Q2 2022 Azek Company Inc Earnings Call
[music].
Welcome to the age that company's second 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 Chris Russell.
Please go ahead Chris.
Thank you and good morning, everyone. We issued our earnings press release. This morning to the Investor Relations portion of our website at investors Dot as Echo Dot com as well as via 8-K on the SEC's website I am joined today by Jeff <unk>, Our Chief Executive Officer, and Pete <unk>, Our Chief Financial Officer.
I'd like to remind everyone that during this call. We may make certain statements that constitute forward looking statements within the meaning of the federal securities laws, including remarks about future expectations beliefs estimates forecasts plans and prospects such statements are subject to a variety of risks and uncertainties.
As described in our periodic reports filed with the Securities and Exchange Commission that could cause actual results to differ materially we.
We do not undertake any duty to update such forward looking statements. Additionally, during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance.
non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
Reconciliations of such non-GAAP measures can be found in our earnings press release, which is posted to our web site. At this point I will turn the call over to <unk> CEO Geoffrey things.
Good morning, and thank you for joining today's call. The eight that came delivered record second quarter performance highlighted by a 35% increase in net sales.
A 27% increase in adjusted EBITDA over the comparable period last year we.
We have consistently posted strong results each quarter since our initial public offering in June of 2020 and have growing momentum as a company.
Since 2019, our last year as a private company, we have grown our last 12 months net sales and adjusted EBITDA by approximately 70% during an unprecedented time of labor.
By chain and raw material volatility in inflation.
While we are very proud of these results we continue to remain focused on the future.
And as a team we believe that the best is yet to come.
Our performance is the result of a clear and focused strategy to revolutionize outdoor living and create a more sustainable future.
Very proud of our experienced management team and what they've been able to deliver over the last few years, we consider our management team to be the most diverse and most experienced team in the industry and a key point of differentiation.
Our announcements on the promotions of John Kelly to President of our residential business and Morgan Walbridge, as our new Chief legal officer to highlight the strength and breadth of our team.
Over the last 10 years, our team and our strategy has delivered an 18% net sales CAGR and our residential business and expanded adjusted EBITDA margins.
As a reminder, the key elements of our strategy are one to deliver double digit above market sales growth by playing in SaaS growing markets benefiting from a material conversion opportunity and by launching new products.
Spanning our channel improving the customer journey.
And attacking adjacency through organic development and selective M&A.
Two two.
To expand our adjusted EBITDA margins through continuous improvement expanding use of recycle and selective use of price and mix to capture value.
Our third key element to our strategy.
Positively impact the world through our foundational commitment to ESG stewardship.
Purpose, driven strategy and by our core values.
Fourth.
Continuing to invest in our core strengths of bran material Science U S based integrated manufacturing and strong customer connections.
These strengths allow us to deliver a unique value proposition to the marketplace.
And build a sustainable.
And profitable enterprise.
The long term secular trends around our business are strong and underpin our confidence to achieve our guided revenue growth long term of 8% to 12%.
Repair and remodel has been and we expect we will continue to be driven by thematic trends.
These trends include the historic under building up homes.
Rising average age of U S housing stock.
A large millennial generation driving household formations.
Low inventory of homes to purchase and rising home equity levels, providing strong support for repair and remodel into the future.
We see the repair and remodel market contributing mid single digit growth so our growth algorithm.
We continue to see an acceleration in material conversion from wood to our types of low maintenance high performance alternative materials over time.
As stated in our earlier calls our research suggests that we are in the early innings of this ship with only approximately one quarter of the decking market converted to date.
This what conversion is an added development to growth in all of our markets and won't be an important aspect of sustained growth of the business through economic cycles.
As an example in decking, we believe that every one point of wood conversion adds an additional 3% to four points of growth to the overall market.
Outdoor living continues to experience increased attention and focus and we believe that unique environment over the last couple of years as increased consumers and commercial desire for outdoor living environments.
Given our breadth and capability to add new innovative solutions. We believe that we are well positioned to continue to win an increasing share of the dollars spent in this area.
Our recent structure acquisition is a terrific example of adding additional capability to provide a more complete consumer solution for outdoor living spaces.
We believe our company specific strategy across the breadth of our product portfolio will drive additional above market growth.
Collectively we are confident the repair and remodel market material conversion and outdoor living and as that specific initiatives will drive 8% to 12% long term growth.
More specifically this year, we continue to see incremental growth opportunity through new product development.
Our impression rail express product platform is a great example of this innovation leveraging ultra lots of differentiated time saving technology. The platform continues to exceed expectations and deliver growth in excess of 100% year over year in Q2.
We announced the introduction of a number of new products in the second quarter, both to broaden and deepen our already strong rail product portfolio. These products include vertical cable rail impression rail express and Matt Espresso in our classic composite rail series.
Both of these new product launches has seen strong initial orders and we will begin shipping and selling them in the next few months.
In addition to that earlier this month, we also announced the launch of Captivate, our new line of APAC exteriors pre finished siding and trim developed in collaboration with Watson, a premier distributor and pre finisher of building materials in the northeast.
The new Captivate pre finished trim and siding collection is designed to target and drive conversion away from wood and other interior materials in the northeastern market. While also saving contractors time in the field and enabling increased productivity.
On the recycling and ESG front, we recently announced an alliance with BTG recycle, a recycle or construction and demolition or C&D material baked in Mill Creek, Washington.
This alliance will expand as a full circle PDC recycling program to include the collection of PVC base, CND scrap, including PVC pipe and siding that traditionally would have otherwise reached landfills.
The alliance is another step toward <unk> long term goal of diverting and utilizing 1 billion pounds of waste and scrap annually by the end of 2026.
