Good day and welcome to the American Woodmark Corporation Fourth Quarter 2017 Conference Call. Today’s call is being recorded, May 30, 2017. 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 maybe 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 Scott Culbreth, Senior Vice President and CFO. Please go ahead, sir.

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, President and Chief Executive Officer. Cary will begin with a review of the quarter and I will add additional details regarding our financial performance as well as an outlook for fiscal year ‘18. After our comments, we will be happy to answer your questions. Cary?

Thank you, Scott, and good morning to you all. Another solid quarter for the company and the end to a very successful fiscal year. For the quarter, we grew sales 7.4% over prior year, outpacing both the industry and our key competitors. Key drivers were once again our new construction and dealer channels. For the full fiscal year, we grew revenue 9% and I am extremely excited to say that for the first time in the history of the company, we have surpassed the $1 billion mark for the fiscal year. It is truly quite a success story when you consider how quickly and profitably we have grown coming out of the recession, a true reflection and credit to the incredible people that make up this great company. I would like to go specifically at new construction. For the quarter, we grew our Timberlake direct business 12% over prior year, significantly outpacing single-family home start growth of closer to 5%. For the fiscal year, we grew our direct business by 19%, another very strong year of market share gain as we continue to win in the marketplace. From an industry perspective, we are monitoring current dynamics very closely. Although still strong, overall demand remained a bit lower coming into and out of the spring than we had initially anticipated. Reports vary greatly when you read the headlines regarding regional demand. Most remain very positive, with some feeling that weather has had some impact, particularly in California, the Midwest and the Northeast. Others continue to recognize the ongoing constraints in the market. Labor and land shortages remain key bottlenecks as does the corresponding impact on home pricing. This was evident as first quarter U.S. home pricing continued an aggressive upward trend, increasing 6% over prior year. Supply is certainly a factor…

The financial headlines for the quarter. Net sales were $258.7 million, representing an increase of 7% over the same period last year. Reported net income was $17.3 million or $1.06 per diluted share in the current fiscal year versus $13.4 million or $0.81 per diluted share last year. Exclusive of after-tax non-operating charges related to corporate business development expenses at fiscal 2017 and idled land disposal on fiscal 2016, the company generated $18.6 million or $1.13 per diluted share of net income for the fourth quarter of the current fiscal year compared with $14.2 million or $0.86 per diluted share for the same period in the prior fiscal year. For the fiscal year ended April, net sales are $1,030.2 million, representing an increase of 9% over the same period last year. Net income was $71.2 million or $4.34 per diluted share in the current fiscal year versus $58.7 million or $3.57 per diluted share last year. Exclusive of after-tax non-operating charges related to corporate business development expenses in fiscal 2017, without land disposal of fiscal 2016, the company generated $72.9 million or $4.45 per diluted share of net income for the entire current fiscal year compared with $59.5 million or $3.62 per diluted share for the same period in the prior fiscal year. For the current fiscal year, the company generated $77.1 million in cash from operating activities compared to $74.6 million from last year. New construction market continues to perform well. Recognizing a 60-day to 90-day lag between start and cabinet installation, the overall market activity in single-family homes was up 5% for the financial fourth quarter. Single-family starts during December, January and February to prior period averaged 795,000 units, starts over that same time period from the current year, averaged 832,000 units. Our new construction base revenue increased…

Thank you. [Operator Instructions] We will take our first question from Tim Wojs.

Hey guys. Good morning.

Good morning Tim. How are you?

Good. Nice job on the passing $1 billion there, it’s been quite an achievement.

Thank you. We appreciate it.

So maybe turning just to the puts and takes, maybe to gross margin guidance Scott, what – and maybe this will kind of dovetailing to the promotional discussion, but what do you assume from a promotional cadence in the gross margin outlook or in the EBIT margin outlook and how should we think about input costs for this year?

Yes, on the promotional front, as you recall in fiscal year ‘17, although the costs were elevated each quarter versus the prior year, we really didn’t move into a parity state with our competition until the second half, so our expectation is the rate of promotional spend we saw in the second half of fiscal year ‘17 will continue into fiscal year ‘18. As far as input costs, lumber has continued to be somewhat stable for us. We anticipate that to continue as we go forward. We do have increases built in to our outlook with respect to fuel, as well as carrier increases and then we have a number of other related purchasing material items that we have built in some inflation for.

