Good day and welcome to the American Woodmark Corporation’s Second Quarter 2020 Conference Call.

Today's call is being recorded November 26, 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, net leverage 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 also use our website to publish other information that may be important to investors such as investor presentations.We'll 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 that 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 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'd 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 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'll be happy to answer your questions.Cary?.

Thank you, Scott, and good morning.Despite continued challenges with cost headwinds and a softer R&R market, our strong operational performance generated solid margin and adjusted EBITDA results for our second fiscal quarter.

We continued to over-index the single-family new construction market with strong growth in our Timberlake brand and we had strong growth in our stock business particularly kitchens.Net sales for the fiscal quarter were up slightly at 0.7% with continued volatility by channel.

Within new construction, we grew our business a very strong 8.9% over prior year. This compares to a market growth of 1.6% when considering a lag from a single-family start to cabinet installation.

We continued to gain share with our large builder customers combined with the fact that big builders are also gaining overall share within the single-family market.We remain optimistic on continued expansion within single family.

We experienced strong growth in nearly all of our regional markets, particularly in Texas, the Northeast, the Southwest, and Northern California.Our PCS business in Southern California remains a challenging environment. Affordability has become such a significant factor that the market has slowed considerably.

Although it is a much lower percentage of our mix, we are continuing to approach it very strategically with the hopes of getting it turned around.Regarding overall market price point, the shift to lower-priced homes is occurring, however, not yet at the pace that we feel is still to come.

Land positions are a challenge as is overall affordability, yet builders are absolutely making the necessary investments to ramp up opening price point homes.With our full product offering down to our value-based Origins line, we will continue to profitably support this growth and over-index the market.

Our direct-to-builder model has certainly proven its competitive advantage and will continue to do so into the future.Looking at our remodel business, which includes our dealer/distributor and home center businesses, revenue was down 4.7% to prior year. Our combined home center business was down 3.8%.

We continue to see a significant move down towards value-priced products within home centers.We experienced negative comps in our higher price made-to-order product, while our more value based frameless designer series business once again experienced very strong double-digit growth and market share gain.Promotional activity remains very elevated within the made-to-order space.

We are not participating at the level of our competition as the promos are not driving any additional business into the stores and are not having an impact on closure rate.

In fact, they have the unintended consequence of driving consumers to higher priced options, which they simply cannot afford.Current promotions do not address the two most important challenges our industry faces, affordability and the need to drive simplicity for the consumer.

We remain very focused on these two strategic initiatives and firmly believe they offer the most significant returns on our investment.Within our home center stock business, we experienced positive comps overall with particularly strong comps within our stock kitchen business.

Not only did we grow our kitchen business organically across the country with our home center partner, but I am very pleased to announce that our team was recently awarded one of the markets previously lost prior to the acquisition.

We communicated from day one as part of our synergy commitment to regain both markets lost.Our strategic relationship and commitment to our home center partner is unwavering, and we appreciate their confidence and our ability to successfully grow this market for both the retailer and their own business.

We also remain committed to regain the final market in the future.Regarding our dealer/distributor business, we were down 7.9% for the quarter. We did experience a more significant drop than expected in our dealer business. However, it is in alignment with reported KCMA made to order data.

Industry-wide dealer and distributor sales, particularly within semi-custom, continued to show strong declines.One of the key questions being asked is tied to the impact of the tariffs on the industry and our own specific growth. As you may remember from a previous call, I quoted that I would like to have seen a minimum of 50% anti-dumping rate.

Actual came in at 39%, but with the cash rate at 29%.The reality is that the combined tariffs thus far have not had a significant of an impact as hoped.

The combination of the manufacturers and retailers reducing what were very significant margins along with the evident circumvention and alternates resourcing has minimized the overall impact thus far.However, there is one factor that is creating some unpredictability in forecasting and that is tied to the inventory build prior to the anti-dumping announcement.

