American Woodmark Corporation (AMWD) Q3 2018 Earnings Conference Call Transcript

American Woodmark Corporation (AMWD -1.41%)
Q3 2018 Earnings Conference Call Transcript
March 9, 2018, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Please standby. Good day, and welcome to the American Woodmark Corporation Third Quarter 2018 conference call. Today's call is being recorded March 9th, 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.

Scott Culbreth -- Vice President and Chief Financial Officer

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

Cary?

Cary Dunston -- Chairman and Chief Executive Officer

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 it's being 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 toward 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 consolidate results and organic results excluding the RSI acquisition. Please recognize the 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 grown is slightly above reported KCMA Cabinet growth for the quarter, it is below our expectations.

Looking specifically at new construction, we grew our business 7% with 3% growth excluding the acquisition. We have been reporting for some time that builders were beginning to make a move toward the 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 -- excuse me, 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 three 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, teething 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 it'll 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 is being 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 insulations 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 two 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 with an in-stock kitchen and vanities, as well as special order, our level of strategic discussion with our partners is greatly enhanced. We remain very confident in our ability to offer enhanced solutions across our product portfolio for long-term grown of our home center partners and our business.

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

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 are absolutely committed to regain the markets we lost, as well as growing this business throughout all channels.

January revenue was also impacted by 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 schedule 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 a 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 and efficiency 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 continue to experience high transportation and raw material inflation. We constantly challenge ourselves in opportunities to offset raw materials and transportation cost 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 amateurization 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 extraneous expend. Adjusting that 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 toward our vision. It's hard to pick up a business paper today and not read about the headwinds the housing 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 home buyers returning to the market. This demand is clearly changing as evident in the number of starts and 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're 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 would begin to free up existing home inventory and assist with the move up cycle. Ultimately, we believe that 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 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 grown priority, the opportunity to grow in home center, dealer, distributor, and multifamily 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 and all our new teammates within RSI; a great culture and great people that align with our own core values.

The most significant challenges related to 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 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 system 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 over to Scott for the financial details.

Scott Culbreth -- Vice President and Chief Financial Officer

Thanks, Cary. The financial headlines for the quarter; net sales were $293 million representing the increase of 17% over the same period last year. Including 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 of inventory step-up amortization, acquisition-related cost to $10.2 million; both offset by an associated tax benefit of $4.4 million in gross margin declines, which were partially offset by additional sales volumes and lower incentive cost.

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 here in the third fiscal quarter is primarily due to additional sales growth and inclusion of one-month results for RSI. For the nine-month into January, year to date net sales are $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 sales for the first nine 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 starting cabinet installation, the overall market activity in single-family homes was at 7.6% for the financial third quarter. Single-family starts during September, October, and November 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 based revenue increased 7% for the quarter and, as Cary noted, we were impacted negatively by shifting demand to 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 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 existent home price was 5.8% to $246,800.00 for December impacting our consumer's affordability index. Interest rates increased in the quarter with the 30 year fixed rate mortgage at 4.03% in January. Residential investment is a percentage GDP for the fourth calendar quarter of 2017 remains steady at 3.5%, versus the prior year, but below historical norms.

Homeownership 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. This year first-time buyers remain flat; the December reported rate was 32%, then changed from the prior year, but up from the 29% reported in November. Keep in mind this share remains well below the historical norm of 40%.

December 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, is responded to competitive positioning, and market conditions. The company's growth 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 nine months of the current fiscal year was unfavorably impacted by higher transportation cost, raw material inflation, higher healthcare cost, 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 the prior year to 14.5% this fiscal year. Through nine 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 fiscal 2018 compared with 7.4% of net sales for the same period in fiscal 2017. The decrease in ratios result in lower personnel cost and product launch cost.

General 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 is driven by acquisition-related cost of $10.2 million, the $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 cost and a reduction of the domestic manufacturer's 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.

Pre-cash flow total of $81.8 million for the first nine months of the current fiscal year compared to $69.2 million in the prior year. The company repurchased 309,612 shares of common stock that costed $29 million to the first nine months of the fiscal year and has previously now suspended its repurchase program. Performing that leverage with just under 2.9 times adjusted EBITDA at the end of the third fiscal quarter.

In closing, the company expects that organic growth with 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 four months of RSI results.

...

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

Questions and Answers:

Operator

If you would like to ask a question, that is *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is *1 for any questions.

Our first question comes from Katherine Thompson from Thompson Research Group, please go ahead.

Steven Ramsey -- Thompson Research Group -- Senior Equity Analyst

Good morning, this is Steven Ramsey, on for Katherine. 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?

