Q4 2022 Azek Company Inc Earnings Call
Good afternoon. My name is Emma and I will be your conference operator today at this time I would like to welcome everyone to the <unk> fourth quarter and full year 2022 earnings call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one.
Eric Robinson, you May begin your conference.
Thank you and good afternoon, everyone. We issued our earnings press release and a supplemental earnings presentation. This afternoon to the Investor Relations portion of our website at investors that AZ Cuddle Dot com.
The earnings press release was also furnished via 8-K on the SEC's website.
I'm joined today by Jeffrey <unk>, our Chief Executive Officer, and Peter Clifford, Our Chief Financial Officer.
I would like to remind everyone that during this call. We may make certain statements that constitute forward looking statements within the meaning of 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 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 performance. These non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
A reconciliation of such non-GAAP measures can be found in our earnings press release, which is posted on our website.
Now, let me turn the call over to ASIC CEO Jesse.
Good afternoon, and thank you for joining today's call. We hope everyone had a relaxing Thanksgiving and we appreciate your taking the time to join us.
The Asia team delivered solid fourth quarter performance and despite a challenging macro environment, we delivered strong growth in revenue and adjusted EBITDA for fiscal 2022.
I am proud of what the entire APAC team has been able to accomplish as we navigated through a constantly changing external environment, while continuing to provide strong service to our customers and drive meaningful innovation in the marketplace.
During our Investor day in June of this year, we highlighted that we play in large growing and resilient markets with strong tailwind.
Operate leading brands with category leadership and have multiple levers to drive growth and margin expansion.
We remain confident about our markets our strategy and our ability to deliver on our long term objectives and goals.
As we enter fiscal 2023, we believe that our business is well positioned to navigate through any macroeconomic situations and to continue the next phase of our strategic growth and margin expansion plan.
For the fiscal year, we delivered $1 $36 billion in net sales generated $301 million in adjusted EBITDA, representing increases of 15% and 10% year over year.
<unk> delivered 97, and adjusted diluted earnings per share.
Our fiscal fourth quarter results and execution are all in line with our guidance and expectations sure. The last time, we spoke.
As previously highlighted we expect that our Q4 to be meaningfully impacted by the lapping of the inventory build in 2021 and significant channel inventory drawdown.
Q4 was consistent with our expectations with customer demand remaining steady and the channel drawing down inventory levels.
The Destocking, we saw in the channel was primarily in our deck rail and accessories business, where we generally saw consistent positive sell through growth on a dollar basis and modest declines on a unit basis.
This resulted in a meaningful drop in our net sales to our channel partners.
We were able to hold our balance sheet inventory steady by lowering production levels in Q4 to the levels required to meaningfully drawdown, but necessary inventory from the channel.
We have plans for continued lower production volumes in fiscal Q1 2023, before we expect to increase our production levels starting in fiscal Q2.
Because of our aggressive actions to move quickly past this period of under utilization, we expect to see the greatest financial impact in Q1 and early Q2.
From a demand indicator perspective, our recent contractor survey highlighted continued backlogs for the remainder of the year with many of our contractors booking into 2023.
However over the last few quarters, there concerns have shifted away from material availability.
Toward economic uncertainty and labor availability.
We also saw a consistent consumer engagement with leads and samples continuing to show year over year growth within the quarter and a continued modest year over year decline in web traffic.
Our strategic initiatives are on track with strong growth in new products Pro dealer channel expansion and positive retail channel point of sale trends.
Our recycling expansion continues to progress as expected and we exited Q4, having achieved a key milestone in our expanded use of recycled PVC for our advanced PVC decking lines. These decking products are now made up approximately 60% recycled materials an increase from approximately 55.
5% at the beginning of fiscal 2022.
We also saw strong performance from our commercial segment with sales and segment adjusted EBITDA growth driven by the combination of net price realization and operational discipline.
In fiscal 2022, the rapid increase in replacement during the year created a lag in our ability to deliver desired margin and deferred our margin expansion as pricing lagged raw materials.
As highlighted on our last quarterly earnings call. Our price cost margin coverage has moved to a net benefit and we have been running with higher recycle rates, which will provide us a cost benefit as we move through coming quarters.
