Good day, and welcome to the American Woodmark Corporation's Third Quarter 2019 Conference Call. Today's conference is being recorded February 26, 2019. During this call, the company may discuss certain non-GAAP financial measures, including our earnings release such as adjusted EBITDA, adjusted EBITDA margin, free cash flow and adjusted EPS per diluted share. The earnings release, which can be found on our website, www.americanwoodmark.com, includes definitions of each of these non-GAAP financial measures, the company's rationale for their usage and a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures. We will begin the call by reading the company's safe harbor statement under the Private Securities Litigation Reform Act of 1995. All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on factors that may be beyond the company's control. Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission and the annual report to shareholders. The company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. I would now like to turn the conference over to Scott Culbreth, Senior Vice President and CFO. Please go ahead.

Good morning ladies and gentlemen. Welcome to American Woodmark's third 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 experience and volatility in our markets, we are pleased with the overall performance for our third fiscal quarter. Net sales were up 31% with the inclusion of RSI. Excluding acquisition or core growth was 1%. Looking at our net sales by channel within new construction, we grew our business 12% over prior year with our core growth at a strong 5%. The 5% growth over indexed the market and our competition as we continue to leverage our direct-to-builder business. We did experience more pronounced volatility by region within our new construction business with a decline in southern and northern California, as well as the southeast. However we – excuse me, we had revenue growth in all remaining markets with particularly strong performance in Florida and Texas, both of which are large markets for us. Coming into our third quarter, we were expecting some challenges given the macro and micro economic factors that were impacting the industry. We believe most of the volatility in our third quarter was related to the overall uncertainty in the economy driven by a few variables. Most notably, the government shutdown, uncertainty on tariffs and wavering consumer confidence. On the positive, it appears much than negativity towards the housing market as somewhat settled. However, the uncertainty of the 25% 301 tariff continues to create a bit of a challenge. In addition, inflationary pressure and labor availability continue for builders. At the same time, as I noted on our call last quarter, we remain confident in the fundamental and underpinning drivers to grow the new construction. Most agree, notional demand by the younger generation remains strong, particularly at the lower price point. The critical question yet to be fully answered is the ability of builders to shift production to opening…

Thanks Cary. The financial headlines for the quarter, net sales were $384 million representing an increase of 31% over the same period last year. Excluding the impact of the RSI acquisition net sales for the third fiscal quarter increased 1% to $257 million. Adjusted net income was $24.1 million or $1.40 per diluted share in the current fiscal year versus $16.7 million or $1 per diluted share in last year. Adjusted Net income was positively impacted by additional sales volumes, price mix and unrealized gain on FX forward contracts of $500,000. Adjusted EBITDA was $52.2 million or 13.6% of net sales compared to $36 million or 12.3% of net sales for the same quarter of the prior fiscal year. The increase during the third fiscal quarter was primarily due to the inclusion of eight incremental months of results for RSI. For the nine months ended January year-to-date net sales were $1.238 billion, representing an increase of 47% over the same period last year. Excluding the impact of the RSI acquisition net sales increased 6% to $854 million. Adjusted net income was $88.2 million or $5.05 per diluted share in the current fiscal year versus $58.8 million or $3.57 per diluted share over the last year. Adjusted EBITDA was $181.1 million or 14.6% of net sales compared to $110.4 million or 13.1% of net sales for the same period in the prior fiscal year. The new construction market slowed during the quarter, recognizing a 60 to 90 day lag between starts and cabinet installation. The overall market activity in single family homes was down 3.7% for the financial third quarter. Single family starts during September, October and November of the prior period averaged 889,000 units, starts over that same time period from the current year, averaged 856,000 units. Our direct new…

[Operator Instructions] And we will take our first question from Truman Patterson with Wells Fargo. Please go ahead.

Hey, good morning guys. Congrats on the quarter.

Thanks Truman.

Just wanted to dig in on the gross margin performance, you guys had a nice turnaround, it fell in the second quarter, it ended up being up year-over-year in the third quarter. I guess could you just walk us through the primary drivers of this and how sticky it is going forward? I'm thinking of a few different items, the November pricing, correcting the staffing and labor and then just the RSI acquisition?

