Welcome to the American Woodmark Corporation's Second Quarter 2019 Conference Call. Today’s conference is being recorded November 29, 2018. During this call, the company may discuss certain non-GAAP financial measures, including our earnings release such as adjusted EBITDA, adjusted EBITDA margin, free cash flow and adjusted EPS per diluted share.

The earnings release which can be found on our website www.americanwoodmark.com includes definitions of each of these non-GAAP financial measures, the company’s rationale for their usage 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 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 conference over to Mr. Scott Culbreth, Senior Vice President and CFO. Please go ahead, sir..

Good morning, ladies and gentlemen. Welcome to American Woodmark’s second 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. Our second quarter created mixed results with some significant positives as well as some challenges. We experienced growth in every channel, however we faced some cost headwinds and it impacted our margin performance. Net sales were 55% for our second quarter driven by the inclusion of RSI.

Excluding the acquisition, our core growth was 8% continuing to over index the market and our competition. Looking at our revenue by channel, within new construction, we grew our business 16% over prior year with our core grow at 4%.

On our frameless PCS direct-to-builder business which primarily serves the Southern California market we continued very strong growth up 25% of our prior year. Construction [ph] growth has been reported in the industry, we are experiencing a slowing trend in single-family new construction.

On the macroeconomic side, the combined impact of overall inflation, the uncertainty of incremental tariffs and the volatility of the stock market has impacted consumers' willingness to spend on high ticket items. Significantly on the microeconomic side, the housing industry continues to face strong headwinds.

Builders continue to be impacted by material inflation, rising land costs and labor availability. Up until recently, rising home prices had helped to offset this inflation for builders. However, when combined with rising interest rates, affordability, particularly for entry-level homes has become a real challenge.

The most talked about question is, how significant this slowdown and new starts will be? From our perspective, it is very important to keep in mind that the fundamental and underpinning drivers to the growth in new construction remained strong. Single-family starts sit at 865,000 homes per year.

It is very difficult to image a scenario over time where starts did not return into its historical averages of closers to $1.1 million to $1.2 million. When considering the pent up demand coming out of the recession, combined with the underlying demographics of rising millennials housing must grow.

Our economy remains strong backed by the highest consumer confidence since the year 2000 and continued strong employment rates. However, when it comes to discussing actual demand within our industry we feel it is important to separate notional demand from the factual demand.

We believe the opening price point consumers have a high notional demand for homes and find that they have a strong desire to purchase a home if not heavily burdened by the cost. The result is a much lower effective demands driven by affordability.

We simply need to solve the equation of providing affordable opening price point homes to first time home buyers within both existing homes and new construction. Although not an easy solution, historically our market has proven it is very efficient at selling demand. Builders, suppliers, and the financing community ultimately find a way.

The current reality in the industry is that we are all working hard to understand the duration and magnitude of the current slowdown. However, we firmly believe it is just that, a slowdown. Through our direct-to-builder network we will utilize a frontline position and stay very close to the current situation and we'll adjust our platform accordingly.

Longer term we continue to believe that new construction industry outlook remained strong with real growth remaining. Looking at our remodel business, which includes our dealer distributor and home center businesses, revenue increased 97% or 12% excluding the impact of the acquisition.

With regards to our dealer distributor channel, excluding the acquisition we grew our business 7%. Our dealer distributor teams are aggressively leveraging our expanded product offering in this channel particularly this is pro consumer. Within home center we grew our core special order business by a very healthy 14% for the quarter.

With promotional levels near parity we have successfully regained some of the prior share loss. However, the cost to support promotional parity remains a concern as those periodic elevated promotional activity by our competition.

As such, looking forward, our demand remains very [indiscernible] on promotional levels and actions of both our competitors and the home centers themselves. Within our home center kitchen and bath stock category, we continue to have mixed results.

In our largest category of in-stock kitchens we are very pleased with our performance and once again experiencing low double-digit growth with our home center partner.

Within that, we continue to be impacted by low sales at one specific vendor as in-store inventory, displays and reset execution continue to improve, we expect our performance to follow. It is also important to understand that we still have time remaining before we fully lap some of the products that were discontinued within our home center.

We have spoken in the past about lapping the market losses which are all behind us; however, we continue to have some very discrete product discontinuances that remain. These business decisions were made prior to the acquisition so have a longer duration to fully implement.

From a timing perspective and the majority of the discontinued products will be lapped within our third quarter. Overall, as we look forward on remodel sales, despite the slowdown in new construction we remain positive.

Although the great recession was an exception, historically remodel demand often showed some resilience and counter [ph] through new construction volatility. When a consumer makes a decision if they are going to remain in their current home rather than repurchase, oftentimes they'll have to remodel.

