American Woodmark Corp (AMWD) 2018 Q3 法說會逐字稿

Good day, and welcome to the American Woodmark Corporation Third Quarter 2018 Conference Call. Today's call is being recorded, March 9, 2018. Please note, American Woodmark's earnings release is available on the Investor Relations page of the company's website at www.americanwoodmark.com.

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, sir.

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'll add additional details regarding our financial performance. After the presentation, we'll be happy to answer your questions. Cary?

Thank you, Scott, and good morning to you all.

Our third quarter of our fiscal year proved to have some challenges as well as some significant positives. As has been reported throughout the industry, growth slowed in our third quarter, while facing one of our toughest comps on revenue. We also observed a more pronounced shift downward towards opening price point homes in a number of markets we serve. In addition, we faced some cost challenges that impacted our gross margin. However, we had some great successes as we grew sales in all channels, closed on the acquisition of RSI Home Products and we have made tremendous progress in the integration work.

I will talk specifically to the integration after my comments on performance. Regarding performance, we will talk to both our consolidated results and organic results, excluding the RSI acquisition. Please recognize that results include only one month of RSI's performance. For the quarter, we grew sales 17% over prior year. Excluding the acquisition, sales increased 2% over prior year. Although this growth is slightly above reported KCMA cabinet growth for the quarter, it is below our expectation.

Looking specifically at new construction. We grew our business 7% with 3% growth, excluding the acquisition.

We've been reporting for some time that builders were beginning to make a move towards a lower-priced housing market. This movement was a key strategic reason for our acquisition of RSI Home Products, given their strength in the lower-priced value-based product. Until recently, we have not been aggressively building on this business due to -- bidding on this business, due to the positioning of the existing Timberlake platform. Although this decision has impacted our new construction growth in the short term, we have 3 key areas of opportunity. The first, with the completion of the acquisition, we have been actively bidding on strategic accounts that offer strong growth in the opening price point home market, seeding the business with our existing Timberlake product. Secondly, we have a dedicated team to develop the systems and processes to allow us to begin to sell our lower cost RSI product with a target launch by the first quarter of our new fiscal year.

Over time, we will shift existing Timberlake opening price point business to our low-cost platform as well. Although we must recognize that it will take time to ramp this operation up to its fullest potential, it offers an extremely positive long-term growth opportunity by leveraging our national direct-to-builder infrastructure.

Lastly, although we are seeing a shift downward to lower-price-point homes, opportunity remains at the middle and higher-end price points. Our team is aggressively bidding on growth opportunities with not only new builders, but also in geographical markets, not currently served with existing builders.

From a remodel perspective, we were up over 30% with organic growth at 2%. Breaking remodel down, excluding the acquisition, our dealer business grew 3% over prior year. As has been reported throughout the industry, we are seeing a slowing of the dealer business that is serving the more affluent consumer. I believe this is a reflection of both a slowdown in demand as well as labor shortages impacting installations within the dealer channel. Looking forward, and including the benefits of the acquisition, we have a focused effort to develop a holistic market and product-positioning strategy with the expectation to continue to gain share and over-index within the dealer market.

Regarding home center, following the 2 quarters of negative comps, we were pleased with our positive 2% organic growth rate in the quarter. Although promotional activity remains at historical high levels, indications are that it has leveled off. As such, working closely with our home center partners, we have made strategic changes to regain our competitiveness. Although still somewhat volatile right now, we expect to grow with the home center channel going forward.

In addition, following the acquisition of RSI and the strength of our product positioning within in-stock kitchen and vanities, as well as special order, our level of strategic discussion with our partners has greatly enhanced. We remain very confident in our ability to offer enhanced solutions across our product portfolio for long-term growth of our home center partners and our business.

Looking specifically at RSI from a high level. As we reported during the acquisition process, the revenue in calendar year '17 declined due to a loss of business within home center and 2 localized geographical regions. For planning purposes, the transition out of the impact in markets impacted revenue through January; however, it is now complete and we expect no additional share loss.

