American Woodmark Corp (AMWD) 2021 Q2 法說會逐字稿

Good day, and welcome to the American Woodmark Corporation Second Fiscal Quarter 2021 Conference Call. Today's call is being recorded, November 24, 2020.

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 and free cash flow, net leverage and adjusted EPS per diluted share.

Earnings release, which can be found on our website, americanwoodmark.com, includes definition of each of these non-GAAP financial measures, the company's rationale for their usage and a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures. We also use our website to publish other information that may be important to investors, such as investor presentations.

We will begin the call by reading the company's safe harbor statement under the Private Securities Litigation 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 SEC 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'd now like to turn the call over to Mr. Paul Joachimczyk, Vice President and CEO. Please go ahead, sir.

Good morning, ladies and gentlemen. 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. I hope that you and your loved ones continue to remain safe.

Our teams did an exceptional job of delivering results in the quarter. Our second quarter sales were up 4.8%. Within new construction, our business declined 7.4% versus prior year as we felt the impacts from COVID-related restrictions on prior period starts.

Our Timberlake direct business comped positive low single digits on units, while our frameless PCS business continued to comp negatively in Southern California. Our national builders are optimistic for the remainder of our fiscal year due to strong order growth over the prior months.

Capacity of the manufacturing and trade base to keep up with demand, rising prices and potential COVID-related restrictions could slow future builder rates. Lot supply and community count growth were also key indicators we're watching closely.

Our incoming order rates for the Timberlake business increased throughout the quarter, building backlog across our MTO platform. As a reminder, we level load our production on the MTO platform. Our incoming order rates across both the new construction and remodel businesses exceeded shipments for the quarter. Our teams have been increasing production levels, which will drive incremental sales and our next fiscal quarter and improved backlog levels.

Looking at our remodel business, which includes our home center and independent dealer and distributor businesses. Revenue was up 14.1% to prior year. Within this, our home center business was up 18%. Our made-to-order remodel platform recovered during the quarter and delivered a low single-digit positive comp. Our stock business was up over 25% as pro and DIY demand increased.

Our frameless offering also returned to strong double-digit positive comps as well. With regards to our dealer/distributor business, we were up 0.6% for the quarter with our core waypoint offering up double digits. Demand has improved with dealers and distributors reporting elevated consumer and builder interest, especially within the value stock segment. The ability of dealers and manufacturers to support the demand in the quarter's created backlog I previously noted that will take into calendar year '21 to relieve.

Our adjusted EBITDA margins were 14.5% for the quarter with EPS of $1.31 and adjusted EPS of $1.97. Our cash balance improved from $97.1 million at the end of the prior fiscal year to $112.6 million at the end of the second fiscal quarter, and the company has access to an additional $93 million under its revolving credit facility. We made a $40 million debt payment in the quarter, bringing net leverage below 2x adjusted EBITDA at 1.98.

In addition, our teams modified our credit agreement to allow for $100 million of unrestricted cash to be utilized in our covenant calculations. As I stated last quarter, the company remains well positioned to take advantage of the favorable housing environment. Consumers are spending more time at home. Consumers have additional discretionary funds to spend at home, and existing home sales and single-family starts have improved.

I do have some [returns] about price appreciation and new construction impacting demand short term, but our long-term fundamentals for growing single-family starts remain intact. Our focus will be to take advantage of these trends by permanently improving efficiencies across our footprint and investing wisely in the future. Investments are being made in product, technology and labor.

New finished colors and door styles were launched in February, along with needed discontinuances that will allow us to refresh and simplify our lines. Technology investments with an ERP cloud solution provider have begun in the finance procurement functions, allowing us to operate as one company to become more efficient. Ongoing investments in labor wages, retention and absenteeism programs will continue, allowing us to meet our customers' needs.

With respect to COVID-19, recent vaccine development should allow for the nation to get back to a level of normalcy in calendar year 2021. But in the meantime, we have to navigate surge in case counts or restrictions by states that could impact demand and labor.

