American Woodmark Corp

NASDAQ:AMWD

Earnings Call Analysis

American Woodmark Faces Decline Amid Soften Demand and High Interest Rates

American Woodmark reported net sales of $459.1 million for Q1 FY25, a 7.9% decrease from the previous year, driven by weaker demand. Adjusted EBITDA was $62.9 million, with plans to target $225 million to $245 million for FY25. The company attributes lower consumer spending to high interest rates and macroeconomic pressures. They remain optimistic for growth in 2025 as interest rates decline, projecting a resurgence in home projects. Despite market challenges, American Woodmark continues its focus on operational excellence and strategic investments in digital transformation and capacity expansion .

A Challenging Quarter

In the first quarter of fiscal year 2025, American Woodmark Corporation faced significant challenges, reporting net sales of $459.1 million, a decline of 7.9% from the previous year. Management attributed this decrease primarily to weakened demand in the remodel channel, particularly for large-ticket items. The housing market has exhibited signs of softness, influenced heavily by factors such as rising interest rates and declining consumer confidence. As a point of reference, the company observed a notable slowdown in single-family housing starts over the past three months, which also contributed to lower cabinet installations.

Profitability Pressures

Gross profit margins were also negatively affected, decreasing 180 basis points to 20.2%. This decline was linked to lower sales volumes affecting manufacturing leverage, coupled with increased costs in logistics, raw materials, and labor. However, operational efficiency initiatives helped to partially mitigate these impacts. Operating expenses dropped to 10% of sales compared to 12% a year prior, largely due to the end of acquisition-related intangible asset amortization that had previously inflated expenses.

Adjusted Earnings and Cash Flow

The adjusted net income for the quarter fell to $29.6 million, translating to $1.89 per diluted share, down from $46.2 million or $2.78 per share last year. This was compounded by a negative mark-to-market adjustment on foreign currency hedging instruments. The adjusted EBITDA was $62.9 million or 13.7% of net sales, a decrease from 15.1% a year earlier. Free cash flow dropped significantly to $29.4 million from $72.5 million, primarily due to increased inventory levels.

Looking Ahead: Economic Headwinds

American Woodmark provided a cautious outlook for the remainder of fiscal year 2025. The management anticipates a low single-digit decline in net sales relative to the prior year, contingent upon the continued softness in the Repair and Remodel market and reduced larger ticket remodel purchases. Projections suggest that larger discretionary projects may see a more significant downturn of high single digits.

Financial Stability and Share Repurchases

Despite the challenging environment, American Woodmark retains a solid financial position with $89.3 million in cash and access to an additional $322.9 million under its revolving credit facility. The company also continued its share repurchase program, buying back 171,000 shares, equivalent to 1.8% of outstanding shares. There remains $65.4 million authorized for further repurchases.

Guidance and Future Expectations

Looking into fiscal year 2025, the company is targeting an EBITDA margin in the range of $225 million to $245 million, influenced by reduced sales volumes and manufacturing inefficiencies. The management expressed optimism that as economic conditions improve, particularly through potential interest rate cuts from the Federal Reserve, consumer confidence could rebound, rekindling demand in both remodel and new construction markets, potentially benefiting the company in the latter half of 2025.

Operational Strategies

Management indicated they are not changing their capital allocation priorities and continue to invest in digital transformation, including ERP and CRM systems, and automation enhancements. These investments aim to support long-term growth and maintain operational efficiencies amidst current market pressures. The strategy also includes monitoring input costs closely and adjusting pricing strategies appropriately to mitigate inflationary impacts.

Earnings Call Transcript 2025-Q1

[Operator]

Good day, and welcome to the American Woodmark Corporation First Fiscal Quarter 2025 Conference Call. Today's call is being recorded, August 27, 2024.

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 the usage and reconciliation of these non-GAAP financial measures to the most recent, 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 may be made by the company involve material risks and uncertainties and are subject to change based on factors that may be beyond company's control.

Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in such forward-looking statements. Such factors include, but 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 publicity, update or revise its forward-looking statements, even if experience or future changes may make it clear that the projected results expressed or implied therein will not be realized.

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

[Paul Joachimczyk, executive]

Good morning, and welcome to American Woodmark's First 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 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?

[M. Culbreth, executive]

Thank you, Paul, and thanks to everyone for joining us today for our first fiscal quarter earnings call.