During the quarter, we were also able to start using our capacity to increase our formulation work on lower cost recycled material and we expect to see the benefits of these additional efforts in 2023.
The APAC company has also been named to Newsweek's 2022 list of America's most trusted companies ranking third in the construction industry. This recognition is a testament to the team's focus on our core values and unyielding dedication to and passion for our customers and our purpose.
<unk> strategy.
We also continue to make progress against our Boise factory build out and achieve key milestones over the last few months, including shipping customer orders out of our new fulfillment center and in April we started commissioning our first set of new decking manufacturing lines.
We anticipate the completion of Boise factory build out during the first half of fiscal 2023 at which time, we will have increased our capacity by approximately 100% over a 2019 baseline for our decking products.
We are bringing this capacity online in an incremental manner quarter by quarter, which allows as act responsibly states capacity, while we captured new growth opportunities.
As a reminder, this investment provides us with ample space to continue to cost effectively add capacity beyond this phase as needed in the future.
As part of our ongoing optimization of capital allocation, we announced today that our board of directors has authorized a share repurchase program.
While we continue to make substantial investments in growth, we believe that our model will generate additional excess cash flow that could be deployed to add additional shareholder value.
The program will allow us to repurchase up to $400 million of shares and we expect to invest approximately $50 million and an accelerated share repurchase in the first two months of the program.
Now turning to second quarter results.
<unk> net sales and adjusted EBITDA increased 35% and 27% respectively over the same period in the prior year.
Net sales in our residential segment increased 34% driven by strong performance across both our deck rail and accessories and exterior businesses.
We saw strength in decking, and exteriors, where innovative products such as our higher recycled content trim and sheet products grew significantly in Q2.
These products are high and recycle content and were developed specifically to compete against non PVC trim materials, including wood and wood composites.
We benefited from our increased shelf position with the pro channel as this channel continued to show healthy demand.
The quarter consistent with what we've seen over the last 18 months.
We have benefited from incremental decking capacity coming online each quarter.
This new capacity and our already strong service and exteriors and trim has put us in a position to provide best in class service to our partners.
The integration of our recently acquired structure hurdle of business continues to progress well with top line results growing over 90% year over year in Q2, and a healthy backlog heading into the next few quarters.
While primarily a residential focused business structures products are also sold into commercial settings, such as restaurant and hospitality, which were particularly strong in the quarter.
We saw similar trends in sales to commercial and multifamily residential setting for our ultra relax railing business.
Net sales in our commercial segment saw a strong performance increasing by approximately 48% year over year, driven by a combination of strong demand and disciplined pricing actions to offset inflation.
We saw continued strength in end markets, including outdoor living marine and semiconductor.
Backlog for this business remains at near record levels and the margin recovery continues driven by our team's focus on productivity combined with pricing actions.
As previously guided our adjusted EBITDA margin was impacted during the quarter.
By the price versus commodity lag startup costs and the impact of our recent acquisition of structure.
As stated last quarter, we expect to bring the overall EBITDA margins of structure into the Twenty's in fiscal year 2023.
As we turn to the outlook, let me provide some context on what we're seeing in the market in the period, we are entering.
Internally, we continue to monitor demand signals and these all continue to show positive trends with key leading indicators showing increases over an already elevated base in the prior year.
While we did see a reduction in generic composite decking searches sample orders grew high single digits year over year and leads in Q2 were up double digits over the same period in 2021.
Our dealer and contractor surveys point to continued growth expectations.
With extended backlogs similar to prior quarters.
These signals are consistent with what we're seeing externally across our markets.
While we recognize that the macro environment has shifted over the last few months there continue to be strong backlogs.
Favorable thematic trends, including strong housing values and ongoing material conversion.
Third party industry projections show sustained larger ticket repair and remodel spend as homeowners stay in their homes longer and invest in new spaces to extend the livable space of their existing homes and make them more comfortable.
In addition to addressing a lifestyle trends outdoor living spaces are a cost effective way to increase the livable area of a home.
Before Pete provide more detail on our outlook I wanted to provide some context for our top line and margin Guy as we enter the second half of the year.
As a reminder, in the second half of fiscal year 2020, we were unable to fully meet demand and compressed our channel inventory.
In the second half of 2021 as new capacity came online, we replenished our dealer and distribution inventory leading to an improved channel inventory position as we exited 2021.
As previously communicated we will be lapping more than $60 million of this channel inventory replenishment in the second half of 2022, and our guidance reflects that elevated year over year comparison.
During the second quarter. We also saw an additional $40 million of annualized inflation, primarily driven by the effects of the recent conflict in Europe , bringing the total material inflation to approximately $250 million.
We have offset all of this inflation with pricing and productivity subject to the approximate one quarter timing lag that we experience in the channel.
As the lag subsides, we expect net price to raw material to be a benefit to margins in fiscal 2023, as we see the full benefits of our actions.
With this context I'll now turn it over to Pete who will take you through the financials and guidance.
Thanks, Jessie and good morning, everyone before we get into the second quarter results I wanted to provide some color on the operating environment during the quarter.
From a revenue perspective, as Jesse mentioned, the bulk of our demand indicators point to positive trends with construction activity in line with last year's record levels and contractor backlogs at elevated levels.
In the fall, we established great shelf position at dealers heading into the building season, we expect that our strong service levels will only strengthen as we continue to bring online incremental capacity during the second half of the year positioning us for best in class service to our customers.
From an operating perspective, we continue to execute in a challenging environment, we started the quarter and manage their way through six weeks of Covid disruption on the plants as you recall.
We exited last quarter with healthy commodity availability and stabilizing input cost environment.
