American Woodmark Corp (AMWD) 2018 Q4 法說會逐字稿

Good day, and welcome to the American Woodmark Corporation Fourth Quarter 2018 Conference Call. Today's call is being recorded, May 29, 2018. During this call, the company may discuss certain non-GAAP financial measures, including in our earnings release such as adjusted EBITDA, adjusted EBITDA margin, free cash flow and adjusted EPS per diluted share. Earnings release, which can be found on the website at www.americanwoodmark.com, includes definitions on each of these non-GAAP financial measures, the company's rationale for each of their uses 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. According to 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 be not realized.

I would 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 fourth 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. Overall, we are pleased with our fourth quarter performance. And when looking back at our fiscal year as a whole, we remain very confident in the strategic decisions we made that position us for strong success going forward. Despite evidence of slowing in the industry growth and the onset of some headwinds, we grew our business and achieved very solid adjusted EBITDA margin for the quarter. Net sales were up 57% for our fourth quarter driven by the inclusion of RSI. Excluding the acquisition, our core growth was 3%, over-indexing our competition and KCMA reported cabinet growth. Just as importantly, we were pleased to see a more positive trend in demand as the quarter progressed with some improvement in our backlog. For the full fiscal year, sales increased 21% or 4% excluding the acquisition.

Looking specifically at new construction. For the quarter, we grew our business 20%. Excluding the acquisition, our Timberlake business grew 6%, slightly higher than family starts over the same time period. For the full year, we grew our business at a very healthy 7%. Last quarter, I reported that we were being impacted by a strong movement towards opening price point homes. This remains true. However, our team has been successfully leveraging our direct-to-builder service model to grow our share at the mid and higher price points, while bidding on strategically aligned opening price point business. We committed that we will have the systems and processes in place by the first quarter of our new fiscal year to begin to sell RSI products to our direct-to-builder networks. I'm pleased to say that we remain on plan to do just this.

Although a very competitive business, the opening price point single-family home offers strong growth opportunity. We continue to believe that the opening price point home will over-index as single-family starts continued to move towards a longer-term sustainable level of 1.1 to 1.2 million homes per year. With our new low-cost manufacturing platform, we can strategically and profitably leverage our direct-to-builder service model to grow our business well into the future.

In addition, we will remain focused and diligent on competing to gain share in the mid to higher price point home market.

From a housing industry growth perspective, numerous macroeconomic factors remain, including high land cost, labor shortages, material inflation and freight capacity. Labor and freight are also evolving into macroeconomic factors given their potential impact on America's growth as a whole. Nearly every industry is facing the same constraints. With home prices continue to rise, affordability is also being closely monitored. Despite these challenges, given the changing demographics and the spending power of the younger generation, we remain confident in the continued growth of the housing industry. Likewise, our improved platform offers the best opportunity to capitalize on this growth.

Taking a look at our dealer channel, excluding the acquisition, we grew the business by 11% for the quarter and 11% for the year. Despite evidence of slowing in the channel by more affluent consumers, our team continues to drive growth, over-indexing the market.

Regarding our home center business, it was up 82% as a company. However, excluding the acquisition, we were down 2% for the quarter. Promotional activity remains a key driver in the variation in our business. An unpredictable factor that impacts us is when a competitor supports an exclusive promotional event. Although very expensive for the competitor, such an event did shift share in our fourth quarter.

The greater challenge we all face, however, is the continued under-indexing of the home center channel to the rest of the market. Despite these challenges, we continue to remain confident in the special order segment within home centers, particularly as it relates to what we consider to be strong future growth within repair and remodel. As existing home inventory is freed up and purchased by the growing number of first-time homebuyers, we believe kitchen remodeling will be at the forefront of R&R spend. In addition, the pro business within America continues to grow and strengthen. Home centers are ideally positioned to serve this segment as a one-stop shop. With our value-based special order and in-stock kitchen and bath products, combined with our best-in-class service platform, we are strategically aligned to meet this demand with our home center partners.

