American Woodmark Corp
NASDAQ:AMWD
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American Woodmark Corp
Earnings Call Analysis
Q3-2024 Analysis
American Woodmark Corp
American Woodmark Corporation faced a challenging third fiscal quarter in 2024, with net sales falling by 12.2% to $422.1 million from the previous year. The new construction market saw an 11% drop, although the company remains well-positioned with 19 of the top 20 national builders. This strategic alignment could bode well with improving builder sentiment as spring approaches. The remodel segment experienced a 13.1% decrease, with a significant 14.1% dip in the home center business, attributed to reduced customer traffic and a trend towards smaller projects. The dealer distributor business was also down 10.3%.
Despite the sales downturn, operational adjustments have borne fruit. Adjusted EBITDA margin advanced by 140 basis points to 12%, representing a sturdy fiscal discipline with only a 0.7% slip in adjusted EBITDA to $50.6 million. Moreover, the company reported an EPS of $1.32 and an improved adjusted EPS of $1.66, reflecting better product mix and manufacturing efficiency. Looking ahead, the company forecasts fiscal year '24 to continue with a low double-digit decline in net sales and high single digits in Q4 sales.
The firm's solid performance in the fiscal third quarter prompted an upward revision of the adjusted EBITDA forecast for the fiscal year to a range of $247 to $253 million. This revision signifies not just a recovery tactic but an aggressive strategy to leverage operational excellence and maintain an upward trajectory.
The company's commitment to digital transformation is evident with the implementation of a new ERP system in Monterrey and enhancements to the home center website. The next phase involves CRM service modules to support the customer care and new construction service center operations. The company is also focused on platform design and the expansion of its manufacturing footprint, with new shipments from Monterrey, Mexico, and Hamlet, North Carolina. These efforts demonstrate a long-term investment in optimizing operations and ramping up production capabilities.
Gross profit margin surged 350 basis points to 19.2% of net sales, up from 15.7% the previous year, thanks to favorable product mix and inflation-responsive pricing. Total operating expenses rose marginally due to increased incentives and profit-sharing as a result of lower sales. Meanwhile, free cash flow has seen a robust increase to $131.7 million, compared to $91.5 million in the prior year. This growth has been driven by operational efficiencies, including higher net income and a reduction in inventory levels.
The financial strength of American Woodmark is highlighted by its share repurchase initiative. The company bought back approximately 216,000 shares for $19.6 million in the third quarter, demonstrating confidence in its valuation and commitment to delivering shareholder value. Such strategic buybacks can potentially enhance earnings per share and reflect an efficient use of capital.
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Good day, everyone, and welcome to the American Woodmark Corporation Third Fiscal Quarter 2024 Conference Call. Today's call is being recorded February 29, 2024.
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 the 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 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 stock 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 floor over to Paul Joachimczyk, Senior Vice President and CFO. Please go ahead, sir.
Good afternoon, 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.
Thank you, Paul, and thanks to everyone for joining us today for our third fiscal quarter earnings call. Our team delivered net sales of $422.1 million, representing a decline of 12.2% versus the prior year. Within new construction, our net sales declined 11% versus prior year.
Recent data points such as housing starts, and [ AHV's ] measure builder sentiment point to improving demand as we head into the spring. We remain 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 benefit from the share gains our partners are realizing in the marketplace.
Looking at remodel, which includes our home center and independent deal and distributor businesses, revenue declined 13.1% versus the prior year. Within this, our home center business was down 14.1% versus the prior year. Demand trends remain under pressure due to lower in-store traffic rates and consumers choosing smaller size projects. With regards to our dealer distributor business, we were down 10.3% versus the prior year.
Our adjusted EBITDA decreased 0.7% to $50.6 million, but our adjusted EBITDA margin percentage increased 140 basis points to 12% for the quarter. Reported EPS was $1.32 and adjusted EPS was $1.66. 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 $97.8 million at the end of the third fiscal quarter. And the company has access to an additional $322.9 million under its revolving credit facility. Leverage was reduced to 1.05x adjusted EBITDA, and the company repurchased 216,000 shares in the quarter. Our net sales outlook for fiscal year '24 remains unchanged with our expectation of a low double-digit decline with fiscal Q4 sales down high single digits.
