Good day, everyone, and welcome to the American Woodmark Corporation's Second Fiscal Quarter 2025 Conference Call. Today's call is being recorded on November 26, 2024. 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 the 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 today's 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, and 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 it experiences 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.

Good morning, and welcome to American Woodmark's second 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 will add additional details regarding our financial performance. After our comments, we will be happy to answer your questions.

Thank you, Paul, and thanks to everyone for joining us today for our second fiscal quarter earnings call. Teams delivered net sales of $452.5 million, representing a decline of 4.5% versus the prior year. This was in line with the expectations we shared last quarter. The year-over-year decline was due to continued softer demand in the remodel market along with the slowdown in new construction single-family starts over the summer. Despite Fed rate cuts, mortgage rates were up 60 basis points from the low achieved in late September, which continues to put pressure on existing home sales and new construction activity. In addition, sales of existing homes fell to a 14-year low last month in October, according to the National Association of Realtors, slowing the demand for remodel projects. Single-family housing starts comped positively in August and September but declined in October due to a slowdown in the Southeast that was impacted by weather. We believe that the Southeast will rebound in future months and that the impacts from favorable starts activity should benefit cabinet installations in future quarters. Although net sales were negative for the quarter versus the prior year, unit growth for the new construction channel was positive but was more than offset by price mix. Our home center customers continue to be impacted by factors that lead to weaker spending on projects. This remains more significant for higher-priced discretionary projects like kitchen and bath. We are not experiencing a loss of share with our customers, and our teams remain focused on growing share through our accounts. Our belief is that as mortgage rates decline, consumer confidence increases, existing home sales increase, and the potential for home projects increases. This should serve as a tailwind for our business in the future. Adjusted EBITDA results were $60.2 million, or…

Thank you, Scott. I will begin by discussing our second quarter results and then provide our outlook for the rest of the fiscal year. Net sales were $452.5 million, representing a decrease of $21.4 million, or 4.5%, versus the prior year. We believe the long-term fundamentals of the housing industry are still sound, but they are currently dampened by persistently high interest rates and lower consumer confidence. This led to the continued softness in large-ticket purchases, primarily impacting our remodel business. Gross profit as a percent of net sales for the second quarter decreased 290 basis points to 18.9% versus 21.8% reported last year. Lower sales volumes impacting our manufacturing leverage in our facilities combined with increasing product input costs around raw materials, labor, and customer freight rates. However, these impacts are partially offset by our sustained operating excellence efforts. Operating expenses, excluding any restructuring charges, were 9.3% of net sales, versus 12.2% last year. The 290 basis point decrease is due to the roll-off of lower incentive compensation and controlled spending across all functions, offset by our lower sales. Adjusted net income was $32 million, or $2.08 per diluted share in the second quarter, versus $41.1 million, or $2.00 per diluted share last year. Within this quarter, we changed our definition of adjusted EPS to exclude the mark-to-market adjustments on our foreign currency hedging to be aligned with our industry and match our adjusted EBITDA definition for exclusions. Adjusted EBITDA was $60.2 million, or 13.3% of net sales, versus $72.3 million, or 15.3% of net sales last year, representing a 200 basis point decline year over year. Free cash flow totaled a positive $30.1 million for the current fiscal year to date compared to $109.9 million in the prior year. The $79.8 million decrease was primarily due to changes…

Ladies and gentlemen, at this time, we will begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we ask that you please pick up the handset prior to pressing the numbers to ensure the best sound quality. We will begin that as star and then one to join the question queue. We will pause momentarily to assemble the roster. Our first question today comes from Trevor Allison from Wolfe Research.

Hey, good morning. Thanks for taking my questions. First, just given the post from Trump last night calling for 25% tariffs on all imports from Mexico, can you guys quantify your supply chain exposure to Mexico, appreciating you guys have a couple of facilities there?

