American Woodmark Corp

NASDAQ:AMWD

Earnings Call Analysis

American Woodmark Q2: Sales Down, EBITDA Up

American Woodmark's second fiscal quarter saw net sales fall 15.6% to $473.9 million, with a decline in both new construction and remodel sectors, at 11.1% and 18.8% respectively. Despite the downturn, the company increased adjusted EBITDA by 7% to $72.3 million, attributing the improvement to better product mix and manufacturing efficiencies. The company also managed to reduce leverage to 1.05x adjusted EBITDA and repurchased 394,000 shares. Looking ahead, they expect a low double-digit sales decline for fiscal year '24, but have raised their adjusted EBITDA guidance to $235-250 million.

Revisiting American Woodmark's Growth Amidst Market Challenges

American Woodmark, a titan in the cabinetry industry, faced a demanding quarter indicative of present macroeconomic headwinds. The company posted net sales of $473.9 million, which is a noticeable 15.6% decline from the previous year. This drop was seen across their businesses, with new construction sales down by 11.1% and remodel revenue, encompassing home centers and independent dealers, decreasing by 18.8%. The decline in new construction sales is attributed to current economic challenges such as rising interest rates and housing affordability concerns. Despite these factors, American Woodmark remains in a strategic partnership with top national and regional builders, continuing its growth trajectory by capitalizing on market share gains.

Operational Efficiencies Bolster Profits

Even with declining sales, the company's financial health showed resilience with a 7% increase in adjusted EBITDA, totaling $72.3 million. The improvement reflected in a 15.3% margin is credited to a favorable product mix and enhanced manufacturing efficiencies. American Woodmark's commitment to operational excellence is evident in its ability to trim leverage down to 1.05x adjusted EBITDA, while also implementing a shareholder-friendly move by repurchasing 394,000 shares during the quarter. Moreover, the firm maintains considerable liquidity with a cash balance of $96.4 million and additional access to $323.2 million through a revolving credit facility, thus instilling confidence in ongoing financial stability and shareholder returns.

Steadfast on Strategic Initiatives Amid Market Instability

American Woodmark stays the course with its three pillars of strategy: growth, digital transformation, and platform design. Growth is targeted with the launch of a new low-SKU, high-value offering for PRO customers in home centers and a new brand strategy for distribution customers. Digital transformation is on track with initiatives including the rollout of ERP systems and online platform enhancements. In the realm of platform design, progress has been marked by occupancy developments in Mexico and North Carolina, promising additional capacity for stock kitchen and bath cabinetry product lines in the near future.

Performance Indicators Provide Assurance Despite Sales Dip

Detailed review of the fiscal second-quarter numbers reveals gross profit margins advancing impressively by 420 basis points to 21.8%, compared to 17.6% in the same period last year. This positive shift is a direct result of a smart product mix, pricing strategies matching inflationary pressures, and reliability in the company's supply chain. Adjusted net income stood at $38.8 million, translating to $2.36 per diluted share. The firm's year-over-year adjusted EBITDA also saw 330 basis points elevation, indicating the efficiency and effectiveness of the team's sustained cost control measures amidst growing operational headwinds.

Solid Cash Flow and Enhanced Share Repurchase Program

The company's robust performance is salient in its free cash flow figures as well, which showed a dramatic increase to $109.9 million compared to $44.4 million in the prior year. The company attributes this improvement to operational cash flow changes, such as higher net income and reduced inventory levels, despite increased capital expenditures. Further underlining its commitment to returning value to shareholders, the Board of Directors sanctioned a new $125 million share repurchase plan, underscoring its confidence in the company's financial fortitude and its prospects for value creation.

Optimistic Forecast Amidst Fiscal Conservatism

American Woodmark's outlook for the fiscal year 2024 remains conservative from a sales point of view, with an anticipated low double-digit decline when compared to fiscal year 2023. However, reflecting a confident stance based on strong operations, they have raised their adjusted EBITDA expectations to between $235 million to $250 million for the full fiscal year. This optimism is built on solid execution and operational performance in the first half of the fiscal year, suggesting that the company is adeptly navigating through a challenging economic landscape.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, everyone, and welcome to the American Woodmark Corporation Second Fiscal Quarter 2024 Conference Call. Today's call is being recorded, November 30, 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'll 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 involving 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 under 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'd now like to turn the floor over to Paul Joachimczyk, Senior Vice President and CFO. Please go ahead, sir.

[Paul Joachimczyk, executive]

Good afternoon, and welcome to American Woodmark's second fiscal quarter conference call. Thank you all 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.

