Good day, and welcome to the American Woodmark Corporation Fourth Fiscal Quarter 2023 Conference Call. Today's call is being recorded, May 25, 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. The company's rationale for their usage and a reconciliation -- I'm sorry, 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 the 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'd now like to turn the conference call over to Paul Joachimczyk, Senior Vice President and CFO. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to American Woodmark's fourth fiscal quarter conference call. Thank you all for taking the time to participate today. 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. Scott?

Thank you, Paul and thanks to everyone for joining us today for our fourth fiscal quarter earnings call. Our team delivered net sales of $481 million, a decline of 4.1% versus the prior year and in alignment with our outlook shared in last quarter's call. Within new construction, our business grew 5.3% versus prior year. Builders are cautiously optimistic going forward as sales have improved since the start of the year. Some builders are now projecting modest growth in starts in 2023 versus a 10% to 15% decline forecasted entering the year. Cancellation rates have been normalizing and new home sales have begun to improve. 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 grow our share with new and existing customers. Looking at our model, which includes our home center and independent dealer/distributor businesses, revenue declined 9.9% versus the prior year. Within this, our home center business was down 12.4% versus the prior year. Our made-to-order kitchen business was down single digits with stock kitchen and bath down double digits versus the prior year. Our stock bath business was impacted by promo loss versus the prior year to retailer, and the entire stock business was negatively impacted by inventory de-stocking efforts at our customers to sell through short of POS. In addition, in-store traffic was down over the past quarter for our home center customers. With regards to our dealer/distributor business, we were down 1.5% versus the prior year. Incoming order trends in both areas have improved in the last two months as consumers and builders take on activity for the spring and summer. Our adjusted EBITDA increased 46.7% to $65.3 million or 13.6% for the quarter. Reported EPS…

Thank you, Scott. I will first talk about our fourth fiscal quarter results, then transition to our full year performance and close with our outlook for fiscal year 2024. Net sales for the fourth quarter of fiscal year 2023 were $481 million, representing a decrease of 4.1% over the same period last year. The combined home center and independent dealer and distributor net sales decreased 9.9% for the fourth fiscal quarter, with home centers decreasing 12.4% and dealer/distributor decreasing 1.5%. New construction net sales increased 5.3% for the fourth fiscal quarter compared to the prior year. The company's gross profit margin for the fourth quarter of fiscal year 2023 was 20.1% of net sales versus 13.9% reported in the same quarter of last year, representing a 620 basis point improvement. Gross margin in the fourth quarter of the current fiscal year was positively impacted by our pricing actions, operational improvements in our manufacturing facilities, and the stability in the supply chain, partially offset by increased costs in our labor and domestic logistic expenses. We are returning to our own performance cycles, where our fiscal Q4 and Q1 are at higher performance levels due to the seasonality of our industry. Total operating expenses, exclusive of any restructuring charges was 11.8% of net sales in the fourth quarter of fiscal year 2023 compared with 10.1% of net sales in the same period in fiscal year 2022. The ratio increased 170 basis points due to increases in our incentives, profit sharing and digital spend, partially offset by controlled spending in SG&A functions. Adjusted net income was $37.1 million or $2.21 per diluted share in the fourth quarter of fiscal year 2023 versus $22.9 million or $1.38 per diluted share last year. Adjusted EBITDA for the fourth quarter of fiscal year 2023 was $65.3…

The first question is from Adam Baumgarten of Zelman. Please go ahead.

Hi, good morning, guys. Nice results. I guess maybe just to start on the revenue outlook. Maybe just some additional specifics on your assumptions for new residential versus the remodel piece in that double-digit decline outlook?

Sure. Thanks, Adam. We're likely to see declines, I think, throughout calendar year '23 in both remodel and new construction. Most of the projections that are in the market have single-family starts down mid-teens. I think there's maybe a little upside of that now based on the Q1 activity. And then on the remodel side, that mid-single-digit range, and I think you saw that validated with the home center reports over the last two weeks. We obviously expect to perform better than the market. And historically, on the margin side, we've targeted decrementals of roughly 25%. I think we'll beat that as well as we indicated with our outlook for fiscal year '24.

Got it, thanks. And maybe just on that decremental outlook, which is better than historical. I guess, what are the main offsets in fiscal '24 to the volume deleverage that you'll be seeing?

Operating performance, automation and just overall OpEx initiatives within our teams.

Okay. Got it. And then just lastly, just in that revenue outlook, is price still expected to be a positive contributor for the year?

No, at this point in time, we've lapped the pricing, and we've not taken any pricing actions in any of the channels at this point in time.

