Good day and welcome to the American Woodmark Corporation Fourth Quarter 2018 Conference Call. Today’s call is being recorded, May 29, 2018. During this call, the company may discuss certain non-GAAP financial measures, including in our earnings release such as adjusted EBITDA, adjusted EBITDA margin, free cash flow and adjusted EPS per diluted share.

Earnings release of which can be found on the website at www.americanwoodmark.com includes definitions on each of these non-GAAP financial measures, the company’s rationale for each of their uses and a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures.

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.

According to 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 be not 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, Chairman and CEO. Cary 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.

Cary?.

Thank you, Scott and good morning. Overall, we are pleased with our fourth quarter performance and when looking back at our fiscal year as a whole, we remain very confident in the strategic decisions we made that positioned us for strong success going forward.

Despite evident slowing in the industry growth and the onset of some headwinds, we grew our business and achieved very solid adjusted EBITDA margin for the quarter. Net sales were up 57% for our fourth quarter driven by the inclusion of RSI.

Excluding the acquisition, our core growth was 3% over index in your competition and KCMA reported cabinet growth. Just as importantly, we were pleased to see a more positive trend in demand as the quarter progressed with some improvement in our backlog. For the full fiscal year, sales increased 21% or 4% excluding the acquisition.

Looking specifically at new construction, for the quarter, we grew our business 20%. Excluding the acquisition, our Timberlake business grew 6% slightly higher than family starts over the same time period. For the full year, we grew our business a very healthy 7%.

Last quarter, I reported that we were being impacted by a strong movement towards opening price point homes. This remains true. However, our team has been successfully leveraging our direct-to-builder service model to grow our share at the mid and higher price points while bidding on strategically aligned opening price point business.

We committed that we would have the systems and processes in place by the first quarter of our new fiscal year to begin to sell RSI product through our direct-to-builder networks. I am pleased to say that we remain on plan to do just this.

Although a very competitive business the opening price point of single-family home offers strong growth opportunity. We continue to believe that the opening price point home will over index as single-family starts continue to move towards the longer term sustainable level of 1.1 million to 1.2 million homes per year.

With our new low cost manufacturing platform, we can strategically and profitably leverage our direct-to-builder service model to grow our business well into the future. In addition, we will remain focused and diligent on competing to gain share in the mid to higher price point home market.

From a housing industry growth perspective, numerous microeconomic factors remain, including high land cost, labor shortages, material inflation and freight capacity. Labor and freight are also evolving into macroeconomic factors given their potential impact on America’s growth as a whole. Nearly every industry is facing the same constraints.

With home prices continuing to arise, affordability is also being closely monitored. Despite these challenges, given the changing demographics and the spending power of the younger generation, we remain confident in the continued growth of the housing industry. Likewise, our improved platform offers the best opportunity to capitalize on this growth.

Taking a look at our dealer channel, excluding the acquisitions, we grew the business by 11% for the quarter and 11% for the year. Despite evidence flowing in the channel by more affluent consumers, our team continues to drive growth over index in the market. Regarding our home center business, it was up 82% as a company.

However, excluding the acquisition, we were down 2% for the quarter. Promotional activity remains a key driver in the variation in our business. An unpredictable factor that impacts this is when a competitor supports an exclusive promotional event. Although very expensive for the competitor such an event did ship share in our fourth quarter.

The greater challenge we all faced however is the continued under-indexing of the home center channel to the rest of the market. Despite these challenges, we continue to remain confident in the special order segment within home centers, particularly as it relates to what we considered to be strong future growth within repair and remodel.

As existing home inventory is freed up and purchased by the growing number of first-time homebuyers, we believe kitchen remodeling will be at the forefront of R&R spend. In addition, the Pro business within America continues to grow and strengthen.

Home centers are ideally positioned to serve this segment as a one-stop shop with our value-based special order and in-stock kitchen and bath products combined with our best-in-class service platforms, we are strategically aligned to meet this demand with our home center partners.

From an RSI perspective, we are focused on growing all aspects of our business. Last quarter, I commented on two prior year regional offices within our home centers business. Although these losses are behind us, they will continue to impact year-over-year comps until we lap the events in mid-summer.

We remain very determined on restoring these markets as well as making continued investment to grow our in-stock kitchen and bath business. We did grow the business from Q3 to Q4 and we remain confident in our ability to grow the RSI core business well into the future.

