Q2 2024 American Woodmark Corp Earnings Call
Participants
Paul Joachimczyk; Senior VP & CFO; American Woodmark Corporation
Scott Culbreth; President & CEO; American Woodmark Corporation
Garik Shmois; Analyst; Loop Capital Markets, LLC
Steven Ramsey; Analyst; Thompson Research Group, LLC
McClaran Hayes; Analyst; Zelman Partners, LLC
Julio Romero; Analyst; Sidoti & Company, LLC
Tim Blues; Analyst; Baird
Collin Verron; Analyst; Jefferies LLC
Presentation
Operator
Good day, everyone. And welcome to the American Woodmark Corporation second fiscal quarter 2024 conference call. Today's call is being recorded, November 30, 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 at American Woodmark.com includes definitions of each of these non-GAAP financial measures, 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 may be important to investors, such as investor presentation.
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 involving material risks and uncertainties and are subject to change based on factors that may be beyond the company's control. And accordingly, the company's future performance and financial results may differ materially from those expressed or implied under any under 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'd now like to turn the floor over to Paul Joachimczyk, Senior Vice President and CFO. Please go ahead, sir.
Paul Joachimczyk
Good afternoon. And welcome to American Woodmark's second fiscal quarter conference call. Thank you all 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 questions.
Scott Culbreth
Thank you, Paul. And thanks to everyone for joining us today for our second fiscal quarter earnings call. Our teams delivered net sales of $473.9 million, representing a decline of 15.6% versus the prior year. Within new construction, our business declined 11.1% versus prior year. Macroeconomic factors, including interest rates and housing affordability, continues to account for the slowdown in new construction. These short-term factors are being partially mitigated by builders through rebate buy-downs and shifts to ready to move in homes and buildings and homes. We are strategically aligned with 19 of the top 20 national builders and key regional builders with our best in class direct service model. We plan to continue to grow our share with new and existing customers and take advantage of the share gains our partners are realizing in the marketplace.
Looking at remodel which includes our home center and independent dealer distributor businesses, revenue declined 18.8% versus the prior year. Within this, our home center business was down 18.3% versus prior year. Demand trends declined due to lower in-store traffic rates and consumers choosing smaller-sized projects.
With regards to our dealer distributor business, we were down 20% versus the prior year. Adjusted EBITDA increased 7% to $72.3 million or 15.3% for the quarter. Reported EPS was $1.85 and adjusted EPS was $2.36 improvement performance is due to product mix and improved efficiencies in the manufacturing platforms.
Our team continues to drive operational excellence in our plants. Our cash balance was $96.4 million at the end of the second fiscal quarter. And the company has access to an additional $323.2 million under its revolving credit facility leverage was reduced to 1.05 times adjusted EBITDA and the company repurchased 394,000 shares in the quarter. Our Board has authorized a new $125 million share repurchase program that replaces our current authorization only had $22.9 million remaining. Our outlook for fiscal year 24 remains unchanged with our expectations for sales at a low double digit decline due to the strong fiscal second quarter performance. Our adjusted EBITDA expectations increasing to a range of $285 million to $250 million. Our team continues to execute against our strategy that has three main pillars growth, digital transformation and platform design growth will benefit from an upcoming launch of the low skew high-value offering in the home centers, targeting pros and a new brand to serve our distribution customers.
Digital transformation efforts over the last fiscal quarter include the final planning of ERP for Monterrey, go live next quarter and website enhancements for our home center business and the launch in February. In addition, we completed the implementation of our CRM sales solution across the new construction channels, field sales organization. And we initiated the planning for the next phase of work, which includes the CRM service modules supporting our customer care organization and new construction service center operations. Platform design work continues with occupancy in Monterrey, Mexico in November, and Hamlet, North Carolina in December. We will continue infrastructure and equipment installations in the coming months as well as training and hiring new teammates to support the initial ramp plan. 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 this team accomplished in the second fiscal quarter and look forward to their continuing contributions during fiscal year '24.
I'll now turn the call back over to Paul for additional details on our financial results for the quarter.
