Good day and welcome to the American Woodmark Corporation Second Fiscal Quarter 2022 Conference Call. Today's call is being recorded November 23, 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 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 we make that may be important to investors, such as investor presentations. 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 call over to Paul Joachimczyk, Vice President and CFO. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to American Woodmark's Second Fiscal Quarter Conference Call. Thank you 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 second fiscal quarter earnings call. Our teams continue to navigate a challenging labor, logistics and supply chain environment. Second quarter sales were up 1% with demand continuing to outpace production across all platforms. The ability to match demand remains limited by two factors, labor and material availability. Material shortages led to unplanned downtime and efficiency loss due to substitutions that were made to continue production. International shipping container challenges also persist with higher rates and longer delivery times due to port congestion. Backlog increases slowed but still represents an increase versus the prior quarter. Going forward, production levels continue to increase and drive incremental sales over the next few quarters. Our teams will continue to invest in production capability and capacity, the outsourcing staffing additions and productivity improvements. Within new construction, our business grew 7.1% versus prior year. Strong order growth is expected to continue across our markets. Capacity of the manufacturing trade base to keep up with demand and rising prices could slow future build rates and these factors continue to increase the build cycle time. We are monitoring lot supply and community growth count -- sorry community count growth, the consumer price index, which has increased 6.2% over the past 12 months, interest rate trends and decline in consumer sentiment, which has been tied to inflationary concerns. Looking at our remodel business, which includes our home center and independent dealer and distributor businesses revenue was down 2.7% to prior year. Within this, our home center business was down 3.5%. This was expected due to retailer stocking efforts in the prior year and timing of winter promo shipments coupled with labor challenges across the platforms. Our stock kitchen business performed well as pro and DIY demand…

Thank you, Scott. Financial headlines for the quarter. Net sales were $453 million inclusive of $14 million of price, representing an increase of 1% over the same period last year. New construction net sales increased 7.1% for the second fiscal quarter compared with the same period in the prior year. Timberlake direct business comped positively for the quarter and the first half of fiscal year 2022. We continue to experience growth in our Origins line related to the ongoing mix shift occurring towards lower-priced products in the market. Delays from the builders and their ability to receive our cabinets improved slightly within the quarter. However, we continued to build our finished goods -- goods backlog higher than historical trends, which is impacting our inventory levels. Our frameless business continues to grow and has built a backlog of orders during the past two quarters, primarily due to logistical and supply constraints on the West Coast. New construction sales were above market completions during the second quarter of fiscal 2022. We are experiencing a 90 to 120 day plus lag between start and cabinet installation. The overall market starts in single-family homes were up 14.8% for our fiscal second quarter. Looking at completions during our second fiscal quarter, we saw a 3.4% increase year over year, which further supports timing impacts the market is experiencing and our continued growth in the new construction channel. The combined home center and independent dealer distributor channel, net sales decreased 2.7% for the quarter, with home centers decreasing 3.5% and independent dealer and distributor increasing 0.4% for the quarter. Within both the new construction and recurrent remodel markets, we continue to foresee consumers focusing on larger investments within their homes, whether it is kitchens or baths, we expect this trend to be extending as a time…

And the first question will come from Garik Shmois from Loop Capital. Please go ahead.

On your high-single digit sales growth outlook for the year, correct me if I'm wrong, is that up from the guide last quarter, I think it was mid-to-high single-digits and if so what's the incremental differences at just the additional pricing you're putting through. And maybe just speak more broadly to your level of confidence on that guide, just given some of the volume headwinds you've experienced?

Yes, Garik, this is Paul. Last quarter we did guide mid-to-high single digits. This quarter, we revised our guidance to be high-single digits and we did up our guidance that is out there in our outlook, mainly due to the confirmed pricing actions that we did complete and then -- and our confidence in the production abilities that are out there.

Okay, thank you. And I guess my follow-up question is just around the volume in the quarter. I don't know if you could provide maybe a little bit more color on how much of the impact was the labor shortfalls, how much was some of the supply chain headwinds. I think you had cited particle board both in your prepared remarks and in the release. And then how much of that was just the extent of the lag between starts and cabinet installations?

So, I really wouldn't attribute any of the sales miss to our estimates for the last point you made, I would attribute it primarily to labor shortfall. I think our team did a good job of overcoming most of the material availability challenges we experienced inside the period, but by far and away the biggest impact would be the labor shortfall.

And then just a follow-up on them on the labor piece. Are you, just given the actions that you've been taking at a point now where you're labor is where it needs to be or I guess how much more do you need to invest in labor to meet demand?