For example, we strategically partnered with one of our home center partners to offer a program that is catered to the growing Profire. Within this program, we supplement our in-stock kitchen cabinet business with an expanded product offering at a greatly reduced lead time.

It is our clear intention to continue to invest in and fully support this expanding business opportunity. Within the home center bath vanity business, we have launched considerable new product this spring and we are already seeing growth.

Within our PCS business that consists of their frameless product offering, we experienced solid year-over-year growth as well, particularly in the Southern California new construction market. This platform is also part of our future growth plan within home center and multifamily.

So, as a whole, we are confident in our foundation and our ability to continue to grow across all channels of our business. From a gross margin perspective, we finished the quarter at 22% versus 22.3% prior year.

Two of the key headwinds we are seeing ramp up our logistics cost and material inflation, both of which impacted us in Q4 and will continue to do so in the new fiscal year. Higher healthcare costs also impacted us in the quarter. For the year, gross margin was 20.4% with logistics, material and healthcare costs being key challenges.

In addition, we have $6.3 million of inventory step up amortization related to the acquisition. Operationally, our teams are performing well and are entering the new fiscal year with strong results. Looking at our adjusted EBITDA, we finished the quarter at very solid 16.1% of sales, up from 13.3% in our fourth quarter prior year.

For the year, adjusted EBITDA was 14.1%, including 4 months of RSI results, up from 13% prior year. On adjusted net income, we generated $29 million in the quarter and $87.7 million for the year.

Regarding integration work underway with the acquisition, I am extremely pleased with our progress as we remain on plan with every one of our key deliverables. We have been very purposeful on our internal communications holding numerous town hall meetings and getting to know our new teammates.

I can honestly say that our excitement only continues to grow in time as we all get to know each other and realize just how aligned we are. My team and I have spent considerable time with leadership joining us as one team and one vision. We are very focused on the future and are openly challenging each other with new thoughts and ideas.

I can tell you it is extremely exciting to see the two organizations come together as teams are already working very aggressively to capture synergies on both the revenue and cost sides of our business.

As I mentioned previously, we are on plan to launch our new value-based product offering through our Timberlake platform this quarter and we have already taken orders on the product.

This was no easy task with the system and process requirements and offers a clear indicator of how well our teams work together towards a common goal to grow our business. I am very pleased to say that our teams are executing very well and we are on plan to deliver the cost and revenue synergies we committed during the acquisition announcement.

We are very focused on the strategic opportunity to grow our new construction, home center, dealer, and distributor markets by leveraging our two national platforms. We also have numerous active teams in place working on cost synergies across their manufacturing and supply chain platforms. In summary, our industry is not getting any easier.

The headwinds we all knew were coming have now arrived, combined with the numerous variables already impacting the new construction and R&R markets predictability is going to be an even greater challenge. As unpredictable as tomorrow can be, we are confident in the future growth of our industry within both new construction and R&R.

In addition, one thing is absolutely certain, bringing together two industry leaders in American Woodmark and RSI absolutely places us in a far better position to win in this industry. Everyone is going to face the same headwinds. However, the new American Woodmark has the greatest strategic platform to continue to win and grow.

With that, I will turn over to Scott for the detailed financials..

Thanks Cary. The financial headlines for the quarter, net sales were $406 million representing an increase of 57% over the same period last year. Excluding the impact of the RSI acquisition, net sales for the fourth fiscal quarter increased 3% to $267 million.

Beginning with this earnings release, the companies has revised its definition of adjusted EPS per diluted share to exclude intangibles amortization charges. Adjusted net income was $29 million or $1.64 per diluted share in the current fiscal year versus $18.6 million or $1.13 per diluted share last year.

Net income was positively impacted by additional sales volumes and lower incentive costs that were partially offset by gross margin declines in the core business partially due to raw material inflation.

Adjusted EBITDA was $65.3 million or 16.1% of net sales compared to $34.5 million or 13.3% of net sales for the same quarter of the prior fiscal year. The increase during the fourth fiscal quarter was primarily due to additional sales growth and the inclusion of 3 months of results for RSI.

For the fiscal year ended April, year-to-date net sales were $1.250 billion scripting the increase of 21% from the prior fiscal year. Excluding the impact of the RSI acquisition, net sales for the fiscal year increased 4% to $1.073 billion.