Paul Joachimczyk
Thank you, Scott. Reviewing our second quarter results for fiscal year 2024, net sales were $473.9 million, representing a decrease of $87.6 million or 15.6% versus the prior year. Remodel net sales which combines home centers and independent dealers and distributors decreased 18.8% for the second quarter versus prior year, with both home centers and dealers, distributors decreasing 18.3% and 20%, respectively. New-construction net sales decreased 11.1% for the quarter compared to last year. Our gross profit margin for the second quarter of fiscal year 2024 improved 420 basis points to 21.8% of net sales versus 17.6% reported in the same period last year. Gross margin benefited from a favorable product mix and sustained pricing matching inflationary cost impacts, continued operational improvements in our manufacturing facilities and an increased stability in our supply chain. Total operating expenses, excluding any restructuring charges for the second quarter of fiscal year 2024 was 12.2% of net sales versus 10.1% for the same period last year. The 210 basis point increase is due to increases in our incentives and profit-sharing for all employees. Adjusted net income was $38.8 million or $2.36 per diluted share in the second quarter of fiscal year 2024 versus $37.3 million or $2.24 per diluted share last year. Adjusted EBITDA for the second quarter of fiscal year 2024 was $72.3 million or 15.3% of net sales versus $67.6 million or 12% of net sales reported the same period last year. This represents a 330 basis point improvement year over year
Despite facing the year to date volume headwinds. Our continued strong earnings performance this year is a direct result of the hard work and efforts our teams have put in to reestablish our operating efficiencies stabilize our supply chain and control spending in the SG&A functions. These earning gains are partially offset by increases in incentive compensation, profit sharing and our digital transformation costs. Free cash flow totaled a positive $109.9 million for the current fiscal year to date compared to $44.4 million in the prior year. The $65.4 million increase was primarily due to changes in our operating cash flows, specifically higher net income and lower inventory, partially offset by our increased capital expenditures. Net leverage was 1.05 times adjusted EBITDA at the end of the second quarter of fiscal year 2024, representing a 1.18 times improvement from the 2.23 times as of last year. As of October 31, 2023, the company had $96.4 million of cash and cash equivalents on hand plus access to $323.2 million of additional availability under our revolving facility. Under the current current share repurchase program, the company purchased $30 million or 394,000 shares in the second quarter, representing about 2% of the outstanding shares being retired. The Board of Directors has approved and authorized a new $125 million share repurchase plan. We are retiring the remaining $22.9 million on the old share repurchase authorization and rolling it into this new authorization.
Our outlook for fiscal year 2024 remains unchanged from a 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 impact, interest rates and consumer behaviors. Given our strong performance for the first half of the year, we are increasing our adjusted EBITDA expectation for the full fiscal year 2024 to a range of $235 million to $250 million increase in our expected outlook is due to our strong operational performance and execution we have achieved in the first half of our fiscal year 2024. Reiterating our outlook for 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 our results as we continue incurring the operational expenses without the offsetting full revenue performance of those locations. The total impact of these charges is approximately $8 million in the full fiscal year 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 and Hamlet, North Carolina, continuing our path forward in our digital transformation with investments in our ERP and CRM solutions and investing in automation.
Next, we will continue our share repurchasing and given our current debt position who we will be prioritizing paying down debt in fiscal year 2024.
In closing, the business continues to build off the progress made throughout the past year. We fully expect these improvements to carry through the financials through the remainder of the fiscal year. This is a testament to the commitment, hard work and efforts our employees invest in the company to achieve our results and a direct alignment to the GDP. strategy. I am grateful for what the teams have accomplished and thank all of our team members at American Woodmark for their continued efforts there to the ones who truly 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
Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question. You may press star and then one using a touchtone telephone to withdraw your questions. You may press star and two. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the numbers to ensure the best sound quality once again, that is star and then one, I join the question here.
Garik Shmois, Loop Capital. Please go ahead with your question.
Garik Shmois
Oh, hi. Thanks and congrats on the quarter on within all of our calls. Wondering if you could go into some more color on what you're seeing on both in stock and on me to order categories?
Scott Culbreth
Thanks, Garrick. So specifically in R&R, the home center side, when you talk about in-stock and NTO, we've seen negative trends in both categories, but NTO has been more severely impacted overall.
When you think about the price points, we've always said that we felt the stock category would be a bit more resilient in a slowdown, but even in this environment today, we are seeing unfavorable trends, but not to the degree we see in special order.
Garik Shmois
Got it. I think you spoke to favorable mix. I think that was more related to R&R, but I think we are hearing from a competitor that they were seeing trade-down effects of more on the new construction side. Curious to see if you're seeing the same negative trade down pressures are and just maybe speak to pricing trends more broadly.
So yes, we're not seeing that same trend, and we've also not got the high end of the price continuum. So we're not selling customer high and semi-custom product to trade down against in the value space that we then we've seen a very much a maintenance mode and some positive mix depending on the customer and the product category.
Got it. Thanks for that additional accomplishment.
Thanks.
Operator
Our next question comes from Steven Ramsey from Thompson Research Group. Please go ahead with your question.
Steven Ramsey
Good evening. Maybe to start with on the raised EBITDA guidance a very strong first half. Can you clarify if any of that is the second half outlook it being any better?
Paul Joachimczyk
Yes, Steven, I guess maybe rephrase your question about the second half outlook being better.
