Q1 2022 Azek Company Inc Earnings Call
Welcome to the age that company's first quarter 2022 earnings call. At this time all participants are in a listen only mode. After the Speakers' remarks, 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.
Vice President ESG. Please go ahead Amanda.
Okay.
Thank you good morning, everyone. We issued our earnings press release. This morning to the Investor Relations portion of our website at investors stocking Zakho dot com as well as via 8-K on the SEC's website I'm joined today by Jessie Singh, Our Chief 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 1995. These 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 first fiscal quarter of 2022 as filed with the Securities and Exchange Commission the.
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.
GAAP.
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 first quarter.
2022.
At this point I would like to turn the call over to Jessie Zheng.
Good morning, and thanks for joining us on today's call we're off to a solid start to fiscal 2022, delivering strong first quarter results and focused execution against our strategic priorities. We continue to see consistent demand across our portfolio and strong results.
<unk> from our initiatives and new products.
I'd like to take a moment to thank both our employees and supplier partners for their focus and dedication operating through a challenging and complex environment. Their commitment has allowed us to continue to meet end market demand and uphold high service levels, providing an industry, leading customer experience and a difficult.
<unk> environment.
<unk> momentum is driven by a clear and focused strategy to revolutionize outdoor living and create a more sustainable future. We have been operating with a specific set of initiatives that include <unk>.
Driving above market growth and accelerating material conversion by investing in new product innovation and expanding our downstream focused sales and marketing team.
Expanding our margins through the use of recycled materials, and our manufacturing processes and through our continuous improvement programs.
Positively impacting the world through our commitment to ESG stewardship.
Investing in our core strengths, which include brand material science integrated manufacturing and customer connection.
We continue to see a strong underlying market driven by positive demographic trends, increasing focus on outdoor living and the ongoing conversion away from wood.
Awards are types of low maintenance high performance alternative materials.
In decking as an example, we see our market opportunity is almost five times the current market, including would we see a similar opportunity in other segments, such as exteriors, where we have seen strong momentum in wood replacement.
Our core markets are nearly $9 billion currently and we see an adjacent opportunity within outdoor living of an additional $11 billion.
We also see an opportunity to positively impact the planet as well as our margins through the expanded use of recycled materials underpinned by our ESG ambition to divert and utilized 1 billion pounds of recycled materials annually by the end of 2026.
Against this market opportunity, we have a focused strategy and have invested in capacity innovation and new products people and acquisitions.
We believe that through these actions we have not simply delivered against our short term objectives, but we have meaningfully strengthened our position in the marketplace.
And the capability of the company to continue to meet and exceed our long term goals.
During the fiscal quarter, we saw continued demand across our portfolio and we benefited from our increased capacity to position the company for future growth.
Our capacity service levels, and new products have put us in a position to pick up additional share.
And accelerate what conversion in key markets.
We recently executed a successful early buy season this year with our pro dealers. During this process, we expanded our stocking positions at a number of key dealers.
We converted a number of new dealers to our products.
As a reminder, early buy is the process of engaging pro dealers in the winter months, where they decide which products and brands to stock for the following selling season, and where they place pre season or early buy orders to stage inventory prior to the building season, our success in this early.
Days of the season as a result of our continued focus on our customers increasingly reliable service levels, and our broad and differentiated portfolio.
As we exit the capacity constrained environment in the recent past we remain on the offensive and are pursuing new business opportunities that expand our channel geographic reach and customer relationships.
We also introduced a number of new products in the first quarter, including our timber tax Asac landmark collection, decking, and French white oak and timber tech edge Prime plus decking and dark cocoa, along with the new edge hidden cliff that fastener.
These products once again highlight our focus on leveraging our unique technologies to create beautiful natural looking products.
New capacity has allowed us to scale previously launched products more broadly and we are expanding the availability of our edge and landmark decade collections.
We will be showcasing a few of these at the upcoming international builders show in Orlando, Florida.
Alongside structure Pergola acts and Cabana X solutions. This newest addition to the APAC portfolio.
Our exterior business continues to deliver with good momentum and demand across its end markets.
The breadth of our exteriors portfolio, including our recently launched innovative attainable trim in shingle siding, both available with our paint pro technology is driving material conversion and share gains and historically underpenetrated markets.
Sales of these new product innovations have more than doubled in the last quarter with customers appreciating the low maintenance high performance characteristics of the products over wood competitors.
Our paint pro technology was launched in 2020 and highlights the strength of our new product development model and driving growth in our core and in Adjacencies.
Additionally, as customers become more aware and better educated of the performance characteristics and benefits of our <unk> trim and siding. It enables increased penetration of our broader portfolio as part of our focus on expanding our position in outdoor living and positioning ourselves and fast growing.
Adjacencies in December we acquired structure outdoor structure is a designer and manufacturer of high quality and innovative aluminum pergolas end cabanas.
Structure is the premium player in and identified market adjacency estimated to be nearly $1 billion.
And one that is experiencing similar long term secular growth and material conversion trends away from wood.
Structured products are highly complementary to our timber tech decades, and we know that each company's products are already being installed together on projects by contractors across the country structures products also enhanced outdoor hardscape is they have a strong presence in southern Smile states.
We believe this will further open new adjacent opportunities for our combined company.
Structure shares our focus on ESG with each of structures existing product lines being made from up to 50% recycled aluminum we plan to leverage <unk> expertise in sourcing operations research and development and material science to improve structures already impressive performance.
We also see significant revenue synergies from leveraging our combined portfolio across our broader customer base. We are excited to welcome structure to the APAC family and look forward to working with the team in the months and years ahead. In addition to structure in November we closed an acquisition of a.
Regional PVC recycler offering full service recycled materials sourcing processing logistics and scrap management programs.
