Q3 2021 Azek Company Inc Earnings Call
Okay.
Welcome to the ASX companies third quarter 'twenty to 'twenty, one earnings 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. Please be advised that today's conference is being recorded I'd now like to hand, the conference over to Amanda Cimaglia life's precedent ESG. Please go ahead.
Thank you good morning, everyone. We issued our earnings press release. This morning to the Investor Relations portion of our website at investors thought as that co dot com as well as via 8-K on the SEC's website I'm joined today by Jessie Zheng, Our Chief Executive Officer, Ralph Nicoletti, Our Chief Financial Officer.
Pete Clifford our incoming Chief Financial Officer, John Kelley, Our senior Vice President of customer experience and Greg Jorgensen, our Chief Accounting Officer.
Before we begin I would like to remind everyone that during this call is that management may make certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095 CS.
Include remarks about future expectations 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 in the company's earnings release posted on the website and will be provided in our form 10-Q for our third quarter of fiscal 2021 as filed with the Securities and Exchange Commission.
The company 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 in 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 reckon.
Reconciliations of adjusted EBITDA to net income calculated under GAAP and adjusted gross profit to 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 on our website and will be included in our form 10-Q for our third.
Quarter of fiscal year 2021.
I'd like to now turn the call over to Jessie Zheng.
Good morning, everyone and thanks for joining us today before we begin I'd like to officially welcome Pete Clifford our incoming CFO to the call.
<unk> was most recently CFO and then president and CEO of Cantel Medical we're fortunate to have an overlap in both Pete and Ralph time with the company, which is sure to facilitate a smooth transition.
Pete Thank you for joining us and I look forward to working with you for many years to come.
Start by recognizing the impressive efforts of our team, which delivered strong revenue and EBITDA growth in the fiscal third quarter.
This builds upon the momentum of our business has seen over the last several years.
Since completing our IPO just over a year ago. We believe we have demonstrated the flexibility of our differentiated business model.
Agility of our team and our commitment to investing for growth and delivering against our long term sales and margin expansion goals.
We believe that the breadth of our portfolio and the strength of our market presence allows us to uniquely benefit from secular growth and material conversion opportunities, we are not only growing and expanding and decking railing and accessories, but are seeing strong growth and market conversion.
And our exteriors portfolio.
This includes a broad mix of complementary products that are benefiting from wood conversion.
More specifically to today's update.
We continue to experience favorable end market demand in our residential segment and we have started to see improving sales trends in the commercial segment.
We continue to execute and invest against our strategic initiatives to deliver long term growth and margin expansion, while managing through near term supply chain and inflationary pressures.
We remain confident in our outlook for the remainder of the year and are once again, raising our fiscal 'twenty 'twenty one guidance.
We believe that we are well positioned to continue to grow in fiscal year, 'twenty, two and are well positioned to achieve and exceed our long term growth and margin objectives.
During the quarter, we saw strong growth across the residential portfolio as market demand remained strong additional capacity came online and we modestly improved our inventory position at our dealer base.
Our SG&A returned to more normalized levels and included additional public company costs and strategic investments, we made additional investments to ensure labor transportation and raw material availability to meet strong customer demand and saw increasing raw material inflationary pressures as.
We progressed through the quarter.
We've taken additional pricing and productivity actions that we expect to fully offset these headwinds in early 2022.
Given recent investments in capacity in our exterior business combined with strong sourcing and operational execution, we have been able to provide strong service levels and support to our customers in meeting increased demand.
We also improved our service levels to our contractors and dealers for our decking products.
However, our distribution channel continues to operate at below normal stocking levels.
We continue to make progress on key initiatives that will drive long term value creation through growth and margin expansion.
As a reminder, these initiatives include first.
Drive above market growth and accelerate material conversion by investing in new product innovation.
And expanding our downstream focus sales and marketing team.
Ongoing product innovation supports our core and adjacency market expansion, our new landmark and reserve decking lines would replacement trim panelized aluminum rail and canvas series tongue and groove products, all performed well and position us for ongoing future growth and would cause.
<unk>.
Second expand our margins through the use of recycled materials in our manufacturing processes and through our continuous improvement programs. We continue.
To expand our recycling capacity and developed strategic partnerships with various Oems.
We are finding new sources of otherwise hard to recycle materials that we are uniquely positioned to recycle into our products.
We have recently expanded our use of a certain type of PVC product, which has historically been landfilled, providing us with lower cost sources of PVC and reducing environmental impacts.
Third.
Positively impact the world through our commitment to ESG stewardship.
In recognition of our ESG leadership within the vinyl industry. We recently achieved vantage vinyl certification by the vinyl sustainability Council.
The vantage vinyl certification underscores and validates our strong efforts to be a leader in the recycle of PVC materials.
Diversity equity and inclusion continues to remain a key focus of our full circle ESG strategy in.
In June we formalized and communicated our D. Eni commitment statement, which serves as the foundation upon which we build out our Eni framework.
In short we are committed to providing a diverse equitable an inclusive workplace where diversity of all kinds is sought out valued respected and appreciated.
We believe this fuels, our innovation drive operational excellence and as a source of our competitive differentiation.
Fourth <unk>.
Invest in our core strengths, which include brand materials science integrated manufacturing and customer connection.
