Good day and welcome to the American Woodmark Corporation First Quarter 2020 Conference Call. Today's call is being recorded August 27, 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 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 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 first fiscal quarter conference call. Thank you for taking time to participate. Joining me today is Cary Dunston, Chairman and CEO. Cary will begin with a review of the quarter and I will add additional details regarding our financial performance. After our comments, we'll be happy to answer your questions. Cary?

Thank you, Scott. And good morning to you all. Our first quarter proved to be positive despite some significant headwinds and challenging revenue comps. We are very pleased with our financial performance particularly related to our adjusted EBITDA and earnings per share.Net sales for the fiscal quarter were down 0.4% for the business as a whole with continued volatility by channel. Within new construction, we grew our business 4.5% over prior year. Our Timberlake direct business comped very favorably, while our frameless PCS business in Southern California experienced a year-over-year decline.Our Timberlake direct business once again outperformed the market and our competition, in alignment with our strategic expectations. Our success is even more evident in comparing our growth to the 7.5% market decline when considering the 60 to 90 day lag between the start of a home and moving to install our cabinets.Our ability to continue to gain share even in the current market is a reflection of our direct-to-builder service platform and our recently expanded offering with our lower price point Origins product.Although the movement to opening price point homes remains a challenge for builders, we are definitely beginning to see a shift towards the lower price point.Consensus among builders remains fairly strong towards first-time homebuyers, particularly with lowering mortgage rates. As reported last quarter, we are experiencing volatility by region within Timberlake.Comps remain strong in the Northeast, Texas, Atlanta, the Southwest and Northern California. We have experienced some softening in Florida, but continue to believe it's temporary as builders remain confident, particularly as they head into the second half of their fiscal year.With regards to our new construction PCS business that is concentrated in Southern California market, we continue to experience a decline in housing starts.On the positive, the comps did trend more favorably throughout the quarter. Housing…

Thanks, Cary. The financial headlines for the quarter. Net sales were $427.4 million, representing a decrease of 0.4% over the same period last year.Adjusted net income was $36.1 million or $2.13 per diluted share in the current fiscal year versus $36 million or $2.04 per diluted share last year. Net income was positively impacted by lower selling and marketing expenses and lower interest expenses.Adjusted EBITDA was $59.6 million or 16.3% of net sales compared to $68.1 million or 15.9% of net sales for the same quarter of the prior fiscal year. The increase during the first fiscal quarter is primarily due to improved operating efficiencies and lower selling and marketing expenses.The new construction market remained challenging during the quarter. Recognizing a 60 to 90-day between start and cabinet installation, the overall market activity in single-family homes was down 7.5% for the financial first quarter. Single-family starts during March, April and May averaged 838,000 units. Starts over that same time periods in prior year averaged 906,000 units.Our builder channel net sales increased 4.5% 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 July U3 unemployment rate was 3.7% and U6 was 7%. Both measures were lower than the July 2018 reported figures.Interest rates decreased in the quarter, with 30-year fixed-rate mortgage at 3.77% in July, a decrease of approximately 76 basis points versus last year.The share of first-time buyers increased. The June reported rate was 35% versus 31% reported last June. Keep in mind, the share remains well below the historical norm of 40%.All cash purchases in June were 16%, down from 22% last year. Consumer sentiment increased to 98.4 July versus 97.9 reported July 2019.On the negative side, existing home sales decreased during…

Thank you. [Operator Instructions]. And we'll take our first question today from Justin Speer with Zelman & Associates.

Thank you, guys. Really appreciate it. Thanks for the color also on the RSI path and the tariffs. I wanted to unpack the competitive dynamics in the repair/remodel channel. Any perspective you can provide, what's taking place and how your performance compares to underlying market growth? And the change in promotional cadence across the landscape, just context around what you're seeing and whether or not you think that's going to be an ongoing aim for the balance of the year.

Hi, Justin. It's a big question with regards to how the R&R market from a competitive landscape is really shaping up. Obviously, with home centers, primarily us and two other key competitors. So, it is down. We mentioned our negative comps. Our competition mentioned negative comps in home centers themselves. To talk about negative comps, just the move down in price point, I think the challenge our home centers are having in making sure they can make that transition and attract the next generation into the stores, we're confident they can do that. We're just going through a transition here. And, unfortunately, that transition, with the pressure to try to improve comps, we're seeing an increasing level of promotional activity.It definitely concerns me because it's not where we feel the investment should be made. Is it going to last? I don't know. Obviously, it's been ongoing now for, what, three years, four years with a steadily increasing level of promotional activity in that channel. I keep saying every quarter, every six months, every year that at some point it has to stop, you can't keep taking promotional activity up and up and up. At some point, there has to be a resolution to it. So, we're continuing to make a lot of investments in those channels, but more on the strategic side. We're not really willing to take our promotional levels up to any higher significant levels. It's just not a good ROI on that. But at the same time, we are willing to work with our partners and make some strong business decisions. So, home centers, a little unknown right now on the MPO side.When you're getting to the stock side of the business, more encouraging, more promising. As I mentioned, we do expect to achieve positive comps going…

So, that's good color across the different pieces of the business there. And then, there's this other element. There are so many moving parts, one of the other elements, you mentioned tariffs and antidumping duties. Can you run through your thoughts on the impact to the industry and, more specifically, more pertinent to your business, with these elements in the background, what's taking place near term in reaction to those tariffs and how you think – it sounds like you think they'll be successful, but how you think that will manifest itself in your business model?