Our teams delivered net sales of $459.1 million, representing a decline of 7.9% versus the prior year. This was below our expectations provided during last quarter's call due to weaker demand during the summer and the remodel channel. Year-over-year growth in single-family housing starts have slowed over the past 3 months, putting downward pressure on cabinet installations in future quarters. The focus remains on future rate cuts from the Fed, which could drive stronger demand in calendar 2025.

Our home center customers have noted higher interest rates and macroeconomic pressures leading to weaker spending on projects. This has been more significant for higher-priced discretionary projects like kitchen and bath. We are not experiencing a loss of share with our customers, but we do expect weaker demand versus our expectations at the start of the fiscal year.

Our teams remain focused on growing share on our accounts and have realized recent awards in our stock kitchen and bath business that will benefit the remainder of the fiscal year. Our belief is that as interest rates decline, consumer confidence increases, existing home sales increase and the potential for home projects increases. This should serve as a tailwind for our business in calendar year '25.

Our adjusted EBITDA results were $62.9 million or 13.7% for the quarter. Reported EPS was $1.89. Operational excellence efforts continue to drive progress across the enterprise, but were offset in the quarter by lower volumes. Our cash balance was $89.3 million at the end of the first fiscal quarter, and the company has access to an additional $322.9 million under its revolving credit facility.

Leverage was at 1.19x adjusted EBITDA, and the company repurchased 271,000 shares in the quarter. Our outlook for the industry in fiscal year '25 assumes the Repair & Remodel market will be down mid-single digits and new construction to be at mid-single digits. Within R&R, larger discretionary projects will trend worse than the overall market and are projected to be down high single digits.

As a result of the softer R&R demand and the recently reported slowdown in new construction single-family housing starts, our expectation for the company's net sales is being adjusted to a low single-digit decrease versus fiscal year 2024. Adjusted EBITDA expectations are targeted in the range of $225 million to $245 million.

Our teams continue to execute our strategy that has 3 main pillars: growth, digital transformation and platform design, with a number of key accomplishments over the past quarter. Our summer launch has been well received in the market, and conversion activity continues within our distribution business in 1951, and a number of new accounts are being pursued.

As previously noted, our teams have won several stock bath and kitchen opportunities over the past quarter. Digital transformation efforts continue with our teams planning for ERP go-live and our West Coast [indiscernible] facility later this fiscal year. Platform design work continues as we ramp our Monterrey, Mexico and Hamlet, North Carolina facilities. Mill equipment continues to be installed at both sites and will ramp over the coming months. Automation efforts are progressing in our mill, component and assembly operations.

In closing, I'm proud of what this team accomplished in the first fiscal quarter and look forward to their continuing contributions during fiscal year '25.

I'm now going to turn the call back over to Paul for additional details on the financial results for the quarter.

[Paul Joachimczyk, executive]

Thank you, Scott. I'll begin by discussing our first quarter results and then provide our outlook for the rest of the fiscal year.

Net sales were $459.1 million, representing a decrease of $39.1 million or 7.9% versus the prior year. We saw a softening in large ticket items that primarily impacted our remodel business. We still believe in the long-term fundamentals of the housing industry, and they are being impacted currently by consumer confidence and higher interest rates.

Gross profit as a percent of net sales for the first quarter decreased 180 basis points to 20.2% versus 22% reported last year. Lower sales volumes impacted our manufacturing leverage in our new facilities with combined price increases in our input costs around logistics, raw materials and labor, but those impacts are partially offset by our sustained operating efficiency efforts. Operating expenses, excluding any restructuring charges, were 10% of net sales versus 12% last year.

The 200-basis-point decrease is due to the roll-off of our acquisition-related intangible asset amortization that ended in December 2023. Lower incentive compensation and controlled spending across all functions offset by our lower sales. Adjusted net income was $29.6 million or $1.89 per diluted share in the first quarter versus $46.2 million or $2.78 per diluted share last year.

This was impacted by an unfavorable mark-to-market adjustment on our foreign currency hedging instruments of $4.7 million net of tax. Adjusted EBITDA was $62.9 million or 13.7% of net sales versus $75.2 million or 15.1% of net sales last year, representing a 140-basis-point decline year-over-year.

Free cash flow totaled a positive $29.4 million for the current fiscal year-to-date compared to $72.5 million in the prior year. The $43.1 million decrease was primarily due to changes in our operating cash flows, specifically higher inventory. Net leverage was 1.19x adjusted EBITDA at the end of the first quarter compared with 1.09x last year.