During the quarter, we successfully brought on phase two of our $230 million multi phased capacity expansion program, increasing our total decking capacity by 40% compared to the end of 2019.
Our previously announced Upsized investments in capacity are on track to deliver an incremental 15% more decking capacity by the end of the calendar year.
Our third phase the opening of our new facility in Boise is expected to be fully operational during fiscal 2022, adding approximately 30% more decking capacity for a total of 85% increase in decade capacity versus a baseline of 2019.
We are making these investments against the backdrop of expanding market opportunity. We recently conducted a proprietary consumer market research study, which showed that nearly half of consumers in the market for wood decking.
Consider our types of high performance low maintenance materials.
This leads to a non wood market that we believe over time could reach a conversion level of nearly 50% of the total decking market versus today's approximately 22%.
We believe this favorable material conversion opportunity exists in all of the outdoor living markets in which we play, including our railing and exteriors markets.
This research strengthens our confidence in the long term secular growth opportunities ahead enabled by our leadership and innovation and investment in our key strategic initiatives.
Turning to our third quarter results, we delivered strong sales and adjusted EBITDA growth.
The growth environment remains robust and we were able to incrementally ship more product as new capacity came online during the quarter.
We are also lapping an unusual Q3, and 2020, where we saw modest growth and lower spending constrained by the pandemic.
Combination of spend normalization additional investments and public company costs combined with the previously discussed inflation versus price lag.
Led to an EBITDA margin compression within the quarter.
We are appropriately focused on meeting customer demand and improving service.
And we prioritized manufacturing output and product delivery.
We are operating in an unusual environment with material labor and transportation.
Where incremental volume can lead to an increased rather than decreased costs and lower volume leverage.
We view this margin compression is transitory and have taken pricing actions to offset these headwinds beginning in Q4 and continuing as we move through fiscal Q1.
For our residential business, we exited the quarter with improved service, but have meaningfully lower levels of inventory in our distribution channel than historical norms.
Overall web traffic has returned to typical seasonal patterns, we saw higher quality digital engagement activity on our web site and an approximately 25% increase in leads.
Contractor backlogs remain extended in above historic levels.
Repair and remodel activity strengthened during the third quarter and housing inventory remains near record lows.
With elevated buyer demand, we expect a continued tailwind, resulting from homeowners investing in and renovating their homes and outdoor spaces.
We also continue to see strong sentiment from dealers and contractors as people continue to invest in larger repair and remodel projects.
As previously indicated the strategic actions, we took within our commercial segment, coupled with an with an improvement in certain end market conditions started to show through in the quarter net.
Net sales in our commercial segment increased by approximately 17% year over year as we are starting to see some demand returning we've.
We are also seeing nice margin recovery in this business throughout the fiscal year, driven by our team's focused execution on productivity and pricing actions.
As a reminder, this business tends to track more closely to GDP and the broader economy, which continues to improve.
Now turning to our outlook for the full year of fiscal 2021, we are raising our consolidated net sales outlook and increasing the midpoint of the range for our full year adjusted EBITDA guidance.
This increased guidance underscores our conviction in the underlying demand, we are seeing across outdoor living and exteriors markets.
While we saw additional inflation during Q3, we also executed additional price and productivity actions to cover the increased costs.
As we look at current inflation and supply chain dynamics, we expect pricing actions to offset inflation as we exit fiscal Q1.2022.
We feel that we have and will continue to manage through this unique period by prioritizing customer service, while maintaining our focus on delivering against our long term growth and margin expansion objectives.
To sum up demand in our markets remained strong with a long runway to capture the expected growth in our markets. We continue to invest in our core strengths of brand manufacturing R&D and customer connection supported by the best team and underpinned by our commitment.
To ESG leadership, we have confidence in our differentiated business model operational execution and strategic positioning in large and growing markets that we expect will allow us to deliver sustainable above market growth and achieve our long term margin expansion goals.
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 Jeff.
As I discuss our results all comparisons made will be on a year over year basis compared to the same period ending June 30 of 2020.
For the third quarter of 2021, we delivered net sales growth of 46% year over year to $327.5 million with strong growth in both our residential and commercial segments.
Gross profit for the third quarter of fiscal 'twenty, one increased by $31.7 million were approximately 42% to $106.9 million.
The increase in gross profit was primarily driven by the strong sales results in the residential and commercial segments pricing and manufacturing productivity, partially offset by higher raw material and manufacturing costs gross profit margin decreased to 32, 6% for the three months ended June 32020.
One compared to 33, 6% for three months ended June 32020.
As expected adjusted gross profit margin decreased 290 basis points to 37, 9% compared to 48% for the prior year period.
As we have discussed on our last two earnings calls we have been experiencing significant inflation as well as disruption in our supply chain, both driving up the cost to service these strong demand levels during.
During the third quarter cost increases intensified and have reduced the progress we were expecting on incremental margins in our fourth quarter as we prioritize servicing customers.
We implemented an additional price increase on August 1st which will take effect October one.
<unk> our pricing actions this year represent a mid teens increase.
Selling general and administrative expenses increased by $5.1 million to $70.3 million or 21, 5% of net sales for the third quarter.
Excluding the effect of lower stock based compensation expense SG&A increased by approximately $18 million. The increase was primarily driven by higher personnel costs public company costs professional fees supporting strategic research and marketing expenses.