As importers bleed through this inventory, we could still see some upside to future demand.

In addition, the final ruling by the International Trade Commission is yet to come, and we are in hopes the AKCA successful in driving a more significant anti-dumping ruling.Yet, as I've said all along, by no means are we relying on any specific impact from this lawsuit nor have we built any impact into our forecasting.

Strategically, we are very focused on successfully competing at the lower price point.

However, the dumping of all plywood construction cabinets is a challenge for all American cabinet manufacturers.Over time, all tariffs are circumvented and thus we as an industry must move customers away from all plywood cabinets by offering superior alternatives that are manufactured locally.

This is at the heart of our strategy.In summary on revenue, quite a bit of variation by channel within geographical regions. On the positive, the housing market continues to regain momentum, which significantly benefits us given our market-leading position.

Builders are moving their price points down, which will support growth for the foreseeable future, and we will continue to over-index this growth given our Origins product.Repair and remodel are more of a challenge to predict. As I have stated for some time, existing home sales at lower price points need to increase.

With this, we will see a greater shift towards younger buyers.These buyers expect a significantly different buying experience than those that have been driving our industry for over 20 years.

Significant complexity must be removed to make a much simpler and more reliable buying experience.Long-term success is not dependent upon new offers and greatest promotional discount within the existing extremely complex process.

It will be about those that take the time to connect with and property segment our new consumers, understand their key buying attributes and expectations, and deliver a completely different superior experience than what exists today.This is what we remain focused on and why we are so confident in our future success.

Product is important, but is only a portion of the entire consumer buying experience that must change. We will successfully deliver on this challenge and our commitment to provide a superior experience to our customers.Moving on to gross margin. Despite continued significant cost headwinds, we finished the quarter at 20.3%.

Our teams continue to execute on our cost synergies and we are running extremely well operationally.As with our first fiscal quarter, we managed to offset much of the costs associated with tariffs and the particleboard disruption.

301 tariffs continue to be our greatest unknown regarding both scope and duration.We are very focused on continuing to remove cost and complexity in our business to avoid passing along price increases associated with tariffs.

However, given our previous sourcing moves much of this to our low cost operation in Mexico, the anti-dumping tariff and countervailing duty have had very little additional cost impact on us.Moving on to adjusted EBITDA margin. We finished the quarter at 14.7% versus 14.3% from prior year.

We are very pleased with our performance given the market and cost challenges we are facing. Our team is functioning at a very high level and I am personally extremely proud of what they are accomplishing.On adjusted net income, we generated $31.2 million in the quarter, up from $28.1 million in the prior year.

And our adjusted earnings per diluted share was $1.84 versus $1.60 in prior year. Lastly, free cash flow remained strong totaling $66.1 million for our current fiscal year.

Our net leverage was reduced to 2.29 times adjusted EBITDA as we paid down $30 million in our term loan.In summary, it was another tough quarter within our made-to-order repair and remodel business.

Although we are seeing softening within both our home center and dealer channels, I feel is relatively short term and not indicative of the future growth opportunities that exist.I have a strong belief in the pent-up demand that is building and tied to the existing home cycle. It is not a matter of if, it is when the cycle will ramp up.

However, I also firmly believe that we are beginning to see the impact of the shift in demographics and the lack of simplistic and affordable solutions within the retail space.We firmly believe our industry needs to undergo a dramatic shift in how we market to our new targeted consumer, and that this change needs to happen soon.

Strategically, we are aggressively working on solutions with our partners that address the entire consumer experience.Regarding our stock business, it is a tremendous win for our teams to regain a major market with our home center partner. It is very reflective of our success at integrating our businesses and strengthening our partner relationship.

Within new construction, our direct to builder model is improving lending strategy.We are confident in our ability to continue to over-index industry growth through share gain. Housing has been and always will be cyclical.

