Cary Dunston - Chairman and CEO Scott Culbreth - SVP and CFO.

Steven Ramsey - Thompson Research Group Scott Rednor - Zelman & Associates Tim Wojs - Baird Gary Chammas - Longbow Research Lee Brading - Wells Fargo.

Good day and welcome to the American Woodmark Corporation Third Quarter 2018 Conference Call. Today’s call is being recorded, March 9, 2018. Please note American Woodmark’s earnings release is available on the Investor Relations page of the Company’s website at www.americanwoodmark.com.

We will begin the call by reading the Company’s Safe Harbor statements 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 Scott Culbreth, Senior Vice President and CFO. Please go ahead, sir..

Good morning, ladies and gentlemen. Welcome to American Woodmark’s third fiscal quarter conference call. Thank you for taking time to participate. Joining me today is Cary Dunston, Chairman and CEO. Cary will begin with a review of the quarter and I will add additional details regarding our financial performance.

After the presentation, we will be happy to answer your questions.

Cary?.

Thank you, Scott, and good morning to you all. Our third quarter of our fiscal year [proved that] [ph] some challenges as well as some significant positives. As is being reported throughout the industry, growth slowed in our third quarter while facing one of our toughest comps on revenue.

We also observed a more pronounced shift downward towards opening price point homes in a number of markets we serve. In addition, we faced some cost challenges that impacted our gross margins.

However, we had some great successes as we grew sales in all channels, closed on the acquisition of RSI Home Products and we have made tremendous progress in the integration work. I will talk specifically to the integration after my comments on performance.

Regarding performance, we will talk to both our consolidated results and organic results excluding the RSI acquisition. Please recognize the results included only one month of RSI’s performance. For the quarter, we grew sales 17% over prior year. Excluding the acquisitions, sales increased 2% over prior year.

Although this growth is slightly above reported KCMA cabinet growth for the quarter as it’s below our expectations. Looking specifically at new constructions, we grew our business 7% with 3% growth excluding the acquisition. We have been reporting for some time that builders are beginning to make a move towards a lower priced housing market.

This movement was a key strategic reason for acquisition of RSI Home Products given their strength in the lower priced value-based products. Until recently we have not been aggressively building on this business due to - bidding on this business due to the positioning of the existing Timberlake platform.

Although this decision has impacted our new construction growth in the short-term, we have three key areas of opportunity. The first was a completion of the acquisition we have been actively bidding on strategic accounts that offer strong growth in the opening price point home markets seeding the business with our existing Timberlake product.

Secondly, we have a dedicated team to develop the systems and processes to allow us to begin to sell our lower cost RSI product with a target launch by the first quarter of our new fiscal year. Over time, we will shift existing Timberlake opening price point business to our low cost platform as well.

Although we must recognize that it will take time to ramp this operation up to its fullest potential it offers an extremely positive, long-term growth opportunity by leveraging our national direct to builder infrastructure.

Lastly, although we are seeing a shift downward to lower price point homes, opportunity remains at the middle and higher-end price points. Our team is aggressively bidding on growth opportunities with not only new builders, but also in geographical markets not currently served with existing builders.

From a remodel perspective, we were up over 30% with organic growth at 2%. Breaking remodel down, excluding the acquisition, our dealer business grew 3% over prior year. As is being reported throughout the industry, we are seeing a slowing of the dealer business that are the serving the more [indiscernible] consumer.

I believe this is a reflection of both a slowdown in demand as well as labor shortages impacting installations within the dealer channel.

Looking forward, and including the benefits of the acquisition, we have a focused effort to develop a holistic market and product positioning strategy with the expectation to continue to gain share and over index within the dealer market.

Regarding home center, following the two quarters of negative comps, we were pleased with our positive 2% organic growth rate in the quarter. Although promotional activity remains at historical high levels, indications are that it has leveled off.

As such, working closely with our home center partners, we have made strategic changes to regain our competitiveness. Although still somewhat volatile right now, we expect to grow with the home center channel going forward.

In addition, following the acquisition of RSI, and the strength of our product positioning with an in-stock kitchen and vanities as well as special order, our level of strategic discussion with our partners is greatly enhanced.

