American Woodmark Corporation (NASDAQ:AMWD) Q3 2023 Earnings Call Transcript February 28, 2023

Operator: Good day, and welcome to the American Woodmark Corporation Third Fiscal Quarter 2023 Conference Call. Today's call is being recorded, February 28, 2023. 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 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 and a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures. 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. 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 statements. Such factors include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission and the annual report to shareholders. The company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

I would now like to turn the call over to Paul Joachimczyk, Senior Vice President and CFO. Please go ahead, sir.

Paul Joachimczyk: Good morning, ladies and gentlemen, and welcome to American Woodmark's third fiscal quarter conference call. Thank you for taking the time today to participate. Joining me is Scott Culbreth, President and CEO. Scott will begin with a review of the quarter, and I'll add additional details regarding our financial performance. After our comments, we'll be happy to answer your questions. Scott?

Scott Culbreth: Thank you, Paul, and thanks to everyone for joining us today for our third fiscal quarter earnings call. Our teams delivered net sales of $481 million or growth of 4.6%. Our made-to-order frame backlog normalized as planned at the end of the calendar year. In addition, demand trends softened throughout the quarter within remodel, and as a result, we took several unscheduled production down days around the holidays. Recent trends, however, have improved, and we remain confident in delivering our full year forecast shared last quarter. Within new construction, our business grew 19.7% versus prior year. Order growth has slowed due to the decline in single-family housing starts that began last summer and fall. Builders are optimistic going forward as January sales have improved.

We continue to monitor recent trends with interest rates, home prices, household formations and consumer confidence. The long-term fundamentals of the market remain strong. There continues to be a deficit in the number of homes built falling short of household formations, but we acknowledge the slowdown will occur in calendar year '23. Opportunities remain to grow our share with new and existing customers. Looking at remodel, which includes our home center and independent dealer and distributor businesses, revenue declined 4.9% versus the prior year. Within this, our home center business was down 9.8% versus the prior year. Our stock in made-to-order kitchen business was down single digits with stock bath down double digits versus the prior year.

Our stock bath business was impacted by a promo loss versus the prior year at a retailer, along with inventory destocking efforts at our customers. With regards to our dealer/distributor business, we were up 14.4% versus the prior year. Our adjusted EBITDA increased 66.8% to $51 million, or 10.6%, for the quarter. Reported EPS was $0.88, and adjusted EPS was $1.46. The improvement in performance is due to pricing better matching inflationary impacts, mix and improved efficiencies in the manufacturing platforms. Our cash balance was $45.8 million at the end of the third fiscal quarter, and the company has access to an additional $277.6 million under its revolving credit facility. Leverage was reduced to 1.81 times adjusted EBITDA as the company paid down $46.1 million in debt during the quarter.

As I shared in the prior two quarterly earnings calls, we committed to restore profitability and are delivering on that commitment. A slowdown in demand will present a near-term headwind, but we were prepared to navigate short-term demand reductions, and our product portfolio is positioned to win and attract customers in a more difficult economic environment. Our full year outlook remains unchanged from the prior quarter as we continue to reflect a low double-digit growth rate in net sales with mid-single-digit negative sales comps expected in fiscal Q4. Despite this revenue headwind, we are maintaining the expectation of low double-digit adjusted EBITDA margins for the fiscal year. We released an updated Investor Relations deck in January that shared our view on financial performance over the next five years.

Photo by Collov Home Design on Unsplash

Despite a near-term slowdown in demand, we believe the 4% to 5% CAGR in net sales is appropriate, and then we will grow adjusted EBITDA little over $350 million. The key driver of margin expansion is tied to our platform design work that I will cover in a moment. Our team continues to execute against our strategy that has three main pillars: growth, digital transformation and platform design. Growth will benefit from our upcoming summer launch at two new finishes in several new door styles. Digital transformation efforts over the last fiscal quarter include the planning efforts for the next implementation area of ERP and our manufacturing operations, including global design and Monterrey location planning. We also completed the first two sprints in the build phase of our CRM project, which goes live this summer.

Platform design work is accelerating as ground break in dense occurred within the quarter for our expansion in Monterrey, Mexico and Hamlet, North Carolina, that will deliver additional capacity in our stock kitchen and bath cabinetry product lines. Automation efforts continue, and we have committed over $75 million in automation investments over the next five years. In closing, I am proud of what this team accomplished in the third fiscal quarter and look forward to their contributions during the fourth fiscal quarter of fiscal year '23. I will now turn the call back over to Paul for additional details on the financial results for the quarter. Paul?