Cary Dunston -- Chairman and Chief Executive Officer

Hi Steven, it's Cary. Definitely a different strategy, and 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; tendency to give the promotional space and the end stock used a little bit differently, so you'll see it around the holidays. There's two 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 this special order is.

Steven Ramsey -- Thompson Research Group -- Senior Equity Analyst

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 loss share and what are the main governing factors here?

Cary Dunston -- Chairman and Chief Executive Officer

The biggest assumption is assuming it does level off, as I stated we do believe it is leveling off, recognizing that it is at the historically high level, so it remains very high. I think we are seeing, and obviously not only with us, our competitors, and working with the home center partners, getting a little more strategic with regards to 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 is leveled off and if we're at parity.

Assuming those assumptions are true, then we are expecting to basically grow with the home center, overall home center growth moving forward.

Steven Ramsey -- Thompson Research Group -- Senior Equity Analyst

Excellent, thank you.

Cary Dunston -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Scott Rednor from Zelman & Associates, please go ahead.

Scott Rednor -- Zelman & Associates -- Director Research

Hi, good morning.

Cary Dunston -- Chairman and Chief Executive Officer

Morning, Scott.

Scott Rednor -- Zelman & Associates -- Director Research

Question on the sales outlook for you guys, the mid-single digit guidance this whole 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 through the first two months of fiscal 4Q?

Scott Culbreth -- Vice President and Chief Financial Officer

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

Cary Dunston -- Chairman and Chief Executive Officer

And bigger picture, it's no different than what I just stated in the call, it's just we are definitely seeing no transition down in new construction, and we're lining ourselves up to serve that, but it's gonna take some time, obviously.

Scott Rednor -- Zelman & Associates -- Director Research

And Cary, just recognizing that they're a size builder business based on the discloser you gave is about -- you know, 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 gonna help reinvigorate the growth rates on the builder direct side, just realizing that the basis are significantly different?

Cary Dunston -- Chairman and Chief Executive Officer

Yeah, so obviously we've been very successful in the single-family new construction, so focusing just on single-family initially is -- starts around $850,000.00, $880,000.00 trending up. Obviously, like I stated, between where it's $1.1, $1.2 million and when we get there, I think everybody will debate, but the single-family new constructions are gonna continue to grow in the coming years.

So, the question is who's gonna get that share of that growth. And a certain percentage of that growth, say, two thirds of it will continue to be a, I'll say, mid-price point to higher, but that influx of the lower price point, opening price point which is first time home buyer as well as, you know, we also get reports from builders that even though we've been placing a lot of emphasis on first time home buyers, there's a lot of interest in 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. So that lower price tier, or what we'll often call the opening price point's gonna make up the greater influx, or greater percentage of the index of that growth going forward. So, if you look at our two pieces of business, one on what you call the legacy American Woodmark, we still see growth opportunity there, we're gonna continue to leverage our core competency, everything that we've done well up to this point. Like I said in 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 certain geographical markets.

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 slow, and that's just because of that shift to the opening price point. So now enter RSI, look at our core legacy platform, continue to grow, and then you obviously need to take the RSI platform, lower cost platform, and we can go out now and be much more aggressive.

Take timings, I'd love to say I'd have it a year ago, but tend to align 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 could not do it at the same profitable level as we have been serving the market, or do we not bid on it. And we've obviously elected not to bid on it, knowing our strategic plan.

Well, once again, we're gonna get market share we expect over index, but same time you gotta expect that the market's gonna 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 expect to grow it.

Scott Rednor -- Zelman & Associates -- Director Research

Thank you for all that color. Just one last one, Scott, can you give a flavor for what the EBITDA contribution and gross margin for RSI was in the quarter?

Scott Culbreth -- Vice President and Chief Financial Officer

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.

Scott Rednor -- Zelman & Associates -- Director Research

Okay, I'll follow up later, thank you.

Operator

As a reminder, that is *1 for any questions. Our next question comes from Tim Wojs from Baird, please go ahead.

Tim Wojs -- Robert W. Baird & Co. -- Senior Research Analyst

Hey, guys, good morning.

Cary Dunston -- Chairman and Chief Executive Officer

Morning, Tim.

Tim Wojs -- Robert W. Baird & Co. -- Senior Research Analyst

So, maybe just going back to the new construction and kind of pulling through RSI I mean, can 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 training 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?

Cary Dunston -- Chairman and Chief Executive Officer

Yeah, so not a lot of detail, like we said, we have a formal team going through that. We'll say it's, from a manufacturing process, we've been very careful to say we're not gonna go in and make tremendous change because obviously, we've got to be cautious of, I'll say, adding additional cost to their process. So, what our side does they do very, very well with the low-cost value based platform; we're gonna adhere to that, so right now it's really understanding how we can ramp it up.

