Good day, everyone, and welcome to the American Woodmark Corporation Fourth Quarter 2019 Conference Call. Today’s call is being recorded May 28, 2019.

During this call, the company may discuss certain non-GAAP financial measures included in our earnings release such as adjusted net income, adjusted EBITDA, adjusted EBITDA margin, free cash flow 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 reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures.

We also use our website to publish other information that may be important to investors such as investor presentations. We will begin the call by reading the company’s Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on factors that may go 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 reports to shareholders.

The company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. I would now like to turn the call over to Scott Culbreth, Senior Vice President and CFO. Please go ahead, sir..

Good morning, ladies and gentlemen. Welcome to American Woodmark’s 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’ll be happy to answer your questions.

Cary?.

Thank you, Scott, and good morning to you all. On prior earnings calls, I’ve regularly referenced uncertainty in the market and the resulting volatility. We experienced this volatility in our fourth quarter, particularly by channel. Net sales were up 0.4% for the business as a whole.

Looking at our net sales by channel, within new construction, we grew our business 5% over prior year. Within this, our Timberlake direct business comped very favorably, while our frameless PCS business in Southern California saw a year-over-year decline.

Within our Timberlake single-family direct business, we once again over-indexed the market as we continue to leverage our direct-to-builder business. It’s important to note that the Timberlake direct growth includes our low-cost Origins product that we established shortly after the acquisition.

Although the number of opening price point single-family starts continues to lag long-term averages, our team has been successfully bidding business with our Origins product and winning share across the country. The vast majority of the nation’s top builders are all moving to increase investments in lower-priced homes.

However, this will take time as they have to develop and launch their strategic business models at the more challenging lower-price point. We continue to firmly believe that opening price point homes will begin to over-index as starts climb towards more historical levels.

Providing affordable homes for the millennials that have recently entered the prime buying age is critical to industry growth. As I have stated on this call in the past, I believe that real demand is strong. The industry simply needs to find affordable solutions.

Strategically, we are very well positioned to continue to serve the nation’s top builders with Origins through our direct network as the market grows.

With regards to our new construction PCS business, it is heavily concentrated in Southern California where the market has seen a notable reduction in housing starts, driven by a very significant home price inflation and the resulting affordability issue.

Outside of Southern California in our Timberlake direct business, we are seeing mixed results by region. Despite the continued decline in Southern California, Northern California is on a more positive trajectory following a slowdown over the winter months.

It too has been impacted by rapid home inflation, however, we expect it to return to positive comps this quarter. Our strongest growth was in Texas. Atlanta was also very strong after recovering from record rainfall. However, the rest of the Southeast was relatively flat year-over-year. The Northeast and Southwest had strong comps as did Florida.

However, we are currently seeing some volatility within the Florida market. Nothing that we are overly concerned with yet, however, we are keeping a close eye on it. Despite indications that point to a bumpy year, we do remain optimistic within single-family new construction.

We certainly recognize the macro economic factors that work, both globally and within the U.S. that can impact our economy and our industry. Specifically, the tariffs remain unpredictable. Global companies are being impacted and the stock prices are showing it. Tariffs can also drive inflation in the U.S.

Consumer confidence can then come into question impacting the entire economy. However, although many variables are at play, we absolutely continue to believe in the long-term growth of this industry. Housing supply is far too low to support underlying demand.

When you include historical low existing home inventory levels, particularly opening price point homes, the supply is even more constrained. Entry-level consumers are more price elastic than the more affluent consumer base that support our industry post-recession. We simply need to generate affordable supply.

American Woodmark has the best low-cost supply chain and can absolutely support demand for affordable housing, while leveraging the most reliable service platform in the business. It is only a matter of time. Looking at our remodel business, which includes our dealer/distributor and home center businesses, revenue was down 2% to prior year.

Our dealer distributor business grew 4% for the quarter. Despite a slowing by the more affluent consumer, our dealer business is positioned as a value-based product, particularly when considering the industry-leading service we provide through our sales team and customer care organization.

As a result, compared to industry data, we continue to believe we are gaining share. Our home center business proved to be challenging with a negative 4% comp for the quarter. We saw low single-digit decline within made-to-order and mid-single digit within our finished stock kitchen businesses.

Within made-to-order, we do not believe we have lost any share as it is tied to overall kitchen department sales. However, within stock kitchens, we believe we are being impacted due to fairly aggressive promotional activity within the home center that carries competitive product.