In closing, I couldn't be prouder of our employees and what they've accomplished. We are executing on our vision and strategy for American Woodmark, and our teams are making it happen.

I will now turn the call back over to Paul for additional details on the financial results for the quarter.

Thank you, Scott. The financial headlines for the quarter.

Net sales were $449 million, representing an increase of 4.8% over the same period last year. Adjusted net income was $33.5 million or $1.97 per diluted share in the current fiscal year versus $31.2 million or $1.84 per diluted share last year. Adjusted net income was positively impacted by higher sales, leveraging of our fixed costs and benefits from our actions taken in the first quarter.

Additionally, we incurred restructuring charges related to the closure of our Humboldt manufacturing facility for $2.8 million that were partially offset by an unrealized gain on foreign exchange forward contracts of $0.6 million.

Adjusted EBITDA was $65 million or 14.5% of net sales compared to $63 million or 14.7% of net sales for the same quarter of the prior fiscal year.

The combined home center and independent dealer and distributor channel, net sales increased 14.1% for the quarter, with home centers increasing 18% and dealer/distributor increasing 0.6%. The remodel business is showing strong signs of recovery as people are more comfortable allowing access into their homes to install cabinets as well as the increased demand from the DIY and Pro customers.

The new construction sales channel lagged market demand during the second quarter of fiscal year 2021, recognizing a 60- to 90-day lag between start and cabinet installation. The overall market activity in single-family homes was up 9.5% for the fiscal second quarter. Looking at the start data that extends the lag time to 90 to 120 days, we saw a 2% increase in starts during that same period.

Shifting focus to completions during our second fiscal quarter. We saw a 0.7% decline year-over-year, which further supports timing impacts. New construction net sales decreased 7.4% for the quarter. Timberlake direct business comped positively in units, which was offset by a mix shift to lower-priced products and negative comps in our frameless business.

The company's gross profit margin for the second quarter of fiscal year 2021 was 20% of net sales versus 20.3% reported in the same quarter of last year. Gross margin in the second quarter of the current fiscal year was negatively impacted by higher material and logistic costs. Investment made in our locations for PP&E and safety measures combined with wage and retention programs. These costs were offset by increased sales, creating leverage of our fixed costs in our operating platforms and a onetime benefit received in the quarter related to an employee retention credit of $0.8 million. Keeping our employees safe during these unprecedented times remains a key focus for everyone at the company.

Total operating expenses were 11.6% of net sales in the second quarter of fiscal 2021 compared with 11.8% of net sales for the same period in fiscal 2020.

Selling and marketing expenses were 4.8% of net sales in the second quarter of fiscal 2021 compared with 4.8% of net sales for the same period in fiscal 2020. The ratio in net sales remained flat as a result of higher launch costs and incentive expenses, offset by leverage created from higher sales in the second quarter of fiscal 2021 and a onetime benefit received in the quarter related to an employee retention credit of $1.7 million.

General and administrative expenses were 6.7% of net sales in the second quarter of fiscal 2021 compared with 7% of net sales for the same period of fiscal 2020. The decrease in the ratio was primarily driven by the leverage from higher sales, lower spending and the impacts of our actions taken in the first quarter of fiscal 2021.

There was some pressure in our general and administrative expenses related to a onetime legal charge of $1.5 million, offset by employee retention credit of $0.4 million. In total, for the company, we received an employee retention credit of $2.9 million, both of these discrete events were onetime in nature.

Free cash flow totaled $57.4 million for the 6 months of the current fiscal year compared to $66.1 million in the prior year. The decrease was primarily due to changes in our operating cash flows, specifically, cash outflows from customer receivables and inventories as a result of the increased sales demand.

Net leverage was 1.98x adjusted EBITDA at the end of our second fiscal quarter as a result of our increasing cash balance and declining debt position. The company paid down $40 million of our term loan facility during the quarter. As a reminder, there are no term loan debt maturities due until December 2022.

