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Edited Transcript of AMWD earnings conference call or presentation 27-Aug-19 3:00pm GMT

Q1 2020 American Woodmark Corp Earnings Call

Winchester Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of American Woodmark Corp earnings conference call or presentation Tuesday, August 27, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* M. Scott Culbreth

American Woodmark Corporation - CFO, Senior VP & Corporate Secretary

* S. Cary Dunston

American Woodmark Corporation - Chairman, President & CEO

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Conference Call Participants

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* Jeffrey Stevenson

Longbow Research LLC - Research Analyst

* Julio Alberto Romero

Sidoti & Company, LLC - Equity Analyst

* Justin A. Speer

Zelman & Associates LLC - MD of Research

* Paul Allen Przybylski

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Timothy Ronald Wojs

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the American Woodmark Corporation First Quarter 2020 Conference Call. Today's call is being recorded, August 27, 2019.

During this call, the company may discuss certain non-GAAP financial measures included in our earnings release, such as adjusted income, adjusted EBITDA, adjusted EBITDA margin, free cash flow net leverage and adjusted EPS per diluted share. The earnings release, which could be found on our website, www.americanwoodmark.com, includes definitions of each of these non-GAAP financial measures, the company's rationale for their usage and 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 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 the -- that any projected results expressed or implied therein will not be realized.

I'd now like to turn the call over to Scott Culbreth, Senior Vice President and CFO. Please go ahead, sir.

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [2]

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Good morning, ladies and gentlemen. Welcome to American Woodmark's first fiscal quarter conference call. Thank you for taking time to participate.

Joining me today is Cary Dunston, Chairman and CEO. Cary 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. Cary?

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S. Cary Dunston, American Woodmark Corporation - Chairman, President & CEO [3]

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Thank you, Scott, and good morning to you all. Our first quarter proved to be positive despite some significant headwinds and challenging revenue comps. We are very pleased with our financial performance, particularly related to our adjusted EBITDA and earnings per share.

Net sales for the fiscal quarter were down 0.4% for the business as a whole with continued volatility by channel. Within new construction, we grew our business 4.5% over prior year. Our Timberlake direct business comped very favorably, while our frameless PCS business in Southern California experienced a year-over-year decline.

Our Timberlake direct business once again outperformed the market and our competition in alignment with our strategic expectations. Our success is even more evident in comparing our growth to the 7.5% market decline when considering the 60- to 90-day lag between the start of a home and moving in to install our cabinets. Our ability to continue to gain share even in the current market is a reflection of our direct-to-builder service platform and our recently expanded offering with our lower-price point Origins product.

Although the movement to opening price point homes remains a challenge for builders, we are definitely beginning to see a shift towards the lower price point. Consensus among builders remains fairly strong towards first-time homebuyers, particularly with lowering mortgage rates. As reported last quarter, we are experiencing volatility by region within Timberlake. Comps remain strong in the Northeast, Texas, Atlanta, the Southwest and Northern California. We have experienced some softening in Florida, but continue to believe that it's temporary as builders remain confident, particularly as they head into the second half of their fiscal year.

With regards to our new construction PCS business that is concentrated in the Southern California market, we continue to experience a decline in housing starts. On the positive, the comps did trend more favorably throughout the quarter. Housing affordability remains a critical issue in this region driven by land, labor, materials and overall infrastructure cost. We do expect comps to continue to improve in this market as we head into the fall with the hopes of restoring our business to positive comps the second half of our fiscal year.

It is also important to note that despite our negative comps, starts data in Southern California shows we over-indexed in this market as we did on our Timberlake side.

Looking at our remodel business, which includes our dealer/distributer and home center businesses, revenue was down 3.4% to prior year. Our combined home center business was down 3.1% with positive comps within our stock business and negative comps within made-to-order. We were pleased with the positive comps in our stock business, particularly bath and vanity. Within made-to-order, it continues to be a challenge for all suppliers and our home center partners. Unfortunately, along with the lower comps, we have seen an increase in promotional activity. We do not believe elevating promotions within made-to-order to even higher levels will be effective. Although affordability is a challenge to consumers wanting to remodel, so too is the inherent complexity that a consumer experiences during the ideation and purchasing process.

