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Edited Transcript of AMWD earnings conference call or presentation 28-May-19 3:00pm GMT

Q4 2019 American Woodmark Corp Earnings Call

Winchester May 29, 2019 (Thomson StreetEvents) -- Edited Transcript of American Woodmark Corp earnings conference call or presentation Tuesday, May 28, 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, CEO & President

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Conference Call Participants

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* Garik Simha Shmois

Longbow Research LLC - Senior Research Analyst

* Julio Alberto Romero

Sidoti & Company, LLC - Equity Analyst

* Justin A. Speer

Zelman & Associates LLC - MD of Research

* Steven Ramsey

Thompson Research Group, LLC - Senior Equity research Analyst

* Timothy Ronald Wojs

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

* Truman Andrew Patterson

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the American Woodmark Corporation Fourth Quarter 2019 Conference Call. Today's call is being recorded, May 28, 2019.

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 and adjusted EPS per diluted share. The earnings release, which can 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 will begin the call by reading the company's safe harbor statement under the Private Securities Litigation Reform Act of 1995. All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on factors that may go 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 reports 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 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 fourth 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, CEO & President [3]

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Thank you, Scott, and good morning to you all. On prior earnings calls, I've regularly referenced uncertainty in the market and the resulting volatility. We experienced this volatility in our fourth quarter, particularly by channel. Net sales were up 0.4% for the business as a whole.

Looking at our net sales by channel, with the new construction, we grew our business 5% over prior year. Within this, our Timberlake direct business comped very favorably while our frameless PCS business in Southern California saw a year-over-year decline. Within our Timberlake single-family direct business, we once again over-indexed the market as we continue to leverage our direct-to-builder business. It is important to note that the Timberlake direct growth includes our low-cost Origins product that we established shortly after the acquisition. Although the number of opening price point single-family starts continues to lag long-term averages, our team has been successfully bidding business with our Origins product and winning share across the country. The vast majority of the nation's top builders are all moving to increase investments in lower-priced homes. However, this will take time as they have to develop and launch their strategic business models at the more challenging lower price point. We continue to firmly believe that opening price point homes will begin to over-index as starts climb towards more historical levels.

Providing affordable homes for the millennials that have recently entered the prime buying age is critical to industry growth. As I have stated on this call in the past, I believe that real demand is strong, the industry simply needs to find affordable solutions. Strategically, we are very well positioned to continue to serve the nation's top builders with Origins through our direct network as the market grows.

With regards to our new construction PCS business, it is heavily concentrated in Southern California where the market has seen a notable reduction in housing starts, driven by very significant home price inflation and the resulting affordability issue. Outside of Southern California in our Timberlake direct business, we are seeing mixed results by region. Despite the continued decline in Southern California, Northern California is on a more positive trajectory following a slowdown over the winter months. It too has been impacted by rapid home inflation; however, we expect it to return to positive comps this quarter.

Our strongest growth was in Texas. Atlanta was also very strong after recovering from record rainfall; however, the rest of the Southeast was relatively flat year-over-year. The Northeast and Southwest had strong comps as did Florida. However, we are currently seeing some volatility within the Florida market. Nothing that we are overly concerned with yet, however, we are keeping a close eye on it.

Despite indications that point to a bumpy year, we do remain optimistic within single-family new construction. We certainly recognize the macroeconomic factors that work both globally and within the U.S. that can impact our economy and our industry. Specifically, the tariffs remain unpredictable. Global companies are being impacted and the stock prices are showing it. Tariffs can also driving inflation in the U.S. Consumer confidence can then come into question impacting the entire economy.

However, although many variables are at play, we absolutely continue to believe in the long-term growth of this industry. Housing supply is far too low to support underlying demand. When you include historical low existing home inventory levels, particularly opening price point homes, the supply is even more constrained.

Entry-level consumers are more price elastic than the more affluent consumer base that supported our industry post recession. We simply need to generate affordable supply. American Woodmark has the best low-cost supply chain and can absolutely support demand for affordable housing while leveraging the most reliable service platform in the business. It is only a matter of time.

Looking at our remodel business, which includes our dealer/distributor and home center businesses, revenue was down 2% to prior year. Our dealer/distributor business grew 4% for the quarter. Despite a slowing by the more affluent consumer, our dealer business has persisted as a value-based product, particularly when considering the industry-leading service we provide through our sales team and customer care organization. As a result, compared to industry data, we continue to believe we are gaining share.

Our home center business proved to be challenging with a negative 4% comp for the quarter. We saw low-single-digit decline within made-to-order and mid-single-digit within our finish stock kitchen businesses. Within made-to-order, we do not believe we have lost any share as it is tied to overall kitchen department sales. However, within stock kitchens, we believe we are being impacted due to fairly aggressive promotional activity within the home center that carries competitive product. Consumers are fairly elastic on stock product and will often times shop both home centers for the best price.

