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American Woodmark (AMWD) Q3 2019 Earnings Conference Call Transcript

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AMWD earnings call for the period ending January 31, 2019.

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American Woodmark (AMWD -3.05%)
Q3 2019 Earnings Conference Call
Feb. 26, 2019 11:00 a.m. ET


Prepared Remarks:


Good day, and welcome to the American Woodmark Corporation third-quarter 2019 conference call. Today's call is being recorded February 26, 2019. During this call, the company may discuss certain non-GAAP financial measures included in our earnings release such as adjusted net income, adjusted EBITDA, adjusted EBITDA margin, free cash flow and adjusted EPS per diluted share. This earnings release, which can be found on our website,, includes definitions of each of these non-GAAP financial measures, the company's rationale for their usage and a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures.

We 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 the experience or future changes make it clear that any projected results expressed or implied therein will not be realized. I would now like to turn the call over to Scott Culbreth, senior vice president and CFO. Please go ahead.

Scott Culbreth -- Senior 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'll add additional details regarding our financial performance. After our comments, we'll be happy to answer questions. Cary?

Cary Dunston -- Chairman and Chief Executive Officer

Thank you, Scott, and good morning. Despite experiencing volatility in our markets, we are pleased with the overall performance for our third fiscal quarter. Net sales were up 31% with the inclusion of RSI. Excluding the acquisition, our core growth was 1%.

Looking at our net sales by channel, within new construction, we grew our business 12% over prior year with our core growth at a strong 5%. The 5% growth over indexed the market and our competition, as we continue to leverage our direct-to-builder business. We did experience more pronounced volatility by region within our new construction business with a decline in Southern and Northern California as well as the Southeast. However, we had revenue growth in all remaining markets with particularly strong performance in Florida and Texas, both of which are large markets for us.

Coming into our third quarter, we were expecting some challenges given the macro and microeconomic factors that were impacting the industry. We believe much of the volatility in our third quarter was related to the overall uncertainty in the economy, driven by a few variables, most notably, the government shutdown, uncertainty on tariffs and wavering consumer confidence. On the positive, it occurs much the negativity toward the housing market has somewhat settled, However the uncertainty of the 25% 301 tariff continues to create a bit of a challenge. In addition, inflationary pressure and labor availability continue for builders.

At the same time, as I noted on our call last quarter, we remain confident in the fundamental and underpinning drivers to growth in new construction. Most agree notional demand by the younger generation remains strong, particularly at the lower price point. The critical question yet to be fully answered is the ability of builders to shift production to opening price point homes. Affordability is a real issue that is dampening demand throughout the market.

Through our direct relationships with builders, we know they are very focused and remain confident on finding low-cost solutions to satisfy the demand of the younger consumer. And we remain very well positioned to meet this lower price point growth with our new Origins platform. Looking at our remodel business, which includes our dealer/distributor and home center businesses, revenue increased 46% when including the impact of the acquisition. Excluding the acquisition, our core made-to-order remodel business declined 3%.

When breaking remodel down, we did experience volatility by specific channel. Our core dealer business grew 4% from prior year. Industry data has shown a slowdown in the dealer channel. However, we continue to believe we over indexed some market in the quarter.

Core made-to-order home center revenue proved to be more of a challenge in our third quarter with net revenue declining 4%. A number of variables continue to impact the volatility of our demand within the home center channel both from a macro and micro factor. We do not believe we lost any share during this period, and that our demand was a reflection of the overall demand in our space. As we look forward, the made-to-order remodel business is the more difficult of our channels to forecast.

Our home center partners remain very focused on the performance of their kitchen departments. As part of the strive, individual home center strategy and promotional activity remain a critical factor. Strategically, one home center partner has made some changes in their in-store support resources that are anticipated to negatively impact kitchen cabinet sales in the short term. In addition, although promotional levels have remained at parity for a number of months, we're monitoring levels closely as this could potentially change.

On the positive, we remain very pleased with our pro business within home center and feel that remains positioned for strong growth. Beyond our core remodel business, our revamped frameless offering continues to accelerate nicely within home center with strong double-digit growth. Within our home center kitchen and bath stock category, we experienced improving results over prior quarters. Our stock finish kitchen business continued to comp positively, while our bath business, when excluding discontinued product, recovered nicely, also comping positively within both home centers for the first time in this fiscal year.

We have seen a very nice recovery in our bath business and expect to continue to comp favorably moving forward. Regarding the timing of the discontinued bath product, the majority is now behind us as with -- and with the remaining to be completely lapped in our fiscal fourth quarter. Overall, as we look forward on remodel sales, just as with a new construction, predictability is going to be a challenge in the near term. Existing home sales have comped negatively for some time now.

