuttered one of their large particle board planes. Shortly thereafter. They made the unexpected decision also close to remaining particleboard plants and U.S. This left the industry with a capacity shortage within particle board.
As our customers have always come to expect our teams that is simply amazing job, a very quickly finding alternative supplies, including product substitution where appropriate.
Although we have a material variance in fact, we've already what could have been a very detrimental impact on our customers and thus our company.
Scott will provide you with more details on the expected cost impact. Shortly we are currently working with our insurance carrier to recover as much of the cost as we can however, the final note impact has yet to be determined and remains a potential headwind.
Scott will also provide you with some detail cost data related to the terrorists and the countervailing duty as a reminder, we have not taken any pricing actually related to tariffs.
I personally team continues to work hard and mitigating our exposure on the materials side of the business the announced expansion of the three one tariff on September 1st to include such items as hardware and glides, a direct impact on our cost and that would be difficult to offset simply due to limited sourcing options. However, we remain focused on driving internal efficiency improvements and we will continue to evaluate the need for pricing action.
Moving on to adjusted EBITDA margin, we finished the quarter at 16.3% versus 15.9% from prior year.
As I mentioned previously considering the cost headwinds we experienced we are very pleased with his performance. The key driver. Once again is the operating efficiency of our integrated platform as well as lower S. unit costs. We are extremely proud of the work accomplished and how United The team has been on driving operating results on adjusted net income we generated $36.1 million in the quarter up slightly from 36 million in prior year and our adjusted earnings per diluted share was $2.13 versus 2004 cents prior year.
Lastly, we continue to be very pleased with our cash flow generating $56 million of free cash flow versus $41.4 million in prior year, we paid down $42 million of our term loan and reduced our net leverage to 2.35.
In summary, although we are disappointed and overall market growth and our corresponding revenue growth, we overcame significant cost headwinds in the quarter in January that strong financial returns, we remain confident in our ability to operate at a high level of efficiency in their platform and to continue to capitalize on cost synergies from the acquisition.
However cost headwinds will continue most notably the the impact of tariffs the relocation of our facility in California, and the net impact of the park aboard supply issue.
Regarding revenue the market is volatile we expect new construction to improve as we head into the fall or low cost platform is performing very well yet our revenue synergies are running at a rate lower than expected due to the slowdown in the market the transition to lower price point homes is accelerating however, and we remain well positioned excuse gain share with our origins product home center is challenging yet remain very focused on our strategic relationships with our partners I am concerned with the increasing level of promotions with both home centers as well as within dealers as stated previously I firmly believe that this is not the best investment impact consumer we're focusing on making strategic investments that will reduce complexity and connect with the next generation consumers.
Within our stock business, we do expect to continue to see growth. We are confident in our ability to grow both the bath and kitchen businesses as we capitalize on revenue synergies and the strength of our platform.
Overall, we know that trying to predict our industry in the short term will be increasingly difficult. Yet. We also accept that this makes it even more important that we get the longer term future right on this I'm extremely confident our new vision. We recently launched is already challenging our teams in January and thoughts and ideas never before imagined not only will we be ready for the future will be driving the future with that I. Thank you and I will now turn it back over to Scott for the detailed financials. Thanks Terry.
Financial headlines for the quarter net sales were $427.4 million, representing a decrease is your 0.4% over the same period last year.
Adjusted net income was $36.1 million or $2.13 per diluted share in the current fiscal year versus $36 million or $2.04 per diluted share last year.
Net income was positively impacted by lower selling and marketing expenses and lower interest expenses.
Adjusted EBITDA was $69.6 million or 16.3 person that sales compared to $68.1 million.
10.9% of net sales in the same quarter of the prior fiscal year.
The increase during the first fiscal quarters, primarily due to improved operating efficiencies and lower selling and marketing expenses.
The new construction market remain challenging during the quarter.
Recognizing a 60 to 90 day lag between start and cabinet installation. The overall market activity in single family homes was down 7.5% for the financial first quarter.
Single family starts are in March April and they averaged 838000 units starts over that same time period than prior year average nine or 6000 units.
Our builder channel net sales increased 4.5% for the quarter. Despite a continued slowdown in the southern California market.
Remodel business continues to be challenging.
On the positive side unemployment remains low.
The July you three unemployment rate was 3.7%.
And you six or 7% both measures were lower than in July 2018 reported figures.
Interest rates decreased in the quarter with a 30 year fixed rate mortgage at 3.77% in July a decrease of approximately 76 basis points versus last year.
This year first time buyers increased gene reported rate was 35% versus 31% reported last year.
Keep in mind this year remains well below the historical norm of 40%.