This impact is very dependent upon the overall housing cycle. Longer term, we remain very optimistic on remodel. As I have mentioned a number of times on past calls, I believe the kitchen remodel market is far from experiencing a full recovery. Kitchen cabinetry has led the other major R&R categories following the recovery.

I continue to believe this was driven by the discretionary nature of that business and more importantly the lack of the younger first-time homebuyer entering the housing market.

They have moved down by baby boomers and they move up and move in by younger buyers within existing homes will absolutely happen and when it does the average age of existing homes and kitchens we believe that will have a significant impact on remodel in our industry. The key question is timing as we all know.

Strategically, American Woodmark will remain well positioned to leverage a national platform and low cost product to capitalize on this future growth. Moving on to grow margin, we had a number of cost challenges finishing the quarter at 20.4% versus 20.4% versus 20.9% prior year.

We had three key drivers that contributed to this gross margin performance. The first was higher available cost due to staffing for a higher level of demand and actually incurred in our operations. Although we experienced growth in all channels it was at a lower level than we forecasted and labor absorption was a challenge.

We continue to monitor demand very closely; however, forecast accuracy is difficult given the current volatility in the industry. Our plants are actively reducing headcounts to align with updated production levels; however, we always approach this with a level of conservatism to ensure we do not negatively impact our customer experience.

The next key driver is associated with inflation across material, logistics and labor. Regarding material inflation, although it has slowed we continue to see increases in timber price including, hardwood, plywood and paint.

Many indices are seeing a downturn in lumber, however these are more reflective of softwood and oak rather than our key hardwood purchase of high grade [indiscernible]. Regarding logistics cost, it is a significant macroeconomic factor impacting all of America.

We continue to focus on load efficiency utilization while working on future state changes to our value chain to improve our overall logistics cost. Labor cost is driven not only by the cost of increased turnover in our factories, but we are beginning to see a rise in wage rates as well.

Once again our teams are very focused on actions to improve turnover, while improving productivity and reducing overall cost. On a positive, we have already seen another full improvement in turnover in the past few months. Longer term we have strategically committed to root for automation and higher skilled labor.

The last driver was associated with the 10% tariff that went into effect on September 24. Although much less of an impact on the majority of our competitors, we have roughly we have roughly $56 million of spend from China that was subject to the tariff. Our teams have been working diligently to minimize the impact associated with this 10% increase.

Through short-term resourcing alone we expect to offset 50% of the potential impact. When combined with incremental pricing action we expect to offset the majority of this 10% tariff. Moving on to our adjusted EBITDA margins, we finished the quarter at 14.3%. The aforementioned costs within gross margin flow through to adjusted EBITDA.

To offset previously incurred material and logistics inflation we passed along price increases through our channels that were effective in early November. However, the impact will not be fully realized until midway through our third quarter given the lag between order and ship within our system.

Looking forward at inflation, although there has been some talk by the administration to try to reach agreement prior to the 25% tariff, at this time we are assuming that will be effective January 1. As such, as I mentioned previously, we are very focused on offsetting the majority of the tariff impact.

However, we are also sensitive to the overall demand elasticity curve and thus our initial incremental focus is on resourcing including fully leveraging our low-cost Mexican operations. We will keep additional pricing action as an open option as needed.

On adjusted net income we generated $28.1 million in the quarter up from $19.8 million in prior year. Lastly we continue to generate strong free cash flow which has not only allowed us to bring our pro forma net leverage to just under 2.65, but we also resumed repurchasing shares. In summary, certainly a more challenging quarter than we anticipated.

I stated in the last quarter's call that there was tremendous uncertainty within our industry. We were challenged in the quarter by various headwinds on the gross margin side of our business. However, numerous actions are underway to right size our business with the current market and to resource purchase product to counter the impact of the tariff.

Pricing action has been intermittent and although we have some lag remaining it will have a positive impact on our EBITDA margin. Although there are a great many distractions to say the least, what we will not allow is any interference on our longer term strategy.

We remain focused on fully integrating our RSI and capitalizing on our cost of synergies. Our teams are working diligently on all synergies with new revenue gains been reflected and our ability to continue to over index our market.

Our new origins product is accelerating in the market as our teams are actively bidding on and wining opening and lower price point projects that we had previously avoided.

And although it can be challenging to fully understand the revenue side of the acquisition due to the remaining product discontinuances with the exception of the discrete issue within that at one of our venders we are growing in all channels.

We are not losing share within our stocked product and in fact we remain committed to regain share by restoring our business within the [indiscernible] markets lost that have been ours prior to the acquisition. Multifamily also remains a tremendous opportunity as we finalize our long strategy.