Okay. And then how do you think about, just from a mix perspective, I mean what are you guys seeing, Cary you mentioned that a little bit on the remodel side, but if you could add a little bit about what you are seeing in mix and maybe how that’s compared to maybe the last year or so?

Overall, I would say looking forward, we expect mix to stabilize. I think we have all benefited in the market from a fairly good mix, with a more affluent consumer and also if you look at the relevant average mean home prices and so forth. So obviously it’s very dependent upon that first-time homebuyer and as it starts to trend down, for the most part, for the next fiscal year, we are anticipating and expect our mix to be fairly stable, pending obstacles, other variables that we have to forecast. But the first-time homebuyer does come back at a greater rate, we would expect a potential shift downward in mix, but right now we are anticipating stability.

Okay. And then last quarter, I think you guys had benefited in the new construction channel for maybe some pull-forward from your builder customers. I mean, does that have an impact on the growth rate this quarter and anyway to kind of think about how much?

Yes. So, the question on how much is where we actually really would like to have that and answer to that question, because that’s lot of variables in the market and as I mentioned it. We are little – I won’t say surprised, obviously, we did grow fairly aggressively particularly relative to the market that we did have, I guess, a little bit of surprise in the overall market growth. We are anticipating it to come in a little bit higher. We are continuing to do some of our own analysis and work closely with builders. Like I said there is various opinions out there and it’s also very regional. We did see lot of demand pulled forward. And I would say, 2 months ago, if you are asking me that question, I would say the answer was, they probably pulled more than we thought and emptied out the pipeline a little bit more than anticipated and therefore there was a little bit of catch up and it would take a couple of months to do that or to see that result. But as I come out of the spring now, it is still a little bit lower than where we would initially anticipated it, still growing, but a lower growth rate than what we probably would anticipated a few months ago. So, it’s something we are just watching closely. There is nothing out there, I’d say, is alarming at this point in time, whether it’s consumer confidence, administration, there is various variables out there that could be impacting it. There is also some theories that as you approach that 800,000, 850,000 single-family start level for it to really to continue to grow at the pace it has grown, that mix is going to have to shift down at some point. You can’t sustain that type of growth with a higher medium home price like we have enjoyed for the past, let’s say, 4 to 5 years. So that may stabilize or cause that growth to slow down a bit for another year or two until that first-time homebuyer really gets back to more historical levels. So, it’s a good question and that was a long answer. We don’t have a perfect answer for you nor can I tell you really the overall impact of each one of the variables, but something we are going to continue to monitor closely.

Okay. And then the last question for me and then I will hop back in queue. But how do you feel about capacity at this point in terms of manufacturing, but then also some of the – maybe more of the builder facing employees and footprint? And then just on the M&A side, I mean, anything you can talk about as to maybe why you didn’t consummate the deal would be helpful? Thanks and good luck on fiscal ‘18.

Yes. You threw like three questions in one in there. So, on the capacity question, we are good. I mean we are – it’s something we as I recall we made investment and that’s been notably 2 years just coming this fall that we have leveraged very effectively. I think we would continue to grow at pretty aggressive rates. So, we still have that investment that is growing, but it’s being utilized very efficiently. So, it’s something we are continuing to stay close to where we are good right now. And from a manufacturing capacity perspective, we have no concerns and we will continue to make investments on our core platform as necessary. With regards to M&A, it’s no different from what I said before is we do remain committed, particularly the whole mix question, we do feel strongly that there is a lot of growth opportunity remaining, particularly within what I’ll call the Southwest corner. It’s really a little bit lower price point, more back to I would say where we were prior to the recession. We have moved up in price and mix. So, I think finding a very profitable solution and also being able to potentially enter new markets, such as multifamily and lower price point is it remains a strong strategic opportunity for us. We remain committed to it where that solution is via M&A or Greenfield, Brownfield is to be determined, but we continue to work aggressively on that solution.

Great. Thanks. Good luck.

Thank you.

[Operator Instructions] We will take our next question from Scott Rednor with Zelman & Associates.

Hey, good morning Cary. Good morning, Scott.

Hey, good morning.

Good morning, Scott.

The first question I just want to make sure I understand a couple of the comments on the sales line near-term. On the one hand, I think you said that the home center business strengthened through the quarter, but then the prior comments was in terms of demand being lower than expected. Is that on the builder side or is that relative to the overall portfolio? I was just hoping you could...