We remain very confident in our ability to offer enhanced solutions across our product portfolio for long-term growth of our home center partners and our business.

Looking specifically at RSI from a high level, as we reported on the acquisition process, the revenue on calendar year 2017 declined due to a loss of business within home center and two localized geographical regions.

For planning purposes, the transition out of the impacts in markets impacted revenue through January however it is not complete and we expect no additional share losses. On the positive, we were able to work proactively with our customer and maintain some of the market that was initially plan to transition.

In addition, we are absolutely committed to regain the markets we lost as well as growing this business throughout all channels. January revenue was also impacted by a significant product change out in the vanity aisle of a key home center customer.

Not only are we working through product discontinuance but we are loading inventory with resets scheduled for our fourth fiscal quarter. With the new product offering, we are expecting improved growth.

We are also partnering with our largest customer in the in-stock kitchen business to offer a new program that will significantly enhance the experience for the pro and homeware consumer, as well as a designer. Once again we expect improved growth in this segment. Moving on to gross margins, we ended the quarter at 17.2%.

Our manufacturing platform was impacted by labor and efficiency as we were staffed with our higher production level based on a more favorable forecast. Looking forward, we are focused on using attrition to right-size our platform based on updated forecasting. In addition, we continue to experience high transportation and raw material inflation.

We constantly challenge ourselves on opportunities to offset raw material and transportation costs through efficiencies however, we are also evaluating and implementing price increases in the market as appropriate.

Additionally on cost, we had a one-off issue with a key piece of equipment that failed on our largest finishing operations impacting our cost, quality and delivery metrics. New equipment had to be ordered and was recently installed restoring our historical operational performance.

Lastly on gross margins, Scott will speak to $6.3 million of inventory step-up amortization related to the acquisition. Finally, our adjusted EBITDA margin was 12.3% compared to 11.3% prior year. Excluding acquisition-related expenses, we continued to remain disciplined on our SG&A spends.

Adjusted net income was $14.1 million versus $15 million prior year. Net income was impacted by acquisition-related cost and purchase accounting entries. In addition, as a reminder, this only includes one month of operating results from RSI. In summary, our industry continues to be as challenging as ever.

As those that have followed us over the years know, we do not react to short-term trends. We are focused on our vision and our strategy to move us towards our vision. It’s hard to pick up a business paper today and not read about the headwinds the housing industry is facing.

Despite how rocky the road maybe, we remain very confident on long-term growth. History shows that when there is demand, the housing industry will find a way to supply. And I firmly believe that significant demand remains.

I’ve spoken in the past of the importance to the recovery cycle of both first time and move down home buyers returning to the market. This demand is clearly changing as evident in a number of starts in single-family new constructions that are targeting these buyers.

However, with regards to existing home sales, inventory remains at record lows, particularly at lower price points. The good news is that we are beginning to see movement of baby boomers transitioning out of their larger homes and into smaller, lower cost, new construction communities.

Not only does this [indiscernible] new construction that would begin to free up existing home inventory and assist with the move up cycle. Ultimately, we believe existing sales will increase at all price points. With the average age of existing homes in America over 35 years old, we expect a corresponding increase in R&R spend.

Kitchen remodeling will be very high in the list, particularly with the younger generations. I reviewed a chart just this morning that referenced that peak age for first time home buying being in the early 30s and the tremendous surge of over 14 million millennials that will move into this age range between now and 2021.

As such, having modern yet affordable kitchens will be key to future growth and success and opportunities that we are best positioned to serve with our broadened product portfolio.

Within single-family new construction and the increasing mix of opening price point homes, we now have a low cost product and a national service platform that is second to none. The demand shift is occurring more quickly than we anticipated. However, we delivered on our strategy and we will be able to properly serve this market in the coming months.

And although our market synergy work is focused on single-family new construction and is our first growth priority, the opportunity to grow at home center, dealer, distributor and multi-family channels are right behind it. Overall, our integration work with RSI is on plan.

First and foremost, culturally the alignment is as positive as I believe that it would be during our diligence work. People that know American Woodmark know that our culture is our number one priority. As our people that truly differentiate us and create our only through long-term sustainable competitive advantage.