As of July 31, 2024, the company had $89.3 million in cash, plus access to $322.9 million of additional availability under its revolving facility. Under the current share repurchase program, the company purchased $24 million or 171,000 shares in the first quarter, representing about 1.8% of outstanding shares being retired. We have $65.4 million of share repurchase authorization remaining.

Our outlook for fiscal year 2025. Net sales are expected to be down low single digits versus fiscal year 2024. This is a result of the softer Repair and Remodel market and a decline in larger ticket remodel purchases across the retailers, partially offset by the continued growth in new construction during the back half of the year. However, these assumptions are highly dependent upon overall industry, economic growth trends, material constraints, labor impacts, interest rates and consumer behaviors.

Our projected EBITDA margin for the fiscal year 2025 is being targeted in a range of $225 million to $245 million, driven primarily by sales volumes retracting and the increased manufacturing deleverage of our facilities during the last 9 months of the fiscal year. We will continue to optimize our manufacturing and service platforms.

In addition, we evaluate our pricing monthly, and we'll continue to do so on a go-forward basis to mitigate the inflationary impacts on logistics, raw materials and labor. Our capital allocation priorities for fiscal year 2025 remain unchanged. We will first be focused on investing back into the business by continuing our path for our digital transformation with investments in ERP and CRM and investing in automation.

Next, we'll be opportunistic in share repurchasing. And lastly, with our debt position at a leverage ratio we want to achieve, debt repayments will be deprioritized.

In conclusion, our team is dedicated to making it happen every day. Our operational improvements that have been put in place over the past year have helped us mitigate the volume declines affecting the broader repair and model industries. Investments in automation will drive future operational efficiencies and enable our long-term targets from both a growth and margin perspective.

We remain steadfast in our GDP strategy and confident in the long-term investment opportunities within the housing market, including both new construction and the repair and remodel sectors.

This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.

[Operator]

[Operator Instructions] And the first question will come from Adam Baumgarten with Zelman & Associates.

[Adam Baumgarten, analyst]

Just on first quarter, could you maybe give some color on how revenue trended by channel in the fiscal first quarter?

[M. Culbreth, executive]

Yes. For new construction, we were up single digits and for repair and remodel down double digits.

[Adam Baumgarten, analyst]

Okay. Got it. And then just thinking about the updated outlook for the year, it looks like it assumes flat year-over-year revenue over the balance of fiscal '25. Maybe help us think about how you expect that to trend over the next 3 quarters? Should we expect some pressure in the coming quarter and then maybe a bit of growth in the back half of the fiscal year? Maybe just a bit more color on how you expect it to face.

[M. Culbreth, executive]

Yes, Adam, we don't want to get into a quarterly forecast and projection outlook. We'd rather provide just a full year basis. So there's still a lot of uncertainty as to what will play out over the next couple of quarters with the rate cuts, but we feel confident in the full year projection that we provided.

[Adam Baumgarten, analyst]

Okay. And then just lastly on the input costs. I mean it sounds like there's some pressure there, and you guys are considering pricing. Maybe just an update on how the pricing typically works? I know it's different by channel. And how much would potentially be needed if the input costs stay elevated here?

[M. Culbreth, executive]

Sure. And you're right, the pricing actions will be variable depending on the channel. The timing could move around based on we also had our last increase in their respective channel. Historically, what you would typically see is first actions and dealer distributor followed by new construction followed by home center just because of the lag time in getting those prices input into the process.

I can tell you, at this particular point in time, we have been active in dealer. And we have announced a price increase in that channel.

[Operator]

Next question will come from Garik Shmois with Loop Capital.

[Garik Shmois, analyst]

Just on the new construction side. If I remember correctly, it sounds like you held your outlook, but you also talked to some of the weaker trends just given the housing start environment that slowed over the last 90 days.

So just curious as to what's underpinning some of the new construction view for you is share gains, some interest rate assumptions you're making for the back half of the year? So just any color on new construction would be great.

[M. Culbreth, executive]

Sure. On new construction, I would tell you that out of the gate for our first fiscal quarter, we exceeded what our original planning expectations were from a demand standpoint and feel pretty good about our second quarter. Our concern became the second half as we saw starts to decline over these last 90 days. So we start to model that forward as to when cabinet installation will occur, and our expectation is we'll see a little bit softer cabin install in the back half.