Yes I will give you a little high level and then Scott can probably provide a little more details on it. But few key drivers Scott will talk a little bit more to the inventory adjustment we had prior year, but from the operational performance perspective, historically, when you look at the seasonality Q3 is obviously typically a challenge because volume comes down. Our teams did a good job of managing to the volumes. From an efficiency perspective, we did make the decision to carry obviously additional variable costs because obviously we always see spring selling season come back up. But relative to the prior quarters, some of the disruptions I've talked about on prior calls and obviously our supply chain overall, manufacturing processes significantly improved. In addition to my comment with regards with turnover, item like that has a pretty significant impact with regards to the overall efficiency of our operating platform from a gross margin perspective. And we have seen very significant improvement in our turnover rates throughout the company. That's had a positive impact on that gross margin as well. So we definitely faced some headwinds, but overall the platform is operating effectively. So Scott do you have additional details?

Yes Truman just around what happened inside the quarter versus the prior quarter and sort of what sticks as you go forward you hit the two primary items. One would be the pricing as we've signaled in the last call, price went into effect in November. We didn't get a full impact of that inside our fiscal third quarter, we will inside our fiscal fourth quarter. The second was operating efficiencies, which were a challenge inside our second quarter. We did approve upon that inside our fiscal third quarter. And expectations would be that we continue to run more efficiently going forward. The question that still remains would be the ones that we've already highlighted in the conversation thus far around tariffs, are they going to increase or not? And then what happens on [indiscernible]? They'd certainly stabilized as of late. And does that continue or do we see those start to move up or down? And that obviously would have a short term impact.

Okay. Okay, gotcha. Thank you guys for that. So it's good to hear that your raw material inflation seems to be stabilizing at least as of now. Jumping over to the slower new res growth environment, could you just give us an update on maybe some of your revenue synergy targets and where you stand with pushing RSI product through your direct-to-builder network, especially as we enter the spring selling season?

Yes, I'm very pleased with where we are. I think obviously one of the key early synergy deliverables that we were focused on was the platform we call origins, which has taken a low cost platform and leveraging over our direct-to-builder channel, which obviously, we from a timing perspective, we are very focused on getting out in the market with the anticipation that we would see a significant move down towards the first time home buyer. So right now, obviously the market has not progressed down to that space as quickly as we anticipated with really affordability being the key driver. So I think from an overall synergy perspective the pie that we're going after is not quite the size that we anticipated. However, what I will say is our ability to go out and get the business at the rate that we anticipated we would is basically on plan. So we've got the product in place, we have all the systems in place, we've been leveraging that across our platform for going on, I think, nine months now. And we are accelerating that at double digit growth. So all we need really now have to happen is going through my whole move up, move down process and getting the first time home buyers in the market and getting builders from affordability perspective to be able to go out and build opening price point homes. We truly believe that demand is there. So we're well positioned for it and we've got it out there across our entire platform and we are continuing to gain share out there through origins. We just need more builders to build opening price point homes at this point.

Okay, thank you guys for that. If you don't mind me sneak in one more in, your largest competitor repositioned their supply chain to attack the lower price point products. Are you guys seeing any increased competition in the market, especially in kind of the home center channel, and RSI’s value price points?

No, I wouldn't say, I mean, we're basically both of us are, the competitor you're talking about obviously and us, we're very focused on our markets with specific home center partners in that stock space that you're referring to. And obviously we're very confident in our product and our supply chain. It's world-class that's one reason that the acquisition of RSI was so attracting for us. It's an outstanding platform and it continues to perform very, very well. And I believe the service that we offer to our partner is really second to none. So, we never underestimate our competitors, but we're continuing to perform. And we continue to feel there's upside in that space. And then even on the stock bath side, which is what the both partners, like I mentioned, that actually is improving significantly for us. Obviously we've all spoke up when the home center partners was going through some challenges, and it made adjustments and their operational performance has significantly improved and obviously we're seeing it in our results, even to I’d say a level that's over-indexing our competition in that space. So we're very pleased with our bath space and continue to feel that will improve in the coming quarters.

Alright, t you guys.

[Operator Instructions] And we will take our next question from Garik Shmois from Longbow. Please go ahead.

Well, hi. Thanks. Just wondering if you could talk maybe a little bit more about just the remodel trends that you're seeing? It seems like you just had a divergence between dealer and home centers in the quarters so just wondering? Maybe a little bit more color there and just how these are progressing over the next couple of months if you think that divergence is going to be sustainable?

