AMWD
#Good morning, ladies and gentlemen.
Welcome to American Woodmark's second fiscal quarter conference call.
Thank you for taking time to participate.
Joining me today is <UNK> <UNK>, Chairman and CEO.
<UNK> will begin with a review of the quarter, and I will add additional details regarding our financial performance.
We will then walk through the presentation available on our website regarding a transaction announced this morning.
After the presentation, we'll be happy to answer your questions.
<UNK>.
Thank you, <UNK>, and good morning to you all.
Certainly, an exciting time for American Woodmark, and I look forward to presenting the information on the acquisition.
But I'd like to begin with our second quarter, which ended with mixed results.
The quarter proved to be challenging from a revenue perspective, with a 4% year-over-year growth.
With Florida and Texas being very large operations for us within new construction, we did see an impact from the 2 hurricanes.
With the remodel, we continued to gain share in our index and our dealer channel.
However, home center was hit especially hard by promotional activity.
Looking specifically at new construction, for the quarter, we grew our Timberlake business 9%.
Sales under index reported single-family starts, driven by the impact of the hurricanes and the increase in delay between starts and closing.
Regarding the hurricanes, though there was ---+ were not only shutdown for a period of time, but start-ups have been delayed with the most visible impact in Florida, one of our largest operations.
One key question we're often asked is, if builders will be able to catch up in these markets.
We continue to work closely with our builders on this very topic, particularly with the year-end approaching for many of them.
Although they are driving hard, the challenge associated with labor shortages remains a key bottleneck.
We do expect demand to remain healthy, and our Timberlake business to regain prior momentum.
The industry as a whole remains very favorable with increasing demand from first-time home buyers.
Although headwinds remain, we continue to see strengthening in the lower price point, which is very favorable for long-term growth within new construction and remodel.
Taking a look at our dealer channel, we grew the business 11% over prior year.
Although the industry has seen some softening with the more affluent consumer, demand remains strong, and we continue to gain market share and outpace industry growth.
Regarding our home center business, we unfortunately saw a decline of 7% for the quarter.
Promotional activity proved to be even stronger than we had hoped.
As many of you recall, it was one year ago that we announced we would come into ---+ come up to parity on what was already a very high promotional level.
Unfortunately, promotional discounting has continued to increase with it occasionally reaching roughly twice the level it was a year ago.
Given our industry-leading growth, post recession and current capacity utilization levels, we simply do not believe it makes financial sense to match these high promotional levels.
This has actually no correlation whatsoever with our long-term strategic commitment to the home center channel.
We do not believe such high promotional spend levels are sustainable in the long term, and therefore, we feel it's best to invest in more strategic work with our home center partners.
And although we're making a choice to not bring our promotional spend to parity, we are being creative with our promotional activity.
We continue to work with our merchants on new approaches to track consumers with the goal of improving our market share.
From a gross margin perspective, we finished the quarter at 20.9%.
Margin was impacted by continued pressure on logistics costs as well as material inflation.
In addition, we had forecasted our demand to be higher in the quarter with our manufacturing plant staffed accordingly.
Not only do we have to take some of our operations down in response to the hurricanes, but we also had to operate at reduced levels of efficiency throughout the quarter.
On operating margin, we remain pleased with our performance of 11.2%.
Despite many of the challenges in the quarter, we continued to operate the system very well, meeting our commitment to sustained operating margins above 10%.
Our net income generated $19.8 million in the quarter, up 12% from prior year.
In summary, despite the volume challenge, we performed well at the operating margin level.
Looking forward, as we have clearly stated in the past, finding a low-cost solution was vital to our ability to continue to grow revenue and profitability.
And I look forward to taking you through our acquisition in a few minutes.
For now, I'm going to turn it back over to <UNK> to cover the details on the quarter.
The financial headlines for the quarter, net sales were $274.8 million, representing an increase of 4% over the same period last year.
Reported net income was $19.8 million or $1.21 per diluted share in the current fiscal year versus $17.6 million or $1.07 per diluted share last year.