We have also taken steps over the last two quarters to breakdown, our overall SG&A expenses, while continuing to invest in customer activity and market expansion and we have made the conscious decision to prioritize certain customer investments in Q1, while reducing activity in Q2.
As we look back on the quarter and the fiscal year, we have made significant progress in executing against the plan we laid out at the beginning of the year and against our long term goals that we highlighted at our Investor day in June of 2022.
We operate with a clear strategy to drive above market growth through market conversion, new product innovation multichannel expansion and a best in class customer journey and market expansion through Adjacencies.
We have a clear operational strategy of expanding the use of recycle and leveraging our <unk> program to drive increased profitability and our focus on ESG as a core part of how we operate and who we are.
We once again received multiple awards for our culture and focus on ESG.
Most notably we were recognized by cone reznik in their inaugural game changer in ESG Award, highlighting ASX leadership and driving positive change for our people our customers our communities through ESG.
We are also proud to be named to the list of America's most trusted companies by Newsweek based on fair treatment of employees opportunities for career development and employee compensation and trust in the company's values leadership and customer facing communications.
In addition, we continued our history of innovation and new product development by launching multiple new products in the year.
And our exterior segment, we took home the HCS dealer Golden Hammer Award for APAC exteriors Captivate pre finished siding and trends for its innovation and value.
In decking, we received the archetypes, our <unk> plus product award for timber tax landmark collection for decking in the sustainable design category.
Finally at our acquired structure business unit, we are proud to have officially launched Cabana X and.
A non permanent high quality high Tech Savannah to apex pro channel and to commercial applications.
This new product expands structure's already robust product portfolio.
Moving to our outlook our.
Our business is overwhelmingly focused on the repair and remodel market with strong long term tailwind is driven by the combination of favorable demographic trends and an aging housing stock.
<unk> is also experiencing the positive impact of a sustained focus on outdoor living and a material replacement from traditional wood products towards our long lasting and sustainable products.
Industry data suggests that there are around $60 million tax in the U S and approximately half are estimated to be beyond their useful life.
A meaningful part of our decking business is driven by this need to replace wood decks.
The large installed base and natural obsolescence from materials, such as wood helps drive our material conversion opportunity.
These strong tail wins combined with company specific strengths around new product innovation portfolio breadth and best in class aesthetics.
Collectively we believe <unk> is positioned to drive above market growth and margin improvement.
While we continue to see solid contractor demand and continued interest in our category, we expect the macro economic environment will likely impact our business in 2023.
For planning purposes, we are assuming that the approximately 15% of our business that is new construction focus will see high teens decline from a volume perspective.
We are also assuming repair and remodel activity will be down mid to high single digits.
These assumptions are based on a number of industry projections that include the impact of recent interest rate moves on new construction and the broader economy.
The combined impact of new construction and R&R leads to our planning assumption of a 10% decline in volume, excluding the contribution from acquisitions and pricing in fiscal 2023.
Using this assumption, we would expect to deliver $250 million to 265 million of adjusted EBITDA in fiscal year 2023 as.
As a reminder, we are exiting 2022 with a number of positives on the margin front, including positive price recycled benefit productivity and a moderating raw material environment.
We expect the majority of our Underutilization to impact Q1, and part of Q2.
In fiscal 2023, we expect an approximately $8 million impact from an update to the process by which we estimate the value of our inventory.
This incorporates our increased use of recycled materials.
Significant part of the impact is expected to occur in Q1 and early Q2.
We expect to see the benefit of our margin and sourcing programs in Q3, as we work our way through higher cost inventory in the first half of 2023.
Our assumptions for the back half of the year include continued price realization commodity deflation that we are already experiencing completed productivity actions and our current recycle rates.
Pete will provide more detail in a moment, but with the visibility we have in our cost in the balance of the fiscal year. We are confident that we are in a strong position to navigate the next few quarters and expand our margins as we move past the first quarter.
We are also confident in our ability to execute our business model to drive incremental market penetration and growth now let me turn the call over to Pete to provide some additional context on our financial results and outlook.
Thanks, Jessie and good afternoon, everyone as Erik highlighted upfront, we have uploaded a supplemental earnings presentation on.
On the Investor relations portion of our website.