The acquisition is a vertical integration that complements the return polymers team and add new sources of PVC scrap material, a key input and our polymer base decking boards and trim and one that will allow for continued progress towards our goal of utilizing 1 billion pounds of recycled.
<unk> annually by the end of 2026.
Going forward, we will continue to invest organically and through M&A to achieve both our business and ESG objectives. We are committed to investing ahead of the curve to put ourselves in a position to drive growth and increase conversion in the market.
As part of that focus we continue to make progress against our new capacity adds in our core facilities and our Boise facility Buildout, we successfully commissioned additional decking capacity in our core facility in Ohio and these lines are currently in production as a reminder, this combined with <unk>.
Previous phases brings our total completed capacity adds to over 55% against our 2019 baseline.
Our new Boise facility, our supply chain and operations teams have also done well to operate through a difficult environment. Since we have broken ground and we are on track on the build out of the facility with our modular manufacturing processes.
Boise is a strategic investment for the company and we will provide much needed capacity and flexibility and we are very excited by the additional opportunities with the Boise expansion will provide.
In total our announced decking capacity additions will bring our total capacity increase to 100% versus a 2019 baseline.
We also continue to be focused on expanding the depth and breadth of our team.
We recently announced the appointment of Dan Boss as senior Vice President of research and development.
Dan is joining us from <unk> industries and has a long career in R&D to positions of increasing responsibility and will be an asset to our organization.
Assumes leadership of our R&D function.
It will be focused on introducing the next phase of <unk> and Tim protect products to our already strong portfolio.
Another key appointment to the APAC management team Sam tool as our Chief Marketing Officer Sam.
Sam joined <unk> from California, Closets, where she served as CMO and drove significant growth by developing a multi touch point marketing strategy.
Increasing the use of digital tools and data and overseeing the production of award winning content.
We are excited by the timing of Sam's arrival as we continue to drive our next phase of growth and wood conversion.
She will draw on her collective in various experiences to improve the customer journey and expand our consumer driven growth engine.
We are excited about the addition of these two strong world class leaders, whose skills and experience will complement the existing management team and enable our next phase of growth.
Turning to first quarter results.
<unk> net sales and adjusted EBITDA increased 22% and 21% respectively. In the first quarter of 2022 over the same period in the prior year net.
Net sales in our residential segment increased 19% driven by a strong performance across our deck rail and accessories and exteriors business.
As a reminder, we exited 2021 with an improved channel inventory position and our growth in the quarter reflected more normalized seasonal demand and inventory.
Sell through in this traditionally slow part of the season grew modestly year over year, and notably accelerated into the month of December a particular source of strength was our decking business, which grew at higher rates than the company average.
As previously mentioned our exterior business also saw strong performance and continues to benefit from a concerted focus on new product development.
Our rail business continues to operate through material and supply chain issues, which constrained growth to low single digits as previously anticipated.
Net sales in our commercial segment saw a strong performance increasing by approximately 45% year over year due in part to pricing actions and robust demand in comparison to an easier comparable period last year we.
We saw particular strength in certain markets, including outdoor living marine industrial and semiconductor end markets.
As we transition to the outlook.
Want to provide some context on our results and typical seasonality.
<unk> fiscal first and second quarters are generally considered to be stocking quarters, and which distributors and dealers filled the channel with inventory in preparation for the start of the spring selling season.
We've had strong operational execution over the past few quarters and have successfully been able to support our dealers and distributors with increasing service levels.
Our distributors and dealers now have the inventory on hand to aggressively drive growth in the market. This has put us in a terrific position to service our customers and to incrementally pick up share heading into the balance of the fiscal year underlying demand or sell through will.
Determined net sales.
As mentioned earlier, we are excited by our progress through early buy and expect to see the benefits over the next few quarters.
This combined with our ongoing investments and pricing set us up for another strong year.
From a market perspective, we see continued favorable trends in our internal and external forward looking demand indicators.
APAC total website traffic increased double digits year over year and overall lead increased over 50% over the same period in the prior year ex.
Externally, our contractor and dealer engagement surveys reflect continued optimism with persistent project backlog similar to prior quarters.
Our confidence is underpinned by external demand indicators around repair and remodel activity continued interest in outdoor living.
And woods converged and accelerating over the past few years. In addition to these positive internal and external data points. We believe our focused strategy and consistent execution are continuing to drive success as witnessed by our strong performance in early buy.
Now I'll turn the call over to Pete to talk through the financials and guidance.
Thanks, Jessie and good morning, everyone before we get into the first quarter results.
I wanted to provide some color on the operating environment that we've been seeing in the last couple of months as expected.
And we continue to see strong price realization from our pricing actions that took effect at the beginning of the first quarter.
On the material side commodity prices have and as a general matter stabilized over the last three to four months and our major commodities polyethylene seems to peak late in the summer and early fall and has started to recede in the first quarter, while PVC prices appear to be flattening out this winter.
Certain specialty materials remained challenged from both a pricing as well as a supply perspective, we.
We are optimistic.
What we can see in the markets today supports the modest deflation assumptions that we adopted in our guidance. Our recycling strategy continues to be our defense against Virgin supply challenges and serves as a natural buffer to inflation our capabilities to source convert validate formulate and deploy.
Lloyd recycled materials in our manufacturing processes for PVC products continues to be a differentiator for US now, let's discuss our first quarter 'twenty two results in more detail.
Overall revenue was in line with expectations for the quarter, while margins were modestly better than expected given some inventory capitalization timing, we continue to see price realization offset material inflation dollars and start to get very close to offsetting rate as we expected and one into 'twenty two.
For the first quarter 'twenty, two we delivered net sales growth of 22% year over year.
<unk> hundred $59 7 million was strong and broad based growth in both our residential and commercial segments.
Gross profit for the first quarter of 'twenty, two increased $15 6 million or approximately 21% to $88 6 million gross profit margin rates decreased to 34, 1% in the <unk> 22, compared to 34, 4% in the prior year.