We feel that one of the key drivers for this is the fact that opening price point, existing home inventory remains at record lows, limiting the ability for the first-time homebuyers to enter the market. Longer term, we continue to believe a critical driver for remodel growth within our industry is directly linked to getting first-time homebuyers into the existing home market. For this to happen, baby boomers will need to move down at a greater pace, thereby, allowing existing homeowners to move up. As first-time homebuyers and move-up buyers purchase existing home inventory, we feel kitchen and bath remodeling will be a priority investment.

Kitchen cabinetry has led other major repair and remodel categories following the recovery, thereby, resulting in a very aged existing inventory. The pinup demand tied to this cycle continues to keep us very optimistic about the long-term health of the remodel industry. The question is always related to timing. Our goal in the short term is to continue to over index total growth -- total industry growth, while strengthening our core competitive advantage and leveraging our low-cost platform.

Moving on to gross margin. Despite a challenging quarter on volume, we finished at 20%, up from 17.2% at prior year. Operationally, our plants performed well, despite the volatility in demand. Our ability to efficiently manage backlog across our entire made-to-order platform is a tremendous benefit.

However, we did carry a higher level of variable cost than needed for the lower demand, simply to remain positioned to meet forecasted demand this spring. Inflation also continue within logistics and labor, two key macroeconomic factors that we remain very focused on strategically. Counter to the labor challenges, I'm extremely pleased with the tremendous improvement our teams have driven on our employee turnover the past 6 months. This improvement, a true reflection of our culture, is also visible in our efficiency gains.

Regarding the 10% tariff, to-date we have passed a little of the increase through via pricing as we remain sensitive to the elasticity of the market. We are primarily focused on offsetting as much of the increase as we can through resourcing and leveraging our low-cost platform. Clearly, we are watching the current negotiations with China closely and the potential of this -- of the tariffs moving to 25%. We have taken numerous actions in anticipation of the tariff, including building inventory of imported product.

Our purchasing and manufacturing teams have also been actively working to mitigate our exposure by resourcing and leveraging our low-cost platform in Mexico. As I mentioned previously, the uncertainty of the tariff is a significant challenge with the most recent news simply further delaying the decision. However, if the 25% tariff materializes, we will take pricing action as a means to help offset the impact. Moving on to our adjusted EBITDA margin.

We finished the quarter at 13.6%. We were pleased with this performance, particularly considering the lower-than-expected revenue. We have been facing the industry headwinds with strong operational performance and continue to focus on leveraging our low-cost platform. Our opening price point Origin business is growing at double-digit levels as we strengthen our penetration in existing markets.

Likewise, we are on plan with our cost synergy work. On adjusted net income, we generated $24.1 million in the quarter, up from $16.7 million in the prior year. Lastly, our solid free cash flow position us to allow us to continue to pay down debt and repurchase shares. In summary, we knew going into our third fiscal quarter that significant uncertainty existed regarding market conditions.

On our last call, I reiterated our position on the strength of the fundamentals of the housing industry and our overall confidence in our builder partners. Although we did experience volatility in the new construction market, we once again gained share through our direct-to-builder business over indexing the market with 5% growth. Demand by first-time homebuyers is growing. The challenge is affordability.

Our builder partners are making significant strides in offering affordable product, and we feel that mix will continue to shift downward to the lower price point offering. With our new low-cost Origins product leveraged across our direct-to-builder platform, we will continue to service the nation's top builders with the same strong level of commitment they have come to expect from us. With regards to remodel, we're working diligently to understand market movement, particularly in the made-to-order space. Over time, existing home inventory will turn over, and younger generation will become much more prominent in the market.

This impacts product design and buying expectations. We are focused on remaining ahead of this curve through innovation, our new frameless product and our ability to effectively service the pro consumer. We continue to see a strengthening of the pro in nearly all markets driven by less interest in Do-It-Yourself by homeowners. Outside of our existing markets, we are working diligently on our multifamily strategy and solution.

As I stated in the past, we're extremely focused on creating a strategy that differentiates us in this channel. We have no intention of simply entering with a commodity product to compete against a market that is heavily sourced through Chinese and other low-cost products. Our teams are working to create a clear competitive advantage through both product and service, once again, leveraging our national builder platform. In wrapping up, although, we have some uncertainty about the current economy and the impact on our industry, when I look back the past four to five years of my call notes, the word uncertainty has certainly become very commonplace.

As most on this call know, we have never let uncertainty guide our strategic focus. We continue to make the right choices and deliver on our long-term commitment to grow this business. Volatility is the name of the game when it comes to the cyclical industry. However, being able to focus on the overall strengths of the industry, while creating a clear competitive advantage that is extremely difficult for competitors or new entrants to replicate has been and will continue to be the key to our focus and our success.

