Q1 2024 American Woodmark Corp Earnings Call
Participants
M. Scott Culbreth; President, CEO & Director; American Woodmark Corporation
Paul Joachimczyk; Senior VP, CFO & Corporate Secretary; American Woodmark Corporation
Adam Michael Baumgarten; MD; Zelman & Associates LLC
Collin Andrew Verron; Equity Analyst; Jefferies LLC, Research Division
Julio Alberto Romero; Equity Analyst; Sidoti & Company, LLC
Steven Ramsey; Senior Equity Research Analyst; Thompson Research Group, LLC
Timothy Ronald Wojs; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
Presentation
Operator
Good day, and welcome to the American Woodmark Corporation First Fiscal Quarter 2024 Conference Call. Today's call is being recorded, August 29, 2023.
During this call, the company may discuss certain non-GAAP financial measures included in our earnings release such as adjusted net income, adjusted EBITDA, adjusted EBITDA margin free cash flow, net leverage and adjusted EPS per diluted share. The earnings release, which can be found on our website, americanwoodmark.com, includes definitions of each of these non-GAAP financial measures and the company's rationale for their usage and a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures. We also use our website to publish other information that might be important to our 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 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 any projected results expressed or implied therein will not be realized. I would now like to turn the call over to Paul Joachimczyk, Senior Vice President and CFO. Please go ahead, sir.
Paul Joachimczyk
Good afternoon, and welcome to American Woodmark's first fiscal quarter conference call. Thank you for taking the time today to participate. Joining me is Scott Culbreth, President and CEO. Scott will begin with a review of the quarter, and I'll add additional details regarding our financial performance. After our comments, we'll be happy to answer your questions.
M. Scott Culbreth
Thank you, Paul, and thanks to everyone for joining us today for our first fiscal quarter earnings call. Our teams delivered net sales of $498.3 million, representing a decline of 8.2% versus the prior year. Within new construction, our business declined 6.4% versus prior year. Builders continue to buy down rates to drive sales and are shifting to our ready-to-move-in build strategy. Cancellations are holding in more historic norms in the 14% to 16% range.
The long-term fundamentals of the market remain strong, and there continues to be a deficit in the number of homes built following short of household formations. We plan to continue to grow our share with new and existing customers. Looking at remodel, which includes our home center and independent dealer and distributor businesses, revenue declined 9.5% versus the prior year. Within this, our home center business was down 12.8% versus the prior year. Demand trends have slowed for our made-to-order and stock kitchen business due to lower in-store traffic rates and consumers are choosing smaller-sized projects. Our stock bath business was positively impacted by a promo versus the prior year, but that was more than offset by inventory destocking efforts at our customers.
With regards to our dealer/distributor business, we were up 0.1% versus the prior year. Incoming order trends improved at the end of the prior fiscal quarter, allowing for stronger shipments in the first -- in the fiscal first quarter. Our adjusted EBITDA increased 33% to $75.2 million or 15.1% for the quarter. Reported EPS was $2.28, and adjusted EPS was $2.78. The improvement in performance is due to pricing, better matching inflationary impacts, mix and improved efficiencies in the manufacturing platforms. Our ops team continues to drive excellence in our plans.
Our cash balance was $89.7 million at the end of the first fiscal quarter, and the company has access to an additional $323.2 million under its revolving credit facility.
Leverage was reduced to 1.9x adjusted EBITDA, and the company repurchased 328,000 shares in the quarter. Our outlook for fiscal year '24 assumed market declines in both new construction and repair and model. And our view has not changed, but we do view repair and model demand is softer versus our original outlook with slightly better demand in new construction. Our expectation for sales remains unchanged with a low double-digit decline. Due to the strong fiscal first quarter performance, our adjusted EBITDA expectation is increasing to a range of $225 million to $245 million. Our team continues to execute against our strategy that has 3 main pillars: growth, digital transformation and platform design.
Growth is benefiting from our summer launch that included several new finishes and new door styles, enhancements to our internal organization accessories within our made-order platform. Digital transformation efforts over the last fiscal quarter include the conclusion of our global design workshops for the next implementation area of ERP and Monterrey go-live. Our CRM tool went live in August across the remodel channel and will be followed by the new construction channel in September. Platform design work is accelerating with over 70% of the wall panels installed in Monterrey, Mexico, and all of the wall panels are installed in Hamlet, North Carolina. We expect both sites to be on our roof in the next 60 days.
As a reminder, this expansion will deliver additional capacity in our stock kitchen and bath cabinetry product lines.
In closing, I'm proud of what our team has accomplished in the first fiscal quarter, and I look forward to their continuing contributions during fiscal year '24.
I will now turn the call back over to Paul for additional details on the financial results for the quarter.