As a reminder, last year in Q3, we significantly pulled back on marketing and travel with the onset of the Covid 19 pandemic.
Net income increased by $73.9 million to $21.8 million for the quarter compared to a net loss of $52.1 million for the same period last year, primarily due to strong operating results in a decrease in interest expense, resulting from the reduced principal amount.
Standing under our term loan agreement and an absence of the $37 million loss on debt extinguishment of our formerly outstanding senior notes.
Adjusted net income was $40.5 million or 26, a share for the third quarter compared to adjusted net income of $6.2 million were <unk> a share a year ago.
Adjusted EBITDA for the quarter increased by $14.9 million, approximately 26% to $72.7 million the.
The increase was mainly driven by higher sales growth in both our residential and commercial segments and higher gross profit.
As expected adjusted EBITDA margin declined 360 basis points to 22, 2% from 25, 8% last year, given the mismatch of pricing relative to cost increases and SG&A expenses.
Now turning to our segment results residential segment net sales for the quarter increased by $98.6 million or 51%.
$291.2 million a strong increase was primarily attributable to higher net sales in both our rail and accessories and exterior businesses, which grew at comparable levels are.
Our year over year sales growth benefited from strong underlying demand a lapping of pandemic related headwinds experienced during the same quarter of last year.
And pricing as well as a modest increase in channel inventory at the dealer level.
Inventory at the distributor level remained significantly below historical levels.
And given the demand pattern it could be another quarter or more before inventory levels get healthier and the channel.
Residential segment adjusted EBITDA for the quarter increased by $22 million or approximately 32% to $82.5 million.
The increase was primarily driven by higher sales and manufacturing productivity.
Firstly, offset by higher raw material and manufacturing costs, and selling and general administrative expenses.
Commercial segment net sales for the quarter increased by $5.1 million or 16, 5% to $36.2 million. The increase was primarily driven by higher net sales in our <unk> business, partially offset by decreased net sales in our Scranton products business.
We're seeing solid demand from outdoor living marine and semiconductor end markets.
And also starting to see modest recovery with trade show customers.
Commercial segment adjusted EBITDA for the quarter was $6.3 million.
The $1.3 million increase year over year was primarily driven by sales performances of icon business and manufacturing productivity looking.
Looking at our balance sheet and cash flow as of June 32021, we had cash and cash equivalents of $225 million and.
<unk> $145.6 million available for future borrowings under our revolving credit facility.
Total debt as of June 32021 was $467.7 million and we have not drawn on our revolving credit facility.
Our net leverage ratio stood at one times at the end of fiscal Q3.
Net cash provided by operating activities was $118.7 million for the nine months ended June of 'twenty, one versus $11.3 million for the nine months ended June 30 of 2020.
Turning to our outlook for fiscal Q4, we expect total company net sales growth to be in the range of 22% to 27% year over year.
With the residential segment growing in the mid to high <unk> range and the commercial segment growing in the low to mid single digit range and we expect adjusted EBITDA growth in the 19% to 25% range.
I would like to provide some additional color regarding margin progression as we exit fiscal 'twenty, one and into 2022.
As I discussed earlier in my remarks.
Combination of inflation and supply chain disruption has significantly increased our cost to service continuing strong demand.
In fact, we have seen over $10 million of additional costs since our last earnings call with a portion impacting Q4 incremental margins.
Importantly, as we saw cost escalating we took action and in August implemented another price increase effective in October in order to offset our higher cost and position us well for fiscal 2022.
Given our pricing actions and productivity programs with the current raw material and supply conditions, we expect incremental EBITDA margins to improve from the low 20% range too in Q4 to about the mid to high 20% range as we exit Q1, excluding the anticipated startup costs.
We project primarily for the new factory in Boise.
These costs are expected to be in the $3 million to $4 million range in the first quarter importantly.
Importantly, we believe that we have covered the dollar cost of this current high cost environment and are well positioned to expand margins during 2022.
Turning to the full year of fiscal 'twenty. One we now expect total company net sales to increase 28% to 30% year over year and have raised our outlook on adjusted EBITDA growth guidance to be in the 27% to 29% range year over year.
From a segment perspective, we expect full year residential segment net sales growth in the low to mid 30% range year over year in the commercial segment, we are starting to see some economic stability in certain end markets with our projection of net sales declining at a low single digit rate year over year in.
An improvement compared to our previous outlook of a mid single digit decline.
To assist in modeling, we continue to expect approximately $175 million to $185 million and capital expenditures and 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 27%.
As a result of higher non deductible compensation expenses.
And our full year weighted average diluted share count is unchanged at approximately 157 million shares.
I will now turn the call back to Jesse for some closing remarks. Thanks.
Thanks Ralph.
And as you near your well deserved retirement I want to personally. Thank you for your leadership hard work and dedication.
Been an instrumental part of the team helping to ensure our organization is set up for success, especially now as a public company.
<unk> been a terrific business partner and I am proud to have worked alongside you for these last several years.
While we're going to Miss you. We are excited to welcome Pete Clifford to the team and are looking forward to more formally introducing peak.
Shareholders in the weeks and months ahead.
Thank you Jessie I am grateful to have worked alongside of you for several years and look forward to following the next phase of Asics growth under yours and peaks leadership.
Thanks Ralph.
