Q4 2021 Azek Company Inc Earnings Call
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Good morning, My name is shantou and I'll be your conference operator today at this time I would like to welcome everyone to the Asia Company fourth quarter 2021 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question Press Star one again. Thank you.
Amanda Cimaglia Vice President of ESG, you May begin your conference.
Thank you good morning, everyone. We issued our earnings press release. This morning to the Investor Relations portion of our website at investors thought is that co dot com as well as via 8-K on the SEC's website I'm joined today by Jessie thing or.
Keith Executive Officer, and Peter Clifford, Our Chief Financial Officer, 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 1090 fives.
These include remarks about future expectations anticipation beliefs estimates forecasts plans and prospects.
The 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-K for our fourth quarter and fiscal year end 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.
Reconciliations of adjusted EBITDA to net income calculated under 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 on our website and will be included in our Form 10-K for our fourth quarter and fiscal year end 2021 at this point I would like to turn the call over to Jessie Zheng.
Good morning, I'd like to welcome everyone to today's call and it's great to be speaking with you today.
We are proud to announce that we once again delivered a record fourth quarter with strong growth in net sales adjusted EBITDA and adjusted EPS. Our results were driven by continued robust demand in both of our segments and industry leading operational execution.
During the fourth quarter, we meaningfully improve service to our customers made progress against our <unk> capacity expansion and completed additional investments to drive long term growth.
The teams have done a great job navigating what has been a challenging environment to deliver strong results and we exit the year in a strong position to service our customers in 2022.
And to continue to gain market share from wood and other direct and indirect competitors.
Our strategy is to drive growth and share great combination of product innovation commercial execution and targeted acquisitions, given the breadth of our portfolio, which includes a leading exterior business and the most differentiated decking products on the market, we believe that we.
We are uniquely positioned to win.
We have a proven track record of results and continue to believe our strategy and investments will drive sustained long term growth and margin expansion.
This confidence is underpinned by the continued tailwind we are experiencing as a company, including strong repair and remodel activity sustained interest in outdoor living and an acceleration in wood conversion trends on our last call. We discussed the extensive research we conducted on wood replacement and the draw.
Drivers of wood conversion in the decking market. Our research indicate that there is an opportunity to convert approximately 50% of the market to natural looking alternative materials with an unmatched portfolio of the highest quality and most natural looking decking products on the market driven by innovation in <unk>.
R&D, we believe <unk> is in a unique position to benefit from these underlying trends. In addition to previously announced capacity additions. We are announcing a fourth phase of decades expansion that we expect to be completed during calendar year 2022, bringing our overall decking capacity.
Increased to over 100% from the 2019 baseline. This additional phase will take advantage of our expanded footprint in Boise, Idaho and highlights the speed and flexibility of the APAC team to respond to market opportunities.
We believe this combination of investment and execution places <unk> in a position to aggressively engage the market as we move into fiscal 2022.
More importantly, our existing footprint gives us the flexibility to add additional lines as needed and we expect to exit 2022 with enough space to double our Boise manufacturing capacity within the existing footprint.
These capacity expansions come at the right time and enable us to aggressively go after new market in wood conversion opportunities.
Turning to fiscal year 2021 highlights in our first year as a public company, we delivered record financial results and achieved a number of milestones we saw acceleration in the residential segment driven by strong end market demand combined with initiatives share gains in <unk>.
Price realization, our decking product line grew in the mid $40 range in our exteriors business grew over 30% we.
We delivered the first two phases of our multi phased capacity expansion plan, all while improving throughput in our existing operations.
Our capacity increased by 40% and decking, our actual output capability increased meaningfully above that driven by increased efficiency in an unprecedented inflationary environment. The team was able to offset raw material inflation through pricing and productivity gains.
We expanded our consumption and supply of recycled materials to meet increasing demand and are well positioned to achieve our 2026 goal of recycling 1 billion pounds annually.
In fiscal 2021, we also launched a number of new products. We also strengthen an already strong management team with expanded leadership in sales marketing and corporate functions.
And we continued investments in sales marketing brand and consumer engagement, which will continue into fiscal 2022 week.
We experienced high quality digital engagement throughout the year and leads increased over 40% year over year.
We continue to focus on our core value of doing the right thing and building out our focus on ESG.
We issued our inaugural full circle ESG report and are making progress on multiple initiatives within each part of the DFS and the G. In addition to our most recent board member announcements, we continue to make progress on our ongoing effort to create a more inclusive company.
We recently held the <unk> championship in Boca Raton, Florida, which is an event benefiting local area hospitals that as part of the PGA Tour champions.
We committed to making it a zero waste event and we were the first and only tournament and the PGA tour champions to do so.
We were also recognized as one of Chicago Tribune's top workplaces for creating a culture, where employees feel highly engaged appreciated and fulfilled.
Turning to our fiscal fourth quarter results.
Despite ongoing inflation in the quarter, we once again delivered very strong net sales and adjusted EBITDA.
A combination of new manufacturing capacity and our strong execution enabled improvement in channel inventory and sets us up for growth heading into fiscal 2022.
Our teams continued to navigate supply chain challenges, including hurricane either extremely well as we continue to prioritize service to our customers.