Paul Joachimczyk
Thank you, Scott. Net sales for the first quarter of fiscal year 2024 were $498.3 million, representing a decrease of 8.2% over the same period last year. The combined home center and independent dealer and distributor net sales decreased 9.5% for the first fiscal quarter, with home centers decreasing 12.8% and dealer distributor increasing 0.1%.
New construction net sales decreased to 6.4% in the first fiscal quarter compared to the prior year. The company's gross profit margin for the first quarter of fiscal year 2024 was 22%, of net sales versus 16% reported in the same quarter of last year, representing a 600 basis point improvement. Gross margin in the first quarter of the current fiscal year was positively impacted by our pricing, better matching inflationary impacts, operational improvements in our manufacturing facilities and stability in the supply chain, partially offset by the $4.9 million tariff charge incurred within the quarter. As we discussed in our previous earnings call, we are returning to our normal performance cycles for our fiscal Q1 and Q4 are at higher performance levels due to the seasonality of our industry.
Total operating expenses exclusive of any restructuring charges was 12% of net sales in the first quarter of fiscal year 2024 compared with 10.3% of net sales for the same period of fiscal year 2023. The ratio increased 170 basis points due to increases in our incentives, profit sharing and digital spend. Adjusted net income was $46.2 million or $2.78 per diluted share in the first quarter of fiscal year 2024 versus $28.4 million or $1.71 per diluted share last year.
Adjusted EBITDA for the first quarter of fiscal year 2024 was $75.2 million or 15.1% of net sales compared to $56.5 million or 10.4% of net sales for the same quarter of the prior fiscal year, representing a 470 basis point improvement year-over-year and matching the performance gain that we had in our fourth fiscal quarter of fiscal year 2023. Commerce made a final determination in the plywood case and the company's 2 vietnamese plywood suppliers were included. Within the quarter, we took a $4.9 million pretax charge. We plan to vigorously appeal the determination. However, this will take time to recover. For context, our last order with new supplier was placed in June of 2022.
The strong performance this year is a direct result of the hard work and efforts our team have put into reestablishing our operating efficiencies, stabilizing our supply chain and controlled spending in the SG&A functions, offset by increases in our incentive compensation, profit sharing and the $4.9 million pretax tariff charge. Free cash flow totaled a positive $72.5 million for the current fiscal year compared to $32.7 million in the prior year. The $39.8 million increase in free cash flow was primarily due to changes in our operating cash flows, specifically higher net income and lower inventories.
Net leverage was 1.09x adjusted EBITDA at the end of the first quarter -- first fiscal quarter 2024, representing a 1.71x improvement from the 2.8x in the prior fiscal year. As of July 31, 2023, the company had $89.7 million of cash and cash equivalents on hand, plus access to $323.2 million of additional availability under its revolving facility. Under the current share repurchase program, the company purchased 22.1 million or 328,000 shares in the first quarter, representing about 2% of outstanding shares being retired. The remaining share repurchasing authorization is $52.9 million.
Our outlook for fiscal year 2024 remains unchanged from a net sales perspective. And we continue to expect low double-digit declines in net sales versus fiscal year 2023. The change in net sales is highly dependent upon overall industry economic growth trends material constraints, labor impacts, interest rates and consumer behaviors. Our EBITDA expectation for fiscal year 2024 is being increased $20 million from our prior outlook to a range of $225 million to $245 million. The increase in our expected outlook is due to the stabilized operational performance and the positive start we had to our fiscal year 2024.
Reiterating our outlook from the past quarter, we are still on track for starting our new operational locations in Hamlet, North Carolina, and Monterrey, Mexico this fiscal year. This will negatively impact the results as we have -- as we will be incurring the operational expenses without offsetting full revenue performance of those locations. The total impact of these charges is approximately $8.1 million in the full fiscal year of 2024.
Our capital allocation priorities for fiscal year 2024 remain unchanged. We will first be focused on investing back into the business for the plant expansions in Monterrey, Mexico, Hamlet, North Carolina and continuing our path on our digital transformation with investments in our ERP and CRM solutions. And lastly, investing in our automation efforts.
Next, we'll continue our share repurchasing. As a reminder, we still have $52.9 million remaining. And lastly, we have our debt position at a leverage ratio we wanted to achieve, and we will be deprioritizing paying net debt in fiscal year 2024.
In closing, the business continues to build off the progress made through the past fiscal year. We fully expect these improvements to read through the financials throughout this year. This is a testament to the commitment, hard work and efforts our employees invest in the company to achieve our results and the direct alignment to the GDP strategy. I'm grateful for what the team has accomplished and thank all of our team members at American Woodmark for their continued efforts. They are the ones who make it happen daily.
This concludes our prepared remarks. We'll be happy to answer any questions you have at this time.