Consumers are fairly elastic on stock product and will often times shop both home centers for the best price. Although, we offer superior program with greater SKUs and a quick ship program, it is difficult to overcome notable price separation. We continue to monitor this situation and are working closely with our partner to restore our share.

Within bath and vanity, we are down low-single digits for the quarter. However, we faced a challenging comp associated with a large new product load-in at one of our key partners in our fourth fiscal quarter of prior year. Looking forward, we do expect bath to comp positively.

Lastly, our designer series product, which is our frameless offering within one of home center partners, continued to comp very positively with high double-digit growth. Overall, looking forward within remodel, the story remains similar to new construction. Accurate forecasting is a challenge.

I believe future remodel growth is heavily dependent upon existing home sales. Given the average age of homes and the average age of the kitchen cabinetry within these homes, kitchen remodeling will heavily correlate to existing home sales. I have consistently stated that kitchen remodeling has never recovered coming out of the great recession.

The existing home buying cycle has yet to normalize. With baby boomers aging in place and millennials being challenged with affordability, the cycle is having a significant impact on our industry. However, we continue to see what I believe to be an extraordinary level of pent-up demand.

This cycle will speed up and when it does, the impact will be very significant on kitchen remodeling. Affordable solutions will be the key and we are well poised to serve. Despite the shorter-term uncertainly that exist in the economy and our industry, we absolutely believe that future is worth investing in. Those that get it right will win.

American Woodmark will absolutely win. Moving on to our gross margin, we continued to see improvement trend over the past three quarters coming at 21.4%. Our operational performance was strong in our fourth quarter.

Our teams have truly done an exceptional job on integration, and we are performing better than expected on cost synergies with opportunity remaining. Material inflation and logistics costs continue to be our two greatest challenges.

Although low-grade lumber pricing in the housing industry has come down, the high-grade maple we purchase continues to inflate. We have also had inflation across a number of other raw materials. Likewise, logistics cost is and will remain a major headwind into the future. Our nationwide assembly coverage absolutely helps us compare to our competitors.

However, logistics cost is impacting us all. Regarding the 10% tariff and what may soon be a 25% tariff, our purchasing team has been hard at work mitigating as much of the cost as we can. We remain committed to minimize the overall net cost impact through our combined resourcing and leveraging our low-cost system.

And as a reminder, we have not taken any pricing action related to the tariffs as of yet. If the 25% indeed comes into play, we will be required to take some future pricing action.

However, as I stated on prior calls, given our ability to mitigate much of the impact, we will be more competitively positioned against both domestic manufacturers and importers of Chinese product.

If the administration were to expand the scope of the impacted product within the 301 tariff, we would have immediate cost implications until we were able to complete a resourcing strategy on these specific products. The larger unknown is related to the antidumping countervailing duty lawsuit that is underway.

This lawsuit is targeting the evident dumping of subsidized Chinese cabinetry into America. If this lawsuit is successful, we would have some additional short-term incremental impact. However, given the mitigation work already underway on the impacted product, the net incremental cost will not be significant.

However, we do believe, it would have a positive impact on our competitive positioning in the market. Our team is evaluating this opportunity and we will be prepared to work with our partners to supply any shift in demand. We have a competitive low-cost product and the ability to deliver it.

Moving on to our adjusted EBITDA margin, we finished the quarter at 15.7%. Despite the headwinds and the fact that we have not taken any pricing actions associated with the tariffs, we are very pleased with this performance.

Our cost synergy work and our ability to leverage our – all of our channels – with all of our expanded product offering is proving to be a winning strategy. On adjusted net income, we generated $31.5 million in the quarter, up from $29 million in the prior year, and our adjusted earnings per diluted share was $1.87 versus $1.64 prior year.

Lastly, we generated $151.5 million of free cash flow for the fiscal quarter. In our fourth quarter, we completed the $50 million stock repurchase authorization, as well as continued to pay down our debt. We ended the year with a net leverage of 2.59. In summary, in the second-half of our fiscal year, we faced greater uncertainty in our market.

The industry continues to be impacted by macro and macroeconomic factors that are influencing consumer behavior. Although single-family housing starts have declined year-over-year, they have shown a more favorable trend in the past two months.

We continue to well over-index the market within our direct-to-builder network, particularly when considering the 60 to 90-day lag between starts and cabinet installation. Having said this, new construction growth is becoming more volatile by region.