Adjusted net income was $87.7 million or $5.24 per diluted share in the current fiscal year versus $72.9 million or $4.45 per share for the prior fiscal year. Adjusted EBITDA was $175.8 million or 14.1% of net sales for fiscal 2018 compared to $133.7 million or 13% of net sales for 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 5.8% for the financial fourth quarter. Single-family starts during December, January and February of the prior period averaged 833,000 units.

Starts over that same time period from the current year averaged 882,000 units. Our new construction-based revenue increased 20% for the quarter and core growth was 6% for the quarter. The remodel business continues to be challenging.

On the positive side, unemployment continues to improve, while U3 employment rate dropped to 3.9%, U6 decreased to 7.8% during the fourth fiscal quarter. Both measures were lower than the April 2017 reported figures. All cash purchases in March were 20%, down from 23% last year.

Consumer sentiment increased to 101.4 in March versus the 96.9 recorded in March 2017. On the negative side, existing home sales decreased slightly during the first calendar quarter 2018. Between January and March of 2017, existing home sales averaged 5.61 million units as same period for 2018 averaged 5.51 million units, a decrease of 1.8%.

The median existing home price rose 5.8% to $250,400 for March impacting our consumers’ affordability index. Interest rates increased in the quarter with a 30-year fixed rate mortgage at 4.47% in April, an increase of approximately 42 basis points versus last year.

Residential investment as a percent of GDP for the first calendar quarter of 2018 declined to 3.5% versus the prior year. Home ownership rates remain low versus historical averages. The percent of Americans who own their home in the first calendar quarter was 64.2%, which increased from last year’s rate of 53.6%.

The share of first-time buyers declined. The March reported rate was 30% versus 32% in the prior year. Keep in mind, the share remains well below the historical norm of 40%. Our combined home center and dealer channel revenues were up 67% for the quarter, with home centers increasing 82% and dealer growing 11%. Core growth was 1% for the quarter.

The company’s gross profit margin for the fourth quarter of fiscal year 2018 was 22% of net sales versus 22.3% reported in the same quarter of last year. Gross margin in the fourth quarter was unfavorably impacted by higher transportation cost, raw material inflation and higher healthcare cost.

Year-to-date gross profit margin was 20.4% compared to 21.8% for the same period in the prior year. Gross profit for the entire fiscal year was unfavorably impacted by higher transportation costs, raw material inflation, higher healthcare cost and $6.3 million or 50 basis points of inventory step up amortization.

Total operating expenses increased from 12.1% of net sales in the fourth quarter of the prior year to 12.5% this fiscal year. Through 12 months, operating expenses increased from 11.3% of net sales to 11.8%.

Selling and marketing expenses were 5.5% of net sales in the fourth quarter of fiscal 2018 compared with 7.3% of net sales for the same period in fiscal 2017. The decrease in ratio is a result of leverage for higher sales and lower personnel cost and product launch cost.

General and administrative expenses were 7% of net sales in the fourth quarter of fiscal 2018 compared with 4.8% of net sales for the same period of fiscal 2017. The increase in ratio was driven by $12.3 million of intangibles to amortization or approximately 300 basis points partially offset by lower incentive cost of approximately 7 basis points.

Free cash flow totaled $36.9 million for the current fiscal year compared to $51.5 million in the prior year. The decline was primarily due to the funding of the company’s corporate office, which was completed in April. Approximately $21 million was spent in fiscal year 2018 for the new office.

Pro forma net leverage was just under 2.9 times adjusted EBITDA at the end of the fourth fiscal quarter and the company paid down $40 million of its term loan facility during the quarter. In closing, the company delivered on its outlook for the year shared last quarter, while sales growth of 21% and adjusted EBITDA of 41.1% for the fiscal year.

Regarding our fiscal year ‘19 outlook, for the market we expect the following. Single-family housing starts to grow approximately 7% to 9%. Interest rates declined along with continued increases in the average price of new homes. Those factors will negatively impact affordability particularly for the important first-time and first separate buyers.

Unemployment should remain steady. Cabinet remodeling sales continue to be challenged until economic trends remain consistently favorable. Growth is expected at roughly mid single-digit rate during the company’s fiscal 2019. In this environment, our expectations for company performance are as follows.

The company’s home center market share will remain at normalized levels for fiscal 2019 after annualizing for market losses in the in-stock business. However, this is heavily dependent upon competitive promotional activity company. The company will continue to gain market share in its growing distributor business.

