Q1 2021 Azek Company Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Asa Company Q1, 'twenty 'twenty One earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone.
If you require any further assistance please press star zero.
I'd now like to hand, the conference over to your Speaker today, John Kelly SVP of strategy and execution.
Thank you. Please go ahead.
Thank you good morning, everyone. We issued our earnings press release. This morning, the Investor Relations portion of our website at investors day, and he's a co dot com as well as via 8-K on the SEC's website and.
I'm joined today by Jessie, saying, our Chief Executive Officer, Ralph Nicoletti, Our Chief Financial Officer, Greg Jorgensen, Our Chief Accounting Officer and me.
And that's <unk>, our vice President.
The S G.
Before we begin I would like to remind everyone that during this call <unk> management may make certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These include remarks about future expectations, and anticipation beliefs estimates forecasts plans and prospects such statements are subject to a variety of risks uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements such risks and other factors are set forth and the cash.
<unk> earnings release, Who's done on the web site and will be provided in our form 10-Q for our first quarter of fiscal 2021 as filed with the Securities and Exchange Commission.
The company and does not undertake any duty to update such forward looking statements. Additionally, during today's call. The company will discuss non-GAAP measures, which we believe can be useful and evaluating our performance.
The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
Reconciliations of adjusted EBITDA to net income calculated and our GAAP and adjusted gross profit gross profit calculated under GAAP as well as reconciliations for other non-GAAP measures discussed on this call can be found in our earnings release, which is posted to our website and will be included in our form 10-Q for our first fiscal quarter of fiscal year 2021, I would now.
I'd like to turn the call over to Jessie Zheng.
Good morning, I'd like to welcome everyone, who has joined today's call. We are off to a strong start to our fiscal 'twenty and 'twenty one building off the momentum we saw both pre pandemic and as we exited 2020. Our results this quarter were driven by robust and market demand for our products and our residential.
Segment operational execution on our capacity expansion and recycling plants and downstream sales investments.
Given the last few months, we continue to remain confident about the future the.
And the strength of our business model and our ability to drive value and various market environments.
We also remain committed to making a positive contribution to society and expanding our recycling capabilities to further divert waste from landfills.
Insistent with that commitment we are announcing today a goal of utilizing 1 billion pounds of recycled scrap and waste annually and the manufacturing of our products by the end of 'twenty and 'twenty six.
This is an ambitious target that builds upon the 400 million pounds of scrap waste that APAC diverted from landfills and fiscal 2020 and highlights our ongoing commitment to ESG and sustainability.
Achieving 1 billion pounds of recycled consumption will be a guidepost for us and drive our future behavior, including the ongoing reengineering of our current product portfolio and the launching of new products that use and increased amount of recycled material content and.
In many cases these steps have the added benefit of reducing our cost position.
We believe that we can revolutionize outdoor living by building a more sustainable future.
We continue to make progress executing our strategy and key initiatives, we have been investing and our core strengths of bran manufacturing R&D and customer connection and we remained focused on our key initiatives to achieve our long term performance objectives.
Through innovation.
Margin expansion through recycle and continuous improvement and positively impact and the world through our commitment to ESG stewardship.
First we have multiple levers to drive above market growth and accelerate material conversion, including investing in new products and leveraging downstream focus sales and marketing teams, we are making meaningful progress on these levers and see continued growth and our internal leading indicators and.
As part of our innovation pipeline, we recently announced the launch of our exciting new timber Tech HVAC Landmark collection, which is the latest extension of our premium cap polymer decking and Leverages advanced technology to create the most natural looking in demand look of rustic reclaimed wood.
We also announced new railing products to complement our high performance decking, including new top rail options for timber Tech impression rail express and new aluminum ballast or options for timber Tech Radiance rail express.
Second as part of our focus on sustainability and margin expansion, we have made great progress with our recycling initiatives.
During the quarter, we brought our third polyethylene and recycling line into production and Wilmington.
Our <unk> full circle PDC collection, and recycling program, which launched in November 2020 continues to gain and momentum and we are honored to have been recently recognized for the program as a 'twenty 'twenty one green innovation of the year Award winner by Green builder media.
Third we continue to make significant progress and improving our social and environmental impact and corporate governance.
Our core value of always do the right thing.
Serves as the guiding principle of our culture and commitment to environmental social and governance excellence, it's part of our corporate DNA.
We are building the age that company and a way that drives long term value creation for all stakeholders and as such our business and sustainability objectives are highly complementary.
We are excited to have recently brought on Amanda Cimaglia as vice President of ESG.
With this newly created role our goal is to formalize and further accelerate the implementation of ESG programs throughout the organization and across key stakeholders. We will soon be releasing our inaugural ESG report, which will contain more details on our performance and targets.
And many ways. We view this just as the start of our journey.
Put simply we not only look at the full circle, we bring things full circle and we believe we are uniquely positioned to pursue sustainability initiatives that positively impact our products, our people and our planet.
And finally, we continue to invest and our core brand manufacturing R&D and customer connection strengths.
We have made significant progress against our capacity expansion, which will be detailed later and the call.
The strength serve as the foundation of our differentiated business model and we continue to see opportunity arising from our ongoing investments.
As we continue to operate through the pandemic and the early innings as a public company. Our recent success and track record serves as evidence of the attractive market opportunity and our ability to enhance our growth drivers through conversion and product innovation, along with operational excellence and margin execution.