[M. Culbreth, executive]

Thank you, Paul, and thanks to everyone for joining us today for our second fiscal quarter earnings call. Our team delivered net sales of $473.9 million, representing a decline of 15.6% versus the prior year. Within new construction, our business declined 11.1% versus prior year. Macroeconomic factors, including interest rates and housing affordability, continues to account for the slowdown in new construction. These short-term factors are being partially mitigated by builders through rate buydowns and shifts to ready-to-move-in homes and build-to-rent homes.

We are strategically aligned with 19 of the top 20 national builders and key regional builders. With our best-in-class direct service model, we plan to continue to grow our share with new and existing customers and take advantage of the share gains our partners are realizing in the marketplace.

Looking at remodel, which includes our home center and independent dealer and distributor businesses, revenue declined 18.8% versus the prior year. Within this, our home center business was down 18.3% versus the prior year. Demand trends declined due to lower in-store traffic rates and consumers choosing smaller-sized projects. With regards to our dealer/distributor business, we were down 20% versus the prior year. Our adjusted EBITDA increased 7% to $72.3 million or 15.3% for the quarter. Reported EPS was $1.85 and adjusted EPS was $2.36. The improvement in performance is due to product mix and improved efficiencies in the manufacturing platforms.

Our team continues to drive operational excellence in our plans. Our cash balance was $96.4 million at the end of the second fiscal quarter, and the company has access to an additional $323.2 million under its revolving credit facility. Leverage was reduced to 1.05x adjusted EBITDA, and the company repurchased 394,000 shares in the quarter.

Our Board has authorized a new $125 million share repurchase program that replaces our current authorization that only had $22.9 million remaining. Our outlook for fiscal year '24 remains unchanged, with our expectations for sales of a low double-digit decline. Due to the strong fiscal second quarter performance, our adjusted EBITDA expectation is increased into a range of $235 million to $250 million.

Our team continues to execute against our strategy that has 3 main pillars: growth, digital transformation and platform design. Growth will benefit from an upcoming launch of a low-SKU, high-value offering in the home centers targeting PROs and a new brand to serve our distribution customers. Digital transformation efforts over the last fiscal quarter include the final planning of ERP for Monterrey Go Live next quarter and website enhancements for our home center business to be launched in February.

In addition, we completed the implementation of our CRM sales solution across the new construction channels field sales organization, and we initiated the planning for the next phase of work, which includes the CRM service module supporting our customer care organization and new construction service center operations. Platform design work continues with occupancy in monitoring Mexico in November and Hamlet, North Carolina in December.

We will continue infrastructure and equipment installations in the coming months as well as training and hiring new teammates to support the initial ramp plan. As a reminder, this expansion will deliver additional capacity in our stock kitchen and bath cabinetry product lines. In closing, I am proud of what this team accomplished in the second fiscal quarter and look forward to their continuing contributions during fiscal year '24.

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

[Paul Joachimczyk, executive]

Thank you, Scott. Reviewing our second quarter results for fiscal year 2024, net sales were $473.9 million, representing a decrease of $87.6 million or 15.6% versus the prior year. Remodel net sales, which combines home centers and independent dealers and distributors, decreased 18.8% for the second quarter versus prior year, with both home centers and dealer distributors decreasing 18.3% and 20%, respectively.

New construction net sales decreased 11.1% for the quarter compared to last year. Our gross profit margin for the second quarter fiscal year 2024 improved 420 basis points to 21.8% of net sales versus 17.6% reported in the same period last year. Gross margin benefited from a favorable product mix and sustained pricing matching inflationary cost impacts, continued operational improvements in our manufacturing facilities and an increased stability in our supply chain.

Total operating expenses, excluding any real restructuring charges for the second quarter of fiscal year 2024 was 12.2% of net sales versus 10.1% for the same period last year. The 210 basis point increase is due to increases in our incentives and profit sharing for all employees.

Adjusted net income was $38.8 million or $2.36 per diluted share in the second quarter of fiscal year 2024 versus $37.3 million or $2.24 per diluted share last year. Adjusted EBITDA for the second quarter of fiscal year 2024 was $72.3 million or 15.3% of net sales versus $67.6 million or 12% of net sales reported in the same period last year. This represents a 330 basis point improvement year-over-year.

Despite facing the year-to-date volume headwinds, our continued strong earnings performance this year is a direct result of the hard work and efforts our teams have put in to reestablish our operating efficiencies, stabilize our supply chain and controlled spending in the SG&A functions. These earnings gains are partially offset by increases in incentive compensation, profit sharing and our digital transformation costs.