The company’s core new residential construction direct business will increase the market rate for single-family housing starts. In total, the company expects it will grow core sales in the mid single-digit rate in fiscal 2019 with total sales growth of approximately 35%.

Margins will be challenged with increases in labor costs, raw materials, fuel, and transportation rates. The company expects adjusted EBITDA margins for fiscal 2019 of 15.5% to 16% depending upon synergy timing, execution and significance of inflation rate increases.

Free cash flow generation of approximately $120 million will be utilized to further pay down the company’s term loan facility. This concludes our prepared remarks. We will be happy to answer any questions you have at this time..

[Operator Instructions] Our first question comes from Justin Speer from Zelman & Associates. Please go ahead..

Thank you, guys. Congratulations on the good quarter.

One quick question for me just housekeeping, RSI EBITDA contribution, can you break that out for us?.

We are not breaking that out between the different segments. We are just going to report as one total enterprise..

Okay.

Well, stepping back just thinking about price cost, I would like to get some color on how much raw materials and labor were a drag in the quarter, if you could break that out from a dollar standpoint? And then help us unpack what’s going on at the home center channel, really a lot of questions around why the growth is – what it is there in the context of broader building products category being more like mid single-digits, what you are seeing there from a competitive landscape and how that in your mind manifest itself a price cost going forward?.

Hi Justin, this is Cary. I will kind of address the later part of your question and Scott will provide a little bit information on the first part. So with regards to home center, it is obviously a continued challenging environment.

Obviously, we were not pleased with the negative 2% comp from prior year and expected at least to be flat, if not slightly up.

The unpredictability as I mentioned though is we did have a fairly significant impact by one of our competitors and had a exclusive promotion like event during the quarter, which really shifted a solid amount of share over during that period of time and impacted us.

That’s something that we just don’t know going into the quarter and we don’t know when it’s going to happen, but it does happen and obviously it has an impact on us and it’s just when the competitors are willing to find a lot of money to gain share. It’s one of those unpredictable events, that’s out there right now.

So longer term though I mean, obviously the home center and we talk openly with both the home centers and with regards to their future and the growth and so forth and they know they have under-indexed and have not really recovered coming out of the recession.

We still believe that’s going to happen just given they really think who their key customer is and where that consumer sits today with the younger generation that’s rising and so forth.

So I guess put that into the special order side and the in-stock side, the special order obviously is where it’s been lagging and we would expect that timing as the question, but we expect that recovery to occur as consumers get out there and purchase single-family new construction or single-family existing and they start doing those remodels.

So, timing is key there.

Our new platform obviously, those consumers aren’t going to go out and spend the typical values that you have seen being spent recently is going to really shift that price point, which is a key part of our acquisition and plays well into our existing core business as well as into the value-based platform with that frameless BTS business that I mentioned before.

From an inside perspective, this actually is growing well, coming out of the recession, will continue to grow well. That really meets a lot of the needs of that Pro contractor business. We are doubling down in that both in our core and with our investment in RSI.

We fit that build very, very nicely with that Pro contractor and partnered with one of the leading home centers out there to continue to offer superior experience for that Pro business. So, we do expect that to grow, continue to grow and you expect to see growth investment not in the future.

So, it’s one of those we don’t get into detail as far as split now by product line within the home center channel, but we are definitely seeing growth.

Once again we faced that year-over-year comp due to some regional losses a year ago, but excluding those, we are definitely seeing growth in that in-stock kitchen business within home center and we expect to continue see that growth going forward..

And just on the margin side, yes….

I am sorry, on the margin side on your original question, don’t have dollars to breakdown into each of the respective elements, but as we have talked about raw material, healthcare and transportation being the three biggest impacts, I will tell you that raw and healthcare were the two biggest followed by transportation, so you clearly stack it that way, but not able to breakdown the dollar amount to share with you..

But just in terms of looking back in history, this industry has had a good track record of recouping commodity cost headwind, is there anything on the horizon, particularly the competitive landscape it is going to prohibit you in your mind for recouping these costs?.

It’s one of those where, you are right, with the market has been fairly efficient at passing price increases on for inflation, there was obviously a lag there dependent on the channel, but it is fairly efficient.

I think what you have to be careful for – careful of is demand elasticity curve that I think we are facing out there is that really most of – lot of the growth that you at least in our opinion we are going to start seeing and going forward is going to be at lower price point. So now, you can look at two ways.