Turning to our first quarter results, we delivered strong sales and adjusted EBITDA growth. Our residential business grew 37 per cent compared to the first quarter a year ago, while our commercial segment declined approximately 12%.
Adjusted EBITDA grew 43% year over year, and adjusted EBITDA margin expanded 240 basis points over the same period.
As a reminder, our fiscal Q1 is a seasonally smaller net sales quarter, where we traditionally build internal inventory and our residential business to service future quarters.
The strong trends that we saw and the second half of fiscal 2020 continued throughout the first quarter as consumers remain focused on improving and investing in their homes and channel demand remained robust driven by strong and demand and lower than normal inventory levels.
Our adjusted EBITDA margins benefited in the quarter from the higher rate of sales operational excellence and carryover from 'twenty 'twenty pricing per.
Partially offset by startup costs related to our capacity expansion.
Within our residential business, we experienced strong demand through the first quarter.
Repair and remodel and new construction and benefited from favorable tailwind and both the pro and retail channel saw significant growth this quarter.
Sales within our exteriors business grew over 20% year over year, and our deck rail and accessories business grew over 40% year over year.
We saw strong sell through and demand was broad based across our residential product portfolio, including our 2020 product launches like timber Tech Pro reserve and edge Prime plus.
Inventory days and the channel improved exiting the quarter, but remain below typical levels.
While inventory in the channel is not where we would like it to be based on historical benchmarks, we are doing a better job at servicing our customers and getting them the right inventory.
We continue to improve internal and channel inventory levels ahead of the price deck building season that typically starts and the spring and.
And we are working with our channel partners to ensure we have the right inventory at the right time and the right geographies.
Our investments and digital branding and improving the overall customer experience continue to drive strong returns.
Key demand metrics, we track such as website sessions and sample orders all saw strong growth in Q1 relative to the same period last year.
Our commercial business declined for the quarter on a year over year basis, but continues to perform relatively well and a difficult market.
While we are starting to see improvement and certain end markets like marine and we expect commercial to remain challenged especially for trade shows and retail through at least the first half of calendar year 'twenty 'twenty one.
As a reminder, this business tends to track more closely to GDP and the broader economy.
Our commercial business product portfolio includes high privacy bathroom partitions and barrier products with important anti microbial and anti viral features that could become increasingly necessary as well as innovative OEM solutions that are utilized and faster growing up.
<unk> living applications. Our team is doing a great job navigating the difficult macro backdrop and while we still see some near term challenges on this front, we continue to expect to see some stabilization in the back half of fiscal 2021.
Though as you can imagine certain end markets won't fully recover until the economy has fully reopened.
Operationally our team once again worked tirelessly to respond to customer demand, while continuing to execute against key operational initiatives.
These initiatives are on track and include the expansion of manufacturing capacity the increased use of recycled raw materials and the execution of our continuous improvement programs.
On the capacity front, we are encouraged by our early success with our capacity expansion program.
Favorable operational execution led to the first phase of our capacity expansion plan coming online faster than planned during the quarter.
Despite the sustained level of demand we saw during the quarter, we are improving our ability to more fully meet total market demand and made progress on service levels during the quarter.
We expect gradual continued improvement as new phase II capacity is on track to come online by the end of the third quarter of fiscal 'twenty 'twenty, one and we continue to evaluate opportunities to accelerate the third phase of our capacity expansion program.
As a reminder, the strategic capacity expansion plan includes an incremental decking production capacity of approximately 70% relative to the end of fiscal 2019.
And a new manufacturing facility in the western part of the U S. Over the next 12 to 18 months.
This is a multi phase investment that is modular and flexible and importantly will allow us to position ourselves for ongoing growth and market penetration.
The growth from these investments coupled with our recycle and continuous improvement initiatives give us long term confidence that we will continue to expand our adjusted EBITDA margins.
As you recall from our last update during the fourth quarter of fiscal 2020, we announced a low single digit price increase across the majority of our product portfolio within our residential segment as well as across our commercial product portfolio that went into effect at the beginning of the calendar year.
Year.
During our fiscal second quarter, we have continued to experience incremental inflationary pressure and raw material pricing, particularly on the resin side as well as inflationary pressures on the labor front.
As such we recently took action and implemented and additional price increase and the low single digit range that will begin flowing through and late fiscal Q3 to offset this increased inflationary pressure.
Now turning to our outlook.
We are raising our net sales and adjusted EBITDA growth guidance for fiscal year 2021.
As previously discussed our outlook is fundamentally driven by a number of internal and external variables.
We continue to see positive signs and our internal digital and website metrics sample order activity as well as dealer and contractor survey checks.
The macroeconomic indicators that most highly correlate to our business such as repair and remodel activity and new housing construction activity also continued to show positive signs.
This is balanced against the continued uncertainty and the overall economic environment.
As we look ahead to the remainder of our fiscal 2021, we are increasingly confident in our outlook as steady demand continues across our residential segment.
We have improved visibility on channel inventory levels, our pricing action and downstream demand from our pre season or early buy program.
And together.
This data and are more near term visibility are the drivers behind our increased outlook for the fiscal year.
In summary, we are well positioned as a company to continue to perform strongly and remain optimistic about the opportunity that lies ahead.