From a RSI perspective, we are focused on growing all aspects of our business. Last quarter, I commented on 2 prior year regional losses within our home centers business. Although these losses are behind us, they will continue to impact the year-over-year comps until we lap the events in midsummer. We remain very determined on restoring these markets as well as making continued investment to grow our in-stock kitchen and bath business. We did grow the business from Q3 to Q4, and we remain confident in our ability to grow the RSI core business well into the future. For example, we strategically partnered with one of our home center partners to operate program that has catered to the growing pro buyer. Within this program, we supplement our in-stock kitchen cabinet business with an expanded product offering at a greatly reduced lead time. It is our clear intention to continue to invest in and fully support this expanding business opportunity. Within the home center bath vanity business, we have launched considerably new product -- considerable new product this spring and we are already seeing growth.

Within our PCS business that consists of a frameless product offering, we experienced solid year-over-year growth as well, particularly in the Southern California new construction market. This platform is also part of our future growth plan within home center and multifamily.

So as a whole, we are confident in our foundation and our ability to continue to grow across all channels of our business. From a gross margin perspective, we finished the quarter at 22% versus 22.3% prior year. Two of the key headwinds we are seeing ramp up are logistics cost and material inflation, both of which impacted us in Q4 and will continue to do so in the new fiscal year. Higher health care costs also impacted us in the quarter.

For the year, gross margin was 20.4% with logistics, material and health care costs being the key challenges. In addition, we have $6.3 million of inventory step-up amortization related to the acquisition. Operationally, our teams are performing well and are entering the new fiscal year with strong results.

Looking at our adjusted EBITDA, we finished the quarter at very solid 16.1% of sales, up from 13.3% in our fourth quarter prior year. For the year, adjusted EBITDA was 14.1%, including 4 months of RSI results, up from 13% prior year. On adjusted net income, we generated $29 million in the quarter and $87.7 million for the year.

Regarding integration work underway with the acquisition, I'm extremely pleased with our progress as we remain on plan with every one of our key deliverables. We have been very purposeful on our internal communications holding numerous town hall meetings and getting to know our new 2 teammates. I can honestly say that our excitement only continues to grow in time as we all get to know each other and realize just how aligned we are. My team and I have spent considerable time with leadership joining us as 1 team and 1 vision. We are very focused on the future and are openly challenging each other with new thoughts and ideas. I can tell you it's extremely exciting to see the 2 organizations come together as teams are already working very aggressively to capture synergies on both the revenue and cost side of our business.

As I mentioned previously, we are on plan to launch our new value base product offering through our Timberlake platform this quarter, and we've already taken orders on the product. This was no easy task with the system and process requirements and offers a clear indicator of how well our teams worked together towards a common goal to grow our business. I'm very pleased to say that our teams are executing very well, and we are on plan to deliver the cost and revenue synergies we committed during the acquisition announcement.

We are very focused on the strategic opportunity to grow our new construction, home center, dealer and distributor markets by leveraging our 2 national platforms. We also have numerous active teams in place working on cost synergies across our manufacturing and supply chain platforms.

In summary, our industry is not getting any easier. The headwinds we all knew were coming have now arrived. Combined with the numerous variables already impacting the new construction and R&R markets, predictability is going to be an even greater challenge. As unpredictable as tomorrow can be, we are confident in the future growth of our industry within both new construction and R&R. In addition, one thing is absolutely certain: Bringing together 2 industry leaders in American Woodmark and RSI absolutely places us in a far better position to win in this industry. Everyone is going to face the same headwinds. However, the new American Woodmark has a greater strategic platform to continue to win and grow.

With that, I will turn it over to Scott for the detailed financials.

Thanks, Cary. The financial headlines for the quarter. Net sales were $406 million, representing an increase of 57% over the same period last year. Excluding the impact of the RSI acquisition, net sales for the fourth fiscal quarter increased 3% to $267 million. Beginning with this earnings release, the company has revised its definition of adjusted EPS per diluted share to exclude intangibles amortization charges. Adjusted net income was $29 million, or $1.64 per diluted share in the current fiscal year versus $18.6 million or $1.13 per diluted share last year.

Net income was positively impacted by additional sales volumes and lower incentive costs were partially offset by gross margin declines in the core business, partially due to raw material inflation. Adjusted EBITDA was $65.3 million or 16.1% of net sales, compared to $34.5 million or 13.3% of net sales for the same quarter of the prior fiscal year.

The increase during the fourth fiscal quarter is primarily due to additional sales growth and the inclusion of 3 months results for RSI.