Due to the impacts of COVID-19 and the evolving macroeconomic uncertainty in the current remodeling and homebuilding environment, we are unable to provide a full fiscal 2021 outlook.

Shifting our focus onto the third quarter of fiscal 2021. We expect mid- to upper single-digit net sales growth versus the prior year. This growth rate is very dependent upon overall industry economic growth trends and consumer behaviors. Margins will improve based on the increased sales volume that will create leverage within our operating platforms. We will continue to invest back in the business through wage programs, continue to launch new products and start our journey on our financial and procurement system consolidations with one of the leading software providers.

We expect adjusted EBITDA margins for the third quarter of fiscal 2021 to increase versus prior year results, but remain below our current second fiscal quarter. The company had very strong operating cash flows for the year, which led to a $40 million paydown of our term loan facilities.

Free cash flow generation continues to be a strength of the company. We ended the quarter with our cash position as of October 31, 2020, at $112.6 million of cash on hand and access to $93 million of additional availability under its revolver. Liquidity and margin management are priorities for our teams.

In closing, the strong performance that was executed in our second fiscal quarter was a direct result of the hard work for all of our employees who make it happen every day.

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

(Operator Instructions) First question comes from Garik Shmois of Loop Capital.

Just wondering, just given the lag between backlogs and delivery rates. It seems like you're expecting an inflection in sales growth in the third quarter, but how long do you think it's still going to take to normalize? And so that you'll be able to catch up with respect to the delivery times versus [ordinary rates].

Yes. We think it will take us till the end of the calendar year to fully catch up, so that we better match our demand with production. We've been making significant progress throughout the prior fiscal quarter. By the time we get to January, we think we'll be matched and caught up and get our lead times back to the normalized rate as well as on a stock platform, get our customer inventory levels to the rate they need to be at.

Okay. And with respect to the sales outlook for the third quarter, could you maybe walk through the different categories and how you see that? And what's driving the inflection relative to the nearly 5% growth that you saw in the second quarter?

Sure. When you take a look at each of the respective channels, the trends are going to be fairly comparable to the discussion we just had around fiscal Q2. So new construction certainly has accelerated when you look at starts and look at the lag. We still felt some of the impacts at the start of our quarter related to the COVID shutdowns back at the very beginning of summer, we've now lapped that. So now we're seeing the strong demand read-through from the starts that were up significantly at the end of the summer. So we'll see new construction growth as we push forward.

On the remodel side, both our home center and dealer/distributor business both returned to positive growth inside Q2. We think that carries forward. Again, as consumers are willing to invest in their home and they're spending more time there.

And then finally, our stock business, which again is both kitchen and bath. Pro and DIY demand there has been tremendous. We were up over 25% in Q2. We think the opportunity for continued growth there remains high. Part of that is [giving] our customers and stock levels up to the appropriate level. We think when we do that, it creates additional POS opportunity as well for those customers going forward.

And just my last question is just on the made-to-order within the home centers. It seems like it -- I think after the last quarter, you indicated you're expecting that to improve, and it looks like it comped positive this time as well. Do you think that you're seeing just a step function change in improvement in made-to-order and home centers? And how sustainable is the (inaudible) the recent [strong growth].

Yes. I do think there's a step change function there with consumer behavior. We've definitely seen millennials now back in the marketplace as it relates to buying either new homes or existing homes as they're doing that, we're seeing millennials engage in projects like a remodel project of their kitchen. There were questions over the last 2 to 3 years as to whether they would go -- that population would go to home centers. We're definitely seeing that. We're seeing that in the retail data that millennials are going to Home Depot, one of those, to do those to do those types of projects. They're also going to dealers, but definitely over-indexing the home center. So we're seeing that as an opportunity.

The other thing that I would mention would just be around imports. And as we've seen, again, the import data fall come out of China, net imports down out of Asia. That's created an opportunity for domestic manufacturers and domestic retail outlets. So you're seeing, I believe, an increase at the home center, both in special order and stock as a result of that.