We play and growing markets operate leading brands with category leadership and have multiple levers to drive growth and margin expansion combined with a strong balance sheet.
We are in the early innings of our multiyear value creation strategy with that I'd like to turn the call over to Ralph who will discuss our financial results and outlook in greater detail.
Thank you Jesse.
As I discuss our results all comparisons made will be on a year over year basis compared to the same period ending December 31 2019.
For the first fiscal quarter 2021, net sales increased by $46 $2 million or 28% to $212 $3 million.
The increase was primarily driven by sales growth and our residential segment aided by favorable operational execution as the first phase of our capacity expansion plan came online faster than planned during the quarter.
For the first quarter net sales for our residential segment increased by 37% year over year, driven by deck rail and accessories growth of over 40% and exteriors growth of over 20%.
Within that rail and accessories, we estimate consumer and contractor demand drove approximately three quarters of the growth with the balance being attributable to rebuilding inventory and the distribution and dealer channels.
Residential segment growth was partially offset by a decrease and our commercial segment of 12% year over year.
Gross profit for the first quarter of fiscal 2021 increased by $21 7 million or 42, 3% to $73 million.
Adjusted gross profit for the first quarter of fiscal 2021 increased by $22 $3 million or 34% to $88 8 million.
Adjusted gross profit margin was 41, 8% and increase of approximately 180 basis points compared to the prior year period.
The increase and adjusted gross profit was driven by higher residential segment sales carryover pricing from 2020 and manufacturing.
Actually and productivity, partially offset by startup costs related to our capacity expansion program.
In the first quarter, we experienced a modest cost inflation impact and expect higher raw material prices will flow through our P&L and subsequent quarters.
Raw material prices have continued to increase further during our fiscal second quarter and as Jesse noted we have taken additional actions to offset the impact, including the recently announced incremental price increase.
Selling general and administrative expenses increased by $9 $6 million to $53 million or 25% of net sales for the first quarter of fiscal 2021.
The increase was primarily driven by higher stock based compensation expense ongoing public company expenses and personnel costs.
Net income and the first quarter increased by $20 million to a net income of $10 $2 million compared to a net loss of $9 8 million for the three months ended December 31, 2019, primarily due to higher net sales and lower interest expense.
Adjusted net income was $23 million or 15 cents a share for the first quarter of fiscal 2021 compared to adjusted net income of $3 $6 million were <unk> <unk> a share a year ago.
Adjusted EBITDA for the first quarter of fiscal 2021 increased by $14 $6 million were 43% to $48 $5 million adjusted EBITDA margin expanded 240 basis points to 22, 8% from 24% a year ago.
Now turning to more detail on our segment results.
Residential segment net sales for the first quarter of fiscal 2021 increased by $50 million or 37% to $185 $6 million.
Residential segment adjusted EBITDA for the first quarter increased by $19 9 million or 51% to $58 $8 million the.
The increase was mainly driven by higher sales and gross profit margin, partially offset by higher selling and general administrative expenses.
Commercial segment net sales for the first quarter of fiscal 2021 decreased by $3 $7 million were 12% to $26 6 million.
The decrease was primarily attributable to declining sales and our Scranton products and Viacom businesses as the effects of COVID-19 continues to impact certain end markets.
Commercial segment adjusted EBITDA for the first quarter was $3 3 million to $300000 increase year over year was primarily driven by lower manufacturing and selling general administrative expenses offset by declining sales.
And the steps the team took and the second half of last year to lower operating costs given the revenue challenges are starting to benefit the segment margin profile.
Looking at our balance sheet and cash flow as of December 31, and 2020, we had cash and cash equivalents of $210 million and approximately $143 $3 million available for future borrowings under our revolving credit facility.
Total debt as of December 31, 2020 was $463 $3 million and we have not drawn on our revolving credit facilities.
Our net leverage ratio stood at one one times at the end of fiscal Q1, and notably and early February we refinanced the entire balance of our term loan and we're able to realize over 100 basis points of interest rate savings.
Net cash provided by operating activities was $20 1 million for the three months ended December 31 2020.
Turning to our outlook our outlook is based on continued solid demand within our residential segment. We remain encouraged by our strong demand trends, including internal signals like web traffic digital engagement and sample orders growth as well as external demand signals, such as housing starts and repair and remodeling activity.
To set some context, our second fiscal quarter is historically, one where inventory is manufactured and position in the channel ahead of the building season How's.
However, we expect this staging to extend more into the third fiscal quarter, given demand and production dynamics this fiscal year.
For the fiscal second quarter, we expect total company net sales growth to be in the range of 13% to 15% year over year with the residential segment growing and the high teens range and adjusted EBITDA growth and the 18% to 22% range.
For the full year fiscal 2021, we expect total company net sales to increase 14% to 18% year over year, and adjusted EBITDA growth and the 19% to 23% range year over year.
This results and continued adjusted EBITDA margin improvement as additional costs, including startup from our capacity expansion and incremental raw material and labor inflation.
A normalization of marketing and SG&A expenses and cost of being a public company are more than offset with pricing and manufacturing cost savings from recycle initiatives.
From a segment perspective based on our leading indicators, we expect full year residential segment net sales growth and the range of 17% to 21% year over year.
This outlook reflects the visibility we have for the next three to six months and recognized as continued macro uncertainty and the strong performance. We saw in the first fiscal quarter of 'twenty, 'twenty, one and and the second half of fiscal 2020.