For the fiscal year ended April, year-to-date net sales were $1,250,000,000 representing an increase of 21% from the prior fiscal year. Excluding the impact of the RSI acquisition, net sales for the fiscal year increased 4% to $1,073,000,000 million. Adjusted net income was $87.7 million or $5.24 per diluted share in the current fiscal year versus $72.9 million or $4.45 per diluted share for the prior fiscal year. Adjusted EBITDA was $175.8 million or 14.1% of net sales for fiscal 2018 compared to $133.7 million or 13% of net sales for 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 5.8% for the financial fourth quarter. Single-family starts during December, January and February the prior period averaged 833,000 units. Starts over that same time period from the current year averaged 882,000 units. Our new construction base revenue increased 20% for the quarter and core growth was 6% for the quarter. The remodel business continues to be challenging. On the positive side, unemployment continues to improve. The April U3 employment rate dropped to 3.9%. U6 decreased to 7.8% during the fourth fiscal quarter. Both measures were lower than the April 2017 reported figures. All-cash purchases in March were 20% down from 23% last year. Consumer sentiment increased to 101.4 in March versus the 96.9 recorded in March 2017.

From a negative side, existing home sales decreased slightly during the first calendar quarter 2018. Between January and March of 2017, existing home sales averaged 5.61 million units. At same period for 2018, averaged 5.51 million units, a decrease of 1.8%.

The median existing home price was 5.8% at $250,400 for March impacting our consumers affordability index.

Interest rates increased in the quarter with a 30-year fixed-rate mortgage at 4.47% in April, an increase of approximately 42 basis points versus last year. Residential investment as a percentage of GDP for the first calendar quarter of 2018 declined to 3.5% versus the prior year. Home ownership rates remained low versus historical averages. The percent of Americans who own their home in the first calendar quarter was 64.2%, which increased from last year's rate of 63.6%. The share of first-time buyers declined. The March reported rate was 30% versus 32% in the prior quarter. Keep in mind, the share remains well below the historical norm of 40%.

Our combined home center and dealer channel revenues were up 67% for the quarter, with home centers increasing 82% and dealer growing 11%. Core growth was 1% for the quarter.

The company's gross profit margin for the fourth quarter of fiscal year 2018 was 22% of net sales versus 22.3% reported in the same quarter of last year. Gross margin in the fourth quarter was unfavorably impacted by higher transportation cost, raw material inflation, and higher health care cost.

Year-to-date gross profit margin was 20.4% compared to 21.8% for the same period in prior year. Gross profit for the entire fiscal year was unfavorably impacted by higher transportation cost, raw material inflation, higher health care cost and $6.3 million or 50 basis points of inventory step-up amortization.

Total operating expenses increased from 12.1% of net sales in the fourth quarter of the prior year to 12.5% this fiscal year. Through 12 months, operating expenses increased from 11.3% of net sales to 11.8%.

Selling and marketing expenses were 5.5% of net sales in the fourth quarter of fiscal 2018 compared with 7.3% of net sales for the same period in fiscal 2017. The decrease in ratio is a result of leverage for higher sales and lower personnel cost and product launch cost.

General and administrative expenses were 7% of net sales in the fourth quarter of fiscal 2018 compared with 4.8% of net sales for the same period of fiscal 2017. The increase in the ratio was driven by $12.3 million of intangible amortization, or approximately 30 basis points -- 300 basis points, partially offset by lower incentive cost of approximately 70 basis points.

Free cash flow totaled $36.9 million for the current fiscal year compared to $51.5 million in the prior year. The decline was primarily due to the funding of the company's corporate office, which was completed in April. Approximately $21 million was spent in fiscal year 2018 for the new office.

Pro forma net leverage was just under 2.9x adjusted EBITDA at the end of the fourth fiscal quarter and the company paid down $40 million of its term loan facility during the quarter.

In closing, the company delivered on its outlook for the year we shared last quarter with sales growth of 21% and adjusted EBITDA of 14.1% for the fiscal year.

Regarding our fiscal year '19 outlook for the market, we expect the following. Single-family housing starts to grow approximately 7% to 9%. Interest rates to climb along with continue to increases in the average price of new homes. Both factors will negatively impact affordability, particularly for the important first-time and first-upgrade buyers. Unemployment share remained steady. Cabinet remodeling sales continue to be challenged until economic trends remain consistently favorable. Growth is expected at roughly mid-single-digit rate during the company's fiscal 2019.