Free cash flow totaled a positive $109.9 million for the current fiscal year-to-date compared to $44.4 million in the prior year. The $65.4 million increase was primarily due to changes in our operating cash flows, specifically higher net income and lower inventory, partially offset by our increased capital expenditures. Net leverage was 1.05x adjusted EBITDA at the end of the second quarter fiscal year 2024, representing a 1.18x improvement from the 2.23x as of last year.

As of October 31, 2023, the company had $96.4 million of cash and cash equivalents on hand, plus access to $323.2 million of additional availability under our revolving facility. Under the current share repurchase program, the company purchased $30 million or 394,000 shares in the second quarter, representing about 2% of the outstanding shares being retired. The Board of Directors has approved and authorized a new $125 million share repurchase plan. We are retiring the remaining $22.9 million on the old share repurchase authorization and rolling it into this new authorization.

Our outlook for fiscal year 2024 remains unchanged from a sales perspective, and we continue to expect low double-digit declines in net sales versus fiscal year 2023. The change in net sales is highly dependent upon overall industry, economic growth trends, material constraints, labor impact, interest rates and consumer behaviors.

Given our strong performance for the first half of the year, we are increasing our adjusted EBITDA expectation for the full fiscal year 2024 to a range of $235 million to $250 million. The increase in our expected outlook is due to our strong operational performance and execution we have achieved in the first half of our fiscal year 2024.

Reiterating our outlook from the past quarter, we are still on track for starting our new operational locations in Hamlet, North Carolina and Monterrey, Mexico this fiscal year. This will negatively impact the results as we continue incurring the operational expenses without the offsetting full revenue performance of those locations. The total impact of these charges is approximately $8 million in the full fiscal year 2024.

Our capital allocation priorities for fiscal year 2024 remain unchanged. We will first be focused on investing back into the business for the plant expansions in Monterrey, Mexico and Hamlet, North Carolina, continuing our path forward in our digital transformation with investments in our ERP and CRM solutions and investing in automation. Next, we will continue our share repurchasing. And given our current debt position, we will be deprioritizing paying down debt in fiscal year 2024.

In closing, the business continues to build off the progress made throughout the past year. We fully expect these improvements to carry through the financials for the remainder of the fiscal year. This is a testament to the commitment, hard work and efforts our employees invest in the company to achieve our results and the direct alignment to the GDP strategy.

I'm grateful for what the teams have accomplished and thank all of our team members at American Woodmark for their continued efforts. They are the ones who truly make it happen daily. This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.

[Operator]

[Operator Instructions] Our first question today comes from Garik Shmois from Loop Capital.

[Garik Shmois, analyst]

Congrats on the quarter. Within R&R, I was wondering if you could go into some more color on what you were seeing on both in-stock and made-to-order categories.

[M. Culbreth, executive]

Yes. Thanks, Garik. So specifically, in R&R at the home center side, when you talk about in-stock and MTO, we've seen negative trends in both categories. But MTO has been more severely impacted overall when you think about the price points. We've always said that we felt the stock category would be a bit more resilient in a slowdown. But even in this environment today, we are seeing unfavorable trends, but not to the degree we see in special order.

[Garik Shmois, analyst]

Got it. I think you spoke to favorable mix. I think that was more related to R&R. But I think we were hearing from a competitor that they were seeing trade-down effects more on the new construction side. Curious to see if you were seeing the same negative trade-down pressures, and just maybe speak to pricing trends more broadly.

[M. Culbreth, executive]

So yes, we're not seeing that same trend. We've also not got the high end of the price continuum, so we're not selling custom or high-end semi-custom product to trade down against. In the value space that we've been, we've seen very much a maintenance mode and some positive mix, depending on the customer and the product category.

[Operator]

Our next question comes from Steven Ramsey from Thompson Research Group.

[Steven Ramsey, analyst]

Maybe to start with on the raised EBITDA guidance, a very strong first half. Can you clarify if any of that is the second half outlook being any better?

[M. Culbreth, executive]

I guess -- Steven, I guess, maybe rephrase your question about the second half outlook being better.

[Steven Ramsey, analyst]

Sure. On the EBITDA guidance being raised, was that solely in the first half? Or does the second half of the year have anything to do with that?

[M. Culbreth, executive]

Yes, it's primarily the first half performance that we've seen because there's still so much uncertainty as we think about the second half from a demand profile standpoint. And as we've signaled over the past couple of quarters, we do have those start-up costs that Paul referenced of roughly $8 million that's all back half loaded for Monterrey and Hamlet.