On the positive, we were able to work proactively with our customer and maintain some of the market that was initially planned to transition. In addition, we were absolutely committed to regain the markets we lost as well as growing this business throughout all channels.

January revenue was also impacted by a significant product change-out in the vanity aisle of a key home center customer. Not only are we working through product discontinuance, but we are loading inventory with reset scheduled for our fourth fiscal quarter. With a new product offering, we are expecting improved growth.

We're also partnering with our largest customer in the in-stock kitchen business to offer a new program that will significantly enhance the experience for the pro and homeowner consumer as well as the designer. Once again, we expect improved growth in this segment.

Moving on to gross margin. We ended the quarter at 17.2%. Our manufacturing platform was impacted by labor inefficiency, as we were staffed for a higher production level based on a more favorable forecast. Looking forward, we are focused on using attrition to right-size our platform based on updated forecasting.

In addition, we continued to experience high transportation and raw material inflation. We constantly challenge ourselves on opportunities to offset raw material and transportation costs through efficiencies; however, we are also evaluating and implementing price increases in the market as appropriate.

Additionally, on cost, we had a one-off issue with a key piece of equipment that failed on our largest finishing operation, impacting our cost, quality and delivery metrics. New equipment had to be ordered and was recently installed restoring our historical operational performance.

Lastly, on gross margin, Scott will speak to $6.3 million of inventory step-up amortization related to the acquisition.

Finally, our adjusted EBITDA margin was 12.3% compared to 11.3% prior year. Excluding acquisition-related expenses, we continue to remain disciplined on our SG&A spend. Adjusted net income was $14.1 million versus $15 million prior year. Net income was impacted by acquisition-related cost and purchase accounting entries. In addition, as a reminder, this only includes one month of operating results from RSI.

In summary, our industry continues to be as challenging as ever. As those that have followed us over the years know, we do not react to short-term trends. We are focused on our vision and our strategy to move us towards our vision. It's hard to pick up a business paper today and not read about the headwinds of how the industry is facing. Despite how rocky the road may be, we remain very confident in long-term growth. History shows that when there is demand, the housing industry will find a way to supply. And I firmly believe that significant demand remains. I have spoken in the past of the importance to the recovery cycle of both first time and move-down homebuyers returning to the market.

This demand is clearly changing, as evident in the number of starts in single-family new construction that are targeting these buyers. However, with regards to existing home sales, inventory remains at record lows, particularly at lower price points. The good news is that we are beginning to see movement of baby boomers transitioning out of their larger homes and into smaller, lower-cost, new construction communities. Not only does this benefit new construction, it will begin to free up existing home inventory and assist with the move-up cycle. Ultimately, we believe existing sales will increase at all price points.

With the average age of existing homes in America over 35 years old, we expect a corresponding increase in R&R spend. Kitchen remodeling will be very high on the list, particularly with younger generations. I reviewed a chart just this morning that referenced the peak age for first time home buying being in the early 30s and a tremendous surge of over 14 million millennials that will move into this age range between now and 2021. As such, having modern, yet affordable kitchens will be key to future growth and success, an opportunity that we are best positioned to serve with our broadened product portfolio.

Within single-family new construction and the increasing mix of opening price point homes, we now have a low-cost product and a national service platform that is second to none. The demand shift is occurring more quickly than we anticipated; however, we delivered on our strategy and we will be able to properly serve this market in the coming months. And, although our market synergy work is focused on single-family new construction as our first growth priority, the opportunity to grow at home center, dealer, distributor and multi-family channels are right behind it.

Overall, our integration work with RSI is on plan. First and foremost, culturally, the alignment is as positive as I believed it would be during our diligence work. People that know American Woodmark know that our culture is our number one priority. It is our people that truly differentiate us and create our only true, long-term sustainable competitive advantage. We have been extremely impressed with the leadership team and all of our new teammates within RSI, a great culture and great people aligned with our own core values. The most significant challenges related to the integration are of no surprise and are tied to our financial and IT systems as well as the alignment of our HR benefit programs.