With that, I thank you, and I will turn it back over to Scott for the detailed financials.

Scott Culbreth -- Senior Vice President and Chief Financial Officer

Thanks, Cary. The financial headlines for the quarter. Net sales of $384 million, representing an increase of 31% over the same period last year. Excluding the impact of the RSI acquisition, net sales for the third fiscal quarter increased 1% to $257 million.

Adjusted net income was $24.1 million or $1.40 per diluted share in the current fiscal year versus $16.7 million or $1 per diluted share last year. Adjusted net income was positively impacted by additional sales volumes, price, mix and unrealized gain on FX forward contracts of $500,000. Adjusted EBITDA was $52.2 million or 13.6% of net sales compared to $36 million or 12.3% of net sales for the same quarter of the prior fiscal year. The increase during the third fiscal quarter was primarily due to the inclusion of two incremental months of results for RSI.

For the 9 months ended January, year-to-date net sales were $1.238 billion, representing an increase of 47% over the same period last year. Excluding the impact of the RSI acquisition, net sales increased 6% to $854 million. Adjusted net income was $88.2 million or $5.05 per diluted share in the current fiscal year versus $58.8 million or $3.57 per diluted share last year. Adjusted EBITDA was $181.1 million or 14.6% of net sales compared to $110.4 million or 13.1% of net sales for the same period of the prior fiscal year.

The new construction market slowed during the quarter, recognizing a 60- to 90-day lag between starts and cabinet installation. The overall market activity in single-family homes was down 3.7% for the financial third quarter. Single-family starts during September, October, November of the prior period averaged 889,000 units. Starts over that same time period from the current year averaged 856,000 units.

Our direct new construction net sales increased 12% for the quarter, and core growth was 5%. The remodel business continues to be challenging. On the positive side, unemployment remains low. The January U3 unemployment rate was 4% and U6 was 8.1%.

Both measures were lower than the January 2018 reported figures. This year, first-time buyers held steady. The December reported rate was 32%, flat with prior year. Keep in mind, the share remains well below the historical norm of 40%.

On the negative side, consumer sentiment decreased to 91.2 in January versus the 95.7 reported January 2018. Existing home sales decreased during the fourth calendar quarter 2018. Between October and December of 2017, existing home sales averaged 5.59 million units. That same period for 2018 averaged 5.18 million units, a decrease of 7.4%.

The median existing home price rose 2.9% to $253,600 for December, impacting our consumers' affordability index. Interest rates decreased throughout the quarter, but increased versus the prior year with the 30-year fixed rate mortgage of 4.46% in January, an increase of approximately 43 basis points. All-cash purchases in December were 22%, up from 20% last year. Our combined home center and dealer/distributor channel net sales were up 46% for the quarter, with home centers increasing 61% and dealer/distributor growing 9%.

Core growth within the home center and dealer/distributor was down 3% for the quarter. The company's gross profit margin for the third quarter of fiscal year 2019 was 20% of net sales versus 17.2% reported in the same quarter of last year. Gross margin in the third quarter was favorably impacted by higher sales volumes, price, mix and overhead cost leverage due to higher volumes. These favorable impacts were partially offset by higher transportation cost, tariffs and raw material inflation.

In addition, the prior-year results included $6.3 million in inventory step-up amortization. With respect to the 301 tariffs, assuming the tariffs rise to the 25% levels, we could be exposed to approximately $8.5 million of potential annual direct cost increases. We work to mitigate these impacts through a combination of price increases, supply negotiations, supply chain repositioning and internal productivity measures. Year-to-date gross profit margin was 21% compared to 19.7% for the same period in the prior year.

Gross margin for the first nine months of the current fiscal year was favorably impacted by higher sales volumes, price, mix and overhead costs, leveraged due to higher volumes. These favorable impacts were partially offset by higher transportation costs, tariffs and raw material inflation. Total operating expenses were 13% of net sales in the third quarter of fiscal 2019 compared with 14.5% of net sales for the same period in fiscal 2018. Through 9 months, operating expenses increased from 11.5% of net sales to 12.4%.

Selling and marketing expenses were 5.8% of net sales in the third quarter of fiscal 2019 compared with 6.5% of net sales for the same period in fiscal 2018. The decrease in ratio is a result of leverage from higher sales. General and administrative expenses were 7.2% of net sales in the third quarter of fiscal 2019 compared with 8% of net sales for the same period of fiscal 2018. The decrease in the ratio was driven by leverage from higher sales and a reduction in acquisition-related expenses of $9.6 million, which is partially offset by an additional $8.2 million of tangible asset amortization or approximately 213 basis points.