This outlook also assumes some channel inventory refilling for the full year.
And the commercial segment, we are assuming there will be economic stability with some improvement and the second half of the fiscal year, leading to our projection of net sales declining at a mid single digit rate year over year.
System with our prior outlook.
We continue to expect total capital expenditures to be and the $125 million to $135 million range as we work through our capacity program, primarily in decades, and we continue to evaluate opportunities to accelerate the third phase of our capacity expansion program.
To assist in modeling, we expect approximately 21% to $22 million of interest expense for the full year of 2021 and our tax rate for 2021 is now estimated to be approximately 25% and.
And our full year weighted average diluted share count is estimated to be approximately 157 million shares.
I'll now turn the call back to Jesse for some closing remarks.
Thank you Ralph.
I'd like to recognize our team, including Ralph and John for their continued leadership and our response to the pandemic and its impact can.
<unk> with our core value of always do the right thing. Our first priority has been and will continue to be the safety of our employees our customers and our communities.
Thank you to the entire <unk> team and our channel partners for your commitment and dedication.
With that operator, please open the line for questions.
At this time, if you would like to ask a question Press Star then the number one and your telephone keypad and.
And the interest of time, we ask that you limit your questions to one and one follow up you May press star one again to rejoin the queue for additional questions.
Our first question comes from Susan Mcclary with Goldman Sachs. Your line is now open.
Thank you good morning.
And my first question is around just thinking about you've now announced two price increases over the last couple of quarters and there are you seeing any pull forward of demand and the pre buy and could that perhaps if any implications as we think about the seasonality as we move through the rest of this year.
Hi, Susan.
And.
Go ahead, Rob just yeah just.
And as it relates to the.
The price increase.
And we plan that and set the timing of orders and effective dates.
So that there isn't that there isn't any pull forward.
And any material way influencing the results. So I think as you look at our guidance and.
What we saw and the first and the first quarter to no real effect from no real effect from.
Pricing and and of course, as we've said before.
The capacity the capacity relative to demand situation.
And as is tight so we had to take all that into consideration when we set the dates.
Yes, our demand right now and as you look at the demand.
And the demand pattern.
We have is really driven by.
Optimizing service at this point.
And and making sure that we have the right inventory.
Position with the right players that at.
At the right time and.
As such the.
The pricing.
And really any any other factors are less prevalent.
This year than they might be.
And we consider.
Past years.
Okay. That's helpful. And then my next question is you talked to the fact that your capacity. Some of your capacity came online a little sooner than you had expected in the quarter and three.
Think about you're continuing to add some lines in there how should we think about that flowing through as he moves through the next couple of quarters and is there the potential that we could see that coming online a little faster as well and how does that kind of influence. The revenue guide that you put out there for this year.
Yes relative to the capacity adds as we highlighted we were very pleased with the with what the team did in there and the first quarter.
As we add capacity.
There is a normal ramp up that occurs there.
We're staging that occurs and there's expectations around that of when that capacity will become productive.
As we highlighted in Q1.
That capacity became more productive faster as we look at the later stages.
We have what we believe is a realistic plan for how that capacity.
Comes online and as such our guidance is really based on that and and the way to think of our guidance throughout the entire year.
As we certainly have at least enough capacity to meet that guidance and as you would expect from from any good management team, there and theres always opportunity to exceed that.
From a production capability standpoint, but in aggregate for the year, we think our guidance is very appropriate given the.
The timing of the production that we see coming online.
Okay. That's helpful. Thank you and good luck.
Thank you Susan.
Our next question comes from Mike Dahl with RBC capital markets. Your line is now open.
Hi, Thanks for taking my questions.
My first question is as sort of a follow up around cadence and I was hoping you could elaborate more on some.
Some of the timing when you talk about kind of demand and production and influencing the timing between <unk> and <unk>.
<unk> because it sounds like and demand is still quite strong and channel inventories are.
Low so is it is it a behavioral.
Decision on the part of the customers or is it truly more.
Production constraints that are pushing the seasonal timing more towards <unk> this year.
Yeah. So so.
Ralph I'll start and in and please.
Chime in afterwards, so so as you look at our demand pattern the underlying demand in.
The market that we have seen has continued and we expect to continue at.
And at a nice pace. So that's the underlying demand consumers buying from contractors as you take a look at the channel itself as you can see from our Q1 results.
The channel has demand needs and is running at lower inventory levels as we mentioned and the call. We took a step against that a modest step.
And our deck rail and accessories to get a little bit healthier in the channel, but the vast majority of what we sold in Q1 was against underlying demand and so as you play that out into Q2, and Q3 youre dealing with a situation where there is strong demand.
And also a need to.
Position inventory for the selling season, and then and so the way to think of it is what we're what we're highlighting for Q2 into Q3 and.
And as us managing our production managing what we sell to our customers.
Against that demand to make sure that inventory is well positioned.
Such that we can meet and market demand and when you do that you time.
<unk> and a more efficient way rattler or not efficient necessarily but in a and a more structured way against and demand and so if you roll all that up what you see then is a flattening of that inventory build.
And to progress.
During Q2 into Q3 that allows us to meet both and demand, but also give our channel partners, what they need to service demand in season.
Got it okay. Thanks Jessy.
And then my second question just relates to kind of.