In this environment, our expectations for the company performance are as follows. The company's home center market share will remain at normalized levels for fiscal 2019 after annualizing for market losses in the in-stock business. However, this is heavily dependent upon competitive promotional activity. The company will continue to gain market share in its growing dealer distributor business. The company's core new residential construction direct business will increase the market rate for single-family housing starts.

In total, the company expects it will grow core sales in the mid-single-digit rate in fiscal 2019 with total sales growth of approximate 35%. Margins will be challenged with increases in labor cost, raw materials, fuel and transportation rates. The company expects adjusted EBITDA margins for fiscal 2019 of 15.5% to 16% depending upon synergy timing, execution and a significance in inflation rate increases. Free cash flow generation of approximately $120 million will be utilized to further pay down the company's term loan facility.

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 Justin Speer from Zelman & Associates.

One quick question for me, just housekeeping. RSI EBITDA contribution. Could you break that out for us?

We're not breaking that out between the different segments, we're just going to report as 1 total enterprise.

Okay. Well, stepping back just thinking about price cost, I'd like to get some color on how much raw materials and labor were a drag in the quarter. If you could break that out from a dollar standpoint? And then, help us unpack what's going on at the home centers channel? Really a lot of questions around why the growth is what it is there in the context of broader building products category being more like mid-single digits. What you're seeing there from a competitive landscape? And how that, in your mind, manifest itself in price cost going forward?

This is Cary. I'll kind of address the latter part of your question and Scott will provide a little bit of information on the first part. So with regard to the home center, it is a -- this is a continued challenging environment. Obviously, we're not pleased with the negative 2% comp from the prior year and expected at least to be flat, if not slightly up. The unpredictability that I had mentioned though is we did have a fairly significant impact by one of our competitors that had a exclusive promotional event during the quarter, which really shifted a solid amount of share over -- during that period of time and impacted us. That's something that we just don't know going into a quarter and we don't know when it's going to happen, when it does happen, it obviously has an impact on us. And it's -- just when a competitor is willing to fund a lot of money to gain share, it's just -- it's one of those unpredictable events that's out there right now. And so longer term though, I mean, obviously, the home center and we talk openly with both the home centers and with regards to their future and the growth and so forth. And they know they've under-indexed and have not really recovered coming out of the recession. We still believe that's going to happen just given the really thinking who their key customer is and where that consumer sits today with the younger generation that's rising and so forth. So you split that into the special order side and the in-stock side. The special order obviously is where it's been lagging and we expect that. Timing is a question, but we expect those -- that recovery to occur as those consumers get out there and purchase single-family new construction or single-family -- like a single-family existing and they start doing those remodels. So timing is key there. Our new platform, obviously those consumers aren't going to go out and spend the typical values that you've seen being spent recently. It's going to really shift that price point down, which is a key part of our acquisition and plays well into our existing core business as well as into the value-based platform with that frameless PCS business side that I mentioned before. From an in-stock perspective, it actually has grown well coming out of the recession. We will continue to grow well. That really meets a lot of the needs of that pro-contractor business. We're doubling down in that, both in our core and with our investment in RSI. We fit that bill very, very nicely with that pro-contractor and have partnered with one of the leading home centers out there to continue to offer a superior experience for that pro business. So we do expect that to grow -- continue to grow. And you expect to see growth or investment in the future. And so it's one of those we don't get into details as far as splitting out by product line within the home center channel. But we are definitely seeing growth. Once again we're faced with that year-over-year comp due to some regional losses 1 year ago. But excluding those, we are definitely seeing growth in that in-stock kitchen business within home center and we expect to continue to see that growth going forward.

And just on the margin side...

Sorry, on your margin side on your original question. Don't have dollars to break down into each of the respective elements. But as we talked about, raw material, health care and transportation being the 3 biggest impacts. I'll tell you that raws and health care were the 2 biggest, followed by transportation. So you could at least stack it that way, but not able to break down a dollar amount to share with you.

But just in terms of looking back in history, this industry has had a good track record of recouping commodity cost headwind. Is there anything on the horizon, particularly the competitive landscape that is going to prohibit you in your mind from recouping these cost?