Free cash flow totaled  $106.2 million for the current fiscal year compared to $16 million in the prior year. Pro forma net leverage was 2.7 -- 2 times adjusted EBITDA at the end of the third fiscal quarter. The company paid down $99 million of its term loan facility during the first nine months of the fiscal year and repurchased 628,714 shares of common stock at a cost of $41 million. In closing, despite the slowdown in the new construction market and volatility within the remodel market, we were pleased with our overall performance of our third fiscal quarter.

The company expects that it will grow core sales in the mid-single digit rate in fiscal 2019 with total sales growth of approximately 32% to 33%. This growth rate is very dependent upon overall industry and economic growth. Margins will be challenged with increases in labor costs, raw materials, tariffs, fuel and transpiration rates. The company expects adjusted EBITDA margin for fiscal 2019, 14.7% to 15%, depending upon synergy timing, execution and the significance of inflation rate increases.

Free cash flow generation should exceed $135 million for the fiscal year. The revision downward in free cash flow is related to timing of receivables and inventory. This concludes our prepared remarks. We'd be happy to answer any questions you have at this time. 

Questions and Answers:


[Operator instructions] And we will take our first question from Truman Patterson with Wells Fargo. Please go ahead.

Truman Patterson -- Wells Fargo -- Analyst

Hey, good morning, guys. Congrats on the quarter. 

Cary Dunston -- Chairman and Chief Executive Officer

Thank you very much. 

Truman Patterson -- Wells Fargo -- Analyst

Just wanted to dig in on the gross margin performance. You guys had a nice turnaround at sale in the second quarter. It ended up being up year over year in the third quarter. I guess, could you just walk us through the primary drivers of this.

And how sticky it is going forward? I'm thinking of a few different items: the November pricing, correcting the staffing and labor and then just the RSI acquisition.

Cary Dunston -- Chairman and Chief Executive Officer

Yes, I'll give you a little high level and then Scott can provide little more details on it. But a few key drivers. Scott will talk a little bit more to the inventory adjustment prior year. But from operational performance perspective, historically, when you look at the seasonality, Q3 is obviously typically a challenge because buying comes down.

Our teams did a good job of managing through the volumes from an efficiency perspective. We did make the decision to carry, obviously, additional variable cost because, obviously, we always see spring selling season come back up. But relative to the prior quarters, some of the disruptions I've talked about on prior calls and our -- obviously our supply chain, overall manufacturing processes were significantly improved. In addition my comment with regards to turnover.

Item like that has a pretty significant impact with regards to the overall efficiency of our operating platform from a gross margin perspective. And we have seen very significant improvement in our turnover rates throughout the company that's had a positive impact on that gross margin as well. So we definitely faced some headwinds, but, overall, the platform is operating effectively. So Scott, do you have any additional details?

Scott Culbreth -- Senior Vice President and Chief Financial Officer

Yes, Truman, just around what happened inside the quarter versus the prior quarter and sort of what sticks as you go forward. You hit the two primary items. One will be the pricing. As we've signaled in the last call, price went into effect in November.

We didn't get a full impact of that inside our fiscal third quarter. We will inside our fiscal fourth quarter. The second was operating efficiencies, which were a challenge inside our second quarter. We did approve upon that inside our fiscal third quarter and expectations will be that we continue to run more efficiently going forward.

The question that still remains will be the ones that we've already highlighted in the conversation thus far around tariffs. Are they going to increase or not? And then what happens? They've certainly stabilized as of late. And does that continue or do we see those start to move up or down? And that obviously would have a short-term impact.

Truman Patterson -- Wells Fargo -- Analyst

OK, OK. Got you. So it's good to hear that your raw material inflation seems to be stabilizing, at least as of now. Jumping over to the slower new res growth environment.

Could you just give us an update on maybe some of your revenue synergy targets? And where do you stand with pushing RSI product through your direct-to-builder network, especially as we enter the spring selling season?

Cary Dunston -- Chairman and Chief Executive Officer

Yes. I'm very pleased with where we are. I think the -- obviously, one of the key early synergy deliverables that we were focused on was the platform we call Origins, which is taking a low-cost platform and leveraging over our direct-to-builder channel, which, obviously -- we time -- from a timing perspective, we're very focused on getting that in the market with the anticipation that we'll see a significant move down toward the first-time homebuyer. So right now, obviously, the market has not progressed down to that space as quickly as we anticipated, with really affordability being the key driver.

So I think, from an overall synergy perspective, the pie that we're going after is not quite the size that we anticipated. However, what I will say is our ability to go and get the business at the rate that we anticipate we would is basically on plan. So we've got the product in place. We have all the systems in place.

