American Woodmark Corporation Price & Performance (AMWD)

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 real. I would now like to turn the call over to Paul Johimczak, Senior Vice President and CFO. Please go ahead, sir. Good morning, and welcome to American Woodmark's third fiscal quarter conference call. Thank you all for taking the time today to participate. Joining me is Scott Kalbrath, President and CEO. 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 any of your questions. Scott? Thank you, Paul, and thanks to everyone for joining us today for our third fiscal quarter earnings Our teams delivered net sales of $397,600,000 representing a decline of 5.8% versus the prior year. This was below our expectation share last quarter as we continue to experience softer demand in the remodel market and saw a decline in new construction single family activity as inventories were reduced by builders. Interest rates continue to challenge affordability for new and existing home buyers. National Association of Realtors recently reported that existing home sales finished 2024 at the lowest annualized rate in almost thirty years which has clearly slowed the demand for higher ticket remodel projects such as kitchen and bath remodels.

For the quarter, our home center made order business was roughly flat versus the prior year, and our stock kitchen business was up mid single digits. This was offset by negative comps in the stock bath storage business. Our dealer business was also roughly flat with the prior year quarter but our distribution business was down double digits as new construction activity slowed in the quarter. Single family housing starts experienced negative comps versus prior year in November and January. For our new construction direct business, our teams delivered growth in the Northeast and Northern California markets, but this was more than offset a double digit declines in Atlanta, [indiscernible] and Southern California. We continue to see a rotation down in our made order new construction offering resulting in an unfavorable mix impact on the business. Within our overall made order business, our teams had to navigate a lower backlog As demand slowed within the quarter, our teams adjusted production schedules to maintain appropriate backlog. To accomplish this, we took several unscheduled production down days around the holidays creating margin pressures within the quarter from deleverage. Longer term, our belief remains it is mortgage rates and decline consumer confidence increases existing home sales increase and the potential for higher ticket home projects increases.

Mortgage interest rate relief and consumer confidence increase will also benefit the single family new construction business as more consumers enter the home buying market. We have the products and platforms to win Our adjusted EBITDA results were $38,400,000 or 9.7% for the quarter. Reported EPS was $1.09 Operational Excellence Improvements and SG and A spending benefits in the quarter more than offset by lower sales, and higher material and labor costs. Demand trends are expected to remain challenging and our outlook is for a mid single digit decline in net sales for the full fiscal year and an adjusted EBITDA range of $210,000,000 to $215,000,000 Macroeconomic concerns for the remainder of the fiscal year include consumer consumer sentiment declines, inflation risk that is growing and we don't see interest rate relief in the near term. Recent data for January new construction single family activity also indicates a slower start to the spring selling season but there's still time for improvement. Tariffs have become a concern over the past few weeks. Unfortunately, there continues to be a tremendous amount of uncertainty regarding future policies. Given the focus on Chinese imports in the past, our sourcing team has significantly reduced our exposure over the past five years.

Our overall spend is now less than $25,000,000 and we continue to evaluate the supply chain for those purchased items. Regarding our exposure in Mexico, the risk is considerably larger as those facilities support approximately 10% of our revenue. Should tariffs be in place for an extended period of time, our team will work to optimize our global supply chain, and we would need to consider pricing actions. Note that our current outlook does not include any tariffs beyond those in place for China. Our teams have adapted to tariff and regulatory changes in the past and I remain optimistic that once the landscape settles, we will quickly make the necessary adjustments. Our team continues to execute our strategy that has three main pillars: growth, digital transformation, and platform design. With a number of accomplishments over the past quarter. Conversion activity is now complete with our distribution business customers converted to our new brand 1951 Cabinetry. Our teams are actively pursuing a number of new accounts within that channel. Our upcoming summer launches are underway with a warmer paint stain made to order finish launching to complement existing finishes. New finishes and styles that stay on trend are also launching in our frameless and stock business.

Finally, we're testing new collections within the stock bath category to further drive share gains. Digital transformation efforts continue with our ARP go live at our West Coast made to stock facility targeted during the May. Platform design work continues with the recent announcement of a plant closure within our network. Our Orange Virginia team has been a key contributor to this company for over fifty years. Product mix and overall efficiency gains have allowed us allowed us to consolidate that production into other facilities in our network. Namely Monticello, Kentucky, and Moorfield, West Virginia. Our transition will be completed next month and I want to thank all of our team members for their many years of service. Also wanted to remind everyone that this is a component plant and does not impact our finished goods assembly capacity. In closing, I'm proud of what this team accomplished in the third fiscal quarter and look forward to their continued contributions. I'll now turn the call back over to Paul for additional details. On the financial results for the quarter. Thank you, Scott. I'll begin by discussing our third quarter results, then provide our outlook for the rest of the fiscal year.