However, as with R&R, we feel strongly that significant growth remains in single-family.In addition, we are focused on our ability to leverage our unique service center platform across other channels. Creating an exceptional customer experience throughout the entire purchasing process is an absolute necessity, as we look into the future.

Volatility is the name of the game, but an innovative strategy with the ability to execute is the winning formula. We have been winning for some time and we'll continue to win as we move forward.With that, I thank you and I will now turn it back over to Scott for the detailed financials..

Thanks Cary.The financial headlines for the quarter. Net sales were $428 million, representing an increase of 0.7% over the same period last year. Adjusted net income was $31.2 million or $1.84 per diluted share in the current fiscal year versus $28.1 million or $1.60 per diluted share last year.

Adjusted net income was positively impacted by higher sales, improved operating efficiencies, lower selling and marketing expenses, and lower interest expenses.Adjusted EBITDA was $62.9 million, or 14.7% net sales compared to $60.8 million or 14.3% of net sales for the same quarter of the prior fiscal year.

For the six months ended October, year-to-date net sales were $855 million, representing an increase of 0.2% over the same period last year.Adjusted net income was $67.3 million or $3.97 per diluted share in the current fiscal year versus $64.1 million or $3.64 per diluted share last year.

Adjusted EBITDA was $132.5 million, or 15.5% of net sales compared to $128.9 million or 15.1% of net sales for the same period of the prior fiscal year.The new construction market improved during the quarter.

Recognizing a 60 to 90-day lag between start and cabinet installation, the overall market activity in single-family homes was up 1.6% for the financial second quarter.Single-family starts during June, July and August averaged 881,000 units. Starts over that same time period from prior year averaged 868,000 units.

Our builder channel net sales increased 8.9% for the quarter, despite a continued slowdown in the Southern California market.The remodel business continues to be challenging. On the positive side, unemployment remains low.

The October U3 unemployment rate was 3.6% and U6 was 7%, both measures were lower than the October 2018 reported figures.Interest rates decreased in the quarter with 30-year fixed-rate mortgage at 3.69% in October, a decrease of approximately 114 basis points versus last year. Existing home sales increased during the third calendar quarter of 2019.

Between July and September of 2019, existing home sales averaged 5.43 million units. That same period for 2018 averaged 5.31 million units, an increase of 2.3%.The share of first-time buyers increased. The September reported rate was 33% versus 32% reported last September. All cash purchases in September were 14%, down from 16% last year.

On the negative side, the median existing home price rose 5.9% to $272,100 for September, impacting our consumers' affordability index.Consumer sentiment decreased to 95.5 in October, versus the 98.6 recorded October 2018. Homeownership rates remain low versus historical averages.

The percent of Americans who own their own home in the third calendar quarter was 64.8%, which is slightly higher than last year's rate.Our combined home center and independent dealer and distributor channel net sales were down 4.7% for the quarter, with home centers decreasing 3.8% and dealer distributor decreasing 7.9%.

The company's gross profit margin for the second quarter of fiscal year 2020 was 20.3% of net sales versus 20.4% reported in the same quarter of last year.Gross margin in the second quarter was unfavorably impacted by tariffs, net cost impacts related to our particleboard supply disruption of $0.9 million, and duplicate rent move costs related to our California facility move of $0.4 million.

These impacts were partially offset by higher sales volumes and improved operating efficiencies.

Year to date gross profit margin was 21.2% compared to 21.4% for the same period in the prior year.Gross margin for the first six months of the current fiscal year was unfavorably impacted by tariffs, net cost impact related to our particleboard supply disruption of $2.4 million, and duplicate rent new cost related to our California facility move the $0.8 million.

These impacts were partially offset by improved operating efficiencies.Total operating expenses were 11.8% of net sales in the second quarter of fiscal 2020 compared with 12.2% of net sales for the same period in fiscal 2019.

Selling and marketing expenses were 4.8% of net sales in the second quarter of fiscal 2020, compared with 5.4% of net sales for the same period in fiscal 2019.