We've been leveraging that across our platform for going on, I think, 9 months now, and we are accelerating that at double-digit growth. So all we need really now to happen is the going through my whole move up, move down process and getting the first-time homebuyers in the market and getting builders from affordability perspective to go out and build the opening price point homes. We truly believe that demand is there. So we're well positioned for it.

We've got it out there across our entire platform, and we are continuing to gain share out there through Origins. We just need more builders to build opening price point homes at this point.

Truman Patterson -- Wells Fargo -- Analyst

OK. If you don't mind me sneaking one more in. Your largest competitor repositioned their supply chain to attack the lower price point products. Are you guys seeing any increased competition in the market, especially in kind of the home center channel and RSI value price points?

Cary Dunston -- Chairman and Chief Executive Officer

No. I won't say any. We're -- basically, both of us, are the competitor type, obviously, and we're very focused on our markets with specific home center partners in that stock space that you're referring to. And obviously, we're very confident in our product and our supply chain.

It's world-class. That's one reason the acquisition of RSI was so attracting for us. It's outstanding platform, and it continues to perform very, very well. And I believe the service that we offer to our partner is really second to none.

So it's -- we never underestimate our competitors, but we're continuing to perform. And we continue to feel there is upside in that space. And then even on the stock bath side, which is with both partners, like I mentioned, that actually is improving significantly for us. Obviously, we all spoke openly.

One of the home center partners was going through some challenges, and they made adjustments. And their operational performance is significantly improved and, obviously, we're seeing it in our results, even to, I'd say, a level that's over indexing our competition in that space. So we're very pleased with our bath space and continue to feel that will improve in the coming quarters.

Truman Patterson -- Wells Fargo -- Analyst

All right. Thank you guys.


[Operator instructions] And we will take our next question from Garik Shmois from Longbow. Please go ahead.

Garik Shmois -- Longbow Securities -- Analyst

Hi. Thanks. Just wondering if you could talk maybe a little bit more about just the remodel trends that you're seeing. It seems like you just had divergence between dealer and home centers in the quarter.

So just wondering maybe a little bit more color there just how you're progressing over the next couple months, if you think that divergence is going to be sustainable.

Cary Dunston -- Chairman and Chief Executive Officer

Yes. I mean dealers --- dealer overall spend are probably more predictable, I'll say, decline. We -- past several quarters, we kind of commented particularity with the more affluent consumer that we started to see the decline in the dealer channel. So our -- obviously, our comps are not what they were a year ago or two years ago, but we're still continuing to over index.

It's just in that mid-single digit growth level within the dealer channel. So going forward in dealer, we -- I think we expect probably to -- the industry as a whole to be around that mid-single digit or lower. And our plan is to continue to over index that. I think the bigger question out there is home center and some of the recent volatility and so forth.

And I think that has become a little bit more unpredictable and part of it, I think, just the impact of the seasonality. A lot of folks -- they don't make too many decisions when you get into, what we call, our third fiscal quarter just because their variability to see with the consumers happened over just tied to the -- getting into the holiday season and so forth. But obviously, there's a lot of things going on from a consumer mindset perspective with the shutdown and tariffs and so forth. So that creates some uncertainty.

I think, obviously, we just saw the Depot came out this morning with their revenue a little more in the challenging side. But same time, I don't think anybody is saying that R&R is necessarily slowing down. I think we still remain very optimistic about it. I think it's more from our specific industry with the kitchen and bath site is there are some strategic changes going in place, particularly with one of our key customers out there in the home center side.

And they are making some changes, which we agree with. But they're going to really require them to make some shift in resourcing that will have some short-term impacts on us. That was kind of my comment in there on that space. But nothing that we see or show right now that says there's any fundamental change that we anticipate negatively impacting our home center volume in the future.

But there is unknowns. I just -- once again, I even mentioned the impact of the promotional aspect that says it's kind of come back up. I'll say right now is this kind of come back up in the discussions again. So it's starting to get a little more attention, which makes me a little more nervous on where it could go.

So hopefully, it remains at parity, and we don't see any changes there. But there is a chance that that could change. And we -- right now, I'm going to tell you. Our intention is not to go out and spend any more money on the promotional side.

I think it is where it is, and we're going to stay where we are and so forth. But all that tends to create a little more volatility in that space. So we'll see. I mean, right now, we're working on our forecasting.

We're working on our obviously new fiscal year that begins in May, and there's a lot of unknowns in that space right now, just because a lot of uncertainties.

Garik Shmois -- Longbow Securities -- Analyst

Just wanted to follow up just on a comment on the home center partner that's making the reset. Is some of the uncertainty factored into your guidance for revenues in -- will be the fourth quarter of your fiscal year? Or would some of this uncertainty be more of a fiscal '20 impact?

Cary Dunston -- Chairman and Chief Executive Officer

No, that's basically baked in. That's what's really driving a little bit of the incertainty in Q4.