Due to the strong fiscal third quarter performance, our adjusted EBITDA expectations for the full fiscal year is increasing and narrowing to a range of $247 million to $253 million. Our team continues to execute against our strategy that has 3 main pillars: growth, digital transformation and platform design. Growth will benefit from the launch of a low SKU high-value offering in the home centers targeting PROs and a new brand that will serve our distribution customers 1951 cabinetry.
Our made-to-order business will also benefit from the upcoming summer launch featuring new on-trend styles and finishes. Digital transformation efforts over the last fiscal quarter include the go-live of ERP in Monterrey, they go-live at WMS from Hamlet, North Carolina and the go-live of website enhancements for our home center business.
The planning for the next phase of work continues and includes the CRM service modules supporting our customer care organization, and new construction service center operations and ERP for our [ May to stock ] facilities. Platform design work continues with our first shipment of components from Monterrey, Mexico in January. And shipments of bath products from our Hamlet, North Carolina location in February.
We will continue equipment installations in the coming months, along with the training and hiring new teammates to support our ramp plan. In closing, I'm proud of what this team accomplished in the third fiscal quarter and look forward to their continuing contributions during fiscal year '24.
I will now turn the call back over to Paul for additional details on the financial results for the quarter.
Thank you, Scott. Reviewing our third quarter results for fiscal year 2024. Net sales were $422.1 million, representing a decrease of $58.6 million or 12.2% versus prior year. Remodel net sales, which combines home centers and independent dealer and distributors decreased 13.1% for the third quarter versus prior year, with both home centers and independent dealer distributors decreasing 14.1% and 10.3%, respectively.
New construction net sales decreased 11% for the quarter compared to last year. Our gross profit margin for the third quarter of fiscal year 2024 improved 350 basis points to 19.2% of net sales versus 15.7% reported in the same period last year. Gross margin benefited from favorable product mix and pricing matching inflationary costs impacts along with operational improvements in our manufacturing facilities, combined with the stability in our supply chain.
Total operating expenses, excluding any restructuring charges for the third quarter of fiscal year 2024 was 12.6% of net sales versus 10.4% for the same period last year. The 220 basis point increase is due to increases in our incentives and profit sharing for all employees and lower sales. Adjusted net income was $26.8 million or $1.66 per diluted share in the third quarter of fiscal year 2024 versus $24.4 million or $1.46 per diluted share last year.
Adjusted EBITDA for the third quarter of fiscal year 2024 was $50.6 million or 12% of net sales versus $51 million or 10.6% of net sales reported in the same period last year and represents a 140 basis point improvement year-over-year. Despite facing year-to-date volume headwinds, our continued strong earnings performance this year is a direct result of the hard work and effort our teams have put into reestablishing and maintaining our operational efficiencies, stabilizing our supply chain and controlling overall spending.
These earning gains are partially offset by increases in incentive compensation, profit sharing and digital transformation costs.
Free cash flow totaled a positive $131.7 million for the current fiscal year-to-date compared to $91.5 million in the prior year. The $40.2 million increase was primarily due to changes in our operating cash flows, specifically higher net income and lower inventory, partially offset by increased capital expenditures.
Net leverage was 1.05x adjusted EBITDA at the end of the third quarter of fiscal year 2024, representing a 0.7% improvement from the 1.81x as of last year. As of January 31, 2024, the company had $97.8 million of cash and cash equivalents on hand, plus access to $322.9 million of additional availability under our revolving facility.
Under the current share repurchase program, the company purchased $19.6 million or approximately 216,000 shares in the third quarter representing about 1.3% of outstanding shares being retired. For the first 9 months, we have repurchased $71.8 million of the company's common shares and have $105.4 million of share repurchase authorization remaining.
Our outlook for the fiscal year 2024 from a net sales perspective, we continue to expect low double-digit declines in net sales versus fiscal year 2023, with high single-digit declines in the fourth fiscal quarter. The change in net sales is highly dependent upon overall industry, economic growth trends, material constraints, labor impacts, interest rates and consumer behaviors.