First I want to provide some color on the operating environment during the quarter as Jesse mentioned the demand environment has remained relatively stable the sell through profile was positive on a dollar basis had modestly negative on a unit volume basis. This backdrop has allowed us to make real progress on taking inventory out of the channel with our partners.
The <unk> inventory reduction in the channel was in line with expectations from an operating perspective, the focal points for <unk> were around getting our conversion costs down as much as possible to match the significant drop in production levels without hurting the future.
It is important to note that we held our balance sheet inventory levels flat sequentially quarter to quarter production levels were down more than 40% on the period.
On the commodities front, we saw the bulk of our purchases portfolio remained stable in the quarter with the exception of PVC resin, which saw a decline during the last 10 days of September .
Since the close of <unk>. We are also seeing softening in other key commodity inputs. This is a positive news for the business and the laws on it as it sets us up to recapture loss margin. During 2022, while we were playing catch up on inflation versus pricing.
There is an approximately a four five month lag on purchase price variance positively impacting our income statement. Therefore, we will not fully realize the impact of that deflation until late <unk> and into the second half of 2023.
For the full year fiscal 2022, I'd like to reiterate Jeffries point that we're proud of the results. We delivered in a very disruptive environment. So quickly recap full year net sales were $1.356 billion up 15% year over year, while our adjusted EBITDA was $301 million of <unk>.
10% year over year.
For the fourth quarter of 2022, we saw net sales of 305 million modestly above our guidance.
Sales declined 12% year over year, driven by the previously communicated channel inventory reduction and we are well on track to achieving normalized channel inventory levels by the end of the current quarter.
During the quarter, we updated our process by which we estimate the value of our inventory.
The primary update was made to include more consistent and predictable recycling introduction rates into our inventory valuation, the resulting impact reduced our inventory valuation by $19 3 million during the quarter.
It is important for us to do this given the significant progress we have made in our recycling introduction rates, which are now more consistent and the stability of our operations has made delivering the impact more predictable over time.
Our business will benefit from the improved clarity and predictability around our margins for 2022 gross profit decreased by $40 4 million or 36% year over year to $71 9 million inclusive of the previously mentioned updating process by which we value our inventory.
The <unk> 20 to adjusted gross profit decreased by $16 2 million or 12% down year over year to $114 2 million. The adjusted gross profit drop was in line with the decline in net sales.
Note there is approximately a two month lag on our labor and overhead which will push some of the cost pressure into fiscal <unk> 23.
Selling and general administrative expenses increased by 7 million to $67 5 million or approximately 22, 2% of net sales.
The bulk of the year over year increase was the impact from the contribution from acquisitions and transaction related expenses, partially offset by one time lower incentive compensation as a result of the reduced outlook in fiscal 2022.
Adjusted EBITDA for the fourth quarter was $65 1 million in line with guidance adjusted EBITDA declined 20% year over year, driven by loss volume leverage with the decline in both production and net sales levels net income for the quarter was a loss of $4 8 billion.
Approximately negative <unk> <unk> per share driven by the previously mentioned inventory valuation process update.
Adjusted net income for the quarter was $24 5 million for adjusted diluted EPS of <unk> 16 per share.
Note that our effective income tax rate in fiscal 2022 was negatively impacted by increased state tax expense recognized in the current period, which reduced our earnings per share by approximately <unk> <unk>.
Now turning to our segment results.
Residential segment net sales for the quarter were $254 million down 16, 7% year over year, driven by the previously mentioned channel inventory calibration impact, which was largely in our deck rail and accessories business.
The exteriors business saw positive growth year over year and the acquisition of structure contributed approximately $24 million in the fourth quarter.
Residential segment adjusted EBITDA for the quarter came in at $64 5 million, which was down 30% year over year commercial segment net sales for the quarter were $50 4 million up 23% year over year, we saw double digit growth in both our Viacom and Scranton products businesses.
Commercial segment adjusted EBITDA for the quarter came in at $14 6 million, an increase of $8 5 million year over year.
Margin expansion was driven by favorable price commodity coupled with productivity with.
The commercial segment team continues to exceed expectations.
From a balance sheet cash flow perspective, we ended the quarter with cash and cash equivalents of $128 million and approximately $147 2 million available for future borrowings under our revolving credit facility.