For the 6 months ended October, year-to-date net sales were $551.6 million, representing an increase of 6% over the same period last year.
Net income was $42 million or $2.58 per diluted share in the current fiscal year versus $39.3 million or $2.39 per diluted share last year.
For the current fiscal year, the company generated $41.8 million in cash from operating activities compared to $40.1 million the last year.
The new construction market was negatively impacted by 2 significant hurricanes during the quarter, but continues to perform well.
Recognizing a 60- to 90-day lag between start and cabinet installation, the overall market activity in single-family homes was up 13% for the financial second quarter.
Single-family starts during June, July and August in the prior year averaged 756,000 units.
Starts over that same time period from the current year averaged 856,000 units.
Completions over that same time period only averaged 7%, as closings were delayed in the Texas and Florida markets as a result of the hurricanes.
We also believe the construction cycle has been extended and utilizing a 90- to 120-day lag between start and cabinet installation, growth was approximately 10%.
Our new construction-based revenue increased 9% for the quarter.
The remodel business continues to be challenging.
On the positive side, existing home sales increased slightly during the third calendar quarter 2017.
Between July and September of 2016, existing home sales averaged 5.38 million units.
The same period for 2017 averaged 5.39 million units, an increase of 0.2%.
Unemployment continues to improve.
The October U3 unemployment rate dropped to 4.1%, its lowest level since December 2000, and U6 dropped to 7.9%.
Both measures were lower than the October 2015 reported figures.
Consumer sentiment increased to 100.7% in October versus the 98.5% recorded at the beginning of the calendar year, and 87.2% recorded in October 2016.
All cash purchases in September were 20%, down from 21% last year.
On the negative side, the median existing home price rose 4.2%, $245,100 for September, impacting our consumers' affordability.
Residential investment as a percent of GDP for the third calendar quarter 2017 dropped to 3.4% versus 3.5% for the prior year.
The index remains well below the historical average of 4.6% from 1960 to 2000.
Homeownership rates remained low versus historical averages.
The percent of Americans that own their home in the third calendar quarter was 63.9% or 0.4% above last year's rate.
Interest rates increased in the quarter with a 30-year fixed-rate mortgage at 3.9% in October, an increase of approximately 43 basis points versus last year.
The share of first-time buyers declined.
The September reported rate was 29% versus in the prior year rate of 34%, and with the lowest share since September 2015.
Keep in mind, the share remains well below the historical norm of 40%.
Our combined home center and dealer remodel revenues were down 3% for the quarter, with home centers declining 7% and Waypoint growing 11%.
Promotional activity remained higher than the prior year for the second quarter as we responded to competitive positioning and market conditions.
<UNK> mentioned we are not able to maintain parity in the promotional offering and realized a loss of share in the quarter.
The company's gross profit margin for the second quarter of fiscal year 2018 was 20.9% of net sales versus 21.3% reported in the same quarter of last year.
The company generated the year-over-year gross margin of 11% for the second fiscal quarter.
Gross margin was negatively impacted in the quarter by higher transportation costs and material inflation.
Year-to-date gross profit margin was 21% compared to 22.1% for the same period in the prior year.
Gross margin for the first 6 months of the current fiscal year was negatively impacted by higher transportation costs, material inflation and higher health care costs.
Total operating expenses decreased from 10.5% of net sales in the second quarter of the prior year to 9.7% this fiscal year.
Through 6 months, operating expenses improved from 10.5% in net sales to 9.8%.
Selling and marketing expenses were 6.6% of net sales in the second quarter this year compared with 6.5% in the prior year.
Increase in the ratio is due to higher personnel cost and product launch cost in the quarter.
General and administrative expenses were 3.1% of net sales in the second quarter of this year compared with 4% in the prior year.
The decrease in our ratio is a result of leverage from increased sales, lower pay-for-performance compensation cost and ongoing expense controls.
The company generated net cash from operating activities of $41.8 million during the first half of fiscal year 2018, compared with $40.1 million during the same period in prior year.