Adjusted gross profit for the first quarter of <unk> increased by $18 3 million or approximately 21% to $107 1 billion.
Adjusted gross profit margin percent decreased to 41, 2% and <unk> 22, compared to 41 eight in the prior year.
Selling and general administrative expenses increased by $9 7 million to $63 2 billion or 24, 3% of sales.
Adjusted EBITDA for the quarter increased by $10 1 million or up 28% to $58 5 billion adjusted Ebitdas margin rates for the quarter declined 30 basis points to 22 five from 22 eight in the prior year.
Net income increased by $6 6 billion to $16 7 million for the quarter compared to $10 1 million for the same period last year.
Earnings per share increased by <unk> <unk> per share <unk> 11 for the quarter compared to <unk> <unk> per.
Per share for the same period last year.
Adjusted net income was $28 8 billion or.
Or <unk> 18 per share for the first quarter compared to adjusted net income of $23 1 million or <unk> 15 per share a year ago.
Now turning to our segment results.
Residential segment sales for the quarter increased by $35 5 million or approximately 19% to $221 1 billion the increase was.
Was primarily attributable to broad based growth and deck rail and accessories and exteriors growing at comparable rates.
Residential segment adjusted EBITDA for the quarter increased by $10 7 billion or approximately 18% to $69 4 billion.
<unk> segment net sales for the quarter increased 11, 9 billion or 44, 8% to $38 6 billion yen.
The increase was primarily attributable to higher net sales in both the Viacom and Stratton products businesses.
Each grew well in excess of the company average we saw an acceleration of Viacom business with continued strength in outdoor living marine and semiconductor end markets Kadena, continuing a trend from the prior quarter.
Commercial segment adjusted EBITDA for the quarter increased by $1 4 billion or approximately 43% to $4 7 million from our balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $66 1 billion at approximately $146 7 million at Vale avail.
Both for future borrowings under our credit facility.
Working capital current assets minus current liabilities was $274 5 billion gross debt as of 12 31.
2021 was $467 7 million and our credit facility remains Undrawn net.
Net debt was $401 6 million and our net leverage ratio stood at one four at the end of the first quarter.
Capital expenditures for the quarter reached $65 million, largely driven by timing of cash outflows related to capacity expansion programs.
Net cash consumed in operating activities was $30 6 million during the quarter versus net cash generated by operating activities of $20 3 million during the prior year.
I want to provide some context to how we are viewing the second quarter, an early view of the second half as Jesse noted we believe the combination of healthier channel inventory levels improved lead times and strong early buy participation positions us well for the upcoming season we.
We anticipate that supply chain and logistics environment or main unchanged through the first half of the year and our teams are prepared to deal with that complexity as they have over the last several quarters.
<unk> did bring an added level of complexity to our business and supply chain in December and January and we are appropriately managing through it.
Commodity prices as we have mentioned have stabilized the availability of major commodities is improving gradually and we expect that to continue.
The current environment supports our assumption of modest raw material deflation in the back half of this year.
As detailed last quarter Reframed up the full year in two parts. The first half was slight margin dilution followed by a stronger second half with margin accretion excluding the impact of structure.
We still see the first half 'twenty two coming in line with our expectations and more importantly, we see organic business margin accretion in the second half of the fiscal year.
As a reminder, during first quarter 2022, we had moderate startup costs that drove 70 basis points of headwind into our reported margins finally with our latest acquisition of structure. We are excited to have acquired such a strong growing business and an identified adjacency the purchase price was $19.
<unk>.
And with revenue and cost synergies, we believe it will equate to a sub 10 multiple the management team and structure is terrific and they're incentivized to deliver for the combined company in the future years does that and we believe this business will grow at or above our long term residential growth rates and we believe it has the ability to.
Expand margins to approach our corporate average over time, while providing a strong return on invested capital to our shareholders.
Now turning to our guidance.
For full year fiscal 'twenty two we now expect consolidated net sales to increase approximately 17% to 21% year over year, including $40 billion of structure related net sales contribution or three points of growth to fiscal 'twenty two.
First of all the startup costs associated with our capital investment programs.
We expect to deliver approximately 18% to 22% adjusted EBITDA growth year over year, including nearly $5 million of structural related EBITDA contribution.
We see full year EBITDA margin dilution impact from the structure acquisition of approximately 30 to 40 basis points.
For the second quarter of 2022, we expect consolidated net sales growth of approximately 24% to 27% year over year, including approximately $8 million of structure related debt sales contribution from.
From an adjusted EBITDA perspective, which includes startup costs, we expect growth of approximately 17% to 20% year over year, including approximately 50 basis points of structure related ebitdas margin dilution impact.
The quarter also includes approximately $2 billion of startup expenses, which equates to approximately 50 basis points of our EBITDA margin as a reminder, given seasonality and other factors. We expect the acquisitions will breakeven from a profitability perspective in the quarter.
Looking forward for the entire business and similar to our commentary at last quarters call. We expect to see organic business leverage on our bottom line starting in the third quarter of 2022 accelerating throughout the second half of 2022.
To assist in modeling we are reiterating our expectation of approximately 180 million to $200 billion in capital expenditures for fiscal 2022, we continue to expect 21 million to $22 billion of interest expense for the full year.
Our tax rate for 2022 is estimated to be approximately 25%.
Our full year weighted average diluted share count is expected to be approximately 157 to 158 million shares I'll now turn it back to Jesse for some closing remarks.
Thanks, Pete as that has consistently outperformed over the last several years through strong focus agility and execution combined with relentless focus on our customers.
Our building upon that momentum and remain excited about the long term opportunities in front of us.
We have invested ahead of demand and are positioned to increase market share through an innovative and differentiated product portfolio best in class sales execution and a culture of continuous improvement.