All cash purchases and June was 16% down from 22% last year.
Consumer sentiment increased to 98.4 in July versus and then simply not reported July 2018.
On the negative side existing home sales decrease during the second calendar quarter 2019.
Between April and June 2019, existing home sales averaged <unk> 0.2 8 million units.
Same period for 2018 hours 5.41 million units a decrease of 2.3%.
The meetings listing home price was 4.3% to an all time high $285700, Virginia.
Impacting our consumers affordability index.
Homeownership rates remain low versus historical averages the percent of Americans in her home in the second calendar quarter was 64.1%, which is slightly lower than last year's rate.
Our combined home center and independent dealer distributor channel net sales were down 3.4% for the quarter with home centers, decreasing 3.1% and deal with distributor decreasing 4.8%.
The company's gross profit margin for the first quarter since the year 2020 was 22% in the sales.
Versus 22.3% reported in the same quarter of last year.
Gross margin in the first quarter was unfavorably impacted by lower sales volumes terrorists cost impacts related to our park water supply disruption of approximately $1.6 million and duplicate rent costs related to our California facility move a $400000. These impacts were partially offset by improved operating efficiencies.
Total operating expenses were 11.7% of net sales in the first quarter fiscal 2020.
Compared with 12.3 person that sales for the same period in fiscal 2019.
Selling and marketing expenses were 4.8% of net sales in the first quarter fiscal 2020, compared with 5.3% in net sales for the same period in fiscal 2019.
The decrease in ratio as a result of ongoing expense controls and lower personnel costs.
General and administrative expenses were 6.9% of sales in the first quarter fiscal 2014, compared with seven person enough sales for the same period in fiscal 2019.
The decrease in the ratio was driven by lower incentive compensation cost.
Free cash flow totaled $56 million for the current fiscal year compared to $41.4 million in the prior year.
The increase is primarily due to additional net income generated in the period and lower capital spending.
Net leverage is 2.35 times adjusted EBITDA in the first fiscal quarter and the company paid down $42 million and it's a term loan facility during the quarter.
On August 22nd 2019, the board authorized stock repurchase program of up to $50 million.
In closing, although sales performance was lower than expected due to continued weakness in the remodel channel. We are pleased with our adjusted EBITDA performance during the quarter.
Regarding our previously disclosed synergy targets in $30 million to $40 million within three or four years.
We've realized our cost synergy targets, we continue to make progress and sale synergy capture.
At the end of fiscal 20000, 2020, we will realize roughly half of the total anticipated synergies.
With respect to the preliminary countervailing duties and termination else on August 6% to 16.1%.
We can be exposed to approximately five and a half million dollars into England direct cost increases in addition to three or one tariffs.
Our teams are working to mitigate the impact through supplier negotiations supply chain repositioning internal productivity measures and pricing actions needed.
To the tariff changes can you just don't communicate in August 20, Threerd 2019 go into effect, we would have an annual exposure of approximately two to two and a half million dollars, which is included in our outlook for fiscal year 2000.
We believe Particleboard supply disruptions will continue to have a negative impact on at least our second and third quarters.
Cost could be negatively impacted by approximately $2 million to $5 million per quarter until fully resolved.
We continue to work with our insurance carrier on this matter in spectra recovery portion of the losses incurred but there will be a lag.
As a result of the slowing trends and remodel channel the company expects that it will grow sales at a low single digit rate in fiscal 2020.
This growth rate is very dependent upon overall industry and economic growth.
Margins will be challenged with the increases in labor cost raw materials tariffs and transportation rates. The company will also be negatively impacted by the news or whatever California facilities and incremental merchandising expenses.
The company expects adjusted EBITDA margins to decrease slightly or remained flat with prior year results.
Upon the outcome of our insurance recovery related to Particleboard supply disruption.
This concludes our prepared remarks, we'd be happy to answer any questions you have at this time.
Thank you.
If youd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to buy or sell a tree tree equipment again press star one to ask a question.
And we'll take our first question today from Justin Speer with Zelman and associates.
I think you guys I really appreciate it thanks for the color also on the Hearthside path and the tariffs one of the one of the unpack the competitive dynamics in the repair remodel channel.
Any perspective, you can provide a what's taking place and how your performance compares to underlying market growth.
Yeah, and the change in promotional cadence across the landscape just context around what you're saying and and and whether or not you think that's going to be an ongoing theme for the balance of the year.
Hi, Justin to that's a big question with regards to how how the iron ore market from a competitive landscape is really shaping up.
Yeah, I'll say within homes under its home center is primarily a us another two other key competitors. So.