Okay, great. Best luck

The next question is from Garik Shmois of Loop Capital. Please go ahead.

Hi, thanks and congratulations on the quarter. I wanted to just follow up on pricing. If you've seen any change in pricing just given the weaker sales environment, or if there's been any change to the promotional environment as well?

Yes. So we'll take each of those separately. So first on the pricing side, again, we've not taken any pricing actions in any of the channels. I would remind you that our profitability has not returned to the levels we were achieving prior to the inflationary impacts we've all experienced throughout the pandemic. Certainly, we've seen some improvement in lumber, but I would also counter that by saying we continue to see increases in other categories like labor, final mile delivery, and some other raw materials. Our belief is, if we continue to see or see additional deflation in the marketplace, and there's some expectation around pricing as a result of that, it'd be offset by the reduced spend. On the promo side, we have seen an increase in promotional activity, principally in the dealer/distributor space. And I think most folks are going to go to that category first as opposed to dealing with any pricing.

Understood. Thanks for that. I'm wondering if you could provide a little bit more color as to when the capacity is going to be fully online in North Carolina and Mexico? And just your level of confidence in filling the capacity when it does come online.

Yes. Now the first comment I'd make is there's typically always a mismatch between the demand and capacity coming online. But we certainly have desire and plans to be able to fill that capacity as we push forward. We'll need it, by the way, to meet our five year plan that we put out in our investor relations deck back in January. Our current timeline is on track for both the facilities. We should have them online and starting to ramp by the end of our fiscal year. So most of the benefit and expectations from incremental capacity really pushed into the next fiscal year.

Okay, got it. All right. Thanks for that. I'll pass the line.

The next question is from Steven Ramsey of Thompson Research Group. Please go ahead.

Hi, good morning, it's actually on for Steven. Thank you for taking my questions. I think the -- on the guidance, I think it implies EBITDA margins hold roughly flat. Can you just kind of touch on how much that implies for gross margins, if that's flattish or if it's more on reduced OpEx or reduced marketing spend? I guess, are there additional levers you can pull throughout the year as the year progresses for the different outlooks?

Yes, Brian. Thanks for the question. Really, it does account for -- there will be some gross margin expansion in fiscal year 2023. Some of that increased spend is going to come into the SG&A levers that are out there. There could be, I'll call it, additional facets that we could do and adjust if the market demands change out there to really help overall drive and meet our expectations of the EBITDA that's out there.

Got it. Thank you. And a follow-up, I guess, is on -- in the slower demand environment here, I think you touched on the prepared remarks a little bit. But can you talk again about plans for rolling out automation capabilities? And if that's being accelerated or decelerated in the slower demand environment, any more additional color that would be helpful and impactful quantity impact.

So we continue to focus on automation. That's not a new topic for us. I think what's different is we've made a bit more of a declaration around the investments that we're targeting in that. So again, we're shooting for $75 million over the next five year cycle. That's substantially more than what we would have spent in the prior five years. So we've got a whole host of initiatives that I already mentioned in the prepared remarks that we're focused on specifically inside fiscal year '24.

Thank you.

The next question is from Collin Verron of Jefferies. Please go ahead.

Hi guys. Thanks for taking my question. And a great quarter. Maybe a little bit more longer term. I guess you're expecting that low double-digit decline in sales in fiscal '24. But can you just talk about how you're thinking about the timing and the pace of recovery baked into your five year sales target of $2.6 billion? I mean at least $350 million in EBITDA. Do you see things bottoming out here in fiscal year '24 before returning to growth? Or could this sort of decline kind of linger into fiscal year '25? Just any color on how you're thinking about the recovery would be great.

Yes. Thanks for the question, and I'll start by saying whatever assumption I have or statement I make, I know I'll be wrong. So let's lead with that as a factor. When we gave our five year projection back in January at that particular point in time, we had always assumed a recessionary impact. We weren't exactly sure when that was going to happen, would it be '24, '25, but we modeled a down case and then we would grow back up off of that. So at this point in time, we see most of that impact happening in '24. My crystal ball says that we would recover and start to see growth again in '25. But there's a lot of question marks that go into that analysis.

Great. That's helpful. And I guess more near term, you talked about some de-stocking in the stock remodeling business. Any sense of the magnitude of what that de-stocking was and your expectations for any further de-stocking going forward in that channel?

I think we've gotten through the de-stocking efforts, and we're starting to see a little bit better uptick on incoming orders inside our fiscal Q1 for fiscal year '24. So I think we're somewhat past that. I don't have an exact value to be able to assign to that over the last quarter.

Great. I appreciate the color. And good luck going forward.