During the second quarter availability remains strong, but inflation picked up in the supply chain primarily caused by the disruption from the conflict in Europe , We will talk more about the industry leading actions that we've taken in response to this changing environment.
Outlook section later on.
Finally, as we had previously communicated we expect that our price commodity inflation relationship to be positive on a dollar basis, but lagged on a rate base. During the second quarter. We are excited to report that even given the supply chain challenges we delivered the first half in line with our guided expectations.
For the second quarter of 2022.
We delivered net sales growth of 35% year over year to $396 3 million was strong and broad based growth in both our residential and commercial segments. These results are a testament to our team's ability to manage through any environment.
<unk> gross profit increased by $24 6 million or approximately 25% to $122 5 million <unk> 22, gross profit margin rates decreased to 39% versus the prior year of 33, 4%.
<unk> adjusted gross profit increased by $29 1 million or approximately 25% to $143 8 million, while our <unk>.
22, adjusted gross profit margin decreased to 36, 3% compared to $39 one in the prior year.
Note in our GAAP results, we incurred $1 2 million of inventory step up adjustment expense related to our recent acquisitions.
Selling and general administrative expenses increased by $10 7 million to $70 8 million or 17, 7% of sales.
Adjusted EBITDA for the quarter increased by $19 4 billion are up 27, 1% to $90 9 million adjusted.
Adjusted EBITDA margin for the quarter declined to 150 basis points to $22 nine from 24, 4% in the prior year note that <unk> <unk> dilution impact from acquisitions was 90 basis points and startup costs were another 60 basis points.
Net income increased by $13 2 million.
To $35 8 million for the quarter compared to $22 6 million in the prior year.
Earnings per share increased by <unk> <unk> per share to 20, <unk> for the quarter compared to <unk> 14 per share in the prior year.
Adjusted net income increased by $11 4 million to $50 8 million or <unk> 33 per share for the second quarter compared to adjusted net income of $39 4 million or <unk> 25 per share a year ago.
Now turning to our segment results.
Residential segment net sales for the quarter increased by $88 2 million or approximately 34% to 354 billion <unk>.
The increase was driven by strong growth in both our exteriors and deck rail and accessories businesses, along with $16 million and structure related sales.
Residential segment adjusted EBITDA for the quarter.
Increased by $16 7 million or approximately 20% to $98 4 million.
Commercial segment net sales for the quarter increased by $15 million or approximately 48% to $45 9 million. We saw both commercial businesses grow in excess of the company's average with exceptionally strong growth in Viacom lifetime.
<unk> Com continues to see strength in outdoor living marine and semiconductor end markets.
<unk> segment adjusted EBITDA for the quarter increased by $5 billion or approximately 134% to $8 7 million.
From a balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $25 8 million.
Approximately $107 2 million available for future borrowings under our credit facility.
Working capital.
Defined as current assets minus current liabilities was $347 3 million.
We ended the quarter with gross debt of $564 9 billion.
Which included approximately $57 million of capital leases and $40 million drawn on the credit facility.
As a reminder, our fiscal <unk> is typically our seasonal high point from an AUR perspective, driven by extended terms offered to customers during the winter months.
We expect cash from operations to build in the following quarters.
Net debt was $539 1 million and our.
Net leverage ratio stood at one eight times at the end of the second quarter.
Subsequent to quarter end, we completed the refinancing and upsizing of our term loan B in April 2022.
Through the transaction, we refinanced our existing term loan b, a $467 7 million of principal with a new $600 million term loan B E.
The excess proceeds plus associated fees and expenses once our balance sheet to be utilized for general corporate purposes.
Subsequent to the close of the quarter in May 2022, our board of directors authorized a share purchase program. The program will allow us to repurchase up to $400 million in shares over an indefinite period.
We expect to invest approximately $50 million and an accelerated share repurchase in the first two months of the program and just to Echo <unk> points, our capital allocation priorities remain the same as we previously discussed we will continue to invest in our business, both organically and Inorganically and to the extent we have X.
<unk> cash flow, we will look to repurchase shares opportunistically.
Capital expenditures for the quarter.
$48 7 million largely driven by timing of cash flows related to our capacity expansion programs.
Net cash used in operating activities was $36 9 million during the quarter versus net cash used in operating activities of $12 2 million during the prior year.
As we turn to the outlook, let me provide some context and color on what we're seeing as we enter the quarter.
First some comments on the topline as we communicated on our fiscal year end call in November and included in our original guidance, we delivered strong sales in our residential business. During the second half of 2021, as we built inventory levels back up in both our dealer and distributor channels.
Our second half revenue growth rate was approximately 40% year over year in the residential segment and included strong organic growth combined with approximately $60 million of inventory replenishment during the period.
Which we began lapping this third quarter.
On the cost side as I mentioned at the beginning of my remarks commodities, which were starting to moderate in <unk> 'twenty two began to rise in the second quarter.
As we have in the past, we led the market with pricing for inflation coverage.
Took a an incremental pricing action in the second quarter.
In the mid single digits range that will start to benefit our results in late may to counter the cost headwinds.
Similar to historical pricing actions, we will experience a 60 to 90 day lag in price realization as pricing actions work through the channel.
Due to the lag we will not offset all the incremental inflation in the second half of 2022. However, we believe we are well positioned for fiscal 2023 as our pricing actions in 2022 should bring us favorable net recapture of 30% to $40 million in 2023.
Consistent with recent history, we will continue to navigate the environment going forward and we'll respond accordingly.
Now turning to our guidance.
Our updated outlook for the remainder of the fiscal year reflects the solid demand trends and indicators we monitor.
For the full year fiscal 'twenty, two we expect consolidated net sales between one $3 9 billion to $1 43 billion, reflecting a year over year increase of approximately 18% to 21%.