Question and Answer Session
Operator
(Operator Instructions). At this time, Our first question comes from Julio Romero with Sidoti & Company.
Julio Alberto Romero
So I guess can you maybe start on the sales guide, you talked about a little bit better new construction outlook, but a little bit worse R&R outlook. Can you just talk about the repair and remodel side? You mentioned smaller-sized projects. Does that just mean you're selling less volume per home remodel? And maybe just talk about what's driving lower in-store traffic rates?
M. Scott Culbreth
Sure. I'll take just a couple of questions in there. Let's first talk about our expectations as we think about calendar year '23, I don't want to step into '24 yet at this point. But certainly, we're expecting to see sales decline in both channels. I would say the range for single-family starts has widened from high single digits to low double digits, depending on the source, and they're looking at starts data that just came out January to July, we averaged down 17%. Nationally with July of 10. And then remodel, it's been trending in that mid-single-digit range. Home centers just reported in the last 2 weeks. They shared an outlook of down mid-single digits. And in their most recent quarter showed that our particular category was performing below the average store comp.
They did attribute that to 2 factors: one, slowing traffic in the outlets and then also just smaller jobs. So we're taking all that into consideration as we look at our business and projections going forward. We just think it's a reallocation between the 2 channels for us, but ultimately, the same sales guide we had last quarter.
Julio Alberto Romero
Okay. I appreciate the color there. And then just wanted to ask about the free cash flow figure, which was pretty impressive for the first quarter. Maybe what's your sense of inventory levels today? Should they continue to trend lower? And just how do you think about free cash flow overall for the rest of the year?
Paul Joachimczyk
Yes. Julio, really, we have our inventories kind of starting to get stabilized. We still have room for improvement in that, and we're not going to continue our efforts on those avenues free cash flow started off much stronger than we anticipated in the first part of the year, primarily due to our outperformance. But also, we have some delays still in regards to our manufacturing facilities coming online with the OEMs, not from a lack of desire to do these projects, but just timing of that. But we will have a strong free cash flows for the year.
Operator
Our next question comes from Adam Baumgarten with Zelman.
Adam Michael Baumgarten
I guess just on the input cost side. I don't know if you guys touched on that, but just kind of what you're expecting for the balance of the fiscal year?
M. Scott Culbreth
Yes. On the inflation side, at this point, we are seeing relief in hardwood lumber specifically. So we've seen declines there. But we still see upward pressure on other categories from a year-over-year standpoint, such as plywood, paint and hardware. Certainly, labor, right, continues to be an increasing input cost along with domestic transportation. Don't see that changing materially between now and the end of the calendar year, even really the end of our fiscal year.
Adam Michael Baumgarten
Okay. Got it. And then just on the softness in the on the R&R side, just kind of maybe talk about promotional activity and how that's trending.
M. Scott Culbreth
Yes. We've seen a slight uptick in promo activity. I think we messaged the same last quarter, again, principally in the remodel channel, so both in the dealer distributor space as well as the home center. So a slight uptick, but nothing of concern.
Adam Michael Baumgarten
So like kind of back to normal, is it a good way to think about it?
M. Scott Culbreth
I still would say it's below the historic norm.
Operator
Next question comes from Steven Ramsey with Thompson Research Group.
Steven Ramsey
On gross margins being strong again for the second consecutive quarter, you called out the drivers there. Could you maybe walk through the order of magnitude on the drivers helping gross margin in the quarter? And then maybe just order of magnitude, how you see that evolving going through the rest of the year on those drivers?
Paul Joachimczyk
Yes, Steven, good question. Really, we talked about pricing better matching inflation. So we really have caught up to that kind of commentary that's out there. So from our first from a magnitude perspective, that is the first and foremost that's out there. Then you look at the other opportunities that are out there, operational efficiencies, really matching better from we did the stability of supply chain. Those 2 work hand in hand, so as our supply chain really stabilized, it does allow our operations to get back to their normal operating cadences which increases our overall plant efficiencies. And those are the, I'd say, kind of stack 1 and then 2 with those 2 being combined together.
M. Scott Culbreth
Then the only thing I would add to that is just on the pricing piece, I would tell you that we've really lapped the increases that we put into the business a year ago. So we're not expecting additional gains in pricing to benefit year-over-year going forward.
Steven Ramsey
Okay. Helpful. And then on the new facilities cost of about $8 million this year, is that a pressure that steps down or goes away completely as the markets normalize over the next year or so, or maybe kind of talk to the outlook on that spend.
M. Scott Culbreth
Yes. It's basically the ramp-up and start-up cost. You start paying a lease and you don't have it fully utilized. So we'll take that charge this year as an impact. And then our expectation is that we do start to better utilize and leverage both of those facilities going forward.