Combined with strong repair and remodel activity sustained interest in outdoor living and an acceleration in wood conversion trends. We believe we will deliver above market sales growth and margin improvement.
Other words, we believe we are well positioned to win for the long term.
Thanks, again to all of our employees our partners our suppliers our customers and our contractors, we look forward to continuing to work together to build a brighter future.
With that operator, please open the lines 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.
In the interest of time, we would ask participants to limit themselves to one question and one follow up.
Your first question comes from the line of Philip <unk> with Jefferies. Your line is now open.
Good morning.
I was curious have you announced any incremental price increases since October November timeframe is that essentially the last quarter and stripping out some of the noise from the acquisition is the price cost margin recovery path tracking pretty much in line with what you thought appreciating it's a pretty complex environment to operate in.
Thanks, Phil This is Peter Yeah.
<unk>.
Ratio on price versus inflation here as we look at the remainder of the year is entirely intact with how we guided we still expect to see.
Price realization Cub.
Covering all four quarters of inflation dollars and we expect to your very late <unk> to start covering the rate and maintain that throughout the back half of the year as.
As far as any additional price increases.
Did take some very small targeted increases as part of our year end kind of price maintenance process.
And really it was a very select products really those.
<unk> impacted by the <unk> 'twenty, one PVC increases that were a result of the hurricane Ida situations. So again in total was price increases were very nominal compared to our 2021 price increases.
Got it that's really helpful.
What does this recent acquisition that you made on the recycling side do you on the capabilities and.
In terms of where you are going to shake out from a recycling goals standpoint, I think last quarter, you were kind of at 54% to 56% range, if I remember correctly and any color how to think about the EBITDA EBITDA contribution from this deal.
Yeah. So I think first and foremost what this acquisition provides us secure sourcing of the product.
So this is a great Avenue for US first and foremost again to help get bring in some high quality recycled PVC second thing as it adds capacity and just material flow that we think over time. This acquisition increases our PVC recycling capacity and access to products that by about <unk> <unk>.
Proximately, 20% as far as an impact on 'twenty two the way we're thinking about it is we would expect a modest cost savings in <unk> 'twenty two but the bulk of this is really going to be a 2023.
Impact and that's really just due to the formulation and validation work that we will be starting here this quarter and carrying over into the third quarter.
Okay. Thanks, a lot.
The only the only thing I would add to that is is the addition of <unk>.
Our new capacity has allowed us to return our focus on expanding our use of recycled materials and so we are now able to both service our customers.
And <unk>.
Expand our formulation work so we're not going to guide specifically, but we're in a really good position now as we look out over the next few quarters to continue to expand our use of recycled materials and obviously this is helpful Alright.
Alright got it thanks, a lot Jesse.
Your next question comes from the line of Matthew Bouley with Barclays. Your line is now open.
Good morning, everyone. Thank you for taking the questions and for all the detail in the prepared remarks as always.
So as that capacity has come online.
It sounds like you've made real tangible progress in improving service levels and if I'm hearing you.
Correctly your ability to target new customers is really crystallizing. So can you outline a little bit what that new customer opportunity is are there any pricing implications from going after new customers in.
I guess, specifically if there is anything embedded in the revenue guide related to that thank you.
Well clearly the addition of capacity.
Improved service gives us an opportunity to make sure that we service our existing customer base and that's really provided a benefit and that we are now fully able to service.
Current demand.
April to meet the demand that we've built out.
Over a number of years, but as you pointed out we're able to now incrementally take on additional business.
So I would break it into.
And to really three different chunks.
The first one is we've had opportunities to add.
To our dealer network both in depth at our existing dealers, but also add new dealers that really see the benefit of our differentiated product we've had a constraint in that over the last few years.
We were more able to do that.
This particular early buy season and as such we.
<unk> gained additional position I think the second component is when you are constrained on capacity as we mentioned on the last call we haven't fully been able to.
Our launch our new products and specifically, we called out in the prepared remarks, our edge product line Prime plus and Prime in addition to our landmark product line in our more premium segment, both those products have been constrained.
Even though they have been launch.
We now have an ability to to unconstrained that which will lead to natural.
Natural growth and really the third bucket is.
Is really around let's call it newer channels.
And expanding geographically and I am not going to get into specifics there but.
We do have additional opportunity over the long term that we can now aggressively go after so.
<unk>, two buckets, where I can provide some clarity and then I'll leave you a little bit of a bumpy third bucket.
Okay, well, that's great detail there Jessie thank you for that.
So I want to follow up on the on the acquisition of the PVC recycler, but maybe at a higher level.
Obviously, you did return polymer is a couple of years ago I, just think it's important to kind of lay this all out.
Helping investors kind of understand what youre doing on the PVC side. So can you kind of frame for us just the state of the PVC recycling market as it stands.
And then just generally how your own efforts to do this internally will sort of expand that opportunity overtime. Thank you yeah just taking.
The recycled market at a high level. So if you look at power.
Really deal with two streams of recycle as you as you mentioned one is on the polyethylene side.
And that is a relatively well developed market whether it be high density Polyethylene award low density polyethylene or the variance in between.
So there is an established market as we look at the.
PVC market. It is just a less established market there are less players able to use recycled PVC and as such there is an opportunity for us to continue to.
To build out our own capability and build out our use of recycled PVC and and it's just a less developed market and in that environment. It's really important that we continue to build our own infrastructure to be able to access all of that material thats being landfilled and so.
It is really important for us that we continue to build our own internal capability to source to process and to utilize.
Increasing amounts of recycled PVC and this is just another step in that direction. In addition to previously announced capital expansions that we have ongoing at our existing facilities and we didnt return polymers.
Wonderful well, thank you for the color and good luck.
Appreciate it thank you.
Your next question comes from the line of Tim <unk> with Baird. Your line is open.
Hey, good morning, everybody.
Maybe just on back on the early buy programs Jesse.