We have been extremely impressed with the leadership team and all of our new teammates within RSI. A great culture and great people will align with our own core values. The most significant challenges related to integration are no surprise and are tied to our financial and IT systems, as well as the alignment of our HR benefit programs.

Given the scope of the work we are using a mix of internal resources, as well as external experts to help with the integration and we remain pleased with our progress. With regards to synergies, we are already working very aggressively together to identify and capture synergies.

We absolutely see opportunities to leverage RSI’s low-cost manufacturing platform to share best practices within operations and engineering teams to capture synergies within our purchased materials and logistic systems. However, our greatest opportunity rests with growing our business.

As I mentioned previously, we have a formal team established with clear deliverables to develop the systems to begin to sell RSI products through the AWC builder platform. I cannot say enough how impressed I am with how both teams have come together so quickly aligned by the common goal to make this acquisition a success.

Three months ago, American Woodmark had 6,000 incredible teammates driving that common vision. Today we have 10,000 incredible teammates online to drive a shared vision to grow this business together that is powerful and one which I have tremendous confidence. With that, I will turn it over to Scott for the financial details. .

Thanks, Cary. The financial headlines for the quarter. Net sales were $293 million, representing an increase of 17% over the same period last year. Excluding the impact of the RSI acquisition, net sales for the third fiscal quarter increased 2% to $254 million.

Adjusted net income was $14.1 million or $0.84 per diluted share, in the current fiscal year versus $15 million or $0.92 per diluted share last year. Net income was negatively impacted by purchase accounting entries of $6.3 million of inventory step-up amortization.

Acquisition-related cost of $10.2 million, both offset by an associated tax benefit of $4.4 million and gross margin declines which were partially offset by additional sales volumes and lower incentive cost.

Adjusted EBITDA was $36 million, a $12.3% in net sales compared to $28.1 million or 11.3% of net sales for the same quarter of the prior fiscal year. The increase during the third fiscal quarter is primarily due to additional sales growth and inclusion of one months results for RSI.

For the nine months ended January, year-to-date net sales were $844 million, representing an increase of 9% over the same period last year. Excluding the impact of the RSI acquisition, net sales for the first nine months of the current fiscal year increased 4% to $806 million.

Adjusted net income was $56.1 million or $3.41 per diluted share in the current fiscal year versus $54.3 million or $3.31 per diluted share last year. Adjusted EBITDA was $110.4 million or 13.1% of net sales for the first nine months of fiscal 2018 compared to $99.1 million or 12.9% of net sales in the same period of the prior fiscal year.

The new construction market continues to perform well recognizing a 60 to 90 day lag between start and cabinet installation. The overall market activity in single-family homes was up 7.6% for the financial third quarter. Single-family starts during September, October and November of the prior year averaged 826,000 units.

Starts over that same time period from the current year averaged 888,000 units. Completions over the third fiscal quarter averaged 3%. Our new construction-based revenue increased 7% for the quarter, as Cary noted we were impacted negatively by shift in demand to first time and move down home buyers. Organic growth was 3% for the quarter.

The remodel business continues to be challenging. On the positive side, existing home sales increased slightly during the fourth calendar quarter of 2017. Between October and December of 2016, existing home sales averaged 5.54 million units as same period for 2017 averaged 5.61 million units, an increase of 1.3%. Unemployment continues to improve.

The January U3 unemployment rate held steady at 4.1% and U6 increased 8.2% during the fourth calendar quarter. Both measures were lower than the January 2017 reported figures. All cash purchases in December were 20%, down from 21% last year.

On the negative side, the median existing home price rose 5.8% to $246,800 for December impacting our consumers’ affordability index. Interest rates increased in the quarter with the 30-year fixed rate mortgage of 4.03% in January.

Residential investment as a percentage of GDP for the fourth calendar quarter of 2017 remains steady at 3.5% versus the prior year, but below historical norms. Home ownership rates remain low versus historical averages. The percentage of Americans who own their home in the fourth calendar quarter was 54.2% or 0.5% above last year’s rate.