An indication of how important attacking this complexity is can be seen in our designer series platform. Not only did we relaunch it with a new and much simpler program with one of our key partners, it is also a frameless product that is more appealing to the younger consumer. We continue to experience strong double-digit growth on this platform and expect it to remain so into the future. As such, we are very focused on our strategy within made-to-order to remove complexity that will not only offer a superior customer experience but will improve the cost structure of the business.

Regarding our dealer/distributor business, we were down 4.8% for the quarter. Dealer was relatively flat, while distribution comped negatively. In accordance with the KCMA data, overall dealer and distributor sales, particularly within semi-custom, continued to show strong declines. The story in the dealer channel is very similar to what we are seeing within home center. Demand by the more affluent consumer for higher-end special order cabinets has been trending down over the past year.

At the same time, we are seeing a shift downward in price point by new consumers. Unfortunately, as consumers move into the lower-price point space within dealer, the industry is seeing more of an impact from the Chinese imports. Albeit with a lower SKU count, this product comes standard with all prior constructions and other features only found in higher-level American-made cabinets, aimed at a price point that is well below what American manufacturers can achieve. Although the cost of this product has been impacted by tariffs, the cost delta was so significant that even with the tariff increases thus far, they are still selling at a price point below local manufacturers. This is the whole premise of the American Kitchen Cabinet Alliance antidumping lawsuit.

The initial countervailing duty was successful earlier this month. However, the most significant duty will be tied to the antidumping findings in October. Within American Woodmark, we believe the AKCA will be successful and as a result, feel there is potential upside to our current revenue outlook. We have the right product at the lower price point to be successful.

In summary, on revenue, quite a bit of variation by channel and within geographical regions. Although the housing market has certainly slowed, we remain confident in continued growth this year and the long-term outlook for the industry. Building affordable homes remains a key bottleneck. The good news is that with lowering interest rates, affordability is improving. However, inflationary drivers with material, labor and land cannot be overlooked in the housing industry as well as the overall macro and micro factors impacting our economy and consumer confidence.

The good news is that single-family starts turned positive on year-over-year growth in July. We expect a favorable trend going forward with the industry growing at a low single-digit rate for our fiscal year. We believe we will continue to gain share and over-index the industry with our direct platform.

As within new construction, the kitchen remodeling industry will continue to see a move down in price point. Future growth in the industry is dependent upon the ability for us all to adapt and change. We are beginning to see -- excuse me, we are beginning to undergo what I believe to be a major shift in buyer demographics. This change will have a very significant impact on our targeted customer, how they shop, where they shop, what attributes are important to them and the price point they are willing to pay. Personally, I look forward to this change. We believe we are very well positioned to make this shift in the next-generation buyer, both within remodel as well as new construction. We have the right product and systems today and are working diligently on innovative solutions for tomorrow.

However, we must also work closely with our retail partners to ensure we significantly shift the current model. Minimizing complexity within the value stream and the consumer buying experience will be critical as well as leveraging future-state products and the digital space to deliver a superior customer experience.

Moving on to gross margin. Despite very significant cost headwinds, we finished the quarter at 22.1%. I mentioned last quarter that our teams continue to do an outstanding job of leveraging our operations to drive efficiency improvements. This work continued and had a significant impact on our first quarter. We managed to offset much of the cost associated with tariffs, the loss of overhead absorptions, costs associated with beginning to relocate one of our California facilities and the particle board supply disruption.

Regarding particle board supply, we previously reported that a major supplier experienced a significant fire that shuttered one of their large particle board plants. Shortly thereafter, they made the unexpected decision to also close 2 remaining particle board plants in U.S. This left the industry with a capacity shortage within particle board.