Although we offer a superior program with greater SKUs and a quick ship program, it is difficult to overcome notable price separation. We continue to monitor this situation and are working closely with our partner to restore our share. Within bath and vanity, we are down low-single digits for the quarter. However, we have faced a challenging comp associated with a large new product load-in at one of our key partners in our fourth fiscal quarter of prior year. Looking forward, we do expect bath to comp positively.

Lastly, our designer series product, which is our frameless offering within one of our home center partners, continues to comp very positively with high-double-digit growth.

Overall, looking forward within remodel, the story remains similar to new construction. Accurate forecasting is a challenge. I believe, future remodel growth is heavily dependent upon existing home sales.

Given the average age of homes and the average age of the kitchen cabinetry within these homes, kitchen remodeling will heavily correlate to existing home sales. I have consistently stated that kitchen remodeling has never recovered coming out of the great recession. The existing home buying cycle has yet to normalize. With baby boomers aging in place and millennials being challenged with affordability, the cycle is having a significant impact on our industry. However, we continue to see what I believe to be an extraordinary level of pent-up demand. This cycle will speed up and when it does, the impact will be very significant on kitchen remodeling. Affordable solutions will be the key, and we are well poised to serve. Despite the shorter-term uncertainty that exists in the economy and our industry, we absolutely believe that future is worth investing in. Those that get it right will win, and America Woodmark will absolutely win.

Moving on to our gross margin. We continued to see improvement trend over the past 3 quarters coming at 21.4%. Our operational performance was strong in our fourth quarter. Our teams have truly done an exceptional job on integration, and we are performing better than expected on cost synergies with opportunity remaining. Material inflation and logistics cost continue to be our 2 greatest challenges. Although low-grade lumber pricing in the housing industry has come down, the high-grade Maple we purchase continues to inflate. We have also had inflation across a number of other raw materials. Likewise, logistics cost is and will remain a major headwind into the future.

Our nationwide assembly coverage absolutely helps us compare to our competitors. However, logistics cost is impacting us all. Regarding the 10% tariff and what may soon be a 25% tariff, our purchasing team has been hard at work mitigating as much of the cost as we can. We remain committed to minimize the overall net cost impact through our combined resourcing and leveraging our low-cost system. And as a reminder, we have not taken any pricing action related to the tariffs as of yet. If the 25% indeed comes into play, we will be required to take some future pricing action. However, as I stated on prior calls, given our ability to mitigate much of the impact, we will be more competitively positioned against both domestic manufacturers and importers of Chinese product.

If the administration were to expand the scope of the impacted product within the 301 tariff, we would have immediate cost implications until we were able to complete our resourcing strategy on these specific products. The larger unknown is related to the antidumping, countervailing duty lawsuit that is underway. This lawsuit is targeting the evident dumping of subsidized Chinese cabinetry into America. If this lawsuit is successful, we would have some additional short-term incremental impact. However, given the mitigation work already underway on the impacted product, the net incremental cost will not be significant. However, we do believe it would have a positive impact on our competitive positioning in the market. Our team is evaluating this opportunity, and we will be prepared to work with our partners to supply any shift in demand. We have the competitive low-cost product and the ability to deliver it.

Moving on to our adjusted EBITDA margin. We finished the quarter at 15.7%. Despite the headwinds and the fact that we have not taken any pricing actions associated with the tariffs, we are very pleased with this performance. Our cost synergy work and our ability to leverage all of our channels with all of our expanded product offering is proving to be a winning strategy.

On adjusted net income, we generated $31.5 million in the quarter, up from $29 million in the prior year. And our adjusted earnings per diluted share was $1.87 versus the $1.64 prior year.

Lastly, we generated $151.5 million of free cash flow for the fiscal quarter. In our fourth quarter, we completed the $50 million stock repurchase authorization as well as continued to pay down our debt. We ended the year with a net leverage of 2.59.

In summary, in the second half of our fiscal year, we faced greater uncertainty in our market. The industry continues to be impacted by macro- and micro-economic factors that are influencing consumer behavior. Although single-family housing starts have declined year-over-year, they have shown a more favorable trend in the past 2 months. We continued to well over-index the market within our direct-to-builder network, particularly when considering the 60- to 90-day lag between starts and cabinet installation. Having said this, new construction growth is becoming more volatile by region. Our direct-to-builder network and frontline positioning allows us to keep a strong pulse on current reality within the industry.