Given the scope of the work, we are using a mix of internal resources as well as external experts to help with the integration and we remain pleased with our progress.

With regards to synergies, we are already working very aggressively together to identify and capture synergies. We absolutely see opportunities to leverage RSI's low-cost manufacturing platform to share best practices within operations and engineering and to capture synergies within our purchase materials and logistic systems. However, our greatest opportunity rests with growing our business. As I mentioned previously, we have a formal team established with clear deliverables to develop the systems to begin to sell RSI product through the AWC builder platform.

I cannot say enough how impressed I am with how both teams have come together so quickly, aligned by the common goal to make this acquisition a success. Three months ago, American Woodmark had 6,000 incredible teammates driving a common vision. Today, we have 10,000 incredible teammates aligned to drive a shared vision to grow this business together, that is powerful and one, which I have tremendous confidence.

With that, I will turn it over to Scott for the financial details.

Thanks, Cary. The financial headlines for the quarter.

Net sales were $293 million, representing an increase of 17% over the same period last year. Excluding the impact of the RSI acquisition, net sales for the third fiscal quarter increased 2% to $254 million. Adjusted net income was $14.1 million or $0.84 per diluted share in the current fiscal year versus $15 million or $0.92 per diluted share last year. Net income was negatively impacted by purchase accounting entries of $6.3 million and inventory step-up amortization, acquisition-related costs of $10.2 million, both offset by an associated tax benefit of $4.4 million, and gross margin declines, which were partially offset by additional sales volumes and lower incentive costs.

Adjusted EBITDA was $36 million, or 12.3% of net sales compared to $28.1 million or 11.3% of net sales for the same quarter of the prior fiscal year. The increase during the third fiscal quarter is primarily due to additional sales growth and the inclusion of one month results for RSI.

For the 9 months ended January, year-to-date net sales were $844 million, representing an increase of 9% over the same period last year. Excluding the impact of the RSI acquisition, net sales for the first 9 months of the current fiscal year increased 4% to $806 million. Adjusted net income was $56.1 million or $3.41 per diluted share in the current fiscal year versus $54.3 million or $3.31 per diluted share last year. Adjusted EBITDA was $110.4 million or 13.1% of net sales for the first 9 months of fiscal 2018 compared to $99.1 million or 12.9% of net sales in the same period the prior fiscal year.

The new construction market continues to perform well. Recognizing a 60- to 90-day lag between start and cabinet installation, the overall market activity in single-family homes was up 7.6% for the financial third quarter. Single-family starts during September, October and November of the prior period averaged 826,000 units. Starts over that same time period for the current year averaged 888,000 units. Completions over the third fiscal quarter averaged 3%. Our new construction base revenue increased 7% for the quarter. As Cary noted, we were impacted negatively by shifting demand of first time and move-down home buyers. Organic growth was 3% for the quarter.

The remodel business continues to be challenging. On the positive side, existing home sales increased slightly during the fourth calendar quarter of 2017. Between October and December of 2016, existing home sales averaged 5.54 million units. That same period for 2017 averaged 5.61 million units, an increase of 1.3%.

Unemployment continues to improve. The January U3 unemployment rate held steady at 4.1% and U6 increased to 8.2% during the fourth calendar quarter. Both measures were lower than the January 2017 reported figures. All-cash purchases in December were 20%, down from 21% last year. On the negative side, the median existing home price rose 5.8% to $246,800 for December, impacting our consumers' affordability index. Interest rates increased in the quarter with the 30-year fixed-rate mortgage at 4.03% in January.

Residential investment as a percent of GDP for the fourth calendar quarter of 2017 remained steady at 3.5% versus the prior year, but below historical norms. Home ownership rates remain low versus historical averages. The percent of Americans who own their own home in the fourth calendar quarter was 64.2% or 0.5% above last year's rate. The share of first-time buyers remained flat. The December reported rate was 32%, unchanged from the prior year, but up from the 29% reported in November. Keep in mind, the share remains well below historical norm of 40%.