This guidance implies approximately 12% growth in the second half of fiscal year 2022 at the midpoint of our guidance range, while lapping $60 million of channel inventory replenishment in the second half of fiscal 2021.
Turning to our adjusted EBITDA guidance due to the incremental inflation pressure, we expect through the balance of the year. We now expect adjusted EBITDA between 316 million to $332 million, reflecting a year over year increase of approximately 15% to 21%.
We expect full year adjusted EBITDA margin dilution impact from the structure acquisition of approximately 40% to 50 basis points.
And 60% to 70 basis points from our Boise startup costs.
For the third quarter of 2022, we expect consolidated net sales between $384 million to $390 million.
We expect adjusted EBITDA between $78 million to $82 billion we.
We expect Q3, adjusted EBITDA margin dilution impact from the structure acquisition of 50% to 60 basis points and approximately 50 basis points from our Boise startup costs.
To assist in modeling we continue to expect approximately 180 to 200 million in capital expenditures for the fiscal year 2022.
We now expect $26 million to $28 million of interest expense for the full year with the increase driven by term loan refinancing and associated expenses with the transaction fiscal Q3, our tax rate for 2022 is estimated to be approximately 25%.
Our full year weighted average diluted share count is expected to be approximately 155 to 156 million shares.
Finally, before I turn it back over to Jesse we will host our inaugural Investor Day in New York at the New York Stock Exchange on Wednesday June 15th 2022.
We're excited to take the opportunity to talk to <unk> strategy and highlight our long term growth opportunities competitive differentiation and products and brands across the Asia company.
We will outline our strategy and growth drivers our financial strengths capital allocation strategy at other topics. We look forward to spending time with each of you and now I'll turn it back to Jesse for some closing remarks. Thanks.
Thanks Pete.
I would like to take a moment to highlight the tremendous efforts of our dedicated team members channel and supplier partners and contractors to support the as that company.
You once again for your continued focus dedication and your contribution to the results in the second quarter.
As we close the call before the Q&A session. It is clear why we are excited about our company and the opportunity that we have in front of US we have a stated target of double digit growth in our residential business and an EBITDA margin expansion target of 500 basis points.
We remain confident in our ability to achieve our goals.
<unk> is benefiting from strong tailwind that we believe are in the early innings of a long term growth and value creation opportunity.
When combined with our clear strategy and as that specific initiatives to drive incremental growth in the market. We believe that we are well positioned to win and deliver on our growth and margin improvement all while creating a more sustainable future.
Operator, please open the line for questions.
If you would like to ask.
Question Press Star then the number one on your telephone keypad, if he would like to withdraw your question again press the star one.
We asked today that you limit yourself to one question and one follow up thank you.
Your first question comes from the line of Keith Hughes with Trust. Your line is now open.
Thank you.
I guess digging into the raw material.
Acceleration discussed in the prepared statements.
It's heavily driven by PVC or are there other products.
What you've seen inflation, if you give me kind of proportionality that would be helpful.
Yes, Keith this is Peter the way I would think about it the bulk of it is centered around PVC aluminium and to some degree.
Polyethylene.
From the conflict, we saw PVC pop about 15% now settled about 10% up from our last few guidance, but on the aluminum side. It was a pretty sharp reaction up about 30 after the conflict and it settled out about 'twenty.
Okay. Thank you and one other question within residential can you breakout how much of the game.
Non acquisition getting with volume and how much was price.
Yes, I think on that one.
<unk> the question, but I'm not sure that we're going to parse out necessarily every quarter, our price versus volume versus mix or what I think I can say is look at our original kind of guide we.
Communicated roughly about half price and half volume and since then we've taken a very very small price action in <unk> 'twenty two.
Obviously, the B announced price increase here, its really only going to impact three or four months of the remainder of the year.
Okay. Thank you.
Yeah.
Your next question comes from the line of Tim <unk> with Baird. Your line is now open.
Hi, Good morning, This is Josh Chan calling in for Tim.
I guess my first question is on sort of the implied margin cadence for the second half.
So I guess it dipped a little bit in Q3, but it seems like margins are coming back pretty strong in Q4. So is it all because of the price cost timing and if so I guess could you talk to how that kind of sets you up for 'twenty three as well, yes, Josh. Good question. So as stated first half in line with expectations for <unk>.
<unk> perspective.
This is purely the nuance of us having basically three months of inflation without the price coverage as most of the pricing is not really coming in until June .
And so obviously it puts us back in place to deliver expansion both sequentially and year over year in the fourth quarter, and then obviously I get the benefit of.
That price carryover into 'twenty, three we're going to be winding up basically with three months of price without any inflation in 'twenty. Three so that's why we feel pretty bullish about the start to 2003, yes, I think we provided a lot of this is Jesse.
We provided a lot of detail on the call, but I think in the numbers that Pete gave during his prepared remarks, he tried to size that a bit as as $30 million to $40 million is as we move into <unk>.
As we move into next year.
I appreciate it.
Just to add on.
<unk> previous question is.
Yes, we price that those highs.
Right and obviously anything that we see in terms of receiving back.
To cover the initial movements after the conflict.
That's fair that's fair, Okay, and then for my follow up on the $60 million in restock comp in the second half could you just talk to how that kind of split between the two quarters is it kind of more heavily weighted to Q4 and is there. Some restock comp also as we look into Q1.
Okay. Thank you.
I'll take that one Josh.
I would just say the <unk>.
Slant is the impact on the 60 million slanted more towards the third quarter of 'twenty, one modestly then than the fourth quarter and as far as the first half of this year.