The increase in the company's cash from operating activities was driven primarily by lower increases in customer receivables and higher operating profitability, which was partially offset by higher inventories to support increased sales and lower increases in accounts payable.
Net cash used by investing activities was $31.1 million in the first half of the current fiscal year compared with $50.4 million during the same period of the prior year due to a $28.5 million reduced investment, certificates of deposit, which is partially offset by increased investment in property, plant and equipment.
Net cash used by financing activities of $25.1 million, increased $16.6 million during the first half of the current fiscal year, compared to the same period in the prior year as the company repurchased 251,241 shares of common stock at a cost of $23.5 million, $13.1 million increase than the prior year and proceeds from the exercise of stock options decreased $1 million.
In closing, the company expects it will grow its total sales in the mid-single-digit rate for fiscal 2018.
Despite material inflation and transportation rate increases, the company expects to improve operating margins for fiscal 2018.
I will now turn the call back over to <UNK> to share an update on our recently announced transaction.
All right.
Thanks, again, <UNK>.
So it's with great excitement that we announced today that we've entered into a definitive agreement to acquire RSI Home Products, Inc.
As <UNK> mentioned, we have prepared a presentation that we will walk you through on this call, and as a reminder, the presentation has been posted and is available on our website.
As I present, I will call out each slide that I'm referencing to ensure that you can follow along with me.
Begin with Slide 4.
I want to provide a high-level summary of industry growth and product and market end-use breakdown.
We've communicated for some time that we remain very confident in future industry growth, both in R&R and in new construction.
With single-family new construction starts at roughly 850,000, we believe 30% to 40% growth remains, driven heavily by first-time home buyers.
And although multifamily new construction has leveled out, this is a market in which we have very little share, thus creating a significant opportunity to leverage our builders service platform with a low-cost, value-based product.
Aging multifamily units also offer opportunity within the R&R space.
In addition, as first-time home buyers continue to enter both the new construction and existing home markets, we feel this will start to release some of the deferred R&R spending within the home centers and dealers.
Bottom line, significant growth remains in our industry as does the opportunity for us to continue to gain share and over-index the overall market.
We absolutely remain committed to making smart investments to achieve this goal.
Moving to Slide 5.
For over a year now, we have been openly communicating our strategy to expand our positioning into all relevant markets.
American Woodmark's current manufacturing platform is designed to service the middle to higher in-stock and lower and semi-custom markets that offers limited ability to provide a lower-cost, value-based product or a middle to higher end semi-custom product.
We remain committed to expand into the higher-end semi-custom space, particularly for long-term growth of our dealer business.
However, we stated that our initial priority was a lower-cost solution associated with 2 key drivers.
The first is our need to continue to serve the nation's top single-family builders as they move to attract first-time home buyers.
The second is that we strongly believe that a significant amount of deferred R&R demand from the younger generations will be a lower price point.
RSI's low-cost manufacturing platform is specifically designed and engineered to service the in-stock and lower- to middle-stock segments with very little overlap with American Woodmark's product line.
Therefore, the acquisition of RSI is fully in alignment with our stated strategy to expand into lower price point market.
From a transaction overview perspective, on Slide 6, the deal has been ---+ has an implied transaction value of $1.075 billion funded through cash, issuance of common stock to RSI shareholders and an assumption of RSI's net debt.
<UNK> will take you through the financing details later in the presentation.
Following the transaction, RSI shareholders will own approximately 8% of AWC's diluted shares outstanding.
We feel this is a significant positive as it clearly shows the confidence that RSI investors have in this deal.
Financially, the deal is expected to be immediately accretive to American Woodmark's profit margins and earnings per share.
We are continuing to work on a financial modeling, but we expect immediate accretion on earnings per share to be at least 10% to 20%, and this is excluding any synergies.
We anticipate annual run rate synergies of $30 million to $40 million to be phased in over the next 3 to 4 years.
Following the transaction, our net debt to adjusted EBITDA ratio will be approximately 3x.