Consumer sentiment decreased to 95.7% in January versus 98.5% reported January 2017. Our combined home center and dealer channel revenues were up over 30% for the quarter, with home centers increasing over 40% and dealer growing 3%. Organic growth was 2% for the quarter. Promotional activity remained higher than the prior year for the third quarter, as we responded to competitive positioning and market conditions.

The company's gross profit margin for the third quarter of fiscal year 2018 was 17.2% of net sales versus 20.7% reported in the same quarter of last year. Gross margin in the third quarter was unfavorably impacted by higher transportation cost, raw material inflation, operating inefficiency and $6.3 million or 216 basis points of inventory step-up amortization.

Year-to-date, gross profit margin was 19.7% compared to 21.7% for the same period in the prior year. Gross profit for the first 9 months of the current fiscal year was unfavorably impacted by higher transportation costs, raw material inflation, higher healthcare costs and $6.3 million or 75 basis points of inventory step-up amortization.

Total operating expenses increased from 12% of net sales in the third quarter of the prior year to 14.5% this fiscal year. Through 9 months, operating expenses increased from 11.1% of net sales to 11.5%.

Selling and marketing expenses were 6.5% of net sales in the third quarter of fiscal 2018 compared with 7.4% of net sales for the same period in fiscal 2017. The decrease in the ratio is the result of lower personnel cost and product launch cost.

General and administrative expenses were 8% of net sales in the third quarter of fiscal 2018 compared with 4.6% of net sales for the same period of fiscal 2017. The increase in the ratio was driven by acquisition-related costs of $10.2 million, $4.1 million of intangible amortization, partially offset by lower incentive cost.

Taxes were impacted in the quarter by an impairment of the company's deferred tax asset of $1.6 million related to the tax act. A $0.8 million impact of nondeductible transaction costs and a reduction of the domestic manufacturer deduction benefit of $0.7 million. These items were partially offset by a $2.7 million benefit from the corporate rate reduction enacted with the tax act.

Free cash flow totaled $81.8 million for the first 9 months of the current fiscal year compared to $69.2 million in the prior year. The company repurchased 309,612 shares of common stock at a cost of $29 million in the first 9 months of the fiscal year. And as previously announced, suspended its repurchase program.

Pro forma net leverage was just under 2.9x adjusted EBITDA at the end of the third fiscal quarter.

In closing, the company expects that organic growth will average mid-single digit for fiscal 2018. Sales growth will average approximately 20% with the inclusion of the RSI acquisition. With higher-than-anticipated material inflation and transportation rate increases, the company expects adjusted EBITDA for fiscal 2018 to be approximately 14%, which includes only 4 months of RSI results.

This concludes our prepared remarks. We'd be happy to answer any questions you have at this time.

(Operator Instructions) Our first question comes from Kathryn Thompson from Thompson Research Group.

This is Steven Ramsey on for Kathryn. The first question is in regards to RSI and the impact from promotions in the home center channel. How has RSI historically responded to these promotional environments? And how have they handled the most recent chapter in this promotional environment? And do you plan to make edits to their strategy here?

Steven, it's Cary. Definitely a different strategy. We've been speaking very heavily, obviously, for a number of years now of the heavy promotional activity in the home center space. Most of that's been predominantly in the special order, which is obviously, where the legacy American Woodmark market serves. There has been some promotional activity. You tend to see the promotional space and the in-stock used a little bit differently. So you will see it around holidays. There is 2 big primarily promotional periods that they offer promotions on and obviously, we participate in that, but it's a much different strategic and environmental backdrop when it comes to promotional activity on the in-stock product. I'll say, it's much more manageable right now than what you say the special order is.

Excellent. And then thinking more for core American Woodmark and with the promotional environment starting to level off, how soon would you expect to regain lost share and what are the main governing factors here?