Yes, I mean dealers – dealer overall, it's been probably more predictable I'll say decline. [indiscernible] several quarters we kind of commented particularly with the more affluent consumer that we started to see that decline in the dealer channel. So obviously our comps are not what they were a year ago or two years ago, but we're still continuing to over index. It's just in that mid single digit growth level within the dealer channel. So going forward in dealer, I think, we expect probably the industry as a whole to be around that mid-single-digit or lower. And our planet is to continue to over index that. I think the bigger question out there is home center, and some of the recent volatility and so forth. I think that has become a little bit more unpredictable. And part of it, I think, just the impact of the seasonality a lot of folks, they don't make too many decisions when you get into what we call our third fiscal quarter, just because the variability you see with the consumers, half of which is tied to getting into the holiday season and so forth. But obviously there's a lot of things going on from a consumer mindset perspective with the shutdown, and tariffs, and so forth. So that creates some uncertainty. I think obviously we just saw the depot came out this morning, with their revenue a little more on the challenging side. But same time I don't think anybody is saying that R&R is necessarily slowing down. I think we still remain very optimistic about it. I think it's more from our specific industry with the kitchen and bath side is there are some strategic changes going in place, particularly with one of our key customers out there and a home…

Thanks for the color. Just want to follow-up just on a comment on the home center partner that's making the reset. Is some of that uncertainty factored into your guidance for revenues and will it be the fourth quarter of your fiscal year or would some of this uncertainty be more of a fiscal 2020 impact?

No that’s basically baked in. That's what's really driving a little bit of that uncertainty in Q4.

Got it. Okay. And then just a last question, I just wanted to get an update to some different frameless initiatives. What kind of penetration you're seeing in California if there's any opportunity you could discuss outside of the state?

Yes, I think there's two aspects of frameless you have to look at. One is on the new construction side, really three exciting new construction, dealer, distributor and then home center. Obviously we're focused in all three of those areas, with the initial focus primarily on the new construction side and then on the home center side with the taking obviously the opportunistic approach right now in dealer distributor, but very strong. I've been communicating strong growth in Southern California for a few quarters. Last quarter we did see some volatility there. Like I mentioned in California as a whole, those both Southern and Northern California, Southern California, we have very strong market share with what we call our PCS platform, which is a frameless platform. We did see some slowdown on the single family side. On the positive, we just had some conversation this morning with our team is we main very confident in the growth of the multifamily in that, that area. So that's one region where we actually are in the multifamily environment, where we are continuing to learn a lot, and we are growing pretty successfully in that market with our frameless platform. So we continue to expect a growth there. Nationwide on new construction right now we're – it's really continuing to work with builders and so forth. Obviously on the single family, you definitely see a lot of demand ship yet towards that frameless platform as younger generations to start to get into the market and take up a greater percentage of that demand. Who knows that could certainly shift towards that frameless European look and we're ready for that if it does occur. Moving over to home center, very, very pleased. We have what I call the re-launch of our frameless platform with a key partner and that is going very, very well. So we're just in early phases of that, but the comps are extremely strong and the team remains very confident as does our home center partner and the growth of that platform within the home center channels. So we expect strong growth on the frameless side.

Okay. Thanks for the help. Appreciate it.

And we will take our next question from Tim Wojs from Baird. Please go ahead.

Hey guys, good morning. Nice stuff.

Good morning.

So if I just think about the tariffs, is the way that we should understand that the 25% on March 1 is in your guide? And essentially you would maybe see a modest impact from that on a negative – from the negative side near term and then you'd have some pricing that would go into to offset that over time is that the right way to kind of think about the cadence of tariffs in guidance?

No, we really aren't. We not put the impact of the 25% tariffs and obviously a lot of uncertainties there. It does – I guess indirectly does impact a little bit of our guidance because we have taken some operational actions like I mentioned, we bought some inventory and made some short-term decisions and anticipation. It's one of those things where the greatest impact of this tariff is more the unknown than the actual tariff itself because everybody's trying to make a decision, how many leverage do you pull and how much do you actually resource without really knowing that 25% tariff is going to happen. So we have taken some action. Obviously built up some inventory and we have taken advantage of our low-cost operation in Mexico to begin to transfer some things. But we have not actually built in the 25% tariff. We've basically built in 10% and like I mentioned the most of that we've been really focused on just resourcing and offsetting that cost operationally. We've taken a little bit due to the market, but very little as of yet.