It's one of those where -- you are right, with the market's been fairly efficient at passing price increases on for inflation, there was obviously a lag there depending on the channel. But it is fairly efficient. I think what you have to be careful for -- careful of is demand elasticity curve that I think we're facing out there is that, that really most of -- a lot of the growth that at least in our opinion that we're going to start seeing going forward is going to be a lower price point. So now you're going to look at 2 ways. So from a core perspective, we'll definitely pass that price increase on. I think we're going to continue to be challenged with comps in that environment just given the price point. However, that's really what positions us well with our acquisition is the lower price point customer and the product that we actually can sell at that lower price point and make good margin there. So you have to be careful about making assumption that just because we're passing price on we're going to lose consumers because actually it favors us in the context that we now have a product offering that we can sell and make solid money out of it. So it's -- I think we are all trying to figure out where our future demand is going to go. Like I mentioned on my pre described notes there that we are seeing some slowdown in the dealer channel that tends to be a more affluent consumer. And you see it in new construction as well although opening price point are still -- you hear builders talking a lot about it. We are definitely seeing regional shifts to that lower price point, opening price point. But at the same time you also see articles out there, that some of the younger generation have been sitting on their money, for such an extended period of time now that they're skipping what we'd typically call an opening price point home and moving into the middle price point home. So that's actually favorable for new construction. And it allows us to keep price points higher and does allow us to pass on inflation, and so forth. So I think there is a lot to be determined over the next 1 year or 2 with regards to demand elasticity and where that consumer is going to shop. But all I can state is we're -- with this acquisition, we're very well positioned now to fulfill both of those needs.

Our next question comes from Garik Shmois from Longbow Research.

Just a follow-up on the last point. Just wondering if you could provide any color just on how to think about the mix to margins if we're going to see a shift towards more opening price points? Would that end up being a potential headwind like you would end up seeing or conversely could that be neutral or positive?

No, I think that really -- I mean, if you were to listen to the call 1, 1.5 years ago, I think that was one of our concerns, right, is that you saw that movement down in the opening price point. We could not as efficiently as -- effectively and as efficiently serve that market with our what I'd call, our core business. With the acquisition, we actually can serve that and with good strong margin. So it's no longer a concern of ours. It's actually a positive as we see that shift downward now. So obviously there's a time lag there. We are in a process of selling product at that opening price point, leveraging our existing core platform and the RSI product, it's just going to take some time to wrap up. But the good thing is that you see in the numbers that Scott mentioned as a starting trend is bouncing around quarter-to-quarter, but over time we do expect the opening price point over-index. And I'm not going to say margin accretive, but based on Scott's EBITDA projection for our fiscal year that 15.5% to 16% is where we're expecting.

Okay. That's helpful. You mentioned they're still going to improve as the quarter progress. So just wondering if you can provide some more detail either by channel or by end market?

Yes. I mean, it was -- I kind of spoke to home center, that was a challenge driven by promo. Although I'll say we did see a little bit bump. Once the promo was done, we did -- obviously, it shifted back. And our promotional activity is high as well, trying to be competitive in that market. So when you don't see a vendor-specific promotional event going on, we have basically regained or restored what we had called more of our longer-term historical share averages in our home center channels. So we did see some pickup latter part of the quarter. But most of that backlog really came on the direct side. So you know what I -- we struggled last quarter. Our new construction was lower single digits. And I mentioned that big push towards the opening price point. Our teams did a very nice job of going out and recovering with the new construction and both getting new share at the mid- to higher price point as well as getting the platform in place to start to sell the opening price point. So we built some backlog on the new construction side and then on even the dealer side obviously with 11% comp over prior year, that was -- built some backlog in that. So that's something we're watching closely though because it's -- I think, we're going to see some volatility there quarter-to-quarter just been on promotional activity as well as that more affluent consumer and what they're doing in the market. But -- so the good thing is our backlog came in, I will say, slightly stronger than we initially had predicted for starting up the new fiscal year. And that's -- I know it's hard to put models in place to [track] backlog. But we obviously have incoming. Scott talks about 60 to 90-day lag from a builder perspective. So it's a lot of variables that go into that we monitor very closely, but it was slightly positive.

Okay. That's helpful. And just lastly, just on the special order home center piece of the business. Just how flexible can you be if that market just continues to stall out for the next several quarters, if not a little bit longer, just given the uncertain macro environment? And how quickly or how efficiently can you maybe reposition to service in-stock vanities at home centers or tailor your capacity to service other end markets?