Within one of their plants, within a couple of their plants they have a little bit of, I'll say, a 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 gonna take to ramp that up looking at our forecasting for the new construction business and obviously getting the process and the system in place to support that.

A lot of the work right now, honestly, yes, is 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 gotta be able to come into the RSI system, everything has to align, from order processing, from the logistics, and so forth. So, I'd say that is the most technical aspect of this work that's under way, and it's going as planned, but that is a big piece of it.

And yes, as you stated, there's definitely gonna be some training, that's not difficult; obviously we know the market, we know the customers, we've already been on communicating to customers, and obviously, we're already outbidding on business with the product. So, that piece of work's under way given the lag time that you have between bid and recognizing when a subdivision may start. So, you know, nothing's easy in our business, but it's being managed appropriately, and we have a lot of opportunity, and if it takes investment we'll make that investment just given the opportunity that lies ahead.

Tim Wojs -- Robert W. Baird & Co. -- Senior Research Analyst

Okay, OK, great. And then I guess with all the builders that you're talking to what's the tone and kinda their outlook? I think there's been a little choppiness here to 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?

Cary Dunston -- Chairman and Chief Executive Officer

Yes, and you hear, I mean we -- obviously we never really stated, but the markets that we participate in, in particular, the northeast and so forth haven't any comps on it, but we have been hit by weather, 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 reasons and where they're going.

So, our builders remain positive overall, it's definitely choppy, I mean you can't go talk to builder now and not have them talk about some of the headwinds, where it's labor, where it's land, whether it's material inflation coming from all different directions right now. But 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, our announcement of the acquisition and our ability to sit down with them and say we have announced ending solution, now, to be able to supply what is very evident in their strategies, they've been very vocal with regards to communicating their desire to grow in the opening price point. And we've seen it, that 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 home buyer 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 I think we have a good future ahead.

I think everybody's gonna have a different, dependent on the growth, it's definitely gonna be rocky for sure, but we will obviously find a way. It's pretty efficient and we see a lot of growth ahead, and we now have a very efficient platform to service it.

Tim Wojs -- Robert W. Baird & Co. -- Senior Research Analyst

Okay, OK. 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 gonna be more of that in the April quarter? That's number one, and then number two, if we adjust that out and kinda think about the year-end year gross margin contraction, how much of that was kinda price cost versus some of the operational efficiencies that you talked about with the line and the staffing?

Scott Culbreth -- Vice President and Chief Financial Officer

Yeah, 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'd be an update there if there's some shift in the purchase accounting work, of course, that's got -- we've got up to a year to finalize that, 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 two biggest items, and that'd be followed by the operating inefficiency, part of which Cary highlighted with structurally being staffed to a higher forecast and not being able to right side that as rapidly as one would like.

Tim Wojs -- Robert W. Baird & Co. -- Senior Research Analyst

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

Scott Culbreth -- Vice President and Chief Financial Officer

Yeah, 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 four months at the new. So 34% for the fourth, and then as you push forward in the fiscal year '19, our expectations would be a rate of approximately 26%.

Tim Wojs -- Robert W. Baird & Co. -- Senior Research Analyst

Okay, OK, great. I appreciate the time, guys, good luck.

Scott Culbreth -- Vice President and Chief Financial Officer

Thank you.

Cary Dunston -- Chairman and Chief Executive Officer

Thanks, Tim.

Operator

Next question comes from Garik Shmois from Longbow Research, please go ahead.

Garik Shmois -- Longbow Research -- Senior Research Analyst

Hi, thank you, I just wanted to ask about incremental margins over the medium to long term once you move through some of the highest periods, you get RSI scaled up, how should we think about incremental margins across your platforms?

Cary Dunston -- Chairman and Chief Executive Officer

Yeah, I guess I'll give you the input and Scott may have some, I think right now we're still doing analysis to fully understand long term, I think the mix of product, the range of change of our ability to go out and get the new product, and so forth. Obviously, as Scott said, we're not gonna comment on specifics by business, but I think it's, obviously we have optimism, I'll say, given their profitability and so forth, but we still have work to do to fully understand. When we 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 fast three months here working on this.

So, still more work to do, and I think we'll have more information to share as we go forward.

Scott Culbreth -- Vice President and Chief Financial Officer

Yeah, I think that's the best way to frame that, Cary, from a legacy standpoint we've always talked about Woodmark being a targeted 25% incremental gross margin rates, we certainly recognize some periods will be better than that, some periods will be worse than that, but that's what 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 a more to an EBITDA incremental approach.

So, as we complete that work, and we're in the midst of our budget cycle as we're talking today, we'll leave and 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.