I guess, what drives the dealer to stock inventory versus versus the competitors. It's been availability at this point or is there kind of payment term incentives in <unk>.
I guess, just wondering what the restocking convergence it does seem like you'll be able to kind of gain sellout share. This year. If that's the idea so am I correct in assuming that.
Yes.
Any time.
So let me answer.
That last question first obviously being able to have access to more.
Position in the market and more availability and more access to shelf space.
You would hope that that would convert to.
Ongoing.
Both in the market <unk>.
Key execution point is not only getting on the shelf, but doing what we do and what we're most proud of which is working with our contractors working with consumers to make sure. They see the value of the products. So that we can pull it off the shelf, but clearly it is a.
In our mind, a positive step in the process of continuing to drive share against.
<unk> wood and other types of materials relative to the decision process.
Every.
Every one of our partners has a different set of criteria typically.
These are reasonably sophisticated and well sophisticated companies they want to make sure. They partner with companies that have the ability to provide good service the ability to have a product thats going to sell.
And also the ability to continue to work with them to grow their business and I would say in a lot of cases those are.
The major drivers.
Combination of service the right products and the ability to drive their growth in the marketplace for the long term and that's really.
With our more realistic looking.
Checking product and our better wood conversion exteriors products.
We are able to provide a better long term value incrementally on the incentives we operate.
Within a reasonable set of incentives to make sure that we're supporting.
Long term growth, but in general, we're not a price driven or incentive driven kind of a business. Our dealers are sophisticated enough to know that they are building something for the long term.
Okay. Okay. That's helpful. And then I guess, just just on the year around SG&A as a percentage of revenue.
How would you kind of balance that relative to maybe revenue growth and kind of maybe some increased brand spending as you've as you kind of.
Can you kind of increase that as you layer in capacity.
Okay.
Well look I think in the back half of the year. We will continue as we have through the first fast to make strategic investments in sales and marketing we are a growth company and so.
That has stepped up a bit in the first quarter year over year.
Especially with a more normalized kind of timber Tech championship event, but again as we see.
Creating our own demand in the back half of the year marketing its going to be a focal point here throughout the year.
Okay could you get leverage.
Great I'll just ask.
Jim.
I'm, sorry, I will just add Tim I think it's important for us to continue to support our growth.
Part of this is being appropriate on on leverage but a key part of it is also if we see opportunity where we're going to continue to.
Invest against that opportunity as we're building this for the long term I'm, sorry, I cut you off there Tim on your second question.
Oh, Yes, no I was just wondering would you be able to get SG&A leverage this year or do you think it might grow just a little faster than sales.
Yeah, I mean, historically, we've kind of articulated the ambition that in most years, we'd like to see ourselves get modest.
SG&A leverage.
Okay, Okay, that's not going to be so all of a sudden every quarter, but it is a year that's kind of our ambition.
Okay, Okay, great well, thanks everything guys appreciate it.
I appreciate it thanks Ken.
Yeah.
Your next question comes from the line of Michael Rehaut with Jpmorgan. Your line is now open.
Hi, This is Maggie on for Mike.
Just a couple questions related to the capacity expansion.
I believe you said in <unk> startup costs were a 70 bps headwind in there it is expected that.
50 bps in <unk>. So as you go through this year what is your full year guidance contemplating in terms of.
The startup costs.
And yes, so let me take yes go ahead.
Yeah.
We kind of articulated on our full year guidance call.
We're looking at $8 million to $10 million I think that's still the right range for the whole year, which sort of implies that dilution range of kind of call. It 50 to 70 basis points.
Got it and check in another quick one.
As the capacity comes online you mentioned is <unk>.
Three buckets of kind of sales growth opportunities in the third fuzzy Buck.
You didn't want to get into.
Newer channels and expanding geographically do you have any sort of a timeframe on when you might start exploring those opportunities.
More.
Yes.
I think the key for us is.
If you look at our portfolio of growth actions right Dow.
<unk> sales and marketing continued.
To expand our channel new products and acquisitions.
That that portfolio of actions on growth is just something we are continually.
Working on and I just want to highlight a lot of what we do may seem transactional but.
Even in the situation, where we had some positive early buy wins, we've been working with those accounts for.
A couple of years and in some cases multiple years. So I think the way to think of our growth scenarios is.
We do things continually and we're doing things over the long haul.
Buckets I talked about so it's an ongoing process and as we have.
This additional capacity, we can we can execute against it and that's something I referred to on the last call.
Got it thank you.
Your next question comes from the line of Ryan Merkel with William Blair. Your line is now open.
Thanks, and good morning, Jesse first off I was hoping you could address two concerns that investors have potential for pull forward demand just given everyone rush to do outdoor living and then also higher prices, if theres going to be any impact on demand from that.
Any evidence what's your view.
Yes.
As we've looked at our.
As we've looked at our leading indicators.
And our.
Our activity in the market there has been really nice consistent.
Activity in growth and as we talked about during the <unk>.
The calls over the last 18 months, we do believe that as people continue to use our types of materials. So take <unk> as an example.
As they focused on outdoor living they continue to expand the use of our types of materials. What you see is that that material on the ground leads to other people trying to.
Being aware of that material and using that material and it gets back to that neighborhood effect right someone in your neighborhood Hasnt has installed our products <unk> got a beautiful timber tech deck. The perception historically may have been composite has been looked at good neighbors come over.
And they start then moving in that direction. So clearly the activity that we've seen.
During the pandemic has led to a greater interest and we see that as an opportunity as basically additional.
Locations that can drive additional growth I think some of the volatility that youre going to see in some of the numbers quarter to quarter.
Across our industry. It has as much to do with channel fill.
And I think if you Peel back the underlying demand you would see pretty strong consistent demand.
Quarter to quarter.
And as we project moving forward.
We continue to.
Assume that that kind of activity.