Yeah, Trevor. I guess I would start by just saying there is a lot of uncertainty regarding future policies on tariffs, and, you know, quite frankly, it could be a daily or weekly tweet that could change the tone on that. Looking back, I guess I would point to, you know, the focus previously on Chinese imports. You know, our sourcing team was able to significantly reduce our exposure for those purchases over the last five years. And the other potential import exposures, whether it is Mexico or Canada now that are recently noted, I just I would say that our teams have adapted to any kind of tariff or regulatory change that has come our way. And our belief is that whatever the final policy is that is put in place, our teams will be able to make the adjustments necessary to be able to mitigate that. That could look like resourcing and shifting things to other markets. It could also lead to potential price impacts in the marketplace. Those could be offset.

Yeah. Makes a lot of sense. I appreciate there is still a lot of uncertainty about what actually ends up happening. Second question then, on the last call, you had indicated you announced a price increase in your dealer channel, typically the first channel to get pricing for you guys. In your prepared remarks today, you talked about reviewing your pricing monthly. Have you guys added any incremental pricing in any other channels in addition to the dealer channel?

Yeah. Nothing additional at this point in time. You are right. We did announce last quarter an increase in the dealer channel. That went effective October 1, so that is in place. As Paul mentioned, we evaluate all of our input costs on a monthly basis. And once those reach what we believe is an appropriate trigger point, we would start negotiations and actions in those channels. Keep in mind that it depends on the channel and the time frame as to when we had our last increase and when a future increase may be necessary.

Appreciate all the color. Good luck moving forward.

Thanks, Trevor.

Our next question comes from Garik Shmois from Loop Capital Markets. Please go ahead with your question.

Oh, hi. Thanks. First question is just on the sales outlook. It looks like you kept your view of low single digits sales declines for the fiscal year. But, you know, if you are looking at your end market commentary, if I remember correctly, I think you did moderate some of your new construction observations. So just wondering kind of what the offset is in the maintained sales guidance into, yeah, maybe stronger share gains or, you know, fully baked pricing actions, just if there is any additional color, that would be great.

Sure. When you look at the second half versus the first half, we do expect better performance from a sales comp standpoint. Why would that be? You just hit one of the points. Pricing clearly in the dealer channel would be a tailwind as we go into the second half. The other areas that I would look at are the stock kitchen and bath business. We had signaled last quarter some wins there. That will benefit our second half. We only got some partial benefit for that in the first half of the year. And then the other one I would point to is in our made-to-order business, specifically our home center business, we do have easier comps in the back half than we experienced in the first. So that goes into our guidance outlook for the year.

Okay. That is helpful. And then I guess, you know, tariffs aside, but I was wondering if you could speak to what you are seeing on the cost side for the second half of the year.

Yeah. We had mentioned last quarter that we were seeing some increases in particle board. You know, that continues. In Paul's planned remarks, he shared continued increases in labor and final mile delivery specifically as a call-out. So we continue to see input costs move in those particular areas. I think liner board would be the other one I would call out where we have seen some recent inflation.

Okay. Very good. Thanks for the help. I will pass it on.

Okay. Thank you.

Our next question comes from Steven Ramsey from Thompson Research Group. Please go ahead with your question.

Hi, good morning. Was looking at trailing twelve-month sales in the last few quarters hovering in that $1.8 billion range. In the midst of the market, as you said, incrementally weakening or staying weak despite rates, I am curious if you kind of look at this zone of sales as a bottoming, or are you pontificating on any incremental risks or issues that could pressure it further aside from the macro, or do you think it is pretty macro-driven at this point?

I still think it is pretty macro-driven. You had a lot baked into that remark. Could there be other things that perhaps could negatively impact even our outlook? Certainly, there are. We have got past the election. So for quite some time, there was a lot of uncertainty as it relates to that. Now that we have gotten past that, now there is policy uncertainty. So what specifically do we expect to see with tariffs? We have already remarked a couple of times on that in this call. Immigration policies and what that means with respect to employment, especially our overall industry of building products and homebuilding. So there are some variables out there that we are not exactly sure what the policy mandates will be and what those will do from an impact on consumers to consumer spending.

Okay. That is helpful. And then secondly, I was thinking about volume sales down 4.5%. You have got some better pricing flowing through in the dealer channel. I am curious a little bit on retail promotions in the quarter and expectations for the second half. All trying to get a directional sense of how you expect volumes to unfold in the second half.

Yeah. The good news on the promos, we continue to see consistent activity and behavior with the prior year. So we have not seen any substantial ramp-up in promotional activity nor a decline. It has been pretty consistent year over year. So do not expect any additional impacts there.

