Good day and welcome to the American Woodmark Corporation Fourth Fiscal Quarter 2021 Conference Call. Today’s call is being recorded May 27, 2021.

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, 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 maybe important to investors, such as investor presentations..

Good morning, ladies and gentlemen and welcome to American Woodmark’s fourth fiscal quarter conference call. Thank you for taking the time to participate today. And joining me today is Scott Culbreth, President and CEO. Scott 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.

Scott?.

labor and material availability. Labor was impacted by the ability to attract and retain employees as the American Rescue Plan negatively impacted the available pool of employees. Reported manufacturing job openings soared to 706,000 in March, a new record.

Material shortages led to unplanned downtime and efficiency loss and substitutions were made when available to continued production. Backlog increased across our made-to-order platform with incoming order rates over 20% plus. As a reminder, we level load our production on the made-to-order platform..

Thank you, Scott. Financial headlines for the quarter, net sales were $473 million, representing an increase of 18.6% over the same period last year. Adjusted net income was $21.8 million or $1.28 per diluted share in the current fiscal year versus $22.5 million or $1.33 per diluted share last year.

Adjusted net income for the fourth quarter of fiscal 2021 decreased $0.8 million due to higher material and logistics costs, which was partially offset by an increase in net sales.

Adjusted EBITDA for the fourth fiscal quarter was $47.2 million, or 10% of net sales compared to $53.4 million or 13.4% of net sales for the same quarter of the prior fiscal year.

Financial results for the fiscal year ended April, net sales for the current fiscal year were $1.744 billion, representing an increase of $93.7 million, or 5.7% from the prior fiscal year.

Adjusted net income was $109 million or $6.40 per diluted share in the current fiscal year versus $111.8 million, or $6.59 per diluted share for the prior fiscal year. Adjusted EBITDA for the current fiscal year was $223.2 million or 12.8% of net sales compared to $236 million or 14.3% of net sales for the prior fiscal year..

Our first question today will come from Truman Patterson with Wolfe Research. Please go ahead..

Hi. This is Trevor Allinson on for Truman. Thank you for taking my question. First, can you just bridge the year-over-year decline in gross margins for us in the quarter. You mentioned raw material inflation, logistical inflation, wage inflation.

Just hoping you can maybe bucket out each of those different categories or maybe rank order them for us? And then also maybe some benefit from leverage in the quarter?.

Yes. I don’t want to break it out into that level of detail, but I certainly can tell you that the material inflation is by far and away, the #1 challenge that we face. I would put freight secondary and then I will put labor third.

The way I would perhaps look at the quarter and think about inflation and pricing is if we had our pricing actions fully in place, we had realized it inside the quarter, what might that have done to our EBITDA margin. And I would say we would have likely finished in the 13% to 14% range without that.

But that’s the stack ranking I would give you on the elements..

Okay. Got it. Thank you for that.

And then, yes, jumping over to pricing then, you have mentioned you expected to start flowing through in 1Q, can you just give us an idea of what kind of pricing you think you might be able to realize in 1Q and then maybe throughout the full year for fiscal 2022?.

I will just say that we are going to – our expectation is to get pricing to offset both the material and logistics inflation within the year. I think it’s going to take us the first half to be able to fully accomplish that. And that assumes the baseline doesn’t keep moving. We have continued to see increasing inflation.

That was predominantly the factor inside our fourth quarter and why we didn’t meet our outlook that we have provided to the marketplace. So, I think there is going to be multiple actions that will be taken as an enterprise. So, our first round about complete. We are starting to realize that in some channels today.

Others, it will be a little bit further out, where we actually start to recruit those dollars with new orders coming in. So by the end of the second quarter, I would expect that to be complete, but we may be dealing with the second round at that point in time..

Okay, got it. And then just another just really quickly, jumping back to raw material inflation.

Can you just give us an idea for how that trended from your fiscal 3Q to 4Q?.

I would just say it accelerated from Q3 to Q4..

Okay, got it. Thank you very much..

And our next question will come from Garik Shmois with Loop Capital. Please go ahead..

Hi, thanks. Just a follow-up on the margin question.