Looking forward, we believe single-family starts will continue to recover, growing low-single digits in our fiscal year '20. We expect to continue to over-index and gain market share during this period.

Developing affordable housing is a critical link to restoring higher growth rates. This will come; once again, the question is timing. We are well positioned, and we'll continue to gain share with our Origins product. Within repair and remodel, we are once again forecasting low- to mid-single-digit growth looking forward. However, the demand is going to be very lumpy quarter-to-quarter, particularly within home center. Focused sales events, promotional activity and strategic initiatives with our retail partners will impact quarterly sales, not to mention the impact of economic factors. The key driver to greater R&R comps in our industry is growth in existing home sales. This is particularly true with first-time homebuyers. The pent-up demand is significant, we simply need the housing cycle to support it. Having said this, we do have a number of incremental growth opportunities that we are developing, not only those related to our synergy work, but new channels of opportunities with new customers. In addition, we remain fully committed to restoring our stock kitchen business in the 2 markets lost before the acquisition. We absolutely have the best low-cost product offering as well as the best solution with our express options and quick ship programs. Our team is working aggressively with our business partner on restoring these markets.

On the margin side, we will face some key headwinds next year that will be difficult to fully overcome in the short term. Not only through inflation and tariffs, but due to the incremental costs passed down from the home center partner to vendors associated with adding dedicated merchandising teams.

We are also having to relocate our PCS manufacturing facility in Southern California. Unfortunately, we were notified that the owner has sold the building and that the new owner would terminate agreement at the end of the contract. As a result, we have secured another facility and will be incurring the costs associated with relocating our operations over the next year. We will absolutely protect our customer base and will be taking the opportunity to invest in some new, more-efficient manufacturing equipment and processes during this move.

In wrapping up, our fiscal year '20 will be an extremely important year for our company. We are launching a new secured vision for 2025 that will elevate us to new levels never before imagined. Our customers and our employees are at the heart of this vision. We'll be driving our thinking to a very innovative and systems-based approach throughout our entire value stream. We will be the innovative leader in the market, and we'll continue to win in all channels. We recognize that the coming months and this fiscal year will be fraught with challenging headwinds. Yet, we will not allow ourselves to be distracted from our vision and the strategy that we are developing that will ensure our continued success.

With that, I thank you, and I will now turn it 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 $407 million, representing an increase of 0.4% over the same period last year. Adjusted net income was $31.5 million or $1.87 per diluted share in the current fiscal year versus $29 million or $1.64 per diluted share last year. Adjusted net income was positively impacted by additional sales volumes, lower interest expense and lower taxes, which was partially offset by a $1.2 million or $0.05 impact for fixed asset write-offs.

Adjusted EBITDA was $63.8 million or 15.7% of net sales compared to $65.3 million or 16.1% of net sales for the same quarter in the prior fiscal year. The decrease during the fourth fiscal quarter is primarily due to tariffs and transportation rate increases.

For the fiscal year ended April, year-to-date net sales were $1.645 billion, representing an increase of 32% over the same period last year. Adjusted net income was $119.7 million or $6.91 per diluted share in the current fiscal year versus $87.7 million or $5.24 per diluted share last year. Adjusted EBITDA was $244.9 million or 14.9% of net sales compared to $175.8 million or 14.1% of net sales for the same period of the prior fiscal year.

The new construction market remained challenging during the quarter, recognizing a 60- to 90-day lag between start and cabinet installation. The overall market activity in single-family homes was down 2.7% for the financial fourth quarter. Single-family starts during December, January and February averaged 857,000 units. Starts over that same time period from the prior year averaged 881,000 units. Our builder channel net sales increased 5% for the quarter despite a significant slowdown in the Southern California market.

The remodel business continues to be challenging. On the positive side, unemployment remains low. The April U3 unemployment rate was 3.6% and U6 was 7.3%. Both measures were lower than the April 2018 reported figures. Interest rates decreased in the quarter with a 30-year fixed-rate mortgage at 4.14% in April, a decrease of approximately 33 basis points versus last year. This year, first-time buyers increased. The March reported rate was 33% versus 30% reported last March. Keep in mind, this year remains well below the historical norm of 40%.

On the negative side, consumer sentiment decreased to 97.2% in April versus the 98.8% recorded in April 2018. Existing home sales decreased during the first calendar quarter of 2019. Between January and March of 2019, existing home sales averaged 5.2 million units. That same period for 2018 averaged 5.47 million units, a decrease of 4.9%. The median existing home price rose 3.8% to $259,400 for March, impacting our consumers' affordability index. All-cash purchases in March were 21%, up from 20% last year. Residential investment as a percent of GDP for the first calendar quarter 2019 decreased to 3.2% versus 3.4% in the prior year.