It's unclear how much we'll have to invest to continue to see labor, what I'll take you back to is, my earlier remarks, that we've seen an improvement. So our actions are starting to work. We've seen an improved -- an improvement in our production levels as a result of that. We need to continue to make progress on that. So we still have open positions across our platforms that we're seeking to fill, whether that will come at the current wage rates or adjusted wage rates, I don't have an ability to frame that for you.

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

On the Q3 margin thinking about that and kind of the new bridge into the Q4 pricing coming through. Can you explain at the messaging around the embedded pricing that's in the backlog if that is playing out in a different way than what you discussed in the prior call. And if so, what is driving the changes there?

Yes. No real change in how the backlog is going to be consumed, what has changed is the second round of pricing now being confirmed and starting to build inside the backlog. So the two points we wanted to highlight is incremental pricing plus our total pricing that will be realized in the quarters, over $35 million in Q3, over $50 million in Q4 and as a result, we do expect sequential margin improvement off of what we just delivered in Q2 over the next few quarters.

Okay, helpful. And then on the balance sheet, can you comment with cash being lower than normal, the receivables still elevated as well as payables. Is this something that unwinds naturally as the backlog burns off and maybe can you go into a little more detail how much of the inventory is the finished goods you discussed, how much of it is in-transit inventory is being elevated or other factors contributing?

Yes Steven, are impacting us a little bit in different ways that are out there. For the receivable balances there is no issues anything in regards to collection or things like that, really has to do with the timing of the increased sales as we get more price for the channels, we get increased sales through there, our balances will naturally grow as we really kind of create more operational activities for the business. Really the drain on our working capital was related to our inventory balances, and there is a couple of factors that played into that; one of it is the timing of shipments coming in from the international ports and duties and then just containers being stuck at ports. So, we've actually prepaid for a lot of this inventory, but we also made a conscious choice, as an organization, to stock up on key components for those raw materials. So the spike that you'll see on our balance sheet really is focused in our raw material growth. There is some finished goods inventory that did grow due to the builder channels that are out there, in regards to just some of the inventories that they couldn't take for completions for the end of the quarter for their perspective. But all-in-all, you'll see our balance sheet is going to be effectively used to bolster up inventories to complete and work down our backlog in the future months coming up.

Excellent. And then last one for me to make sure I understand, are backlogs currently, how do they compare to Q1 and now that you're entering maybe a seasonally slower period, is this the time where you can improvement -- show improvement in the shipment to order ratio and be in a better position to take orders as you get into the busy season of 2022. And maybe one more additional, are there any cancellations from customers?

Yes, I'll take the last part, no material change in cancellations. We're not seeing that to be a factor. Specifically around the backlog, it is elevated, we're at all-time highs, as I mentioned in my remarks, they still grew inside the quarter but it was at much slower rate of growth than what we've seen in the prior couple of quarters. We will start chewing into that backlog as we go forward. So as our production levels increase and to your point, you have this naturally slower time period typically around remodel, over the winter months will have an ability to start to chew into that backlog and get back to the lead times we want to be able to communicate going forward.

And the next question will be from Adam Baumgarten from Zelman. Please go ahead.

Thanks for taking my question. Could you dig into that promotional timing that you cited in the release and on the call, is that pulled forward last quarter or is it pushed out into 3Q. Just some more color on that would be helpful?

Last year it was, it was heavier ship inside the -- in the Q2 period and this year it's more of a heavy ship inside the Q3 period.

That's helpful and then just, you talked about on the last call, trying to compress the time it takes to execute these price increases. I think your target, and I'm sure it will take time as it was a couple of months, any progress you've made there in some of these negotiations that we can maybe think about for the future.

So, we did compress the timing in the two channels that we need to target that in. That is why you're seeing us take up the guidance and expectation around pricing as we go forward. So, we were able to achieve our goals there. Should a third or fourth increase ever be required going forward, we will continue to take learnings from that and try to work out to be even tighter in the future.

And then just maybe walk us through your confidence in returning to margin expansion by year-end. Is it a continuation of current cost trends and labor shortages or is there a cut -- some kind of improvement from a cost perspective, combined with the raised pricing that gives you the confidence?

So obviously, the pricing is a huge lever when you think about what we expect to see from a margin improvement standpoint in the second half of the year. I think the pace of inflation is going to slow. It's not going to zero that but it's certainly seems to have moderated as of late. It's not to say there won't be more inflation in the second half, but I don't think it's going to be as severe as we experienced inside the first half. We've seen improvement in the hiring efforts here as of late. So our expectation is for that trend to continue. And then finally, we do have some new saving projects either capital related or product related that will start to see some benefit in the second half of the year. So all of those factors combined drive the expectation for a sequential margin improvement.