I'd also like to take a moment to thank our entire as that team and our partners for their agility and unwavering dedication to our customers, especially during such a challenging and unprecedented time as we recently celebrated the one year anniversary of our IPO revolutionizing the industry to create a more so.
Stable future is only possible with their continued focus and dedication.
In closing we are investing in the future investing in our brand and our capacity and our recycling and continuous improvement initiatives.
When you combine this with the long term trends underpinning our end market growth, including material conversion opportunities R&R trends and demographics shifts our conviction to deliver on strong growth and margin improvement as high going into fiscal year 2022 and beyond.
We continue to remain excited about the opportunity that's in front of us.
With that operator, please open the line for questions.
Thank you, ladies and gentlemen, as a reminder to ask a question you will need to press star followed by the number one on your telephone keypad again Thats star one to ask a question.
We have your first question with team moves with Baird. Your line is open.
Hey, guys. Thanks, good morning, and nice job on the results.
Ralph Best wishes and Pete welcome.
Yeah. Thanks, Thanks I appreciate it.
I guess, maybe just.
Just first on the pricing side of things Ralph you talked about.
Mid teens price increases from the actions that you've taken this year.
Just hoping if you could kind of break down what's actually being realized in sales in fiscal 'twenty, one for pricing and how much of that flows through actually into 'twenty two at this point.
Yes.
So Tim.
The mid.
Mid teens pricing is what we have in place by the end of the year.
And.
As we mentioned in the remarks, we added we added more incrementally that's going to take effect.
In Q1.
And that positions us very well for 'twenty. Two so 22 is going to benefit from that.
We will share more about 'twenty two as we guide as we guide 22, but.
This year.
With the pricing actions that we've taken cumulatively, we're exiting the year in that.
Teens level and again.
Well positioned for 2002.
Okay. Okay. That's good to hear and then I.
Just on kind of on a capture basis historically.
Each cycle can be different but could you just remind us.
About your ability to kind of hang on to pricing. If you would kind of see a more deflationary environment on the raw materials side at some point.
Yes.
If you just look back at our recent history.
Ben taken pricing over the last several years.
Those prices hold hold in the market.
Obviously again, we're not we're not guiding to 'twenty, two but particularly on deck grilling accessories.
But also and to some degree on exteriors.
We're pricing to value and.
And we also.
I think importantly, and you heard this a little bit in our remarks.
We're pretty analytical about this in terms of our approach, we actually even investments and some pricing analytics work. So we're comfortable with the pricing we have in the market and how we are and how we're positioned on value across our product lines.
Okay. Okay. That's good well good luck on the next chapter Ralph and I will hop back in queue. Thanks, guys.
Thanks, Tim.
And next question, we have Matthew Bouley with Barclays.
Everyone. Thank you for taking the questions.
Echo congratulations.
To Ralph's and we'll compete.
So.
Jeff you gave the stat.
Around that market study you did.
Non wood materials can reach 50% of the market one day.
Heard you correctly I'm just curious if there's any more.
Detail or context, you could give there maybe if theres any way to glean from that study how consumers' perceptions have changed over time.
And then even on the 50% that presumably just once would could.
Could you tell kind of what's holding them back.
Yes.
Thanks, Matt.
So just to give a perspective.
We did a really in depth study of the.
The wood buyers and we had done a study three years ago. So so I think one thing.
To consider is the number of folks that are generally buying wood has declined so I think when we did the study.
A few years back what you saw was.
High teens people identifying themselves as.
As composite buyers.
It has progressed into the low twenty's, which I think is a reflection of what we're seeing.
Born out in the market.
As we look at the call someone at Woodbine I think it's a bit of.
Of a misnomer right what it is as people in various points of how they consider the attributes.
As we look at at that totality.
In general much of that even above 50% is still an opportunity.
I think where we're focusing is where we can see the greatest opportunity and so that 50%.
Is is really made up of folks that are positively inclined.
Theres a portion of that.
That are positively inclined, but theres, some kind of a barrier right that barrier might be a perception.
Composites being plastiki.
That might be related to our perception of where we are in the environmental journey.
Sure.
And so a portion of that are of the wood what was great. In the research is a portion of the Woodbine are positively inclined.
I just need to be educated.
And I think that there is a another portion of that.
Of that 50%, we're talking about that that kind of defaults to wood, but fit the right characteristics and demographics of someone that should be buying composites and once again I'll come back to it's an education process, what's interesting in the research is.
We're not including the price buyers only in in that 50% and I think it's important when we look at wood conversion.
We're really looking at it in its totality based on.
On the combination of aesthetics value education.
And that's really where we're defining that 50% there's another portion of that not 50%.
That's effectively a price buyer and that's that's someone who just wants.
To price right at the beginning that's not included in that 50%. So so what's interesting for US is really the opportunity here with new product development and messaging to continue to educate and aggressively convert the market.
Wonderful.
Very very helpful color there. Thank you for that Jesse.
Second one to zoom in a little on the margins.
I think you spoke to conviction to margin improvement in 'twenty, two but it sounds like you mentioned.
Some pressure from the startup costs early in the early part of next year.
Just given you did daylight.
Sort of expectations or expansion on a full year basis, and correct me if I didn't hear that.
Correctly, but.
Whats kind of the visibility to I guess, the pace of incremental margins.