The share of first time buyers remain flat. The December reported rate was 32% and changed from the prior year, but up from the 29% reported in November. Keep in mind the share remains well below historical norm of 40%. Consumer sentiment decreased 95.7 January versus 98.5 reported January 2017.

Our combined home center and dealer channel revenues were up over 30% for the quarter with home centers increasing over 40% and dealer growing 3%. Organic growth was 2% for the quarter. Promotional activity remained higher than the prior year for the third quarter, as responded to competitive positioning and market conditions.

The company’s gross profit margin for the third quarter of fiscal year 2018 was 17.2% of net sales versus 20.7% reported in the same quarter of last year.

Gross margin in the third quarter was unfavorably impacted by higher transportation cost, raw material inflation, operating inefficiency and $6.3 million or 216 basis points of inventory step-up amortization. Year-to-date gross profit margin was 19.7% compared to 21.7% for the same period in prior year.

Gross profit for the first nine months of the current fiscal year was unfavorably impacted by higher transportation costs, raw material inflation and higher healthcare costs and $6.3 million or 75 basis points of inventory step-up amortization.

Total operating expenses increased with 12% of net sales in the third quarter of the prior year to 14.5% this fiscal year. Through nine months, operating expenses increased from 11.1% in net sales to 11.5%.

Selling and marketing expenses were 6.5% of net sales in the third quarter of fiscal 2018, compared with 7.4% of net sales for the same period in fiscal 2017. The decrease in ratio is a result of lower personnel cost and product launch cost.

General and administrative expenses were 8% of net sales in the third quarter of fiscal 2018, compared with 4.6% of net sales for the same period of fiscal 2017. The increase in ratio was driven by acquisition-related cost of $10.2 million, a $4.1 million of intangibles to amortization, partially offset by lower incentive cost.

Taxes were impacted in the quarter by an impairment of the company’s deferred tax asset of $1.6 million related to the tax act. A $0.8 million impact of non-deductible transaction cost and a reduction of the domestic manufactured deduction benefit of $0.7 million.

These items are partially offset by a $2.7 million benefit from the corporate rate reduction enacted with the tax act. Free cash flow totaled $81.8 million for the first nine months of the current fiscal year, compared to $69.2 million in the prior year.

The company repurchased 309,612 shares of common stock at a cost of $29 million in the first nine months of the fiscal year and as previously announced to spend its repurchase program. Pro forma net leverage was just under 2.9 times adjusted EBITDA at the end of the third fiscal quarter.

In closing, the company expects that organic growth will average mid-single-digit for fiscal 2018. Sales growth will average approximately 20% with the inclusion of the RSI acquisition.

With higher than anticipated material inflation and transportation rate increases, the company expects adjusted EBITDA for fiscal 2018 to be approximately 14%, which includes only four months of RSI results. This concludes our prepared remarks. We’d be happy to answer any questions you have at this time. .

[Operator Instructions] Our first question comes from Kathryn Thompson from Thompson Research Group. Please go ahead..

Good morning. This is Steven Ramsey on for Kathryn. The first question is in regards to RSI and the impact from promotions in the home center channel.

How has RSI historically responded to these promotional environments and how have they handled the most recent chapter in this promotional environment? And do you plan to make edits to their strategy here?.

Hi, Steven, it’s Cary. Definitely a different strategy and we’ve been speaking very heavily obviously for a number of years now, the heavy promotional activity in the home center space. So, most of that’s been predominantly in the special order, which is obviously where the legacy American Woodmark market serves.

There has been some promotional activity, you tend to see the promotional space and the in-stock used a little bit differently. So, you’ll see it on holidays.

There is two big primarily promotional periods that they offer promotions on and obviously we participate in that, but it’s a much different strategic and environmental backdrop when it comes to promotional activity on the in-stock product. I’ll say it’s much more manageable right now than what you’ll say the special order is. .

Excellent.

And then, thinking more for core American Woodmark, and with the promotional environment starting to level off, how soon would you expect to regain loss share and what are the main governing factors here?.

The biggest assumption is, assuming it does level off as I stated, we do believe it is leveling off, recognizing that it is at the historically high level. So it remains very high.