The decrease in ratio is a result of ongoing expense controls and lower personnel costs.General and administrative expenses were 7% of net sales in the second quarter of fiscal 2020 compared with 6.8% of net sales for the same period of fiscal 2019. The increase in the ratio was driven by higher incentive compensation costs.

Free cash flow totaled $66.1 million for the current fiscal year, compared to $89.5 million in the prior year.The decrease is primarily due to a one-time tax benefit received in the prior year related to the acquisition, which is partially offset by higher net income.

Net leverage was 2.29 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 quarter.In closing, although sales performance was lower than expected due to continued weakness in the remodel channel, we are pleased with our adjusted EBITDA performance during the quarter.

Also I want to thank our commercial and operations team for all their efforts in securing stock kitchen and home center market previously transitioned to a competitor.Regarding the previously disclosed particleboard supply disruption, the company could be negatively impacted by product substitution cost and incremental transportation cost up to $1 million to $2 million per quarter until fully resolved.

The company maintains property insurance including business interruption/dependent property coverage with a limit of $5 million.The company has realized $2.9 million reimbursement to date, on the $5 million limit. We expect the level of insurance proceeds will cover approximately 60% of the losses we incurred due to these events.

But there can be no assurance that we'll ultimately be able to collect such amounts and such collection may occur in a different reporting period from a reporting period when we experienced losses due to these events.The company continues to believe that it will grow sales at a low-single-digit rate in fiscal 2020.

This growth rate continues to be dependent upon overall industry and economic growth. Margins will be challenged with increases in labor costs, raw materials, tariffs and transportation rates.

The company will also be negatively impacted by the move of one of our California facilities, incremental merchandising expenses and particleboard supply disruption cost.In spite of these headwinds, the company expects adjusted EBITDA margins to remain flat with prior-year results. This concludes our prepared remarks.

We'd be happy to answer any questions you have at this time..

[Operator Instructions] We'll take our first question today from Garik Shmois with Longbow Research..

You've had good EBITDA margins I guess relative to your flat guidance for the first half of the year. So just kind of wondering what the expectation would be for the second half of the year.

Would you anticipate some margin contraction to be in line with your guidance or do you think the gains that you've had thus far are sustainable?.

So when you take a look at our overall outlook for the year, we do expect EBITDA margins to be flat with the prior year, which would mean there would be some contraction in the second half. So why would that occur? There's really a couple of factors. First would be the California facility location move.

I have disclosed the cost impacts in the first and the second fiscal quarter. The bulk of those expenses will occur in the fiscal third quarter when we actually start and complete the move. So that's a piece of the story.The second would be List 4 tariffs.

That impact started late in the first half of the year and we had some inventory pre-build, so we were able to offset and mitigate. So that will be a larger impact in the second half of the business and then we still have some of the challenges around the particleboard that we're working through..

Wanted to follow up on the comments you made around the anti-dumping tariffs. You are not really seeing much of the benefit if at all, from a market opportunity.

Just wondering if you would anticipate that being an opportunity in the second half of the year, sounds like maybe there is a little bit of inventory that could get flushed out, it could benefit you, but any additional color on how you're viewing market share?.

Yes, we're kind of on a watch-and-see mode right now. Like I said, the greatest unpredictability is that inventory build. It's really hard to put a dollar value and scope of how much inventory was built.

We do know there's inventory built, and we’ll kind of see what happens after that inventory is depleted, so I think there could be some upside, but I think many were surprised based on how much margin I think the industry was enjoying with that anti-dumping and some of the obviously dealers out there and so forth, and the manufacturers themselves.So they've been able to absorb a lot of the price increases thus far and our cost increases thus far and also they very quickly have been working on resourcing, and I mentioned the word circumvention, and we have seen some circumvention because we do get letters from suppliers out there directly to us because they don't know who we are saying, hey, we found a way to circumvent and we certainly pass those straight alon the AKCA.But there is a lot of variables out there that could impact, I think, the market as a whole.