Our direct-to-builder network and frontline positioning allows us to keep a strong pulse on current reality within the industry. Looking forward, we believe single-family starts will continue to recover during low single digits in our fiscal year 2020. We expect to continue to over-index and gain market share during this period.

Developing affordable housing is a critical link to restoring higher growth rates. This will come, once again the question is timing. We’re well positioned and will continue to gain share with our Origins product. Within repair and remodel, we are once again forecasting low to mid single-digit growth looking forward.

However, the demand is going to be very lumpy quarter-to-quarter, particularly within home center. Focused sales events, promotional activity and strategic initiatives with our retail partners will impact quarterly sales, not to mention the impact of economic factors.

The key driver to greater R&R comps in our industry is growth in existing home sales. This is particularly true with first-time homebuyers. The pent-up demand is significant, we simply need the housing cycle to support it. Having said this, we do have a number of incremental growth opportunities that we are developing.

Not only those related to our synergy work, but new channels of opportunities with new customers. In addition, we remain fully committed to restoring our stock kitchen business in the two markets lost before the acquisition.

We definitely have the best low-cost product offering, as well as the best solution with our express options and quick ship programs. Our team is working aggressively with our business partner on restoring these markets.

On the margin side, we will face some key headwinds next year that will be difficult to fully overcome in the short-term, not only through inflation in tariffs, but due to the incremental cost passed down from the home center partner to vendors associated with adding dedicated merchandising teams.

We are also having to relocate our PCS manufacturing facility in Southern California. Unfortunately, we were notified that the owner has sold the building and that the new owner would terminate agreement at the end of the contract.

As a result, we have secured another facility and will be incurring the costs associated with relocating our operations over the next year. We will absolutely protect our customer base and we will be taking the opportunity to invest in some new more efficient manufacturing equipment and processes during this move.

In wrapping up, our fiscal year 2020 will be an extremely important year for our company. We are launching a new six-year vision for 2025 that will elevate us to new levels never before imagined. Our customers and our employees are at the heart of this vision.

We’ll be driving our thinking to a very innovative and systems-based approach throughout our entire value stream. We will be the innovative leader in the market and will continue to win in all channels. We recognize that the coming months in this fiscal year will be brought with challenging headwinds.

Yet, we will not allow ourselves to be distracted from our vision and the strategy that we are developing that will ensure our continued success. With that, I thank you. And I will now turn it over to Scott for the detailed financials..

Company’s home center market share will remain at normalized levels for fiscal 2020. However, this is heavily dependent upon competitive commercial activity. The company will continue to gain market share and is growing independent dealer and distributor channel.

The company’s builder business will increase your faster rate in the market rate for single-family housing starts due to continued share gains. Until the company expects, it will gross sales in the mid single-digit rate is fiscal 2020. Margins will be challenged with increases in labor cost, raw materials, tariffs and transportation rates.

The company will also be negatively impacted by the move of one of our California facilities that Cary alluded to earlier and incremental merchandising expenses. As a result, the company expects adjusted EBITDA margin to decrease slightly for fiscal 2020. This concludes our prepared remarks. We’d be happy to answer any questions you have at this time..

Thank you. [Operator Instructions] We’ll take our first question from Truman Patterson with Wells Fargo..

Hey, good morning, guys, and thanks for taking my questions. First, just wanted to dig into your margin guidance a little bit more. You guys said that there were some cost inflations in tariffs, home centers are passing on some costs to you all.

Could you guys just elaborate a little bit more and maybe when you think you might be able to inflect positive and cover all those costs, or do you think that they could actually remain a headwind and margins could decline throughout the full-year fiscal 2020?.

Good morning, Truman. This is Cary. I’m going to provide a little higher-level overview and then Scott can jump in and provide some details if desired. But – so, as we mentioned, we do have inflation on several fronts. Some of those are unknown. We have, in our current forecasting, we have baked in the 10% tariff.

Tariffs beyond that obviously are still questionable, so we have not baked anything in. So, there would be some financial impacts. Obviously, our response on that, two-fold. Number one is, we do have additional sourcing options we can take.

There’s some timing related to that, but we do have the option, obviously given our low-cost platform, Mexico [ph] as other resourcing options. And then obviously, we do have the pricing trigger that we have not pulled as of yet.