Steven Ramsey
Sure. On the EBITDA guidance being raised, was that solely the first half or does the second half of the year have anything to do with thar)
Paul Joachimczyk
Yeah, primarily first half performance that we've seen because there's still so much uncertainty as we think about the second half from a demand profile standpoint. And as we've signaled over the past couple of quarters, we do have those start-up costs that Paul referenced of roughly $8 million. That's all back loaded from Monterrey and Hamlet.
Steven Ramsey
Okay. Helpful, helpful. And then if you think about stocking levels by channel and customer type, do you feel that they're at a healthy level or do you think given the slowdown of broadly in D. and big ticket, do you think that some customer channel partners have taken stock down too low?
Scott Culbreth
So yes, just as a reminder, the vast majority of our portfolio is not stocked at a retailer or a builder or a dealer. So you really are only talking about our stock kitchen and bath business that sits in that inside the home centers.
Now over the last couple of quarters, we've had some discussion around some destocking that has occurred that was impacting the business. I feel we're roughly behind that. There's always some opportunities to get better in-store positions, and we continue to pursue those with the retailers. But nothing significant that I would highlight that space.
Steven Ramsey
Okay, helpful. Thank you.
Operator
And our next question comes from McClaran Hayes from Zelman & Associates. Please go ahead with your question.
McClaran Hayes
Hey, good evening, guys. I was curious if you could talk a little bit about input costs and how they're trending at this point?
Scott Culbreth
Yes. Certainly, when you think about the raw materials that we're purchasing, those have stabilized. So so that's a positive. On the flip side, we do continue to see upward pressure in the labor markets as well as domestic transportation And has any of that relief, I guess on the hardwood lumber side, are there any discussion around pricing rollbacks across any of your three channels?
I certainly wouldn't use the term rollbacks. When we talk about pricing. We do monitor those input costs. And we do have some arrangements that are tied to those particular indices. But our general philosophy and approach and discussion that we've shared even in this call over the last couple of quarters, is that any pricing reductions would have to be driven by deflation first, but also there being evaluation of the profitability of that particular channel customer because we've got to continue to deliver on our long-term profitability goals. So I'll just say that we're always having conversations around pricing is continuing to be ongoing with our customers.
McClaran Hayes
Okay, thanks. And I guess one last one. Could you just elaborate a bit on some of those website changes you alluded to in the home center channel?
Scott Culbreth
Yes, it's basically just a reskilling to refresh more relevant content as well as ways to drive consumers through the purchase journey that ultimately helps drive them into the store. So ultimately make a make a purchase decision.
McClaran Hayes
Awesome. Well, thank you.
Operator
Our next question comes from Julio Romero from Sidoti & Company. please go ahead with your question.
Julio Romero
Hey, good afternoon. Can you maybe just take a little bit more into the operational efficiencies and the stabilization of the supply chain and how much more runway you have for each of those?
Scott Culbreth
I think on the supply chain stability, that's pretty much secured and we should kind of lap that. So we've had a couple of quarters of that performance being very strong. So we're not seeing the disruption that we were experiencing over the last couple of years, I would say that we always have ongoing opportunity in the operation side. We talk about operational excellence across the business, not just in the manufacturing facilities, but all of our functional costs, it areas, and we'll continue to drive projects to take cost out of those particular areas as we go forward.
Julio Romero
Really helpful there. And then I guess in the second quarter, you had a very tough year-over-year comparable on the volume side. Just how would you have us think about the third quarter and the fourth quarter is that year-over-year comps get a little bit easier from a volume perspective?
Scott Culbreth
Yes, I think Q3 is unfortunately going to be fairly similar to Q2. We've now got a softer demand environment that you're obviously seeing in the marketplace. We will put a couple of extra down days and around the holidays as well. But as we push into Q4, we think the comps do start to improve at this time. I still think they're likely negative, but not nearly to the rate we've seen in Q2 and Q3.
Julio Romero
Very helpful. I appreciate the questions.
Operator
Our next question comes from [Tim Bruce] from Baird. Please go ahead with your question.
Tim Blues
You guys, good afternoon. Maybe just the first one, Scott, just how when you look when you talk to your builder customers on where do you feel like you in terms of affordability, they are in kind of adjusting kind of square footage and home sizes. And you know, if if it trends lower to trying to create a more powerful, more affordable product, I mean, how does that kind of impact would mark if at all?