However, due to the combined company expecting to generate significant cash flow, we anticipate reducing our net debt to EBITDA ratio to nearly 1.5 by the end of calendar year 2019.
From a structure perspective, RSI will operate as a subsidiary of American Woodmark following this transaction.
I'm honored to remain as the Chairman and CEO.
On timing, we expect to close in American Woodmark's fiscal quarter, that ends January 31, 2013 (sic) [2018], subject to regulatory review and approval and other customary closings.
Moving on to Slide 8, I would like to provide some background on RSI.
So RSI was founded 28 years ago by Mr.
Ron Simon and has grown to be an industry leader within the in-stock and value-based segments of the cabinetry market.
Calender year '17 revenue is approximately $560 million with a 22% adjusted EBITDA margin.
They have a great team with a very strong value-based culture.
With 9 manufacturing and distribution facilities, they are recognized as a highly efficient, low-cost operator, offering exceptional customer value and performance in a lower price point segment.
This lower price point positioning offers strong growth opportunity by leveraging the American Woodmark's superior service platform in both new construction and R&R.
As you can see from Slide 9, RSI offers a strong brand portfolio with a broad range of value-focused solutions within kitchen, bath and home organization.
Although their core business is focused within home center, in-stock kitchen and bath cabinetry, they also offer a value-based stock cabinetry solution with strong growth opportunity in both new construction and R&R.
Moving to Slide 9 (sic) [11], with a 16% pro forma EBITDA margin, RSI is clearly accretive to our business.
They have a relentless drive to engineer value into their product while taking cost out, including a strong commitment to invest in new technology.
They fully leverage their low-cost manufacturing and supply chain platform across their full product offering.
And looking at our combined footprint on Slide 12, our operations and sales locations fully complement each other.
The broad footprint offers operating flexibility and the ability to continue to enhance our customers' experience in all channels.
Moving to Slide 13.
From a consolidated company perspective, this deal will add tremendous scale with forecasted calendar year 2017 revenue of $1.6 billion.
From a channel perspective, the consolidated mix places home centers at 55%, new construction with 38% and dealer at 7%.
The home center concentration is a strength given the expanded ability to leverage our service platform to better serve the special order customer, the value-focused DIY-er that favors in-stock and the rapidly growing pro customer, all with different service and product needs.
From a total product and business mix perspective, the consolidated company offers increased diversity with stock plus accounting for 52%, stock at 22%, in-stock kitchen at 12% and bath at 14%.
At this time, I'm going to turn ---+ hand it back up to <UNK>, and he is going to take you through the financing details that are on Slide 14, then I'll come back on with the wrap-up.
As <UNK> noted previously, the implied enterprise value for the transaction is $1.075 billion, including approximately $346 million of net cash, debt assumed of $589 million and $140 million in American Woodmark common stock.
The company will fund the transaction with cash in the balance sheet and a new $250 million term loan.
The company will also enter into a new $100 million revolving credit facility to replace its existing facility.
Note that we do plan to pursue a refinance of the second lien notes at the appropriate time.
Pro forma net debt to adjusted EBITDA will be 3x calendar year 2017 adjusted EBITDA and will reduce to 1.5x net debt-to-EBITDA by the end of calendar year 2019, including synergies.
Finally, the company will have approximately $200 million in liquidity at closing.
<UNK>.
Wrapping up with Slide 15.
I cannot express enough how very excited we are about the strategic alignment.
We have been steadfast in our vision and have been patient enough to make the best long-term strategic decision for our company, employees and shareholders.
Critical to this deal is that we remain true to our culture.
Throughout our review of the business, it was quickly ---+ quickly became evident that our cultures are very aligned and complement each other.
RSI is made up of incredible people that truly care about each other in all they do.
Both companies have similar backgrounds and were founded with strong values, and I'm very excited to be able to lead the combined company well into the future.
This deal clearly positions us as an industry leader with greater scale and broad product offering.
With the new offering, we will strengthen our existing customer relationships and continue to grow our business well into the future.