Starts may have softened, however this will not dampen our ability to gain market share within this channel. We are committed to leveraging our investment in our national direct-to-builder service platform to offer differentiated serve levels within the multifamily channel.

Lastly, although most have been focused on the short term cost impact of the tariffs, we do expect a net positive impact as we become more competitive against the Chinese imports. Our teams are monitoring competitive pricing actions closely and we will capitalize on market gain opportunities as presented within all channels.

The housing industry may slow for a period of time, but the economy remains extremely strong and robust. When evaluating our service platform versus competition throughout our industry, we will continue to win and gain share.

We are focused on our gross margin and remain confident in our ability to begin to begin to deliver on our cost synergies from the acquisition as well. With that, I will turn it back over to Scott for the detailed financials. Thank you..

Thanks, Cary. The financial headlines for the quarter, net sales were $425 million representing an increase of 55% over the same period last year. Excluding the impact of the RSI acquisition, net sales for the second fiscal quarter increased 8% to $298 million.

Adjusted net income was $28.1 million or $1.60 per diluted share in the current fiscal year versus $19.8 million or $1.21 per diluted share last year.

Net income was positively impacted by additional sales volumes and mix that was partially offset by a gross margin decline in the core business and an unrealized loss on FX for contracts of $0.7 million. Adjusted EBITDA was $60.8 million or 14.3% of net sales compared to $37 million or 13.5% of net sales for the same quarter of the prior fiscal year.

The increase during the second fiscal quarter is primarily due to additional sales growth in the quarter and inclusion of three months of results for RSI. For the six months ended October, year-to-date net sales were $854 million representing an increase of 55% over the same period last year.

Excluding the impact of the RSI acquisition net sales increased 8% to $597 million. Adjusted net income was $64.1 million or $3.64 per diluted share in the current fiscal year versus $42 million or $2.58 per diluted share last year.

Adjusted EBITDA was $128.9 million or 15.1% of net sales compared to $74.4 million or 13.5% of net sales for the same period of the prior fiscal year. The new construction market continues to grow but at a slower rate.

Recognizing a 60 to 90 day lag between start and cabinet installation, the overall market activity in single-family homes was up 1% for the second quarter. Single-family starts during June, July and August of prior period averaged 859,000 units. Starts over that same time period from the current year averaged 867,000.

Completions over that same time period grew 9%. Our direct new construction-based revenue increased 16% for the quarter and core growth was 4%. The remodel business continues to be challenging. On the positive side, employment continues to improve. The October U3 unemployment rate was 3.7% and U6 was 7.4%.

Both measures were lower than the October 2017 reported figures. The share of first-time buyers increased. The September reported rate was 32% versus 29% in the prior year. Keep in mind the share remains well below historical norm of 40%. On the negative side, consumer sentiment increased to $98.6 in October versus the 100.7 recorded October 2017.

Existing home sales decreased slightly during the third calendar quarter of 2018. Between July and September 2017 existing home sales averaged 5.4 million units. That same period for 2018 averaged 5.27 million units, a decrease of 2.4%. The median existing home price rose 4.2% to $158,100 for September impacting our consumers' affordability index.

Interest rates increased in the quarter with a 30-year fixed rate mortgage at 4.83% in October an increase of approximately 93 basis points versus last year. All cash purchases in September were 21% up from 20% last year. Residential investment as percent of GDP for the third calendar quarter of 2018 remained flat at 3.3% versus the prior year.

Home ownership rates remain lower versus historical averages. The percent of Americans who own their own home in the third calendar quarter was 64.4%, which increased slightly from last year’s rate of 63.9%.

Our combined home center and dealer distributor channel revenues were up 97% for the quarter, with home centers increasing 138% and dealer distributor growing 20%. Core growth within home center and dealer distributor was 12% for the quarter.

The company’s gross profit margin for the first quarter of fiscal year 2019 was 20.4% of net sales versus 20.9% reported in the same quarter of last year. Gross margin in the second quarter was favorably impacted by higher sales volumes, mix and overhead cost levers due to higher volumes.

These favorable impacts were more than offset by higher transportation cost, tariffs, raw material inflation and operating inefficiencies. With respect to the 301 tariffs the company has almost $56 million in annual purchases impacted.

If the 301 tariffs rise to 25% levels with no mitigation we would experience approximately $14 million in inflation or roughly 1% of our annual cost of goods sold. We believe we can mitigate approximately 50% through sourcing changes by the end of fiscal 2019 with an opportunity to pass along price increases remaining impact.