We benefited from pricing that offset inflation on a dollar basis, and we have incremental pricing that will be realized in the first quarter of fiscal year 2022.
We believe that our pricing and productivity actions position us well for ongoing margin expansion.
We continue to make progress during the quarter on key initiatives that drive long term value creation.
Our core products in our portfolio as well as our new reserve in landmark decking collections, APAC paint pro and panelized aluminum rail products, all performed well during the quarter.
Two of our newest product innovations were recently recognized by Hbf Stealer, which awarded our timber Tech landmark decking collection and <unk> shingle siding with the Golden Hammer awards for their value innovation and shelf appeal. Our landmark collection of decking also received inaugural.
Designed for reuse award from the vinyl sustainability Institute.
We are excited to continue this culture of innovation by announcing the launch of several new products this quarter for fiscal 2022.
We are also excited to have announced a partnership with yards and a leading technology enabled landscape design company, where customers can design the yard of their dreams, incorporating timber tech materials in the design process.
This partnership will allow us to better access and grow an alternative channel, while expanding our customer journey.
We recently completed customer events that coincided with the timber Tech championship, where we engaged a significant number of our contractors and dealers on future strategy and growth opportunities.
It was great to engage in person with these customers are contractors and channel continue to be optimistic about the outlook for growth in fiscal 2022, and the long term. They validated data from our recent contractor and dealer survey, which highlighted ongoing optimism and strong backup.
Logs.
We continue to make progress on recycle and finding new sources of otherwise hard to recycle materials to incorporate into our products. We are proud to report that we diverted approximately 500 million pounds of scrap and waste from landfills through our recycling programs in fiscal 2021 on approximately 25.
5% increase from 400 million pounds in 2020.
Recycled materials made up approximately 56% of our extruded product portfolio wake up from 54% last year.
In fiscal 2022, we will continue to invest in our recycling capabilities and expect both our use of recycled and the cost benefit from recycling to continue to expand.
Our innovative full circle PDC program is gaining momentum in the marketplace and has strengthened our position as the industry, leading recycler of PVC.
With the benefit of our expanded capacity, we are now able to more effectively expand our channel geographic reach and customer relationships.
We are pleased to have recently expanded our distribution relationship with a key distribution partner Weyerhaeuser. The expansion allows for timber tech products in APAC exteriors full product line offering to be available throughout the Texas market through warehouses, Dallas and Houston based distribution centers.
The portfolio expansion increases ASX relationship with Weyerhaeuser to 13 distribution facilities nationwide.
Would like to thank Weyerhaeuser and all of our channel partners for their tremendous support and look forward to our continued partnerships in the future.
To our outlook.
For fiscal year 2022, we expect we will grow net sales at a mid teens rate driven by growth in our core and new products and previously announced price increases.
We expect to deliver high teens growth in adjusted EBITDA year over year inclusive of the startup costs associated with our capital investment programs. Our recent actions combined with ongoing productivity and recycle expansion position us well for fiscal year 2022.
Raw material prices normalize we believe we are well positioned to achieve our margin objectives.
In summary, we continue to be confident about our position in the market and the opportunity for the age that company heading into fiscal 2022.
Repair and remodel activity remains strong with a number of housing related and home remodeling indices, showing continued and projected future strength.
There continues to be a strong interest in outdoor living and we see wood conversion trends accelerating in addition, our contractor and dealer engagement and survey reflects ongoing optimism and backlogs.
APAC has continually invested in innovation and R&D to create the highest quality and most natural looking products and the breadth of our portfolio, including exteriors and outdoor living give us a competitive advantage as we continue to penetrate and almost $20 billion market opportunity.
We believe we are investing ahead of increased demand with capital investments coming online to service incremental demand and we believe we provide the best service in the industry.
We believe the future is bright for the age that company and we are excited to execute our strategy in the coming years with the support of our loyal team members channel partners and shareholders.
With that I'd like to turn the call over to Pete who will discuss our financial results and our outlook in greater detail.
Pete.
Thanks, Jessie and good morning, everyone, let's take a few minutes to walk through our <unk> 21, and full year 'twenty one financial results as a reminder.
At our <unk> in fiscal full year 'twenty one the results are through September 30.
The actions that we've taken a look pricing capacity expansion as well as investments in our core have us exiting 2021 with lots of momentum and position us to outperform in 2022 and beyond.
Consolidated basis.
Sales for the quarter increased 31, 1% year over year to 346 million for <unk> 'twenty, one drivers for the fourth quarter net sales for our residential segment also increased by 31, 1% year over year driven by strong deck results. Our commercial segment increased by 31, 3% year over year as well.
<unk> net.
Net sales for the year increased 31, 1% year over year to $1.179 billion for the full year 'twenty one drivers for the year included broad based growth in both our residential as well as commercial divisions.
Gross margins for the quarter GAAP gross margin dollars expanded by $22 million are up 24, 4% year over year, while adjusted gross margin dollars grew by $24 3 million or up 22, 9% year over year.
Adjusted gross margin rates contracted 250 basis points to 37, 7% versus 42% in the prior year.