Okay Thank you.

The next question is from Tim Wojs of Baird. Please go ahead.

Hi guys. Good afternoon and good morning, or whatever it is.

Great. Good morning, Tim.

Yes. Nice job. Maybe just a bigger picture kind of conceptual question. Just within your builder customers, I mean, is there any way to kind of think generally about what the runway there from a penetration perspective is? And I know it's not uniform across the customers, but just maybe give us an idea of maybe where kind of generally wallet share is today and maybe what's kind of possible over time?

Yes. The first thing I'd say is that the builders that we've partnered with are taking share and will continue to take share. So the fact that we partnered with them just naturally leads to a better sell-through rate for our business. I think we've talked in the past that we do business with the vast majority of the top 20 national builders, but that doesn't mean we have a position with each builder in each market. So the first thing our team always spends time focused on is, there are new opportunities, new markets that we can explore to try to get incremental share gains with a particular account, and that's throughout that entire list of top 20 national builders. I don't have an exact value to quote to you around the overall business. We tend not to be a sole supplier except in limited cases. So our belief is we'll continue to get share really with the vast majority of those builders. And again, they're going to take share in the marketplace and have been demonstrating that certainly over the last couple of years.

Okay. Is there a way to think -- how big is the national, kind of, top 20 relative to your total builder business or builder direct business?

Maybe let me restate that. How much of our builder business goes to the top 20?

Yes, yes. Basically, I'm just trying to think about how much -- if your builder business -- how much of your builder business is going to the top 20 versus the other builders?

Yes, not an exact percentage to give to you, but it would be a high percentage. I don't know about that.

Okay. Okay. Okay, good. And then, I guess, from just a mix perspective, I mean, is there anything within the business from a mix perspective that has changed over the last 3 months to 6 months?

No, nothing substantially changed on the mix side.

Okay. And then the last one, just on inflation and kind of deflation, thinking about fiscal '24, it does seem like materials have kind of come down a little bit, whether that's kind of plywood or particle board or maybe some of the hardwood. Do you model or kind of think about explicitly in fiscal '24 seeing some material deflation?

When we go and put together our budgets and plans to try to figure out an outlook to be able to share with the investment community, we look at a number of different scenarios, one that includes inflationary environment and one that also includes a deflationary environment. I'll go back to the comments a few questions again though. So if we do see more deflation than modeled and assumed, there's likely -- it's going to cascade and come our way on pricing, but we would view those as being offsetting. Similar to the uptick, right, when we saw inflation going up, you basically are going to gain pricing for those inflationary impacts. We had a lag on the front end. We'll try to ensure there's a similar lag on the down slope as well.

Okay. Okay, so the main point would be, from a dollars perspective, you would expect those things to kind of offset, but it could kind of push the margins around from a timing perspective?

You got it. Exactly.

Okay. Okay, got you. Good. Awesome. So, thanks guys, and good luck on the year.

Thanks, Tim.

Thanks, Tim.

The next question is from Julio Romero of Sidoti. Please go ahead.

Thanks. Hey, good morning. I wanted to ask about the gross margin performance in the quarter. Just wondering if there's any way to put a finer point on how much of a benefit was the operational efficiencies and the streamlining you did in late calendar '22?

Yes. Julio, won't dial in exactly, but a lot of the benefits that we received in our fiscal fourth quarter were due to some of the operational improvements that are out there. Not only are our plants running at our historical normal operating performance is kind of pre-COVID levels, we're seeing improvements across our supply chains that are out there as well, too. And then just -- we talked about automation. Some of those efforts are now starting to take hold and really kind of, say, setting us up for success in FY '24 as well, too. So I know it's not an exact answer. I know you're looking for a percent or a dollar amount, but those things are actually taking hold and are going to carry forward for our performance in the future.

Got it Thank you for that. The commentary is helpful there. And then just thinking about the balance sheet and your capital allocation priorities, just how much more aggressive should we expect you to be with opportunistic repurchases in '24, just given the free cash generated in fiscal '23 and the debt reduction you guys just did in the fourth quarter?

I would just say we're going to be opportunistic. I would focus on that word. Obviously, we didn't do any repurchasing in '23. Our focus was on deleveraging debt, so we've done that. We've gotten below 1.5 times, which is a fantastic result for this business. So we'll now look at opportunistic repurchases. And Paul walked you through the various things that we'll focus on. We've got a plant expansion we're dealing with. We've got the automation that we've talked about, and then we'll look at shares.

Really helpful. I'll hop back in the queue. Thanks very much.

Thanks, Julio.

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 closing comments. Please go ahead, sir.

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.