Good morning, ladies and gentlemen. Welcome to American Woodmark's third fiscal quarter conference call.

Thank you for all for taking the time to participate. Joining me today is Scott Culbreth, President and CEO.

Scott will begin with a review of the quarter, and I'll add additional details regarding our financial performance. After our comments, we'll be happy to answer your questions.

Scott?

Thank you, Paul, and thanks to everyone for joining us today for our third fiscal quarter earnings call. I hope that you and your loved ones continue to remain safe.

Our teams once again did an exceptional job of delivering sales growth in the quarter, but our margins were pressured by material, logistics and labor inflation, which was partially offset by overhead and SG&A leverage. Our third quarter sales were up 9.1%.

Within the new construction, our business grew 3.8% versus prior year as install activity accelerated from prior month starts growth. Our Timberlake direct business comped positive low double digits on units, while our frameless PCS business continued to comp negatively in Southern California.

We've received a number of questions on the impact of the PCS business on the total performance of new construction. For the third fiscal quarter, the negative comps were approximately $4.5 million or 2.9% of growth in the channel.

We believe that we have stabilized the PCS business and return to low or mid single digit growth in fiscal Q4. Our national builders remain optimistic due to strong order growth over the prior months.

Capacity of the manufacturing and trade base to keep up with demand, rising prices and potential COVID-related restrictions could slow future build rates, and these factors have already increased the build cycle time. Lot supply and community count growth are also key indicators we're watching closely.

Thank you, Scott. Financial headlines for the quarter.

Net sales were $432 million, representing an increase of 9.1% over the same period last year. Adjusted net income was $25.5 million or $1.50 per diluted share in the current fiscal year versus $22 million or $1.30 per diluted share last year.

Adjusted net income was positively impacted by higher sales, offset by higher material and logistics costs.

Hi. This is Jeff Stevenson on for Garik.

Thanks for taking my questions. Can you provide some more color on your sales growth expectations by categories in your fourth quarter guidance?

Yeah. So Jeff – good morning.

Our kind of our guidance right now is we're talking about double-digit growth, we're thinking and we're expecting in the mid to upper digits growth in that area. So it'd be double digits for sure.

As far as the growth in the categories out there, we expect it to be strong growth rates across all of the repair, remodel and the home centers and in our new construction channels as well. And then also, we won't have the drag of our PCS business in our fourth quarter.

Yeah. And just to clarify, mid to high teens is what we're expecting from a net sales growth.

Got it. Got it.

And then what is the timing of your new capacity initiatives to be fully online? And then following up on that, also, how is your capacity right now set up to meet the recent inflection of lag housing starts?

So our teams are always evaluating capacity across our entire platform. We've been adding shifts in personnel really since the summer time period across both the MTO and stock platforms.

We'll continue to do that as we push forward. We are increasing the overall output across both of those platforms.

With respect to capacity in general across all aspects of the manufacturing footprint, we are making investment decisions in capital equipment as needed along with those labor investments, and believe that we'll be well positioned for growth as we start to think about fiscal year '22.

Okay. And then lastly, can you talk about the levers you have to manage cost inflation moving forward?

I know you mentioned the pricing actions in this quarter, but any more color there would be helpful.

So pricing, obviously, the one that we started our conversation about. We've already taken actions in several of the channels.

We'll continue to pursue that. I'd tell you, over the long haul, Jeff, we tend to get back pricing for commodity-based material inflation.

When it comes to other aspects of inflation, when we think about things like labor, that's really up to us to manage and it comes down to productivity projects. It could be introduction of alternate materials, substitutions.

It could be investments in automation of equipment. These are all solutions that will always be driving to try to offset increases.

Thank you.

Hey, guys, can you hear me?

Yes, we can hear you. Good morning.

Good morning, Tim.

Okay. Great, good morning.

Glad you guys are all well. I guess, first question I had was just on pricing.

Is there any way to just maybe quantify the types of increases that you're taking in terms of just magnitude? And where - which channels those have maybe gone into already?

And kind of maybe what might be kind of there in the future?

Yes. Rather than provide specifics just because we're in that process, Tim.

I'll just kind of lay out the framework of how it typically functions. We will typically select the input cost to understand what the likely percentage increases that we need to apply to the products.

We will typically first address our dealer, distributor segment, that's usually followed by new construction, which is then followed by home center. And I think we've talked about this in past years, some of the unique situations either around contracts or other restrictions that prevent just doing a blanket increase across the board, certainly in new construction and home center.

So that's typically the way we'll roll that out. We have already started those conversations and announcements inside the current quarter.

That's why Paul's guidance was we won't see much lift as it relates to price inside Q4. We'll start to pick up some of that advantage as we shift into the first quarter of fiscal year '22.

Okay. Okay.