Next question comes from Truman Patterson of Wells Fargo.

First, I wanted to touch on a little bit more on the capacity issues or potential issues constraining your ability to service demand. And I'm asking this a little bit because I thought last quarter, you all gave the impression that new residential would be pretty solid. It was down, I think you said 7.5%. So I'm hoping to understand some of the market share dynamics there, whether or not any imports are starting to play in that at all?

But also, single-family starts are now up 30% in October. Do you all have the capacity to service that? Does the industry have the capacity to service that? Just trying to understand the moving parts there.

Yes. So a couple of questions in there, Truman, I'll try to unpack. The first, let's talk maybe more holistically about capacity. I think you were asking about our business. So specifically in our business and our platforms, there's really 2 areas to drive the capacity question for us. One is labor, and we certainly talked at length about that in the prior quarter call. I'd say that's continuing. We have made progress. The labor continues to be a challenge, both the traction and retention of that.

Also just the component supply base, so it's not just our ability to make, but all the parts and pieces we're buying, as our supply partners capable of doing that. That's been the work that's been ongoing inside our fiscal second quarter and will continue until the end of this calendar year to get us in a better position to be able to match our production to overall demand.

As you think about market share, that was the second question you had in there around new construction. On our Timberlake side, no share losses there. In fact, I'd be more optimistic and say we've likely taken share over the summer time frame. We have lost share in Southern California with our frameless business, though. So if I kind of separate that out, that's been a different topic, and we've certainly talked about that as well over the last few quarters. But on the direct platform, no share erosion loss issues there.

Can the overall new construction industry absorb 30% comps for a long period of time? I think it's going to create challenges for all involved. It's not just a cabinet discussion, it's appliance, it's roofing. It's all the categories as well as just the builders themselves. We're certainly scaling our operations to ensure that we can produce the product and then make sure that we've got the installed capacity in place.

We'll have to see how the comps are actually read-through for the builders and how quickly -- I guess, the question there would be, does the lag stay 60 to 90? Or does it start to move out? I know, Paul and (inaudible) we're starting to see a shift there. We'll see how long the lag time carries into the first part of next year, and that will tell you whether or not they're able to absorb that type of increase.

Okay. Okay. And then just following up on the cabinet imports. I understand year-to-date outside of China is still not necessarily healthy, but we've seen total imports recently, I think, are up like 60% in August and September, if my numbers are correct. Are you seeing import competition start to come into the market the past, we'll call it 3 months or so? If so, which channels are you seeing it take place?

Yes. I'll take the second part of the question first. So we're not seeing any incremental import challenges in any of the channels. At this point in time, especially over these last couple of months that you just highlighted. Going back to the import data itself, so through September, the data I saw was China is still down almost 60%; definitely see the increases in Vietnam and Malaysia, but still in total, down about 6% through that 9-month period, which is about a $370 million, $375 million shortfall. And that's where we've intimated there's been opportunity created domestically for dealers, distributors and the home centers to grab that share.

Next question comes from Steven Ramsey, Thompson Research Group.

Maybe to start with the Timberlake mix. Can you share a bit more on the mix shift how it impacted Q2 sales and margins and thoughts how that evolves in Q3 and if there's thoughts beyond that?

Yes. No additional details really to provide around that, Steven, other than to just talk about the introduction of our value line. So Origins, and that's something we certainly highlighted coming out of the acquisition. It was one of the key synergy drivers. It's a profit improver for the business, but it does come at a lower price point.

So as we rotate and move more consumers to that space or grab more share in that, it does have an impact in the mix equation. So that's what you're seeing inside of the quarter, and I would expect that to be something that continues as we go forward.

Great. And then can you share more on -- regarding dealer and distribution growth not as strong as home centers in the second quarter, do you expect home centers to still outpace dealer/distributor going forward? And then should there be economic shutdowns in the U.S. in the coming months?