So, there could be some short-term opportunities this spring we’ve going to keep a close eye on it. But like I said, there is nothing in our forecasting and certainly nothing in the model right now where we're relying on any upside there. We continue to expect growth in new construction R&R.I think it's -- we have the right model.

The all-plywood construction creates a challenge and we have to really work to change some mini models out there around all plywood construction, and we're aggressively working on that.

IF not - and we definitely have ways to beat it.So, we have not pulled strategic triggers to do that because obviously we firmly believe in the anti-dumping lawsuit, and if we don't see an improvement or a change and there are things that we can do to hopefully go out and compete against it..

Next, we'll hear from Justin Speer with Zelman & Associates..

I wanted to start with the revenue - your revenue growth assumptions for the full year. And I think last quarter, you mentioned low-single digits. I don't think I heard you talk or address that this quarter.

I'm assuming they weren't changed, but maybe how you're thinking about the shape or the slope of growth for the balance of the year implied in your full-year guide?.

Yes, Justin, with respect to the outlook, I did reaffirm that. So we do expect to continue to see a growth rate of low-single digit for fiscal 2020. As you know, we don't do a quarterly outlook. So, we'll just reaffirm for the full year low single..

And then in terms of the home improvement trends, just particularly in that special order business, maybe give us some context on the promotional environment today maybe versus last quarter, last year, and how you're combating that and addressing that with your large channel partners?.

Yes. I mentioned it is elevated. It's not as easy as going on saying direct to direct comparison of prior quarters.

They are trying different types of, say, creative moves towards promotions, but it's still promotions, and our total spend in that space has come down, but obviously there is - when you take promotions down and we saw it in the past, it is a share shift from one partner, from one competitor to another, but the reality is home centers themselves are struggling in this space with comps that aren’t favorable.So, I think it's a matter of making the strategic question, how much money do we throw at promotions versus investing in what we feel is the right long-term solution.So, there is no easy answer to your question, and we're continuing to work very, very closely with our partners and we continue to work with them on what we feel are longer term solutions as well as - we're not just walking away from promotions, we're trying to be creative ourselves, but being mindful of the spin in that space and the ROI on that spend.

So, it's - I mentioned it's a variable that we really don't fully have a good predictability on right now.So we to continue to watch it, see what competitors do, see what home centers do, and - but I think like I stated many quarters now, just continuing to focus on our long-term strategy..

And then Last follow-up question from me is just on the RSI synergies. I think you mentioned last quarter, you anticipated maybe getting to about half of the expected - initial expected revenue synergy total by the end of this fiscal year. And you did really pretty good growth there in the new residential channel.

It's just based on that - and based on the good news about winning back I guess one of your previously lost markets, does that change the calculus there in terms of the revenue synergy potential?.

I'll let Scott answer to specific, just because he made some comments in the past on that. But from a memory, we have a separate revenue and we have cost synergies. So the revenue synergy we committed was - which most of the synergy is obviously we're getting the market back is it related to.

So the cost synergies, Scott, do you want to comment on this one?.

Right. Yes, Cary. So suggested in the last quarter when we talked about it, we went back to the data transaction that we communicated $30 million to $40 million in three or four years, what we indicated is that we've realize the cost synergies and then we were making progress on the sale synergies.

But as we have talked for the prior few quarters, that had been lagging, we have not seen that realized to the pace we expected.

In spite of that, we did state in the fiscal '20 we felt roughly half of the overall synergy commitment, which had been captured and realized.Now subsequent to that, we had this win that Cary just noted so that would be a positive trend on top of that statement from last quarter..

And you got to remember, the one of the biggest portions of that synergy growth was based on our Origins and the shift of new construction to a lower price point.