Year-to-date gross profit margin was 21.4% compared to 21% for the same period in the prior year. Gross margin for the first six months of the current fiscal year was favorably impacted by higher sales volumes, mix and overhead cost leverage due to higher volumes.

These favorable impacts were partially offset by higher transportation cost, tariffs and raw material inflation. Total operating expenses increased from 9.7% of net sales in the second quarter of the prior year to 12.2% this fiscal year. The six months operating expenses increased from 9.9% of net sales to 12.2%.

Selling and marketing expenses were 5.4% of net sales in the second quarter of fiscal 2019 compared with 6.6% of net sales for the same period in fiscal 2018. The decrease in the ratio is a result of leverage from higher sales and lower advertising cost.

General and administrative expenses were 6.8% of net sales in the second quarter of fiscal 2019 compared with 3.1% of net sales for the same period in fiscal 2018. The increase in the ratio was driven by $12.2 million of intangible amortization or approximately 288 based acquisition related expenses and higher incentive compensation cost.

Free cash flow totaled $89.5 million for the current fiscal year compared to $20.2 million in the prior year. Pro forma net leverage was just under 2.65 times adjusted EBITDA at the end of the second fiscal quarter and the company paid down $30 million of its term loan facility during the second fiscal quarter.

The company also repurchased 189, 633 shares of common stock at a cost of $13.2 million. The Board authorized an additional $14 million for repurchases of November 28, 2018. In closing, the quarter was more challenges than projected.

Strong sales growth in the core business and our in-stock kitchen business were partially offset by disappointing bath sales. Gross margin declines impacted our EBITDA margins, but we have taken recent pricing actions and projects underway to improve our operating efficiencies.

The company expects that we'll grow core sales at a mid, single digit rate in fiscal 2019 with total sales growth of approximately 32% to 33%. This growth rate is very dependent upon overall industry and economic growth. Margins will be challenges with increases in labor cost, raw materials, tariffs, fuel, and transportation rates.

The company expects adjusted EBITDA margins for fiscal 2019 14.75% to 15.25% depending upon synergy timing, execution, and the significance of the inflation rate increases. Free cash flow generation should exceed $150 million for the fiscal year. This concludes our prepared remarks. We'd be happy to answer any questions you have at this time..

Thank you. [Operator Instructions] And we'll take our first question from Kathryn Thompson with Thompson Research Group. Please go ahead..

Good morning. This is Steven Ramsey on for Kathryn.

The first topic I wanted to hit on, if you could just discuss regional demand trends? And also if there is anything regionally that you would call out that any region that is more or less impacted by rising logistics costs?.

Good morning Steven. This is Cary. With regards to the regional demand, yes, we are starting to see some variance by region. That really depends on how safe if you look at new construction does depend on the price point. You starting with the Northeast, Northeast, actually remains fairly positive as of right now.

As you look forward, that's always dependent upon what our winter weather looks like, but right now, we're not seeing as much of an impact and the Northeast as you see in some other areas of the country.

Jumping down to our other really strong market which is Florida, believe it or not, Florida has actually remained quite strong, stronger than even we anticipated it would.

So obviously at this time of the year it gets somewhat difficult to decide, to really decide that’s you real demand or builders are trying to you know rapidly close out of home because you get close to the end of their your calendar fiscal years, but right now we're seeing strong growth in Florida.

As you move into Texas and then further out west, yes we're starting to see more softening. It's a little more evident in those markets, obviously you can, particularly in Southern California you have a lot of talk of slowdown in that market. I think just given our platform out there with our low cost approach with our PCS business.

We had very, very strong growth so we're definitely over indexing in the market. That's something we're paying attention to, but I think if you jump up in Northern California that was republished start to see more, more evidence of a slowdown.

I think they have grown so rapidly the past couple of years, inflation really got out ahead of them, and I think that affordability issue is becoming much more prevalent in Northern California.

Texas is, it’s one where, there's lot of price points sensitivity in the Texas markets, so something we're paying close attention to, but at the same time our teams are out now aggressively bidding projects with our new origin product line. So what have to see how it progresses over time, but right now I know Florida is strong.

We're starting to see some slowdown in Carolinas is the impact of the hurricane in there, but obviously given the low powers of that hurricane went through it wasn't really that prevalent and the northeast is slowing, but still remains a little bit higher than the rest of country, but again the Texas and how west is and we're seeing more prevalent slow down.

From a logistics perspective, that's very, very dependent upon, we could answer that question much more differently than our competitors and than others within the industry. We do have the added benefit of having manufacturing so many plants all over the country including out West, on made to order side, special order size.

We're the only ones that really have a major platform out west in Kingman, Arizona. So I think we're all being impacted significantly just given the fact that once you assemble a cabinet that final model delivery really in particular you're basically shipping a lot of inefficient air.