Garik Shmois -- Longbow Securities -- Analyst

Got it. OK. And then just the last question. I just wanted to get an update just on the frameless initiatives.

What kind of penetration you're seeing in California and 1if there's any opportunities you can discuss outside the states?

Cary Dunston -- Chairman and Chief Executive Officer

Yes. I think there's two aspects of frameless you have to look at, one's on the new construction side -- really 3: so new construction, dealer/distributor and then home center. Obviously, we're focused in all three of those areas, with the initial focus primarily on the new construction side and then on the home center side, with taken, obviously, the opportunistic approach right now in dealer/distributor. But very strong -- I've been communicating strong growth in Southern California for a few quarters.

Last quarter, we did see some volatility there, I think, like I mentioned in the California as a whole, both Southern and Northern California. Southern California, we have very strong market share with the, what we call, our PCS platform, which is a frameless platform. We did see some slowdown on the single-family side. On the positive, in just some conversation this morning with our team is we remain very confident in the growth of the multifamily in that area.

So that's one region where we actually are in the multifamily environment, where we are continuing to learn a lot, and we are growing pretty successfully in that market with our frameless platform. So we continue to expect growth there. Nationwide, on new construction, right now, we're -- it's really continuing to work with builders and so forth. Obviously, in the single-family, just from CLI demand shift yet toward that frameless platform as younger generation start to get in the market and take up a greater percentage of that demand, who knows, it could certainly shift toward that frameless European look, and we're ready for that if it does occur.

Moving over to home center, very, very pleased. We have, what I call, relaunch of our frameless platform with a key partner, and that is going very, very well. So we're just in the early phases of that, but the comps are extremely strong and the team remains very confident as those are home center partner and the growth of that platform within the home center channels. So it's -- we expect strong growth on the frameless side. 

Garik Shmois -- Longbow Securities -- Analyst

OK. Thanks for the help. Appreciate it.


And we will take our next question from Tim Wojs from Baird. Please go ahead.

Tim Wojs -- Baird -- Analyst

Hey, guys. Good morning. Nice job.

Cary Dunston -- Chairman and Chief Executive Officer

Good morning.

Tim Wojs -- Baird -- Analyst

So if I just think about the tariffs, is the way that we should understand that the 25% on March 1 is in your guide? And essentially, you would maybe see a modest impact from that on a negative -- from the negative side near term? And then you'd have some pricing that would go in to offset that over time. Is that the right way to kind of think about the cadence of tariffs in guidance?

Cary Dunston -- Chairman and Chief Executive Officer

No. We really aren't -- we've not put the impact of the 25% tariff in. Obviously, there's a lot of uncertainties there. It does -- from, I guess, indirect way, it does impact a little bit of our guidance because we, obviously, have taken some operational actions.

Like I mentioned, we built some inventory and made some sourcing decisions in anticipation. That's one of the things where I -- the greatest impact of this tariff is more the unknown than the actual tariff itself because we're -- everybody is trying to make a decision on how many levers do you pull and how much do you actually resource without really knowing the 25% tariff is going to happen. So we have taken some action. Obviously, we've built up some inventory and we have taken advantage of our low-cost operation in the Mexico to begin to transfer some things.

But we have not actually built in the 25% tariff. We have basically built in. It's 10%. And like I mentioned, on most of that, we've been really focused on just resourcing and offsetting that cost operationally.

We've taken a little bit through to the market, but very little as of yet.

Tim Wojs -- Baird -- Analyst

OK, OK. And when you think about price maybe relative to just cost inflation, was that positive for Q3? And I guess as you kind of look forward, you get more price in Q4 and we're obviously moderating. Does that gap become a little more favorable?

Cary Dunston -- Chairman and Chief Executive Officer

Yes, it definitely becomes more favorable. Scott mentioned, obviously, we only have partial impact in Q3. We'll have full impact of the pricing increases in Q4. So you will see that more of that positive and see that gap close.

I think Scott mentioned material inflation is fairly stable right now. We are continuing to see inflation on the logistics side. Fuel, obviously, is trending a little better now, but logistics availability and cost are still a challenge on the inflation side.

Tim Wojs -- Baird -- Analyst

OK. And then just thinking about kind of free cash flow. Does that -- would you expect that to grow in 2020? I know before it was maybe some onetime things in '19. So now with the adjustment, was that expect to grow next year?

Scott Culbreth -- Senior Vice President and Chief Financial Officer

Yes. Tim, there was a onetime item at the beginning of the year that was tax related that impacted fiscal year '19. To be frank, we haven't really gotten into the meat of our fiscal year '20 process. We're just now getting our budget cycle started, so we'll give you a good perspective on what that number will look like as we move into that year.