And I think we are seeing and then obviously with, [indiscernible] our competitors and working with the home center partners getting a little more strategic with regards to the promotions and targeting customers obviously trying to get new customers in the door and so forth.

But our goal obviously is, as I stated, is going forward, once again it’s very dependent upon the volatility and eventually it’s leveled off and for that parity. But I mean, assuming those are – those assumptions are true and we are expecting to basically grow with the home center, overall home center growth moving forward..

Excellent. Thank you. .

Thank you..

Our next question comes from Scott Rednor from Zelman & Associates. Please go ahead..

Hi, good morning. .

Morning, Scott. .

Question on the sales outlook for you guys.

The mid-single-digit guidance for the full year, can you maybe just give us a flavor since it’s later in the quarter than you typically report where your sales are running, through the first two months of fiscal 4Q?.

We are actually only one month through. So, it’s fiscal Q4, but I would say, it’s still is the same guideline that I’ve already stated in the outlook, consistent with that. .

And when you think about…..

And your picture is no different what I just stated on the call, it’s just we are definitely seeing that transition down in new construction and we are aligning ourselves up to be able to serve that, but it’s going to take some time obviously. .

And Cary, just recognizing that, there RSI’s builder business based on the disclosure you gave is, about your Timberlake business is about 10x your builder business, can you maybe help us get a little bit more comfortable from that outside looking in how that’s going to help reinvigorate the growth rates on the builder direct side, just realizing that the bases are significantly different?.

Yes, so obviously, we’ve been very successful in the single-family new construction.

So focusing just on single-family initially is, starts around 850, 880 trending up obviously like I stated, between where it’s $1.1 million, $1.2 million and when we get there I think everybody will debate, but, the single-family new construction is going to continue to grow in the coming years.

And so, the question is, who is going to get that share of that growth.

And for certain percentage of that growth, say two-thirds of it will continue to be, I’ll say a mid-price point to higher, but that influx of the lower price point or premium price point, which is first time home buyer as well as we also get reports from builders that even though we’ve been placing a lot of emphasis on first time home buyers, there is a lot of interest and demand period for lower priced homes.

Obviously, some of it’s moved down buyers but they are also seeing at all levels. But so that, lower priced or what we often call the [indiscernible] price points going to make up a greater inflow, greater percentage of the index of that growth going forward.

So, if you look at our two pieces of the business, one on – what we call the legacy American Woodmark, we still see growth opportunity there. We are going to continue to leverage our core competency, our – everything we’ve done well up to this point.

Like I said in my prepared notes, I think there is opportunity for us to continue to drive some share growth with customers that we currently don’t serve today in certain geographical markets.

And we’ve been very selective of our growth up to now and we want it to be a controlled growth, obviously we’ve over indexed and we’ve slowed down recently, still growing but slowed and that just get to the shift to the opening price points.

So, now, and at RSI, so, look at our core legacy platform, continue to grow and then obviously take the RSI platform, lower cost platform and we can go out now and be much more aggressive on [indiscernible] timing, and I’d love to say it a year ago, but it’s in alignment with our strategy and we are seeing that growth that we knew would come and now we can go out and aggressively start bidding that on that in a very profitable way.

So, that was one of the strategic dilemmas that we are faced do you go out and bid on that with our existing Timberlake product recognizing that we cannot do it at the same profitable levels we’ve been serving the market or do we not bid on it and then we’ve obviously like to not to bid on knowing on our strategic plan.

So, well, once again, we are going to get market share we expect over index. But same time, we are expecting the market is going to continue to grow as well.

So, I think, you take it both of those factors into consideration and in our plan looking forward, once we get this operation fully up and running and leveraging our core platform with the ability to service it and then, ramping up RSI’s manufacturing process and so forth in those systems. We expect to grow it. .

Thank you for all that color.

Just one last one, Scott, can you give a flavor for what the EBITDA contribution and gross margin for RSI was in the quarter?.

Not a specific breakdown on the business. Our goal is to report a consolidated view there, will give you the color commentary on the sales breakdown. But didn’t want to start dissecting margin and EBITDA between the various units. .