Look I would characterize our first half is normal right. The traditional cycle in the business is the <unk> is the quarter that you are preparing for the season and you're building inventory and I think what we would say is the inventory put in into Q is in line with historical days on hand.
Preparation for the season.
Great. Thank you both for the color and good luck for the rest of you.
Thank you I appreciate it Jeff.
Yeah.
Your next question comes from the line of Michael Rehaut with Jpmorgan. Your line is now open.
Good morning, everyone and congrats on the results.
The first question just wanted to make sure I was thinking about the $60 million of inventory and Phil from second half of 'twenty one correctly.
You're obviously guiding for.
Roughly I believe 17% to 20% sales in the third quarter, which would imply.
At the mid points.
Only about 6% growth in the fourth quarter.
Is the predominant amount of that $60 million from last year in the fourth quarter of 'twenty, one and if you could give a rough split of that that'd be helpful. Because it certainly appears that way based on the growth.
And also just bigger picture on growth.
How are you thinking about some of these new products that you've detailed earlier in the call as.
Be additive to sales I guess is it kicks into gear in the back half of this year and into next year.
Let me let me start this is Jesse and good morning, and thanks for the comments.
Relative to your macro comment.
First off as we think of new products those new products are really us planting seeds for the future.
And in certain cases, when those new products are launched in the core.
Like our new rail products, we would expect those products to continue to progress as we move through the season and in other cases for.
For example, our move into pre finished products.
That's really a progression that we'll see some benefit within this season, but it is really intended to be.
Building.
Platforms for the future and then just a general comment on our guidance as we look at the back half of the year.
As those of you that have gotten to know us.
Being.
Yeah.
Let's call it appropriately conservative.
As we look at revenue per <unk>.
Grass, we've clearly seen positive momentum.
We continue to see strong momentum and.
Having said all of that we're still early in the season and so I think as as we think of our progression.
Comfortable with our guide and it's consistent with with how we've guided in the past.
Taking into account all the different variables.
Okay.
So before I ask my second question.
Again, the is it fair to say based on the math that most of the $60 million is kind of bill.
Believes to be in the fourth quarter of last year.
Yeah. It was fairly balanced split between the quarters again, a little bit more in the third quarter, our prior year growth rate in <unk> for residential was 51%.
Followed by 31% in the fourth quarter Gibson.
Give some color okay.
Thanks for that I guess, just secondly on the.
Price cost tailwind into 'twenty three.
I believe you're talking about $30 million to $40 million.
Against the revenue base that you are expecting for fiscal 'twenty, two that would represent about.
250 bps of margin catch up let's say.
You're also looking at an implied margin in the fourth quarter.
In the high 20 fives and.
250 on the 23 midpoint would also put you in the mid 20 fives so is that.
Good way to think about.
Next year as we start.
Modeling in.
I'm not asking for.
Forward guidance on 'twenty three out of course, but.
Are there any other kind of let's say takes hum.
We should be considering in terms of any types of offset against that.
250 bps.
Price cost catch up.
Yes, I mean, I think the way we're thinking about 2023 has put volume aside I think the things that we can see that we can control I E price carryover the COO.
Gary over impact of M&A.
Regardless of what happens with volume with recycling, we kind of control our own lock to expand margin. So the things are in front of us that we can directly control, we feel really really good about 'twenty three as we sit here at the midpoint of the year I don't know if you.
Yes.
Sure.
Specifically within our guide for.
For 'twenty two.
Your interpretation is generally consistent where we are.
Sure.
We feel pretty good about what's ahead of us as we looked at 'twenty three.
As Pete mentioned we.
We certainly have some tailwind as we move forward and we're not guiding specifically, but we feel really good about.
Our ability to continue to execute.
As as we work our way through the lag.
Great. Thank you.
Your next question comes from the line of Matthew Bouley with Barclays. Your line is now open.
Hey, good morning, everyone. Thank you for taking the questions I wanted to ask on those leading indicators of demand that you mentioned at the top there Jesse you said.
Growth in some of the samples and leads and positive dealer surveys and all of that I think I also heard you say that.
There was a decline in generic composite decking searches I just wanted to understand if there's anything to read into that how do you interpret that.
And typically how strong an indicator or those search trends in your view. Thank you yeah. So.
As I mentioned earlier, our focus is really on our metrics and our capability to execute what our contractors say, what our dealers say and what our own internal data says.
The contracts is over the last couple of years, we have had elevated activity.
And searches not just in our area, but in a lot of parts of the housing sector.
And whether or not that manifests itself to revenue I think remains to be seen.
So I would just I mean, the way we are considering it is there was heightened.
Search interest.
That doesn't always translate to volume and in particular, we tend to play in the more premium segments and we tend to play in the.
The repair the pro repair and remodel segment.
And so based on that we are looking at our own specific data, but it's publicly available that searches were down. So we wanted to make sure that that we acknowledge that.
In the call, but that's how we're looking at it.
Got it okay. Thank you for that Jesse and then.
Second I wanted to ask on the Boise facility progress I think you highlighted completing the build out in the first half of 'twenty three.
And that you're already commissioning new lines I'm, just curious number one if anything has changed around the timing of that ramp.
Given everything going on with supply chain and all of that and just secondly kind of to what extent the second half revenue guide and Embeds any of the ramp of that new capacity.
So let me give you a macro and I'll, let Pete.
Get a little specific.
We brought.
Boise online knowing that we were and we are bringing it online knowing that there is a tremendous opportunity in this market.
In the quarters and years to come and we have made a decision.
As we invested to make sure that we had ample capacity ahead of the curve.
After those growth opportunities our core production in particular in the last couple of months is really driving.
Great performance and we're getting terrific output.
From that so the Boise capacity is.
A nice additive element.