And are you kind of thinking kind of Q1, Q2 is when you start to see price, at least, kind of offset inflation or is it just hard to know at this point?

I'd still say it's hard to know. And the reason I'll say that, Tim, is what happens from this point forward with respect to these commodities and input costs.

Are they going to start to plateau with the new levels we've got or do we see a continued acceleration and then you're continually chasing that uptick. So at this point in time, if things were to stabilize, I think that's a fair representation that inside the first, second quarter of the next fiscal year is when we start to get some recovery against that.

If they keep moving up then we'll be chasing another cycle potentially of pricing as well and have to pursue it that way.

Okay. That's helpful.

And then on PCS, just a factual question. Thanks for the detail and the color on just the pressure there.

Is the -- I think it was about $4.5 million this year -- this quarter on a year-over-year basis, is that similar to what you've seen over the last three quarters? I'm just trying to think of as you're annualizing that, what that impact has been maybe over the prior three quarters outside of this one?

Yeah. I don't have that annual number here in front of me, Tim, but I would tell you that, that impact was likely higher in the first and second quarter.

But you're right, $4.5 million is what we just disclosed, specifically around the fiscal third quarter. But more importantly, inside the fourth quarter, our plans are for low to mid-single-digit growth on that platform and new construction.

Okay. Good to see that stabilized.

And I guess the last one, just on maybe the order rates and the unit kind of shipment rates in Timberlake relative to maybe the revenue contribution, what's the gap between unit shipments and I guess revenue as you kind of think about mix? And is that really just structurally more of the origin product and more kind of entry-level shipments that are impacting that or are you seeing any sort of change in kind of the overall kind of builder mix on maybe a price point specific basis?

Yeah. It was more of your latter comment around rotation to origin.

So as you rotate Timberlake historical business to an origin's platform, that will be at a lower price point, but a better margin profile for the enterprise.

Okay. Great.

Good luck on the rest of year, guys. Thanks for the color.

Thank you. Thank you, Tim.

Good morning, guys. Thank you.

I guess a couple of questions for me. Just if maybe you could provide some of your thoughts or commentary with regards to the import dynamic, the import situation seeing surged in the non-Chinese imports over the last year, pretty much filling the void left by when the Chinese vacated.

But I guess, as you think about your pricing, is there any risk to pricing power or your market position from those dynamics, in your opinion?

Yeah. I'll answer the second question first, Justin.

I don't think there's any risk from a pricing profile perspective as it relates to the imports. I think the inflation impacts are not unique to American Woodmark.

I think our competitors are going to feel that both domestically as well as internationally. So I'm not concerned there.

To the first question, specifically around the import data, I'm sure you saw the information that came out through December. China down roughly 50% on the calendar year shows total down, I think, roughly 3.5%, $40-odd million because we've seen Vietnam and Malaysia both come back with substantial increases year-on-year.

Those products are coming in, though, at a higher cost versus what they were historically out of China. So we definitely see that uptick on that product.

But I'd say probably even more importantly, here's of late, just logistics and transportation challenges, if you follow any of the information certainly on the West Coast as it relates to the ports and just product entry challenges, we're feeling it for some of the components that we buy. But certainly, our international competitors as well are dealing with some lead time challenges.

So that continues to give us an advantage in the marketplace.

Okay. So I guess going back to Tim's question, just in regards to the input costs and the pricing required to offset this cost, can you quantify how much of a drag just from all those buckets?

How much of a drag that was in the quarter? And I guess, is the price increase announcement enough?

If we snap the line on what you see today, is it enough to at least offset or more than offset what you're experiencing in terms of cost input inflation?

Yeah. So rather than get into specifics of exactly what the amount was associated with those impacts and, again, what that's going to translate into pricing.

I'll take you back to prior quarter. And when we talked about what our forecast and projections were going into fiscal Q3, what our EBITDA margin expectations were and we obviously fell short of those.

And the reason we fell short of those is material inflation. And it was predominantly increasing throughout the quarter, it started in December and accelerated into January.

So that's why we missed our - missed the mark by, what, 70 to 100 basis points from an estimate perspective. So you can do some math, if you like, around that, but I don't want to give any more specific than that at this point.

Got it. Got it.

And then I guess the other dynamic is the PCS business, what led to the improvement there? Is it that the comps you've kind of run rated or did you improve ahead of expectations because I was thinking you're going to see more pressure into this quarter?

Yeah. So we're starting to lap the tough comps.

So that's obviously going to be a factor, but our teams have done a nice job going out and winning business. I think I mentioned last quarter as well, we are introducing more relevant styles.

We've gotten stale in that portfolio. So we launched some new colors here in February that will help us as we go forward.

We've got another round of introduction of product as well in the next launch bucket, which will be the August, September time frame. So it's a combination of easier comps, sales team really driving growth and product relevance.