Well, we did service the in-stock vanity business. Obviously, that's -- that was one of RSI's core strengths on the in-stock kitchen, the in-stock bath and vanity. So we have flexibility there now with our platform. The good thing in home center, I don't think there's anything drastic that's going to happen within home center that's going to make the market fall off, it's just I think we're going to continue to see slower growth in home center until we can get this younger consumer out there shopping. So we do have flexibility there. It's something obviously -- really when we look at our capacity, it's something that we monitor very closely. So it's not a matter of flexibility, it's a matter of, honestly, what I think, what we have conversations about internally is making sure we don't miss what I consider -- I truly believe that demand is coming. How much of that home center will get versus dealer versus the pro-business going through distributors, I think that's to be determined, where the younger generation shops. But I think it can be a win-win for all the channels out there. And the good thing, I think, to really answer the question is we have a lot of flexibility now depending on where that consumer goes. With our lower price point cost product now, it really opens up the door for us to flex that within the lower cost or our mid price point product that we have. So I think the only platform we really don't serve today is that kind of mid to higher end semi-custom consumer, which obviously is a much lower volume than where the market is trending. So we have that flexibility.

(Operator Instructions) Our next question comes from Josh Chan from R. W. Baird.

My first question is on the guidance. For the EBITDA margin guidance, how much of an impact from price costs are you baking in for that guidance? And does it kind of assume price cost is unfavorable basically for the whole fiscal year?

We have the lag built in on the front end. So the fact that the inflation's already occurred, it takes us a bit of time to recover that in pricing. But we've modeled pricing recovery throughout the year. It depends on the respective channel. And at the end of fiscal '19, we believe we will deliver that 15.5% to 16% adjusted EBITDA margin.

Right. Okay. And am I reading you correctly, if I were to say that price can catch up to cost by the end of the fiscal year, is that kind of what you're thinking?

Certainly the assumption we'd be making there is that, that inflation doesn't continue to move up. So if it stays stable and where we're at today, I think that's a fair assumption. If we continue to see it to move up at a higher rate, that would be more challenging.

All right. That does makes sense. And then secondly, on RSI for the quarter, kind of how did that fare versus your expectation? And I think the core cabinet business typically steps up even more seasonally in the July quarter. So wondering if that's the right way to think about RSI going forward as well.

No, I think from a quarter perspective, it was -- it's near where we expected, like, so we did see -- something we're trying to figure out the proper way to communicate because we did have a couple of regional losses last year that we remain committed to restore. But excluding those, we did grow the business on the in-stock kitchen side. We launched quite a bit of new product in the bath vanity side that obviously have to go out and do all the resets and most of those took place in Q1 and our Q3 and then beginning part of Q4. So we're starting to see the return on that now. But as far as the comment on the early summer, that's actually -- they tend to be more tied to, I'd say, a lot of fall, but a lot of holiday events. So you could have like a Black Friday is a huge one for us believe it or not on the in-stock side. So on the special orders, it's not that different. You really don't see big special events. But the in-stock side, they tend to tie those to a lot of the holidays and so forth. Summer tend to be a slower period of time really across a lot of the country on R&R because people are more outdoor focused than indoor. So it's not a busy time that you'd typically see on either in-stock or special order.

Okay, great. And then, I guess, my last question kind of is addressing some of the capacity question from the last caller. If you see certain kind of competitors shift their focus towards lower price points or certain parts of the dealer channel, I guess, how do you see the competitive environment setting up over the next couple of years? And is there much you can do in terms of adjusting your own capacity as well?