So, I personally do believe that the market is becoming more elastic, so that’s why we’ve been heavily focused on resourcing and trying to mitigate the cost of really all the inflation, including logistics, material, and the potential tariffs through our own internal resourcing options. So – but we do have that potential out there.

So as far as timing, it’s hard to really say just because there’s so much questions around the tariffs themselves. The antidumping countervailing duty is really late summer, and into early fall, and in the 25% 301 tariff obviously is really [indiscernible].

Obviously, we have a short-term impact potentially, but I think most of us believe that if it does hit the likelihood of it lasting very long, it is not high, but once again it’s just getting harder and harder to predict.

So, we are proceeding with the actions around sourcing, so there is – most of that cost is really already identified with the exception. If they do expand the scope of the 301, we have not taken any actions on that yet.

So, the – timing wise, it’s just, as I said, forecasting is getting very hard to predict and the tariffs and other things are certainly contributing to that. But as Scott mentioned that, we do expect some pressure on EBITDA, but obviously a lot is in here right now..

Yes. The only thing I would add there is, sorry, Truman, all I would add there’s, certainly the tariff situation is uncertain is the best way to describe it. And from a short-term perspective, certainly there could be pressure on our performance if it is expanded, if antidumping comes through, et cetera.

But our perspective is long-term, we offset that and we’re going to offset either through sourcing changes or pricing action, but quarter-to-quarter, it could be noisy based on actions that are taken..

And then obviously with the tariffs, I’ve said before, I still believe the tariffs are a net positive for American Woodmark just given our positioning. We stand to gain a fairly notable competitive advantage in the market.

So, obviously, what’s not baked into our budget as well or on to our plan for next year is any upside potential related to the 301 tariff or the antidumping tariff that would improve our competitive positioning..

And possibly some share gains, heard you loud and clear, on the 301 tariff, the 25% that’s been implemented, I guess, since it’s not included in guidance thinking more near term just over the next two to three quarters, how long will that take the flow through your supply chain and actually hit your P&L?.

The good thing is, that’s unlike the initial 10%, it did not include everything that was already on the water, so there was a delay there. So, it should be a month and a half, I would guess..

We still – we’ll have the impacts inside the Q1 – definitely in Q1….

Okay..

…if they stay, and that’s a big question if it stays. So, he gave himself a little buffer there to stop it. But, right now we, as you stated, we are all planning on it hitting..

Okay, okay. And then jumping over to the home center channel, you guys made a few comment that it was challenging. There were some promotional activities and product loading comp and everything. Reading through the home center’s conference calls, it seems like they had low single-digit growth for you guys, revenues declined.

Could you guys just elaborate a little bit more on the dichotomy, if you will, and maybe what your strategy is for maintaining that market share?.

Yes. If you looked at the home center comps, that was holistically not really – they’re going to call out the kitchen and bath department at a 3% comp. So our database, it shows we were in line with overall home center comp, particularly on the major order side.

Now on the in stock side, based on the cash and carry stock product category, what I was referencing, you mentioned a couple of things there. The load-in a year ago was on the bath side, so that created – basically, when you do a low one, we – the vendor orders are quite a bit of inventory that results in a net positive increase in our revenue.

We’ve reported that in our fourth quarter fiscal year last year. So we had a hard comp come into this prior quarter. But going forward, we expect back to positive comps within bath. So bath right now is not really as big of a challenge when you look at the kitchen cabinet side of it.

On the stock side is, as I think, most know we provide stock cabinetry on the kitchen side to one key home center and our competitor provides to another key home center.

One of the – based on our competitive – on that front, the home center themselves really has been doing quite a bit of promotional activity in the stock space, not just in cabinetry really across the Board, but also in cabinetry and we definitely saw a noticeable shift in, I think some of that demand from our partner over to the other home center, which is impacting our stock sales.

So, timing wise, I mean, that home center is continuing with that promotional activity. We are working with our partner on – we’re not – we’re going to have any type of response or obviously, there’s other strategic options we have as well. But we’ve been fairly reluctantly.

Particularly, when we get in that low price point and when we get into the promotional activity, we’ve all seen what has happened over the past four years on the made-to-order side. So we’re very reluctant to jump into any type of promotional gain down at low price level.

It’s just – it really does promote the margin and obviously we have a better product offering. And right now, we’re sticking with our position. But once again, we’ll continue to play buyer and see how the market goes..

Okay. Thank you, guys..

Thank you..