Do you think the dealer channel is more prepared to handle that during this time frame? Is there enough business written in backlog to even keep them going should they have to shut down stores?

Yes. So on the demand side of it, if you unpack our dealer/distributor business, the Waypoint brand, which is our principal brand we get to market at in the dealer space. It was still up double digits, which was more consistent with the special order business in the home center. So I think there's a line where we continue to see the weakness and challenges have been in the distributor space.

So I still think that the dealer business overall should be able to perform pretty well, consistent with what we're seeing in the special order home center categories.

As we look at shutdown impacts overall, our dealer are better prepared for that. I would say they should be based on living through that, but more importantly, our customers prepared for that. Are customers going to be willing to go spend at dealers? Are they going to allow folks in their home? We certainly saw that open up, and it was -- they were more willing to do that towards the back half of the summer and current time period. But does that mindset start to pivot away with some of the shutdowns? I don't know yet. We're going to have to see how that shakes out. But I have to think that all parties are better prepared to go through a second round of shutdowns than they did the first time.

Got you. And last quick one from me on launch cost impact that you called out for Q2. Is this a cost headwind that fades -- I'm sorry, you called out for Q3. Is this a cost headwind that fades following Q3? If it does, are there other marketing expenses to take its place? Or is this a source of better margins in out quarters?

Yes, Steve, I'm just kind of reflecting back into our Q1 call, we announced that we'll [do these] product launches in 2 periods of time. One we've seen in our Q2, and then we'll see it in our Q3. Our Q3 expected launch costs will be higher than they were in Q2, and that's really kind of directionally the guidance we'll give you there.

(Operator Instructions) Next question comes from Justin Speer of Zelman.

I wanted to dig into that PCS frameless business in Southern California, if you could give us a status update and maybe give us an idea of how big that business is and how much it fell in the quarter?

Yes. So it was down pretty substantially inside the quarter, Steven. We've talked about our frameless business -- sorry, Justin, sorry, our frameless business in the last couple of quarters. And quite frankly, it's not really met our expectations post acquisition. This is an opportunity for us to think about expansion of that product category outside of SoCal, where we've had some specific challenges in market and SoCal is around just the product offering, price and logistics.

We have been working through the product space, and we actually do have a number of new colors that are launching in February. So that's inclusive of our frameless line when we talk about product launches. So we're pushing that through. We are looking at the price and logistics and complexity of that product offering and what opportunities we have to take that outside of Southern California. There's certainly opportunities in markets like Phoenix, Dallas, Houston, et cetera. So that's what we continue to work on from a strategic standpoint.

I guess, what changed? Because I know this has been kind of -- as you mentioned, it's been an obstacle to performance, I guess, since before the pandemic. Maybe like what took place or what detail can you provide behind the scenes that have led to those headwinds?

Yes. I would say there's a couple of things in that, specifically around our effort to grow that outside of Southern California. That's been a capacity issue internally. We've talked about it and just haven't prioritized it and put the resources on it. So that's on us. And we've done that over the last quarter where we've dedicated an assigned team to work through that.

The other part of the question is around product and have we stayed relevant in the market. We got behind on launching some products over the last couple of years. That put us at a disadvantage from a good standpoint and lost us some share there in Southern California. So I'd say that was the biggest driver.

Perfect. And then I guess on the -- in terms of the trends on the single-family versus multifamily side, can you -- I guess, is the Timberlake kind of a good idea of what the single-family looked like? Is that a good kind of break down that low single-digit numbers or maybe more detail you could provide in those distinct trends between single-family, multifamily?

Yes. So Timberlake, the proxy there is single family. That's the vast majority of the business that we do there. The real -- the only significant multifamily business we do is that PCS line, the frameless offering in Southern California. So Timberlake direct will match up with single family.