Gross margins for the full year GAAP gross margin dollars expanded by $93 9 billion are up 31, 7% year over year, while adjusted gross margin dollars grew by $98 9 million or up 27, 5% year over year.
Adjusted gross margin rates contracted 110 basis points to 38, 8% versus 39, 9%.
In the prior year.
Our margin rate performance year over year is primarily driven by the fact that we've seen significant material commodity inflation, which we've offset the dollar impact, but not the accretion over natural margin rate.
Our gross margin rates were stable sequentially from <unk> to <unk> as our pricing has exceeded inflation dollars and both <unk> 21, and <unk> 21.
Our last price increase was effectively on October 1st increase so we expect pricing to continue to exceed inflation dollars and <unk> 22.
Lastly, we remain confident we are positioned for structural margin change when material commodity prices start to recede.
SG&A expenses for the quarter.
SG&A expenses decreased $89 5 million or down 59, 7% year over year. The decrease was primarily attributable to lower stock based compensation expense, partially offset by investments and higher personnel costs professional fees and other public company costs SG&A.
SG&A expenses for the full year SG&A expenses decreased $64 1 billion or down 28% year over year. The decrease was primarily attributable to a lower stock based compensation expense, partially offset by investments and higher personnel costs marketing and branding professional fees.
And other ongoing public company expenses.
Adjusted EBITDA for the quarter <unk>.
Adjusted EBITDA dollars for the quarter increased by $15 4 billion or up approximately 23, 4% to 81 5 million <unk>.
Adjusted EBITDA margin rates for the quarter declined to 150 basis points to 23, 5% from 25% in the prior year.
As previously mentioned the primary driver of the EBITDA impact is price realization offset material inflation dollar for dollar, but not on a percentage basis.
Adjusted EBITDA for the whole year.
Adjusted EBITDA dollars for the year increased by $60 7 million or 28, 4% to $274 2 million adjust.
Adjusted EBITDA margin rates for the year declined by 40 basis points to 23, 3%.
From 23, 7% in the prior year.
Nope material commodity inflation did not start to accelerate until the middle of <unk> 'twenty. One so we had a relatively normal fiscal <unk> 21 year over year.
Net income and EPS for the quarter.
Net income increased by $103 billion to $38 6 million or <unk> 25 per share compared to a loss of 43 per share in the prior year period.
Adjusted net income increased by $5 4 million or up 12, 3% to $49 8 million.
Our adjusted diluted EPS of <unk> 32 per share compared to 29 per share in the prior year period key drivers strong operating performance year over year, coupled with prior year debt extinguishment impact on our formerly outstanding senior notes.
Net income for the year GAAP net income increased by $215 4 million to $93 2 million or <unk> 59 per share compared to $1 <unk> loss in fiscal 2020.
Adjusted net income increased by 83 million to $152 9 billion, our adjusted diluted EPS of <unk> 98 per share.
Compared to 59.
Per share in fiscal 2020.
Key drivers strong operating performance year over year interest expense reduction of $51 million year over year and the elimination of certain expenses associated with the company's initial public offering in 2020.
Now for the balance sheet cash flow and Capex, our balance sheet remains incredibly strong with significant capacity, we have over $146 million of unused credit facility at 930 <unk>.
One we.
We ended the quarter with $255 million of cash and cash equivalents and $362 billion of working capital.
Gross debt ended the quarter at $467 7 million.
Net debt came in at $217 1 million and our net leverage ratio came in less than one times at <unk> eight <unk>.
Capex spending for the quarter reached 59 million, while capex for the year reached $175 million at the low end of our annual guidance largely driven by timing of cash outflows related to our capacity expansion programs.
Cash from ops for the year came in at $207 7 million were up 111% year over year.
Now for some segment results for our residential segment sales for the quarter grew 31, 1% to 305 billion.
Generic drivers for both the quarter and the full year are similar we have benefited from strong underlying demand and price realization enabled by the commodity environment and some right sizing of channel inventory sell through was driven by broad based strength in deck rail and accessories at 33% and exteriors that 25%.
<unk> capacity expansions and machine efficiency improvements, we delivered more product, which allowed us to make progress in <unk>.
Proving service levels and building channel partner inventory closer to desired levels during the quarter.
Sales for the full year grew 35, 4% to.
So 1.044 billion cells.
Sell through was driven by broad based strength in deck rail and accessories at 37% and exteriors at 31%.
<unk> grew in the mid Forty's range, our rail business was constrained during the year by certain material and supply chain issues channel inventory improved at year end as new capacity came online and we made improvements to service levels.
Segment, adjusted EBITDA, adjusted EBITDA for the quarter versus $17 6 million or up 23, 7% to $91 6 million.
Adjusted EBITDA for the full year grew $76 5 million or up 32, 1% to $314 6 million as.
As we have articulated the margin impact is driven by timing lag in price realization versus commodity inflation impact, where we are offset dollar impact about the accretion of our natural margin rate.
For our commercial segment.
Sales for the quarter grew 31, 3% to $41 million.
Sales for the full year grew five 3% to $134 8 million.
The strength in revenue for both the quarter and the year are primarily attributable to higher net sales in our Viacom business. We are seeing solid demand in marine outdoor living and semiconductor end markets.