Operator
Your next question comes from Collin Verron with Jefferies.
Collin Andrew Verron
Great quarter. I just wanted to start with the guide. Backing to some numbers back into a 100 basis point increase in the EBITDA margin from your previous guide. Can you just give us some more detail around what's driving the increase in the margin guide? Is it all operational improvements? Or are you seeing the -- or is it going to be lower raw material costs? Just looking for some more color on the drivers of that.
M. Scott Culbreth
Yes, I'd really take it back to Paul's comment a moment ago. Certainly, the impact of our first quarter being better than what we had modeled and assumed when we gave that outlook a year ago would be a contributor and as he mentioned, pricing was a key piece of that as well as how we run in the factories. As we go forward, we expect to continue to run our factories well. So we think we've got some upside for that, and we've got that factored in to the overall equation. We do expect softer demand as a bit of an offset as we go forward. But when we take all of those considerations together, we're confident with the increase that we've put out there for our range.
Collin Andrew Verron
Okay. That's helpful. And then in terms of the margin performance through the rest of the year, any help in thinking about that as the shape of the year? And where you see EBITDA margins bottoming?
M. Scott Culbreth
So I don't want to get into a quarterly outlook view on really, quite frankly, sales or EBITDA. That's how we give the full year view. The only thing I will comment on specifically is just recall that Q2 a year ago, was by far and away our strongest sales comp in the prior year. Why was that? We made considerable headway in reducing our backlog a year ago. So just as a reminder, that would be a bit of a tailwind as we think about this upcoming quarter fiscal year '24.
Collin Andrew Verron
Great. That's helpful color. And then just the last one here for me. You talked about some destocking at the home centers. Can you just talk about how much of a headwind that was for you guys in the quarter? And where you guys think that channel is from an inventory perspective after this quarter?
M. Scott Culbreth
I have a specific amount that I'll call out for that, Collin, but we believe there's an opportunity at both of our key accounts to see increases in in-store inventory levels to help both the bath, kitchen, quite frankly, even storage category. So our teams work hand in hand with our customers on driving that improvement in stock rates so that we can assure that we get our in-consumers product to be able to purchase.
Operator
(Operator Instructions) Our next question comes from Tim Wojs with Baird.
Timothy Ronald Wojs
Maybe just my first question, just on that one of your last answer to Scott, did you say, are these are the tailwind? Did you mean a headwind from inventory kind of your backlog kind of conversion in the prior year last year?
M. Scott Culbreth
So we had a -- sorry, to clarify that comment, when you compare Q2 to prior year or specifically, prior year had the benefit of being able to chew through a pretty substantial amount of backlog. We will not have that this year. So there's a tailwind last year that doesn't repeat itself this year. Thus, it's a headwind. Sorry for not being clear that first time.
Timothy Ronald Wojs
No, yes. I just want to make sure I heard that Okay. Got that. And then I guess within your builder business, I mean, is there -- are you seeing any differences in terms of kind of order activity or just kind of the confidence that your builders have based on -- based on the size of the builder. Just trying to think -- I know you do a lot of work with the larger kind of builders. But how would you kind of compare and contrast some of the larger builders to some of the smaller ones?
M. Scott Culbreth
Yes. All the statements you made are all accurate. So there's a wide range. And it's not only a factor of the builder specifically, Tim, but also the region. So we've seen some weakness out West as of late. That was sort of the last area of the country to start to rotate down. We expect that to come back. So it varies depending on the account, but I would say the larger builders are pretty bullish on their expectations now for the year as opposed to where they were 3 and 6 months ago.
Timothy Ronald Wojs
Okay. Okay. Good. And then would you think from a lead time perspective, or how we think about kind of lagging starts or kind of comparing to completion. I know with the supply chain that had kind of got out of the lag over the last couple of years. But would you kind of revert back to that kind of 90- to 100-day lag relative to starts now as we kind of think about the new construction market?
M. Scott Culbreth
I wouldn't go all the way back to that historic norm. We certainly saw the increase and Paul would quote that moving up, I think, roughly 30 to 60 days. Over the past couple of years, we certainly hear about that coming down you even see some of the builders report on that specifically at that time to build has shrunk. But I don't think we're back to the historic norms yet. We get still pockets of labor challenges, again, market by market, that's creating some difficulty on builders being able to get the homes to complete status. Then you get weather, things like out West and Southern California that also creates some disruptions in that cycle time.
Operator
(Operator Instructions) As I do not see that there is anyone else waiting to ask a question, I would like to turn the line over to Mr. Joachimczyk for any closing comments. Please go ahead, sir.
Paul Joachimczyk
Since there are no additional questions, this concludes our call. Thank you for taking the time to participate.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