The good thing is, you don't -- we kind of explained this when we did the acquisition is in our world the manufacturing processes are fairly specific to price point. So when you get into semicustom, you're going to have a fairly kitchen at a time platform that is -- it's going to be creating more costly products so they can -- they have the ability obviously to shift it down to the, I'll say, the higher end of the stock category where we sit. So we -- our manufacturing platform is going to be a much, much lower SKU count than a semicustom offering. So it's run a higher volume, lower SKUs. We have the ability to get up into the lower end of semicustom with it. But when you get down into the really the, I'll say, the very value-based low-cost platform, which is your in-stock cash-and-carry bath and vanity and kitchen, like RSI has, that is a very unique specific manufacturing platform that is I would say very, very SKU focused. So even though American Woodmark's core we were considered to have a pretty tight SKU offering compared to semicustom you get on the RSI side, can be extremely small even compared to ours. So the good thing is that's not easily replicated. You can't just go out, and which we actually experiment with before we did the acquisition, you can't just go out and shift the manufacturing platform or even start from scratch on a greenfield or brownfield manufacturing platform to lower price point because scale is very, very important. So yes, there is some models out there. You could start importing Chinese product and trying to just build the assembly plant, assembling Chinese products, so yes, the economies of scale aren't as critical there because the capital cost aren't as high. But barriers to entry particularly on a national level are pretty high. So when it comes to flexibility, I will say we are flexible, but I'd say our competition is not as flexible. Once again, we -- with RSI acquisition, as you know, RSI was #1 in that space and combined with American Woodmark on our core side, it's a platform that really cannot be replicated out there without some fairly significant capital investment by somebody.

Our next question comes from Justin Speer from Zelman & Associates.

Just a follow-up. In terms of your guidance, are you embedding any RSI revenue synergies in that number? Is that going to be above and beyond potentially? And on that front, just help us think about your commercial initiative beginning this next quarter fiscal '19, how to think about that as we're progressing and timing standpoint on your 3-year strategy and road map for revenue synergies and cost synergies.

So I will take the first part of the question. So the total sales growth that we're guiding to approximate 35% does have built in some revenue synergy assumptions around that and then on the EBITDA margins as well the 15.5% to 16% is indicated. Synergy time and execution will be a driver around that along with inflation rate increases.

And as we look at kind of particularly the revenue synergies, there is obviously a greater ramp-up period associated with revenue than there is a cost. So our commitment when we announced the acquisition on the cost side will -- more of those will be front-end loaded during the first couple of years, but the revenue side, obviously. So we will get the processes and systems in place and we're taking orders during this first quarter. But obviously it's going to ramp up slow because obviously just given the lag period on bidding sub division is a built-in lag factor for a ramp into that business. But then you are trying to break into and the barriers to entry aren't huge, but you still have to go out there, you have to bid on business, the D.R. Horton expresses of the world and so forth. You have to go out and bid on business and win that business. So it's going to be a slower ramp-up. But we absolutely expect over the next 3 to 4 years to replicate -- I'll just say replicate our market share that we have on the single-family new construction within that lower price point -- opening price point. So that is a good growth. Obviously, much lower price point. So it's a different formula than our current product. And that's been our key focus. Like we announced in the acquisition, it will be the opening price point single-family just because of that shift downward. Lots of opportunities still left out there. There are multifamily and it's a longer lag obviously from getting out there and bidding on business, winning it. And then when you actually take delivery of cabinetry is a longer time period. But we -- with the exception of Southern California where we have some on the RSI side, we have very lower market share within multifamily. So that's once again a 3- to 4-year venture, with a lot of opportunity there that will ramp up. And then another big opportunity is just our pro-business. We are as a pro in the home center or as a pro going through distributors out there, that's a great opportunity for our lower price point product. So those are things you're going to start seeing in this next fiscal year. A lower percentage of our total synergy was based on the fiscal year '19 versus follow-on years whereas cost it will really -- that's a lot of our focus on right now too is getting those cost synergies, which we have some that are known. We have some that are unknown. And those unknown ones are also very exciting just it's what don't know yet and really are going to leverage the low-cost platform within RSI to really help our margin on the American Woodmark side. So definitely opportunity.

And one last question from me is just thinking about the combined business, and I know it's early innings, but what do you think the incremental margin on volumes is for this combined business now that you've had in your hands for 4 months?

Yes, I think the challenge there is it's still only been in our hands for 4 months and we're still trying to fully understand what that's going to look like and what the overall mix impacts will be once we get through all the synergy work that Cary talked to. When we completed the transaction, we talked about our pro forma adjusted EBITDA number in the 16% range. That's essentially what we're guiding to the 15.5% to 16% as we think about this year. Certainly staying in that zone and growing the enterprise would be our base assumption as we go forward. I don't have an exact incremental number for you to start dropping into a model at this stage.