Okay. And when you think about price and maybe relative to just cost inflation was that positive for Q3 and I guess as you kind of look forward, you get more pricing in Q4 and you are also moderating does that gap become a little more favorable?

Yes, definitely becomes little as Scott mentioned, obviously we only have partial impact in Q3. We'll have full impact of the pricing increases in Q4, so you will see that more of that positive and see that gap closed. I think as Scott mentioned material inflation is fairly stable right now. We are continuing to see inflation on a logistics side, fuel obviously is trending a little better now but logistics availability and costs are still a challenge on the inflation side.

Okay. And then just thinking about kind of free cash flow does that – would you expect that to grow in 2020? I know before it was maybe some one time things in 2019 that expect to grow next year?

Yes Tim, there was a one-time item at the beginning of the year that was tax related impact in fiscal year 2019 to be frank we haven't really gotten into the need of our fiscal year 2020 process. We're just now getting our budget cycle started. So we'll give you a good perspective on what that number would look like as we move into that year. But from leverage standpoint I don't see capital changing significantly from [indiscernible] standpoint year-over-year. So they'll come down at working capital management and now we can drive some efficiency there next year.

Okay, great. Well good luck on the rest of the year guys.

Thanks, Tim. Appreciate it.

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

Good morning, this is Steven here. I guess I would be interested to hear more about import competition. Is it more pronounced in the last few months or less given tariff pressures? And to hear more about import competition in the multifamily space, I think it's particularly relevant given the move to entry point homes and products?

Yes, they're – I mean clear comments. No, it has not really changed the past several months. I mean, there's been some impact, obviously the 10% so it's negatively impacted. The Chinese imports obviously much greater level than it's impacted domestic companies, which has been favorable for us and allows us to compete a little bit better on price. I think there are two aspects we look at them. Number one, Chinese had been in the market for several many years now. They did add grown steadily over the past, I'll say three years, three to four years particularly to your point in the multifamily space, but we also see it even in some dealer environments and so forth. Just the fact, that you do have companies that are importing, well they call flat pack product, buildings inventories and then offsetting the inventory with some domestic minor operations to allow them to get to the level of SKU count needed to get into kind of the lower-end of the special order, made-to-order business. So that's existed for quite some time. It’s obviously become much more pronounced and folks are talking about it a lot more, I would say the past year than we have historically, just because the impact has become more visible. I think the good side – good aspect and strategically the way we look at it is, there are some folks that rely on tariffs and so forth thinking it's going to have a major impact that really help their business. I like the noise of it, if you ask me because the reality is we have a platform that we can compete with the Chinese on. Yes, we can't get down to the price point where they may offer all private construction, but there's much more as most people know. Even a multifamily, when you get into the service side, we consistently hear that is very underserved business and we're really the only one in the nation that can go out and have the level of impact from the service perspective and provide a low cost product with our Origin platform and our frameless platform as needed. So if I feel we're well positioned, we are continuing to do that strategic work on multifamily side. We'll see what happens with the tariffs, I’ve mentioned on the last call that yes, the tariffs are financial impact on us, but it is a net positive overall just because it does make the Chinese less competitive. But at the end of the day, I'm not relying on tariffs for us to be successful against Chinese or any other imports as we have a very solid strategic plan in place in our operational platform where we can compete.

Okay, excellent. And then when I circle back on this may have been addressed, but if the market stays slower in the next few quarters or even through a good bit of your fiscal year 2020 does that allow you to make more progress on synergy and operating efficiencies if volume comes in slower than expected?

That's a fair question. I think obviously it does lie to shift focus, if you were in a heavy growth market and I would say the past couple of years, I wouldn't consider it as a heavy growth. It's just the past year we've been extremely focused on obviously the acquisition getting the two companies integrated together, not only from a people and cultural perspective was for us as the number one priority has gone very, very well, but obviously also delivering on the synergies and capturing – starting to capture operational cost and work on the future state platform. So that work will continue regardless of the market growth or so forth. But yes, from a resource perspective the market would grow just like we did during the last recession and obviously I don't expect anything close to what we went through 10 years ago, but the market would slow down when this company does very, very well as we continue to focus very, very intently on our operational performance and we always come out of the other endeavor recession, much more efficient and much more focused and then what we were when we went in. So we would absolutely commit to that.