Segment adjusted EBITDA for the quarter grew $2 1 billion or up 55, 4% to $6 million adjusted.
Adjusted EBITDA for the full year grew $4 3 million or up 28, 4% to $19 3 billion.
Our commercial business did an excellent job recovering margin and profitability during the year, primarily driven by commercial mix plant productivity as well as pricing actions.
Before I close with some color on guidance I wanted to provide some context on the fourth quarter 'twenty, one and first quarter of 'twenty two.
Fourth quarter 'twenty, one closed in line with our expectations a few positives to note on the quarter first from a revenue perspective, we continue to see strong demand, while making progress in improving pro channel inventory and service levels.
Plant productivity performance improved as we move past our startup costs from the phase one phase II capacity projects third our teams executed extremely well with the supply chain disruptions caused by Hurricane Ida.
Finally, we continue to offset new commodity inflation with price realization dollar for dollar.
As we entered the first quarter of 'twenty. Two there are several positives coming out of the fourth quarter of 'twenty one.
First our price actions are now in place, we expect pricing to exceed material inflation dollars and every quarter in 2022 and start to become positive on our margin rate basis in late <unk> 'twenty, two and remain positive throughout the second half of the year based upon current commodity pricing expectations.
Two we are experiencing solid trends in our digital engagement and contractor backlogs, which point to a healthy demand environment.
Three we continue to make progress on phase III, a new phase for capacity expansion projects. Finally, we're hitting the point in which the cost of an incremental dollar of sales have normalized versus the dilution of the last few quarters.
Now turning to our outlook for next year. We believe we are well positioned to deliver on mid teens revenue growth in 2022, driven by a strong demand environment underpinned by material conversion and outdoor living trends carryover pricing.
Our innovative product portfolio and improved service levels that position us well when combined with our key growth initiatives, including new product launches. We are confident in our ability to execute on our margin expansion objectives driven by <unk>.
Continued progress with our recycling initiatives and recycle re formulations.
Peru plant productivity and continuous improvement programs supported by a more stable manufacturing operations.
Operating leverage tailwind driven by a strong end market demand and modest SG&A leverage as we lap. The addition of new public company expenses.
Additionally, our long term opportunity on structural margin improvements remains intact with regard to the price material inflation equation.
For the full year fiscal 'twenty, two we expect consolidated net sales to increase mid teens year over year.
Inclusive of startup costs associated with our capital investment programs, we expect to deliver high teens adjusted EBITDA growth year over year and associated margin expansion for the first quarter of 2022, our total company guidance calls for net sales growth of 18% to 21% from an adjusted EBITDA.
Perspective, which includes startup costs, we expect year over year growth in the 14% to 17% range. The quarter includes approximately $2 million plus of startup expenses and also a bit of a lag in net price versus cost margin recovery. As a reminder, Q1 'twenty one had minimal inflation pressure.
Expect to see leverage on our bottom line starting in late <unk> 'twenty, two and accelerate throughout the second half of 'twenty two.
As previously highlighted we are adding incremental capacity, which should be considered phase four which brings us over 100% capacity increase by the end of calendar year 'twenty two.
When combined with the first three phases relative to the 2019 baseline capacity infill.
In fiscal 'twenty two our capital expenditures will include the remainder of phase <unk> and phase III as well as phase for expansion and other initiatives to assist with modeling, we expect approximately $180 billion to $200 million and capital expenditures for fiscal 2022.
We expect $21 million to $22 million of interest expense for the full year 'twenty two.
Our effective tax rate for 2022 is estimated to be approximately 25%.
Our full year weighted average diluted share count is expected to be approximately 158 million shares.
Thank you Pete once again I'd like to take a moment to thank our entire <unk> team for their ability to achieve strong quarterly and full year results.
Thank you to our customers and partners as well for their continued support of the SaaS company.
As we enter 2022, we will continue to build on our existing strategy and investments across people manufacturing capacity and innovation and we believe this positions the company well for strong net sales and adjusted EBITDA growth.
We remain excited about the many opportunities in front of US and believe we are well positioned to win in the industry.
With that operator, please open the line for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
First question comes from Ryan Merkel with William Blair. Your line is open.
Okay.
Yes.
So my first question is on the outlook.
Yes.
Sure.
Yes, we can hear you Ryan go ahead okay.
So a nice quarter guys I think my first question just Jessie the outlook for mid teens revenue growth and I was thinking there was maybe 12% to 15% price in 'twenty two that wouldn't leave a lot of volume growth can you just unpack that a little bit.
Yes, first let's just step back and take a look at the market and the opportunity that we see.
We talked about we're adding capacity.
In a great position to start to drive new volume growth and we're in a terrific position to be able to get after new growth opportunities relative to the modeling specifically Pete can can get into that specifically, we are going to be lapping. Some additional pricing. So I think the way to think of.
The guide roughly is it's about half price and we've.
I think we've indicated.
High single digits moving forward, but.
Fundamentally the growth opportunity that we see is at or above our long term guidance, which has.
Historically than 8% to 10%.
Got it Okay. That's helpful and then.