As you go through on a quarterly basis next year.
Yes.
Net.
Just think about you think about the year and first where we are in the cost environment.
We've seen a lot of inflation as we've talked about.
And in fact, seeing a lot of inflation, even since since the last earnings call, which which we took action and addressed on but.
That leads though too.
The first the first couple of quarters.
Fiscal 'twenty two.
<unk> has a lot of the peak of what we're seeing right now still flowing through it.
Again, we've positioned ourselves well from from a price standpoint to address to address that.
But do you have and you have in the first couple of quarters of the year.
Combination of still elevated elevated.
And then as we.
We've talked about before.
We've worked through startup costs all during 2021, we've added 40% capacity and the restart up costs associated with that but we've worked through that with.
With offsets.
Boise is a new facility and.
We're starting it up in our first fiscal quarter and that's why we thought it was important.
To kind of highlight that a little bit more for you because that will be we're expecting it to be a more significant startup.
Then all contemplated on our outlooks and the discussions we've had but the first half because Boise startup.
Going to be really in the first first in first half of fiscal 'twenty two.
The first the first half will be weighed a little bit more than the second half in terms of the margin progression.
Yes.
Matt if I could just add one additional comment on top of that I think it's important as as we look out into 'twenty two.
Dynamics, we're dealing with now in the way in which we're offsetting it.
We believe structurally puts us in a stronger position.
Against our long term margin goals.
I think thats a really.
As we look at things over.
As we progressed through 'twenty two.
Moving forward the <unk>.
Dynamics that we're seeing in the short term will lead to.
Really long term favorability, we believe structurally.
Got it well thank you for that Jesse and best of luck Ralph.
Yeah.
Thanks, Matt.
Okay next question.
We have Mike Dahl with RBC capital markets.
Good morning, Thanks for taking my questions.
Let's see Ralph just to pick up on on the last point about margins kind of thinking longer term, but also specific to 'twenty two.
Given the pricing that's put in place in some of the carryover benefits understand that theres still some cost pressures impacting the first half of the year, but if I exclude sorry.
Startup cost, let's treat those differently.
Historically, you've done something that's more in the Thirty's on an incremental EBITDA margins.
I would've thought coming off the base that you're coming off of that was more impacted by.
The price cost lag that that would have been.
More of a reasonable if not conservative benchmark for the incremental margin performance next year.
It sounds like at least in the first half you might be.
Talking to something that's a little bit lower than that.
So I guess, just a little more clarity on.
Again, excluding the startup costs.
What why should incremental margins be even stronger.
Going forward in 'twenty, two based on the pricing actions you've taken.
Mike.
Yes.
Let me address it.
On your question a couple of different ways first.
We clearly see.
Jesse remarks kind of highlighted it.
The line of sight to alert our long term margin goals.
We clearly see that with the 500 basis points of EBITDA margin improvement.
We always said quarter to quarter, there's going to be some lumpiness, particularly when youre kind of working through startup and things like that so you're highlighting that.
We're not in a position to give 'twenty to 'twenty two outlook just yet but.
To your point, we've been in the mid Thirty's on incremental margins.
And we still have.
We still have a lot of runway on productivity and principally in recycled but other areas of productivity still way ahead of us.
We're well positioned from a price cost standpoint entering 'twenty two.
Which we feel right now this cost environment was pretty extraordinary in transitory frankly.
And so we think we're well positioned there and.
We will invest behind the business selectively so.
So over an arc will get SG&A leverage over time.
As well so.
That all leads us to.
We could get ourselves back into the mid <unk> with a very clear path.
With our with our outlook long term, we see our incremental margins going to book above the mid thirties.
Okay.
That makes sense.
It sounds like it'll be a good ramp.
And then I.
I guess second question and sorry. This also.
Ventures into 'twenty two.
Around but.
I think there is just you made the comment that you are now expecting the 85% cumulative capacity increase in decking versus the baseline of 19 and I think in the press release Theres a comment that refers to the expansion plan is $230 million. So I wanted to just clarify.
Is that the $230 million does that represent.
85%.
Capacity increase and then when you think about the.
The incremental since you've been in this multi phased approach in terms of what.
What the what the number is in fiscal 'twenty two versus 21 sincere.
To your second phase at least hasnt fully ramped in 'twenty, one any way to think about how much.
It will be incremental in 'twenty two versus 21.
So just.
As a reminder on.
On the three phases.
We're through the 40% phase.
And as Ralph pointed out that we brought that online last quarter, we've got an additional 15% which will be in fiscal 'twenty two that will come online before the end of the year and then an additional 30%.
That will come online.
During the the.
Early part of 'twenty two calendar year.
So in aggregate I think you should think of it as off of 2019 baseline and we'll probably need to move away from that and establish a new one but after 2019 baseline you should consider that as we move into that next season.
We will have that 85%.
Capacity available relative to what we've disclosed in terms of capital, we're not going to break it out specifically to what's in 'twenty two Watson in 'twenty, one what I would say is that that capital includes the 85% decking capacity that I just talked about.
But it also includes other investments we're making.
Including our exterior business, including expanding some of our recycled capability.
And so that number is inclusive of.
Other capacity adds also and obviously if you take a look at the performance not only of our decking business, but of our exterior business, we're seeing really nice growth there and the investments we've made to position us from a capacity and new product standpoint continue to reap benefits. There also.