Working capital defined as current assets minus current liabilities was $348 1 million. We ended the quarter with gross debt of $678 1 million, which included approximately $78 1 million of financial leases.
Net debt was $557 3 million and our net leverage ratio stood at one nine times at the end of the fourth quarter.
Net cash from operating activities was $40 1 million during the quarter versus net cash from operating activities of $89 million in the prior year period.
Expenditures for the quarter were approximately $31 million.
During the quarter, we executed share repurchases of $23 million or one 1 million shares the remaining authorization under our share repurchase program is approximately $319 million and we will continue to look to act opportunistically to make repurchases.
Our capital allocation priorities remain the same as we've previously communicated.
As we turn to the outlook, let me provide some context and color on what we're seeing and assuming for the balance of the fiscal year.
Let me first safety back to our Investor day back in June 2022, we articulated a sensitivity analysis in June that if our volumes were down approximately 5% in 2023, we can hold our adjusted EBITDA approximately flat on a dollar basis.
The outlook that we're providing today is two specific adjustments to the sensitivity shared at our Investor day on June 1st our fiscal year 2023 planning assumption is volume down 10%.
Second on the incremental 5% volume drop from the 5% to 10%, we're assuming 50% decrementals driven by the first half of the year.
The planning assumptions, we are providing on this call should not be considered formal guidance, we are simply being transparent on our assumptions that we are planning the business around.
Our planning assumption of a 10% decline in volume drives us to a target range of approximately $250 million to $265 million of adjusted EBITDA for the full year fiscal 2023.
A few other planning assumptions per share, we expect lower capital expenditure spending in fiscal 2023 in the range of approximately $70 million to $80 million, which is approximately $100 million less than fiscal 2022, as we enter a period of more normalized capital spending.
We expect to generate significant year over year free cash flow in fiscal 2023.
This strong free cash flow defined as operating cash flow less capital expenditures will allow us to support our repurchase program in 2023.
Additionally, we expect full year SG&A, excluding the carryover impact from acquisitions and more normalized management incentive compensation will be flat to down year over year.
For additional planning assumptions to assist with modeling full year 2023, please refer to the supplemental earnings presentation that we've posted on our Investor Relations website.
Before we turn our guide for the first quarter I wanted to provide context for the operating environment that we expect in fiscal <unk> 2023.
Sales volume is expected to be down approximately $85 million in volume year over year, or a 30% plus decline in sales volume driven by inventory correction in the channel and the lapping of inventory fill from <unk> 22.
This is effectively in line with what we highlighted on our last earnings call. We are well on our way to achieving normalized channel inventory levels at the end of the quarter.
Similarly production volumes are expected to be down approximately 30% year over year.
Just to reinforce these factors, we're making intentional decisions to deal with the impact of right sizing our channel inventory and lower production volumes in the near term as a result, we will have underutilization flowing through in both one and two <unk> on labor and overhead.
During the quarter, we will continue to burn through our higher cost inventory layers.
And we are lapping the impact from recycled costs being period expense in the prior year to being capitalized in <unk> 2023.
With that in SG&A, we have prioritized investments in certain sales and marketing activities in <unk> that will not reoccur in the balance of the year.
For <unk> 2023, we expect consolidated net sales between $200 to $215 million, we expect adjusted EBITDA between 8 million to $12 million in closing it's important to highlight some of the key elements and our implied outlook for the balance of 2023 between <unk>.
And <unk>, which include.
Channel inventory normalization of <unk>, 22, and <unk> 23 will be behind us.
We have material input costs, deflating, and <unk> 23 that will impact our results meaningfully in the third quarter post our lag.
We expect production volumes to normalize in the second half positively impacting utilization and setting the stage for productivity.
We anticipate sales volumes will recover significantly from the <unk> 23, seasonally low and channel inventory impacted profile.
We expect the whole price in our core market.
And lastly, given the environment, we think that we might see more commodities start to deflate.
I'll now turn the call back to Jesse for some closing remarks.
Thanks, Pete I would like to take a moment to thank our dedicated team members channel and supplier partners and contractors that support the HVAC company.
Thank you once again for your continued focus dedication and your contributions to the results in the fourth quarter and for all of 2022.