To your comment on interest rates, let's assume the Fed takes action in September. It feels like that's almost a guarantee at this particular point in time. I don't think one move makes a big change because everyone is expecting it. But as subsequent moves start to take place, we think that will unlock more homeowners interested in buying a new home or also on the repair and remodel side, investing in their home and doing a project in the kitchen and bath area. So we think that could drive incremental demand in new construction, but that starts to play out into mid-calendar year '25, which starts to cross into our next fiscal year.

[Garik Shmois, analyst]

Okay. Is that a comment pretty consistent with remodel as well that your view would be that it would -- you need to see several rate cuts before that end market starts to accelerate as well?

[M. Culbreth, executive]

Yes, absolutely. I think it's going to take a couple of reductions. And then there's going to be a lag effect before consumers get confident, and then start to engage in our project in the planning horizon as well as the actual project time lines. Pretty significant on the kitchen remodel. So I also don't think that's a huge boost for us in our second half, but it starts to set us up for a nice '26.

[Garik Shmois, analyst]

Okay. And then just lastly, if my math was right, it looks like you held your EBITDA margin guidance despite the slower sales. So I was wondering if you can go into any more detail as to some of the offsets and some of the benefits you're seeing on the margin side?

[M. Culbreth, executive]

Yes. The first would be the comment earlier around some pricing actions, as necessary. So as we already mentioned, we've taken some actions in dealer if input costs continue to move. In the other channels, we'll certainly be looking at conversations in those as well. So we'll continue to manage that.

And then just overall operating efficiencies. Our teams are focused on operational excellence, not just in the manufacturing side. but our service platform and new construction, managing SG&A spending wisely. We'll continue to do that despite the pullback in demand, and our goal is to manage that EBITDA number to the range that we just provided.

[Operator]

Your next question comes from Trevor Allinson with Wolfe Research.

[Trevor Allinson, analyst]

First, you all mentioned some awards in stock kitchen and bath that's going to benefit you guys. Can you provide some color on those? Perhaps how large of a benefit they could be? Is there any load-in? And what the timing looks like on those?

[M. Culbreth, executive]

Yes, I don't want to get into the specifics around load-in and maybe exact timing, but I'll just share with you that it's in our full year outlook that we just provided. It's some permanent placement on the kitchen side. And then on the bath side, it's more of a promotional nature. So roughly $30 million from a net standpoint and business annualized, and starting to shift in the current quarter.

[Trevor Allinson, analyst]

Okay. Got you. That's very helpful. And then I wanted to follow up again on input cost trends. You've mentioned a few pieces of that, that's been inflationary. You've got some pricing going into the market. What are you guys assuming for input cost inflation embedded in your full year EBITDA guidance?

[M. Culbreth, executive]

Yes, we've seen some impacts in lumber as well as particle board, more so recently on the particle board side. But labor is going to always be an ongoing input cost increase as we push forward in final mile. So we've got a good handle on what those have been trending. We've got those modeled in our outlook, and then we've built in pricing is appropriate to be able to offset and mitigate to hit the EBITDA numbers.

[Trevor Allinson, analyst]

Okay. Great. And then one more quick one, if I could. You guys previously had mentioned potentially being more aggressive with the new capacity you have available to win some share there. Can you provide more color on that? Is that more aggressive on pricing? Is that more marketing dollars? How exactly are you thinking about that?

[M. Culbreth, executive]

Not more aggressive on pricing and marketing dollars, but more aggressive in sharing our capability, making sure the market understands and our customers understand the capacity we've got, in our ability to serve that demand. So that's the focus. In the energy, as a reminder, when we went through COVID and we saw such a large surge in demand. We really had difficulty keeping up with that, and we had issues around employment, et cetera, that was a barrier.

So we invested despite a recent market downturn. We invested in capacity. We wanted to make sure we were ready to take advantage of demand when it comes back. So we've made that investment, and we're ramping that investment up. So instead of our teams having to pull back on being aggressive in the marketplace on taking share, now we can turn them loose. So we've done that, and we've had some success up to this point.

[Operator]

[Operator Instructions] Our next question will come from Tim Wojs with Baird.

[Timothy Wojs, analyst]

Maybe just first question, Scott. I mean as you talk to like your channel partners and your dealers, just on the R&R environment, do you feel or you get this feedback that this is just an interest rate situation at this point that there is some level of kind of deferred demand that's out there that's just kind of waiting for lower interest rates? Or is there something else? I'm just trying to understand if like there is pocket of kind of projects that are out there that are just waiting for financing to come down to kind of stimulate demand?