Timing of price cost and it's good to hear that Youre getting out in front of the inflationary environment second price increase just to remind us the way that the resins and other.
Cost of goods sold and inflation flows through your P&L from a timing standpoint relative to when price takes effect does your does your guidance for the year incorporate per.
Pressure from price cost or do you think you manage the timing and in a way such that it's going to be price cost neutral still from the year.
Yes, Mike Great.
Great Great question and point because clearly.
And resin prices have been pretty dynamic here over the last several months for sure.
So first to start with the end point is.
And as we've.
And as we've you know.
Looked at looked at costs and both the inflation on the base labor plus plus the movements and resin we've covered the costs and our outlook.
So based on the price increase that we announced early.
We're early into the fiscal year, coupled with the incremental price increase that we just announced we've covered we've covered the expected costs.
Within our guidance, having said that a couple of points relative to how it flows through the P&L. Since this is and this is important to understand.
First.
Coming into the first quarter, if you recall late in.
Q4 of <unk>.
Q4 of 2020.
We said there'd be at least a quarter lag on how those costs flow through and in Q4 2020 actually there was a temporary decline in resin prices that and our first fiscal quarter.
We got the benefit of so there was very modest a modest only a modest impact from inflation and our first quarter.
And.
And while while we benefited from some carryover pricing from the prior year and the first quarter.
Now.
As we moved into the early part of the second quarter here resin stepped up quite a bit.
Big double digit increases.
And.
We have levers to pull here and.
We executed another price increase and.
And so the resin impact that started and to really spike up and the beginning of the second quarter, that's going to impact Q3, and Q4 and more pronounced.
And we took pricing and.
And on the year recovering the costs, but as you think about the quarterly flow of pricing is not going to take effect and full until the latter part of Q3. So there is some.
There is some and.
Imbalance between price and cost and the third quarter, but we fully recover that and the fourth quarter and on a full year. So that's an important.
Important consideration when you just think about the flow of the quarters, but on the full year, we've got it covered.
Okay. Thanks, Ralph that's really helpful. Thanks, Ralph Thanks Jessy.
Yeah, and Mike the only thing I would add is as you know.
Just to reiterate what Ralph said.
The benefit of how we're doing things and and the benefit of the opportunity that we have is we have multiples.
Levers.
By which we we manage our margin and the profitability of the company and and so we've talked a fair amount about recycle.
We've talked about our ability if needed to offset inflation with price and I think as you as you see the.
The actions we're taking.
And the inflation is also on the labor side, so as I think and Matt at a macro level as you see.
Our performance Youre going to continue to see the ability that we have.
For the entirety of the year to appropriately manage both growth and margin.
Okay got it okay. Good point.
Our next question comes from Phil <unk> with Jefferies. Your line is now open.
Hey, guys congrats on a very very strong quarter.
A few of the R&R lever and building products companies have actually reported results and have called out flat to down sales growth for the back half of calendar 'twenty 'twenty one.
Obviously, you guys are dealing with a different dynamic with some of the sector.
And some you are seeing but.
It would be helpful to kind of give us a little perspective, how your channel partners or echo and to you and how they are thinking about the shape of the year. It seems like they're looking to build inventory. So that's pretty encouraging but any color on how youre expecting sell through demand throughout the calendar year.
Yeah.
And thanks for the question Phil as as we do surveys on a monthly basis, and our survey basis against a 1000 dealers and and 1000 contractors.
And in general what you see from their specific perspective is they continue to be.
Very positive on their year over year.
Expected growth specifically around each of our deck builders expecting.
In aggregate close to double digit growth.
At least.
As they look out our channel partners or even a bit more bullish and obviously there is more.
There's more folks focused on outdoor living and and so there we continue to see data points that point too.
Solid underlying growth trends and our long term indicators that we've talked about which relate to.
Which relate to web visits.
Housing starts.
And all of those continue to.
And to point to ongoing growth in the underlying market and as such we continue to see and.
Our market segments and expect.
Ongoing growth.
And we move forward.
And that's really helpful.
And given the growth youre, seeing and not just and deck and youre seeing it and your exterior business as well.
Ralph would be helpful and help us think do you need to add one add more capacity and we when we think about capex and the out years to sustain this level of growth.
Good way to think about it and then just given some of the movement you're seeing on inflation for this year any color on how we should think about working capital as well. Thanks, a lot guys.
Great. Thanks sure.
Phil I guess.
On the two points first one on <unk>.
On capital.
Our program for adding capacities.
Adding 70% seven zero percent capacity over the three phases that we've discussed and.
And.
And.
So that's a significant amount of capacity that.
Will will carry us.
Going forward here into 'twenty, two and frankly, the third phase of capacity, which we said where we're putting in and the.
And the first two fiscal quarters of 2022.
As that ramps up that's really going to help us in season for 'twenty, two and then and set up 23.
Having having said all of that.
We're always looking.
At.
Our outlook and and the pace of demand and.
And we've said in our remarks from me.
Well no.
We're thinking through you know maybe some.
Some options to perhaps.
Accelerate some of the capacity availability in the third phase.
And beyond beyond what we have now and from a total capex standpoint.
Guided to the $125 million to $135 million.
If we need to add more because we see more growth opportunity.
Beyond the timing of what we're looking at then we will add we could add capital moderately.
And in fact.
The.
And the existing capacity plan.
Does provide.
More space.
And both our Wilmington and are.