The fundamentals of our business are strong as is our confidence in the future. We are well on our way to restoring normalized channel inventory levels and the actions we have taken position us well to realize the benefits of our recycling and sourcing initiatives late in Q2 and into Q3.
Given our visibility to costs, we are in a strong position to navigate the next few quarters and expand our margins as we move past our fiscal first quarter.
Our award winning new products, not only solidify our position in the core but give us an opportunity to continue to drive material replacement.
Our acquisitions are expanded exteriors line and our constant innovation and decking and rail have put us in a position to continue to gain market presence and share.
Have a clear strategy and <unk> specific initiatives to drive above market growth and we believe that we are well positioned to win and deliver on our long term goals.
With that operator, please open the line for questions.
Thank you.
As a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.
We asked today that you limit yourself to one question and one follow up.
Your first question comes from the line of Keith Hughes with <unk> Securities. Your line is now open.
Hi, Thank you first question on the raw material commentary, we hope to drive second half fiscal year can you give us any.
Sort of indication how big a number or this is playing in the EBITDA guidance for the year highlighted earlier.
Peter Yes, Keith this is Peter I.
I think I'll start just generically on how we're thinking about deflation first and foremost we're comfortable and confident that we can start to recapture some of the margin that was delayed last year, what the price commodity lag starting in <unk> 'twenty three as far as what we're seeing so far quarter to date and <unk> 23, as I mentioned in my prepared remarks, we are.
Seeing significantly lower purchase input costs and <unk> 23, keep in mind with our balance sheet lag of the four five months some of that will start to roll off until March of 2023.
But obviously that implies and means that we will also have some carryover deflation.
So 2024 from an assumption perspective of what's embedded.
The way, we're thinking about and how you should think about.
What's embedded in the EBITDA profile as we were expecting about $50 million of annualized deflation of which about $30 million of that will actually hit in fiscal 2023 EBITDA.
With the remainder being a carryover.
Favorable deflation to 2024.
And to be clear that $30 million of sales territories, where you. Just said is that is that based on what you've seen so far are you assuming.
More deflation yeah, great question, I think what gives us a lot of confidence.
Based upon that prices were seeing quarter to date.
One Q.
We don't need prices to go down much further to support the $50 million and $30 million. So obviously.
If the commodity markets continue to turn in our favor then obviously theres potentially some upside.
One final thing to this.
I assume in the <unk>.
That you're assuming selling prices for products Hubei.
Flat other than the roll through price actions you did.
This calendar year is that correct, yes, we're not assuming anything changed the list prices.
Okay, great. Thanks, that's very helpful. Thanks.
Okay.
Your next question comes from the line of Matt Bouley with Barclays. Your line is now open.
Hey, good evening, everyone. Thanks for taking the questions.
So given the guidance for margins.
Alluded to for Q1, and then the step up beyond Q1, I mean, it sounds like you've pointed to a few things your production levels should increase youre burning through some of the higher cost inventory.
Should we think that the cadence of margins is going to be kind of consistent in terms of that sequential increase beyond Q1 or is there going to be a more meaningful step up in the second half.
Just given where youre starting in Q1 it would be helpful. If you kind of walk us through some kind of framework for the second quarter. There at a really high level. Matt is look, we'll obviously see sequential improvement from <unk> to <unk>.
Still we'll have a little bit of pressure in <unk> as you are aware, our labor and overhead lag is about two months. So some of the inefficiency of <unk> will push to <unk>.
Our production levels, we really expect to start to normalize in the back half of the second quarter and recover to a much healthier level.
And then we would expect an even more meaningful step up from <unk> to <unk>, and then again, probably a more modest step up from <unk> to <unk>. So.
Obviously with the <unk> guide and in our full year outlook, you can back into the nine months profile and again the <unk>.
Second quarter will be below that average in the third and fourth quarter would be above that.
That helps give some context.
Yes, Matt this is Jeff if I could just add one other component the challenge we have.
Clearly we are.
We are we've got a number of components that.
In Q1.
Some of the.
The change in process that we talked about that will primarily be Q1.
A lot of our year over year inventory decline will be focused in Q1 and a lot of our underutilization.
A disproportionate percentage impact.
The impact will be in Q1, and thats really against our lowest quarter.
So the good news is we get a lot of that behind us as <unk>.
We worked through Q1, so part of the.