Given our strong performance for the first 9 months of the year, we are increasing and narrowing our adjusted EBITDA expectation for the full fiscal year 2024 to a range of $247 million to $253 million. The increase in our expected outlook is due to the strong operational performance and the execution we have achieved in the first 9 months of our fiscal year 2024.
Reiterating our outlook from the past quarter, we have begun operations in our new locations in Hamlet, North Carolina and Monterrey, Mexico, and we'll continue to ramp up production throughout the remaining calendar year. This will negatively impact our results as we will be incurring operational expenses without the offsetting full revenue performance of those locations. The total impact of these charges is approximately $8 million to $9 million in the full fiscal year 2024 with more than half of these charges occurring in the fourth fiscal quarter.
In closing, our business continues to anticipate that these enhancements will positively impact our financials throughout the remainder of the fiscal year. This success stands as a testament to the unwavering commitment, diligence and contributions of our dedicated employees, all in alignment with our GDP strategy. I extend my heartfelt gratitude to every team member at American Woodmark. They are the driving force behind our daily accomplishments. 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.
[Operator Instructions] Our first question today comes from Garik Shmois from Loop Capital.
I was hoping you can go into a little bit more detail on what you're seeing on the remodel side, in particular, if you can provide some detail around in-stock versus semi customer?
Yes, Garik. So when we look at the remodel business, we're not seeing any major differences across the categories from a sell-through rate standpoint. So in stock as well as the special order and the home centers performed comparably inside the period.
Got it. Wondering if you could go into some more detail. I think you talked about an improvement in product mix. What was driving that?
That would be mix across our channels first and foremost. So what we sold through in each of the respective channels that we've got. And we've seen really an ability to hang on to the overall mix. I know there was some speculation going into this most recent fiscal year, perhaps rotation down. We've really not experienced that across the new construction channel. We've seen a little bit of that inside remodel, but in totality, a favorable mix equation for us inside the quarter.
Got it. And then I know we're not in your fiscal '25 yet, but if you're able to share any thoughts on how you think perhaps maybe calendar '24, just maybe a longer-term view of the market, I think we heard from a competitor anticipating low single-digit market growth declines over the next, say, 4 quarters. Just curious if you have any similar observations or any deviation off of that?
Sure. And you're right. We're not ready to share an outlook beyond fiscal year 2024. Our cycle is we're really starting our budgetary meetings internally now. We'll be ready to give you a full fiscal year '25 outlook in our next call. With that said though, what are we hearing and seeing in the market, certainly, there was a number of recent releases in the building products space, across competitors, other categories, customers and then, of course, the show out in Vegas this week.
So if I take all of those inputs together, I think what we're seeing and hearing is that the range for single-family starts is still a bit mixed. We're seeing analysts talk about low to mid-single-digit growth for the calendar year. I think remodel is the one that continues to remain a bit under pressure, estimates there from low to mid-single digits on the negative side. Home centers, again, just reported their figures for the year and their outlook on calendar '24, both signaled negative comps in the calendar year.
And certainly, for the last 2 quarters, they both signaled that our category was performing worse than that. So if I was to take all of that together, I would say that in totality, repair model, call it, down low-, mid- to single and the new construction up mid-single. I think is sort of the market view. Our perspective, and this will be the same as it's been for many years is that we should perform better than that in both new construction and repair and model.
So I'm not yet ready to give you what that translates into an outlook, but that's at least the market view and our expectation is that we'll gain share and perform better than that.
Our next question comes from Steven Ramsey from Thompson Research Group.
Wanted to think about looking out over the next 12 months and with the new facilities now up and running, curious how adaptable you are to run those and ramp production up or down as the demand profile rolls in and how that potentially impacts gross margins going forward with the new facilities coming online?
Yes. Specifically to the first part of the question on our ability to adapt and ramp up or ramp down production. Our operations team has historically done a fantastic job of being able to do that. During COVID, our biggest barrier would have been labor. We certainly have seen a better labor environment, but our belief internally is that, that will continue to always be a challenge.