To be named West facility too.
To add more incrementally without a lot of extra infrastructure.
So it will be at a very efficiently. There then.
As it relates to as it relates to working capital.
And the movement the movement up and.
And and resin.
Price is one tends to be cyclical so what we're seeing now and resin prices is.
Largely due to.
Demand and.
Nearer and demand really and the export side and some capacity on the PVC side coming off of a force majeure situations. So.
There is some expansion over time that that could that could moderate even if it didn't moderate.
We also have payables on the other side.
And you know and and it's a fairly short it's a fairly short cycle.
The cycle there. So I don't think would have a meaningful impact on our.
Return on assets or our working capital overall and those.
As we manage through it.
Is there a need for capacity on the exterior side I know, you're well served on the deck and decided youre, adding a fair amount of capacity, but what about net exterior side.
Yeah, we don't talk about and as a lot, but we are adding some capacity the dollars and not that significant.
But we are adding some capacity on the exterior side and a little bit on rail as well because we have really good growth in those categories as well.
Okay Super Thanks, a lot appreciate it.
Okay.
Our next question comes from Matthew Bouley with Barclays. Your line is now open.
Good morning, everyone hope everyone's well thanks for taking the questions.
So my question is I guess to the extent.
Obviously, a few of your competitors are ramping capacity as we speak and.
Channel inventories are still light.
Following the early buy season is there any risk of some business.
Changing hands or to that and maybe opportunities from your own perspective, as you ramp your capacity successfully or is the customer and dynamic relatively firm here.
Yes, we just thanks for the question, Matt We just went through the early buy process, which is.
Typically.
Alignment and negotiation.
Ed.
The dealer base and and we had a lot of really good discussions I think people are appreciative of both the capacity that we have and the capacity we have.
Coming online and and so in aggregate, we feel really good.
And about our position.
With the with the dealer base that's out there.
And we continue to invest and and service them effectively so if you just step back.
From our vantage point, our focus is on making sure. We were the best that we can be at servicing our customers and.
And relative to the rest of the industry, we feel pretty good.
About where we are.
Specific competitive dynamics.
And in aggregate you you know when we make it through the year you can see growth rates on a relative basis based on underlying demand. We believe that we're we're doing as good if not better and servicing our underlying demand than the other competitors that are out there.
Got it okay. Thanks for that Jesse.
Second one.
The western capacity add.
Guys talk about sort of finalizing the site selection and my question is what are the characteristics that determined that as a distributor footprint.
And what I guess markets out west.
Do you see kind of the greatest conversion opportunity. Thank you.
Yeah.
We you know we have a.
Nice and growing business and the western part of.
The U S and in aggregate.
That part of the country like other parts of the country are certainly benefiting from.
A greater focus on.
On.
On rural or suburban housing and vacation homes and that type of activity and and so.
So we already have a really strong position there and we do view the western part of the U S is having.
Really nice wood conversion opportunity both in our exteriors business and also and our.
And our outdoor living business.
So we're well set up right now to services. The addition of a facility and that part of the U S of course will be beneficial in terms of adding capacity and incrementally beneficial in terms of shortening supply chains.
Out there in terms of characteristics exactly what you would expect.
Yes.
A good location.
<unk> ability to have expansion beyond this next phase I think one of the critical elements for us as we're looking at a facility as Ralph has pointed out we're adding 40%, but any facility, we add needs to have significantly larger capabilities and that and a larger footprint.
Allow us to continue to expand and then a nice.
High quality labor footprint and yeah, we feel really good that we found that and hopefully in the next.
And the next few weeks, we can we can share that with you.
Perfect. Thanks for the color Josef.
Yeah I appreciate it thanks, Matt.
Our next question comes from Tim <unk> with Baird. Your line is now open.
Okay, Hey, everybody nice Michelle and the quarter.
And the outlook.
And recycling just the billion pound.
<unk> of recycled materials that you put out there I think relative to where you ended last year that something like a 15 or 16% CAGR on your usage of recycled materials over time. So I guess two questions I have associated with that a how much of that is kind of incremental kind of recycling that's going into your product.
X versus just end market demand expansion and then second.
How do you think about sourcing that amount of material over time.
Yeah first the intent of the 1 billion pounds for US is to really put a target out there for our teams to align around in terms of how we can.
And how we can make a difference and the world recycled plastics versus Virgin plastics, depending on the on the material itself has something in the neighborhood of 70% to 80% less carbon footprint.
So there's and intentionality to put a target out there to give our teams and opportunity to really align around that and as you point out part of that is <unk>.
Ongoing growth of the business and part of that will be expanding the use of recycle in our core products and and then part of that will be.
Reengineering, new products and new offerings across our entire portfolio to increase the use of <unk>.
Recycle specific what components are or what.
We're not going to disclose that right now and can't really is is to put up.
A relatively big target out there.
And that's one that we can align our teams around can make a difference and the world relative to sourcing we continue to build out our sourcing organization.
We have.
As you know there is a lot of plastic generated and our types of materials over and over 50 billion pounds. According to the numbers, we see and so there is a tremendous opportunity to access.
A lot of materials that are going into the waste stream.
We acquired return polymers, obviously, we are investing and expanding their footprint and investing and expanding their capability and addition to and.
Investing in the expansion of our own capability to.
To access more and more sources of.
Lower value Landfilled.