Scott Culbreth
Yes. So the first thing I would remark on is what are we seeing hearing from the builder customers around price points and then let's bring interest rates into that discussion, the pricing and not really the bigger challenge that interest rates have been the higher priority. So many builders have done buydown strategy is to keep those rates in the sub five or just north of five rate to keep folks interested in going into the homes. I do think there will be a rotation down in home size and folks are starting to model that we experienced at a couple of years ago that was part of our strategy. As you recall, when we did the acquisition that allowed us to bring origins to bear and via product offering and taking those homes from a price point standpoint, I just want to step back and think about homes, though, is they do get specked smaller the most important space, typically defined in those homes is the kitchen and usually those spaces are protected. So I don't I'm not alarmed or worried the trends would be unfavorable for the amount of cabinetry we would sell into a kitchen space where you may have some impacts as perhaps a mud room gets dropped off as space is taken out, but they're certainly still going to be a bathroom and bathroom space, there's still an opportunity to bring product into those areas.
Tim Blues
Okay. Okay. That's really helpful. And then on the kind of a wallet share opportunity. Where do you I know you're not going to talk like what exactly it is, but again, maybe just how much runway could there be from a wallet share perspective with some of your top kind of national regional builders?
Scott Culbreth
So it's a difficult question to answer because it is very much regional and market specific. So there's going to be some markets where we're pretty mature with our partners and have a very high share position. So it's definitely going to be and maintain and maybe target some regionals in that space. And then we've got some markets where we think there's a much more sizable opportunity to go get share with players. So we target those particular markets and go after those particular accounts. Sorry I can't add a lot more detail.
Tim Blues
Yeah no but there still are opportunities. I mean, this is kind of a point for wallet share to improve.
Scott Culbreth
Absolutely.
Tim Blues
Yes. Okay. And then maybe just a last one on kind of first half, you guys did about 15% EBITDA margins.
Yes, there's a little bit of variability here. But in the back half, it's going to be something that's maybe closer to 12 on. I know that you get $8 million from the startups. That's about 100 basis points, January seasonally weaker, like is there anything else just to call out why there would be that kind of maybe step down first half to second half outside of those kind of discrete items.
Scott Culbreth
the three things we talked about last quarter and we had the same items that we'd hit this quarter. You hit on two of them. So monitoring Hamlet, and we've already discussed $8 million in the back half, certainly in a softer demand environment as we think about back half. And then merit cycle was the only mention So some of our fixed costs do move our time line on that as the August September timeframe. So we'll roll through some incremental cost for that, but nothing substantial outside of those three areas.
Tim Blues
Okay. Okay. Very good. Good luck on the rest of your best hedge for the time.
Paul Joachimczyk
Thanks, Tim.
Operator
(Operator Instructions) Our next question comes from Collin Verron from Jefferies. Go ahead with your question.
Collin Verron
Hi, good afternoon and thank you for taking my question. I guess just building off of that last question on the incremental costs that you're going to see in the back half of this year, I guess any color as to how long you expect those start-up costs to linger into 24 your fiscal year 25? Should we be expecting to see some margin compression?
I guess in the first half of the year from these strong 15% margins going forward because of the cost staying in the business.
Scott Culbreth
So we're not yet ready to start providing an outlook specifically on our fiscal year 25. But I think you've you've hit the key point there. We are going to have a ramp period. We're not going to open those factories and then all of a sudden going to be full overnight. So there's going to be a ramp period. I can't disclose necessarily how long going to talk that take us to fill that, but there will be some continued pressure as we go into the early part of 25.
Collin Verron
Brian, I don't know if you're going to want to comment on this either. But I guess some of the larger builders are still fairly optimistic around their ability for volumes in 2020 for calendar year 2024. I guess any early read as to how you guys are feeling about the full year 2024, given the strength in new, what the builders are saying? And then any color about what your feeling for the repair and remodel market more broadly.
Scott Culbreth
Now on the builder side, what we're seeing and hearing is a pretty wide range of expectations, either some analysts projecting low single-digit growth in starts for calendar year 24. We have some builders that are pretty bullish and then others that are that are concerned. We haven't started our official kind of budget cycle process. We'll start that at the beginning at 24. And then I'll give us a better perspective. But there does seem to be some energy to perhaps some slight growth as we move into 24, I think remodel is going to continue to be under pressure. We've certainly heard from the home centers in the last couple of weeks, their overall results and their outlook of kind of mid-single digits down our category, both for the retailers certainly performing worse than that as a message over the last couple of quarters. So I think we'll continue to be challenged there. And then we'll just have to continue to monitor new construction. I think every builder will tell you now is not the best time to ask as we go through the winter months. But as we get into spring selling season, that will dictate how the back half of 24 looks.
Collin Verron
I appreciate the color and good luck going forward.
Scott Culbreth
Thanks.
Operator
And at this time, as I do not see that there is anyone else waiting to ask a question. I'd like to turn the floor back over to Mr. Joachimczyk for any closing comments.
Paul Joachimczyk
Thank you again for joining us today. That does conclude our conference.
Operator
We thank you all for your participation and Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