So from a core perspective, we will definitely pass that price increase on. I think we are going to continue to be challenged with comps in that environment just given the price point.

However, that’s really what positions us well with our acquisition as the lower price point customer and the product that we actually can sell at that lower price point and make good margin there. So, you had to be careful about making assumption of this, because we are passing price on.

We are going to lose consumers, because actually it favors us in the context that we now have a product offering that we can sell them make solid money. So, I think we are all trying to figure out where future demand is going to go.

Like I mentioned on my pre-described notes there that we are seeing some slowdown in the dealer channel that tends to be a more fluent consumer. You see it in new construction as well, although the price point is still – you hear builders talking a lot about it.

We are definitely seeing regional shifts to that lower price point, opening price point, but I think same time you also see articles out there that some of the younger generation have been sitting on there, the money curve for such an extended period of time now that they are skipping what we would typically call on the opening price point home and moving into the middle price point home.

So, that’s actually favorable for new construction and it allows us to keep price points higher and does allow us to pass on inflation and so forth.

So, I there is a lot to be determined over next year to with regards to demand elasticity and where that consumer is going to shop, but all I can state is we are with this acquisition, we are very well-positioned now to fulfill both of those needs..

Thank you..

Our next question comes from Garik Shmois from Longbow Research. Please go ahead..

Hi, thank you.

Just to follow-up on that last point, just wondering if you could provide any color just on how to think about the mix to margins if we are going to see a shift towards more opening price points? Would that end up being a potential headwind that you would end up seeing or conversely, so you could be neutral or positive?.

No, I think really, I mean, if you listen to the call, a 1 year or 1.5 years ago, I think that was one of our concerns, right, is as we saw that movement down the opening price point, we could not as fit efficiently and effectively and as efficiently serve that market with our well below our core business.

With the acquisition, we actually can’t serve that and with good strong margin. So, it’s no longer a concern of ours. It’s actually positivism as we see that shift downward now. So, I would say there is a time lag there. We are in the process of selling product at that opening price point leveraging our existing core platform and the RSI product.

It’s going to take some time to wrap up, but the good thing is that you see in the numbers as Scott mentioned is as the starting trend is bouncing around quarter-to-quarter, but over time, we do expect the opening price point to over-index and I am not going to say margin accretive, but based on Scott’s EBITDA projection for our fiscal year that 15.5% to 16% is where we are expecting..

Okay, that’s helpful.

You mentioned it still could improve as the quarter progressed, so I was just wondering if you could provide some more detail either by channel or by end market?.

Yes. I mean, it was – we kind of spoke to home center, that was a challenge driven by promo, although I will say. We did see – once the promo was done, we did obviously shift it back and our promotional activity is high as well, trying to be competitive in that market.

So when you don’t see a vendor-specific promotional event going on, we have basically regained or restore what we would call more of our longer term historical share averages in our home center channels. So, we did see some pickup in the latter part of the quarter, but most of backlog really came on the direct side.

So, we start with last quarter, our new construction was lower single-digits and I mentioned that big push towards the opening price point.

Our teams did a very nice job of going out and recovering within new construction and both getting new share at the mid to higher price point as well as getting the platform in place to start to sell the opening price point.

So, we built some backlog on the new construction side and then on even the dealer side, obviously with 11% comparable prior year, that was built some backlog in that.

So, that’s something we are watching closely, because that’s I think we are going to see some volatility there quarter-to-quarter to spend on promotional activity as well as that more fluent consumer and what they are doing in the market.

So the good thing is our backlog came in obviously slightly stronger than what we initially had predicted for starting off the new fiscal year. And that’s – I know it’s hard to put models in place to cut on backlog, but we obviously have incoming, Scott talks about a 60 to 90-day lag from a builder perspective.

So it’s a lot of variables that go into that that we monitored very closely, but it was slightly positive..

Okay, that’s helpful.

And just lastly, just on the special order home center piece of the business, just how flexible can you be if that market just continues to stall out for the next several quarters if not a little bit longer just going to be uncertain macro environment, how quickly or how efficiently could you maybe reposition to service in-stock vanities at home centers or tailor your capacity to service on other end markets?.

Well, we did service the in-stock vanity business. Obviously, that was one of RSI’s core strengths on the in-stock kitchen, the in-stock bath vanity. So, we have flexibility there now with our platform.