You know that it is down we mentioned our negative comps our competition mentioned negative comps in home centers themselves to talk about negative comps you know just the move down and price point I think the challenge at home centers are having to making sure. They can make that transition and attract the next generation into the the stores, where we're confident they can do that.
We're just going through a transition here and unfortunately that transition.
With the pressure to try to improve comps were seeing an increasing level of promotional activity and.
It's it's a definitely concerns me because its not where we feel the investment should be made and and then they get a last I don't know us it's been an ongoing now for.
Three years four years with a steadily increasing level of promotional activity in that channel. So I keep saying every every quarter every every six months or years at some point. It has to stop you can't keep taking brown side to be up and up and up and at some point. There has to has to be a resolution to it and so we're continuing to make a lot of investments in those channels, but more on the strategic side, we're not really willing to take our promotional levels up to any any higher significant levels. It's just a it's just not.
Good ROI on that but same time, we are willing to work with our partners and and they make song strong business decisions. So home centers all unknown right now on the MTO side, when you get into the the stock side of the business.
More more encouraging more promising as I mentioned, we do expect to to achieve positive comps going forward within the stock business and.
And I think it's just part of that is you're seeing a move down and price point and and just the overall success of the model that we offer. So oh, we are confident in that space and then as I mentioned to designer series, which has been one of the one of our business partners. It's it's growing very very well. So obviously at lower revenue platform right now, but it has been growing very strong for a number of quarters now. So we feel strong about that when you get to a dealer distributor.
As a case he made data shows and as I commented that we're definitely seeing that move down in price point, which is impacting the overall comps within the dealer distributor world.
I think and the comment I made about the.
The future state concerned next generation consumer and the consumer walking a door now that's not willing to pay the.
You know the levels that I think the more fluent consumer is really led us to enjoy the past seven eight years.
We'll see how that impacts the business, we're definitely see a seen a more prominent impact even on our business and obviously you know dealers much less.
Some of the personal side of our business is most prominent and then home center and our new construction business, but we certainly still feel the impact and we're starting to see some that Chinese impact now and well see where it goes with tariffs and so forth you know with or without tariffs. We remain very very focused on creating a very competitive solution that that lower price point and.
And we now have the platform to do it so we need to and we're working on expansion opportunities. We're working on are are frameless opportunities and.
And so for US we continue to feel very confident in our ability to grow within the <unk> dealer distributor world.
You know overall from a market share perspective, obviously is pretty clear, but continued to gain market share in new construction.
I think when you really look at remodel it it's hard because it gets pretty diluted out there, but right now basically we feel we're in a line that we're not losing share anywhere where basically indexing with the market within remodel space, but obviously that is will be dependent somewhat on where the where we go and home center with regards to.
Oh the.
Oh, sorry, yeah promotion, sorry, <unk>, where promotions going so well see but right now we're holding share.
And so that's good color across the different pieces of the business. There and then there's the other element. There's so much there's so many moving parts, but the other one of the other elements.
You mentioned were terrorists and anti dumping duties.
Can you run through your thoughts on the impact of the industry and more specifically more pertinent to your business with these elements in the background, what's taking place in the near term and reaction to those tariffs and how you think if it sounds like you think will be successful, but how you think that will manifest itself in your business model.
Yes. Another good question you know up to this point I can say other than from a cost impact you know its and its obviously impacted the industry as a whole we communicate early on there was less of an impact on our business. Just because we are we are not that dependent on Chinese imports, we certainly have some supply over there.
Some things like like glides and a lot of the hardware are you getting our industry basically trying to use it for source. So when we talk about the limited sourcing Austin's with regard to the expanded three one tariff that impacts the industry as a whole, but once again were much less.
No dominant on that that supply chain. So obviously with a low cost in the Mexico base. You know, we have fared fairly well and we continue to fair fair very well with regards to move down in price point.
With our service model, we're very competitive in new construction, so the Chinese tariffs and the impact of Chinese product really is not impacted single family New construction you do see it multifamily we go up against it and some of the Binion. We're out there doing now but once again service is also important in that industry, where you really didn't see any impacts in the dealer World and then I guess jumping into home center on made to order you don't see much of an impact either other than just a little bit of the cost side, where where the industry's regret they've been impact isn't dealer and I think we'll see how that plays out. That's that's been less is obviously, it's important to us from a channel perspective, but yeah. It makes up a lower percentage of our total revenues. So you've not seen us impact as the Sniffily has some of the others.
So with regards to where we feel the future holds and who knows obviously with the tariffs material one tariffs on they have a big impact on the Chinese imports.