But from a leverage standpoint, I don't see capital changing significantly from a spend standpoint year over year. So it will come down at working capital management and how we can drive some efficiency there next year.

Tim Wojs -- Baird -- Analyst

OK. Great. Well good luck on the rest of the year guys.

Cary Dunston -- Chairman and Chief Executive Officer

Thanks, and appreciate it.


[Operator instructions] And our next question will come from Steven Ramsey with Thompson Research Group. Please go ahead.

Steven Ramsey -- Thompson Research Group -- Analyst

Good morning. This is Steven here. I guess I would be interested to hear more about import competition. Is it more pronounced in the last few months or less, given tariff pressures? And to hear more about import competition in the multifamily space.

I think it's particularly relevant given the move to entry point homes and products.

Cary Dunston -- Chairman and Chief Executive Officer

Yes. There -- I mean, to your comment, no, it does not really change the past several months. I mean there's been some impact, obviously, with the 10%. So it's negatively impacted the Chinese imports to, obviously, much greater level than it has impacted domestic companies, which has been favorable for us and allows us to compete a little bit better on price.

And I think there's two aspects we look at. Number one is Chinese have been in our market for several -- many years now. It has grown steadily over the past, I'll say, three years -- three to four years, particularly in -- to your point, in the multifamily space. But you also see the -- even some dealer environments and so forth.

Just the fact that you do have companies that are importing, what we call, flat type product building inventories and then offsetting that inventory with some domestic minor operations to allow them to get to the level of SKU count needed to get into kind of the lower end of the special order, made-to-order business. So that's existed for quite some time. It is -- obviously, it's become much more pronounced and folks are talking about it a lot more, I'd say, the past year than we have historically just because the impact has become more visible. I think the good side -- good aspect, strategically, the way we look at it is whether there are some folks that rely on tariffs and so forth thinking it's going to have a major impact or really help their business.

I like the noise of it, to be honest with you, because the reality is we have a platform that we can't compete with the Chinese on. Yes, we can get down to the price point where they may offer all pilot construction, but there is much more as most people know, even in multifamily. When you get into the service side, we consistently hear that is a very underserved business. And we're really the only one in the nation that can go out and have a level of impact from the service perspective and provide a low-cost product with our Origin platform and/or our frameless platform as needed.

So I feel we're well positioned. We are continuing to do that strategic work on the multifamily side. We'll see what happens with the tariffs. I mentioned on our last call that yes, the tariffs are a financial impact on us, but it is a net positive overall, just because it does make the Chinese less competitive.

But at the end of the day, I'm not relying on tariffs for us to be successful against Chinese or any other imports as we have a very solid strategic plan in place and an operational platform we can't compete.

Steven Ramsey -- Thompson Research Group -- Analyst

Excellent. And then wanted to circle back on. This may have been addressed. But if the market stays slower in the next few quarters or even through a good bit of your fiscal year '20, does that allow you to make more progress on synergy and operating efficiencies, if volume comes in slower than expected?

Cary Dunston -- Chairman and Chief Executive Officer

It's a fair question. I think, obviously, it does allow you to shift focus if you're in a heavy growth market. And I would say, the past couple years I wouldn't consider us a heavy growth. It's just -- the past year, we've been extremely focused on, obviously, the acquisition, getting the two companies integrated together, not only from a people and cultural perspective, which for us is the number one priority is on very, very well, but obviously, also delivering on the synergies and capturing -- starting to capture operational costs and work on the future state platform.

So that work would continue regardless of the market growth or so forth. But, yes, from a resource perspective, the market would grow just like we did during the last recession. And obviously, I don't expect anything close to what we went through 10 years ago. But the market would have slowed down.

Then just company does very, very well, as we continue to focus very, very intently on our operational performance. And we always come out of the other end of the recession much more efficient, much more focused than what we were when we went in. So we would actually commit to that.

Steven Ramsey -- Thompson Research Group -- Analyst

Excellent. Thank you.

Cary Dunston -- Chairman and Chief Executive Officer

Thank you.


And we will take our next question from Justin Speer with Zelman & Associates. Please go ahead.

Justin Speer -- Zelman and Associates -- Analyst

Thank you. One -- just a follow-up question on the initial analyst questions. One is with regards to your cumulative revenue or synergy opportunity with this Origins product. I just wanted to revisit.

I think you said when you initially did the RSI deal roughly $30 million to $40 million of synergies in three years, 25% cost, 75% revenues. Just wondering if you have any -- or maybe you can give us some idea of what you think it is now that you've had this in your possession for over a year now?