My second question any signs of slower decking sell through or trade down just given all the price increases.
We.
As we look at our data overall, we've seen very very good growth in all of the segments that we play and I think one of the challenges.
<unk> had last year is because of capacity constraints, we haven't really been able to service all of the opportunity that's out there and all the volume that's out there.
So as we move forward. An example of that would be landmark right. So so landmark we launch, but we had to constrain that launch.
To certain geographies, just because we didn't have capacity to service that I think as we move forward.
We continue to see opportunities with our innovation to be able to drive growth in really all of the segments and so as you look at <unk> in particular, we have really really strong.
Growth last year, and we believe we're in a position to drive really really broad based growth coming forward in a lot of the data we see.
At a macro level and also in our own data supports really continued growth on the decking side.
Very helpful. Thanks, Jesse pass it on I appreciate it thanks, Brian.
Your next question comes from Tim Walsh Your line is open.
Hey, guys good morning, nice job.
Maybe just thinking about kind of stepping back and thinking about seasonality a little bit it's been a pretty dynamic couple of years.
Just in terms of kind of the quarterly cadence for revenue.
At this point, how are you thinking about seasonality for fiscal 'twenty two relative to normal.
It does look like maybe there's some kind of normal sequential seasonality, that's kind of built in but just kind of thoughts on how we should think about the revenue cadence for the year.
Yes, Tim that's a great point I think as just as a reminder, in terms of the seasonality of our types of businesses and our business specifically typically when you get into our first fiscal quarter into the second fiscal quarter Youre dealing with really two key.
<unk> that involve staging for the subsequent year right. So youll typically see.
Normal environment, you'll typically see some inventory drawdown within our channel.
In in our fiscal first quarter calendar fourth quarter, and then Youll start to see a re inflation of that inventory as they prepare for the season.
In.
In the second quarter I think as we have done a great job of servicing the market.
We see a more normalized progression moving forward.
As our capacity is is catching up with the <unk>.
Macro market demand.
Okay. Okay. That's helpful. And then and then when you think about just.
On the recycling side.
It looks like you made.
Some really good progress on just the amount of materials that youre recycling the percent that can be recycled to 56% I mean, where do you see that going over the intermediate term and I guess what are the biggest opportunities moving forward.
Yeah.
Once again great question.
As you pointed out we made a lot of progress in terms of expanding.
Our sourcing of recycle in our processing of recycle the challenge we had in 2021 was just our volume growth.
And really being able to keep up our recycle expansion against that as we move into 'twenty. Two we have made additional investments in recycle and we would expect to be able to continue to expand our use of recycled materials. So you should think of that percentage is happening.
An opportunity to be above.
Above where we currently are and we haven't given a specific number but we clearly see a path to be in the sixties.
Over a period of time and so as we are able to.
Buildup more internal capability and supply.
And do the re formulation work, we should be able to get there and I think the second component is as we bring additional capacity online that gives us line capacity to be able to finish the formulation and ramp up work to be able to increase.
The percentage of recycled, but I think as importantly.
Validate and move forward with lower cost recycle materials.
Okay.
Is it fair to think that the the focus there kind of incrementally.
You kind of have more incremental focus on that going forward, just as things kind of normalize versus kind of trying to just have enough material in terms of just sourcing that you've kind of gone through the last couple of years.
Yeah, I think that's the right way to think of it I mean, if you think of the macro environment.
PVC as an example, there has been a lot of disruption in the Virgin PVC market, our expanded internal recycling of PVC put us in a great position to sustain supply and also balance some of the cost.
Pressures on the Virgin.
As we bring more capacity online it certainly gives us an opportunity to.
To really be able to expand our use of recycled. So I think it's the right way to think of it.
Okay. Okay sounds good thanks, guys I appreciate the time.
Appreciate it thanks guys.
Our next question comes from Matthew Bouley with Barclays. Your line is open.
Sure.
Hi, This is actually Ashley Kim on for Mark today.
So can you just go back to the top line growth of 22 is that dependent on new capacity.
Fine.
Is that achievable just on the existing capacity.
Yes, I would say our capacity plan.
We've laid out and just as a reminder, we have additional capacity coming online.
That incremental 15% coming online by the end of the calendar year, we've got an additional 30% coming online our phase III at Boise, and we've just announced additional capacity and incremental <unk> that comes online by the end of calendar 'twenty two.
We certainly have.
A enough capacity.
With what we have in the modest adds that we've got coming in the next couple of months to be able to.
To meet and exceed.
Our guidance and then the additional capacity, we've got coming online above that puts us in a position to be able to continue to aggressively expand in the market.
Great that's much appreciated.
And then just kind of staying on the topic.
How confident are you that you'll be able to source labor and materials.
Both on the recycled ample side in order to kind of fill that utilization on those lines.
Yes, we don't have we our team has done a really really nice job of managing.
Through a lot of volatility we are very very confident in our ability to continue to scale.
Get the right raw materials.
And move down the path of recycling that the team has done a really nice job.
And arguably the most volatile environment already and we feel really really good about our opportunity to.
Continue to execute at a high level and.
Move forward. So we feel really really good about it we're always looking at it.
But.
We feel confident.