[Steven Ramsey, analyst]

Okay. Helpful, helpful. And then if you think about stocking levels by channel and customer type, do you feel that they're at a healthy level? Or do you think, given the slowdown, broadly, and the big ticket, do you think that some customer channel partners have taken stock down too low?

[M. Culbreth, executive]

So yes, just as a reminder, the vast majority of our portfolio was not stocked at a retailer or at a builder or at a dealer. So you really are only talking about our stock kitchen and bath business that sits inside the home centers. Now over the last couple of quarters, we've had some discussion around some destocking that had occurred that was impacting the business. I feel we're roughly behind that. There's always some opportunities to get better in-store positions, and we continue to pursue those with the retailers, but nothing of significance that I would highlight in that space.

[Operator]

And our next question comes from McClaran Hayes from Zelman & Associates.

[McClaran Hayes, analyst]

Was curious if you could talk a little bit about input costs and how they're trending at this point?

[M. Culbreth, executive]

Yes, certainly. When you think about the raw materials that we're purchasing, those have stabilized. So that's a positive. On the flip side, we do continue to see upward pressure in the labor markets as well as domestic transportation.

[McClaran Hayes, analyst]

And has any of that relief, I guess, on the hardwood lumber side, heard any discussion around pricing rollbacks across any of your 3 channels?

[M. Culbreth, executive]

I certainly wouldn't use the term rollbacks when we talk about pricing. We do monitor those input costs, and we do have some arrangements that are tied to those particular indices. But our general philosophy and approach and discussion that we've shared, even in this call over the last couple of quarters, is that any pricing reductions would have to be driven by deflation first.

But also, there being an evaluation of the profitability of that particular channel and customer because we've got to continue to deliver on our long-term profitability goals. So I'll just say that we're always having conversations around price and has continued to be ongoing with our customers.

[McClaran Hayes, analyst]

Okay. And I guess one last one. Could you just elaborate a bit on some of those website changes you alluded to in the home center channel?

[M. Culbreth, executive]

Yes. It's basically just a reskin and a refresh, more relevant content as well as ways to drive consumers through the purchase journey that ultimately helps drive them into the store to ultimately make a purchase decision.

[Operator]

Our next question comes from Julio Romero from Sidoti & Company.

[Julio Romero, analyst]

Can you maybe just dig a little bit more into the operational efficiencies and the stabilization of the supply chain? And how much more runway do you have for each of those?

[M. Culbreth, executive]

I think on the supply chain stability, that's pretty much secured in which we kind of lapped that. So we've had a couple of quarters of that performance being very strong. So we're not seeing the disruptions that we were experiencing over the last couple of years. I would say that we always have ongoing opportunity in the operations side. We talk about operational excellence across the business, not just in the manufacturing facilities, but all of our functional costs areas, and we'll continue to drive projects to take cost out of those particular areas as we go forward.

[Julio Romero, analyst]

Really helpful there. And then, I guess, in the second quarter, you had a very tough year-over-year comparable on the volume side. Just how would you have us think about third quarter and the fourth quarter as the year-over-year comps get a little bit easier from a volume perspective?

[M. Culbreth, executive]

Yes. I think Q3 is unfortunately going to be fairly similar to Q2. We've now got a softer demand environment that you're obviously seeing in the marketplace. We will put a couple of extra down days in around the holidays as well. But as we push into Q4, we think the comps do start to improve. At this time, I still think they're likely negative but not nearly to the rate we've seen in Q2 and Q3.

[Operator]

Our next question comes from Tim Wojs from Baird.

[Timothy Wojs, analyst]

Maybe just the first one, Scott, just how -- when you look -- when you talk to your builder customers, where do you feel like, in terms of affordability, they are in kind of adjusting kind of square footage and home sizes? And if it trends lower to try to create a more affordable product, I mean, how does that kind of impact Woodmark, if at all?

[M. Culbreth, executive]

Yes. So the first thing I'll remark on is what are we seeing and hearing from the builder customers around price points and then let's bring interest rates into that discussion. The pricing has not really been the bigger challenge. The interest rates have been the higher priority. So many builders have done, by their own strategies, to keep those rates in sub-5 or just north of 5% rate to keep folks interested in going into the home.

I do think there will be a rotation down in home size, and folks are starting to model that. We experienced that a couple of years ago. That was part of our strategy, as you recall, when we did the acquisition that allowed us to bring Origins to bear and be a product offering of taking those homes from a price point standpoint.