And now obviously with the 8-K C. A in the countervailing duty and the related with regards to the anti dumping in October that will have a significant impact on the cost of the Chinese imports our goal and stated goal all along and I know others have have tried to express as well as you know we will start to very very conscious of price elasticity. Our goal is not to go out there and just you know take prices up in the industry. We have been extremely focused on trying to offset the tariffs via resourcing, particularly bring a lot of that internal into our our Mexico supply chain as well as some other resource in options. We have and then offsetting that with efficiency. So as we're very proud to this point, we have not passed any price increases on and.
And we feel we can remain very competitive at those lower price points. So it depending on what the anti dumping tariff comes in that we do expect that there could be some opportunity and upside to to our revenue as we head into a particularly our third quarter. You know are starting to see more I'll say more calls and more interest from potential partners out there and potential retailers in the dealer world that they're asking a lot of questions and do have some concerns with regards that the Chinese product, but yeah, I think thats good for US. It's good for American Cabinet companies you know our goal once again, it's not to just go out and take prices up its to be competitive and create a level playing field at the at that lower price point, we have the right product. We just have to change the middle models with regards to the fact that you all private construction what value. It brings at a lower price point you know, it's not necessary. We you can produce a very high quality cabinet beautiful kitchen.
At that lower price point with with our our pod and other American made product and that's really the message in the <unk>.
Perfect. Thank you guys appreciate the time.
Thanks, Justin.
Next we'll hear from Truman Patterson with Wells Fargo.
Yes, actually this is a possible scale or I was wondering if you could give us any color on how sales trended on a monthly basis through the quarter overall and then by the channel.
Not a whole lot of detail on that other than you have mentioned on the the single family starts we do trend as you watch you know single family starts trend, we do trend fairly in line with that although we are getting a lot of volatility by region, but in general we are trending more favorable.
Within single family, New construction, and we expect to do that going into the fall as a retail single family New starts will improve Megan every mile side and it's just been pretty volatile out there. So it's it's it's hard to really talk about month to month.
Right now you know there are no indications you and every model a world that anything exists it's going to turn remodel around I think it's we've got to get that younger consumer into the you know the let's say the existing home market I've been saying for many many many quarters now that you know getting first time homebuyers are getting existing homes out there at a price point that the younger folks can afford is very critical so inventories remain very very low with existing homes at the right price point, and it's really driven by baby boomers aging in place and just that moved down and move up process has not happened so.
I think you're going to start to see that as time goes on it will improve the remodel market.
It's a just a question of timing right now I think most the most out there, saying flat to low single digit is really what you're looking at and remodel.
Okay and then.
Gross margin was better next expectations any chance that influx on a quarterly basis and 20.
I'm, sorry, I didn't quite catch your question there, yes gross margin was it was better than expectations and I was wondering if there was any chance that that might inflect year over year on a quarterly basis. This year.
So we really don't want to talk about quarterly guidance as we look forward, we provide a perspective on the outlook for the full year. So I'll just take you back to Greg's remarks are our variable at this point in time is really around that part of the board expense recovery.
And depending on how that plays out either will be will be flat with prior year from an EBITDA margin perspective or down just slightly.
Okay. Thank you.
Yeah.
Next we'll hear from Gary <unk> with Longbow Research.
Hi, This is Jeff Stevenson on for Gary. My first question is just how quickly to expect some of the anti dumping benefits to drive upside revenue potential you talked about earlier if that October thing goes through.
No I think what we're like I said, we're starting to get some calls the matter of actually making the decision and pulling the trigger.
I think folks are going a little bit more of a wait and see mode to see what happens, but they also recognize it at that anti dumping takes place it's instantaneous.
So I think over the next three to four months, we're definitely going to start to see opportunity and potential. The big question is how much potential is there it's very difficult for us and I know everybody else in the industry really kind of pinpoint what that is and what that will be we're not willing to put a number out there. Obviously makes it it's just too difficult to I think it's going to be a slow trim would up burden or that tobar anti dumping hits and then we certainly will start to see that pick up much more quickly, but it's very very dependent upon what that they're dumping tariff comes in that you know if it's if it's too low.
There's a chance it may not have a drastic impact so it really is very dependent upon what the ruling is on anti dumping.
Okay great.
And can you give a little more color on the timing and execution of the 50 million buyback program.
So we've got the authorization in play and the way we're going to look at that as it's going to be an opportunistic repurchase. So no specifics will offer. Other then we'll evaluate where appropriate price is just that we believe drastically value for shareholders and we would execute but purely opportunistic debt pay down continues to be our primary focus.
Okay. Thank you.
[noise].
Our next question will come from Tim Weiss with Baird.
Hi, gentlemen, good morning.
All right then.
So so maybe my first question just kind of some clarification around around guidance.