Yes, once again, the biggest assumption is assuming it does level off, it's going to, as I stated, we do believe it is leveling off, recognizing that it is at historically high levels, so it remains very high. I think we are seeing -- and then obviously, with -- not only with us, our competitors and working with home center partners, getting a little more strategic with regards to the promotions and targeting customers, obviously trying to get new customers in the door, and so forth. But our goal obviously, as I stated, is going forward. Once again, it's very dependent upon the volatility and if it truly has leveled off and if it's -- if we're at parity. But I mean, assuming those assumptions are true, then we are expecting to basically grow with the home center -- overall home center growth moving forward.

Our next question comes from Scott Rednor from Zelman & Associates.

Question on the sales outlook for you guys. The mid-single digit guidance for the full year, can you maybe just give us a flavor since it's later in the quarter than you typically report, where your sales are running, say, over the first 2 months of fiscal 4Q?

We're actually only 1 month through, yes, so it's fiscal Q4, but I would say it still is the same guideline that I've already stated in the outlook. It's consistent with that.

And when you think about...

And I mean -- make sure, it's no different. Bigger picture is no different from what I just stated in the call. It's just -- we're definitely seeing a transition down in new construction, and we're aligning ourselves up to be able to serve that, but it's going to take some time, obviously.

And Cary, just recognizing that there -- RSI's builder business based on the disclosure you gave is about -- your Timberlake business is about 10x their builder business. Can you maybe help us get a little bit more comfortable from the outside looking in how that's going to help reinvigorate the growth rates on the builder-direct side, just realizing that the bases are significantly different?

Yes, so obviously, we've been very successful in the single-family new construction. So focusing just on single-family initially is, with starts around $850,000, $880,000 trending up. Obviously, like I stated, between whether it's $1.1 million, $1.2 million, and when we get there, I think everybody will debate, but the single-family new construction is going to continue to grow in the coming years. And so the question is, who is going to get that share of that growth. And we -- a certain percentage of that growth, say 2/3 of it will continue to be at a, I'll say, mid-price point to higher. But that influx of the lower price point, opening price point, which is first-time homebuyer as well as we also get reports from builders that even though we have been placing a lot of emphasis on first-time homebuyers, there's lot of interest and demand period for a lower-priced home. So obviously, some of it's move-down buyers, but they're also seeing it at all levels. But -- so that lower priced or what we often call the opening price point is going to make up a greater influx or greater percentage of the index of that growth going forward.

So if you look at our 2 pieces of business, one, on what you call the legacy American Woodmark, we still see growth opportunity there. We're going to continue to leverage our core competency or everything that we've done well up to this point. And like I said on my prepared notes, I think, there is opportunity for us to continue to drive some share growth with customers that we currently don't serve today and in certain geographical markets. And we've been very selective about our growth up to now and we want it to be a controlled growth. Obviously, we've over-indexed and we've slowed down recently, still growing, but slowed and that's just because of that shift to the opening price point. So now and at RSI, so look at our core legacy platform continuing to grow and then you obviously, take the RSI platform, lower-cost platform and we can go out now and be much more aggressive.

On timings, I'd love to say it happened a year ago but it's in alignment with our strategy and we're seeing that growth that we knew would come. And now we can go out and aggressively start bidding on that in a very profitable way. So that was one of the strategic dilemmas that we were faced is do you go out and bid on that with our existing Timberlake product, recognizing that we cannot do it at same profitable levels we have been serving the market or do we not bid on it. And we've obviously, elected not to bid on, knowing our strategic plan. So we'll -- once again, we're going to get market share. We expect to over-index, but at the same time you've got to expect that the market is going to continue to grow as well. So I think, you take both of those factors into consideration and our plan looking forward once we get this operation fully up and running and leveraging our core platform with regards to our ability to service it and then ramping up RSI's manufacturing process, and so forth in our systems, we'll -- we expect to grow it.

Just one last one, Scott. Can you give a flavor for what the EBITDA contribution and gross margin for RSI was in the quarter?

Not a specific breakdown on the business. Our goal is to report a consolidated view there. We'll give you the color commentary on the sales breakdown, but didn't want to start dissecting margin and EBITDA between the various units.