It's a good question. Up to this point, I can't say other than from a cost impact. It's, obviously, impacted the industry as a whole. We communicated early on there was less of an impact on our businesses because we were not that dependent on Chinese imports. We certainly have some supply over there. Some things like glides and a lot of the hardboard you get in our history, basically China is it for source. So, when we talked about limited sourcing options with regards to the expanded 301 tariff, that impacts the industry as a whole. But once again, we're much less dominant on that supply chain. So, obviously, with the low cost and a Mexico base, we have fared fairly well and we continue to fare very well with regards to move down in price point. With our service model, we're very competitive in new construction. So, the Chinese tariffs and the impact of Chinese product really has not impacted single-family new construction.We do see it in multifamily. We go up against it in some of the bidding we're out there doing now. But, once again, service is also important to that industry where you really tend to see the impacts in the dealer world. And, I guess, in the home center, made-to-order, you don't see much of an impact either other than just a little bit of the cost side.Where the industry has greatly been impacted is in dealer and I think we'll see how that plays out. It's been – obviously, it's important to us from the channel perspective, but it makes up a lower percentage of our total revenues. So, you've not seen us impacted as significantly as some of the others.With regards to what we feel the future holds, obviously, with the tariffs, the…

Perfect. Thank you, guys. Appreciate the time.

Thanks, Justin.

Next, we hear from Truman Patterson with Wells Fargo.

Actually, this is Paul Shibolsky [ph] on. I was wondering if you could give any color on how sales trended on a monthly basis through the quarter overall and then by channel.

Not a whole lot of detail on that other than – I mentioned on the single-family starts, we do trend – as you watch single-family starts trend, we do trend fairly in line with that, although we're having lot of volatility by region. But in general, we're trending more favorable within single-family new construction. We expect to do that going into the fall as we feel single-family new starts will improve.When you get into the remodel side, it's just been pretty volatile out there. So, it's hard to really talk about month to month. Right now, there are no indications in the remodel word that anything exists that's going to turn remodel around. I think we've got to get that younger consumer into the, I'll say, the existing home market. I've been saying for many, many, many quarters now that getting first-time homebuyers or getting existing homes out there at a price point that younger folks can afford is very critical. So, inventories remain very, very low with existing homes at the right price point. It's really driven by baby boomers aging in place and just that move down and move up process has not happened. So, I think you're going to start to see that as time goes on. It will improve the remodel market. It's just a question of timing. Right now, I think most out there are saying flat to low-single digit is really what you're looking at in remodel.

Okay. And then, gross margin was better than expectations. Any chance that inflects on a quarterly basis in 2020?

I'm sorry. I didn't quite catch your question there.

Yeah. Gross margin was better than expectation. I was wondering if there was any chance that that might inflect year-over-year on a quarterly basis this year?

So, we really don't want to talk about quarterly guidance as we look forward. We provide the perspective on the outlook over full year. So, I'll just take you back to those remarks are variable at this point in time. It's really around the particleboard expense recovery. And depending on how that plays out, either we'll be flat with prior year from an EBITDA margin perspective or down just slightly.

Okay, thank you.

Next, we hear from Garik Shmois with Longbow Research.

Hi. This is Jeff Stevenson on for Garik. My first question is, how quickly to expect some of the antidumping benefits to drive upside revenue potential you talked about earlier if that October thing goes through?

Like I said, we're starting to get some calls in the matter of actually making the decision and pulling the trigger. I think folks are going to – a little bit more of a wait-and-see mode to see what happens, but they also recognize that, if that antidumping takes place, it's instantaneous. So, I think over the next three to four months, we're definitely going to start to see opportunity and potential. The big question is how much potential is there. It's very difficult for us and everybody else in the industry to really kind of pinpoint what that is and what that will be. We're not willing to put a number out there. Obviously, it's just too difficult. I think it's going to be a slow trend upward. If October antidumping hits, then we certainly will start to see that pickup much more quickly. But it's very, very dependent on what the antidumping tariff comes in at. If it's too low, there is a chance it may not have a drastic impact. So, it really is very dependent upon what the ruling is on antidumping.

Okay, great. And can you give a little bit more color on the timing and execution of the $50 million buyback program?