As our customers have always come to expect, our teams did a simply amazing job of very quickly finding alternative supplies, including product substitution where appropriate. Although we have a material variance impact, we avoided what could have been a very detrimental impact on our customers and thus, our company. Scott will provide you with more details on the expected cost impacts shortly.

We are currently working with our insurance carrier to recover as much of the cost as we can, however, the final net impact is yet to be determined and remains a potential headwind. Scott will also provide you with some detailed cost data related to the tariffs and the countervailing duty. As a reminder, we have not taken any pricing action related to tariffs.

Our purchasing team continued to work hard on mitigating our exposure on the material side of the business. The announced expansion of the 301 tariff on September 1 to include such items as hardware and glides has a direct impact on our cost and would be difficult offset simply due to limited sourcing options. However, we remain focused on driving internal efficiency improvements, and we will continue to evaluate the need for pricing action.

Moving on to adjusted EBITDA margin, we finished the quarter at 16.3% versus 15.9% from prior year. As I mentioned previously, considering the cost headwinds we experienced, we are very pleased with this performance. The key driver, once again, is the operating efficiency of integrated platform as well as lower SG&A cost. We are extremely proud of the work accomplished and how united the team has been on driving operating results.

On adjusted net income, we generated $36.1 million in the quarter, up slightly from $36 million in prior year. And our adjusted earnings per diluted share was $2.13 versus $2.04 prior year. Lastly, we continued to be very pleased with our cash flow, generating $56 million of free cash flow versus $41.4 million in prior year. We paid down $42 million of our term loan and reduced our net leverage to 2.35x.

In summary, although we are disappointed in overall market growth and our corresponding revenue growth, we overcame significant cost headwinds in the quarter and generated a strong financial return. We remain confident in our ability to operate at a high level of efficiency in our platform and to continue to capitalize on cost synergies from the acquisition. However, cost headwinds will continue, most notably, the impact of tariffs, the relocation of our facility in California and the net impact of the particle board supply issue.

Regarding revenue, the market is volatile. We expect new construction to improve as we head into the fall. Our low-cost platform is performing very well, yet our revenue synergies are running at a rate lower than expected due to the slowdown in the market. The transition to lower price point homes is accelerating however, and we remain well positioned to continue to gain share with our Origins product.

Home center is challenging, yet we remain very focused on our strategic relationships with our partners. I am concerned with the increasing level of promotions with both home centers as well as within dealers. As stated previously, I firmly believe that this is not the best investment to impact consumer. We are focusing on making strategic investments that will reduce complexity and connect with the next-generation consumers.

Within our stock business, we do expect to continue to see growth. We are confident in our ability to grow both the bath and kitchen businesses as we capitalize on revenue synergies and the strength of our platform.

Overall, we know that trying to predict our industry in the short term will be increasingly difficult, yet we also accept that this makes it even more important that we get the longer-term future right. On this, I'm extremely confident. Our new vision, we recently launched, is already challenging our teams and generating thoughts and ideas never before imagined. Not only will we be ready for the future, we will be driving the future.

With that, I thank you, and I will turn it back over to Scott for the detailed financials.

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [4]

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Thanks, Cary. The financial headlines for the quarter. Net sales were $427.4 million, representing a decrease of 0.4% over the same period last year. Adjusted net income was $36.1 million or $2.13 per diluted share in the current fiscal year versus $36 million or $2.04 per diluted share last year. Net income was positively impacted by lower selling and marketing expenses and lower interest expenses.

Adjusted EBITDA was $69.6 million or 16.3% of net sales compared to $68.1 million or 15.9% of net sales for the same quarter in the prior fiscal year. The increase during the first fiscal quarter is primarily due to improved operating efficiencies and lower selling and marketing expenses.

The new construction market remained challenging during the quarter. Recognizing a 60- to 90-day lag between the start and cabinet installation, the overall market activity in single-family homes was down 7.5% for the financial first quarter. Single-family starts during March, April and May averaged 838,000 units. Starts over that same time period from the prior year averaged 906,000 units.