Types of plastics. So obviously, we'll we'll continue to share our progress there, but but our plan and our current plan and our future plans continue to involve making investments against that target.
Okay, Okay, great and then maybe.
Maybe just on SG&A investments could you just kind of kind of run through how you're thinking about SG&A. This year from a from an investment standpoint, and maybe what happened and the first quarter and then and then how are you thinking about incremental kind of demand creation investments for the rest of 'twenty one.
Hey, Tim.
Good morning.
The SG&A and the SG&A side, I think first to your point about.
The first quarter and the full year.
The.
The as.
As we think about the full year and and the and.
And the guide and you know the guidance outlook that we provided.
You saw in the first you saw in the first quarter.
And that will flow from all quarters, you know that the the increase from public company costs.
And that's consistent with what we've said in the past.
We did also and the first quarter.
And just have some higher.
Personnel and related and and some.
Marketing marketing costs that blood and the quarter as you look as you look at the full year and.
And let me take a low.
Up for a second art EBITDA margins. If you just look at the outlook that we provided.
We're expecting our EBITDA margins to continue to grow and we grew over 110, we grew about 110 basis points and 2020, and if you look at our outlook, there's going to be we're expecting continued EBITDA margin.
Margin performance as it relates to SG&A I think importantly, one.
To kind of go back to last year.
Last year, and the second half and particularly in our third quarter, we pulled back on on SG&A, particularly marketing and TNT.
And as the Covid situation.
No.
And was onset and we normalized a little bit more in Q4, so and in our guidance. We're assuming that we're returning to a more normalized level of SG&A.
And marketing and particular in Q3.
So.
Our Q3 EBITDA margins were.
Okay.
Our SG&A was abnormally low last year. So so that's going to affect the flow on the full year, though.
We're making we're making investments and SG&A largely and the public company side as we've said in the past we will continue to add.
SG&A selectively, but the big step function increases.
And.
Largely behind us that we made and sales marketing and R&D, but we will selectively add.
To build on.
Our demand capabilities and in the market, but just wanted to highlight and importantly, the flow of the SG&A.
In the back half does reflect a more normalized level of spend versus what we had and the hit and prior year, particularly and the third quarter.
Okay and.
The only other thing I'd add to that is specific types of investments.
Yeah.
We're obviously building pretty significant brand momentum and the marketplace.
And yes.
We continue to expand our footprint and.
Aligned with that.
Under the <unk>.
Behind the scenes, we continue to invest and digital.
<unk> continued to invest and our capability to reach and expand our presence and awareness with customers and as such we're building this company for a multiyear journey.
We'll continue to look at opportunities and investments that allow us to accelerate that.
Moving forward to continue to make sure that that we sustain and expand our position for the long term.
Okay, Okay, great well good luck on the rest and you guys. Thanks for the color appreciate it thanks, Tim Thanks, Paul.
Our next question comes from Ryan Merkel with William Blair. Your line is open.
Everyone and I guess first off I had a question on EBITDA margins and the back half should we be thinking flattish year over year, and a third quarter with a little more lift and the fourth quarter just due to the price cost dynamics that Ralph was talking about and then capacity may be turning out a bit.
Yeah, Hey, Ron and good morning.
Yes.
Without getting specific on <unk>.
<unk> I think your.
Your observation is right the third quarter.
Third quarter has pressure from two two sides and on EBITDA margins one is the flow through of.
Commodity costs relative to pricing, which I remarked on earlier.
We were covering recovering the inflation that we're seeing on the year.
You know through our pricing and cost actions, but but.
The pricing will come into effect and the latter part of the third quarter. So we're not fully getting there in Q3.
And then Q3 was also.
Pressured by what I, just mentioned regarding last year, our SG&A was abnormally low.
And then we moved normal norm more normalize, but I think what's important to US as you then look at the full year and and the outlook that we provided.
Continuing to expect.
Very solid EBITDA margin growth following very solid EBITDA margin growth.
In 2020 towards the overall.
Longer term goal that we talked about a 500 basis points.
But there is some quarter to quarter fluctuation as you pointed out.
Alright, that's helpful. And then just second just maybe an update on the retail expansion and I'm, assuming that the shortage of product may be limited that a little bit, but do you expect to continue to increase your stock and presence out and the future.
Yes, yes.
Yeah, Ryan as we've discussed in the past we.
We have a modest stocking position both and in.
And the U S and Canada.
We continue to work with our retail partners to make sure that we are helping them meet the demand of <unk>.
They're and consumers and we feel really good about our opportunity to continue to do that and work with them to continue to to help them service their customers more specifically the specific without getting into specific on what stocking and what are what's and stock versus <unk>.
What special order.
The way to think of that growth as it has been and it has been accretive and continues to be accretive to our aggregate residential growth. So.
Even though we're showing some really nice growth numbers, we've continued to be able to.
Support our channel partners and a way that that we see stronger growth and the retail channel than we do.
And.
And our aggregate growth and one other area I'll highlight is is we not only participate with deck rail and accessories and that category, but we also have our exteriors businesses.
That.
Have have done a really really nice job of having.
Having fantastic product availability and delivery, that's put us and are positioned.
To really grow that business.
And with the with our channel partners also.
Thanks, Jessie I appreciate it.
Got it thanks, Brian.
Our next question comes from Keith and Mantaro with BMO capital markets. Your line is open.