So that's something where, the greater your distribution is of assembly plants, the better you are, but it's something that we're all seeing out there just because availability and the overall cost of it.

And I've mentioned before I think logistics is going to be and I'll say it is already a strategic driver in our industry and one obviously we're proactively addressing with regards to our future state platform..

Great and then final question, you mentioned your push into the multifamily market, is there more of a target towards the repair remodel side or multifamily new construction, is there a timeline for kind of this starting and then where maturity margins get to?.

Yes, it's a good question Steven. The first part of your question on new construction remodel, typically when we talk about multifamily in the context on the call I'm referring to new starts, new construction.

So we do a little bit of that business from the total market perspective, we do some of that in Southern California with our PCS business, but for the most part we don't participate in new starts on the multifamily side. So that's a tremendous opportunity for us to get into.

When you think about the remodel side though that's something that we're talking a lot about and you don't really hear a lot of others speaking about it from the national level because it's really a big unknown. As you think about the past 30 years how many multifamily units have been built in America.

We really see that as a tremendous opportunity on the remodel side. I think the big question that we're all trying to figure out is how are they going to go-to-market.

Certainly some of that business is being served today through the dealer channel and some have served through the pro channel when you getting to home centers and so forth as well as through distribution. But personally I feel that business is just now starting to take off.

I think that’s a lot of opportunity when you get into multi-family remodel, but there is also a lot of market knowledge to be gained that we really need to understand before we can go out and make some assumptions there our forecast what the impact of that business would be.

From a ramp-up on the new construction multifamily side, obviously it’s the first stages we’re going on and say pretty near in our market analysis and we’re in the hiring mode. So we’re actually out hiring specific people to go out and actively start bidding projects in that market.

We build, we have got, we have bid on some, but over the next two quarters we really expect to start to get more actively engaged in that market and the big question there obviously is timing. Obviously it is a longer cycle time. You go out, you win big projects. Some of those projects may take a year and a half to materialize.

So we’re not far enough aligned for me to give you a discrete answer on the impact to our financials, but I would suspect in the next quarter or two we'll be able to give you a little bit more discrete information on the timing and impact..

Excellent, thank you..

Thank you..

And our next question is from Truman Patterson with Wells Fargo. Please go ahead..

Hi, good morning guys. Thanks for taking my questions..

Good morning, Truman..

Yes, just wanted to touch on some of the gross margin pressures, you guys mentioned several of them.

I was just hoping you guys could rank order for us between the staffing and headcount, the transpiration, tariffs, labor, some of the hardware costs and then really just rank order those in the quarter for us and then how we should think about some of these moving parts going forward? I believe you guys said you guys are starting to address the staffing issue and then also how we should think about transportation and some of the hardwood cost that appear to be at least leveling off here?.

Yes, I think we won’t get into details on it obviously, this is cabinets and what we do, I don’t want to get detail and provide a rank order on the call just for competitive nature, but I think we can say in the past material inflation obviously was a key driver and that’s really, I don’t know, last call we talked about we are preparing to take pricing action and obviously we did that and our challenge of course is there lag going here.

You go out and you start work on pricing, you have to go through the negotiation process with our - because we obviously are very heavy into the Top 20 builders and very heavy with our two home center partners, so there is a negotiation process we go through when you take price into the market.

So we've completed those and we've implemented the pricing and now there is this lag on getting the flow through.

But historically in the past months material was certainly a fairly significant impact and then logistics obviously, and when I say logistics that includes fuel and it includes the overall logistics, I would say negotiated rates with our business carriers.

So we’re really starting to see heavy - more heavy inflation in that area and I would say that's the one that is probably going to start ramping up even more.

I agree with you, material is starting to level out a little bit and we still continue to see some on the lumber side, part of it are on the plywood and obviously some things are petroleum based, resin based, our paint is up right now, obviously it is dependent upon the petroleum market, so that could start to soften.

But logistics is the one that really, really probably concerns most of America. I would say not just in our industry but all industries.

Labor is another one that it's had an impact but it’s not as prominent as the other two, But it’s starting to have a greater impact just because of labor availability and overall wage rates, obviously Rob and team had wage rates and so forth, but the bigger issue really is just availability, so turnover impact the manufacturers are having.

So I think we’re all getting very creative with regards to our benefits and so forth. But, you know, I'd say first two, two highest priorities would be material and logistics are the two key drivers. As we jump into 25% tariff, obviously that is going to have an impact, Scott will provide the details on that already.

So something we are going to keep a close eye on..

Okay.