Just a quick follow up if I could since since you mentioned them potentially moving off 2019, I'm curious does that the 85% number is that a volume.
Trick or is that a dollar metric that incorporates the pricing that you've put into place in the market as well.
Yeah, I mean, we typically will do it as a volume metric.
But obviously, there's nuances in terms of.
These are directional.
But yes.
I would consider it a volumetric.
Understood Okay, great. Thank you.
Sure.
Thank you next we have Philip <unk> with Jefferies LLC.
Guys. Congrats on a good quarter in a challenging environment and looking forward to working with you and Ralph Thank you for all the help this past year.
I guess from a demand perspective, certainly 50% growth in revenue is very strong you did mentioned that you were able to kind of replenish inventory at the dealer channel any way to kind of parse out how much of that 50% growth is tied to channel fill for resi and it sounds like inventory still pretty depleted in the channel, particularly with distributors are you seeing there.
Channel partners build in inventory and fiscal <unk> fourth quarter, just because that typically when they usually draw down inventory, so sorry, a lot them back there.
Yes.
Phil.
Yes, just on the on.
On the third quarter.
With the 51% growth in.
And then just within my remarks, I mentioned, two that importantly was broad based so Dick Weil and accessories and our exterior business grew at comparable levels.
In the quarter, albeit off of a low base from last year. If you recall, our residential business last year grew about five 5% but.
Nonetheless strong demand as the primary is the primary driver of that growth.
<unk>.
And there is some pricing, but but.
No.
Yes.
That wasn't a significant piece of it and on inventory.
Pacific to your question.
We did make improvements in the dealer channel.
And.
But that's that's that's not we're completely done.
We really didn't make.
Any meaningful progress in the distributor channel yet.
Phil.
We still see that as tight.
And.
At these demand levels.
As we go into Q1 it could be.
Another quarter Q1, or even further out before we see.
Before we see.
Inventories recover fully recover in the distributor channel, but we're making progress or servicing the market better than we were earlier in the year.
We've added capacity.
But but.
Distributor channel still remains quite quite low.
And just to kind of.
Yes.
Cut to maybe.
The background on the question as we look at Q4.
We are not complaining contemplating.
Much.
Channel replenishment in the numbers right. So.
That's we continue to focus on meeting demand.
And just to reiterate what Ralph said.
That replenishment.
When it occurs we will potentially be in subsequent quarters.
Got it that's helpful. Jesse and as you kind of how that phases behind you and you're going to work towards phase III by year end do you have enough capacity to kind of meet that underlying demand and when we.
Until your Greenfield capacity comes on and then as we kind of look out. The next few years just given how strong growth is despite all of the capacity. We're adding are you starting to think about adding more capacity internally for.
Potentially next year as you kind of positioning yourself for 2023.224, just because of growth profile, it's been pretty impressive here.
Yes, so the timing of our capacity adds we believe sets us up pretty well, we've got incremental volume to support us through this part of the season as we move into.
Typically the lower volume months, we've got additional capacity coming online.
And that will help.
As we as we move through the slower part of the season and then we've got additional capacity coming online.
To really set us up for.
For as we move into the season in 'twenty. Two we clearly are selling everything that we make and we have demand for that we would expect that to continue.
But we do feel the timing of our capacity adds.
Sets us up in a nice position as we move into next year.
The macro question of what's next.
We'll answer that question when appropriate.
And.
But I think the way to consider the Boise facility as you have 350000 square feet.
And the capacity, we're adding into there right now.
Is using up a portion of that facility and in it. It's a roof that gives us an opportunity to on a on a relatively responsive basis add more capacity.
Okay. That's really helpful. Good luck on the quarter guys.
I appreciate it thanks, Thanks Bill.
Thank you next we have Michael Rehaut with JP Morgan.
Thanks, Good morning, everyone and congrats route.
Welcome Pete look forward to working with you.
Okay.
First question I, just wanted to perhaps a little bit more of a clarification.
Possibly.
With regard to some of the headwinds.
And the timing of addressing those headwinds.
The.
First quarter.
Obviously.
Our fiscal 'twenty two.
Hum.
Not fully getting getting I guess, the full benefit of the of the price increases.
Is it going to I assume kind of layer in.
But at points.
I heard you say that the.
The challenges of the.
That would be more in the first half as well.
So in other words into the second quarter of fiscal two or into the first calendar quarter of 'twenty two.
I thought I heard it at that.
Relates to startup cost as well so just a little clarification there in terms of.
When when the full offset would occur because it points. It did sound like exiting first quarter. So in the second quarter I presume you could you could expect a return to margin expansion.
Yes.
Mike I think maybe just to start to start.
Everything we're talking about right here is timing.
Structurally we're well positioned.
Two to grow or to grow our margins.
In 'twenty, two and beyond that well.
Well on track.
With our line of sight of our.
Longer term margin.
Objectives.
Marker if you will a 500 basis points. So I think we're working right now through as a transitory period of.
Exceptionally higher costs and inflation.
And in and starting up a new facility in largely in the first half of fiscal 'twenty two.
And so that's cool.
A lot of the noises that we're kind of working through the quarters.
We wanted to give you some visibility to at least the first quarter on startup. So you could start to get some sense of.