So we've done a lot of work over this past year to make sure we've got more flexibility and capability to ramp up as needed, of course, ramping down, quite frankly, a little bit easier in that scenario.
Specific to that capacity, our commercial teams are doing a great job working in the market on finding opportunities for us to be able to fill that capacity. I don't know exactly when we'll get to a full ramp from that perspective. and that will be part of our outlook conversation that we'll share with you all again next quarter.
Okay. That's helpful. And then thinking about signals you're maybe looking at for repair and remodel and a potential recovery there? Do you look first at trends through the dealer channel, through home centers? Just curious if there's anything in the marketplace that you're looking for that may not be publicly stated from others in their outlook?
Nothing that's really different from what you see in the marketplace. I would say that we're looking at other data points outside of those outlets first. So what's happening with existing home sales, of course, that creates an opportunity for a transaction. What's happening with consumer sentiment, their willingness to invest back in the home and spend dollars. Are they going to shift away from experiences back to an investment in an asset they own, what's happening with interest rates.
So the same things you're viewing are the things that we're going to look at there. Depending on the cycle, we've seen difference -- we've seen different channels come back faster. So I don't want to point to dealers a leading indicator, and I don't want to point to a home center as a leading indicator because they both have varied over the years. So we look at the outside factors and then keep our eye around both of those particular outlet system type of activity and jobs are bidding.
Okay. That's helpful. And then last quick one for me. The margin outlook raised, just to make sure that's from already produced results year-to-date? Or is there anything in the Q4 outlook that helps to bolster that full year guide?
Steven, I'm not tracking your question. So the outlook that we're going to give for the full year doesn't include everything that we've achieved through the first 9 months of the year. And we're trying to give you a range of exactly where it's going to be within that last quarter.
Got you. Yes. I just wanted to make sure, is there -- for the raised EBITDA outlook, is that mostly attributable to year-to-date results? Or is there -- is Q4 shaping up better than what you thought from the prior outlook?
Yes. I'd say it's a combination of both. Throughout the year, we're performing a lot better. So in essence gives us the confidence to raise our outlook for the full year.
Our next question comes from Tim Wojs from Baird.
Maybe just to start, Scott, on the -- the 1951 brand. Can you just maybe give us a little bit of color of kind of where kind of the market strategy behind the introduction of the new brand? And then maybe kind of what your 3- to 5-year targets might be for growth related to that business?
1951, prior to us launching that brand our strategy when we thought about the new construction market was to serve it with 1 brand, and that brand was Timberlake. And that was regardless of how that particular builder wondering to really go about obtaining their cabinetry product.
So what we've done now with 1951 as we've been able to consolidate all of our various platforms that we've got underneath the Woodmark umbrella. We're able to now provide to principally distributors, but also to some dealers, a brand that will be specifically focused on their business requirements. We want to make sure we give a choice to whether it's a builder or a contract or remodel the right product and the right service model that they want to actually utilize.
So we're excited about it. The actual go-live is March 4. So we're a week before, but it will be live March 4. It's already up on the website and available and our commercial team is already out preselling and talking, obviously, to our distributors. So we think it will be a great opportunity to perhaps take away from some potential channel conflict that's existed in the past and gives us an opportunity to drive more growth in that channel.
As far as specific goals, I don't have a goal that I want to put out in the market today specific to that. I'll just tell you that's part of the strategy and the overall outlook that we shared in our Investor Relations deck. We did a refresh on that back in January and posted that on the website. So that's factored into that financial model.
Okay. Very good. Maybe just on the start-up cost, the $8 million to $9 million this year. I know you're kind of some -- you don't want to talk too much about next year. But is there any kind of, I guess, start-up cost tail, we should kind of think about that leads into next year or the first half of next year?
It's not necessarily a start-up cost tail. So I would say that the start-up costs go away, right? That's a lot of the costs we had prior to being ready for production and ramping. It will now shift to being deleveraged. So we'll have some fixed costs associated with those facilities if we're not fully utilizing and absorbing those there'll be some deleverage that would roll through the results there. But you're right, we haven't modeled that fully out yet to give you a look, but we won't have this ramp cost to get ready like we had in fiscal year '24.