On on that on the EBITDA line Scott did the.
The duties to five and a half million is that is that in the <unk>. The the guidance now I'm just trying to understand what exactly is in and what might have changed or not.
Yes, sure. So all of the tariff impacts that were currently aware of including announcements on Friday with the the increases of 5% on the two different buckets. Those are all fully incorporated in captured in the outlook.
And the <unk> and really the only deviation is that the particle board you had the public will vote for a cost impact and then it's really just the timing around if you'd get that insurance recovery you know in fiscal 2000 year to date with falling to 21.
What's actually twofold, there Tim first is the timing of recoveries that will be a lag when we get it and then secondly, we'll we've fully recover all of the expenses associated with it that's the piece that's still open and that's what drives the variability in the in the guidance.
Okay. Okay got you there Okay, and then second any way to think about an updated expectation for for free cash flow for that for the year.
We did not work through that from a modeling standpoint for the year. Obviously, we started off with a pretty strong Q1 results, but I'm not ready to change the outlook at this stage.
Okay, and then carry maybe kind of kind of that you know.
Solomon on it one of your prior comments.
What level of kind of anti dumping dumping tariff what kind of narrowed the gap of kind of swinging the pendulum towards the domestic manufacturers just need to put some context.
Yeah. When you look at the anti dumping I think I've heard anywhere from 50% to 100% is being done to what wed hope to to achieve.
You know obviously its a.
Very dependent upon a lot of things, but I think it is a minimum of 50% would probably be required to to really start to see some closure of that cost delta.
Okay. Okay. That's helpful. And then maybe just the last one for me.
Any update that kind of how you're thinking about material cost and freight for the year. Scott I think before you would expect them to be flat to up slightly I'm just kind of curious if that's changed at all.
Yeah, obviously, the particle board is a factor we're seeing increases in until all that capacity comes online that likely continues plywood pain steel continue to be elevated we have seen lumber prices start to it. The other way. So also declined from inside the quarter, primarily around here you know still think it's an inflationary environment fuel came down for us in the period, but we still do see elevated carrier rates are wrong because were contracted predominantly so we still expect that to continue as we as we push forward now those contracts come up for renewal will have the opportunity to more closely align with market rates and perhaps get adjusted for that time.
Okay. Okay sounds good thanks, guys nice job on margins.
Hi, Justin.
As a reminder press star one if you have a question, we now hear from Julio or marrow with Sidoti and company.
Yes, Hey, good morning, everyone.
Good morning, William.
I wanted to ask about little more about the particle board supply disruption.
You mentioned that you were able to find.
Products substitute pretty quickly so that two to two and a half million of incremental costs or would that be just I guess, primarily due to incremental transportation costs is that the right way to think about that.
No. It was actually material cost associated there are some transportation and so it's all in but it's primarily actual material cost on the material itself.
Some of the transportation some of it's actually you had to go out on the spot market. You know so we had to move away from contracts and go out on the spot market and buy.
Which drives up material costs and then there were some actual price Delta is based on the subject to show that we had to use its actually a superior superior product.
Material, but she had a we had to pay more for it.
Got it and you said you expected at this point to affect at least your second and third quarter.
You know what are what's kind of the puts and takes there that would potentially push that out to maybe the fourth quarter and beyond.
We don't expect those much risk there and I think that's basically what's very dependent upon as there's a actually a little there are several companies in a process of bringing on capacity in America as we speak. So our plan is very dependent upon their timeline and getting it because that capacity up on plan right now everything looks fine.
We don't expect any issues, but obviously there are a few unknowns are few risks there based on her willing their ability to get started but but right now everything appears to be coming up on plan.
Okay very good and just my last one here is.
On the Arseight synergies I think you had said you expect half of your annual run rate achieved by by end of your fiscal 20.
Would that maybe being that you expect about a third of your expected revenue synergies, but by that time or is there a different way to kind of think about that thank you.
Yes, I'll just take you back that are more so we believe we'll have the cost component captured by the end of the fiscal year.
And then the remaining delta would be related to the sale synergy you curious talk to.
Links really the last couple of quarters on that's coming slower than expected on the sales side with the cost come in a little bit faster, but again, we expect to be the half realized by the end of this fiscal year.
Okay, so up to about half all in revenue at cost.
That's correct.
Okay, great. Thanks, a lot appreciate it.
Yes, I do not see that there is anyone else waiting to ask a question I would like to turn the line over to Mr. Colebreath for any closing comments. Please go ahead Sir.
Since there are no additional questions. This concludes our call. Thank you for taking time to participate.
That does conclude today's conference call. Thank you for your participation you may now disconnect.