Size and magnitude, there and and again on that.
On the price cost side.
We've covered that the dollars of inflation that we're seeing.
Very peak levels.
Sure.
<unk>.
And well positioned for 'twenty two so it's hard to kind of like pin down exact timing here, but if you think about long term, we are well set up.
And for 'twenty, two and the first half of the year has has more of these.
These headwinds in it because of the startup of the new facility in and just working through this incredibly high inflation environment that will begin to abate at a point in time.
If I could just add.
Just.
At a high level think of it as our price has offset inflation.
And those two elements are offsetting in Q1.
And the timing that routes talking about is is really around.
How long does how long do certain costs extend.
How.
The adoption of the pricing and all that so but the way to think of it as the actions are offsetting the underlying inflation.
And when appropriate we'll disclose the specific timing of that.
Okay.
Thanks for that.
I guess secondly.
I'd Love to hear your thoughts just you had mentioned earlier Jesse in your opening remarks about the.
The potential for a 50% market share of alternative materials.
I believe last year.
In 2020.
The.
Composite decking market.
Two points of share.
From.
Versus in prior years, perhaps about one point of share per year.
There's been a lot of talk obviously in the last six to 12 months around.
Maybe composite decking being a little bit more attractive.
From a cost basis, given the run in lumber obviously lumber is.
Not fully round tripped, but.
More or less on its way there.
At the same time, you are putting through pretty solid price increases for composite decking.
You've kind of said mid teens.
How does that change how did those moving pieces.
The rate of adoption of composite decking in other words was this 2%.
Should we think about that as more of just all the stars aligning.
And maybe return to something more of what <unk> seen in the past.
Or <unk>.
Virtue of the lower price point options that yourself and your competitors have rolled out.
Increased consumer marketing consumer spend and consumer awareness.
That maybe that 2% level or something thats more sustainable.
So let me let me.
Just had a couple of points on their end.
It may drive a difference of dialogue between ourselves and our competitors, we do not believe that conversion is fundamentally.
Based on price.
There are aspects it is a component.
But our research validates that there is a broader conversation going on that we have highlighted over the last year, which is.
The value of the aesthetics.
And wanting to create a certain type of environment. So I think at a macro level, we should not assume that conversion is based on a relative.
Price.
In fact in our research I think price depending on the segment. We looked at was number four on the on the criteria.
The 2% you referenced that conversion occurred before the most recent before the last 12 months of run up in.
And would pricing so the 2% was when would was in.
Yes.
Roughly 300.
Range $3 to 400 range kind of that historical norm.
We are above that now we've been meaningfully above that but I just want to highlight that the.
The conversion.
That we saw and that that number was occurring before and I'll just stress that.
In our type of environment, there is a network.
Effect and so what we see in our research what we see on the ground.
And as wood conversion is occurring at all price points.
And wood conversion is really around a mix of criteria. So hopefully that puts a perspective on it relative to recent price increases.
We make sure that as we increase pricing in our different categories and once again, we've done additional research here Thats part of some of the strategic investment that Ralph talked about that we're making sure that that we're putting ourselves in the right position depending on the category.
Within which we play.
Okay.
Thank you.
I appreciate it thank you.
Alright.
Next we have Alex Ryan <unk> with B Riley Your line is open.
Thank you and nice quarter gentlemen, as it relates to new products can you talk a little bit about annual contribution of sales that you think youre going to be generated from new products can you talk a little bit about your new product pipeline without giving us too much information on it.
On the on the specific contribution we havent disclose that in a while.
I think it's a good question and I think we'll evaluate.
How do you disclose that.
Directional directionally or in more detail on subsequent calls what I would tell you is if you look at.
Our last couple of years of growth.
Seeing meaningful growth from the new products that we've introduced on and on the exterior side.
As of US those of you that had a chance to see our initial analyst meeting saw the productivity solutions that we have that integrate functionality and improve.
The productivity on a job site those that category of products that we have right now that are targeting wood conversion has been a nice growing category. In fact, its growth has been accretive to our aggregate growth.
This year on the on the decking side, the new products, we've launched to put us in a great style position and wood conversion.
<unk>. So they are disproportionately contributing to what we see.
And then on areas like rail.
As an example.
We also have productivity solutions, there with our panelized rail.
That reduces labor for contractors and.
And our other installers and we're seeing really nice.
Growth there in terms of the pipeline.
Last year, despite the pandemic, we launched new products, we fully expect to launch new products again as the season approaches.
But we're also balancing.
To make sure that we create the right tie.
Online in terms of staging of new products. So we've got a pretty broad pipeline.
We're going to stage those introductions based on on the opportunity for <unk>.
For market introduction, so we will we will.
It's a great question will create more transparency.
Both on our Investor deck.
And on our next call relative to some metrics around that.
And then lastly, all across the industry have you seen any notable market share shifts and are there any notable line reviews ongoing or anticipated.
We've.
Relative to specific customer activity.
Well that our customers are our results show that.
As we look at share.
We feel good about if you just look at our trailing 12 and our growth in both our company and our residential business and you do a comparative analysis, we feel good about.
We feel good about what we've been able to do.
We talk a lot about decking.
We we feel good about our position there on the exterior business, we've had both new products.
And the capacity and the service levels to be able to.
To supply the business and so we.