Net sales were 397,600,000.0 representing a decrease of $24,500,000 or 5.8% versus the prior year. The net sales change by channel is as follows: New construction net sales were down 10.4% Repair and remodel net sales were down 2.3% with home centers being down 0.6% and independent dealer distributors down 6.8%. While we believe the long term fundamentals of the housing industry are still sound, current consumer confidence in spending is lower. Primarily on higher ticket remodeled projects and that has adversely impacted our current results. Gross profit as a percent of net sales for the third quarter decreased four twenty basis points to 15% [indiscernible] Lower sales volumes impacted our manufacturing leverage in our facilities combined with increased product input costs around raw materials, [indiscernible] and consumer freight rates. However, these impacts are partially offset by our sustained operational excellence Selling, general and administrative expenses, including any restructuring charges, were 9.6% of net sales versus 12.6% last year. The 300 basis point decrease is due to the roll off of acquisition related intangible asset amortization that ended December 2023. Lower incentive compensation and control spending across all functions helped lead to that decline. Adjusted net income was $15,900,000 or $1.05 per diluted share in the third quarter versus $25,100,000 or $1.56 per diluted share last year.

Adjusted EBITDA was $38,400,000 or 9.7% of net sales. Versus $50,600,000 or 12% of net sales last year. Representing a two thirty basis point decline year over year. Within the quarter, we did announce the closure of our Orange Virginia manufacturing These are never easy decisions or ones that we take lightly. But as Scott stated earlier, this was a strategic move for the organization as operational efficiencies, specifically within our dimensional operations have improved In addition, current market trends are moving towards more alternative materials and our platform moves will help enable a and align us to those trends. Free cash flows totaled a positive $31,500,000 for the current fiscal year to date compared to $131,700,000 in the prior year. Approximate $100,000,000 decrease was primarily due to changes in our operating cash flows specifically higher inventory, higher digital transformation costs, and lower accrued compensation and related expenses balances offset by lower capital expenditures. Net leverage was 1.53 times adjusted EBITDA the end of the third quarter compared with 1.05x last year. As of 01/31/2025, the company had $43,500,000 in cash plus access to $314,200,000 of additional availability under our revolving [indiscernible] Under the current share repurchase program, the company purchased $69,100,000 or 752,000 shares in the first nine months of the fiscal year representing about 5% of the outstanding shares being retired.

We have $145,400,000 of share repurchase authorization [indiscernible] Shifting to our outlook for fiscal year twenty twenty five, net sales are expected to be down mid single digits for fiscal year twenty twenty four. This is driven by the new construction market slowing down as well as the softening repair and remodel market. Resulting from the sustained lower higher ticket remodel project across the retailers. However, these assumptions are highly dependent upon overall industry and economic growth trends material constraints, labor impacts, interest rates and consumer behaviors. Our projected EBITDA margin for fiscal year twenty twenty five is being revised a targeted range of $210 to $215,000,000 driven primarily by the softening sales volumes, and the increased manufacturing deleverage of our facilities. We continue to evaluate our pricing monthly and are contemplating pricing actions to help mitigate the inflationary impacts on logistics, raw materials labor, and the potential new tariff impacts. Please note that this outlook does not include any impact for the changes to tariffs given the current policy environment. Our capital allocation priorities for fiscal year twenty twenty five remain unchanged. We remain committed to investing back into the business in automation and digital effort Any excess capital will be used to repurchase shares And as a reminder, we have repurchased $156,800,000 since the start of fiscal year twenty twenty four.

In conclusion, I am proud of our team's resilience as the market conditions continue to change. We are currently at historic lows in existing home sales and maintaining slower growth rates in the construction markets. Our operational leaders are doing a great job at flexing our platforms making the right choice to help keep our operational footprint sound. All while keeping our customers at top of mind and making We remain committed to our long and operational efficiency gains will help support the long term growth and profitability targets. Throughout all of the macroeconomic challenges, our team is dedicated to making it happen [indiscernible] This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.

We will now begin the question and answer The first question comes from Trevor Alexon with Wolfe Research. Please go ahead.

This is actually Paul Cybulski on for Trevor. I guess first, you discussed a slower R and R environment and the builders reducing inventory. Can you talk about what portion of your reduced guide was attributed to each of those components. Those were both key contributors That's what drove the overall comp rate that we posted for the quarter. And if you look at our full year outlook, guide of mid single digits, it basically assumes we're going to have a similar operating environment in Q4 from a comp standpoint. Okay. Thank you. And then I guess in the past, you've talked about hurricanes being a potential needle mover for you all. Have you begun to see any positive impacts from the hurricanes last fall or potentially the fires in Southern California? Nothing specific to the fires in Southern California, but I would say in Florida, we have seen some positive comps in the stores in the areas that were impacted from the hurricanes last quarter. Not material on the overall quarter result, but there was some positive comp rates there. Thank you. Appreciate it.

The next question comes from Steven Ramsey with Thompson Research Group. Please go ahead. Good morning. Maybe to start with on pricing considerations. I'm curious just the different option you're contemplating. I know you're not committing to anything, but just how you're thinking about maybe the surcharge route or actual price moves and just considerations you're thinking as you work through that part of the environment?