Although volatile, long-term growth remains within single-family new construction, driven by the first-time home buyers.
Likewise, within both our home center and dealer channels, we believe the outlook is very favorable as the younger generation continues to enter the remodel market.
The RSI platform is well-suited for this growing demand at the lower price point.
And as the pro business continues to grow within both home center and dealer channels, the combination of our 2 platforms will allow us to invest in and further strengthen our positioning and commitment to this business.
Lastly, the platform opens the door for us to begin to compete within the multifamily new construction market.
Although it accounts for 1/3 of all new construction starts in America, as I stated previously, we have virtually no share.
Over time, we firmly believe that this is an underserved market that we can create a clear competitive advantage in by leveraging our national builder centers and RSI's low-cost, value-based product for a turnkey solution.
Operationally, we look forward to sharing best practices across the platforms and strengthening our manufacturing excellence.
By bringing together 2 respective platforms and complementary market segments, we will be able to expand our core competitive advantage of offering a superior customer experience.
Financially, the combination is immediately accretive to American Woodmark's margins and earnings per share.
Our final message, we wholeheartedly welcome all RSI employees to the American Woodmark family and look forward to growing our business together.
This concludes our prepared remarks.
We'd be happy to answer any questions you have at this time.
Yes.
Really, the full alignment with the strategy that we've been openly communicating for some time now.
When you think about the shift in the market demographics and the buying power that's accretion out there with the younger generation, we're really starting to see that shift down in the price point.
As the younger generation both enters new construction, obviously, it's driving a lower price point, home as well as the R&R that we feel is coming related to that.
It's also going to be a lower price point.
Our challenge is, as a manufacturing organization and the footprint that we have, is it's really not designed to serve that market.
Running a higher-priced box on the same platform to the lower-priced box is very difficult.
So we've committed that we're going to make the investment to get a dedicated platform to service this market, and we are, obviously, following parallel paths.
We've been working on an internal brownfield/greenfield solution or an M&A solution, and I feel we're blessed enough to have this M&A opportunity come along with an industry leader in that price point.
And so it fits very well, allows us to combine our 2 platforms, to take our service platform and that low-cost platform that RSI offers, and really go out now and aggressively pursue that lower cost price point base as well as in new construction and the repair and remodel.
Specifically, on the home center, I think a lot of folks don't understand the diversity that actually exists within home center.
We really see 3 distinct customers oftentimes that walk in the door.
We're, obviously, very familiar with serving that special order customer and that baby boomer population that's driven that for many, many years now.
We feel there is continued growth in that special order business, but that price point is going to shift downward as the younger generation starts to get out and spend money.
But you also have that in-stock segment that's been growing quite well, so it's coming out of recession.
It's also tend to be more recession-proof when you get into a volatile market.
So getting into that market with that cash-and-carry customer, oftentimes a DIY-er, the flippers that can be out there that will get into that.
And oftentimes, you might have some pros that walk in the door and will use the cash and carry.
It's a significantly different customer with a different need.
And then really at the home center, there's been a lot of focus on that pro customer.
That's a tremendous growth opportunity for them to really service that market.
We have communicated and been aggressively working with our partners in the home center markets to really go after that business with them.
With this low-cost product, it really opens the door to us to kind of double down on that business and offer, I'd say, a best-in-class solution for that pro customer.
So 3 different businesses, 3 different customers in that, and I think 3 different opportunities for us to grow our business with the home center customers.
Sure, Nick.
As we work through that plan, the bulk of those ---+ the bulk of that benefit is going to be driven by incremental revenue.
So the way we've modeled it, there's approximately 75% of the synergies will come from incremental revenue gains.
And then the remaining 25% is purchasing and manufacturing efficiencies.
Correct.
<UNK>, first question for you would just be ---+ as well as to <UNK>, it's a significantly larger deal, I think, you were alluding to, maybe pursuing.
So I just want to maybe ---+ if you guys could give us some clarity what was unique about this asset that you are willing to obviously write a bigger check than kind of what a lot of us thought out there.