Excellent. Thank you.

Thank you.

And we'll take our next question from Justin Speer with Zelman & Associates. Please go ahead.

Thank you. Just a follow up question on the initial analyst questions was with regards to your cumulative revenue or synergy opportunity with this Origins product. I just wanted to revisit – I think you said when you initially did the RSI idea of roughly $30 million to $40 million of synergies in three years, 25% cost 75% revenues. Just wondered if you have any idea – or maybe can give us some idea of what you think it is now that you've had this in your possession for over a year now?

Yes. I can't get into the specifics or detail on that, we aren't doing that work right now. It was part of our fiscal year 2020 budgeting. The Origin platform is up and running, but the part that we can't accurately predict what's going to happen with the economy, the economy would grow at the level that we anticipated, then I would sit here and say that, yes we would still commit to be pretty close to that, but the challenge is obviously growth is slower than what we anticipated and we have not seen them move down to the opening price point like we anticipated as part of our synergies. So by no mean does it impact, any of the strategic reasoning or opportunity to grow in that business, particularly when you think about the multifamily side, I will say that this has been a little bit slower market and then what we initially planned on the multifamily side, but that’s for good reason. Once again, we just – we've learned a lot. It's a little bit longer cycle, obviously when you go out and start bidding on projects, we're pretty aggressive with it. In Southern California, we have hired individuals into the space. We're doing a lot of strategic work. We've hired sales reps into the space, so we're not sitting on our hands. I assure you it's going to be a little bit longer cycle just to really to make sure that we entered this market with a clear competitive advantage and we make sure that we can communicate to the folks out there, the builders out there and the developers out there, the level of service that we bring. It's just not something they're used to or accustomed to like we do on the single family side. So, we're creating that entire strategic launch platform to be able to go to the multifamily environment and to be very, very successful there. So I'm just as excited as I was before, but we just need the market to cooperate like I mentioned.

Understood. And then in terms of the stuff that is more within your control the cost synergy side, have you accrued – have you accrued any efficiencies or synergies there or is that more to come in fiscal 2020 in your kind of roadmap now?

We've actually – we've done very well on that. We're actually starting ahead of plan even on our cost synergies and honestly, it's one of those things where once you bring teams together and really started looking at opportunities, we know there's a lot more to come. So, we are – like I said, we're, we're on plan with all of those even from a timing and total cost saving perspective and we expect to remain on plan and meet the commitments.

Thank you for that. Lastly one for me, just looking at the headlines with regard to the Mexico labor situation, I just want to – may be give us a assessment of the labor relations, what they have historically been and what you're seeing currently in Mexico?

Yes, it's a very good question, because obviously there are a lot of dynamics going on right now in Mexico. There's two aspects on this, number one from a total net labor availability perspective, we do have some of the challenges in our – particularly in areas where we operate, like we've seen in the U.S., but I'd say it softens a little bit on Mexico side. They've – obviously a new President came in and has taken some action with regards to a wage rates and nothing that's drastically impacted us from the financial side, but net-net has been very positive for reason actually it's more related to our culture, the operations in Mexico, there we have three of them and to us, or they're just the most part of that mark family. And we actually are very focused on operationally and culturally. We've made a number of changes down there to really support leadership and the support the plants and the people within the plants themselves, which had gone very, very favorable. So I think there's a lot more to come. I think we have a lot more opportunity, even from operational performance perspective and to even leverage that operation at a higher level than we have in the past. So as of right now, I'm going to tell you we are not experienced in any – also labor is not a constraint that I would even bring up from a operational perspective like we've had at few locations in the U S, it's going very well and continue to improve even just because of the cultural aspect.

So you're not seeing any unrest or any agitation at the labor - within labor from what? Well I guess on the yields of that action?

No absolutely none. Honestly, absolutely none. Actually, it's been a big positive for us, because the way we've communicated the way we pulled them into our company and our culture and some of the changes, other changes will be made down there on very, very favorable. So we have no issues.

Excellent. Excellent. Well thank you guys, really appreciate it.

Thank you.

[Operator Instructions] And it appears there is no one else waiting to ask the question and I would like to turn the line back to Mr. Culbreth for any closing comments.

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