Okay. I’ll follow-up later. Thank you..

[Operator Instructions] Our next question comes from Tim Wojs from Baird. Please go ahead..

Hey guys, good morning. .

Good morning, Tim. .

So, maybe just going back to the new construction and kind of point through RSI.

I mean, can you give us an idea of what you need to change to the RSI operations to kind of make that switch and service that new construction business? Just any sort of – training of some of your reps and then also, what you may have to change to the actual manufacturing process to kind of push that through?.

Yes, so, [indiscernible] because I said we have a formal team going through that, I’ll say it’s from a manufacturing process, we’ve been very careful to say we are not going to go on and make tremendous change because obviously we are going to be cautious, I’ll say, adding additional cost to their process.

So, what RSI does, they do very, very well with the low cost value-based platform. We are going to adhere to that. So right now, it’s really understanding how we can ramp it up within one of their plants, or within couple of plants have a little bit of a – I’ll say, a separate process, that’s a quicker ship process.

We – our plan is to grow that and utilize that in our new construction business. So we’ve got to really work on what’s going to take to ramp that up looking at our forecasting for the new construction business and obviously getting the processes and the systems put it in place to support that.

Lot of the work right now, honestly is just manufacturing work, but the first thing we have to be able to do is get our systems to talk to each other. So that’s a big part of this thing.

So when you place an order through our builder center it’s got to be able to come into the RSI system, everything has to align for order processing, from the logistics, and so forth. So honestly, that is the most technical aspect of this work that’s underway and that’s going as planned. But that is a big piece of it.

And yes, as you stated, there is definitely going to be some training, that’s not difficult. I mean, obviously we know the market, we know the customer, we have already been communicating the customers and obviously we are already are bidding on business with the products.

So, that piece of work is underway given the lag time that you have between bid and recognizing when a subdivision may start.

So, it’s I will say nothing is easy in our business, but it’s being managed appropriately and where we have a lot of opportunity, and if it takes investment, we’ll make that investment just given the opportunity that lies ahead. .

Okay great. And then, I guess, what the – I guess relative, I mean, with all the builders that you are talking to, I mean, what’s the tone and kind of their outlook, I mean, I think there has been a little choppiness here to kind of start the year with the weather and things.

But how are your builders thinking about the season and when weather might break and what type of growth we might see for new construction this year?.

Yes, you heard, I mean, obviously we never restated, but the markets that we participate in, particularly like the northeast and so forth and I comment on, but we have been hit by weather - builders have been hit by weather. So you see a little discontinuity in some of the numbers builders are reporting. Some of them are higher comps.

It just comes down to specifically our regions and where they are growing. So, our builders remain positive overall.

It’s definitely choppy and you can go talk to a builder now and not have them talk about some of the headwinds and where it’s labor, where it’s land, whether it’s material inflation continues that coming from all of the different directions right now.

But at the same time, they see demand increasing and they are being very creative and strategic with regards to how they are going to supply that.

So, they – our announcement of the acquisition and our ability to sit down with them and say we have an outstanding solution now to be able to supply what is very evident and their strategy is they have been very vocal with regards to communicating their desire to growing the opening price point.

We’ve seen it, that move down by, we’ve seen for some time now. It hasn’t been a very high percentage, it’s definitely growing. But that first time home buyer is definitely increasing and they are looking at the fashion side of it. They are looking at what they require and everything.

So we're obviously having those strategic discussions with them and they are very excited about our platform. So I think, we have a good future ahead. I think, here everybody is going to have a different opinion on the growth. I think it’s definitely going to be rocky for sure. But we will obviously find a way.

I mean it’s pretty efficient and we see a lot of growth ahead and we now have a very efficient platform to service it..

Okay, okay.

And then, Scott, maybe just, if we take out the – I guess, one, the inventory accounting, are you through that this quarter or is there going to be more of that in the April quarter? That’s number one and then number two, if we adjust that out, and kind of think about the year-on-year kind of gross margin contraction, how much of that was kind of price cost versus some of the operational efficiencies that you talked about with the line and the staffing?.