The good thing in home center, I don’t think there is anything drafted that’s going to happen within home center, it’s going to make the market falloff. It’s just I think they are going to continue to see slower growth in home center until we can get this consumer out there shopping. So, we do have flexibility there.

It’s something obviously really we would look at our capacity it’s something that we monitor very closely.

So, it’s not a matter of flexibility, it’s a matter of honestly, I think what we have conversations about internally is making sure we don’t miss what I consider, I truly believe that demand is coming out, how much of that home center get versus dealer versus the Pro business going through distributors, I think that’s to be determined where the younger generation shops, but I think it can be a win-win for all the channels out there.

And the good thing I think really answer your question is we have a lot of flexibility now depending on where that consumer goes, with our lower price point cost product now, it really opens up the door for us to flex that within the lower cost or at our mid price point product that we have.

So, I think we are the only platform we really don’t serve today is that kind of mid to higher end semi-custom consumer, which obviously is a much more volume than where the market is trending. So we have that flexibility..

Great. Thank you very much..

[Operator Instructions] Our next question comes from Josh Chan from R.W. Baird. Please go ahead..

Hi, good morning Cary and Scott..

Hi, Josh..

Hi, good morning.

Just on my first question is on the guidance for the EBITDA margin guidance, how much of an impact from price cost are you baking in for that guidance and does it kind of assume the price cost is unfavorable basically for the whole fiscal year?.

Well, we have the lag built-in on the front end. So, the fact that the inflation has already occurred, it takes us a bit of time to recover that in pricing, but we have modeled pricing recovery throughout the year, depends on the respective channel. And at the end of fiscal ‘19 we believe we will deliver that 15.5% to 16% adjusted EBITDA margin..

Right, okay.

And am I reading you correctly if I were to say that price can catch up the cost by the end of the fiscal year, is that kind of what you are thinking?.

Certainly, the assumption you would be making there is that inflation doesn’t continue to move up. So, if it stays stable and where we are at today, I think that’s a fair assumption. If we continue to see it to move up at a higher rate that would be more challenging..

Alright, that makes sense.

And then secondly on RSI for the quarter kind of how did that fare versus your expectation and I think the core cabinet business typically steps up even more seasonally in the July quarter, so wondering if that’s the right way to think about RSI going forward as well?.

I mean, from a core perspective, it’s near where we expected like so we did see something we are trying to kind of figure out the proper way to communicate, because we did have a couple of regional losses last year that we remain committed to restore, but excluding those, we did grow the business on the in-stock kitchen side.

We launched quite a bit of new product in the bath vanity side that obviously just go out and do all the resets and most of those took place in Q1 and our Q3 and then the beginning part of Q4. So we are starting to see the return on that now.

But as far as your comment on the early summer, that’s actually, that tend to be more tied to as I say lot of fall, but a lot of holiday events, so you could have like a Black Friday is a huge one for us, but you are not in the in-stock side. So on the special order it’s quite a bit different.

You really don’t see big special events, but in the in-stock side, they tend to tie those to lot of the holidays and so forth. Summer tend to be a slower period of time really across lot of the country on R&R, just because people are more outdoor-focused than indoor. So it’s not a busy time that you typically see on either in-stock or special order..

Okay, great. And then I guess my last question kind of is addressing some of the capacity question from the last caller. If you see certain kind of competitors shift their focus towards lower price points or certain parts of the dealer channel.

I guess, how do you see the competitive environment setting up over the next couple of years and is there much you can do in terms of adjusting your own your capacity as well?.

The good thing is you don’t – we kind of explained this when we did the acquisition is in our world the manufacturing processes are fairly specific to price point. So when you get into semi-custom you are going to have a fairly kitchenette of time platform that is, it’s going to be more costly product.

So, they can – they have the ability to obviously to shift it down to the, obviously, the higher end of the stock category where we sit. So, our manufacturing platform is going to be a much, much lower SKU comp in a semi-custom offering. So it’s run at higher volume, lower SKUs. We have the ability to get up into lower end of semi-custom with it.

But when you get down into really the, obviously, the very value-based low cost platform which is your in-stock cash and carry bath and vanity in kitchen like RSI has, that is a very unique specific manufacturing platform that is obviously very, very SKU focused.