Okay. And then the last one for me, just on mix. There's been some other kind of building product industries and categories that have talked about, some negative mix kind of impacting whether it's consumer trade down, in the R&R market or maybe it's smaller homes in new construction. Are you guys seeing that? Or is it a situation where your portfolio is kind of built around some of those mix changes and it's actually a benefit to American Woodmark in terms of just how the markets evolve?
Yes, you got it, Tim. It's the latter part. When you think about our portfolio and the price points that we go after, we're not sitting in the semi-customer custom range where you might see folks move down in our category or even other categories of building products. So we go after the value price point offering. That's where we've been focused as a company for decades, and that's where the market is shifting.
So we're not dealing with the rotation down at a higher price points. We're already at the value price points. And I shared it earlier in the call, we really haven't seen much rotation even inside our portfolio now.
[Operator Instructions] Our next question comes from Collin Verron from Jefferies.
I guess I just wanted to start on the R&R market. It looks like it will probably be like a second half story in calendar year '24, just based on commentary from other building product manufacturers and the sentiment at the builder show this week. But I was curious if you had any thoughts on what needs to happen for the R&R market to really come back, whether that be a certain mortgage rate level or some other factor? And just how quickly you think demand can snap back when that happens?
Yes, I'll take the latter part first on the equation. So how fast it comes back. I'm not sure. We talk a lot internally about it will come. It will come quicker than we probably are anticipating. We just want to make sure we're ready for it. We believe there's some pent-up demand there. And when consumers get comfortable again, they're going to come back in a pretty meaningful fashion in want to do projects.
We do think about the second half being stronger. What are the things that we're going to keep focused on that we think will help drive that. Interest rates is going to be at the top of the list, what's really going to happen. I know we've pushed out a March potential reduction to now June. Even then, I think it's a 60% somewhat estimate on actually bringing it down 25 basis points. But we're looking to see interest rates move. We think that helps new construction as well as repair and model.
And then the last one, the existing home sales. We need to see existing home sales numbers increase. All-time lows over the last, I think, 25 years this last calendar year. We need to see those numbers move back up as they do, that creates an opportunity on both sides of the transaction of the sale for remodel, and that's usually when we see our business pick up. So those would be the 2 big indicators we're focused on.
Great. That's really helpful color. And then can you just comment on how your unit costs trended in the most recent quarter? And just how you're thinking about cost inflation or deflation as you look out to calendar year '24 here?
Yes. The 2 things -- well, I guess a couple of things I'd call out for you, yes. So one, on input cost. We have seen some of the hardwood lumber start to move up some maple as an example, specifically, we saw that move up a little bit towards the end of the quarter. And then also particleboard has recently seen some announcements around price increases.
So keeping an eye on those, labor, of course, is always going to be an item that will continue to progress and move. That's not going to stop. And then final mile delivery. That's another box we've seen. So a couple of the raws and then labor and final mile will be the key ones, not too different from what we've seen in the past couple of quarters.
Okay. That's helpful. And then, I guess, just any color on how you're thinking about price mix in the current quarter. Are you seeing any more price competition or pressure from your customers to reduce pricing just given the lower demand environment? Just any thoughts there?
Yes. Demand is not really a driver of the pricing conversation for us. What sometimes you'll see is maybe promotional activity being factored in because of the lower demand. We've seen a little bit of an uptick in repair and remodel, but not a considerable increase in promotional activity really throughout all of our fiscal year.
As far as pricing, we've had conversations with folks starting last year, again, not volume-driven, but deflation driven. So if we've seen deflation on specific input costs, and it's appropriate to make adjustments and we'll have those conversations.
And at this time, I'm not seeing any additional questions. I'd like to turn the floor back over to Mr. Joachimczyk for any closing remarks. Please go ahead, sir.
Since there are no additional questions, this concludes our call. Thank you all for taking the time to participate.
Ladies and gentlemen, that concludes today's conference call and presentation. We thank you for joining. You may now disconnect your lines.