Good morning, Jeff Thanks for taking my question.
Coming back to the recycling side.
Thank you.
Last year I think from a mix standpoint, we're at about 54% and I'm just curious.
I don't know what is the opportunity that you guys see over the next few years too.
And that free cycle mix number higher I'm, not from Florida, and exact percentage, but just sort of.
Just some perspective on where that could go.
Yeah. Thanks for the question.
So as you look at our business.
A lot of the the recycle numbers you hear from from other parties are really start to relate specifically to their deck rail and accessories business and decking specifically so on the decking side are capped composite decking uses 100% recycled plastic and wood and the core.
So we're already there are opportunity there is to cost reduce what's used from a recycle standpoint on our cap polymer decking were at 50%.
Recycle in the core we see a meaningful opportunity to continue to expand that.
Just the nature of the product is.
It might be difficult to get to a 100%, but we certainly see and opportunity.
To continue to move that percentage up over time, and then the rest and so if you add that up that's higher than.
And then 54%, 54% number really relates to our the entirety of our business.
And it also relates to the opportunity so to.
And your point without getting specific.
And we truly believe and hope that through some reengineering and continued focus that we would be able to get that into the <unk>.
Generally.
But.
But.
Right now that that's part of our 1 billion pound ambition.
We need to do a lot of work to move.
And to that area given all of the other businesses that we have that.
And don't naturally lend themselves as much to the use of recycled materials. So theres, some engineering work that needs to get into that.
Got it that's helpful and then.
My second question are you seeing any acceleration and share gains from our board and.
Lumber is is that and all time high right now and I. Appreciate it's all day value proposition is not based just on price.
But I'm just curious if what you're hearing from your customers that sort of where lumber is right now.
Yeah.
And Youre certainly right, if we look at the dynamics and the lumber market.
Dealing with.
And prices that and many materials, whether that's pressure treated where cedar or redwood and some cases availabilities and issue and other cases.
The price has moved to such a point that it makes composites.
Yes.
Very attractive.
Right out of the gate and.
We believe that there is.
Conversion.
And that's occurring there if we look back and history. When these types of events have occurred it has facilitated conversion.
But similar to price once the underlying structure goes back the conversion doesn't necessarily go back so.
And right now it's difficult to give you an exact data point, except to say that we certainly believe that there is meaningfully there's a meaningful opportunity from a demand standpoint.
To accelerate that.
That conversion.
We don't yet.
You don't have the exact data and I think as we as an industry scale manufacturing that will also facilitate that conversion.
Got it Thats very helpful perspective, good luck and the back half of the year.
Thank you I appreciate it.
Our next question comes from Stanley Elliott with Stifel. Your line is now open.
Hey, good morning, guys. Thank you all for squeezing me in.
And the past you guys have talked about 500 basis points plus of margin just curious how that relates to the 1 billion pounds, you're talking now about recycling.
Just trying to frame and square up those two together.
Yeah as we've highlighted.
Yeah, you know the 500 basis points, and we took a step towards that last year and and if you look at our guidance at.
It implies that we're going to take another step towards that this year.
As you look at the underlying elements.
We haven't disclosed specifically.
What's the SG&A and and what's what's SG&A leverage and what is <unk>.
Gross margin, but a meaningful part of the gross margin.
That we're talking about will come from our execution of recycling.
I would once again separate.
The 1 billion pounds I think the 1 billion pounds for us is aspirational.
And.
And it's something that we can hopefully get too aggressively if we do that.
That would part of that would be in the 500 basis points another part of that could be additive.
As we progress against that target.
Perfect and then I apologize if you all have mentioned it but could you talk about you and we would talk about software inventories are lighter inventories and the channel is there a way to quantify that by any any way or I guess is it fair to assume that most of the pro channel still on allocation at this point.
Yes, we have.
We got very detailed data.
On what it and so we go through two steps of of distribution or distribute our distributor customer partners.
We have very good data on what they have and inventory and what their sales are out the door and as such we're able to not only look at the raw inventory on the ground, we're able to look at days on hand, given their current current and expected sales momentum.
So when we refer to days on hand.
At distribution and that's really based on an <unk>.
Solid data and solid math.
As we look at inventory at the dealer base.
That is a softer number for us, but dealers typically carry less inventory and turn the inventory much faster.
So when we talk about.
And the first quarter, having lower inventory levels.
It was both at at distributors and dealers and we believe we took a step towards supporting our dealer base.
And replenishing their inventory and we expect to take additional steps this quarter.
And on providing them with the inventory that they need.
And we move forward. So hopefully that gives you a perspective on the underlying data and analytics that we're using to.
To determine.
And whats the right inventory level.
Perfect guys. Thanks from time I appreciate it and best of luck.
Thank you.
That's all the time, we have for questions today, and I will turn the call over to Jessie Zheng for closing comments.
Great. Thank you all for taking the time. This morning as you can see our strategy and operational execution are on track and it's allowing us to benefit from long term secular trends and.
And the markets that we play in and as highlighted on the call and we continue to become more confident.
About the opportunity that we have ahead of us given long term trends and outdoor living and other demographic trends that are around us. Thank you again to all of you and thank you again to the ASIC team, our channel partners and our customers.
For such a great effort and for their partnership look forward to talking to you next time around thank you.
This concludes today's conference call and you may now disconnect.
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