And lastly for me, just big picture, broadly, what is -- in this kind of environment where you're seeing incredible top line growth and it's married with inflation, I guess, how do you feel about your midterm margin targets? And are they achievable as we think about this next kind of fiscal year that's coming up?

Do you think that you can get to that mid-teens with the strength that we're seeing or do you think that it's a tougher call given the inflation?

Yeah. I think it is a tougher call with the inflation.

At this point in time, we're in -- we're actually in the middle of our budgetary cycle. So we'll do that throughout the February time frame with closure in early April and give you all perspective on our next call of how we see fiscal year '22 shake it out.

Obviously, sales growth is going to be strong. The question around margin profile is going to be really dependent upon these input costs and ultimately what the pricing power is back against that.

So do I think we're going to jump to that long-term target next year? That's going to be challenging, but that still is our target.

That's still what we're striving to drive forward and achieve. Obviously, in this environment, with it being such a strong sales environment, share capture has been a big part of the story for us.

So we want to make sure we capture as much of that as we can. But now let's be a little bit more disciplined around pricing, knowing that we've got escalating material costs.

Thank you, guys. Really appreciate.

Hey. Thanks, guys for the extra question.

Just two things on the balance sheet. I guess when you think about the potential to refinance here, what are kind of the targets, I guess, you guys are looking at in terms of, is it just extending maturities?

Is there an opportunity to lower rate? I'm just kind of curious where you kind of see that.

And then secondly, it sounds like you're going to restart the buyback, and should we just think about it as offsetting dilution or is there going to be an opportunity to maybe take some of the overall share count out?

Yeah. So Tim, I'll answer the first one around the debt first.

And really, what we're doing is we evaluated all those positions that are out there, we're seeing the historical low rates that are out there today currently, and that is our main goal is to really maximize kind of our - and take advantage of those rates, reduce our interest costs and kind of return some of that benefit back to our shareholders. So that is really our priority.

As far as the total deal structure, what it's going to look like, we're still evaluating that. We're going through that process now, and we'll definitely give you more color as we go through that and explore that.

The share repurchase right now, too, is what we're doing is we definitely want to be anti-dilutive against anything that we're going to do from a future perspective. If there's an opportunity to be more accretive there, we will look at that throughout the fourth quarter and more guidance to come as we go through there.

Okay. Okay.

And then I'll sneak one last one. Just the made-to-order business within the home centers, how do you kind of think of that trending over the next year or two?

Just in terms of - I know that's been a tougher channel just for the industry over the last 5 years, I mean, is there any renewed focus there by the home centers to drive traffic into the made-to-order platform or how would you kind of think about conceptually what made-to-order can look like over a couple of year period?

Yeah, I think it's tough to go out multiple years at this point in time. Clearly, Depot and Lowe's, if you followed their earnings release over the last few days, they're going to struggle with some comp issues because of the outstanding comp results they've had over the last three quarters reporting wise.

I still believe there's an opportunity to grow our business in that particular category in both retailers, and that's how we'll set our targets and goals as we push forward. What that level of growth is, is probably the question mark over the next couple of years.

We've certainly seen consumers flock to the home centers with this COVID environment. Can they hang on to those consumers as we get past some of the restrictions and we get more of the population vaccinated, I think is probably the largest wildcard as to what exactly their footprint will be as we go forward for many categories, including ours.

There was a thesis for many years that millennials wouldn't shop at home centers, that they were going to shop elsewhere when they got into the home buying or home improvement model. And I think we've modified the thinking around that, obviously, over the last 12 months and now that they've got those consumers in the stores.

We all need to work together on making sure we keep them, and we keep new ones coming in so we can continue to drive growth in that category.

Okay. Okay, that’s helpful.

Appreciate the color. Thanks, guys

I just wanted to sneak one more in just on the free cash flow side, guys. What are you thinking for the free cash conversion?

And I'm looking at the payables, I know you kind of bucket them together in the release with some of the accruals, but what was the payables contribution? And how should we think about that because I think it's been a pretty good tailwind here, at least thus far in the year?

Yeah. Justin, looking at our free cash flows, we still expect this year to be relatively strong for us.

We did the actions with our debt pay downs and that kind of reemphasizes our position about that they will be strong, even the share repurchase kind of reiterates that, too. In regards to the payables, you're seeing the increase in inventories and payables kind of at a comparable rate that's out there as well.

So you're seeing really the offset there. But I'd say where the challenges that we had in this quarter was around our customer receivables and our AR balances, and it's not concerns around collectability.

It is just timing of the payments that were received within the quarter. So we showed a little bit of, I would say, performance degradation in Q3, but we'll expect to pick that up in Q4.

Excellent. Thanks, guys.

I appreciate it.

Yeah, Thank you.

One second, thank you. Since there are no additional questions, this concludes our call.

Thank you all for taking the time to participate.