We’ll take our next question from Garik Shmois with Longbow Research..

I’m just wondering if you could provide a little bit more color on the cost impact of the frameless PCS move in Southern California.

And also wondering, is the new facility that you’re moving to in Southern California or are there opportunities to look at some maybe lower cost on markets?.

Yes, good morning. This is Cary. So we’re not – we don’t really provide specific details on the cost other than it is broken down into our – what Scott alluded to with some of the challenges for our forward-looking EBITDA, so it is built into that number.

The challenge we really had was timing, so you asked a very good question, is our lower cost options longer-term potentially we’re going to do that analysis. One of the challenges we have is that, that PCS business is, when I say, heavily dominated in Southern California. It’s 90-plus percent, probably 95% in Southern California.

It’s one of the challenges that most companies have of serving that market is just, as you know, if you’ve been to Southern California, the logistic side is very, very challenging. So to move our plan outside of that area has a lot of cost to it. So right now we are sticking with another location that’s in Southern California.

One of the challenges we had through the acquisition is, most of the sites we acquired were leased versus owned. Longer-term, my strategy would be to move away from least and get into own facility just to avoid this type of unannounced type of challenge. But this current one is another lease facility and it is located in Southern California.

So we did the analysis and we did complete cost analysis. We looked at bordering in states and so forth and this was the best cost option despite some of the challenges of obviously relocating..

Okay, thanks. And you’ve been taking share with homes – with homebuilders. And looking at your outlook for fiscal 2020, you’re looking at home construction up 3% to 5%.

Just wondering if you can maybe frame how much in excess of the market you would continue to expect to grow?.

Yes, that’s how we always are. We always typically just say we over-index. I think you can go back just look at historical numbers and where we comp compared to the industry. And obviously, we have fairly regularly over-index the market. Obviously, it does vary. It’s getting really harder, like I said, by region because of volatility.

But we are the number one, obviously, provider in that market. In fact, our Timberlake brand is, we believe the largest brand in the country period now. And so we have a lot of success with that product, with the brand and we’ll continue to over-index the market..

Okay. Thank you..

[Operator Instructions] We’ll take our next question from Justin Speer with Zelman & Associates..

Good morning. Thanks, guys. I just wonder a few questions. One wanted to get a sense for the free cash flow for next year is very good.

This year, but for your guidance if you could maybe give us a little handholding there that would be helpful?.

Yes. I don’t want to give the specific value Justin. But I will tell you as a reminder when you look back at the first quarter results for the prior fiscal year, there was the one-time benefit associated with that tax receivable carryover.

So there was about $30 million swing associated with that, but that would back off before you do any modeling moving into fiscal year 2020. The one thing I will give you some direction on would be around CapEx in displays.

And we do think it will be slightly higher than what we spent in fiscal year 2019, as we do have some higher display cost coming our way..

Okay. Thank you.

And then with regards to the merchandising change, just maybe give us a little bit more handholding there with regards to what kind of personnel you’re looking to potentially put into these stores and maybe how that compares to what you had last year?.

Justin, this was related to – it’s been fairly public knowledge that obviously one of the home centers basically has modified their merchandising process.

So they’ve actually created full-time teams now that are responsible for merchandising within the stores themselves and they basically travel to stores and responsible for making sure the inventory is obviously in stock and basically everything is in line with their plan.

So they basically reached out to vendors and asked as well to help fund what they call the merchandising support teams and that’s something that most vendors have openly communicated on their call because it is a noticeable impact..

Okay.

So you’re not changing your headcount, it’s just supporting that?.

No, we have no headcount whatsoever. So it’s basically our sales force that’s in place. We work directly with the merchandising teams. But no, we have no additional incremental headcount, it’s all to the home center themselves..

Okay. Okay, that’s helpful. And I know you’re not going to give us any details.

But in terms of the cost, is it more than 50 basis points, less than 50 basis points in terms of the incremental drag there?.

Sorry, we’re giggling. So I’ll get back to you as we – we’re not going to give any specifics around exactly what that costs. But it was meaningful for most vendors. Yes, it hard to give a detail, obviously, because all we do is cabinetry is, as you know, and for us to give a certain percentage would give our competitors an exact number.

So basically, it was a negotiating number that we had specifically with our merchant team is as every supplier has as well, so..

Okay.

In terms of the growth contribution from the Origins product in the quarter or maybe even for the full-year and thinking about what you’ve accomplished this year and then potentially what you’re thinking for next year, is there any context that you can give us there?.