(Operator Instructions) Our next question comes from Tim Wojs from Baird.

So maybe just going back to the new construction and, kind of, pulling through RSI. I mean, could you give us an idea what you need to change to the RSI operations to kind of make that switch and service that new construction business? Just any sort of training of -- on some of your reps and then also what you may have to change to the actual manufacturing process to kind of push that through?

Yes, so not a lot of detail. I mean, we -- like I said, we have a formal team going through that. I will say it's -- from a manufacturing process, we've been very careful to say we're not going to go on and make tremendous change because, obviously, we've got to be cautious so -- I'll say, adding additional cost to their process. So what RSI does, they do very, very well with the low-cost, value-based platform. We're going to adhere to that. So right now, it's really understanding how we can ramp it up. Within one of their plants or within a couple of their plants, they have a little bit of a, I'll say, separate process. That's a quicker ship process. Our plan is to grow that and utilize that in our new construction business.

So we've got to really work on what's it going to take to ramp that up, looking at our forecasting for the new construction business, and obviously, getting the processes and the systems in place to support that. A lot of the work, right now, honestly, yes, there's manufacturing work, but the first thing we have to be able to do is allow our systems to talk to each other. So that's a big part of this thing. So when you place an order through our builder center, it's got to be able to come into the RSI system. Everything has to align for order processing, from the logistics, and so forth. So honestly that is the most technical aspect of this work that's underway. And that's going as planned, but that is a big piece of it.

And yes, as you stated, there's definitely going to be some training that's not difficult. I mean, obviously, we know the market. We know the customers. We've already been out communicating to customers. Honestly, we are already out bidding on business with the product. So that piece of work is underway given the lag time that you have between bid and recognizing when a subdivision may start. So it's -- I would say nothing is easy in our business, but that's being managed appropriately and where we have a lot of opportunity, and if it takes investment, we'll make that best investment, just given the opportunity that lies ahead.

Okay. Okay, great. And then, I guess, what the -- I guess, relative -- I mean, with all the builders that you're talking to, I mean, what's the tone in kind of their outlook? I mean, I think there's been a little choppiness here to kind of start the year with the weather and things. But how are your builders thinking about the season and when the weather might break and what type of growth we might see for new construction this year?

Yes, and you hit -- I mean, we -- obviously, we never really stated, but the markets that we participate in, particularly like the Northeast and so forth, I didn't comment on it, but we have been hit by weather. The builders have been hit by weather. So you see a little discontinuity in some of the numbers builders are reporting. Some of them are higher comps. It just comes down to specific geographical regions and where they're growing.

So our builders remain positive. Overall, it's definitely choppy. I mean, you can't go talk to a builder now and not have them talk about some of the headwinds and whether it's labor, whether it's land, whether it's material inflation, it seems like coming from all different directions right now. But at the same time, they see demand increasing and they're being very creative and strategic with regards to how they're going to supply that. So they -- our announcement of the acquisition and our ability to sit down with them and say, we have an outstanding solution now to be able to supply what is very evident in their strategy is they've been very vocal with regard to communicating their desire to grow in the opening price point.

And we've seen it. The move-down buyer, we've seen for some time now. It hasn't been a very high percentage. It's definitely growing, but that first-time homebuyer is definitely increasing. And they're looking at the fashion side of it. They're looking at what they require and everything. So we're obviously, having those strategic discussions with them and they're very excited about our platform. So it's -- I think we have a good future ahead as I think -- everybody is going to have a different opinion on the growth. I think it's definitely going to be rocky for sure. But we will obviously find a way. I mean, it's pretty efficient and we see a lot of growth ahead and we now have a very efficient platform to service it.

Okay, okay. And then Scott, maybe just, if we take out the, I guess, one, the inventory accounting, are you through that this quarter? Or is there going to be more of that in the April quarter? That's number one. And then number two, if we adjust that out and kind of think about the year-on-year kind of gross margin contraction, how much of that was kind of price cost versus some of the operational efficiencies that you talked about with the line and the staffing?