Home ownership rates remained low versus historical averages. The percent of Americans owning their home in the first calendar quarter was 64.2% which was flat to last year's rate. Our combined home center and independent dealer/distributor channel net sales were down 2% for the quarter, with home centers decreasing 4% and dealer/distributor growing 4%.

The company's gross profit margin for the fourth quarter of fiscal year 2019 was 21.4% of net sales versus 22% reported in the same quarter of last year.

Gross margin in the fourth quarter was unfavorably impacted by higher transportation costs, tariffs and raw material inflation. These impacts were partially offset by higher sales volumes, price and overhead cost leverage due to higher volumes.

With respect to the 301 tariffs, assuming the tariffs are maintained at the 25% levels, we could be exposed to approximately $5.6 million of potential annual direct cost increases in addition to the original 10% tariffs. Our teams are working to mitigate the impact through supplier negotiations, supply chain repositioning, internal productivity measures and pricing action if required. Should the 301 tariffs expand to additional categories, we would have an additional exposure of approximately $4 million.

Year-to-date gross profit margin was 21.1% compared to 20.4% for the same period prior year. Gross margin for the current fiscal year was favorably impacted by higher sales volume, price, mix and overhead cost leverage due to higher volumes. These favorable impacts were partially offset by higher transportation costs, tariffs and raw material inflation.

Total operating expenses were 11.9% of net sales in the fourth quarter of fiscal 2019 compared with 12.6% of net sales for the same period in fiscal 2018. Through 12 months, operating expenses increased from 11.8% of net sales to 12.4%.

Selling and marketing expenses were 5.3% of net sales in the fourth quarter of fiscal 2019 compared with 5.6% of net sales for the same period in fiscal 2018. The decrease in ratio is a result of lower display and personnel cost.

General and administrative expenses were 6.6% of net sales in the fourth quarter of fiscal 2019 compared with 7% of net sales for the same period of fiscal 2018. The decrease in the ratio was driven by a reduction in acquisition-related expenses of $2.6 million, which was partially offset by higher incentive costs.

Free cash flow totaled $151.5 million for the current fiscal year compared to $36.9 million in the prior year. Net leverage was 2.59x adjusted EBITDA at the end of the fourth fiscal quarter. The company paid down $120 million of its term loan facility during the fiscal year and repurchased 745,000 shares of common stock at a cost of $50 million.

In closing, despite the slowdown in the new construction market and volatility within the remodel market, we were pleased with our adjusted EBITDA performance for the fourth fiscal quarter.

Regarding our fiscal year '20 outlook. For the market, we expect the following: Single-family housing starts to grow approximately 3% to 5%. Interest rates to climb along with continued increases in the average price of new homes. Both factors will negatively impact affordability, particularly for the imported first-time and first-upgrade buyers. Unemployment should remain steady. Tariff impacts will remain uncertain. Cabinet remodeling sales will continue to be challenged until economic trends remain consistently favorable. Growth is expected at roughly a low- to mid-single-digit range during the company's fiscal 2020.

In this environment, our expectations for the company performance are as follows: Company's home center market share will remain at normalized levels for fiscal 2020; however, this is heavily dependent upon competitive promotional activity. The company will continue to gain market share in its growing independent dealer and distributor channel. The company's builder business will increase at faster rate in the market ready for single-family housing starts due to continued share gains. In total, the company expects it will grow sales at a mid-single-digit rate in fiscal 2020.

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 that Cary alluded to earlier and incremental merchandising expenses. As a result, the company expects adjusted EBITDA margins to decrease slightly for fiscal 2020.

This concludes our prepared remarks. We'll 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) We'll take our first question from Truman Patterson with Wells Fargo.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [2]

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First, just wanted to dig into your margin guidance a little bit more. You guys said that there were some cost inflations and tariffs, home centers are passing on some costs to you all. Could you guys just elaborate a little bit more and maybe when you think you might be able to inflect positive and cover all those costs? Or do you think that they could actually remain a headwind and margins could decline throughout the full year of fiscal 2020?

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

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Truman, this is Cary. I'm going to provide a little higher-level overview and then Scott can jump in and provide some details, if desired. But -- so as we mentioned, we do have inflation on several fronts. Some of those are unknown. We have -- in our current forecasting, we have baked in the 10% tariff. Tariffs beyond that, obviously, are still questionable. So we have not baked anything in. So there would be some financial impacts. Obviously, our response on that, twofold. Number one is we do have additional sourcing options we can take. There is some timing related to that, but we do have the option, obviously, given our low-cost platform. Mexico as other resourcing options. And then, obviously, we do have the pricing trigger that we have not pulled as of yet. So I personally do believe that the market is becoming more elastic. So that's why we have been heavily focused on resourcing and trying to mitigate the cost of really all the inflation, including logistics, material and the potential tariff through our own internal resourcing option.