Okay and I didn’t quite catch your comments on the promotional environment in the home centers, could you guys just give us a little bit more color on that, especially in kind of the semi customer stock plus channel and are you guys seeing any of the promotional behavior start to creep into some of the lower price points the stock product?.

I will answer the second question, no we typically don’t really get into heavy promotions on the stock side of the business. There is obviously some seasonal things we do with our vendors, but nothing that's out of normal cadence.

When we talk about heavy promotions, we are talking about it but in the special order side of the business and it is I call it as parity, so we’re all I think constantly monitoring promotional activity, it is it does remain today at much higher level that was really what my key comment was, key takeaway.

So we've obviously comped very well on our special order business for the past two quarters because we regained much of that share that we had lost because we were not promoting at the levels that our competitors were previously. So we have taken our promotional levels up about six to nine months ago, we’re back near what I call that parity level.

But it is at a much elevated levels. So it’s something we are all monitoring very closely and obviously it can fluctuate, there is still volatility there.

We start to have no intentions of spending more on that promotional level, but what we can’t predict is how our competitors are going to respond and the market starts to slow there is work pressure from the vendors to ramp up promotional activity in the higher level, those are questions I really can’t answer.

Right now we’re in a position I think we're, the way we kind of communicated, we kind of called we are not rising, so we are there are going to maintain that, we have restored our share but we really don’t know what is going to happen in the future..

Okay.

And if you guys don’t mind I’m going to try and sneak one more in on you guys pushing through the RSI products through the direct-to-builder network especially of entry level, have you guys achieved any synergies yet, how was the discussions with some of the largest entry level builders going and especially I’m trying to see how you guys are set up for the spring selling season?.

Yes, actually the origin product is going well, obviously if you go back a year ago we obviously anticipated that starts first time homebuyers and opening price points starts we’re going to be at a higher level by now, so that’s obviously a lower headroom we’re facing and we needed to get that first homebuyer in the market but on the positive the product is out there, our teams are out there and obviously there is a good number of homes that are still being built out there at opening price point or entry level home.

Even at these price point where it’s not quite what you call opening price points some of the 55 plus communities that you’re seeing growing out there which are going to have little bit nicer amenities but still at a lower price point. This product fits that category very, very nicely.

So we’ve got some nice wins almost really every week we are having nice wins, we’ve had key customers actually visiting both of our central locations in Lincolnton and Anaheim California, Lincolnton North Carolina, Anaheim California.

I think but not only impressed, but probably the word to me is that the size and scope of our operations are going to - the efficiency of the operation, it has nice dimension when you have builder walk-in and really understand how sophisticated an operation we have and you're out there supplying this origin product and that obviously then flows through our direct-to-builder network, we would are very used to it.

So it’s been a big win for us and it’s just going to ramp up right now and yes, we are really well positioned to go out and as that market grows, we’re being very aggressive in bidding on opening price point projects and any projects that fit that value based proposition that we now offer..

Okay, thank you..

[Operator Instructions] And we will take our next question from Tim Wojs with Baird. Please go ahead..

Hey guys, good morning..

Hey, good morning..

Good morning, Tim..

Yes, thanks for taking the questions.

Just maybe on the guidance just a couple of clarifications, does the margin guidance does that include the 25% tariff I wasn’t totally clear on that?.

That is inclusive of what we think the impacts could be including the fact that we believe we will be able to mitigate roughly half of that right into the fiscal year. So we do have that built in..

Okay.

And then when we think of just kind of the cadence in the back half for margins, is it reasonable to think that Q3 still sees some pressure just as pricing doesn’t fully offset and you kind of get the incremental I guess quarter of tariffs and then you see more pricing kind of cost lining up in the fourth quarter, is that the right way that we should think about it?.

Yes Tim, I think you hit that to the Tees.

If you look out historically and in our industry Q3 is what our fiscal Q3, but this time of the year for our industry always goes through a little bit of a slowdown just because of the holidays and so forth, so large in terms of the challenge a little bit more and you see it come back up in Q4 and then to your point as we look at the impact of our pricing and so forth, it's basically exactly how you stated it..

Okay and then just on structure and I guess just with a little maybe softer outlook there, from some of your customers over the next six months, what adjustments I guess have you made and what adjustments could you make if new construction does slow down a little more than you think?.

Yes, really it all depends on the level, I mean short term our initial variable cost leverage would be within our manufacturing platform.

Obviously, there's obviously some plants associated with the turnover, but one of the positives is with the turnover is we can bring our headcount - variable headcount down fairly quickly to match the demand platform.

So really it comes down to our forecasting ability, as there out there right now just as you are we are trying to figure out what's going to happen with new construction over the next six to nine months and obviously we're predicting a really important number for us like to months out because we've start our plans in place from a production standpoint.