The margin impact as we go into subsequent quarters is getting some of these things behind us. The other aspect of it is typically the other quarters are meaningfully larger as we flow through typically our first quarter is give or take 17%, 18% of our our volume for the year.
So having those impacts in Q1, just it naturally has a different impact as we flow through in addition to all the tailwind that <unk> talked about.
Got you Okay. No that's really helpful. Thanks for that guys and then.
Second one on the volume outlook and just trying to put the pieces together. So the market planning assumption is for a downturn.
I guess my question is just how does the ASX growth compare versus that is there an assumption of share gains we should be making and I think about Q1, where you talked about the 85 million volume decline.
Which I assume includes destocking and so maybe that I don't know how that compares with the 10%.
Ends up such that they offset each other and as X volumes end up looking like the market volumes and not to put words in your mouth, but just how should we think about <unk> growth relative to the market. Thanks.
Yes, let me take the first piece on just sort of help and give some color on sort of the <unk> geography from a sales perspective, so but what you want to think about the 85 million a volume reduction.
About $70 million to $75 million of that is the channel inventory recalibration.
That small difference between the 75% to 85 is really the sell through that we've talked about that we've seen positive on a dollar basis, but modestly negative on a unit volume basis.
And just one other point on it as it relates to.
The first quarter and $85 million.
Almost half of the entire years down.
Downturn.
And then relative to your question on initiatives.
Clearly.
We.
We believe in what we're doing.
For the initiatives I laid out earlier in the call to impact what we're doing.
Take that for us as we are reviewing that.
A.
A way to give us increased confidence for us to manage through a potentially more volatile environment.
And then even while our scenario would have and so the way to think of it as it's not as simple to add on top of what's there it really depends on the macro but we are certainly expecting a benefit from our initiatives.
But what we've laid out is kind of a market oriented.
Adjustments to volume.
Great well, thanks, Jesse Thanks Pete.
Your next question comes from the line of Michael Rehaut with Jpmorgan. Your line is now open.
Thanks appreciate.
Appreciate you taking my question and good afternoon.
Happy birthday.
Okay. Thank you very much I appreciate that.
First question I wanted to.
Breakdown, a little bit was the organic decline in <unk>.
On the residential side you know you said that it's about $24 million of contribution from the acquisitions. So that puts you down organically about.
Down 25%.
And I think.
It looks like it might be a similar type of rate.
That youre, looking and plus or minus for the first quarter, you compare that to your largest competitor.
With a guidance of.
Revenue down plus or minus 40% and I was hoping.
To get any insights from you around what the difference could be in perhaps breaking out decking rail and accessories versus exteriors, if that might explain some of the differential.
Given that Youre a little more.
You have exposure on the exterior side for what might be driving.
What appears to be a pretty big difference.
Yes.
I think if you just.
And I can't speak.
Specifically.
What other players are experiencing in the market, although we're close to the market and we might have an opinion and let me give you a couple of just basic data points right. One is the way to think of our residential business.
Yes, it's about two thirds of that rail and accessories.
And third.
Exteriors I'm, giving you rough numbers on an average it will vary quarter to quarter.
And against that.
What we mentioned in our prepared remarks was that.
In effect all of the inventory correction that we are going through is within that rail and accessories and so.
We believe that what we're going through as appropriate.
For where we are now.
When you do calculation. So if you look at our.
Fiscal and calendar 2022 and then you start to consider our fiscal and calendar guide for 2023.
I think the math would tell you is that from a revenue standpoint.
We are doing pretty well compared to other players in the marketplace.
And Mike just to help a little bit <unk> kind of came in line with what we talked on our last earnings call for the full year as well you should think of the fourth quarter prices kind of low teens M&A approximately 7%.
Inventory destock was about 25% headwind, which kind of leaves normalized unit volume kind of down low single digits again kind of consistent with how we've been thinking about sell through is kind of positive on dollars and modestly negative on units.
Okay.
Thank you Pete that's very helpful.
Jesse.
I guess secondly.
Looking at the.
The EBITDA guidance for the first quarter.
And apologies if I missed all of these different numbers earlier from your prepared remarks, but I believe you mentioned.
50% Decrementals, if I heard right for the first half of the year.