The next question will come from Collin Verron from Jefferies. Please go ahead.

And thank you for taking my questions. I was hoping you could -- I'm wondering if you can quantify the cost headwind that you guys experienced in fiscal 2Q and just what you've seen so far in November relative to what you guys have seen in the fiscal second quarter. And then just on the guide for sequential margin improvement, can you help us think about the magnitude of that margin improvement from fiscal 2Q to fiscal 3Q?

So, unfortunately, I am not going to give you a lot of those. So, on the last question, specifically around precision or a range around the margin improvement, I don't want to provide a specific value on that because there are so many unknowns. I will just reiterate sequential margin improvement expectations over the next few quarters and again with the fourth quarter comping positively versus prior year. So, we don't want to provide any more granularity beyond that, specifically inside our fiscal second quarter, the exact amount of inflation I don't have that to call out for you today. I'll just reference pricing again that we did realize of over $14 million and nothing specifically to report this year around, major question is inflation and its number, nothing that I would call out specifically around that at this point in time.

Okay, understood. And then just can you give us a sense of what sales could have looked like if you did not have those labor and supply chain issues and just given those current headwinds, can you just talk about your ability to increase shipments in this type of environment or is fiscal 2Q really the ceiling from a volume perspective, just given the shortages that you're seeing?

Yes, I think another $10 million to $15 million of topline was certainly possible inside the quarter. If you wouldn't have some of the challenges in the first half of the fiscal quarter, this by no means is our -- is our ceiling. We have expectations to continue to see production levels increase across all of our platforms, which will continue to drive incremental revenue in future quarter's absence of the price. So we're not at peak at this point in time, if you reference my comment earlier, we had assembly cells and our made-to-order platform were idle over the summer. We started to ramp those back up. They're not at full ramp at this point in time, it takes time to obviously hire and then train and then get the efficiencies on that, so we expect continued improvement.

Our next question comes from Josh Chan from Baird. Please go ahead.

So your pricing comments were pretty encouraging. Could you give us any color in terms of how the price kind of distributes between the channels, are they pretty even? And then also how do you think about the potential impact of customers possibly trading down because of the price increases like this. Is that something you expect to happen?

So, on the pricing itself, I'd say is fairly even based on channel. So, I don't have anything specifically to call out that was materially different result. On the customer side, what we've seen is really lead time discussions opposed to pricing, we're not getting a lot of pushback from a price standpoint on doing the job. What we're hearing is lead time is a barrier. So if you've got an extended lead time, consumers may not be willing to proceed the job, so that seems to be more of a focus area than it is on pricing, which is why we're so focused on increasing our production levels and getting lead times back down to our historical average.

Right, that makes sense. Thanks, Scott. And then on the -- on the cash flow, recognizing that you're trying to service customers, how are you thinking about cash flow in the second half compared to what happened in the first half?

Yes, Josh, our cash flows will get better in the back half of the year due to the timing of -- we won't be stockpiling inventories due to Asia holidays that are happening overseas and we're hoping that logistical challenges for the international containers and things like that will improve and free up some of our capital for those purposes. However, we still need to have some on-hand inventory to keep key critical components doing, we'll make those choices that keep our overall customers happy.

And net income will be substantially higher in the second half than in the first half.

And the next question will be from Julio Romero from Sidoti and Company. Please go ahead. Julio your line is open, perhaps your line is muted on your end.

Thanks very much. Thanks for taking the questions guys. Can you talk to substitution efforts for particle board. I believe in the past you were able to use MDF or plywood, just any additional color there. And is any of those substitute products in the safety stock you currently have?

Yes, so it's not really a substitution across the different types of what you mentioned, plywood, MDF and particle board; really inside particle board right now the challenges of size, so what's the optimal size that we require to run or shut our factories from efficiency standpoint as opposed to what's available in the market in mass quantities. So that's where we're seeing more of a substitute -- substitution challenge, which creates inefficiencies in the factory.

And I guess any additional granularity as to -- I know, earlier you talked about your efforts to compress pricing and what you've done there, just any additional granularity on how much time you may have shaved off that compress by week or month?

Nothing specifically to disclose around that.

And thank you. As I do not see that there is anyone else waiting to ask a question, I would like to turn the line back over to Mr. Joachimczyk for any closing comments. Please go ahead, sir.

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

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.