Okay. Okay. And then lastly for me in terms of the incremental margin pressures that everyone is seeing. I guess, if you were to snap the line and look ahead, recognizing there's a lot of moving pieces here with the PCS business as well, can you offset or maybe even more than offset as you think about price and volume in this environment, can you offset these headwinds from pricing and productivity levers?

Yes. So in Paul's comments, he talked about our outlook, as we thought about the third quarter. And we certainly think we'll expand margins off of prior year, just not as robustly perhaps as what we saw in Q2. So we do believe we have the opportunity for improvement, specifically around inflationary considerations. We do watch that closely, and if we see commodities move in a direction that allows us to take pricing. In the past, we've been able to accomplish that. The answer is certainly different by channel and how quickly it takes you to go get it. But over time, we've been able to get commodity increases back via pricing.

Next question is from David MacGregor of Longbow Research.

Just to follow up, first of all, on that last question, how much forward visibility do you have right now on things like your raw materials and components and logistics costs?

Yes, David, what we're seeing kind of in the marketplace out there is a little bit of pressure on our hardwood lumber supply. You know kind of refresh your memory is we do primarily source from the East Coast with the fires around the West Coast, it did create a little bit of challenges and some pricing pressures that are out there. That will continue until more supply comes back into the marketplace that is out there.

You remember from last year, we had pressures around the particle board charges and things of that nature. There is another mill that's coming online later this year that we expect, that will relieve some of those pressures out there. So we're not projecting those to be really significant headwinds for us.

One of the concerns that we do have is around freight and logistics charges. We are seeing concerns in international shipments and containers coming in as well as domestic freight carriers, charging increases and just the availability of those freight carriers that are out there today.

Right. Okay. Can you just -- you were talking earlier about your stock cabinet business. Can you just talk about kind of that home center cash and carry business? And what you saw in terms of cadence through the quarter around that cash and carry business?

Yes. So again, that stock business was up over 25% for us for the quarter, that both kitchen and bath. So we saw strong demand trends throughout the quarter.

It was consistent throughout the quarter at [25%]?

I don't know what the exact number was by individual month, but I'll just say it was strong throughout the quarter.

Okay. Okay. And then just how are you thinking about capital allocation heading into next year? And I realized it might be just a little bit early to be talking about on 2021 yet, but I'm interested in just kind of at a very high level, how you're thinking philosophically about use of cash and potentially M&A growth in organic growth?

Yes. Speaking of our capital allocation factor today, we really have remained unchanged. Our primary focus is going to be really deleveraging our debt position. That's going to be our first and foremost priority that's out there today. We will look back at giving investments back into the business through digital investments. We started our finance or procurement journey now out to the cloud-based solution out there to really kind of join ourselves as one operating company and gain other efficiencies through that channel. But really, our overall capital allocation will still stay at roughly the 2% to 2.5% guidance that's out there.

And as with respect to M&A?

M&A, if there is a strategic fit that would outpace our kind of our debt paydown and our internal investments, we would consider it. But as of right now, our priority is focusing internally right now, focusing on our core.

Right. And you mentioned deleveraging as your priority. What is your updated thinking around the target on leverage?

Yes. So Paul and I were having this conversation earlier this week. So when we announced the transaction 3 years ago when we acquired RSI, we intimated that we could get down close to 1.5x by the end of, I think, calendar '19. So it's taken us a little bit longer to get under 2. Primary reason for that is we did opportunistically do some stock repurchase, I think, in the out post acquisition. And then obviously, COVID pushed us out from a timing perspective.

So we're now under 2x. I think as you push ahead, we probably get closer to that 1.5x. And as we start to approach that, if we don't have incremental organic investments or M&A investments, certainly, share repurchase would come back up into the conversation.

Next question is from Tim Wojs of Baird.

I have a couple of follow-ups and then just one bigger picture question. So the follow-up, just on the margin sequentially, kind of not being quite at the Q2 level in Q3. That's really due to just normal seasonality, right? There's nothing to kind of think about in terms of moving parts there?