And it's really at our discretion on the staging that we bring that capacity online and so we are certainly on track.
But as our core operations continue to perform well.
And we're able to more than meet demand will be we will be thoughtful on how we on how we stage the ramp up in the startup.
Over the next few quarters, so I'll, let Pete give specifics on the guidance.
I would just.
Reinforce look we're in a good position or we can choose to either speed up the commissioning if we needed or slowed down dependent upon what we see in front of us.
Okay. Thanks, Pete Thanks, Jeff and good luck guys I appreciate it.
Your next question comes from the line of John Lovallo Lovallo with UBS. Your line is now open.
Good morning, guys. Thank you for taking my questions.
First one on the commercial recovery much stronger than we had expected just hoping maybe you can give a little bit more color on the drivers by business and then.
The margin improvement that we saw in the second quarter there.
Is that sustainable or was there anything sort of.
One time that we should be considering there yeah, just at a high level over the last really.
18 months, we've talked about we experienced as a reminder, we experienced margin compression.
In particular and in 'twenty as the pandemic set in.
And.
That had an impact on the corporate margins and at that point, we talked about how we were taking very specific actions to make sure that that business structurally.
Would would operate at higher margins and I think the team's done a terrific job.
<unk>.
Investing in specific actions, taking very aggressive steps in our operations to really optimize.
The margin structure of our products and so.
We are excited to see that flow through and it's really an outcome of.
I have a lot of the hard work and you can see the leverage we get.
The actions that we took as volume starts to normalize.
Two to pre pandemic levels and continues to grow.
As we've also done a nice job on the commercial side on the sales and marketing side of.
Sure.
That business.
Okay. That's helpful and then.
Second question is recognizing that your capital allocation priorities make a lot of sense over time.
I mean do you think the stock's performance creates an opportunity to maybe temporarily changing b.
More aggressive on the share repurchase front.
Well as as we mentioned.
On the prepared remarks.
Really excited about our growth opportunities, we continue to invest in both capacity acquisitions and organic development.
As you heard on the call and certainly having a buyback in place.
Gives us an opportunity to drive shareholder value and certainly at this level.
<unk>.
Where are we.
Where our stock is trading it prevents a really nice opportunity.
For us to get a good return on on buying back some of our some of our own shares the specific pacing I think we announced.
Yes.
A $50 million.
Accelerated share repurchase beyond that we'll we'll evaluate.
<unk> what makes sense.
I'll just highlight that you didn't ask the question, but I think as you look at our working capital.
We certainly see an opportunity to.
To be more efficient there and.
And generate more cash from.
Working capital management as we move through the season and of course that will give us opportunities to.
To deploy that cash as needed.
And all of the areas of the capital allocation priorities that we have.
Okay. Thanks, Jessica.
Your next question comes from the line of Ryan Merkel with William Blair. Your line is now open.
Thanks, Good morning, everyone and thanks for all the details.
My first question is on price power I'm, just curious how has pricing held up during past periods of slower demand and then can you remind us what percent of Cogs is tied to raws because I assume if raws fall at some point you'd see a pretty nice margin lift.
Yeah look in general as.
As we've looked at our residential business.
We have we are typically raise price and held price.
Now there's always some nuances depending on the product.
In particular, our exteriors business.
But in general our philosophy has and will continue to be.
That we take price for the long term you've seen some of the lag of that and we've done enough research that we believe we've got a tremendous value proposition.
In major parts of.
Of our portfolio and that value proposition.
It's still very much intact as we have.
We've raised price over the last 18 months and then relative.
I know Pete can answer this in more detail, but at a high level I think during the IPO process and in general we've guided.
That raw material is typically 70% of our Cogs in general.
With variable labor being about another 20%.
Perfect.
Helpful.
And then my second question.
Appreciate the demand indicators remain strong and thats pretty consistent with what we're hearing compares my question is do you think decking remains a priority investment for the consumer.
Things slowed down a bit more from here and maybe just unpack for US I think you mentioned, it's an inexpensive way to add livable space just talk about why that may be important to the consumer just given the low housing supply.
Yes, So let me let me answer the latter and this is a little bit of back of the napkin right, depending on where you are in the country and in particular with our customer base, which is affluent.
Youre dealing with new construction cost that micron there Mike.
<unk> $8000 a square foot.
And all in with all the bells and whistles are types of project.
Mike might hit $100, a square foot and once again that's.
That's.
That's with a lot of infrastructure and a lot of build out.
Typically it's going to be much lower than that and so as we look at the continued focus on outdoor living.
The continued difficulty consumers have.
Sure.
In expanding or moving into upgraded households.
We think are.
The capability, we have to present.
A unique outdoor living spaces and with structure by the way we now have.
Something overhead that provides protection.
From rain and Sun.
We think it's a.
We think it's an absolute terrific value proposition and Ryan you May have asked another question and I forgot what it was.
No I think you answered it there I was just.
And wondering if you thought <unk> would be a priority investment.
If consumers see a slowdown in their spending where would they spend money I think you sort of answered it with your yes, and the only other thing I'll add is data that we've shared in the past.
There are a lot of <unk> beyond their useful life.
<unk> quoted.
That more than 50% or beyond their useful life, we've got extended housing stock.
So as people have relocated there continues to be a need.
To not only upgrade and add outdoor living space, but also fixed existing outdoor living spaces.
Perfect. Thanks Jessy.
Your next question comes from the line of Susan Mcclary with Goldman Sachs. Your line is now open.
Thank you good morning, everyone and congrats on a good quarter.
My first question is can you talk a little bit about how you're thinking of the conversion to recycled materials next year given the initiatives that you currently have underway. Thank you ended last year at around 55%. How do you think about that as you look to 2023 and what will be the benefit to the margin as we move through next year.