Our builder channel net sales increased 4.5% for the quarter despite a continued slowdown in the Southern California market. The remodel business continues to be challenging. On the positive side, unemployment remains low. The July U3 unemployment rate was 3.7% and U6 was 7%, both measures were lower than the July 2018 reported figures.

Interest rates decreased in the quarter with a 30-year fixed-rate mortgage at 3.77% in July, a decrease of approximately 76 basis points versus last year. This year, first-time buyers increased. The June reported rate was 35% versus 31% reported last June. Keep in mind, this year remains well below the historical norm of 40%.

All cash purchases in June were 16%, down from 22% last year. Consumer sentiment increased to 98.4% in July versus the 97.9% reported July 2018. On the negative side, existing home sales decreased during the second calendar quarter 2019.

Between April and June 2019, existing home sales averaged 5.28 million units. That same period for 2018 averaged 5.41 million units, a decrease of 2.3%. The median existing home price rose 4.3% to an all-time high of $285,700 for June, impacting our consumers' affordability index.

Homeownership rates remained low versus historical averages. The percent of Americans who own their home in the second calendar quarter was 64.1%, which is slightly lower than last year's rate. Our combined home center and independent dealer/distributor channel net sales were down 3.4% for the quarter, with home centers decreasing 3.1% and dealer/distributor decreasing 4.8%.

The company's gross profit margin for the first quarter of fiscal year 2020 was 22.7% of net sales versus 22.3% reported the same quarter of last year. Gross margin in the first quarter was unfavorably impacted by lower sales volumes, tariffs, cost impacts related to our particle board supply disruption of approximately $1.6 million and duplicate rent costs related to our California facility move of $400,000. These impacts were partially offset by improved operating efficiencies.

Total operating expenses were 11.7% of net sales in the first quarter of fiscal 2020 compared with 12.3% of net sales for the same period in fiscal 2019. Selling and marketing expenses were 4.8% of net sales in the first quarter of fiscal 2020 compared with 5.3% of net sales for the same period in fiscal 2019. The decrease in ratio is a result of ongoing expense controls and lower personnel costs.

General and administrative expenses were 6.9% of net sales in the first quarter of fiscal 2020 compared with 7% of net sales for the same period of fiscal 2019. The decrease in ratio was driven by lower incentive compensation cost.

Free cash flow totaled $56 million for the current fiscal year compared to $41.4 million in the prior year. The increase is primarily due to additional net income generated in the period and lower capital spending. Net leverage was 2.35x adjusted EBITDA at the end of the first fiscal quarter, and the company paid down $42 million of its term loan facility during the quarter. On August 22, 2019, the Board authorized a stock repurchase program of up to $50 million.

In closing, although sales performance was lower than expected due to continued weakness in the remodel channel, we are pleased with our adjusted EBITDA performance during the quarter. Regarding our previously disclosed synergy targets of $30 million to $40 million within 3 to 4 years, we have realized our cost synergy targets to continue to make progress on sales synergy capture. By the end of fiscal 2020, we will realize roughly half of the total anticipated synergies.

With respect to the preliminary countervailing duty determination announced on August 6 of 16.41%, we could be exposed to approximately $5.5 million of potential annual direct cost increases in addition to 301 tariffs. Our teams are working to mitigate the impact through supplier negotiations, supply chain repositioning, internal productivity measures and pricing action if needed. Should the tariff changes communicated on August 23, 2019, go into effect, we would have an annual exposure of approximately $2 million to $2.5 million, which is included in our outlook for fiscal year '20.

We believe particle board supply disruptions will continue to have a negative impact on at least our second and third quarters, and our cost could be negatively impacted by approximately $2 million to $5 million per quarter until fully resolved. We continue to work with our insurance carrier on this matter and expect to recover a portion of the losses incurred, but there will be a lag.