Cary Dunston -- Chairman and Chief Executive Officer

Yes, I can't get into the specifics or detail on that. We are doing that work right now, even as part of our fiscal year '20 budgeting. The Origin platform is up and running. But the part that we can't accurately predict is what's going to happen with the economy.

If the economy were to grow at the level we anticipated, then I would steadily stand say that yes, we would still commit to be pretty close of that, but the challenge is, obviously, growth is slower than what we anticipated. And we have not seen a move down to the opening price point like we anticipated as part of our synergies. So by no mean does it impact any of the strategic reasoning, our opportunity to grow in that business, particularly when you think about the multifamily side. I will say that this has been a little bit slower to market than what we initially planned on the multifamily side, for good reason.

Once again, we've learned a lot. It's a little bit longer cycle, obviously, when you go out and start bidding on projects. We're pretty aggressive with it in Southern California. We have hired individuals into this space.

We're doing a lot of strategic work. We've hired sales rep in this space. So we're not seeing on our hands, I assure you. Just that it's going to be a little bit longer cycle just to really to make sure that we enter this market with a clear competitive advantage and we make sure that we can communicate to the folks out there, the builders out there and the developers out there the level of service that we bring.

It's just not something they're used to or accustomed to like we do on the single-family side. So we're creating that entire strategic launch platform to be able to go to the multifamily environment and to be very, very successful there. So I'm just as excited as I was before, but we just think the market to cooperate, like I mentioned.

Justin Speer -- Zelman and Associates -- Analyst

Understood. And then in terms of the stuff that is more within your control, the cost synergy side. What -- have you accrued any efficiencies or synergies there? Or is that more to come in fiscal '20 in your kind of roadmap?

Cary Dunston -- Chairman and Chief Executive Officer

No, we've actually -- we've done very well on that. We're actually slightly ahead of plan even on our cost synergies. And obviously, it's one of those things where once you bring teams together and we just really start looking at opportunities, we know there's a lot more to come. So we are -- like I said, we're on plan with all those, even from a timing and probable cost saving perspective, and we expect to remain on plan to meet the commitments.

Justin Speer -- Zelman and Associates -- Analyst

Lastly for me, just looking at the headlines with regard to the Mexico labor situation. I just wondered if you could give us an estimate of the labor relations. What they have historically been? And what you're seeing currently in Mexico?

Cary Dunston -- Chairman and Chief Executive Officer

Yes, it's a very good question. So obviously, there are lot of dynamics going on right now in Mexico. And there's two aspects of this. Number one from a total net labor availability perspective, you do have some of the challenges in our -- particularly in areas where we operate like we've seen in the U.S.

But it's -- I'd say, it's softened a little bit on that -- on the Mexico side. They -- obviously, a new President came in and has taken some action with regards to wage rates and nothing that's drastically impacted us from the financial side. But net-net, it's been very positive for us for reason actually that's more related to our culture, is the operations in Mexico, There we have three of them. And to us, they're just as much part of the Woodmark family, and we actually are very focused on them operationally and culturally.

We've made a number of changes down there to really support leadership and to support the plants and the people within the plants themselves, which has gone very, very favorable. So I think there is a lot more to come. I think we have a lot more opportunity, even from a operational performance perspective and to even leverage that operation at a higher level than we have in the past. So as of right now, I'm going to tell you we are not experiencing any -- also labor is not a constraint that I would even bring up from operational perspective like we've had at a few locations in the U.S.

It's going very well and continuing to improve even just because of the cultural aspect.

Justin Speer -- Zelman and Associates -- Analyst

So you're not seeing any unrest or any agitation in the labor -- within labor from, what, I guess on the heels of that election?

Cary Dunston -- Chairman and Chief Executive Officer

No, absolutely none. Honestly, absolutely none. We've actually -- it's been a big positive for us just because we've -- the way we've communicated, the way we've pulled them into our company and our culture and some of the changes -- other changes that we made down there, it's very, very favorable. So we had no issues.

Justin Speer -- Zelman and Associates -- Analyst

Excellent. Well thank you guys. Really appreciate it.

Cary Dunston -- Chairman and Chief Executive Officer

Thank you.


[Operator instructions] And it appears there is no one else waiting to ask a question. And I would like to turn the line back to Mr. Culbreth for any closing comments.

Scott Culbreth -- Senior Vice President and Chief Financial Officer

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


[Operator signoff]

Duration: 48 minutes

Call Participants:

Scott Culbreth -- Senior Vice President and Chief Financial Officer

Cary Dunston -- Chairman and Chief Executive Officer

Truman Patterson -- Wells Fargo -- Analyst

Garik Shmois -- Longbow Securities -- Analyst

Tim Wojs -- Baird -- Analyst

Steven Ramsey -- Thompson Research Group -- Analyst

Justin Speer -- Zelman and Associates -- Analyst

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