I think you're going to see some strategic shifts over time too -- I mean if lumber prices continue to go up, as many of you may know, Europe made a shift long time ago to more alternate material man-made product. In America, it's not quite as accepted, but is moving in that direction. So it's not just a matter of -- our only leverage is not just passing price on, there are other leverage within our industry with regards to new materials, alternate materials and so forth. It's got to be combined with the product and marketing strategy, but it will definitely shift in that direction. So there are other opportunities. It's a little bit longer term with regards to, you're required to introduce new product and so forth, but those are incremental levers that we can pull in our market.

Okay. And then you the mention on the freight issues, the logistics issues, how does that affect you? And I think it was 10% of your cost of goods at one point. But I'm thinking about just meeting end demand and how that ELD mandate potentially pulling out capacity for drivers in particular, is affecting you and what may be the risk would be to the models as we think about volatility going forward?

Yes, I mean, the good thing is we do have very, very longstanding relationship with national partners. So I think it's -- we haven't really had any issues with regards to getting product delivered. It is going to be a higher price or cost today than what was in prior years. And we do expect continued inflation out there. Obviously the I have to have it now kind of mentality that exists in the dot-com is certainly driving a lot more truck traffic and they are struggling with drivers. Obviously, the regulations are certainly create some pretty significant limitations on hours and all those things will continue to drive cost up. So it's something that all of America is faced with. So inflation is one thing and so forth. Obviously I'd like to say, we're fairly efficient. We can pass those on. I think the bigger challenge, I think, we are all watching is just the quality of delivery. So as our national carriers and so forth, they are faced with turnover and so forth, just like the rest of us are within manufacturing, is making sure you get good high-skilled labor that can deliver our product. It's something we stay very, very close to. Because, as you can imagine, getting our product delivered not just on time but on the right quality. So handling is very important. So that's something that is a concern that we just have to continue to monitor very closely. All of us in the industry have to monitor very, very closely.

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

You were able to lever the sales and marketing line well this quarter. I guess, I was just thinking about that going forward from a standpoint of how much of that is Category 6 versus variable? Just help me understand that. Can you just -- it's very well done this quarter?

Yes. A piece of that, when you talk about what's fixed and variable, of course, there's a component that's tied to incentive compensation, which we gave some commentary around that was lower from a year-over-year perspective. So as you set targets and establish that for your field personnel, depending on how they track to the budget and the plan you've established, that's going to determine a different payout rate. So that's the piece that's going to be the most variable. You also have some aspects around product launches, which was the other item I referenced and called out in the quarter from a year-over-year standpoint. So if you got a particularly large launch, you can have a lot more materials that you are producing and having ready for that, perhaps even more product that you're sending into the stores and samples, et cetera. So that can be the other variable. But the other thing did help us is just when you combine the 2 enterprises, it gives you a lower rate just in total from a total AWC perspective now versus when it was just AWC, excluding RSI.

Like, is there any seasonality in this number that we see this quarter? Or, I guess, like you mentioned there's some variability based on timing of the launches. So is it fair to try and use this -- go ahead.

Yes. Look back at historical trends on the Woodmark side and you would see that there's typically been 2 launch periods that would play out. That would normally be in the fall time period. It came across the quarters, however, from where our fiscal quarter falls. But it's typically in the fall selling season and then also around the spring time frame. So that's when it can be. But it can bounce between the quarters depending on when the retailer makes the choice to do the launch.

Okay. And the other was on the CapEx side. As you mentioned, the corporate office, you won't have that expense. Should we just return to normality, I guess, and I guess my question is what is, would be a normal way to think about it?

Yes. So if we take CapEx and let's actually roll displays into it as well. So all of the store displays and these are going to the dealer channel to be in model homes, they certainly would be in the home centers as well. If you take CapEx and displays, probably going to trend a little closer to 3% of sales for the year. But that's inclusive of final payments on the corporate office, about $6 million rolled into this year that will be an outflow.

Okay, great. And then my last item is you talked about it last quarter happening, the DNA 23.3 when I look on a combined basis on depreciation and amortization. Is that the way to think about it quarterly as well?

What I would do from an annual basis standpoint, certainly the amortization for the customer list and trademarks, you got really solid visibility on the way we've done the walks there. It's got to be roughly $49 million for the year. Base depreciation on PP&E and displays, this includes assumptions about what we think we'll spend and how we'll activate this year. Ballpark number there is probably close to $44 million for the full year.

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

Yes, 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 for today. Thank you for your participation. You may disconnect.