Is it fair to assume that margins will continue to be depressed in the first half of the year? And then by the time you get the pricing actions, is it reasonable to expect margin expansion year-on-year in the second half of the year or is there just too many moving parts at this point to make that call?.

Yes. I think there is too many moving parts today to go ahead and make that commitment for the second half. That’s why we didn’t provide the full year outlook, and Paul walked through expectations around our first fiscal quarter.

I think there is just too much uncertainty around labor, material availability and shortages as well as the transportation challenges we have already talked about. So at this point in time, your thesis, though, I think is sound.

It’s going to take us a couple of quarters to recover, if things are stable than an expectation of obviously a trajectory of improving margin trends in the second half as expected..

Okay. Thanks for that. And then this might be a tough answer as well. But just given the backlog is exceeding your production capabilities and recognizing you are investing in new capacity.

If you can speak to maybe how long you think it might take for your production to be able to catch up to backlogs or is this going to be a challenge, I guess, a good problem to have, but a challenge for the balance of the year?.

Yes. We often tell ourselves, it’s a good problem to have, but it is a problem nonetheless. So, what can we do to be able to mitigate and offset that. I think 6 months ago, we thought we would be past at this point in time. And now we are looking forward 6 months out and saying we are still going to be challenged over the next couple of quarters.

So I don’t know yet if we see a significant improvement in backlog in the second half of our fiscal year. Again, as we are modeling things today, certainly, the first couple of quarters, it’s going to continue to be challenging.

So, it will all depend on what the demand environment situation looks like throughout the next few quarters as well as our ability to gain the labor needed, gain the material needed and be able to increase production levels..

Okay. Thanks. And then my last question. Just with the increase in the CapEx and the growth initiatives, can you just speak to what kind of payback or what kind of opportunities you are looking at? You touched upon digital a little bit and some other initiatives.

But any more color as to what the growth outlook beyond this year is looking like given the step-up in CapEx?.

Yes. So, maybe let’s peel that apart into a couple of different questions. One that you had in there is the outlook maybe longer term. You will see that in the Investor Relations deck that we will release next week.

We will give you a perspective over the next 5 years from sort of a sales EBITDA standpoint, think mid to high-single digit growth around both of those particular components. So, that was one of the questions. I think you had wedged in there with respect. And apologize, I forgot the second one. You had 2 or 3 that was weighted in there.

I am sorry, that was the other one. Capital. So, with respect to capital, we have our core capital that we put back into our manufacturing facilities. That’s typically been in the 2% to 2.5% range. Yes, we have payback modeling that we drive off of that. At times, there could be a strategic investment that maybe doesn’t pass the threshold.

We may choose to pursue. But we are very much focused on positive NPV strong payback year cycle type investments. And we will model inside our planning, both the capital spend as well as the savings expectations that comes with that overall.

The other area from a capital standpoint would just be sort of displays and selling centers, so having our product available and the outlets that consumers can look at that. That can be lumpy. So, as you do new launches and you have to spend the dollars to put that into the store, the sales that you generate for that can be a bit of a lag.

So, that’s sort of a different dynamic there. The next big bucket I would pick is around digital. So, we have talked over the last, I think, 3 calls around our investments in an ERP solution, also in Salesforce.com. So similarly, you make the investment, you have to make the conversion and put the systems in place.

And then you do model an expectation of efficiencies on the backside of that as you go forward. So, the way I would frame it is we do have a bit of an investment cycle around some of those choices as the company, but it’s setting us up for longer term potential both growth from a sales standpoint as well as growth from a margin standpoint..

Got it. Okay. Thanks again and best of luck..

And our next question will come from Collin Verron with Jefferies. Please go ahead..

Hi guys. Thanks for taking my question. In your prepared remarks, you called out that you are investing in production to alleviate and constraints.

Can you just dive a little bit more into these initiatives, such as the outsourcing, how quickly they will ramp up and the margin impact in the near-term and over the long-term?.

Yes. So specifically around outsourcing, that’s activity that’s underway as we speak. We have been working on that for the past few quarters. That will provide some relief for more of our component and dimension facilities over the next several months. So, that will be in place.