So -- but we do have that potential out there. So as far as timing, it's hard to really say just because there's so much questions around the tariffs themselves. The antidumping, countervailing duty is really late summer and into early fall. And then the 25% 301 tariff, obviously, is really anybody's guess. Obviously, we have a short-term impact potentially, but I think most of us believe that if it does hit, the likelihood of that lasting very long is not high, but once again it's just getting harder and harder to predict. So we are proceeding with the actions around sourcing. So there is -- most of that cost is really already identified with the exception if they do expand the scope of the 301, and we have not taken any action on that yet.

So timing-wise, it's just -- as I said, forecasting is getting very hard to predict and the tariffs and other things are certainly contributing to that. But Scott mentioned that we do expect some pressure on EBITDA, but obviously a lot is in the air right now.

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

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The only thing I would add there -- sorry, Truman, all I would add there is certainly the tariff situation is uncertain, the best way to describe it. And from a short-term perspective, certainly, there could be pressure on our performance, if it's expanded, if the antidumping comes through, et cetera. But our perspective is, long term, we offset that. And we're going to offset either through sourcing changes or pricing action, but quarter-to-quarter it could be noisy based on actions that are taken.

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

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And then, obviously, with the tariffs is, I've said before, I still believe the tariffs are a net positive for American Woodmark just given our positioning. We stand to gain a fairly notable competitive advantage in the market. So -- obviously, what's not baked into our budget as well or into our plan for next year is any upside potential related to the 301 tariff or the antidumping tariff that would improve our competitive positioning.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [6]

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Yes. And possibly some share gains, heard you loud and clear. On the 301 tariff, the 25% that's been implemented, I guess, since it's not included in guidance, thinking more near term, just over the next 2 to 3 quarters, how long will that take to flow through your supply chain and actually hit your P&L?

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

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The good thing is it's -- unlike the initial 10%, it did not include everything that was already on the water. So there was a delay there. So it should be 1.5 months, I would guess.

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [8]

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Yes. We still -- we'll have the impacts inside the Q -- definitely in Q1, if they stay. And that's a big question, right? If it stays. So he gave himself a little buffer there to stop it. But right now, we -- as you stated, we are all planning on it hitting.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [9]

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Okay. Okay. And then jumping over to the home center channel. You guys made a few comments that it was challenging, there were some promotional activities, some product load-in comp and everything. Reading through the home center's conference call, just seems like they had low-single-digit growth, you guys -- revenues declined. Could you guys just elaborate a little bit more on this dichotomy, if you will? And maybe what your strategy is for maintaining that market share?

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [10]

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Yes. If you looked at the home center comps, that was holistically not really -- they're going to call out the kitchen and bath department at a 3% comp. So our data basically shows we were in line with overall home center comps, particularly on the made-to-order side. Now on the in-stock side, basically the cash and carry stock product category, what I was referencing, you mentioned a couple of things there, the load-in a year ago was on the bath side, so that created -- basically when you do a low one, we -- the vendor orders quite a bit of inventory that results in a net positive increase in our revenue. We've reported that in our fourth quarter fiscal year last year. So we had a hard comp coming into this prior quarter. But going forward, we expect back to positive comps within bath. So bath right now is not really as big of a challenge when you look at the kitchen cabinet side of it on the stock side is -- I think most know we provide stock cabinetry on the kitchen side to one key home center and our competitor provides to another key home center. One of the -- based on our competitive on that front, the home center themselves really has been doing quite a bit of promotional activity in the stock space, not just in cabinetry, really across the board, but also in cabinetry. And we definitely saw a noticeable shift in, I think, some of that demand from our partner over to the other home center which is impacting our stock sales.

So timing-wise, I mean, that home center is continuing with that promotional activity. We are working with our partner on -- we are not -- we're going to have any type of response. Obviously, there is other strategic options we have as well. But we've been fairly reluctant, particularly when you're getting that low price point, you're getting the promotional activity, we've all seen what has happened over the past 4 years on the made-to-order side. So we're very reluctant to jump into any type of promotional gain down at that low price level. It's just -- it's really detrimental to margin and obviously, we have a better product offering and right now, we're sticking with our position. But once again, we'll continue to play it by ear and see how the market goes.

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Operator [11]

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We will take our next question from Garik Shmois with Longbow Research.

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Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [12]

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I'm just wondering if you could provide a little bit more color on the cost impact of the frameless PCS move in Southern California. And also wondering is the new facility that you are moving to in Southern California or there are opportunities to look at some maybe lower-cost markets?