It’s difficult once again, because it’s built in to our Timberlake growth number. So we really don’t want to get into calling out a very specific number for a specific product.

But we will say, if you go back to what we committed from go back to the acquisition and our plans with regards to revenue specifically, in this space of single-family new construction. The net number would be less than we hoped it would be right now. However, our market share gain, I would say, is on plan.

I juts said, the total pie is not as large as what we hoped it would be right now, so feel it’s coming. We are gaining share. It’s an exceptional product. I would say, it’s in the history of the company we’ve never been able to go down to that lower price point, hoping price point position and make a strong margin like we have now.

So our teams have been very successful with that. We absolutely our gain and share. So when we talk about those comps within Timberlake on the direct side, it is inclusive of Origins.

And obviously, you can kind of put one to one together as the market starts to move more towards opening price point and it begins to over-index, I think that will be a good text to our ability to gain share with this product, because it will be required for us to continue grow in that space..

And thinking about catching this in the context of potential antidumping duties tariff is potentially stepping up to 25% and thinking about this Origin strategy, you think that may give you that catalyst that jump start that growth and maybe accelerate it to the point that you may be originally gone?.

Yes, absolutely. It’s a very good question and a very good point. We have two platforms.

Number one, the Origins, which is our – it’s a frame product offering, which is more standard in America, and yes, we have that at a very affordable price point that we can go out and successfully bid on business that assuming the antidumping countervailing duty comes into play, it will be very well positioned to do that.

In addition, what I talked about with our PCS, we do produce our frameless product not only in Southern California, but we also produce it in Texas and we’ve been seeing very solid, very aggressive growth on that within one home center.

That is the frameless platform that seems to be more relevant for the younger generation millenials and so forth, because it’s more of a European look. And likewise, we will be able to also hit the market very hard with that just once again because of the price point and the look of it.

So we feel we are well positioned given our product offering, assuming the antidumping countervailing duty comes into play..

Excellent. And last question for me is, just some assets come into market that are outside of your traditional price point.

Any potential interest or the economics such that you may – we shouldn’t be surprised that you participate with your leverage profile coming in a little bit there to 2.6 times?.

Yes. As you know, we’ll obviously do our proper due diligence in betting when the opportunity comes along. At this point, we are just in the process of analyzing the situation you’re referencing..

Okay. Thank you, guys. I appreciate it..

Okay. Thank you..

We’ll take our next question from Tim Wojs with R.W. Baird..

Hey, guys, good morning..

Good morning..

Just – I guess, maybe thinking about pricing, I know you have not put through pricing for tariffs, but is there anyway you could just kind of elaborate or give some color on what type of pricing you’ve put through for inflation and with just inflation?.

You mean this past year?.

Yes..

Yes. So we don’t give the specifics there, Tim. But go back to our Q3 time period we talked about that pricing action taking place in November and that was on the made-to-order frame platform really at the home center and dealer/distributor.

So those pricing actions went in and those actions were really to mitigate and offset prior period increases from an inflationary perspective on both the laws as well as the transportation side.

Because of the timing that did not include anything specifically related to the 10% tariffs, because those came about as we were doing the negotiation on pricing. So looking forward, the pricing action will be to again come back and have the tariff conversation..

Okay, okay. And then as you think of just the use of free cash flow, any – should we just expect – I think, you exhausted the buybacks.

Any kind of opportunity there for another one? And then, I guess, should we just assume that you’re going to use free cash flow in 2020 to continue to delever?.

Yes, Tim. So from an assumption standpoint, just assume that we will continue to pay down the debt. The one thing I will note for you is that, when we did the credit agreement modification earlier this calendar year, we did get some favorable terms with respect to the interest rates as well as some of the covenants around that.

And if we get below particular thresholds, it does open the door for us to perhaps look at repurchases again. So that’s something that may come up down the road. But for the time being, we’ll be focused on debt payment..

Okay. Okay, great.

And then a couple of other small ones, just the tax rate for the year is 26%, still a good tax rate?.

Yes, I would still use approximately 26%..

Okay, great. I appreciate the time..

Sure, Tim, thanks..

[Operator Instructions] We’ll take our next question from Steven Ramsey with Thompson Research Group..

Good morning, guys. I want to get more on the gross margin decline.