It’s primarily on the builder side. Yes, on the dealer channel and remodel as a whole, fairly close to where we would expect.

And so how should we think about squaring that with a lot of the public builders and many of your customers reported strong orders in their calendar 1Q and that’s probably demand you have yet to satisfy yet. So, I was just kind of curious how do you guys think about squaring those two things?

Once again it’s all relative, right. So, I’d say we are outpacing the industry. So as the builders grow, we grow. And I think the question is really is what’s in backlog and where the growth is anticipated to go in the coming months. So when they say they have strong growth, there truly is strong growth, but you’ve got to think of those relative comparisons to where we have grown post-recession. We have had pretty aggressive growth. So if we start talking about 10% to 11% growth in new construction, that is quite lower than where have been, but I think that’s closer to reality going forward in the new construction market. So it’s just I think preparing our analysts for that. But also just thinking about what the housing industry is going to do going forward and what the mix is going to look like. So, I don’t think there is any negative in there, it’s just understanding what those growth rates will be and what that mix is going to look like. So lot of the builders are actually seeing continued strong growth, but they are starting to see some move down in that mix and then starting to invest more in that first-time homebuyer. We haven’t seen a big mix shift yet, but it is coming. But it’s just a lot of variables out there that I think we are all paying close attention to.

Got it. And Cary, would you say that that’s representative of maybe you have maxed out your share opportunity because of the extent to which you have grown those sales over the past 5, 6, 7 years since the recession or is there something else at play?

No, I don’t think. We are – as Scott mentioned, we are going to continue to over-index the industry, particularly in new construction and the dealer channel. It’s really reflective of the industry as a whole. And when you think about how much growth it’s had coming out of the post-recession, but we have been fairly steady at 800,000 to 850,000 despite all of these positive numbers. Single family has not done a lot past year. It’s growing, but I think the big question is to get from the 800,000 to the 1.1 or I will say everybody has a different opinion in what the new norm is out there and what the steady state will be for single-family. What will that growth look like and what would that mix look like to go from the current 800,000, 850,000 to that 1.1 million. So we will continue to over-index. Our large builders will also continue to over-index, but not at really the rates that we have enjoyed since the recession.

And to your question on share being maxed out, I’d answer that as no. There is still opportunities to gain share with our existing builder partners and markets that perhaps we don’t serve.

Yes, they will gain share and we will gain share with them and also continue to expand ourselves.

Okay, great. And then...

None of our business is obtained in that way. Go ahead, Scott.

Okay. And then maybe just taking a step back at this point last year, you guys guided to double-digit growth with flat OM and clearly the year shaped out differently than you saw it. So I am just curious, for either one of you, can you maybe talk about the puts and takes to kind of your planning assumptions this year? What could evolve, upside, downside as you kind of look at the full year outlook relative to how we saw 2017 develop?

Yes, it’s not going to be that different from the conversation we were having with them just a little bit earlier. So we have built in some inflationary factors around the fuel transportation of lumber. Are those still concerned areas for me? Yes, because those could certainly accelerate. The OPT mix, which Cary has already spoken to a couple of times, we don’t think there will be a rapid rotation down, but if for some reason that was to play out that could be certainly a factor for us. We feel good about the efforts of our operations team on driving productivity, making the appropriate investments to get cost out where it makes sense, focusing on Lean and Six Sigma and all those initiatives certainly paid dividends in fiscal year ‘17 and we are counting on that again as we roll forward into fiscal year ‘18.

Okay. And just lastly, can you maybe just clarify why you didn’t pursue the M&A? Was it price? Was it due diligence? I mean I know you guys can’t talk super-specific, but can you maybe give somewhat...

Yes, nothing really we could add to the current state and we really can’t give the specifics on it.

Okay. Thank you.

Thank you.

And we will take our next question from Nick Coppola with Thompson Research Group.

Good morning.

Good morning Nick.

So gross margin is up 200 basis points year-over-year, quite strong, can you just talk more about the main drivers there and I heard you guys call out fixed cost leverage, lower labor benefits and operating efficiencies, just any color in terms of the magnitude of those drivers. And then is there anything we should we thinking about in terms of channel or product mix?