I'd just add again I think our teams have adjusted really well to the new norms of the supply chain world from.
Key products and availability from the PVC side I would describe the environment as capacity is back online.
Concerns on availability on a P side, it's even healthier I would describe it is again no availability concerns and if anything capacity is starting to exceed supply, which would give us some optimism on sort of pricing from a peak perspective.
Great. That's really helpful color guys I'll leave it there.
I appreciate it thanks.
Our next question comes from Phil <unk> with Jefferies. Your line is open.
Hi, This is actually calling on for Phil. Thank you for taking my question. My first question in your fiscal year 2022 guidance. What are you assuming on resin prices and availability with the contract prices and spot prices started to fall off in recent months.
Yeah.
As far as what we're assuming for.
For commodity prices. It's in line with most current cdi's and kind of embedded in that is kind of fairly stubborn PVC.
PVC prices for the year of 2022 and seen some modest deflation on on polyethylene in the back half of the year.
And as mentioned on the supply chain comment.
We actually feel very good right now about material availability and have no concerns on that.
Okay, Great and then just in terms of the startup cost how should we think about the magnitude of those and the timing and cadence during fiscal year 2022.
Yeah.
Look that's going to move a bit as the project moves, but as we're thinking about it right now.
A good way to frame it up as we think on an annual basis, it's about $8 million to $10 million of startup costs.
And we're calling the first quarter at about $2 million approximately of startup costs in <unk> 'twenty two.
Great. Thank you for taking my question.
Okay.
Our next question comes from.
Alex Rygiel with B Riley Securities. Your line is open.
Good morning, and thank you for taking my question Jesse in your prepared remarks, you stated aggressively go after new markets in wood conversion, what exactly did you mean by new markets.
Well.
So if you step back once again and you look at what we.
What we've gone through over the last 18 months, we have not been able.
Because of capacity constraints.
To be able to go after new customer segments within our existing geographic footprint think of the U S and in Canada, and so as we have seen opportunities to take on.
New dealers.
And new opportunities, we have been constrained in that and so.
At one level, we see opportunity in certain geographies.
And at another level as I mentioned earlier, we have constrained certain products and so as we have this additional capacity coming online that will give us an opportunity to really go after some of those product segments.
That we've constrained.
Some of those segments downstream segments are somewhat obvious some are less obvious.
Not going to disclose any specifically, but we do see now that we have.
Additional capacity to bring to bear.
Pretty meaningful opportunity at a number of different con.
Contractors dealers customers.
And segments and products, where we can we can be much more aggressive so.
That's about as specific as I can get.
That is helpful. And then you mentioned I believe that leads were up 40% year over year.
What time period was that measured over and.
What is your historical success rate been.
On these on the leads.
Yes, that's within the.
Excuse me that's within.
The fiscal year in aggregate.
Cross the year I think we've done analysis on our.
John happens to be on also if he wants to comment but as we've done.
As we've done analysis on the correlation between our digital activity and our sales it is typically directional.
We are at time to able to validate whether or not a lead has closed and at other times not so we use that data as as directional data and <unk>.
Indication of the future opportunity, we have and I think the opportunity or the challenge we have and that is just that theres typically.
We talked about earlier between a two and and in 14 month lead time from from when a consumer engages on thinking about.
Building and out.
So we're living projects to when they actually execute it.
Thank you very much.
I appreciate it thanks.
Our next question comes from Susan Mcclary with Goldman Sachs. Your line is open.
Hey, good morning, everyone. This is charles thrown in for Susan today, Congrats on the results and thanks for taking my question.
The first question is on your capacity addition, can you provide more details.
40 capacity addition across product category, you said that you were constrained in rail. This series should we expect more additions going forward on the railing side relative to decking and also I would like to know a little bit more about your exterior business. I mean, you said you grew I think 30% plus.
In the fourth quarter can you talk about the need to add more capacity there as well.
Yeah, Let me let me take the latter question first.
We have publicly.
Closed on the decking side exactly how much.
Capacity, we've been adding.
We have also been adding.
Exterior capacity.
As part of our capital investment, we just haven't disclosed specifically so we we had additional capacity on exteriors come online last year, we've got additional capacity coming online.
This year.
Both in our core products and our new products.
And we've also had.
Some terrific progress on both raw material sourcing and efficiency in that business. So.
Once again, we've got it it's in the capital numbers.
Don't disclose specifically there.
We've talked on your on your earlier question on the rail side.
We've made investments over the last three to six months.
Both on the supply chain raw material and and.
Production side.
We continue to.
To ramp that up and we believe we'll be in a position as we as we move into the next calendar year to be able to continue to service that increased demand and as you highlighted.
We were somewhat constrained on that particular business.
In the last quarter.
And we are debottlenecking some of that.
As we speak and then on the decking side I think we've disclosed that capacity progression and I'll just highlight.
Have we because of our new facility, we have a lot more room under our existing roof to expand.
Our decking and rail capacity above.
What we've what we've highlighted already.
Buildings, there, we have an opportunity to continue to expand.
Okay. That's super helpful color. Thanks, Jesse for that and then my follow up is on on the trade situation.