I think what was fairly well understood and when you get to a lower price point market is, it's really driven by a lower SKU, very, very high volume operation.
So economies of scale are critical when you get into a manufacturing footprint.
So when you get out and really think about being a proactive, offensive player in that space, economies of scale are very, very important.
You think about servicing the home center market and the type of platform that's required to do that on a national level.
It really requires high investment to ---+ sort of start from scratch would be very difficult.
So obviously, having this opportunity to come along that allows us to truly jump in as a real offensive player in this market, fully align and leverage our platform on it was too good of an opportunity to pass up to be honest with you.
And when you think about the ---+ it seems clear that ---+ and maybe if you could just clarify the biggest revenue opportunity is the push into new construction from their existing portfolio.
They seem, based on the slides, that they're underweight new construction, not just relative to your business but relative to the market.
So how easy or hard do you think about that, <UNK>, when you think about a product that's maybe not heavy in new construction.
Is that something in terms of time frame that you could do immediately.
Or is it kind of like what you've done on the dealer side, where you need to put some costs upfront and then over time, you could really ramp the growth rate.
Clearly, we need to get in and better understand their platform in a much, I'd say, greater degree.
But the good thing is, they do have, as I mentioned, what we call a value-based stock product that is well suited for the lower price point and new construction market as well as leveraging perhaps on the in-stock product.
From a revenue perspective, on the single-family side, it's really no different than the way we operate today.
So it's not instantaneous.
We have to go out, the subdivisions are bid ---+ we'll bid on subdivisions.
So that can come at a much quicker rate than, say, something like a multifamily, which tends to be much longer term, contractual and job based.
So it's going to take longer term to wrap up the business in that space.
But at the same time, I would not underestimate the R&R side either.
It's ---+ I've been talking for some time that it's my philosophy, but I think if you really look at the cycle, and how we come out of this recession and compare to prior recessions, there has been very little move up and move down.
And really, what's been missing is that first-time home buyer.
So that new construction is a kicker.
But I think once that starts to really flow, it's going to unleash a lot of demand in the R&R.
It's going to be a lower price point.
So we see growth there as well.
It's going to be a longer delay, I would say, compared to the new construction.
So you're correct, I think single family is our most immediate opportunity, but both home center and the dealer business offers growth.
And we can't forget, too.
I mean, both of those businesses are heavily involved with new construction.
Obviously, the smaller builder and the pro customer on the new construction side is a growing business within dealer and in the home center market that will, obviously, just really provide us an opportunity to go after.
And then just last for me.
On the ---+ for the organic business or for legacy American Woodmark, the revenue growth guidance for the year came down to mid-single versus high single.
Could I ask you guys to maybe talk about that a little bit more by end channel.
Do you have an estimate for what the hurricane impact was in the quarter, and kind of has the builder business rebounded.
So I'll ask <UNK> jump in on the detail with regards to the hurricane.
High level with regards to the channels is we're not going to give tons of detail, but new construction, we ---+ so it's really what we've been communicating.
If you take the hurricane out of the mix, we do expect it to return to what are considered normalized levels.
We've communicated that we're going to continue to over-index, but a lesser rate.
Gaining share in that market is getting tougher with the core business.
Obviously, the new platform will, hopefully, reverse that, and allow us to go out and be aggressive in the lower price point.
But on the core side, we will continue to over-index, and we do expect it to return to more normalized levels.
Very dependent upon the weather.
I mean, when you get to this time of the year and particularly spring, have been very susceptible to the weather.
So pending nothing crazy up in the weather, we're expecting new construction to return to normal, I'd say higher single digit.
Once again in the remodel side, with regards to dealer, we'll continue to over-index, expect similar performance kind of where we've been, but slightly over-index the market in case you made numbers.
Really the challenge, as you know, has been in home center.
I think we've ---+ I honestly don't think the promotions can get much higher with R&R.
In fact, I don't think it can really get any higher.
I think we're all working together very smartly, i.
e.