So I think we're on track with regards overall market share gains and our commitments on our synergies.We just - like I said many quarters now, we just see the market continue to accelerate towards that opening price point. And the good news is that these past three months or so, we're starting to see indications that's picking up.

So that certainly helps our move towards achieving our total revenue synergies as well..

[Operator Instructions] We'll now hear from Truman Patterson with Wells Fargo..

First, I wanted to touch on these countervailing duties, just for the first section 301 Tariffs as well as the countervailing duties that have been passed. I believe you said that there has been no pricing passed on to kind of the vendors, if you will.

Could you just give us a price comparison of some of this Chinese stock product versus a U.S.-made product?.

It's really difficult to do that because it's hard to do a like-for-like. If you really truly compare all plywood construction at the Chinese price point versus where American manufacturers are coming in with all plywood construction, the American would have been 2x to 3x to be honest, out on the market.

Obviously, all plywood construction is an upgrade for us.

So significantly different.So the question that we're all really not just us, I think the industry is really trying to analyze is the consumer that is out there buying the Chinese all plywood construction where they buying it because it was at a very low price point and they could get all plywood construction, already have the consumer that insist on all plywood construction and are willing to move up or that consumer not willing to move up, and therefore you're going to see a drop in overall growth of the cabinet business.It's way too early in the process to really answer those questions, and see how the consumer is going to behave.

What we do know as we look towards the future and look at the next generation of consumer as they are much less demanding with regards to all plywood construction even that what the materials are, so all wood, doors and so forth, they are much more accepting of all - of alternate materials and such.So I think you're going to see a tremendous move in America, where all plywood was not necessarily a critical factor.

It's more critical when you get to what we call the specifier out there, which is the designer.

They like to move to consumer up to all plywood construction because it's a higher price point and typically a higher margin products.So our goal obviously is to be able to take price point down and maintain margin and offer a good margin to our retailers as well. So that's how we feel we can combat that all plywood construction..

And then on the same theme. You said that the Chinese suppliers are circumventing the duties and tariffs.

Could you just elaborate a little bit? I know you mentioned inventory build, but elaborate on - is there any kind of offshore shipping anything going on there and really how does the industry fix this issue potentially going forward?.

Yes, I don't know if you really ever fix it, right. I think in history of the tariff, right, there's two things happened.

And one, there are suppliers that will try to find ways to circumvent, which then obviously enhances the legal battle that the AKCA has to fight against the whole anti-dumping because then you have to go out and specifically find these companies that are circumventing and go after them and so forth.So the ROI on that is to be determined and the extent and scope of circumvention is yet to be determined.

We have definitely been notified of examples where some are trying to do this. The extent of it, we really don't know yet.So the AKCA obviously will dig into that over time and investigate how much convention is going on. Right now they're really just still focused on the final ruling from the Trade Commission and so forth.

So - but long term, you got to realize that it's not just circumvention, is that the Chinese manufacturers are very, very quickly shifting production to other countries, which will be legal obviously.They can set up shop in Vietnam, they can set up shop in other countries and quickly ramp up production more quickly than I think most would realize.

But the full extent of it will take time to get back to the capacity what they used to have, but it will be circumvented, or I'll just say solutions will arrive where they can find ways to continue to move plywood into America which is why I made the statement that we have to really work to make plywood less relevant, that's going away in America, if you're really going to beat this thing.

Otherwise, it - just like most tariffs, they'll find ways around it..

And then you mentioned that you regained some in-stock business, one of the two previously lost regions. Is there any way you could quantify for that and did it hit 2Q results? And in that same line of thought in the home center, you mentioned promotional activity remained high. One of your largest competitors was recently sold.

Do you think this impacts of promotional activity in the home center channel going forward?.

There's a lot there. So on the promotional piece first, I guess is that's a big unknown I would say because as I reported being sold to investment firm, private firm. So what they do is obviously very, very difficult to predict. We just have to keep an eye out and see what they do, and obviously they won't be reporting on margins.