There and specifically considering the 100% capacity addition between 2019 and 2022.
What is the ability for trades to support that growth and is there any measures that you could put in place and through maybe in terms of product design or training that you can help too.
To help support the growth that you could see there on the labor and trade side.
Yeah as it relates to <unk>.
Our contractor base.
One of our innovation focuses has been on driving more productive products and so on the exterior business. We had a number of products that we've launched that are really focused on on.
On contractor productivity.
Whether that be our <unk> channel trim or or corners or column reps. These are products effectively met to solve some of the contractor productivity issues and similarly, one of our fastest growing products as our panelized rail system on the deck rail Unaccepted Reis business.
That.
Solves that problem and then lastly.
As you point out we continue to invest in contractor training.
And we will now have four.
Contractor training facilities.
Including a new one in our in our Boise facility I think as you survey contractors.
And we do at length.
They are.
They continue to work through the labor challenges themselves and.
We work with them on continuing to educate their new employees and support them in the field with the with our sales force.
Okay. Thanks for the time and good luck.
I appreciate it thank you.
Our next question comes from Keaton.
<unk> <unk> with BMO capital markets. Your line is open.
Thank you and thanks for taking my question.
Jesse can you talk a little bit about your capital allocation priorities and our balance sheet is in very good shape.
And perhaps you know from an M&A standpoint, what is most interesting to you guys.
Yeah, I'll just repeat.
As we as we look at our capital allocation.
The best opportunity, we have and the highest return on investment is investing in ourselves.
With capacity expansion and innovation in new products and we have a stated objective of continuing to bring our business model into a broader area as it relates to outdoor living.
And we have the internal organic capability to get there through our new product development, which we're continuing to invest in and Youll see that unfold over the next few years as it relates to.
M&A specifically that is our stated second objective of use of capital.
And we continue to have a really nice robust pipeline.
And we believe that there's going to be opportunity for us to solidify our position as a leader in exteriors and outdoor living.
Both through organic in and.
Acquisition activity so.
We feel good about the pipeline.
And.
As those deals come to fruition.
You'll hear about them.
That's helpful and then.
Just one more on the channel inventory side do you think that you've gotten to a point there.
It's kind of reached more normal levels to be able to service customers or you think that is kind of more to be done there.
We as we talked about on the last call.
During Q3.
We made progress.
Getting our dealer.
Channel inventory healthier and then as we move through Q4.
We're able to continue that progress and get our distribution channel.
Channel inventory healthier.
There's still some room.
As we move forward over the next few quarters.
To continue to support our channel partners on inventory, but I would say right now we are in a great position to really be able to attack.
The market and.
And to continue to expand.
Our service capability, we believe right now as we sit we are in the best if not one of the best positions of any of the players in the industry to be able to service existing and new volume, which we think sets us up well for growth in 'twenty two.
Got it.
Done until we're good luck in FY 'twenty two.
Thank you.
Our next question comes from Michael Rehaut with Jpmorgan. Your line is open.
Thanks, Good morning, everyone and congrats on the results.
First question I would love to just circle back a bit.
To some of the thoughts around.
The composition of the sales guidance sales growth guidance for next year fiscal 'twenty to mid teens.
Said roughly half price half volume just wanted to get a sense in terms of <unk>.
Thinking about the impact of price throughout this year. If you could just kind of walk through I believe theres been two or three price increases.
Perhaps we're thinking about mid single digits for each but perhaps you could clarify on that.
And I believe there is further pricing actions expected to be taken.
Later this year that you alluded to and I thought we've heard that might be a bit of a higher percentage increase.
I wanted to make sure that we're thinking about that right because all else equal.
Could potentially point to it.
If you just kind of flow all that through perhaps even like a low double digit impact of pricing.
In fiscal 'twenty, two and I just wanted to understand if there is.
Parts of that.
Hum.
Methodology that kind of laid out that maybe were a little off center alone.
Yeah, let me take that.
From a pricing perspective, as we articulated we did in fact exit the fourth quarter it kind of mid teens.
But embedded in the 'twenty one pricing is one way at a price action really right at the end of fiscal 'twenty.
That obviously carried over almost completely into 'twenty one.
Obviously that lapse right now goes away and ultimately as we hit the first half of the year 'twenty one price increases.
It does level us back down to a full year.
High single digits.
And as far as sort of what does that mean again by quarter just thought in our prepared remarks, we had articulated that look at least on a dollar inflationary basis, we cover all four quarters of 'twenty two with price dollars completely.
And then what's unique or different now for the first time is in the second quarter late <unk>. We finally expect to have price not only exceeded the inflation dollars, but actually start to accrete.
Margin rates, our gross margin rates a bit.
Okay. No that's great. That's very helpful. So then I guess the second question.
Kind of just focusing on volume, but youre thinking more high single digit price.
That would.
Mid teens then.
You're talking something in the.
Mid single digits, let's say mid to potentially high but.
And.
Certainly.
Fiscal 'twenty, one as a great growth year.
But with the additional capacity into.
And the continued material conversion.
What's the additional distribution with wire Hauser.
Continued gains from that perspective.
Whats the ability for that let's say mid to potentially high single digit volume growth.