With respect to capacity, it depends on where you are at in the manufacturing processes. So, it does vary where the capacity bottlenecks might be. Specifically, we have some flat stock capacity investments that we are making that will be able to get us out of outsourcing.

So, we actually bring some product back in-house to be able to supply to our assembly operations. When I think about our assembly facilities, quite frankly, it’s not a machine capacity and our investment in equipment capacity question. It’s typically more focused on labor.

And can we identify and capture enough labor to be able to run the sales and the operations we have got. So, it varies depending on where we are in the overall manufacturing platforms, and it’s different from made-to-order versus made-to-stock.

But we have a process we run through our materials team, where we perform analysis and sensitivity work around overall capacity, what we think the next 5 years demand looks like. From that, we build a plan, and it’s a multiyear plan on where we are going to attack these bottlenecks, and we are employing that strategy on all of our platforms today..

Great. That’s very helpful color. And then you highlighted some supply chain issues in your prepared remarks.

Can you just dive a little bit more into where you are seeing some of those pinch points, and when you start to see these – when you start to – when do you believe these things will start to improve?.

Yes. Collin, this is Paul. The supply constraints really existed really in the lumber space outside there. You have got a little bit of resources around the hardwoods, the plywoods, particle board. You are seeing glue shortages across there with the Texas issues that were there. Really, it’s across a multitude of areas.

We expect those kind of constraints should be lifted up by kind of halfway through the year to be realistic that’s out there. But now that is assuming that we kind of return to some state at normal. There could be things that could still interrupted as well, too..

Yes. Our sourcing team believes the next couple of quarters will continue to be challenging. It’s going to – our suppliers have the same challenge we have that we just highlighted and framed for you, right. So, labor availability and then they have got challenges, be able to supply the parts.

They need to be able to produce the product that we are purchasing from them as well..

Alright. Thank you and good luck..

Thanks..

And our next question will come from Steven Ramsey with Thompson Research Group. Please go ahead..

Hi, good morning. Maybe to think about the delta between dealer/distributor growth being a good bit less than home center growth.

What is driving this delta? And do you anticipate this closing in the next couple of quarters?.

Yes. I think there has just been significantly more strength inside the home center around Pro. And we have seen growth on that stock platform as well as our made-to-order platform. It exceeded our expectations here in the near-term. So, why would that be happening? I think post-COVID – or sorry, let me step back and talk pre-COVID.

So pre-COVID, I believe there was an assumption that the home centers might struggle in gaining new customers, especially younger customers into their stores, especially when you think about going and doing a kitchen and bath project. I believe post COVID, what we’ve seen is that paradigm has shifted and been adjusted.

And we’ve seen consumers flock back to the home centers of all ages, and we’re seeing those consumers that were sort of a question mark, pursue those jobs now in the home centers. The big question, I think, for the home center going forward is their ability to hang on to that consumer as things start to normalize, the economy starts to open back up.

We sort of get past some of the COVID challenges we had. So I think that’s been a factor, and you’ve seen that, overall, if you follow-up either of the home centers, you’ve seen the strong POS growth that they have highlighted over the last four quarters. They have gained some share in the marketplace.

And the real question is can they maintain that going forward. Specifically around dealer distributor, we still feel really good about that sector for our business. Of course, it’s less than 15% of our total footprint.

So, we want to continue to drive disproportionate growth into that space and have that be a bigger percentage of the mix overall for the organization. But I don’t see anything that’s driving any big behavioral differences other than just push back in the home centers over this last year..

Okay, great. And then maybe to follow on, I’m not sure if I missed this discussed already, but as retailers kind of start to hit the tougher comps mark, yet demand being good. Are you seeing any discounting pressures ramp back up? It seemed like that had eased in the past year or so during the pandemic..

Yes. I’d say we’re still in the same place. It’s been slightly lower than the most recent periods. I’m an advocate that it should be lower. The demand environment is very strong, not just American Woodmark, but most manufacturers are struggling being able to match the overall demand.

So why promote heavily or even at all in that environment, I think, is a question worth asking and challenging. But we’ve continued to see that down year-over-year..