[M. Culbreth, executive]

The feedback we're getting is there's not a structural reduction in demand. It really is consumers just kind of holding back and waiting on the sideline. They want to see what's going to play out with rates to some extent, the election as well and get on the other side of that. And as consumer confidence comes back, obviously, folks are going to want to look to invest in their home.

We've seen the price appreciation. We've seen the value creation that folks have had in holding that asset they're staying in them longer, and that's going to create an opportunity to invest. So we don't think there's a structural reduction in demand. We think it's there. In fact, our Board meeting last week, one of the analogies we used, Tim, was a beach ball being held under water.

And we used it to describe the demand environment perhaps for both new construction and remodel. And these macroeconomic factors are keeping in underwater. Eventually, those will dissipate, and that will come back. And we just want to make sure that we're ready for that from a capacity and from a people standpoint and operating efficiency standpoint.

[Timothy Wojs, analyst]

Okay. Okay. And then I guess when you think about just kind of the expectations for share gains kind of this fiscal year, how has that tracked relative to kind of your initial expectations? I know you secured some wins, but I'm just kind of curious if there's the opportunity to exceed that or if things are kind of tracking as you expected?

[M. Culbreth, executive]

I'd say, at this point in time, Tim, our teams are tracking as we expect. We expected to have some wins, and we've delivered on those up to this particular point in time.

[Timothy Wojs, analyst]

Okay. Okay. Great. And then, I guess, the last thing just on capital deployment. I mean you guys have repurchased probably close to 10% of your stock over the past 5 quarters. I mean anything that would kind of change that trajectory, especially when you kind of look at some of those longer-term targets that you have out there?

[M. Culbreth, executive]

Yes. No, Tim, we remain very confident in the share repurchase program and efforts for our organization. Nothing near term that would change that, Tim.

[Operator]

[Operator Instructions] Our next question will come from Kathryn Thompson with Thompson Research Group.

[Kathryn Thompson, analyst]

Great analogy on the beach ball from earlier in the call. I wanted to follow up on that pent-up demand because with our universe coverage, we -- what we're finding is the kind of the balance between outdoor projects, providing a greater return for homeowners, particularly in the wake of COVID versus kind of your traditional kitchen and bath.

And so there's some stats that some companies have bandied about that. But based on your experience and based on what you're seeing in the market, have you seen any change in terms of the return metrics for the kitchen remodel versus the outdoor, which has been so prevalent since COVID?

[M. Culbreth, executive]

Yes. Thanks for the question, Kathryn. I haven't seen anything that's pointed to a change in the return philosophy or approach for investing in the home as to how that may compare with outdoor projects. I guess, I have a middle model. I don't necessarily have facts in front of me, but I still think a large-scale kitchen project is going to be more costly than an outdoor project in general, but the return metrics continue to be there for us.

So the price points between the two can certainly influence and impact the demand trajectory, but I still think folks are passionate about that indoor space. Folks are passionate about hosting, to your point. Some of that's moved outdoors, but the indoors is still going to be relevant. And we think folks to continue to want to beautify those spaces.

[Kathryn Thompson, analyst]

Okay. Great. And then in terms of share gains, what is the typical lag time to win the financial benefit? In some other words, what historically has been the effect on your financials?

[M. Culbreth, executive]

So it would depend on the type of share gain wins. So typically, in new construction, it's going to be a longer lag. You're going to be awarded the business, say, for a particular community, and that community is going to have to be developed. So is the dirt already ready, they're starting to build, et cetera. So it could be short to long depending on that specific project.

If you're converting an existing community, that could be a little bit faster because you just simply need to change out the model home and then you could presumably start selling as the next customers come in and start making selections.

In home centers, it's essentially the shelf positions of kitchen or bath. Again, it's going to depend a bit on what their time line is, when can they bring their store labor in to do a reset and a change out. So it could be upwards of a couple of quarters before you fully realize all the benefits associated with some choices and decisions that you're realizing.

[Kathryn Thompson, analyst]

Okay. Finally, any color on the M&A market?

[M. Culbreth, executive]

Nothing specific to add there. I know we had a question around that last quarter. There have been some activity. We shared our commentary at that particular point in time. Nothing that we're currently pursuing or looking at this point in time.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Paul Joachimczyk for any closing remarks. Please go ahead, sir.

[Paul Joachimczyk, executive]

Since there are no additional questions, this concludes our call. Thank you, all, for taking the time to participate.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.