As a result of the [flowing] trend in the remodel channel, the company expects that it will grow sales at a low single-digit rate in fiscal 2020. This growth rate is very dependent upon overall industry and economic growth. Margins will be challenged with increases in labor cost, raw materials, tariffs and transportation rates. The company will also be negatively impacted by the move of one of our California facilities and incremental merchandising expenses. The company expects adjusted EBITDA margins to decrease slightly or remain flat with prior year results, depending upon the outcome of our insurance recovery related to particle board supply disruption.

This concludes our prepared remarks, we'd be happy to answer any questions you have at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question today from Justin Speer with Zelman & Associates.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [2]

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Thanks for the color also on RSI path and the tariffs. Wanted to unpack the competitive dynamics in the repair and remodel channel. Any perspective you can provide, what's taking place and how your performance compares to underlying market growth and the change in promotional cadence across the landscape. Just context around what you're seeing and whether or not you think that's going to be an ongoing theme for the balance of the year?

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S. Cary Dunston, American Woodmark Corporation - Chairman, President & CEO [3]

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Justin, it's a big question with regards to how they are in our market from a competitive landscape is really shaping up. I'll say within home center, home center is primarily us and 2 other key competitors. So it is down. We mentioned our negative comps, our competition mentioned negative comps and home centers themselves have talked about negative comps. It's just the move down a price point. I think the challenge our home centers are having of making sure they can make that transition and attract the next generation into the stores, we're confident they can do that. We're just going through a transition here, and unfortunately, that transition -- with the pressure try to improve comps, we're seeing an increasing level of promotional activity. So it definitely concerns me because that's not where we feel the investment should be made. And is it going to last? I don't know, I would say it's been ongoing now for about 3 years, 4 years with a steadily increasing level of promotional activity in that channel.

So I keep saying every quarter, every 6 months, every year that at some point it has to stop, you can't keep taking promotional activity up and up and up. And at some point, there has to be a resolution to it. So we're continuing to make a lot of investments in those channels, but more on the strategic side. We're not really willing to take our promotional levels up to any higher significant levels. It's just not a good ROI on that. But at the same time, we are willing to work with our partners and make strong business decisions. So home center is a little unknown right now. On the MPO side, when you get into the stock side of the business, more encouraging, more promising. As I mentioned, we do expect to achieve positive comps going forward within the stock business. And I think that's just -- part of that is you're seeing a move down in price point and just the overall success of the model that we offer. So we're confident in that space.

And as I mentioned, the designer series, which is one of the -- one of our business partners, it's growing very, very well. So obviously, a lower revenue platform right now, but they've been growing very strong for a number of quarters now. So we feel strong about that.

When you get to the dealer/distributor, as KCMA data shows, and as I commented, we're definitely seeing that move down in price point, which is impacting overall comps within the dealer/distributor world. I think in the comment I made about the future-state consumer, next-generation consumer or the consumer walking in the door now that's not willing to pay the levels that, I think, the more affluent consumer has really led us to enjoy the past 7 to 8 years. We'll see how that impacts the business. We're definitely seeing a more prominent impact even on our business, obviously, dealers much less from a proportional side of our business, it's less prominent than home center and our new construction business. But we certainly still feel the impact, and we're starting to see some of that Chinese impact now. We'll see where it goes with tariffs and so forth. With or without tariffs, we remain very, very focused on creating a very competitive solution at that lower price point, and we now have the platform to do it. So we need to -- we're working on expansion opportunity, we're working on our frameless opportunities and so forth. So we continue to feel very confident in our ability to grow within the dealer/distributor world.

Overall, from a market share perspective, obviously, it's pretty clear, we're continuing to gain market share in new construction. I think when you really look at remodel, it's hard because it gets pretty diluted out there. But right now, basically, we feel we're in alignment, we're not losing share anywhere. We're basically indexing with the market within the remodel space, but obviously, that will be dependent somewhat on where we go in home center with regards to all the...

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [4]

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Promotion.