Yes. I think regardless of the approach taken, the end result is if if tariffs do come through and we're not able to fully mitigate, there's likely going to be pricing action. As you know, it varies by channel. So in inside our dealer distributor channel, let's basically just do a list price change. So I think we would just roll it through that way. With regards to our home center accounts, there's typically a cost justification process that each of the retailers have. They have to follow and provide notice When you've seen the cost increase and then go through a justification process, We've had some internal discussion around whether it should be a surcharge You've heard that term used for fuel surcharges in the past as an example. That could be a mechanism, but the process is still going to be the same in which you have to justify to go get the actual price increase. I'd say it'd be a similar environment in the builder channel that we would see in the home center channel as well. So we don't have a final path, because we need to first have a solid answer on what we're actually going to see as a market environment and is it going to be long term or short term.

So yes, we're having lots of conversations on that. That's certainly not first route we want to take if we can't mitigate and I'd say specifically with Mexico, I don't think we can fully mitigate that. We'd likely have some pricing discussions with our customers.

Okay. That's helpful. And then on dealer being flattish, which I think you called out was very different than the distributor channel. Maybe first to confirm that I heard that right, but then maybe pulling back Would you say that dealer demand is bottoming or R and R generally big ticket remains tough, but do you get any sense that there could be bottoming or stabilization in that part of the demand [indiscernible] So specifically on dealer distributor, as I know it's not an exact ratio I'm going to provide to you, but I would say typically our dealer business is a bit more tied to R and R performance and distribution is tied a bit more to new construction. So that's why I did want to delineate those and talk about them. Are we bottoming? Certainly would hope so. I think that's been our message over the last couple of quarters that we've seen a pullback in R and R demand. That's not just in the dealer channel. I would also attribute that to the home centers as well. They both move in a similar fashion. So yes, our belief is we're bottoming out. And then the expectation is we would see an increase off of the floor.

The question is what is it that's going to trigger and accelerate that increase going forward. And certainly a lot of players in this space, building products specifically have talked about as second half twenty twenty five recovery think we have a similar sentiment. There doesn't seem to be anything that's going to break loose a surge in demand near term. But certainly in the back half if we can get through some of this stage of uncertainty in the market place and regulatory environment perhaps things could then lift second half. The next question comes from Tim Wojs with Baird.

Please go ahead.

Hey, guys. Good morning. Hey, good morning, Tim.

Hey, can you just talk a little bit about so Scott, you mentioned some mix headwinds within it sounds like the new construction business, is there a way to kind of quantify what the impact of that is? And then just Is that smaller square footage type homes, is that kind of a trade down to different product lines? Just maybe a little bit of what you're seeing on the mix side in the new construction offering?

Yes, a bit of both, Tim. So we definitely see a rotation down in the product [indiscernible] made to order product offering, we do have a good, better, best approach and we are seeing a move from what you'd classify as best to better and sometimes better to good. So we've seen that play out as builders are trying to get price points down to impact affordability and attract new consumers. To your point around homes, certainly we're seeing the square footage shrink on houses. We are monitoring the number of cabs that go in to homes. And I would say sequentially, we are seeing a downward trend in the number of cabinets going to a home. Why would that be? It's also a cost equation. So builders are trying find ways to improve the affordability attract consumers and one way they may do that is let's pull the cabinets over the refrigerator out of the design. An example. So that could be an impact that plays out. We are starting to see some of that in the market. [indiscernible] Okay. And then I guess is there a way to quantify just kind of what the input cost headwind, I guess, was in the quarter or what the expectation is for the year?

Nothing specific to call out around input cost as than we continue to see some pressure there that's rolled through our margins. We haven't been ready trigger any pricing action quite frankly because we're trying to ascertain the impact on tariffs timing around that. So we'd like to get that topic closed out and whether or not we need to take action. And if we do, we would incorporate where appropriate if any inflationary considerations for pricing as well.

Okay.

So I mean it sounds like you'd want to take price, but you don't want to dribble it out into the market. You really want to kind of go out with one increase as opposed to to kind of several? Is that kind of the message?

That's exactly the message. You said it well. Okay. Okay, great. And then I guess just on [indiscernible] What would be kind of the annual benefit from closing the facility just in terms of in terms of EBITDA, gross margins, those types of things?

Yes. We'll have that incorporated into our outlook in fiscal year 'twenty six. I know our cycle is always a bit more challenging versus some of the other companies you follow. So we're wrapping up our budget cycles now. And in our next call, we'll give a full year fiscal year 2026 outlook. But certainly would incorporate all of our guide around market and share gains that we would expect on net sales Also EBITDA and inside that certainly would be a consideration for the Orange impact on the business.

Okay.

Okay. Sounds good. Thanks for the color guys. Luck on our side.

Thanks.

As I do not see that there are any there is anyone else waiting to ask a question, I would like to turn the line over to Mr. Joheem Chek for any closing comments.

Since there are no additional questions, this concludes our call. And thank you for taking the time to participate today.