I guess when I step back and think about homes, though, as they do get spec smaller, the most important space typically defined in those homes is the kitchen. And usually, those spaces are protected. So I don't -- I'm not alarmed or worried that trends would be unfavorable for the amount of cabinetry we would sell into a kitchen space.

Where you may have some impacts is perhaps a mud room gets dropped off as space is taken out. But there's certainly still going to be a bathroom, bathroom space. There's still an opportunity to bring product into those areas.

[Timothy Wojs, analyst]

That's really helpful. And then on the kind of the wallet share opportunity, where do you -- I know you're not going to tell us like what exactly it is, but I mean, maybe just how much runway could there be from a wallet share perspective with some of your top kind of national and regional builders?

[M. Culbreth, executive]

Yes. So it's a difficult question to answer because it is very much regional and market specific. So there's going to be some markets where we're pretty mature with our partners and have a very high share position. So it's definitely going to be a maintain and maybe target some regionals in that space. And then we've got some markets where we think there's a much more sizable opportunity to go get share with players. So we target those particular markets and go after those particular accounts. Sorry, I can't add a lot more detail on that.

[Timothy Wojs, analyst]

Yes. No, but there still are opportunities. I mean, it's kind of the point for wallet share to improve.

[Paul Joachimczyk, executive]

Absolutely.

[Timothy Wojs, analyst]

Yes. Okay. And then maybe just the last one, kind of first half, you guys did about 15% EBITDA margins. There's a little bit of variability here. But in the back half, it's going to be something that's maybe closer to 12%. I know that you get $8 million from the start-ups, that's about 100 basis points, January seasonally weaker. Like is there anything else just to call out why there would be that kind of maybe step down first half to second half outside of those kind of discrete items?

[M. Culbreth, executive]

Yes. The 3 things we talked about last quarter will be the same items that we'd hit this quarter. You hit on 2 of them. So Monterrey and Hamlet, we've already discussed the $8 million in the back half. Certainly, a softer demand environment as we think about back half. And then [ near cycle ] was the other we mentioned. So some of our fixed costs do move our time line on that is the August-September time frame. So we'll roll through some incremental costs for that. But nothing substantial outside of those 3 areas.

[Operator]

[Operator Instructions] Our next question comes from Collin Verron from Jefferies.

[Collin Verron, analyst]

I guess, just building off of that last question on the incremental costs that you're going to see in the back half of this year. I guess, any color as to how long you expect those start-up costs to linger into your fiscal year '25? Should we be expecting to see some margin compression, I guess, in the first half of the year from these strong 15% margins going forward because of those costs staying in the business?

[M. Culbreth, executive]

So we're not yet ready to start providing an outlook specifically on our fiscal year '25. But I think you've hit the key point there. We are going to have a ramp period. We're not going to open those factories and they're all of a sudden going to be full overnight. So there's going to be a ramp period. I can't disclose necessarily how long it will take us to fill that, but there will be some continued pressure as we go into the early part of '25.

[Collin Verron, analyst]

And I don't know if you're going to be willing to comment on this either. But I guess some of the larger builders are still fairly optimistic around their ability for volumes in 2024 -- calendar year 2024. I guess any early read as to how you guys are feeling about the full year 2024, given the strength and what the builders are saying? And then any color about what you're feeling for the repair and remodel market more broadly?

[M. Culbreth, executive]

Yes. On the builder side, what we're seeing and hearing is a pretty wide range of expectations. There are some analysts projecting low single-digit growth in starts for calendar year '24. And we have some builders that are pretty bullish and then others that are concerned. We haven't started our official kind of budget cycle process. We'll start that at beginning of '24, and that'll give us a better perspective, but there does seem to be some energy to perhaps some slight growth as we move into '24.

I think remodel is going to continue to be under pressure. We've certainly heard from the home centers in the last couple of weeks their overall results and their outlook of kind of mid-single digits down. Our category at both of the retailers are certainly performing worse than that as they've messaged over the last couple of quarters.

So I think we'll continue to be challenged there. And then we'll just have to continue to monitor new construction. I think every builder will tell you now is not the best time to ask as we go through the winter months. But as we get into the spring selling season, that will dictate how the back half of '24 looks.

[Operator]

And at this time, as I do not see that there is anyone else waiting to ask a question, I'd like to turn the floor back over to Mr. Joachimczyk for any closing comments.

[Paul Joachimczyk, executive]

Thank you again for joining us today. That does conclude our conference. We thank you all for your participation.

[Operator]

And ladies and gentlemen, that will conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.