Yeah, just at a very high level.
We have continued.
To invest in.
And the acquisition and expansion of our.
Recycling capability we.
We mentioned.
On a two calls ago that we have added that we acquired a.
Regional Recycler.
That has given us the capability and raw material streams in particular in PVC to be able to expand our recycling across our portfolio.
The addition of capacity right now has put us in a great position to do the formulation work and the transition work.
We were somewhat constrained over the last 18 months actually the last couple of years.
Because of capacity and so we view that as a we're not guiding specifically.
As we move into 'twenty three it is absolutely a key initiative for US is one where management R&D and operations are heavily focused and we would expect as we exit the year to continue that progress and I think in particular within 23, we would continue.
To expect.
An ongoing ramp of the percentage of our raw material that comes from recycled through 'twenty three.
And just as a reminder.
A pound of recycle typically is going to be less than 50% of a pound of virgin material. So.
We view that as an additive element.
To 'twenty, three and we're not going to at this stage, obviously, we're not guiding to 'twenty three but.
We're certainly excited about the opportunity that that presents.
Just add on Susan part of how we were actually able to offset the disruption and the cost pain of January and February with Covid was actually teams outperforming on the recycling execution in the second quarter.
Okay. That's very helpful color and then my follow up is just.
I know you've spoken a lot about the initiatives you have underway to expand your capacity a lot of your peers are also undertaking similar sort of efforts.
Can you talk a little bit due to the flexibility that you have to adjust those plans should the macro change more than as expected.
What could potentially you do there to sort of realign the business to a slower demand environment if needed yes.
Yeah, well first off.
We continue to see really nice trends.
But to answer your question.
If there were to be a slowdown as mentioned earlier.
Give or take 90% of our costs are.
Our variable.
Okay.
And the factor I'm sorry go ahead, yes, just going to say 90%.
<unk> of our costs in Cogs or are very I'm, sorry, 90% of our caution Cogs are variable.
<unk>.
We.
We certainly have.
Modular manufacturing so just as a reminder.
They are manufacturing is lined up and the way our capital works is we effectively have extrusion lines.
And we have an ability to turn those on and off.
And.
With the exception of the overhead labor.
The costs will go away with that.
And then with respect to overhead and SG&A, we clearly have.
The capability.
To flex that as needed I think if you look at our track record, including the quarter, we went public.
Where.
In the second quarter second calendar quarter of 2020.
You saw some demand concerns and our margins actually sustained and went up during that quarter and so we certainly have many tools at our.
Our disposal and then the last thing I'll say is typically in a slower demand environment, you will see raw material costs.
AD.
Also but I just want to reiterate that.
We continue to be optimistic, but we also have the capability.
To respond.
If needed to <unk>.
Any kind of a macro.
Impact.
To our to.
Our business.
And I would just add I mean, we also as we've communicated before on Capex of the 5% to 7% of sales that.
Half of that is maintenance. So obviously in times of what I would say if it is challenged we can actually scale back capex closer to our kind of maintenance needs.
Okay. That's very helpful color. Thank you and good luck with everything alright. Thank you Susan.
Your next question comes from the line of Phil <unk> with Jefferies. Your line is now open.
Hey, guys with the new capacity you guys have brought on are there any areas or markets you weren't able to tackle in the past and we're seeing wins.
Just I'm just trying to unpack some of those comments because your competitor your largest competitive made similar comments I'm just trying to understand where some of this opportunity is for for all you guys effectively.
Yeah.
You know as as we mentioned on the last Paul.
We.
We talked about the early season negotiations that we go through with our dealers.
And we feel really good about the shelf position.
That.
We exited.
Negotiations with and certainly capacity was helpful in that and that sets us up for.
Not only short term revenue, but an ongoing.
Expansion of.
Of relationships.
I would say for the leaders in the market as we bring capacity online.
There are certainly opportunities in the market.
That where may be filled with inferior products or.
Other areas that.
Now that.
I can speak for US now that we have capacity online that we have an ability to.
To service that that kind of a market as ive highlighted we continue to see a lot of growth opportunity not only in decking, but our adjacent products and and one thing we don't call out a lot.
<unk> is our decking is used in particular, our PVC decking.
Is used in a lot of different applications, just because of it.
Flame Retardants C and its lightweight and its flexibility and one small example of that that really leverages, our exterior sales forces as our cladding applications SaaS.
But theres certainly a lot of other opportunities that are out there and then specific sales or customer opportunities.
We're not going to chat about those specifically and hopefully there'll be opportunity to chat about those in more detail in the future.
Got it.
And then just digging on your margins I guess longer term the exit rate for <unk>, Peter I believe implies almost 26% EBITDA margins is that something we could build off when we look out to 2023 and due to a lot of the startup cost is that largely behind you guys and then longer term the 500 basis points of structural margin.
Improvement you guys have called out how much of that have you realize I. Appreciate some of that has probably masked by all of the inflation youre seeing but kind of help us unpack that.
Margin expansion opportunity in the next few years.
Yeah.
Still think our biggest lever as we look forward as our recycle opportunity and that's why we're investing aggressively both organically and inorganically.
Not only use that as a margin expansion lever, but as we've talked about it's our best inflation buffer as well.
We still have a really active full funnel of sourcing savings and projects as we look out of the business and I think we're in the early days of continuous improvement and what that can bring to the bottom line.
We're excited about our exit rates here this year and.
Mentioned earlier on the call I think just based upon the things that we can see in front of us that we can control.
Price carryover cost execution.
On recycle and at other pieces of the business, we think we're really positioned well for 2023.
Even in any environment, yes.
Yes, just.
Phil just on the 500 basis points.