Yes. So we are done with inventory step-up that was fully amortized in the period, so that doesn't carry over. The only reason there would be an update there, if there's some shift in the purchase accounting work. Of course, that's got -- and we have up to a year to finalize that body of work. It's with the auditors now. Hopefully, we can finalize that here shortly. But I wouldn't expect anything to push forward as it relates to that.

Backing that out, taking a look at the quarter, what were the major impacts for us, certainly, the raw material and transportation increases would be the leaders. Those would be the 2 biggest items and then that would be followed by the operating inefficiency, part of which, Cary highlighted with structurally being staffed to a higher forecast and not being able to rightsize that as rapidly as one would like.

Okay. Okay. And then from a tax rate perspective, what's the right tax rate we should think about on an ongoing basis?

Yes, so for the fiscal fourth quarter, you should use 34%. We'll have a blended rate for this period, where we've got part of the year at the prior Tax Act and then we've got 4 months at the new. So 34% for the fourth and then as you push forward into fiscal year '19, our expectations would be a rate of approximately 26%.

Next question comes from Garik Shmois from Longbow Research.

Just wanted to ask about incremental margins over the medium- to long-term once you move through some of these periods and you get RSI scaled up. How should we think about incremental margins across your platforms?

I guess I'll give you inputs and Scott may add. I think, right now we're still doing analysis to fully understand long term, I think, the mix of product, the rate of change of our ability to go out and get the new product and so forth. Obviously, as Scott said, we're not going to comment on specifics by -- say, by business. But I think it's -- obviously, we have optimism. Obviously, given their profitability, and so forth, but we still have work to do to fully understand when you talk about integrating our financials and what the business model looks like. And as you can imagine, Scott and the financial team have been extremely, extremely busy the past 3 months here working on this. And so still more work to do and I think we'll have more information to share as we go forward.

Yes, I think that's the best way to frame that, Cary. From a legacy standpoint, we've always talked about Woodmark being targeted 25% incremental gross margin rate. We certainly recognize some periods will be better than that, some periods will be worse than that but that's where we've always been driving enterprise over time. RSI clearly has a more attractive margin profile in total. I think our guidance is likely to shift to more of an EBITDA incremental approach. So as we complete that work and we are in the midst of our budget cycle as we are talking today, we'll even continue to have budget reviews tonight and into next week. So as we come out of that, we'll provide a better perspective and outlook as we wrap up the year and give you a perspective on Q4.

Okay. And then as you get comfortable with RSI and making some of the platform changes and targeting different end markets, just curious how that squares with the initial guidance that you provided on synergies. It sounds like you're pleased. You're only a month or so into the integration process, but has anything changed or anything specific relative to the initial synergy targets and once you dig into the business, has you either more excited or less excited? And I guess, just some of the issues that popped up in the 1 month of ownership, was that all just consistent with your expectations when you made the acquisition?

Yes, I think that's what we're most excited about with this acquisition is the 2 companies are so aligned and we know the markets and they know the markets and when we went through this acquisition process, we were very knowledgeable about the synergy potential at least the best we could do and the due diligence. And yes, we remain very consistent, I think, with what we communicated during the acquisition process when we announced it. So yes, we remain very favorable and very strong synergies with, once again, that -- most of that focus on the growth aspect of it.

(Operator Instructions) Our next question comes from Lee Brading from Wells Fargo.

Just wanted to follow up on a couple of the items that you guys have talked about. You talked about now starting to do more -- I wanted to make sure I interpreted it right. It sounded like now that you have RSI, more on the bidding on the direct-to-build side and talked about the operational challenges of that. Is the timing of that of when you start to see being able to go into that direct-to-build channel with the RSI product, did I hear correctly you're thinking probably Q1 of next fiscal year?

That's correct. That's our team that's -- we've got formalized right now. We're targeting first quarter of our new fiscal year.

How challenging is it? You talked about the manufacturing, but just the distribution point of it. Is that, I mean, I guess, what's the most challenging part of trying to integrate with that direct-to-build side?