So it all depends on what's the most important thing to them from - excuse me, from a revenue versus margin perspective. So for the first question? Yeah, the win.Unfortunately we really can't give specifics yet, but think about it from our perspective and from our partner's perspective is that we really identify the scope.

Obviously it is material but we can't identify the exact size of it because that would give competitive data for that given market, which our retail partner would not be happy about. There was some benefit from it in Q2, but obviously, most of it would be realized in Q2 - Q3 to Q4..

Next we'll hear from Steven Ramsey with Thompson Research Group..

I wanted to start with something you had called out last quarter, which was discounting in the dealer channel. Really just wanted to get more color, if that was still the case. In Q2, if it's intensified, if that changes your plans and expanding in the dealer channel..

Discounting with regards to promos, yeah, it still remains fairly active out there in the dealer world.

Anytime you start to see volume come down, like I mentioned, AK - or the KCMA data is reporting fairly consistent negative comps along with our dealer percentages and so forth.So yes, customer, our competitors tend to get pretty aggressive when you're seeing - they’re competitive before.

So you start to see a decline, you see even greater competitiveness. Does it alter our long term? Absolutely not. Right.

The dealer channel is a very significant portion of the - I'll call it R&R, although there is certainly amount of new construction that flows through dealers as well, but it's a big chunk of our market and we certainly remain committed to create competitive solutions to go out and capture additional market share in that space.

But we do feel we can do that without having to rely on heavy promotions..

And then just discounting in general, is there meaningful discounting in the stock segment of cabinets or is it more in the product range, mid-range and above?.

Most of the time when we talk about promo it’s primarily in the made-to-order, special order side of the business. You’ll see a little bit of buying discounting in the stock side from a kitchen perspective and the bath side, you can get a pretty heavy promotional activity.

You can see it over the holidays, you'll see Black Friday specials in bath and so forth that you get involved in. But on the kitchen side, it tends to be relatively consistent..

Our next question will come from Josh Chan with Baird..

I just saw very strong growth in the new construction side. I wanted to ask if you feel like you're picking up share along with specific price points or with certain types of builders, just some more color around that.

And then also relatedly, how sustainable do you think that gap is between your sales growth and housing starts growth?.

Yes, Josh. On the price point mix and so forth, I think the good things we’re winning them both, so many have expected and anticipated and even communicated a pretty significant shift down to the opening price point side in builders.

But obviously in the front line, we definitely see that occurring which is obviously of ours to continue to service our builder at the same level we have done in the past and never seen our builder platform with our new Origins product.So we are, I'll say Origins is certainly a piece of that.

But the good news is price points have not drastically fallen off, so we're continuing to gain share all price points including the price points we've enjoyed for a number of years. We do expect those price points to start to come down in the future as builders make that more significant move towards opening price points.

If you think about where we come in the past eight years post-recession and the price points we've all enjoyed is how we expect as we move from current single-family starts to or I believe we’re going to get 1.1, 1.2 or some may feel due to the tenant demand, we’re going to move over that for a period of time.So opening price point definitely has to over-index.

So to answer your question, we're gaining share at every level just because number one of our direct-to-builder platform. We're with the big builders. We're continuing to gain share with builders.

And obviously, our Origins product helps a lot with that because we're out aggressively bidding on business that in the past we would not have bid on.But we're also gaining share just in the fact that the builders that we serve are gaining shares.

They are a higher percentage of the total market in America today than they were in pre-recession and obviously through consolidation and continued growth of the big builder, we go where they go and we're just a vital part of our partnership with the big builders.

So as they grow, we're growing and we're also continuing to gain share with builders.So as it’s sustainable, we've continued to communicate that we’ll grow but at a lesser rate. Now obviously, this was a very significant, I'll say over-indexing of the market growth. I wouldn't expect that to be at that level consistently.

It's just I think with the shift down in Origins and so forth that all we’ll really communicating at this point is we will absolutely continue to over-index, but we're not giving a specific rate..