Yeah.
When we went public we implied that was.
Give or take about a five year.
Horizon and.
Without getting specific we have made progress against that it is certainly.
Ben.
<unk> environment, where some of that progress is mass, but I would just say we feel comfortable that we have the capability to.
I am confident we have the capability to execute against that.
Within the timetable that we laid out during the IPO.
Super Thanks, a lot appreciate the color I appreciate it thanks Bill.
Your next question comes from the line of Mike Dahl with RBC capital markets. Your line is now open.
Hi, Thanks for taking my question.
Question around.
What youre seeing in terms of the channel inventories are sensors finished capacity has come on for you and your peers distributions been able to.
Restock, a decent amount year to date.
So two part question would be what are you seeing and then to what degree if any is that playing into I know you have a tough comp in the second half of the year, but.
But it does kind of a first half dealer restock.
To your.
Potential caution on.
Growth rates as you go through the balance of this year.
Michael can you clarify.
The the that latter question I'm not sure it came through right.
Sure. So sorry, Jesse so to what extent is potentially a dealer restock in the first half which is benefiting your first half sales impacting your view on second half growth rates I E are you.
Our sense is that there's been some some restock as everyone's brought capacity on among manufacturers. So kind of like are you seeing that benefit and as part of your as part of your more balanced view on growth over the course of the year, reflecting maybe you've already sold in ahead of sell through.
So theres always a little bit of geography, whether its march or April or may. So there is some modest geographic movement the way I would define the cadence of 'twenty.
<unk> 22, so far is it's really manifested itself as a very normalized year.
Right. So that we went through our normal.
In particular, the second quarter, a normal process of Av.
Dealer stocking.
Position.
The.
The ended.
Our customer set.
For the season as we look at the back half of the year I think the main element that we're looking at is just to make sure that we acknowledged that we are lapping.
Third quarter last year in residential for example, we had 50% growth right. So so it's really important that we acknowledge that in general as you look at the back half we're lapping some some meaningfully high growth rates.
That as we've highlighted include.
Inventory Bill So I would say at this stage, it's probably less about.
The.
The first half of the year, it's much more about what we're lapping and in general we're returning to a more normalized environment relative to channel partners.
And how they view.
And their need to carry inventory and so.
We're just the way I would phrase it is the second half is just normal with.
With.
Against the higher comps.
Combined with our improved lead times and our ability to better service the market in general right now inventory in the system is a very normal level.
Okay got it that's helpful. Thanks, Jesse and my second question is back on the.
The price cost dynamics looking.
Into next year, just another clarification.
Think about a 30% to $41 million.
And the tailwind.
How much of that is purely a pricing at the highs versus where you're seeing materials today in your assumptions I guess the question is is your assumption.
<unk> costs stay where they're at today is there an assumption.
There is further.
The cost further recede as we get into fiscal 'twenty three and also.
To the extent you've talked about the recycling expansion initiatives is the benefits from your shift in recycled material, a part of that $30 million to $40 million net tailwind or would that be incremental to that.
Yeah, I mean, I don't know that I am going to get into Super detailed answer on 23 other than to say look it assumes sort of what we can see it from an inflation perspective in front of US that's announced today.
And then relative to recycle is.
As pointed out earlier.
We certainly have visibility on what we're doing and what we could do.
As <unk> pointed out we're not getting specifics except to say the price raws.
Combined with productivity, we feel really good about the opportunity ahead of us and we generally sized it for you because it's it's important to understand that the lag will normalize.
Okay.
Thank you I appreciate it thanks.
Your last question today comes from the line of Alex <unk> with B Riley. Your line is now open.
Thank you and nice quarter gentlemen.
Thanks Ali as it relates to captivate can you discuss where this product fits across the pricing spectrum relative to alternatives and go into a bit more detail on your target market R&R and new construction, so on and so forth.
Yes.
I appreciate the question Alex as as we've talked about we see wood conversion.
Opportunity not just in decking and rail, but we see wood conversion opportunity.
And in a lot of parts of the home and as you as you consider.
The opportunity, we have and what we're defining as exteriors.
There have been gating items.
That that have limited at times, our ability to do wood conversion and I think one of those elements is really our ability to provide a pre finished color both in trim and.
And some of our niche siding products that allow us to really continue to penetrate that market.
And.
Our our announced alliance really sets us up to continue to drive wood conversion.
Specifically in those areas, where we think a pre finished product has has been a limiting.
Item relative to specific value proposition it fits the same general price point.
As our as our trim products with the value add.
That you would expect so.
I'm not I'm not positioning.
We're not going to get into the specific details relative to competition, except that it provides a terrific value proposition to get the benefits of.
And as that material.
And that kind of extended use and the benefits against moisture.
And it does it in a way that contractors have been asking for and and in general.
Our business tends to skew more repair and remodel and we would certainly expect that that's where that's where this would have a really nice position.
And lastly has the movement in rates caused you to change any plans related to capex advertising marketing or new product development or anything.
Short answer is no I think we're always evaluating macroeconomic variables and the change in rates.
In the sectors that we play which is predominantly repair and remodel.
Has not had any kind of a meaningful impact.
Demand.
Once again, if we see the macro change.
As mentioned earlier, we certainly have the capability.
To adjust but right now we're not really seeing.
Any impact from from.
From elevated interest rates at at this point.
Thank you very much.
Great. Thanks, Alex.
This concludes today's question and answer session session. Mr. Jesse thing I'll turn the call back over to you Greg.
Thanks again.
For for the questions and your continued engagement, we look forward to seeing many of you at our Investor day in.
In the coming months, Thanks, again and have a great day.
This concludes today's conference call. Thank you for attending you may now disconnect.
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