Two things to think about, Tim there. One, you got the seasonality down. So Q3 is always our typical weakest period, but also back in Paul's remarks, he talked about the ERC and then legal onetime events. That was a tailwind of about 30 basis points inside the quarter, that's onetime in nature.

Okay. Okay. That's fair. And then just at the closure of Humboldt, could you talk about when you start to see the benefits of that hitting the P&L?

Yes. We're seeing that currently, Tim. We've closed the operation. So we are realizing that now as we speak.

Okay. And then the bigger picture question, just you started to see home sizes or the average size of the home increase. Do you think cabinets in Woodmark should benefit from more square footage in a home? Or do you think it's -- the kitchens are staying the same, but we're adding a bedroom or some thing? I mean is that a content opportunity for you as you kind of look out 12 to 24 months?

Yes. I think it is an opportunity, Tim. I haven't seen data yet that supports that's occurring. But historically, when there's been larger homes, it's created larger spaces for cabinetry product, whether that be mudrooms, laundry spaces or certainly the kitchen spaces. So if we see that rotate back up, and I think we're on -- like year 3 or 4 of a downward trend is size of home. As we see that start to move back up, it certainly should create a content opportunity for our business.

(Operator Instructions) Next question comes from Julio Romero of Sidoti.

Just staying on that topic of your margin outlook. You said you expected margins up year-over-year, but lower than 2Q, but that's a pretty wide range. So I don't know if you could give us a sense of incrementals year-over-year. The way I'm thinking about it is last year, your margins contracted despite higher sales. So that kind of leads me to believe that your incrementals this quarter on a year-over-year basis might be on the stronger side.

We certainly had some onetime hits last year looking back inside the Q3 time period. There was a bit of a particleboard disruption, and we were also moving that facility that we have out in California. So that creates an opportunity to drive strong incrementals.

I think we still got some unknown challenges in front of us, right? It's just the beginning of the quarter. We don't know exactly where COVID and restrictions are going to push us as we go forward. So that creates a little hesitation on giving you an exact number.

You're right, it is a bit of a range, but I think that's also a function of the volume. We're giving you a pretty wide range on the volume there as well. It could be mid- to upper single digits. So we're just trying to give you some boundaries to be able to operate within.

Yes. No, that's fair. And I guess on your technology investments, I guess you gave us a little bit more behind the veil on what you're thinking about ERP cloud solution. Can you maybe dive a little more into expected expenses, time frame and maybe the opportunity there?

Nothing beyond prior color that we've provided on that. We have started the project. We're hopeful to turn on our finance and procurement functions about a year from now. That's our targeted go-live date. So the activity between now and then will be getting up and running. And then on the back side of that is when you would expect to see some of the efficiencies.

Okay. Got it. And then just last one for me is on your Vision 2025 (sic) [2025 Vision] plan, one thing you guys talk about often is prepping for a shift in consumer behavior, and that's always evolving. But I guess, given where we are today, it's been a wild year, we're in late November. Can you maybe speak to anything notable you're seeing in regards to consumer behavior over these fall months?

Yes. Certainly, the use of digital technology tools to assist in the buying process. We saw that really early on, whether you talk about the builders and their use of tools, when folks couldn't go to the actual showrooms or go to the job site to look at home. So we saw it there. We see it as well in the visualization tools that we offer on the front end of many of our customers' websites from a purchasing standpoint.

So we saw -- we've seen an uptick in activity there. We're exploring and continue to work on is how you make that ultimately turn into a transaction. So how do you get car-to-car capability and link that directly into your retailers. So if you're at home and you go through that process of designing a kitchen or a layout, how do you make that a seamless experience, so that when you go to whatever outlet you go to, it's easily transitioned into an order, and you get a price and a bill off of that. So I think that's accelerated, and that's something we're continuing to spend time and energy on.

As I do not see that there is anyone else waiting to ask a question, I'd now like to turn the line back over to Mr. Joachimczyk for any closing remarks. Please go ahead, sir.

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

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