Yes, thanks for that color, Cary. And then switching over to some of the cost items that I think Scott outlined.

So for the particleboard headwind of I think it was less than a $1 million this quarter, was that net of the insurance proceeds? And then I was wondering if you could also update us on sort of what the total tariffs impact will be either in a quarter or annual basis now that List 4 is part of the equation..

Yes, so specifically around the particleboard, that impact was $0.9 million inside the quarter and that was met. So that's after any insurance proceeds recovered. With respect to the tariffs, those are built into our outlook for the year, so the List 3 and the List 4.

So I've opted away from continually having to speak to what the calculation could or could not be because we continue to modify our footprint with sourcing changes either to other countries of Origin or even internally to our Mexico operations or in some cases, in the U.S. operations.

So at this point in time, we've got a fully built-in that there would be no change to the current List 3 and 4 tariffs and that's included in the outlook for the year..

That sounds good.

And then just lastly, Scott, any cash flow target or deleverage target for the rest of the year or for the full-year, I guess?.

So, we don't give a cash flow target for the respective year with respect to leverage and we communicated at the point in time of the transaction that our goal was to be under two within a couple of years. And certainly, we're on pace with that with our current position and what you would likely model out for the second half of the year.

So I think we will quickly be approaching that two times within the next couple of quarters..

[Operator Instructions] We will now hear from Julio Romero with Sidoti & Company..

I just wanted to ask about that dealer distributor channel one more time. Given the softening that you mentioned, you're seeing in there, in your prepared remarks, I mean what gives you the confidence that that softness may be temporary.

And when do you think that could turn the other way?.

Yes, I think temporary is a relative term. I remain or I stay and I remain optimistic on the future. The question is timing. I really believe for and it’s not just dealer, it’s dealer home center and I have to say, R&R in general. It's very dependent upon the whole existing home cycle accelerating.

Our space - folks have reported on R&R growth post-recession for years now, the reality is and cabinets from a unit perspective, we have never recovered.From a revenue perspective, it's been - it's accelerated because of price points that we've all enjoyed.

But from a unit perspective, reality is there's a lot of homes out there with very aged inventory, very aged cabinets in them that when this move down and move up cycle starts and we get younger folks to really start to pick up the pace with regards to existing homes, I think it's going to reaccelerate R&R at a pace that even that, I will say, we will exceed what we had come out of the recession.

So I think that's a matter of timing.You hear a lot about affordability, you heard a lot about student loan debt and so forth. So yes, they don't have a lot of money on down payments but you've heard about delays in marriage and delays in raising children and so forth but all those delays are passed.

And the age of the cohort that's ready to buy homes is there, it's ready.

I think real demand is out there, it's just a matter of we need existing home inventory to pick up and as well as single family but R&R is very dependent upon existing.So it’s going to remain optimistic and in some ways that gives everybody and obviously us a very good window for us to work on strategic changes because I believe that the demographics that future buyer are going to be much, much different, so it is a significant shift and potentially product as well as how we go to market and how you serve that consumers.So there's going to be a delay here, the length of it, that’s anybody's guess to be honest with you.

I just - I can't answer that question because we all have different opinions and somebody will be right but I hate to put a stake in the ground because it would be a guess just like anybody else is out there..

And that's fair and I guess just on the EBITDA guidance, and the flat margin guidance year-over-year, if that incorporates a 60% recovery in the particleboard insurance proceeds I mean, I guess that would imply that if you get greater than 60% recovery, you could see margins grow year-over-year.

Would that be fair?.

We will not see in excess of 60%. So it's a firm $5 million recovery, max..

[Operator Instructions] As I do not see that there is anyone else waiting to ask the question, I'd like to turn the line over to Mr. Culbreth for any additional or closing remarks. Please go ahead, sir..

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

That does conclude today’s conference. Thank you for your participation. You may now disconnect..