So, even though American Woodmark’s core we were considered to have a pretty tight SKU offering compared to semi-custom when you get down to RSI side. It would be extremely small even compared to ours. So the good thing is that’s not easily replicated.

You can’t just go out and which we actually experiment with before we did the acquisition, you can’t just go out and ship the manufacturing platform or even start from scratch on a Greenfield or Brownfield manufacturing platform at a lower price point, because scale is very, very important.

So, yes, there is some models out there you could start importing Chinese product and trying to distill the assembly plant assembling Chinese products together with the economies of scale aren’t as critical there, because the capital cost on it is high, but barriers to entry, particularly on a international level is pretty high.

So when it comes to flexibility, I will say we are flexible, but obviously our competition was not as flexible once again we, with RSI acquisitions, as you know, RSI was number one in that space and combined with American Woodmark on our core side, it’s a platform that really cannot be replicated out there without some fairly significant capital investment by somebody..

Alright, great. Thanks for the color and congrats on a good quarter..

Thank you..

Our next question comes from Justin Speer from Zelman & Associates. Please go ahead..

Hi, guys.

Just a follow-up in terms of your guidance, are you embedding any RSI revenue synergies in that number, is that going to be above and beyond potentially on that front, just help us think about your commercial initiative beginning this next quarter fiscal ‘19 how to think about that as we are progressing in timing standpoint of your 3-year strategy and roadmap for revenue synergies and cost synergies?.

Yes, I will take the first part of the questions. So the total sales growth that we are guiding to of approximately 35% does have built in some revenue synergy assumptions around that. And then on the EBITDA margins as well the 15.5% to 16% is indicated with synergy time and execution will be a driver around that along with inflation rate increases..

Yes. And as we look at kind of particularly the revenue synergies, there is obviously a greater ramp up period associated with the revenue and there is a cost.

So, our commitment when we announced the acquisition on the cost side will more of those would be front-end loaded during the first couple of years, but the revenue side obviously, so we will get the processes and systems in place and we are taking orders during this first quarter, but obviously it’s going to ramp up slow because obviously just given the leg period on subdivision is built-in lag factor for a ramp into that business, but then you are trying to break into and the barriers to entry aren’t huge, but you still have to go out there yet to bid on business, the D.R.

Horton expresses of the world and so forth. You have to go out and bid on business and win that business.

So, it’s going to be a store ramp up that we absolutely expect over the next 3 to 4 years to replicate, I’ll just say, replicate our market share that we have on the single-family new construction within that lower price point – opening price point. So, that is good growth, obviously, much lower price point.

So, it’s different form within our current product and that’s been our key focus like we announced an acquisition, be the opening price point single-family just because that shift downward, lots of opportunity is still left out there though at multifamily, it’s a longer lag obviously getting out there and bidding on business winning it.

And when you actually take delivery of cabinetry is a longer time period with the exception of Southern California, where we have some on the RSI side, we have very little market share within multifamily.

So that’s once again 3 to 4-year venture with a lot of opportunity there that will ramp up and then another big opportunity to set Pro business whereas Pro in the home center or Pro going through distributors out there, that’s a great opportunity for a lower price point product.

So, those are things you are going to start seeing in this next fiscal year.

A lower percentage of our total synergy was based on this fiscal year ‘19 versus follow-on years, whereas cost is really a – that’s a lot of our focus on right now to is getting those cost synergies, which we have some that are known, we have some that are unknown and those unknown ones are also very exciting just it’s what we don’t know yet and really going to leverage the low cost platform within RSI to really help our margin on the American Woodmark side, so definitely opportunity..

Yes.

And one last question for me just thinking about the combined business and I know it’s early innings, but what do you think the incremental margin on volumes is for this combined business now that you have had in our hand for 4 months?.

Yes. I think the challenge there is it’s still been at our hands for 4 months and we are still trying to fully understand what that’s going to look like and what the overall mix impacts will be once we get through all the synergy work that Cary talked to.

When we completed the transaction, we talked about our pro forma adjusted EBITDA number in the 16% range, that’s essentially what we are guiding to at 15.5% to 16% as we think about this year certainly same in that zone in growing the enterprise would be our base assumption as we go forward.

I don’t have an exact incremental number for you to start dropping into a model at this stage..

Alright. Well, thank you..

I think you are going to see some strategic shifts over time to, I mean, if lumber prices continue to go up as many may know, Europe made a shift long time ago to more alternate material manmade product. In America, it’s not quite as accepted, but is moving in that direction.