We feel very positive on the exterior side too so beyond that.
You'll you'll see it in our results. So I appreciate the question.
Thank you.
Thank you next we have Susan Macquarie.
With Goldman Sachs.
Thank you good morning, everyone and let me add my congrats and best wishes to those Ralph entropy looking forward to working with you.
My first question is around productivity you know you mentioned in your comments that you've also taken some additional productivity initiatives in the quarter can you give us a little bit more color on that and how we should be expecting those to come through.
Yes, so I'll break it into.
A couple of different areas right on the recycle.
Side as as we're dealing with working through supply and inflation, we've taken certain actions.
Relative to.
Finding lower cost sources of recycle.
That are available and we have been incorporating those.
I mentioned.
Without giving the specific.
We're incorporating I mentioned that on the call without being specific we have been incorporating that into.
Into our products and and.
That will lead longer term to a lower cost stream.
As you look at specifics.
We continue to look at material utilization.
Uptime OA and once again.
Those are are aspects that we will see long term benefits from.
As we as we cycle through some of these inflationary pressures.
Okay. That's helpful. Thank you.
My question is around your recycling capacity.
You have to work through this expansion plan you also mentioned that to some extent that includes expanding the recycling.
Production that you had I know you came into this year with about 55% of your inputs recycled can you talk to where you are today or where you expect to be to exit this year and how we should expect that to benefit the margins, especially maybe into next year.
Yes.
We've added meaningful capacity to our recycled capability.
But one of the challenges has been that.
Even though we have seen even though we've made very strong progress.
Our growth has also been quite high so so as we add capacity.
We need to add it at a disproportionate rate to our growth and.
We we are balanced right now relative to that.
In certain cases, we have not been able to increase our use of recycle.
PVC decking as an example, we could be at higher percentages of of recycle, but given our growth rate there scaling of our recycle operations to meet demand has not yet given us an ability to increase that.
The good news in that is you know as as we bring additional recycle capacity online it will allow us to increase our percentages and we would expect that that would be something we could do as we move into <unk>.
End of 'twenty two.
Got you Okay. Thank you and good luck with everything I appreciate it. Thank you. Thank you.
Thank you.
Last question, we have Ryan Merkel with William Blair.
Hey, Thanks for fitting me in so two questions first off on raw material prices have leveled out recently and just how much confidence can we have that we won't be talking about pushing back margins again, a quarter from now and then secondly, one of your competitors mentioned labor shortages hurting production did you see that as well.
Okay.
Ralph maybe let me answer the labor one first.
Ralph take the raw material.
Certainly, it's a challenging labor environment.
Our approach has been to be very aggressive.
And insuring.
We continue to SaaS, our facilities and in such a way that we can maintain.
Their operations and as such we have.
We have seen some of the labor dynamics, but we feel that that we've done a pretty good job of working our way through.
Those dynamics now incrementally.
Cost us a bit at times, but we believe that that servicing our customers that will take appropriate steps.
To ensure that we have continuity there.
And Ryan on the.
On the inflation side.
As I mentioned.
Clearly since.
Last earnings call we've seen.
The step up.
The the Virgin resins, PVC and polyethylene.
Since may have been increasing but at a much slower rate than where we were versus year ago.
On the supply side there in general.
There are no known outages so no one's enforced measures. So the supplies are coming back, but but inventories are tight and.
And it takes some time to rebuild that what the capacity is.
Is kind of back on and.
And the supply lines, there are getting better.
We did also see.
Some increase in prices and these typically lag, they're not linear but they do lag.
On the recycle side, we've seen increases in recycled costs across poly.
Polyethylene recycled material as well as PVC.
Sure.
To your question of.
When does it abate.
When you look at year on year or even since the last few months.
Things are things are leveling theres still some increases out there, but I think importantly.
When we see these things emerging we take action in and Thats been our mode, because it's important it's important too.
To cover our costs. So we continue so we could continue to invest in the business.
But the environment.
Could you just characterize as certainly supply improving but inventories in general are low.
In these areas.
Got it thanks for the color and Ralph Best of luck.
Thanks, Ron.
Okay.
A question and answer session and silver I will turn the call back over to Jeff is saying.
Well. Thank you all for attending all I'll reiterate my thanks to Ralph then and just the.
The impact he has made.
Some place along the line is probably in a CFO Hall of Fame, having been a public company CFO.
<unk> five times.
And we welcome Pete.
Let me just reiterate a couple of points.
That we hit.
One I think we are in a.
Terrific position.
With capacity coming online and some of the opportunities that we see moving forward.
And some of the actions that we've taken that we believe put us in a really strong position, but thats really against a bigger backdrop of opportunity. Our core markets are near $10 billion and thats with trim deck rail and accessories, and we view meaningful opportunity there, but we also have adjacencies.
That for the long term of the business that we're building against which for us represent an additional $10 billion of.
Market opportunity and as we continue to have a dialogue about the performance of the business. We will also continue to have a dialogue about the steps we are taking to continue to access.
Accelerated growth in our core and also access that additional market opportunity. So really appreciate all of you.
Taking the time once again, and we look forward to introducing Pete in in a more.
Direct conversation as we evolve over the next few weeks and months. Thank you so much take care.
Ladies and gentlemen, this concludes today's conference call. Thank you all for participating you may now disconnect.
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