How much of it was general cost headwind? How much of it was sales mix trends given, I guess, I would just assume less home center sales is a tailwind to some extent? And then how much – any sort of quantification on the synergy benefit?.

Yes. So you said gross margin, so I’ll focus on that one. No specifics. I’m going to offer dollarization around each of the categories. Just again, the main players for us from the year-over-year standpoint in the fourth fiscal quarter would have been transportation cost.

Of course, the tariffs which we’ve talked a lot about here today and then some raw material inflation impacts..

And then on the dealer/distributor channel, can you discuss what the positive outlook for 2020, how much of that – how much of the impact is pricing mix?.

Yes. We said remodel as a whole we would expect to grow low to mid-single digits. Within the dealer side, I mentioned they are seeing a decline with regards to the more affluent consumer. We tend to be comping a little more favorably just given our value position.

One of the unknowns out there is related to the antidumping countervailing duty, because what folks don’t realize is the kind of a lot of that Chinese dumping product that’s mentioned in the lawsuit.

A good percentage of that has fed into the dealer channel and really impacted more of the semi-custom side, but certainly creates an opportunity for us as well if that were to come through. So growth is, I would say, it’s unpredictable at this point, a lot of variables, a lot of macro and macro factors in there.

Net-net, pricing for us wasn’t a significant impact. So when we talk about growth of low to mid, that’s really not including much pricing impact in there. It’s going to be pure growth, but a lot unknowns in there though..

Great. And then my last question centers more on the CapEx side of things for 2020. I guess, there was about $7 million of CapEx for the new headquarters last year.

Is that investment finished? And then thinking about the new facility, will we see that impact in 2020 with even including the manufacturing – improved manufacturing capabilities within that facility?.

Yes. So the guidance that I provided on the prior question with respect to free cash flow and I mentioned CapEx in displays being slightly higher than prior year. That’s mostly due to additional display spend and inside that number is incremental capital cost associated with the transition that moves to new facility.

And some of that is for productivity improvement, but some of which is basic infrastructure work that we’ve got to do as well..

Excellent. Thank you..

[Operator Instructions] We’ll take our next question from Julio Romero with Sidoti & Company..

Hey, good morning..

Good morning, Julio..

Can you talk about the in-stock kitchen segment? Has that promotional activity you saw in the quarter carried into May in the first quarter here at all?.

Yes. We are seeing the – once again, it’s the – the competitive product that’s in the other home center. It’s a home center themselves that is promoting that stock cabinetry and yes, that is proceeding. So, we’re obviously in conversations with our partner and we’ll be developing a strategy going forward, but yes it’s going into Q1..

Okay. And you mentioned in your prepared remarks some opportunities or some incremental top line growth, I think you mentioned some new customers.

Could you elaborate on that at all?.

Not – no details obviously by customer, but kind of two fronts. Number one, obviously is with our expanded product offering through the acquisition in obviously low-cost platform as we’ve been out actively pursuing new channels and new customers. So we are in conversation with potential customers and so forth as always.

But I think we just have a very viable and strategic footprint now that helps when we approach customers just because of expanded portfolio.

In addition, obviously is, there are some, I would say, retailers, customers out there, various channels that have gotten wind of the antidumping countervailing duty lawsuit and are starting to put contingency plans in place. And therefore, we are taking calls and working on potential options to service an expanded customer base if they were to hit.

So, yes, there’s some potential opportunities..

Understood. And on the RSI integration, think you were about year-and-a-half into your integration plan. I think you had initially called out $30 million to $40 million of annual run rate synergies.

Where would you say you are in terms of that annual run rate target?.

As I said, we are – the biggest that we committed to in the first year, first 12 months out was in single-family. So as I mentioned before, the net is lower than we anticipated just because we have not seen the growth in the opening price point home. Nothing has changed strategically other than just getting the industry to corporate on that.

In multi-family, we are aggressively bidding. I would say, we’re slightly behind, but I mentioned I think on the last call that we’re working on a very strategic plan for the multi-family that leverages our direct-to-builder network. So, we still remain very committed to that $30 million or $40 million. Lots of different variables out there right now.

But net-net, I think, particularly with the antidumping countervailing duty and the potential, we have to leverage our low-cost platform, I think we certainly will plan to meet that..

Got it. That’s helpful. Thanks for taking the questions..

Thanks..

And 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 comments..

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

And that concludes today’s presentation. Thank you for your participation, and you may now disconnect..