We will continue and I forgot your second question I'm sorry.
Just higher prices have you seen that impact demand, maybe even for PDC.
It's such a high end product.
Any risk there.
Yes.
Yes.
As we've looked at our activity in the marketplace and.
And we've done a lot of analytics related to our value in market of our products.
We continue to see a great value proposition.
Each of the categories that we play given the pricing that we have and we continue to see that play out we have not seen a slowdown of momentum and just as a reminder, if you go to our investor deck, you can see on a relative basis the cost of our types of material on a deck are a small part.
<unk> of the overall cost of the deck.
And we have multiple pricing options.
Depending on on where our consumers are I think the other key thing for US we've got such great looking products that we do tend to skew a little bit more to a less price sensitive consumer, especially as you're looking at.
At the at the price over the long term and we see a similar opportunity.
As as we're driving would penetration in wood conversion in our exteriors business.
Got it Thats helpful. Alright, and then a quick follow up I know guidance for the year assumes high single digit volume growth and my question is if sell through was stronger do you have the capacity to deliver upside to that high single digit it sounds like yes, but I just wanted to confirm.
Yes, yes, I mean, our capacity right now we are now when we mentioned this on the last call that that was going to be the case the case with the additional capacity that we have brought online.
In in our fiscal first quarter, we now have.
The ability to meet and exceed.
Production against what we see as our future demand profile and we have additional capacity coming online so.
We are very much in a in a position where.
Which is where we said we wanted to be where we can service meaningfully larger volumes for.
For this year and certainly into next year.
It's great to hear I'll pass it on thanks Jessy.
Okay.
Your next question comes from the line of Susan Mcclary with Goldman Sachs. Your line is now open.
Thank you good morning, everyone.
My first question good point.
There's been a lot of.
Just sort of uncertainty around the housing market in general as we face the potential for a rising rate environment can you talk about the ability to continue to drive growth even if the housing complex it does change.
With that any commentary on how most consumers tend to fund these projects and what is the role of them having to perhaps borrow against the house or other methods of them sort of financing these things.
Okay.
Yeah Yeah.
That on the latter comment we typically don't see.
Our consumers and this is it's hard to get exact data, but on the on the data that we have we typically don't see consumers financing or types of repair and remodel projects.
Drawing on the equity of their homes.
And then relative to the macro environment.
On a relative basis and youre going to hear this probably from a number of building products and homebuilder Ceos.
And earnings call on a relative basis.
We still see incredible strength in this particular segment.
If you look at the dynamics of.
The interest rate environment. We're in it is still at historically low levels, we see a historically low level of inventory on the market. We see really strong housing values and we continue to see the demographic.
Dynamics of more homeowners coming into the market and for the foreseeable future from what we can see from the data.
We are the housing sector in the repair and remodel sector.
<unk> is in a nice position to <unk>.
<unk> focus and growth in the future and I think more specifically at our sector youre dealing with a increased focus on outdoor living and you're also dealing with the opportunity that we have that I mentioned on the call that we will talk about probably on every call which is there is a lot of sales right now in Prague.
That should be our types of products right.
We continue to see.
An opportunity to convert wood and all of our products and convert other types of materials and so against that backdrop.
Theres certainly interest rate noise, but we continue to see a multiyear opportunity here with the combination of the macro environment and then our more specific environment, which is driven by material conversion new.
New products and are focused on outdoor living.
Okay. That's very helpful color. Thank you and then following up you talked a lot about the exteriors business in your commentary can you give us a little bit more color on your ability to service that market and how youre thinking about the future growth rates, there and any other sort of upcoming initiatives that we should be aware of or thinking of.
Yes.
We're really excited by.
What we've been able to do in that business. As a reminder, in that particular business. We have two major brands, <unk> and <unk> and and both of those brands bring innovation.
Market.
And that innovation is is really driven around driving contractor productivity and driven around providing a great alternative.
Two to wood and if you think about all the aging of the home.
It's that the paint peeling on your trim that there could be some of the most annoying and the <unk> on the outside of the house and we have solutions that drive contractor productivity and.
And at the same time provide a terrific consumer benefit.
Against that we continue to invest in new products, we continue to invest in channel expansion.
And we continue to invest in our downstream sales and marketing efforts.
With.
Not only with consumers, but the other elements of.
The chain and as as I pointed out in my prepared remarks, we're really seeing benefits of that once people get used to.
Using our types of materials in new geographies they tend to.
It's not a onetime purchase they tend to use that material and then they tend to expand the use of that material and so we're excited by the beachheads that we've continued to establish over the last year and expect to continue to establish relative to specific growth rate we haven't guided.
On that particular business outside of our deck rail and accessories business and now our <unk> business, but we all we view that the growth opportunities are similar.
And all of our outdoor living and residential businesses.
Thank you that's very helpful and good luck with everything.
I appreciate it.
Your next question comes from the line of Kian <unk> with BMO capital markets. Your line is now open.
Good morning, and thanks for taking my question just a first question on the structural acquisition, you know kind of what sort of what makes this an attractive category as you guys look at the broader outdoor living space.
And maybe talk about the material conversion opportunity. That's in front of you when you look at sort of the.
<unk> in the Gabon us business and even the kind of the multiyear margin improvement run rate.
Yeah.
Take the.
I'll take the market.
<unk> touch upon.
What we've done with other acquisitions and the margin progression there.
So the way to think of it and what got US our project named on for this particular acquisition was called project Sky.
And I think it's apropos right. So right now we produce.
Actively in outdoor decking product, which is the flooring, we got an exterior product, which let's call. It the walls of an outdoor living space and as.
As we as we continue to look at framing outdoor spaces.
From creating an outdoor room.
A pergola is a natural kind of demarcation.
And what structure really is about is creating comfort in outdoor living spaces right. Its got a louvered system. It can let the sun in.