Great. Thank you.

Our next question comes from Adam Baumgarten from Zelman. Please go ahead with your question.

Hey, good morning, everyone. Just curious in the quarter, sales down 4.5%. Maybe if you could break that out by the three main end channels that you guys are...

Yeah. I do not have the breakdown, Adam, for each of the channels. I will just tell you each of the channels were down in the period. The one thing that I did have a specific note on was new construction unit growth in the quarter, but price mix, you know, shifted it just to slightly negative for the quarter.

So units are up in new construction, but price mix was down?

Correct.

Got it. Okay. And then just thinking about the maintained guidance, it implies kind of flattish trends in the back half of the year. I think Scott, you mentioned some of the tailwinds. I guess, does that outlook assume a continuation of the current trends you are seeing across end markets? Are you assuming some kind of pickup outside of the easier comparisons?

Yeah. We are not assuming any kind of major macro improvement or any, you know, substantial change in rates that would lead to an increase in consumer demand. So kind of steady as it goes with this most recent quarter outlook as we think about the next two quarters.

Okay. Got it. Thanks a lot.

Our next question comes from Tim Wojs from Baird. Please go ahead with your question.

Hey, guys. Good morning.

Hey. Good morning.

Hey. Maybe just kind of on that last question, Scott. I guess when you are thinking about low single digits, you know, down for the year, I guess there is a little bit of a range there. But would you expect the top line to kind of turn back positive at least, as you kind of get into the fourth quarter? You know, this fiscal year just given the comps and kind of the implications in the guide?

I think it is too early for me to declare that it will absolutely go positive. I think we modeled still down slightly in Q4. I think we need to get through some of these policy positions at the start of the calendar year and then see what the Fed does here in December and into January before we would get, you know, to a point of claiming that we will go positive in that quarter. Certainly, as we think about 2026, you know, our view is, you know, 2026 should be a positive growth year for the business. Fiscal year 2026.

Okay. And is the kind of tweak lower on the EBITDA guide, I mean, is that just a little lower volume? Is it price cost? It is just what are the drivers of kind of that modest reduction in the EBITDA kind of midpoint?

Yeah. We wanted to tighten it up now that we are halfway through the year. We have got better alignment and sight as to where we see overall performance. To your point, and specifically with some of the inflationary impacts, some of those picked up on us inside the last quarter. And then the volume impacts overall. So as we modeled that out, we said, look, let us tighten this up. This is a better range as to being, you know, a $20 million spread for just half a year open.

Okay. And then any idea or any kind of guidance on free cash flow expectations maybe relative to just EBITDA, you know, for the year?

Yeah. Tim, on the free cash flows relative to it, we will be consistent with how we perform. We are still repurchasing, so we have got a lot of, I will call it, excess cash that is out there. We will have constraints around our inventory, saw the pressures there. Along with the port strikes and the Chinese New Year, we wanted to make sure we had all the available goods that are out there. So if anything, we have just a little bit of pressure on our working capital related to inventory that is out there.

Okay. And then just the last one, did you guys experience any kind of new construction or hurricane impacts in the new construction business in the Southeast in the second quarter?

Yeah. We saw some impacts there. Certainly, there were some, you know, down days where we were not able to actively get out to the job sites. We typically make those up with weekends and overtime. I think the question maybe to explore is do we expect to see any benefit going forward for that? Specifically around new construction, no. Just a timing issue. But when we think about our stock kitchen business, sometimes we will see a little bit of benefit for that. The stores in which we had the largest impact with respect to the hurricanes, we work with our customers to make sure we have got the appropriate inventory levels there in case there is an increase in demand, but we do not expect anything material to impact our Q3.

Okay. Sounds good. Thanks, guys, for the time.

Thanks, Tim.

And ladies and gentlemen, at this time, I am seeing no additional questions. I would like to turn the floor back over to Mr. Joachimczyk for closing comments. Please go ahead, sir.

Thank you, again. This concludes our conference for today. We thank you for your participation.

And ladies and gentlemen, with that, we will be concluding today's conference call and presentation. We do thank you for joining. You may now disconnect your line.