So, we've got the authorization in play. And the way we're going to look at that is it's going to be opportunistic repurchase. So, no specifics we'll offer other than we'll evaluate what appropriate price is to repurchase that we believe drives a good value for shareholders and then we would execute. But purely opportunistic. Debt paydown continues to be our primary focus.

Okay, thank you.

Our next question will come from Tim Wojs with Baird.

Hi, gentlemen. Good morning.

Good morning, Tim.

So, maybe my first question, just kind of some clarification around guidance. On the EBITDA line, Scott, did the duties of $5.5 million – is that in the guidance now? I'm just trying to understand what exactly is in and what might have changed or not?

So, all of the tariff impacts that we're currently aware of, including the announcements on Friday with the increases of 5% on the two different buckets, those are all fully incorporated and captured in the outlook.

And really, the only deviation is that the particleboard – you have the particleboard cost impact and then it's really just the timing around if you'd get that insurance recovery in fiscal 2020 or if it would fall into 2021?

It's actually twofold there, Tim. First is the timing recovery. So, there will be a lag when we get it. And then, secondly, will we fully recover all of the expenses associated with it? That's the piece which is still open and that's what drives the variability in the guidance.

Okay. Okay, got you there. And then, second, any way to think about an updated expectation for the cash flow for the year?

We did not work through that from a modeling standpoint for the year. Obviously, we started off with a pretty strong Q1 result, but I'm not ready to change any of the outlook at this stage.

Okay. And then, Cary, maybe kind of following on with one of your prior comments, what level of kind of antidumping tariffs would kind of narrow the gap or kind of swing the pendulum towards the domestic manufacturers? Just maybe for some context.

When you look at the antidumping, I think I've heard anywhere from 50% to 100% as being kind of they'd hope to achieve. Obviously, it's very dependent upon a lot of things. But I think a minimum of 50% would probably be required to really start to see some closure of that cost delta.

Okay. Okay, that's helpful. And then, maybe just the last one from me, any update to kind of how you're thinking about material costs and freight for the year, Scott? I think the four, you'd expect them maybe flat to up slightly. I'm just kind of curious if that's changed at all.

Yeah. Obviously, the particleboard is a factor where we're seeing increases. And until all that capacity comes online, that likely continues. Plywood, paint and steel would continue to be elevated. We have seen lumber prices start to tip the other way. It's also declined from inside the quarter, primarily around cherry and oak. So, still think it's an inflationary environment. Fuel came down for us in the period. But we still do see elevated carrier rates overall because we're contracted predominantly. So, we still expect that to continue as we push forward. Now, those contracts come up to renewal, we'll have the opportunity to even more closely align with market rates and perhaps get adjusted for that time.

Okay, sounds good. Thanks, guys. Nice job on the margins.

Thanks, Tim.

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

Yes, hi. Good morning, everyone.

Good morning, Julio.

I wanted to ask a little more about particleboard supply disruption. You mentioned that you were able to find a product substitute pretty quickly. So, that $2 million to $2.5 million of incremental cost a quarter, would that be just, I guess, primarily due to incremental transportation cost? Is that the right way to think about that?

No, it's actually material cost associated. There is some transportation. And so, it's all in. But it's primarily actual material cost on the material itself. Some of it is transportation. Some of it is actually you had to go out on the spot market. Also, we had to move away from contracts and go out on the spot market and buy, which drives up material cost. And then, there's some actual price delta based on the substitution that we had used. It's actually a superior product material, but we had to pay more for it.

Got it. And you said you expected, at this point, to affect at least your second and third quarter. What's kind of the puts and takes there that would potentially push that out to maybe the fourth quarter and beyond?

We don't expect much risk there. I think, basically, what's very dependent upon is there is – actually there are several companies in the process of bringing on capacity in America as we speak. So, our plan is very dependent upon their timeline and get that capacity up on plan. Right now, everything looks fine. We don't expect any issues. But, obviously, there are a few unknowns there, few risks there based on their ability to get started. But, right now, everything appears to be coming up on plan.

Okay, very good. And just my last one here is, on the RSI synergies, I think you had said you expect half of your annual run rate achieved by end of year fiscal 2020. Would that maybe mean that you expect about a third of your expected revenue synergies by that time or is there a different way to kind of think about that? Thank you.

Yeah. I will just take you back to the remarks. So, we believe we'll have the cost component captured by the end of the fiscal year and then the remaining delta will be related to the sales synergy. Cary has talked at length really the last couple of quarters on that's coming slower than expected on the sales side, with the cost coming a little bit faster. But, again, we expect to be about half realized by the end of this fiscal year.

Okay. So, that's, what, half all in revenue and costs?

That's correct.

Okay, great. Thanks a lot. Appreciate it.

Thank you.

I do not see that there is anyone else waiting to ask a question. I would like to turn the line over to Mr. Culbreth for any closing comments. 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 call. Thank you for your participation. You may now disconnect.