When it's sunny it can louvre to protect from the elements, if it's rainy and what it does is it's a natural step to creating comfort in the outdoor area and it's extremely complementary to what we have now we have some custom pergola kits.
And so on that are that are out there right now.
But this really gives us scale in that market and as you think about the long term conversion opportunity most per deal is right now.
Are constructed in a in a what we call stick built way right.
It's fabricating products, whether it's out of aluminum.
Or or out of wood and in some cases also out of out of APAC adverse attack, but it's really a fabricated process, whereas.
What structure is doing is really.
Making that process much more efficient and in their higher end products, making it more customizable.
<unk>.
And as we move to some of the other products will show at the builder show. It's more of a standard solution that can quickly be assembled on site and so as we highlighted we view the opportunity.
As of really creating these outdoor overhead.
<unk> is an cabanas.
As a growing trend think about think about houses how much time, we spend outdoors think about the other spaces that are out there in the commercial businesses.
This is a $1 billion market opportunity and we also view the opportunity to create a lot of synergy with what we're already doing and what they can do and I think the other thing Thats presents US is as I mentioned on the call. They their products also go down on Hardscape right and so it allows us.
To get at certain geographies, where there may not be a deck on the ground, but certainly they need some of the other aspects of what we can provide so.
And relative to the margin structure.
I'll turn it over to Pete for just a couple of quick comments there.
Yeah. Thanks Steven.
Ultimately look the margin expansion story for structure is very similar to <unk>.
The levers that we see point as a team together.
I would put in a couple of buckets first and foremost growth we.
We feel like we can accelerate an already fast growing business given our strength in the channel on our contracting partners. So certainly helped me with just leverage with faster growth second bucket I would call sourcing.
As we know.
We've got a meaningful aluminum rail business ourself, and we look at the synergies together and purchasing power.
There's a way for us to buy more efficiently and effectively on a combined basis.
Third one is just I think our ability to kind of drive some of the Ames kind of ops toolbox and so the structure business I think is going to help them drive more productivity and probably overall just stronger throughput.
In a way that they support their growth looking forward and then the last bucket I would kind of say is again very similar to <unk>.
And this pricing slash commodity situation or the structural opportunity.
Opportunity with margins that the structure team is priced for value in the peripheral space and as aluminum sits here at historically very high prices.
When it receipts, we see that same opportunity that we have on PVC that their pricing is going to be pretty sticky and they should have an opportunity again to kind of more meaningfully changed their margin structure.
Got it that's very helpful color actually on the door.
Yeah.
Your next question comes from the line of John Lovallo.
Sure with UBS. Your line is now open.
Good morning, everyone and thank you for taking my questions. The first one and maybe a few Pete is can you quantify how much polyethylene depletion you experienced on a quarter over quarter basis, and then how does this compare to what's embedded in the full year outlook.
Yes, as we mentioned.
We're not expecting a lot of deflation in the second quarter, that's kind of what most of the indexes project and that's kind of what we see.
As far as what we're anticipating seeing in the back half of the year I kind of call. It net debt very similar to what we expected at the beginning of the year with our guidance I would kind of say.
If theres anything thats modestly different I would say, it's probably the slope on polyethylene deflation is probably a little slower, but there's probably an opportunity for a modestly more PVC.
But net net those are about a wash as we think about the business. So again.
I'd leave you with the takeaway.
What we can see in front of US here entering the second quarter I think supports the modest deflation that we've assumed in our guidance.
Okay.
Maybe just to follow up on that if we were to assume that polyethylene and PVC declined by call it 10%.
From today's levels, how much would that benefit second half margins.
Yeah I mean.
It's a good opportunity here for me to educate folks on you know when we think about our balance sheet lag as a business.
Let's start there so from a material perspective, a rollback typically it's three to four months and typically this time of year with inventory being a little bit elevated it's closer to the four months.
Where labor and overhead tends to be pretty constant throughout the cycle what about two months. So what that really implies is that ultimately if we see commodity prices drop more steeply but it comes after like let's say the middle of May it's.
Very difficult for us to really recognize or see any of that impact in our <unk>.
Two results it just becomes upside for 2023.
Got it thank you.
Your next question comes from the line of Trey Grooms with Stephens. Your line is now open.
Hey, good morning, Thank you for taking my questions.
So you just I guess the first thing is on the supply chain issues out there.
Omicron brought some challenges you mentioned in December and January .
Are you seeing any changes in that or are you anticipating any change in the <unk> guide.
Okay.
I think embedded in our second quarter guide is the fact that again some of the favorability in <unk> was sort of timing that works its way through in the second quarter and that we see the first half.
'twenty, two kind of expectations exactly where we expected so.
Crown was definitely disrupted but look the last year and a half to two years, it's been very disruptive from a supply chain perspective.
So what we've said on previous calls our teams have really done a nice job continuing demand assured no matter what the environment is and.
So we think we're well prepared.
From our own visibility here in January or as we get to the first week of February it feels like.
From an absentee perspective, most of our of the varying impacts on our crested in the third week of January and we're starting to now see that taper off so long. So we think the worst of it is behind us and we're optimistic about the second quarter.
Yes.
I would just stress I would just stress.
Our team.
We try not to use too many superlatives right and because we're doing our jobs.
But I think the team has done a remarkable job of managing through the volatility to the point that we're not talking about it much on the call.
There has clearly been a lot of moving parts relative to things like labor supply chain all of those elements, but we've been able to manage that.
Within the operating cadence of the business such that we continue to service customers uninterrupted, we continue to deliver against.
Our financial objectives.
And it really is an outcome of some really really strong operational management and and also planning for planning for the volatility, which I think the team has done a nice job of.
Great.
Thanks for that Jeff.
I guess earlier.
Dropped off the call. So apologies if you touched on this but.
I think you mentioned sell through grew modestly and accelerated through December that acceleration continue through January or.