Paul Joachimczyk: Thank you, Scott. Financial headlines for the quarter and year-to-date. Net sales for the third quarter of fiscal year 2023 were $481 million, representing an increase of 4.6% over the same period last year. And year-to-date, our sales were $1.6 billion, representing an increase of $229.6 million or 16.9%. Adjusted net income was $24.4 million or $1.46 per diluted share in the third quarter of fiscal year 2023 versus $9.9 million or $0.60 per diluted share last year. Adjusted net income for the third quarter of fiscal year 2023 increased $14.5 million due to higher sales, largely driven by price increases and improvements in our operations. Year-to-date, our adjusted net income was $90 million compared to $32 million in prior year, representing a $58 million increase.

Adjusted EBITDA for the third quarter of fiscal year 2023 was $51 million or 10.6% of net sales compared to $30.6 million or 6.6% of net sales for the same quarter in the prior fiscal year, representing a 400-basis point improvement year-over-year. Adjusted EBITDA year-to-date is $175.1 million compared to $93.5 million in the prior year, representing an $81.6 million increase. Looking at our sales for the quarter. The combined home center and independent dealer and distributor net sales decreased 4.9% in the third fiscal quarter with home centers decreasing 9.8% and dealer/distributors increasing 14.4%. New construction net sales increased 19.7% in the third fiscal quarter compared to the prior year. New construction sales outpaced market demand during the third quarter of fiscal year 2023, recognizing a 60- to 90-day lag between start and cabinet installation.

The overall market starts in single-family homes were down 24.6% for the fiscal third quarter. Looking at completions during our third fiscal quarter, we saw an 8.1% increase year-over-year. Given the decline in starts and a large separation between starts and completions, our backlog returned to normal levels within the first part of this quarter. The company's gross profit margin for the third quarter of fiscal year 2023 was 15.7% of net sales versus 11.3% reported in the same quarter of last year, representing a 440-basis point improvement. Year-to-date, our gross margin was 16.5% compared to 11.6% of net sales in the prior year. Gross margin in the third quarter of the current fiscal year and year-to-date was positively impacted by the pricing actions and operational improvements, offset by increases in labor and domestic logistic costs.

Total operating expenses were 10.4% of net sales in the third quarter of fiscal year 2023 compared with 10.2% of net sales for the same period in fiscal year 2022. Selling and marketing expenses were 4.4% of net sales in the third quarter of fiscal year 2023 compared with 5.1% of net sales for the same period in fiscal year 2022. The ratio to net sales decreased 70 basis points resulting from decreased spending and lower commission plan expenses, combined with leverage created from higher sales in the third quarter of fiscal year 2023. General and administrative expenses were 6% of net sales in the third quarter of fiscal year 2023 compared with 5.1% of net sales for the same period in fiscal year 2022. The increase in the ratio was primarily driven by increases in incentives and profit sharing, partially offset by leverage created from higher sales.

Free cash flow totaled a positive $91.5 million for the current fiscal year compared to a negative $48.8 million in the prior year. The $140.3 million increase in free cash flow was primarily due to changes in our operating cash flows, specifically higher net income, lower accounts receivable balances and lower capital spending. Net leverage was 1.81 times adjusted EBITDA at the end of the third fiscal quarter, representing a 1.72 times improvement from the 3.53 times at the end of the fiscal year 2022. As of January 31, 2023, the company had $45.8 million of cash and cash equivalents on hand, plus access to $277.6 million of additional availability under the revolving facility. The company paid down $67.3 million of debt during the first nine months of the current fiscal year.

Shifting our focus to the remainder of 2023. Our full year outlook remains unchanged, and we expect low double-digit growth rate in our net sales versus fiscal year 2022. To achieve this, our fourth quarter sales are expected to be mid-single-digit decline. The growth rate is highly dependent upon overall industry, economic growth trends, material constraints, labor impact, interest rates and consumer behaviors. Our EBITDA margin for the fiscal year 2023 remains low double-digit EBITDA percentages. It is great to see the commitment, hard work and efforts our employees invest in the company to achieve our results, and react to the changing dynamics in the macroeconomic environment. I'm grateful for what the team has accomplished and thank all of our team members at American Woodmark for their continued efforts.

They are the ones who make it happen daily. This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.

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