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S. Cary Dunston, American Woodmark Corporation - Chairman, CEO & President [13]

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Yes, this is Cary. So we're not -- we don't really provide specific details on the cost other than it is broken down into our, what Scott alluded to with some of the challenges for our forward-looking EBITDA. So it is built into that number. Yes, the challenge we really had was timing. So you asked a very good question, is there lower cost options? Longer-term, potentially, we're going to do that analysis. One of the challenges we have is that PCS business is, I might say heavily dominated in Southern California. It's 90-plus percent, probably 95% in Southern California. It's one of the challenges that most companies have of serving that market is just, as you know, if you've been to Southern California that the logistics side of it is very, very challenging.

So to move a plant outside of that area adds a lot of cost to it. So right now, we are sticking with another location, it's in Southern California. One of the challenge we had through the acquisition is most of the sites that we acquired were leased versus owned. Longer term, my strategy would be to move away from leased and get into owned facilities just to avoid this type of unannounced type of challenge. But this current one is another lease facility and it is located in Southern California. So we did the analysis, and we did the complete cost analysis, we looked at bordering states and so forth, and this was the best cost option despite some of the challenges of, obviously, relocating.

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Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [14]

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Okay. And you've been taking share with home builders. And looking at your outlook for fiscal 2020, you're looking at home construction up 3% to 5%. Just wondering if you can maybe frame how much in excess of the market you would continue to expect to grow?

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S. Cary Dunston, American Woodmark Corporation - Chairman, CEO & President [15]

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Yes. That's how we always are. We always typically just say we over-index. I think you can go back just look at historical numbers and where we comp compared to the industry and obviously, we have fairly regularly over-indexed the market. Obviously, it does vary. It's getting really harder, like I said, by region because of the volatility, but we are the #1, obviously, provider in that market. In fact, our Timberlake brand is, we believe, the largest brand in the country, period, now. And so we have a lot of success with that product with the brand, and we'll continue to over-index the market.

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Operator [16]

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(Operator Instructions) We'll take our next question from Justin Speer with Zelman & Associates.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [17]

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I just wonder -- a few questions. Wanted to get a sense for the free cash flow for next year. It's very good this year. But for your guidance, if you could maybe give us a little handholding there that would be helpful.

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [18]

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Yes. So I don't want to give a specific value, Justin, but I will tell you as a reminder when you look back at the first quarter results for the prior fiscal year there was the onetime benefit associated with that tax receivable carryover. So there was about a $30 million swing associated with that. But I would back off before you do any modeling moving into fiscal year '20. The one thing I will give you some direction on would be around CapEx in displays, and we do think it will be slightly higher than what we spent in fiscal year '19 as we do have some higher display costs coming our way.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [19]

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Okay. And then with regards to the merchandising change. Just maybe give us a little bit more handholding there with regards to what kind of personnel you're looking to potentially put into these stores and maybe how that compares to what you had last year?

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S. Cary Dunston, American Woodmark Corporation - Chairman, CEO & President [20]

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Now, Justin, this was related to. It's been fairly public knowledge that, obviously, one of the home centers basically has modified their merchandising process. So they've actually created full-time teams now that are responsible for merchandising within the stores themselves and they basically travel to stores and responsible for making sure the inventory is, obviously, in stock and basically, everything is in alignment with their plans. So they basically reached out to vendors and asked us all to help fund what they call the merchandising support teams and that's something that most vendors have openly communicated on their call because it is a noticeable impact.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [21]

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Okay. So you're not changing your headcount, it's just supporting that?

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S. Cary Dunston, American Woodmark Corporation - Chairman, CEO & President [22]

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No. We have no headcount involved whatsoever. So it's basically our sales force that's in place. We work directly with the merchandising teams. But no, we have no additional incremental headcount. It's all to the home center themselves.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [23]

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Okay. Okay. That's helpful. And I know you're not going to give us any details, but in terms of the cost, is it more than 50 basis points, less than 50 basis points in terms of the incremental drag there?

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S. Cary Dunston, American Woodmark Corporation - Chairman, CEO & President [24]

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Sorry, we're giggling. So I'll get back to your...

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [25]

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I'm giggling a lot. We're not going to give any specifics around exactly what that costs. But it was meaningful for most vendors.

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S. Cary Dunston, American Woodmark Corporation - Chairman, CEO & President [26]

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Yes. It's hard to give a detail, obviously, because all we do is cabinetry, as you know. And for us to give a certain percentage would give our competitors an exact number. So basically, it was a negotiating number that we had specifically with our merchant team as every supplier has as well, so.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [27]

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Okay. And in terms of the growth contribution from the Origins product in the quarter or maybe even for the full year and thinking about what you've accomplished this year and then potentially what you're thinking for next year. Is there any context that you can give us there?