But we are bringing down our manufacturing variable cost, so that's – that occurs fairly quickly just given the turnover numbers. As we monitor it obviously it’s there are actions we can take.

We do have variable cost out in the builder centers and so forth that we can start to address as well, not there yet, we're not, obviously we always go into a little bit of a cost control mode, so we watch spending and discretionary type decisions, but the other aspect of the builder centers, it really depends on the significance that we really get in a regionlity [ph] - so if we start to see specific regions like Texas or Phoenix or out in California start to be more impacted than other regions and then we would actually come back and address some of the variable costs in those plants and it really does come down to labor would be our options..

Okay and then just sort of the last one, was the free cash flow guidance $115 million or $150 million I didn't clearly hear that?.

150 Tim, so 150..

150, so you took up free cash flow guidance by $30 million?.

Correct, you look at with our first half how much it’s been, our first half was stronger than we can modeled so we carry that forward to a full year revision..

And was that, is that just working capital or is that just you were conservative initially just with bringing on a [indiscernible]?.

Working capital conservative with RSI coming on as well as CapEx being a little lower than we modeled..

Okay, great well good luck on the back half year guys. Thanks..

Thanks, Tim..

And our next question is with Justin Speer with Zelman & Associates. Please go ahead..

Hey, good morning guys. Just a few questions..

Hi Justin..

I don't know if you can do it.

Hi, I don't know and I'm going to call up [indiscernible] that's not bothering you because we're out of here, but if you guys can help us understand the underlying margins of the legacy business, maybe split that out and tell us how much - you face in that piece of the business I think that would be helpful, in addition of the cost pressures that you mentioned, just teasing that out, so you kind of put this puzzle together?.

Yes, Justin it’s obviously we're not going to give that much detail with regards to start breaking margin out by legacy or RSI or by product. What I will say is, when we obviously communicated the acquisition and it was very accretive to the business it remains very accretive.

Margins and if you look at any margin degradation within our company when I speak about the headwinds, those are headwinds that as I hold, so there is nothing discrete that we're facing in RSI side, there has been no surprise on the RSI side.

So I think any assumptions out there that we're losing share, there's been margin degradation on the RSI side that we were not aware but it supplies us, really does not exist. So it remains very accretive.

We still have a lot of opportunity to grow that business and obviously through the synergies we're very committed to the $40 million of synergies that we committed when we acquired RSI. We remain very committed to it..

So I guess that logically follows the next question on the RSI, both the revenue and call center, you guys had intermediate term roadmap, where are you if you can articulate, I guess the inning that you're in or the amount of magnitude of synergies that you've been able to enjoy thus far and how do you think that ramps in the coming quarters?.

Yes, I mean Scott and I were actually discussing that. We will over time start to provide more detail related to kind of where we see it. Obviously many of the synergies that the most thinking obviously you find something to acquire someday a bit time the ramp up of synergies.

You know, obviously the SG&A synergies we achieved very quickly in the process. We completed those three or four months ago for the most part, the cost synergies that we committed, we actually started to see those ramp up in Q3 and Q4. As we start to leverage our low cost operations in Mexico with some of our core products.

And then on the synergy side with revenue obviously we talk about origins, we'll provide more detail on that as it becomes more significant, obviously all this is a ramp up. We are ramping it up and as we get into Q3, but probably more likely Q4 we'll start to give you a little more color on where we are specifically on the revenue synergies.

I will say we feel very comfortable with our commitment. You know obviously that $40 million we committed, we said about 70% of it will be through revenue, we continue to feel very comfortable with that.

Obviously part of that depending upon market as a whole as the pie starts showing we still commit to our market share gains that the net revenue gain could be impacted by the market. We feel very comfortable with our ability to go on with the market share gains, aims that were behind our assumptions..

Sure.

Thank you and the last question from me on the tariff side the $56 million figure you quoted that's a good number, but in terms of the annualized impact thinking about that you have the price in hand now to offset that or is that going to have to be a perspective thing as the tariffs are layered in particularly but January 25% of the tariff equation?.

Yes, we really have not taking pricing action on the anything related to tariff yet. Like I mentioned that remains an option for us, but I think it's one of those where we're going to really - it’s dependent upon several variables and a lot of folks just keep saying they are going to pass pricing on, pass pricing on.

But obviously this market does that really last fiscal year to it. So given our position with our low cost product and the margins that we feel we can achieve with that product and we're going to be monitoring the market very closely.

Part of that decision is based on obviously where our margins end up, but our ability also to offset some overhead cost by getting market share gain by going after, closing some of this gap that we have with our competition on the Chinese side. There's definitely going to be some market share to be gained, so it's just a business decision.