Okay, great. Thank you..

And our next question will come from Justin Speer with Zelman. Please go ahead..

Appreciate it, guys. One question for me is how we should think about maybe gross margin or EBITDA margin for this fiscal quarter for fiscal ‘22.

Is your comment on that pro forma 13% to 14% EBITDA in 4Q, if you’d had that pricing in hand for the whole quarter, is that suggesting that you’ll be in that range for the first quarter?.

I think back to the earlier question we got from one of the earlier analysts is not ready yet to make a call adjusting on the full year. I think there is still so much uncertainty that, that would be unfair. At this point in time, Paul gave you a perspective on what we think the first quarter looks like.

We certainly framed up the first half is going to be the price-recapture period, and then there should be an improvement in the second half, assuming things normalize. But I think there is too many questions still today..

Well, I guess – I mean I guess what I’m trying to get – you have that price in hand. I guess you – I guess, it implies like roughly, I don’t know what the percentage is, but maybe 3% or 4% pricing for the full year, if you would – or for the full quarter, if you’d had that, you would be in that low teens kind of range for the quarter.

Is that stuff that – so my question is, is that already in hand? Or is that something that’s in motion still?.

The pricing is in hand for two of our three channels. And the third channel, we’re very close to having that complete. And when you think about the longer term, the issue would be if inflation accelerates, pick a period, the next 90 days, well, then we have to go back and go through another pricing action.

So you always have this lag that you’re chasing in a couple of our channels. So that’s why the hesitation to commit to that second half number..

Right. And I know it’s tough to kind of glean right now, but I know that we look at the import data. I know there is been some allegations of some illegal circumvention, particularly pointing, I guess, one of your competitors pointing in Malaysia is potentially doing some illegal things.

Is that something you guys are paying attention to? And let’s say that there is maybe a case, how does that affect dynamics in the industry and potentially pricing power if at all for you?.

Yes. So we do closely monitor this. We have an executive from our team that sits on the KCMA and is very close to the various trade case issues and topics.

We have not felt pricing pressure that’s creating any concerns for us from a share standpoint with respect to the imports and then some of the domestic challenges, if you will, from an inflationary standpoint. So I don’t yet see concerns there, the notion of circumvention, yes, in place.

And I know there are some filings specifically around that to pursue and investigate. You mentioned Malaysia I think Vietnam sometimes comes up in that particular discussion as well. So we do closely monitor it. I know some of the antidumping and countervailing duties do come up for review this year. So there is sort of an annual review cycle.

We don’t expect a change, but it is in process, and we will closely monitor that as well..

Okay.

And then lastly, on your 2025 vision, I know you talked a little bit – maybe alluded to some of the CapEx investments, but how should we think about the P&L investments in some of those strategies that may be ongoing? And then if these comparisons that are going to be really tough in the coming quarters as we look out maybe a year or more if things started to unwind and maybe go the other way, where there may be some difficult comparisons.

Would you be able to ratchet back on that spend?.

So I think your question is if we started to get into a difficult cycle, can we manage our SG&A and spending. And I’ll say, yes, we’ve historically demonstrated the ability to do that. If things happen at or somewhat outside of our control, we can’t manage either pricing conversation we’ve had.

We’ve got the ability to flex up or down in both of those cases..

Thanks, guys..

And Justin, I can add a little bit to that, too. You can look at our SG&A spend and how much we’ve leveraged year-over-year. It is an area of kind of extreme focus. We do have the ability to flex there as well.

And that is something, as Scott mentioned, we monitor very closely and have the ability to really control that spend and that the way it goes out..

Perfect. Thank you, guys..

And our next question will come from Josh Chan with Baird. Please go ahead..

Hi, good morning, Scott and Paul..

Hey, good morning..

Good morning. Thanks for breaking out the inflation impact.

So I guess, are you thinking about completely offsetting that inflation headwind with just price or for you, is it a combination of price and productivity? Just wanted to kind color on that?.

Yes. It’s always a combination of both of those, Josh..

Okay.

So price is only a component, offsetting some of the inflation is how you’re thinking about it?.