What did you see there and then.
The full year guide assumes high single digit volume growth.
What is that for the assumption for <unk>, if you could.
Yeah, I would just say at a high level.
Relative to sell through.
As you know you've been around this industry, but.
We're in a we're in the low season.
Where.
There's still clearly activity, we still see strong backlogs, we still see contractors needing to work.
And we still see consistent sell through we're not going to get into specifics on either the quarter or.
What we see beyond what we've disclosed except to say that.
There is nothing inconsistent that we're seeing now.
With.
With our expectations and we feel pretty good about our ability once we get into the fall season to continue to.
To meet our growth objectives, and we are confident in our ability to achieve our guide overall, we're not going to parse kind of the volume or or anything.
Specific sell through especially at this time of the year. There is as you might imagine there is day to day volatility just based on you know.
The snow melted or the snow.
The snow fell but in general it's been good.
I understand that and I just wanted to touch on it because I thought it interesting given the time of year that it actually accelerated through December .
Given that.
It is a seasonally kind of.
Cold wet and holidays and that type of thing so anyway, just wanted to touch on it but thanks again for taking my questions and good luck.
I mean, it probably is it as much.
I think we're going to move to a more normalized conversation about the month to month sell through which will be a mix of kind of backlog and whether and.
And all those other <unk>.
Normal things at at this time of the year and so clearly we've had a backlog so.
We expect to continue.
Understood. Thank you again.
Your next question comes from the line of Mike Dahl with RBC capital markets. Your line is now open.
Hi, Thanks for fitting me in I have a couple of follow up questions around structure and Emma.
M&A or Adjacencies in general the first question kind of multipart.
And Jesse can you talk more about structures go to market what their channel exposure is like and.
When you look at your customer base your dealers your retailers what percentage of your customers already stock.
Some sort of a product like this and maybe could you also tie in what the capacity is currently for a structure and do you need to make additional investments there.
So let me let me start just at a high level structures products or products that are.
That are delivered to people that install the product.
And so the nature of a lot of the businesses.
The product is specified by someone who is going to install it.
The orders then go through and the product is delivered and in some cases youre using standard components and so those products are inventoried.
By the installer and so at a high level, where we see the current synergy is a number of our contractors our structure.
Right. So so they will they will.
Are they will source our types of products through their normal channel they'll work directly with structured to have those time kinds of products delivered so.
Then there is a there is there is another set of.
Folks that are structured dealers.
Dealers and installers.
Go to the website you can interact with one of them they'll come out give you a quote and do a really nice job.
Installing the product.
So that's at its current state.
Without getting too specific as we move forward, there's an opportunity to really.
Expand.
Our position and and structures position.
Especially with that contractor base that contractor base and in many cases, our contractor base, which is tens of thousands in many cases might just be.
Might just be using or building their own are designing their own or needing a product like <unk> like.
Like structure, so we see an opportunity from a synergy standpoint to continue to.
To build out those points of of.
<unk> deployment.
Leveraging our current network and working together with structures current networking and theirs I won't get into specifics, but theres a portfolio difference there is.
There's other implications relative to how we do that but over the long term.
<unk>.
There's clearly opportunity there.
Just Pete I'll, just take the capacity.
Comment very high level on structure structure.
Yes.
It's certainly at this point full.
It's.
There is an opportunity to work with the structure team to continue to increase throughput continued to reduce lead times.
To expand their ability to meet market demand.
And in some cases that might be modest capital, but in a lot of cases, it's just debottlenecking their current processing and so we see a great opportunity.
As a combined entity to not only get synergy.
On the.
On the margin side that Pete talked about through sourcing.
Working through our <unk> program, but we also see an opportunity to scale their production capability to better meet the needs of customers. Some of that has to do with just capital deployment, what I've been working capital some of that has to do with which naturally we have a greater ability to do and some of that just has to do with <unk>.
Continuing to invest in debottlenecking and improving their processes.
Okay, that's really helpful and then.
My second question or follow up.
A little bit more holistically.
You do have the aluminum rail business, but this is an acquisition that kind of takes you further into additional material conversion.
When youre getting into into metals aluminum when you look around the backyard of the house or the exterior of the house there is still a lot of different <unk>.
<unk> that would be potential for a material conversion.
How do you think about the broader opportunity and at this point in your lifecycle kind of how aggressive which can be willing to.
Kind of go after further maybe larger acquisitions in some of these adjacencies.
Hi.
We really like our business model, we like the opportunity for differentiated products.
Our.
Where we can get paid for the value that we add we like the opportunity for material replacement, we like the opportunity.
With the focus on outdoor living and and that secular growth trend and clearly at the structure actually acquisition highlights.
We also like the opportunity to continue to expand our position there we are comfortable already.
With the three material sets that we've talked about polyethylene PVC and aluminum.
This just builds on that.
And to your point over the long term.
We continue to see opportunities to be more relevant in that outdoor space.
But we're going to want to stick to the gross margin branded.
Price.
Profile that we've had and as we navigate through that we'll selectively look at acquisitions.
Acquisitions that meet.
Those criteria and I think as I've said prior to this most recent two acquisitions. If you look at what we have acquired in the past we're now at five acquisitions.
In the last few years, its probably indicative of the kinds of things we would look at.
In in the future and we just see a huge runway and a huge opportunity to become the player.
As as we look at driving growth in our market segment.
That's great. Thanks Jessy.
This concludes the question and answer session I will now turn the call back over to Jessie Zheng.
Really appreciate all of you.
Taking the time to join us today, and as always feel free to to.
Follow up with additional questions and for those of you that will be at the builder show.
We will have a.
Nice outdoor living area for for you to come spend some time with us. So thanks again for your time and have a great day.
This concludes today's conference call. Thank you for attending you may now disconnect.
Please wait the conference will begin shortly.
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