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S. Cary Dunston, American Woodmark Corporation - Chairman, President & CEO [5]

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Yes, promotion, sorry. Where promotions go. So we'll see, but right now, we're holding share.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [6]

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So that's good color across the different pieces of the business there. And then there's this other element, there's so much -- there are so many moving parts but one of the other elements that you mentioned were tariffs and antidumping duties. Can you run through your thoughts on the impact of the industry and more specifically, more pertinent to your business, with these elements in the background, what's taking place near term in reacting to those tariffs and how you think it sounds like you think they'll be successful but how you think that will manifest itself in your business model?

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S. Cary Dunston, American Woodmark Corporation - Chairman, President & CEO [7]

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Yes. Another good question. Up to this point, I can't say other than from a cost impact, it's obviously impacted the industry as a whole. We communicated early on there was less of an impact on our business just because we are not that dependent on Chinese imports. We certainly have some supply over there. Some things like glides and a lot of the hardware you get in our industry, basically China is it for source, so when we talk about the limited sourcing options with regards to the expanded 301 tariff, that impacts the industry as a whole. But once again, we're much less dominant on that supply chain. So obviously, with that low cost and the Mexico base, we have fared fairly well and we continue to fare very well with regards to move down in price point.

With our service model, we're very competitive in new construction, so the Chinese tariffs and the impact of the Chinese product really has not impacted single-family new construction. You do see it in multifamily, we go up against it in some of the [vending] we're out there doing now, but once again, service is also important in that industry where you really tend to see the impacts in the dealer world. And then I guess jumping into home center make -- or you don't see much of an impact either other than just a little bit of the cost side.

Where the industry has greatly been impacted is in dealer, and I think we'll see how that plays out. That's been -- obviously, it's important to us from the channel perspective, but yet makes up a lower percentage of our total revenue, so you've not seen us impacted as significantly as some of the others. With regards to where we feel the future will hold, obviously, with the tariffs, the 301 tariffs, they have a big impact on the Chinese imports, and now obviously with the AKCA and the countervailing duty and then the ruling with regards to the antidumping in October, that will have a significant impact on the cost of those Chinese imports.

Our goal and stated goal all along and I know others have tried to express this as well is we still have to be very, very conscious of price elasticity, our goal is not to go out there and just take prices up in the industry, we have been extremely focused on trying to offset the tariffs via resourcing, particularly bringing a lot of that internal to our Mexico supply chain as well as some of the resourcing options we have and then offsetting it with efficiency.

So as we're -- we're very proud to this point, we have not passed any price increases on and we feel we can remain very competitive at those lower price points. So depending on what the antidumping tariff comes in at, we do expect that there could be some opportunity and upside to our revenue as we head into particularly our third quarter. We're starting to see more, I'll say more calls and more interest from potential partners out there and potential retailers in the dealer world that are asking a lot of questions and do have some concerns with regards to that Chinese product, but I think that's good for us, it's good for American cabinet companies. And our goal, once again, is not to just go out and take prices up, it's to be competitive and create a level-playing field at that lower price point. We have the right product, we just have to change some [middle] models with regards to the fact that all plywood construction, what value it brings at a lower price point, it's not necessary. You can produce a very high-quality cabinet and a beautiful kitchen at that lower price point with our product and other American-made product, and that's really the message of the AKCA.

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Operator [8]

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Next, we'll hear from Truman Patterson with Wells Fargo.

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Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [9]

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Yes. Actually, this is Paul Przybylski on. I was wondering if you could give us any color on how sales trended on a monthly basis through the quarter overall and then by channel?

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S. Cary Dunston, American Woodmark Corporation - Chairman, President & CEO [10]

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Not a whole lot of detail on that other than I mentioned on the single-family starts, we do trend as you watch single-family starts trend. We do trend fairly in line with that, although we're getting a lot of volatility by region, but in general, we are trending more favorable within single-family new construction and we expect to do that going into the fall as we feel single-family new starts will improve.