I will continue to evaluate and monitor over the next six to nine months and I'm sure we'll be passing some price increase on, but I'm not considering say that we're going to pass all that to our customers because in a day we feel we can get some market share gain out of this is as well..

Because ultimately your net advantage if this so still happens your net advantage of your cost structure relevant to most of the domestic peers and the import competition that remains a positive for you?.

Yes, and that's certainly is our goal as the net benefit would be positive, so the businesses and we make would be a net positive for the business and so we commented on a pass it.

We're less impacted that than others something relative to our total spend it is much of a less of an impact, but it still doesn't have an impact on the EBITDA margin, so our purchasing teams are working very, very aggressively and the nice thing for us versus some of our competition is we do have a low cost manufacturing platform in place in Mexico already.

There's no capital cost associated with moving that material to our Mexican operations is just matter of relocating it. So we're resourcing that. So we're in the process of doing that. We're also looking at obviously other countries for potential sourcing options. And we’re also obviously monitoring the tariff situation very closely.

So we have a lot of options which is a good thing.

At the end of the day we feel this is a net positive for the company because this can make us much more competitive versus Chinese imports and they make up a lot more, whether it's 20%, 25% or somewhere in between, they make up a decent percentage of the current red sales in America that is going to be challenged by a 25% tariff..

Well, I appreciate the color. Thanks to both of you..

Thank you..

Thanks..

[Operator Instructions] And we’ll take our next question from Jeff Stevenson with Longbow Research. Please go ahead..

Hey, thanks for taking my questions.

I know you mentioned that you recently had price negotiations with home centers and builders, but I'm just wondering with future potential pricing actions, how receptive do you think customers will be especially in a potentially slower near term environment?.

Yes, obviously I think that’s the advantage that we have and I know that’s kind of the significant question that is out there that I once again I can’t say I like the current situation but I feel American Woodmark is much better positioned because we have the ability to make a choice.

Obviously the tariff impact is less of an impact on us and that is impacting us we have the ability to respond much more quickly than our competition because we cannot only leverage potentially other low cost countries, but we have the ability to quickly source material from our Mexico operations.

So we don’t necessarily have to go straight to market and pass all this through to the consumer just to try to stay at parity on the margin perspective. We’re going to be evaluating it and see if we can take perhaps not pass that price increase on and go out and really leverage our position within the market and pick-up additional market share.

So it really comes on to a business decision. You have home centers have been very vocal about their position, they do expect more price increases to come from vendors and you could see releases.

So it’s not going to be a surprise to our - what we consider our customers obviously the home centers and the big builders and so forth, so if we come forth the price increases. But I don’t actually assume that is the right decision at this point in time.

And once again it’s going to a builder it is two different things when we talk about price increases versus going to them and saying, hey I know obviously they are working finding their low cost solution to the opening price point home and we have that solution.

That solution exists with our origin product, it’s a great product, it is very focused and I would say its reduced comp but it offers what sells in the industry at very reduced price points. So it’s a great opportunity for us to go out there and work very aggressively with builders and come out of product that we feel we will win in the market.

So, it’s going to be a strategic decision for us to learn how much, and if we pass price increases through versus certain markets and certain channels if we go after market share instead..

Got it, that’s helpful and then you talked about the mix of businesses, you’re gaining share and I’m just wondering has that had any impact at all on margins from a mix perspective?.

It’s a pretty complex formula to be honest with you. So in some cases yes and in some cases no.

So obviously if we go after and continue to grow our, well we talk about our stock kitchen business, we feel we have an opportunity to continue to grow that business and we are very focused on restoring the markets that we lost, obviously that’s a very margin accretive business for us.

So definitely opportunity is there, we in our home centers side, or special order side we should say it’s very challenging there obviously promotions are having an impact on margins but otherwise there is nothing that really stands out on discrete side I would say impacting margins from a mix perspective..

Yes, I would just add that our new construction business historically if you looked at the margin profile of our core platform, typically would have seen margins below fleet and you would have seen our model business to be above fleet, but we’ve been nearing that gap and delta over the last few years as we've become more productive and more efficient on new construction front.

So from our vantage point, we try not to let the different in-channels drive what the overall margin results are going to be granted there are new launches and study to those as Cary was already highlighting the have to address.

So we believe in that the synergy opportunities that we’re tackling as an organization will be accretive overall and that’s why we communicated a positive synergy results for the combined enterprise..

Okay, thank you..

[Operator Instructions] As I do not see that there is anyone else waiting to ask a question, I would like to turn the line over to Mr. Culbreth for any closing remarks..

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

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