To us it seems somewhat conservative and I, just don't know if there's something I'm missing or if youre just trying to be somewhat conservative at the onset of the year.
Yeah.
We have a.
We've got our stated guidance of <unk>.
Long term of 8% to 10% and.
We'll update that.
As a as the quarters progress.
I think we're really really optimistic about our ability to continue to.
<unk> gained share in the market as as we move into <unk>.
22, I think those of you that have been around us as management, we want to make sure that.
We are setting ourselves up to continue to progress and when in the future and so at this stage, we feel really good about both the market opportunity our ability to.
When in a disproportionate way in the market.
And also we feel good about our guidance.
Okay, great. Thanks, so much.
Our next question comes from Kurt Yinger with D. A Davidson your line is open.
Great. Thanks, and good morning, everyone.
I just wanted to go back to an earlier question around kind of recycling constraints and I was hoping you could maybe put a little bit more color around the investments you're making there to perhaps alleviate some of those challenges and then just as a point of clarification are those constraints more on sourcing.
One internal processing capabilities or just lack of wind time to kind of implement formulation changes.
Yeah, if I could take that one.
I think one of the greatest stories about 2021 is just you alluded to earlier was the performance and execution by our PVC recycling teams. If you look at the product lines and categories that they were supporting in 'twenty. One many of those product categories were growing mid <unk> to 30% on a volume basis.
So the team really rallied to be aggressive and tight in terms of developing and finding new sourcing alternatives for us to get product in we spent capex to expand our returned polymers capacity.
And then ultimately.
The reality is a covered enormous volume growth every one of those pounds.
We had had the chosen to get Virgin PVC, we would've seen meaningful more inflation. So as we think about recycling is a margin expander. It's also one of our best levers against inflation and when we think about 'twenty, two and what we've learned from our hottest source.
In 'twenty one the capacity.
The expansions that we put in and return Palmer's and now number three with significantly different is the extrusion lines and the capacity expansions coming online. It makes that third piece of the equation that much more.
Executable that we now have one time to go chase the validation and re formulations that are required as the final step to increase percentage content of PVC recycling as an example.
Got it Okay. That's very helpful. And then just my second one on conversion trends from wood.
And any thoughts about the impact just as lumber prices have really normalized here at the same time as you and others in the industry are raising prices.
What are the biggest kind of controllable focus areas for you in terms of working to maintain the elevated rate of conversion we've seen over the last two years.
Yeah I'll take that.
We mentioned on our previous earnings call. We did an extensive amount of research on wood conversion and that really led us to defining the market opportunity for conversion.
Over the next few years is getting to 50% and when you dive into that research.
The key element here is that people want a more natural looking product and when they are outside they don't want.
They don't want to stand on what they perceive as plastic.
They want to be honest sustainable materials that.
It gives them the warrants and the feel of wood and and and I think too many times.
Yeah.
I think other players in the industry will continue to highlight.
A specific economic equation as the only driver I think there is a broad based.
Set of criteria.
And the fact that some of our most expensive products, which are the most expensive products on the market continued to do well with wood conversion just really highlights that because they are the most realistic products on the market.
Now having said all that I think as you look at wood pricing visa.
<unk>.
Entry level composite pricing.
We're still in a really really positive range.
<unk>, we're never built at that opening price point on would being in the thousands.
And so the.
The equation for that entry level.
Conversion has held for the last few years and.
And we expect it to hold but we also believe that there is a broader opportunity that's really around the aesthetics quality and educating the market that you can have it all.
Got it okay that makes sense.
All the color and good luck to your new fiscal year.
I appreciate it thank you.
Our next question comes from Mike Dahl with RBC capital markets. Your line is open.
Hey, guys. This is Ryan Frank on for Mike. Thanks for squeezing me in here I'm, just going to ask one quick one in the interest of time so.
You mentioned that inventory levels have been improving and just if you could just piece of what in there is improved service levels versus maybe normal seasonality and slowing of demand.
And then what level of restocking as is included in the <unk> sales guys. That's all for me. Thank you.
Yes, I'll just answer it.
At a very very high level.
We exited the year.
Our channel partners getting closer to where they wanted to be in order to have inventory to service. The market. There was an earlier question relative to normal seasonality and.
We still believe that there is a bit more opportunity.
Continue to solidify inventory in the channel, but as we move through the calendar fourth quarter and the.
The calendar first quarter.
The inventory dynamics really start to move towards positioning inventory.
For the subsequent year and so.
Sure.
I think that's probably the best way to answer it is that we are in a great position to stage inventory.
As we come through the second quarter to be able to drive growth in the market.
Got it and then.
<unk> restocking included in the guide.
Yeah, there's very modest inventory build assumption in the first half of the year.
Got it. Thank you very much that's all from me.
We have run out of time for the Q&A session on today's call I'll turn the call back over to Jesse for closing remarks.
Thank you again for participating.
We're participating in the call we're really excited about the future and we're really excited about our position as we exit 'twenty, one and enter fiscal year 'twenty two.
With that thanks and.
We will chat with you next time have a great day.
This concludes today's conference call you may now disconnect.
Please.
The conference will begin shortly.
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