So it’s not just a matter of our only lever is not just passing price on, there are other levers within our industry with regards to new materials and so forth. It’s going to be combined with product and marketing strategy, but it will definitely shift in that direction.

So, there are other opportunities, little bit longer term regarding to introduce new product and so forth, but those are incremental levers that we can’t pull on our market..

Okay.

And then I mentioned on the freight issues, the logistic issues, how does that affect and I think it was 10% of your cost of goods at one point, but thinking about just meeting in demand and how that ELD mandate potentially pulling out capacity for drivers in particular is affecting you and what maybe the risk could be to the model as we think about volatility going forward?.

Yes. I mean the good thing is we do have very, very longstanding relationship with national partners. So, I think it’s – we haven’t had any issues with regard to getting the product delivered.

It is coming at a higher price or cost today than what it was in prior years and we do expect continued inflation out there obviously to have to have it now kind of mentality that exists that exists in the dotcom is certainly driving a lot more store traffic and they are struggling with drivers.

Obviously, the regulations are starting to create some pretty significant limitations on ours and all those things will continue to drive cost up. So, it’s something that all of America is faced with. So, inflation is one thing and so forth obviously like say we are fairly efficient, we can pass those on.

I think the bigger challenge I think we are all watching this is the quality of delivery.

So as our national carriers and so forth, they are faced with turnover and so forth just like the rest of us are within manufacturing is making sure you get good high skilled labor that can deliver our product is it’s something where we have stayed very, very close to, because as you can imagine getting our product delivered not just on time, but on the right quality, so handling is very important.

So that’s something that it is a concern that we just have to continue to monitor very closely. All of us in the industry have to monitor it very, very closely..

Alright, gentlemen. Thank you very much..

Thank you..

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

Hi, guys.

You all were able to lever the sales and marketing line well this quarter and I guess I was just thinking about that going forward from a standpoint of how much of that is category fixed versus variable, just help me understand that? Can you just – it was very well done this quarter?.

Yes, piece of that when you talk about what’s fixed and variable, of course, there is a component to drive incentive compensation, which we gave some commentary around that was lower from a year-over-year perspective.

So as you set targets and establish that for your field personnel depending on how they track to the budget and the plan you have established that’s going to determine the different payout rates, so that’s the piece that’s going to be the most variable you also have some aspects around product launches, which was the other item that I referenced and called out in the quarter from a year-over-year standpoint.

So if you got a particularly large launch, you are going to have a lot more materials that you are producing and having ready for that perhaps even more product that you are sending into the stores and samples etcetera. So that can be the other variable.

But the other thing that help us is just when you combine the two enterprises, it gives you a lower rate just in total from a total AWC perspective now versus when it was just AWC excluding RSI..

Is there any seasonality in this number that we see this quarter or I guess that you have mentioned there is some variability based on timing of the launches? So, is it fair to say – go ahead..

Yes, look back at historical trends on the Woodmark side we would see that there has typically been two launch periods that would play out, that would normally be in the fall time period. It can cross the quarters however from the way our fiscal quarter falls, but it’s typically in the fall selling season and then also around the spring timeframe.

So that’s when it can be, but it can balance between the quarters depending on when the retailer makes the choice to do the launch..

Okay.

The other was on the CapEx side as you mentioned the corporate office, you won’t have that expense, should we just return to normality I guess and I guess my question is what is – what would be a normal way to think about it?.

Yes. So, if you take CapEx and what’s actually the role this plays into it as well, so all of the store displays and these are going at the dealer channel to be in model homes, it certainly would be in the home centers as well.

If you take CapEx and displays, they are going to trend a little closer to 3% of sales for the year, but that’s inclusive of final payments on the corporate office about $6 million rolled into this year that will be an outflow..

Okay, great.

And then my last, I know is you have talked about it last quarter passing, but the D&A 23.3 when I look at on a combined basis on depreciation and amortization, is that the way think about it quarterly as well?.

What I would do from an annual basis standpoint, certainly the amortization for the customer list and trademarks you have got really solid visibility on the way we have done the walks there.

It’s going to be roughly $49 million for the year based depreciation on keeping the displays, this includes assumptions about what we think will spend and how we will activate this year, ballpark number there is probably close to $44 million for the full year..

Got it. Great, thanks very much..

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

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

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