Yes, so we are done with inventory step-up that was fully amortized in the period. So that doesn’t carryover. The only reason there being update there if there is some shift in the purchase accounting worked, of course, that’s got, we are up to a year to finalize that body to work. It’s with the auditors now.

Hopefully, we can finalize that here shortly. But I wouldn’t expect anything to push forward as it relates to that. Backing that out taking with the quarter, what was the major impacts for us, certainly the raw material and transportation increases would be the leaders.

Those would be the two biggest items and then that’d be followed by the operating inefficiency, part of which Cary highlighted with structurally being staffed to a higher forecast and not being able to right size that as rapidly as one would like..

Okay, okay.

And then, from a tax rate perspective, what’s the right tax rate we should think about on an ongoing basis?.

Yes, so for the fiscal fourth quarter, you should use 34%. We’ll have a blended rate for this period where we’ve got part of the year at the prior tax act and then we’ve got four months at the news. So the 34 for the fourth and then as you push forward into fiscal year 2019, our expectations will be approximately 26%. .

Okay, okay. Great, I appreciate the time guys. Good luck..

Thank you..

Thanks, Scott..

Next question comes Gary Chammas from Longbow Research. Please go ahead..

Hi, thank you. Just wanted to ask about incremental margins over the medium to long-term. What’s your move through some of these highest periods and you get RSI scaled up.

How should we think about incremental margins across your platforms?.

Yes, I guess, and I’ll give you in term, Scott may have some, and I think right now, we are still doing an analysis to fully understand long-term, I think the mix of products, the rate of change of our ability to go out and get the new products and so forth and obviously as Scott said, we are not going to comment on specifics by business.

But I think it’s, obviously we have optimism, obviously given their profitability and so forth.

But we start work to do to fully understand talk about integrating our financials and what the business model looks like and as you can imagine, Scott and the financial team have been extremely, extremely busy over the past three months here working on this.

So there is still more work to do and I think we’ll have more information to share as we go forward. .

Yes, I think that’s the best way to frame that, Cary, from a legacy standpoint, we’ve always talked about Woodmark being a target at 25% incremental gross margin rates. We certainly recognize some periods will be better than that, some periods will be worse than that, but that’s what we’ve always been driving enterprise over time.

RSI clearly has a more attractive margin profile in total. I think our guidance is likely to shift to more of an EBITDA incremental approach. So as we complete that work and we are in the midst of our budget cycle as we are talking today, we’ll leave and continue to have budget reviews tonight and then to next week.

So to come out of that, we will provide a better perspective and outlook as we wrap up the year and give you a perspective on Q4. .

Okay, thanks. And then, as you get comfortable with RSI, and making some of the platform changes, in different end-markets, just curious how that squares with the initial guidance you’ve provided on synergies. It sounds like that you are pleased only a month or so into the integration process.

But has anything changed or anything specific relative to the initial synergy targets once you dig into the business as you either more excited or less excited and I guess, just some of the issues that have topped up in the one month of ownership, was that all just consistent with your expectations when you made the acquisition?.

Yes, that’s what we are mostly excited about with this acquisition, as the two companies are so aligned and we know the markets and they know the markets and when we went through this acquisition process, we were very knowledgeable about the synergy potential at least the best we could do and the due diligence and yes, we remain very consistent.

I think with what we communicated during the acquisition process when we announced this. But, yes, we remain very favorable, and very strong synergies with once again that most of that focus on the growth aspect of it. .

Okay, thank you very much. .

Thank you..

[Operator Instructions] Our next question comes from Lee Brading from Wells Fargo. Please go ahead. .

Hi guys. Just want to follow-up on a couple of the items that you guys have talked about. You talked about now starting to do more – I want to make sure I interpreted right, it sounds like now that you have RSI, more on the bidding on the direct-to-build side and you talked about the operational challenges of that.

Is it timing of that is when you start to see being able to go into that direct-to-build channel with the RSI product, that as you are correctly using by Q1 of next fiscal year?.

That’s correct, yes. That’s our team that’s we’ve got formalized right now. We are targeting first quarter of our new fiscal year. .