, us and even competition and the home centers.
We all know that's not really sustainable long term, and really looking at the business hard.
We're working very closely with our merchants.
Obviously, we're not pleased with the market share loss.
It's a very important business to us.
So when I say, we're not willing to promo, just means we are spending money but we're going to be more aggressive in other areas and areas I feel are long-term strategic opportunities to get new customers in the door and so forth.
So that's going to take time, but honestly, when you're up against some of the heavy promos that we've been facing, there's not much you can do against that.
So if it stays as high as it is, we're probably going to continue to under-index.
We don't expect to have the negative comps like we've seen the past couple of quarters.
Certainly, not our goal.
Like to get that back up, and we're being aggressive on that.
But time is going to tell.
We just have to wait and see what happens in home center, knowing that longer term, I'm very confident in it.
And then, <UNK>, on the hurricane, it's hard to get to an exact number on that, but our team has done some work, and our best estimate is it's approximately $2.5 million impact in our fiscal quarter.
That number would be a ---+ you could call it an EBIT number, yes.
You're right.
I can't give you any precise information there.
We've, obviously, got work to do between sign and close on that effort.
Certainly, you can model it.
We have done some modeling.
And I would just refer you back to <UNK>'s earlier comment around accretion where we believe we'll be at least 10% to 20% with that modeled assumption that we got factored in.
But we'll have more detail around that as we get closer to a closing date, and can produce the performance and give you some context on that.
Kind of 2 aspects, #1 that's early for us, so we really need to get into working on synergies and the footprint and so forth.
But the math can be a little misleading because the reality is what you like ---+ what you see in Texas, for example, is our builder centers where they actually have manufacturing there.
So that's actually a plus for us.
And even when you look across, the manufacturing that they have is particularly on the, I would say, the low-cost in-stock side is very, very different than our manufacturing.
So that has very little to no synergies honestly from what you're thinking about.
Certainly, synergies from learning operational excellence, best practices and so forth, but the manufacturing is very distinct.
The good thing is ---+ I mean ---+ if you could see my fingers, it's miniscule, which is the ---+ and that is the best part of this deal.
It's pretty rare in the M&A world.
You can literally go out and take 2 companies, come together and truly say that there is virtually no overlap.
So even when you talk about the segment of stock, they really serve that low-cost value-based customer, which we cannot do.
Our platform is not capable.
So you get into a much higher price point with our product.
So that is really the best opportunity with this deal, is the minimal overlap.
Yes.
Like I said at the beginning really, we have interest in both.
And don't underestimate ---+ I think the dealer channel, oftentimes people will immediately jump to the fact that you have to have a really high-end product to service the dealer channel.
When you really look at the ---+ what we call the dealer-distributor out there, there is a lot of volume that's at a lower price point.
Really what we call the mega dealers are a lot of the chain stores out there or you could get into lumber yards and so forth.
They are really in a much more value-based pro category.
So we are not ignoring dealer with this.
In fact, our dealer channel is very happy with this acquisition and the opportunity to expand the business.
It was just a matter of priority first, and the context that I provided ---+ really, I provided for some time now, as you think about the entry-level price point home buyer and the concentration how it's growing.
We have to and, obviously, would always continue to service that market just because we service the top builders in the country.
They're not going to allow us to cherry pick nor do we want to.
We have to be a full-service provider for the top builders.
So as they start to move down in price point, we were going to move with them, and unfortunately, not having a lower-cost product would have been detrimental to our margins.
So this has been our key focus initially when we talked about expanding, was really going after that lower-cost price point, not only from a growth perspective but also from a margin protective and allows us to continue to grow.
It will be phased in, but I don't really have any additional color to add at this time.
I'm sorry.
Step-up in the.
.
Yes.
That's a similar question to Tim's earlier.
So we've got work to do around valuation and purchase accounting treatment.
And nothing that I can really share at this point in time.
We got to get through that work between now and closing.
Since there are no additional questions, this concludes our call.
Thank you for taking time to participate.