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

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It's difficult once again because it's built into our Timberlake growth number. So we really don't want to get into calling out a very specific number for a specific product. But we will say if you go back to what we committed from -- going back to the acquisition and our plans with regards to revenue growth specifically, in this space of single-family new construction. The net number would be less than we hoped it would be right now. However, our market share gain, I would say, is on plan. As I said, the total pie is not as large as what we hoped it would be right now. So we feel it's coming. We are gaining share. It's an exceptional product. Obviously, it's -- in the history of the company, we've never been able to go down to that lower price point, opening price point position and make a strong margin like we have now. So our teams have been very successful with that. We absolutely are gaining share. So when we talk about those comps within Timberlake on the direct side, it is inclusive of Origins. And obviously, as you kind of put one to one together as the market starts to move more towards opening price point and it begins to over-index, I think that will be a good test to our ability to gain share with this product because it will be required for us to continue to grow in that space.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [29]

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And thinking about just couching this in the context of potential antidumping duties, tariffs potentially stepping up to 25% and thinking about this Origin strategy, do you think that may give you that catalyst to jump-start that growth and maybe accelerate it to the point that you maybe originally thought?

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S. Cary Dunston, American Woodmark Corporation - Chairman, CEO & President [30]

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Yes. Absolutely. It's a very good question and a very good point. We have 2 platforms. Number one, the Origins, which is our -- it's a frame product offering, which is more standard in America, and yes, we have that at a very affordable price point that we can go out and successfully bid on business that assuming the antidumping, countervailing duty comes into play that we'll be very well positioned to do that. In addition, what I talked about with our PCS, we do produce our frameless product, not only in Southern California, but we also produce it in Texas, and we've been seeing very solid, very aggressive growth on that within one home center. That is the frameless platform that tends to be more relevant for the younger generation, millennials, and so forth because it's more of a European look. And likewise, we will be able to also hit the market very hard with that, just once again, because of the price point and the look of it. So we feel we are well positioned given our product offering, assuming the antidumping, countervailing duty comes into play.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [31]

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Excellent. And last question for me is just some assets come into market that are outside of your traditional price point. Any potential interest or the economics such that you may -- we shouldn't be surprised if you participate with your leverage profile coming in a little bit here to 2.6x?

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S. Cary Dunston, American Woodmark Corporation - Chairman, CEO & President [32]

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As you know, we'll obviously do our proper due diligence in that and if any opportunity comes along. And at this point, we are just in the process of analyzing the situation you're referencing.

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Operator [33]

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We'll take our next question from Tim Wojs with R.W. Baird.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [34]

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Just -- I guess maybe thinking about pricing. I know you haven't put through pricing for tariffs. But is there any way you could just kind of elaborate or give some color on what type of pricing you've put through for inflation and logistics inflation?

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [35]

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You mean this past year?

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [36]

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Yes.

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

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Yes. So we don't give specifics there, Tim. But go back to our Q3 time period, we talked about that pricing actually taking place in November and that was on the made-to-order frame platform really at the home center and dealer/distributor. So those pricing actions went in and those actions were really to mitigate and offset prior period increases from an inflationary perspective on both the laws as well as the transportation side. Because of the timing that did not include anything specifically related to the 10% tariffs because those came about as we were reviewing the negotiation on pricing. So looking forward, the pricing action will be to again come back and have the tariff conversation.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [38]

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Okay. Okay. And then as you think of just the use of free cash flow. Any -- should we just expect -- I think you exhausted the buybacks. Any kind of opportunity there for another one? And then, I guess, should we just assume that you're going to use free cash flow in 2020 to continue to delever?

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

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Yes, Tim. So from an assumption standpoint, just assume that we will continue to pay down the debt. The one thing I will note for you is that when we did the credit agreement modification earlier this calendar year, we did get some favorable terms with respect to the interest rates as well as some of the covenants around that. And if we get below particular thresholds, it does open the door for us to perhaps look at new purchases again. So that's something that may come up down the road, but for the time being we'll be focused on debt payment.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [40]

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Okay. Okay. Great. And then a couple of other small ones just -- the tax rate for the year is 26%, still a good tax rate?

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

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Yes, I would still use approximately 26%.

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Operator [42]

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(Operator Instructions) We'll take our next question from Steven Ramsey with Thompson Research Group.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity research Analyst [43]

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I want to get more on the gross margin decline. How much of it was general cost headwind? How much of it was sales mix trends given, I guess, I would just assume less home center sales as a tailwind to some extent? And then how much -- any sort of quantification on the synergy benefit?