Garik Shmois -- Longbow Research -- Senior Research Analyst

Okay, thanks. 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 sounded like you were pleased a month or so into the integration process, but has anything, or anything specific relative to the initial synergy targets once you dig into the business, has you either more excited or less excited?

I guess just some of the issues that popped up in the one month of ownership, was that all just consistent with your expectations when you made the acquisition?

Cary Dunston -- Chairman and Chief Executive Officer

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

Garik Shmois -- Longbow Research -- Senior Research Analyst

Okay, thank you very much.

Operator

As a reminder that is *1 for any questions. Our next question comes from Lee Brading from Wells Fargo, please go ahead.

Lee Brading -- Wells Fargo -- Senior Analyst

Hi, guys, just want to follow up on a couple of the items that you guys have talked about. You talked about now starting to do more -- I want to make sure I interpreted right, it sounds like now that you have RSI more in the bidding on the direct to build side, and you talked about the operational challenges of that, is the timing of that 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?

Cary Dunston -- Chairman and Chief Executive Officer

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

Lee Brading -- Wells Fargo -- Senior Analyst

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?

Cary Dunston -- Chairman and Chief Executive Officer

It's really a systems aspect, so as you know, all of our product on the legacy American Woodmark side is final now delivery, so we can leverage that delivery system very easily, it's just a matter of getting your systems in place, and when an order is placed through our builder channel that it can flow through into the RSI system and obviously into MRP and so forth.

But working with our logistics carriers, and putting that system, logistic system in place is not a challenge at all, really.

Lee Brading -- Wells Fargo -- Senior Analyst

I gotcha. And when do you start to expect the orders, I guess, from the bidding process to start to occur, or is it already started?

Cary Dunston -- Chairman and Chief Executive Officer

Well, we're bidding on it, and it should be as we're speaking. So, the team, 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's a time lag there, but our goal is actually to see revenue in our Q1. I'm not gonna say it's gonna be high, but that's our goal, is our first quarter is we wanna start to see some revenue.

Lee Brading -- Wells Fargo -- Senior Analyst

Gotcha. And you talked about the home center side, the promos are still up but they've started to level off, I mean I guess I was 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'll eventually start to come back down?

Cary Dunston -- Chairman and Chief Executive Officer

Yeah, right now they're at elevated and I anticipate them staying at elevated but I'll say kinda targeted level. So, excuse me, the bulk home 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 bulk home center partners very well know it, that the high promotional add 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 were playing with everyday low price, but it has to be the right space for the right end consumer, more in the pro space, for example.

So, when it comes to home consumer I think it's gonna take some time, it's conditioning, right, for both the consumer and the designers, and the stores have been conditioned to sell under the very high promotional level, so it's gonna take some time to bring it down.

Lee Brading -- Wells Fargo -- Senior Analyst

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

Cary Dunston -- Chairman and Chief Executive Officer

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, just as we've seen the past three 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.

Lee Brading -- Wells Fargo -- Senior Analyst

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

Cary Dunston -- Chairman and Chief Executive Officer

Yeah, we really don't provide details, obviously, for customer's 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's definitely delays dependent on the segment, but we will actually go out and try to pass price increases on fairly efficient, there's different time frames involved with that.

Lee Brading -- Wells Fargo -- Senior Analyst

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

Scott Culbreth -- Vice President and Chief Financial Officer

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

Lee Brading -- Wells Fargo -- Senior Analyst

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

Cary Dunston -- Chairman and Chief Executive Officer

Yeah, no surprises, business as usual which is a good thing, obviously when you go through an acquisition, but definitely no surprises.

Lee Brading -- Wells Fargo -- Senior Analyst

Correct, yeah. Thanks.

Operator

Our next question comes from Scott Rednor from Zelman & Associates, please go ahead.

Scott Rednor -- Zelman & Associates -- Director Research

One quick one for Scott, just from a modeling perspective can you give us a feel for what the right run rate for interest in DNA should be now that the deal's finalized?

Scott Culbreth -- Vice President and Chief Financial Officer

So in 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.

Scott Rednor -- Zelman & Associates -- Director Research

Great, thank you.

...

Operator

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

Scott Culbreth -- Vice President and Chief Financial Officer

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

Operator

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

Duration: 42 minutes

Call participants:

Scott Culbreth -- Vice President and Chief Financial Officer

Cary Dunston -- Chairman and Chief Executive Officer

Steven Ramsey -- Thompson Research Group -- Senior Equity Analyst

Scott Rednor -- Zelman & Associates -- Director Research

Tim Wojs -- Robert W. Baird & Co. -- Senior Research Analyst

Garik Shmois -- Longbow Research -- Senior Research Analyst

Lee Brading -- Wells Fargo -- Senior Analyst

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