It's really a systems aspect. So as you know, all of our product on the legacy American Woodmark side is final mile delivery. So we can leverage that delivery system very easily. It's just a matter of getting the systems in place. And when an order is placed through our builder channel that it can flow through -- flow through into the RSI system and obviously, into MRP, and so forth. So -- but working with our logistics carriers and putting that system -- logistic system in place is not a challenge at all really.

Got you. When do you start to expect the orders, I guess, from the bidding process to start to occur? Or has it already started?

Well, we're bidding on it. And it should be -- as we're speaking. So the team is -- our Timberlake team is out there bidding as we speak. So it's obviously, given the lag between when we go out and bid on product and then we actually start to break ground and build a subdivision, and so forth, there is a time lag there. But our goal is actually to see revenue in our Q1. I'm not going to say it's going to be high, but we're -- that's not -- that's our goal, is that our first quarter is we want to start to see some revenue.

Got you. And you talked about the home center side, the promos are still up, but it's started to level off. I guess I was just trying to get more flavor of that. Are they still at elevated levels? And do you think they'll probably stay at these elevated levels for a while? Is that kind of a new order? Or do you think they will eventually start to come back down?

Yes, right now, they're elevated. And I anticipate them staying at elevated, but I'll say, kind of, targeted level. So the bolt-on centers are getting a little more strategic as I mentioned and trying to target customers and narrow the focus down to really try to drive more consumers in the door. Longer term, I think, obviously, we know it. Our bolt-on center partners very well know it that the high promotional levels that we're at right now are not desirable to be sustained long term. So they're both very focused on options and opportunities to try to bring those down.

Certain spaces, they're playing with everyday low price, but it has to be the right space for the right end consumer, like more on the pro space, for example. So when it comes to home consumer, I think, it's going to take some time. It's conditioning, right? Both the consumer and the designers in the stores have been conditioned to sell with these -- under these very high promotional levels. So it's going to take some time to bring it down.

How challenging is it for you to maintain market share at these levels?

Well, as long as the levels stay consistent then we can maintain market share. So once again, if somebody does something that's outside the norm then, obviously, it's very susceptible. It's just, as we've seen the past 3 years. So right now, I feel it's at parity. So we should be able to maintain share, but that's very dependent upon those assumptions.

Got you. And to kind of, I guess, drop in a little to the gross margin line, as you talk about the add-back items or the step up in accounting. And now, you're looking at price increases. Can you talk about the price increases? I'm not sure what extent you want to talk -- how much detail you want to talk about, but I guess, as you look at your platform, what you might be doing there?

Yes, we really don't provide details, obviously, for customers' sake and so forth. So we're just continuing to evaluate it. And as we've communicated, historically, in our markets is we'll -- there is definitely delays dependent on the segment. But we do -- we will actually go out and try to pass price increases on. Fairly efficient, just different time frames involved with that.

Do you think you will still probably have another 1 to 2 quarters of challenges, I guess, from maybe a comparison standpoint on the gross margin line?

Yes, I would just defer and say, we'll circle back and give you an outlook perspective at the end of this quarter.

Okay. And then last item was just on the CapEx side. Any color there maybe? You talked about the integration, everything. Hasn't been any surprises, I guess, and I would assume maybe no surprises on the CapEx front, kind of business as usual, but any color there would be great.

Yes, no surprises. Business as usual, which is a good thing obviously, when you go through an acquisition. But definitely no surprises.

Our next question comes from Scott Rednor from Zelman & Associates.

One quick one for Scott, just from a modeling perspective. Can you give us a feel for what the right run rate for interest and D&A should be, now that the deal is finalized?

So interest income expense specifically, probably $38 million should be the number, when you look forward at fiscal year '19. Amortization for the intangibles, $49 million for the year.

As I do not see there is anyone else waiting to ask a question, I would like to turn it back to Mr. Culbreth for any closing remarks. Please go ahead, sir.

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

Once again, this does conclude our conference. Thank you for your participation. You may disconnect.