When you get in the remodel side, it's just been pretty volatile out there, so it's hard to really talk about month to month. Right now, there are no indications in the remodel world that anything exists that's going to turn remodel around. I think it's -- we've got to get that younger consumer into the, I'll say the existing home market. I've been saying for many, many, many quarters now that getting first-time homebuyers or getting existing homes out there at a price point that younger folks can afford is very critical.

So inventories remain very, very low with existing homes at the right price point, and it's really driven by baby boomers aging in place and just that move down and move up process does not happen. So I think you're going to start to see that as time goes on. It will improve the remodel market, it's just a question of timing. So right now, I think most out there are saying flat to low single digit is really what you're looking at in remodel.

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Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [11]

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Okay. And then gross margin was better than expectations, any chance that inflects on a quarterly basis in '20?

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S. Cary Dunston, American Woodmark Corporation - Chairman, President & CEO [12]

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I'm sorry, I didn't quite catch your question there.

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Paul Allen Przybylski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [13]

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Yes. Gross margin was better than expectations, and I was wondering if there was any chance that, that might inflect year-over-year on a quarterly basis this year.

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [14]

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So we really don't want to talk about quarterly guidance. As we look forward, we'll provide the perspective on the outlook of the full year. So I'll just take it back to those remarks, our variable at this point in time is really around the particle board expense recovery, and depending on how that plays out either will be flat with prior year from an EBITDA margin perspective or down just slightly.

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Operator [15]

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Next, we hear from Garik Shmois with Longbow Research.

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Jeffrey Stevenson, Longbow Research LLC - Research Analyst [16]

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This is Jeff Stevenson on for Garik. My first question is just how quickly to expect some of the antidumping benefits to drive upside revenue potentially, you talked about earlier, if that October thing goes through?

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S. Cary Dunston, American Woodmark Corporation - Chairman, President & CEO [17]

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I think like I said, we're starting to get some calls as a matter of actually making the decision of pulling the trigger. I think folks are going on a little bit more of a wait-and-see mode to see what happens, but they also have recognized that if that antidumping takes place, it's instantaneous. So I think over the next 3 to 4 months, we're definitely going to start to see opportunity and potential. The big question is how much potential is there? It's very difficult for us, I know everybody else in the industry, to really kind of pinpoint what that is and what that will be. We're not willing to put a number out there, obviously, it's just too difficult. So I think it's going to be a slow [trend] upward. And if October antidumping hits, then we certainly will start to see that pick up much more quickly, but it's very, very dependent upon what the antidumping tariff comes in at, if it's too low, there is a chance it may not have a drastic impact. So it really is very dependent upon what the ruling is on antidumping.

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Jeffrey Stevenson, Longbow Research LLC - Research Analyst [18]

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Okay. Great. And can you give a little more color on the timing and execution of the $50 million buyback program?

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [19]

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So we've got the authorization in play and the way we're going to look at that is it's going to be an opportunistic repurchase, so no specifics we'll offer other than we'll evaluate what an appropriate price is, just that we believe drives a good value for shareholders and then we'd execute but purely opportunistic. Debt paydown continues to be our primary focus.

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Operator [20]

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Our next question will come from Tim Wojs with Baird.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [21]

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So maybe my first question, just kind of some clarification around guidance. On the EBITDA line, Scott, did the duties of $5.5 million, is that in the guidance now? I'm just trying to understand what exactly is in and what might have changed or not.

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [22]

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Yes. So all of the tariff impacts that we are currently aware of, including the announcements on Friday with the increases of 5% on the 2 different buckets, those are all fully incorporated and captured in the outlook.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [23]

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And really the only deviation is that the particle board -- you'll have the particle board cost impact and then it's really just the timing around if you'd get that insurance recovery in fiscal '20 or if it would fall into '21?

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [24]

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Well, it's actually twofold there, Tim. First is the timing recovery, so there will be a lag when we get it. And then secondly, will we fully recover all of the expenses associated with it? That's the piece that's still open and that's what drives the variability in the guidance.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [25]

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Okay. Okay. Got you there. Okay. And then second, any way to think about an updated expectation for free cash flow for the year?