How challenge it is, as you talked about, you said actually, but just the distribution point of it is that, I mean, I guess, what’s the most challenging part of trying to integrate with that direct-to-build?.

It’s really a systems aspect. So, as you know, all of our products on the legacy American Woodmark side is final mile delivery. So, we can leverage that delivery system very, very easily.

It’s just a matter of getting you the systems in place, when a order is placed through our builder channel that it can flow through into the RSI system and obviously into MRP and so forth. So, but working with our logistics carriers and putting that system, logistic system in place is not a challenge at all really. .

I got you and when do you start to expect the orders I guess from the bidding process to start to occur? Or is it already started?.

Well, we are bidding on it and it should be, as we are speaking, so the team is – our Timberlake team is out there bidding as we speak. So it’s obviously given the lag between when we go out and bid on product and then we actually start to break ground and build the sub-division and so forth, there is a time lag there.

But, our goal is actually to see revenue in our Q1 and I am not going to see it’s going to be high, but, we are – that’s our goal. In our first quarter is we want to start to see some revenue. .

Got you. And you talked about the home center side, the promos there are still up and it’s started to level off. I mean, I guess, I was trying to get a more flavor with that.

Are they still at elevated levels and would you think the price state is elevated levels for a while, is it kind of a new order or do you think they will eventually start to come back down?.

Yes, right now, they are at elevated and I anticipate I am staying at elevated, but I’ll say kind of targeted level. So, excuse me – both home centers are getting a little more strategic as I mentioned and trying to target customers and narrow the focus down to really try to drive more consumers in the door.

Longer-term, I think, obviously, we know it, our both home center partners very well know it that the high promotional levels that right now are not desirable to be sustained long-term.

So, they are focused on options and opportunities to try to bring those down, certain spaces they are playing with everyday low price and it has to be the right space for the right end consumer like more on the pro space for example. So, when it comes to home consumer, I think it’s going to take some time.

It should conditioning, right, both the consumer and the designers in the stores with the condition to sell with these – under the very high promotional levels. So it’s going to take some time to bring it down. .

And how challenging is it for you to maintain market share at these levels?.

Well, as long as the levels stay consistent, then we can maintain market share. So, once again, if somebody does something that’s outside the norm, then, obviously it’s very susceptible, it’s just as we’ve seen in the past three years.

So, right now, I feel is that parities that we should be able to maintain share, but that’s very dependent upon those assumptions. .

Got you.

And, I guess, dropping a little to the gross margin line, as you talk about the add-back items or those step-up in accounting, and now you are looking at price increases, can you talk about on the price increases, I am not sure what extent you want to talk – how much detail you want to talk about, but I guess, as you look at your platform, what you might be doing there?.

Yes, we really don’t provide details obviously for customers' sake and so forth. So we are just continuing that by the way that as we communicated historically in our markets as well.

There is definitely delays dependent on the segment, but we do – we will actually go out and try to pass price increases on fairly efficient, just different timeframes involved with that. .

Do you think you still probably have another one to two quarters of challenges I guess from a – maybe a comparison standpoint on the gross margin line?.

Yes, I would just defer and say we’ll circle back and give you an outlook perspective at the end of this quarter. .

Okay. And the last item was just on the CapEx side. If any color there maybe, have you talked about the integration everything. Hasn't been any surprises, I guess, and I would assume maybe no surprises on the CapEx trying to kind of business as usual, but any color there would be great..

Yes, no surprises, business as usual. .

Great. Thanks so much..

It’s good thing obviously when we close an acquisition, but definitely no surprises..

Great. Thanks..

Our next question comes from Scott Rednor from Zelman & Associates. Please go ahead..

One quick one for Scott, just from a modeling perspective.

Can you give us a feel for what the right runrate for interest and D&A should be now that the deal is finalized?.

So interest income expense specifically, probably $38 million should be the number when you look forward to fiscal year 2019. Amortization for the intangibles, $49 million for the year. .

Great, thank you. .

As I do not see there is anyone else waiting for to ask a question. I would like to turn it back to Mr. Culbreth for any closing remarks. Please go ahead sir..

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

Once again, this does conclude our conference. Thank you for your participation and you may now disconnect..