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [44]

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Yes. So you said gross margin. So I'll focus on that one. No specifics, I'm going to offer dollarization around each of the categories. Just again, the main players for us from the year-over-year standpoint in the fourth fiscal quarter would have been transportation cost, of course, the tariffs which we've talked a lot about here today and then some raw material inflation impacts.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity research Analyst [45]

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Excellent. And then on the dealer/distributor channel, can you discuss what the positive outlook for 2020? How much of that -- how much of the impact is price and mix?

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S. Cary Dunston, American Woodmark Corporation - Chairman, CEO & President [46]

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Yes. And obviously, we said remodel as a whole we do expect to grow low- to mid-single digits. Within the dealer side, I mentioned they are seeing a decline with regards to the more affluent consumer. We tend to be comping a little more favorably just given our value position. One of the unknowns out there is related to the antidumping, countervailing duty because what folks don't realize is kind of a lot of that Chinese dumping product that's mentioned in the lawsuit, a good percentage of that has fed into the dealer channel and really impacted more of the semi-custom side, but certainly creates an opportunity for us as well if that were to come through. So growth is, I'd say it's unpredictable at this point, a lot of variables, a lot of macro and micro factors in there. Net-net, pricing for us wasn't a significant impact. So when we talk about growth of low to mid, that's really not including much pricing impact in there. It's going to be pure growth, but a lot unknowns in there, though.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity research Analyst [47]

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Great. And then my last question centers more on the CapEx side of things for 2020. I guess, there was about $7 million of CapEx for the new headquarters last year. Is that investment finished? And then thinking about the new facility, will we see that impact in 2020 with even including the -- improved manufacturing capabilities within that facility?

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [48]

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Yes. So the guidance I provided on the prior question with respect to free cash flow and I mentioned CapEx in displays being slightly higher than prior year, that's mostly due to additional display spend and inside that number is incremental capital costs associated with the transition to the new facility and some of that is for productivity improvement, but some of which is basic infrastructure work that we got to do as well.

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Operator [49]

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(Operator Instructions) We'll take our next question from Julio Romero with Sidoti & Company.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [50]

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Can you talk about the in-stock kitchen segment? Has that promotional activity you saw in the quarter carried into May and the first quarter here at all?

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S. Cary Dunston, American Woodmark Corporation - Chairman, CEO & President [51]

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Yes. We are seeing -- once again, it's the competitive product that's in the other home center. It's the home center themselves that is promoting that stock cabinetry and yes, that is proceeding. So we are, obviously, in conversations with our partner and we'll be developing a strategy going forward, but yes, it's going into Q1.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [52]

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Okay. And you mentioned in your prepared remarks, some opportunities for some incremental top line growth. I think you mentioned some new customers. Could you elaborate on that at all?

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S. Cary Dunston, American Woodmark Corporation - Chairman, CEO & President [53]

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Other than that, no details, obviously, by customer, but kind of 2 fronts. Number one, obviously, is with our expanded product offering through the acquisition and obviously, low-cost platform as we've been out actively pursuing new channels and new customers. So we are in conversation with potential customers, and so forth, as always. But I think we just have a very viable and strategic footprint now that helps when we approach customers just because of expanded portfolio. In addition, obviously is, there are some, I would say, retailers, customers out there, various channels that have gotten wind of the antidumping, countervailing duty lawsuit and are starting to put contingency plans in place. And therefore, we are taking calls and working on potential options to service an expanded customer base if they were to hit. So, yes, there is some potential opportunities.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [54]

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Understood. And on the RSI integration, think you were about 1.5 years into your integration plan. I think you had initially called out $30 million to $40 million of annual run rate synergies. Where would you say you are in terms of that annual run rate target?

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [55]

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As I said, we are -- the biggest that we committed to in the first year, first 12 months out was in single family. So as I mentioned before, the net is lower than we anticipated just because we have not seen the growth in the opening price point home. Nothing's changed strategically other than just getting the industry to cooperate on that. In multifamily, we are aggressively bidding. I would say we're slightly behind, but I mentioned I think on the last call that we are working on a very strategic plan for the multifamily that leverages our direct-to-builder network. So we still remain very committed to that $30 million to $40 million. Lots of different variables out there right now, but net-net, I think, particularly with the antidumping, countervailing duty and the potential we have to leverage our low-cost platform, I think we certainly will plan to meet that.

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Operator [56]

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And 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.

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M. Scott Culbreth, American Woodmark Corporation - CFO, Senior VP & Corporate Secretary [57]

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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 [58]

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And that concludes today's presentation. Thank you for your participation, and you may now disconnect.