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [26]

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We did not work through that from a modeling standpoint for the year. Obviously, we started off with a pretty strong Q1 result, but I'm not ready to change the outlook at this stage.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [27]

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Okay. And then, Cary, maybe kind of following on at one of your prior comments. What level of kind of antidumping tariffs would kind of narrow the gap or kind of swing the pendulum towards the domestic manufacturers? Just maybe for some context.

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S. Cary Dunston, American Woodmark Corporation - Chairman, President & CEO [28]

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When you look at the antidumping, I think I've heard anywhere from 50% to 100% as being kind of what they'd hoped to achieve. Obviously, it's very dependent upon a lot of things, but I think a minimum of 50% would probably be required to really start to see some closure of that cost delta.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [29]

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Okay. Okay. That's helpful. And then maybe just the last one for me. Any update to kind how you're thinking about material costs and freight for the year, Scott? I think before, you had expected it maybe flat to up slightly, I'm just kind of curious if that's changed at all.

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [30]

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Obviously, the particle board's a factor where we're seeing increases and until all that capacity comes online, that likely continues. Plywood, paint and steel continue to be elevated. We have seen lumber prices start to tip the other way, it's also declined inside the quarter, in primarily around cherry and oak. So still think it's an inflationary environment, fuel came down for us in the period, but we still do see elevated carrier rates overall because we're contracting predominantly, so we still expect that to continue as we push forward. Now those contracts come up for renewal, we'll have the opportunity to more closely align with market rates and perhaps get adjusted for that time.

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Operator [31]

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(Operator Instructions) We'll now hear from Julio Romero with Sidoti & Company.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [32]

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I wanted to ask about -- a little more about the particle board supply disruption. You mentioned that you were able to find a product substitute pretty quickly so that $2 million to $2.5 million of incremental cost order, would that be just, I guess, primarily due to incremental transportation costs? Is that the right to think about that?

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S. Cary Dunston, American Woodmark Corporation - Chairman, President & CEO [33]

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No, it was actually material cost associated. There's some transportation, so it's all in, but it's primarily actual material cost on the material itself. Some of it's transportation, some of it is -- actually, you had to go out on the spot market, so obviously we had to move way from contracts and go out on the spot market and buy, which drives up material cost and then there's some actual price delta based on the substitution that we had to use. It's actually a superior product material, but we had to pay more for it.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [34]

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Got it. And you said you expect it at this point to affect at least your second and third quarter. What are -- what's kind of the puts and takes there that would potentially push that out to maybe the fourth quarter and beyond?

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S. Cary Dunston, American Woodmark Corporation - Chairman, President & CEO [35]

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We don't expect much risk there. I think basically what's very dependent upon is there is -- actually there are several companies in a process of bringing on capacity in America as we speak. So our plan is very dependent upon their time line and getting that capacity up on plan. Right now, everything looks fine, we don't expect any issues, but obviously, there are a few unknowns there and few risks there based on their ability to get started, but right now, everything appears to be coming upon plan.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [36]

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Okay. Very good. And just my last one here is on the RSI synergies, I think you had said you expect half of your annual run rate to -- by end of year fiscal '20. Would that maybe mean that you expect about 1/3 of your expected revenue synergies by that time or is there a different way to kind of think about that?

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [37]

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I would just take you back to the remarks. So we believe we'll have the cost component captured by the end of the fiscal year and then the remaining delta will be related to the sales synergy. Cary's talked that it linked really the last couple of quarters and that's coming slower than expected on the sales side with the cost coming a little bit faster. But again, we expect to be about half realized by the end of this fiscal year.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [38]

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Okay. So about half all in revenue and costs?

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [39]

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That's correct.

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Operator [40]

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I do not see that there is anyone else waiting to ask a question. I would like to turn the line over to Mr. Culbreth for any closing comments. Please go ahead, sir.

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [41]

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

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Operator [42]

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This does conclude today's conference call. Thank you for your participation. You may now disconnect.