Yes. When I think about the buckets, I mean, material and freight, I’m expecting that to all be via price. Labor, that becomes more typically a productivity conversation and somewhat a price conversation..

Okay, alright. And then just on the timing of those price actions, you talked about having two out of the three channels in hand.

Does the price start at the beginning of the fiscal year in Q1? Or are you kind of gradually realizing that as we go on for the two channels that you have in place?.

Yes. So you gradually realize it as you go throughout the quarter..

Okay, alright. And so I guess so on the margins, you mentioned the 300 to 400 basis points of headwind that you saw in Q4 with no price.

Does that mean that we cut slightly into that headwind as we go into Q1 and then cut more into that in Q2, and hopefully, you’re you at parity by the second half? I mean is that the right way to read between the lines there?.

Yes. That’s the right way to think about it. I don’t know yet if I haven’t stated parity yet in the second half. I know we’ve talked a lot about the second half to-date, but certainly, as you think about Q1 and Q2, the way you frame that is correct..

Okay, that’s fair. Thanks for your time and good luck in the next year..

Alright. Thanks, Josh..

And our next question will come from Julio Romero with Sidoti. Please go ahead..

Hey, good morning, Scott. Good morning, Paul..

Good morning..

Good morning..

So I guess most of my questions have been asked here, but maybe if I could talk about some other subjects here. On the new repurchase authorization, a $100 million you did – you announced as an authorization is not inclusive of the $20 million of repurchases you did in Q4.

Is that correct?.

Correct. Yes. So Julio, the way to think of it is we had the original $50 million authorized that was out there, we used $20 million of that $50 million. So that left the $30 million remaining on that.

We expired that whole share repurchase that is out there and then issued a new $100 million share repurchase authorization for – it’s an effect going forward..

Got it. And I assume what you did in the fourth quarter in terms of repurchases kind of sets you up to offset any dilution over the next couple of years or so.

So I guess just given the new $100 million authorization, is the inference that you’re going to be more opportunistic or even more aggressive in repurchases than you have been in the past or just how to think about that?.

Yes. Julio, we really will be opportunistic in the way that we look at and approach it. We want to make sure that we give our best return back to our shareholders and our key investors that are out there. So that would be the stance that we would take on a go-forward basis..

We do want to offset – we do want to manage dilution though. So each year, we want to have that in place. And then beyond that, it’s more of an opportunistic play..

Got it.

But the $20 million you did in the fourth quarter is it fair to say that kind of takes care of any dilutive impacts over the next 1 or 2 years?.

I think that more of the prior dilution looking back because we hadn’t done any repurchases throughout the year. So just going forward, as stock grants are issued, etcetera, we want to make sure we’re offsetting that effect each year in the future..

Okay, got it. And just switching gears to some of your cash flow commentary. One thing that kind of stuck out to me was the receivables.

I think that on a dollar basis, it was flat sequentially, just any additional commentary regarding your receivables? I know last quarter you mentioned you expected some improvement on that and maybe how to think about your DSOs to trend in fiscal ‘22?.

Yes, Julio, good question. When you think about the accounts receivable, a lot of it has to do with timings from some of our bigger customers, and we actually get those payments out there. None of our customers are at risk for any default or bad debt reserves or you actually came down a little bit in some of our channels.

So really strong position, it just really had to do with the timing of when we actually collected the cash at the end of the year..

Got it. I mean do you think your DSOs kind of stay at the current level they are now? Or they revert towards fiscal 2020 DSO range. Just thinking about fiscal ‘22, and how that should trend..

Yes. Actually, really it’s a little bit more complicated around that, too. Because each of our channels have a different DSO target that’s out there. And then as the sales flex up or down in those channels, the DSO will move a little bit. That’s there. So holistically, though, we don’t see any issues there.

Probably we are putting pressure on our teams to actually increase or improve our DSO targets always. But really, it’s highly volatile with the mix of our customers that are in each of our channels..

Got it. Appreciate the commentary. That makes sense. Thanks very much..

Yes. Thanks..

And as I see there are no further questions, I would like to turn the conference back over to Mr. Joachimczyk for any closing remarks..

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

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time..