Yes. So on the margin side, you got the main call-out point obviously the higher volume helps us up 7.4% in the quarter. I mentioned just a moment ago, a number of initiatives, our manufacturing colleagues that worked on with respect to Lean and Six Sigma to take cost out of the process, so we have been running more efficiently on the labor side as well. And then our labor benefit costs were less than the prior year, so healthcare was an advantage for us as well as a bit on some of the incentive programs that we have in place. So those were a couple of drivers. Also keep in mind that the comp, that was one of our weakest periods. If you go back to fiscal year ‘16, when you look back at that Q4 results from a comp standpoint, so that’s also part of the driver.

And then anything on channel or product mix that we should be thinking about?

Nothing of significance, it was pretty comparable to the last couple of periods. And what we have seen is growth in each of their respective channels.

Got it, okay. And then I guess speaking of channels, can you just elaborate at all on the competitive environment in home centers, I think I heard you are saying that February was a competitor was elevated, but then I guess they pulled back, any kind of inflection upward or downward across the industry and just thoughts about how you see this playing out going forward?

I would say on average, we are closer to parity now. You see some one-off promotions here and there that could either be sponsored by a home center themselves or a competitor. So I think in this environment, both home centers are working on different, let’s say solutions, trying to draw more consumers in via promotional activity and so forth, which is as Scott mentioned, will keep the promotional spend at a consistent level, but elevated compared to where we were a year ago, moving into our fiscal year ‘18. So but the good news, I think at least as of right now, it’s unpredictable right now let’s say we are closer to parity. And as Scott mentioned, we expect to grow more in line with overall home center growth for fiscal year ‘18 is what we are forecasting.

Okay, very helpful. And I guess just one last question, if you could talk a bit about the standard consumer and kind of how maybe traffic has looked at home centers and dealers to-date?

It’s a good question. I think it’s very dependent on how you breakdown that consumer, that mix comments that I made before and the fact that we are seeing a more affluent consumer, I have said that in almost every call. But the reality is to, if you look at statistics, we just had some data released from the NKB that still shows that consumers very heavily favor the home center channels at least as where it all start, some may not close there, but the home center channel is still very important to our category. I think the question is at what point does that middle income consumer and I know the middle income consumer of today is going to be different than it was pre-recession. But the younger generation, certainly the job market has improved and their discretionary spend is improving, they are getting back in the market, a lot of conversation about they want a home, because they saw their parents go through struggles. Most of that is like hearsay and most of the data supports that younger generations do and do you want to own a home. And I think we will return to more steady state levels in new construction where that’s 1.1, 1.2 or somewhere around there. That will return. It’s just I think it’s delayed because of all the delays in the market, the delays in marriage, the delays in having children and so forth, but its happening. So I think those delays are catching up. And I think as long as the economics will support the younger buyers getting back in the market, there is still a lot of growth left and in all channels. I think you are going to see dealer business grow, you are going to see home centers grow and you are going to see new channels to market grow. What exactly those are, who knows. There is certainly influence of direct sales via the Internet, very small today, but the younger generation have shown that they are willing to do some of that. I think in our market, that’s going to take time just because it’s a very complex buying process as well as installation process to go through. So I think the dynamics on that consumer are something we are continuing to monitor. We continued to do research data. Right now still heavily weighted towards I will say the more senior aged next generation and a lot of baby boomers are still out there spending money and remodeling. But I feel there is still pent-up demand and that will shift to the younger generation over time.

Okay. Thanks for taking my questions.

Thank you.

[Operator Instructions] We will take our next question from Tim Wojs with Baird.

Hey guys. Just a couple follow-up questions on the model, how should we think about the tax rate in fiscal ‘18 and with that in – and have you guys included the new stock-based options accounting on the tax rate and what should we expect for CapEx?

Yes. So we had already – we already adopted the change in fiscal year ‘17. If you remember our fiscal first quarter, we had a pretty light tax rate as a result of that. If you look at fiscal year ‘18, 35 to 36 is what we are expecting. Likely again to see a lower rate in Q1 of ‘18 with that adopted change in accounting. With respect to CapEx, we are finalizing work on the cable. We will get that out here in the next four weeks. But the way you would typically see is, from a capital budget standpoint, we are going to be 1.5% to 2% kind of the normalized rate, but then you need to layer on top of that this year the new corporate office building, so that would be the one deviation. So if you go back to what we communicated a quarter ago on that, that’s an additional benefit – sorry, an additional spend.

Great. Thanks guys.

[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. Culbreth for any closing comments, please go ahead, sir.

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

This concludes today’s call. Thank you for your participation. You may now disconnect.