When you look at your first quarter 'twenty two.
You did about $60 million $69 million of EBITDA.
And so if you are talking about roughly $50 million less of revenue.
Okay.
<unk> first quarter 'twenty three.
Yes.
<unk>, 50% decremental of $25 million, what's the gap between that decremental and some of the other.
Variables that gets you down to your guidance I know you mentioned that the $8 million of inventory flow through if there's any other kind of drivers that we should be thinking about.
Yes, the way I described Mike is look first quarter, we will have kind of.
Mid single digits pricing right, that's been kind of announced as carryover youre going to have a similar profile for M&A, which again supports and points for that kind of $85 million and volume impact and Thats, where were saying that $85 million is really not falling through it maybe traditional 38% it's closer to the 50.
Because of the dynamic that Jesse mentioned that not only is that our smallest quarter from a sales perspective, but we're also down even more on a production basis than we are on a volume basis as were trying.
To prevent building higher cost inventory, we want to get that out of the way.
So that dilution of that Underutilization in the plant is skewed.
<unk> and again any dollars that we're taking there is on a much smaller base, so its causing the quality of earnings and <unk> to be pressured.
Yes, and just to put a little.
Sense on that.
We just to reiterate what we said in the prepared remarks, we are intentionally scaling down our factory, we scaled it down in Q4, where scale, we scaled it down in Q1, and it's at or below the level of sales specifically in the area.
We're having the biggest adjustments witches and deck rail and accessories.
Yes.
So the and then we will start to bring it back up as volumes normalized theres, a large benefit to that and that it tends to concentrate.
Some of the under utilization.
Into.
And potentially the first quarter not all of it but.
Let's call it.
About half of the Underutilization impact that we thought out for the entire year will be concentrated give or take in.
In Q1, and once again that is intentional rather than level load because we don't want to make product.
With higher cost materials, and when we start making product.
At appropriate levels, we will be making it using lower cost materials.
Okay great.
Great. Thanks, so much.
Your next question comes from the line of Tim <unk> with Baird. Your line is now open.
Yeah, Hey, guys good afternoon.
Maybe maybe just on.
Jesse just your feedback or the conversations youre, having with your distributors.
How are they expecting to kind of think about or how are they thinking about kind of the normal seasonal ramp of kind of taking inventory going into a season I don't know if you want to compare and contrast that versus like a normal year, but what are you kind of heard in terms of that kind of March June kind of load in effect that you would normally see.
From a channel.
Yes.
Yes.
It's a good question and I'll answer it generally and what I would tell you is is that it really varies.
By channel.
By channel partner I should say, depending on their business model. So I think number one is they will be entering.
All of our channels will be entering Q2.
In a good.
Inventory position that is lower.
Where they were the year before on a days on hand, so that's key.
Key point number one.
That means that they naturally need to re inflate that inventory.
To meet demand I think in general.
Without.
Getting too specific there either.
Or a little lower in.
In terms of mindset than the year before.
And once again it varies some of our channel partners.
We'll be right on some of them will be lower and some of them will be above at a distribution level at.
The dealer level I think it's similarly has the potential to vary.
Some dealers feel good about their markets and they would expect.
To take almost as much as last year and other dealers are more conservative relative to their markets and might take a little less so if you add all that up.
It's probably safe to assume as we look at Q2, which is calendar Q1.
That it would be logical that it would potentially be a modestly slower ramp. Although we'll guide Q2, when we get there but that is logical to assume that it would be a slower ramp.
That it was in prior years now what that does is it really sets up Q3 and Q4.
To not have.
First we won't have the same types of inventory corrections.
But it also sets us up to have more seasonally oriented demand rather than.
Perfectly trying to.
Trying to land the plane relative to the right amount of inventory.
In the system. So hopefully that gives you a general.
We get to Q4, obviously, we're lapping were lapping what we just talked about which is a very large inventory correction in the channel and at that point you are.
Your sell through is in a good position and you just want to make sure that you are.
You've got the right amount of inventory in the channel.
Okay, Okay that sounds good.
That's kind of the thinking that you are incorporating in the commentary around guidance just kind of what you've talked about.
Yes, yes.
Once again, we're not guiding Q2, I think it's important.
That.
What what I think Pete's, referring to is the subsequent three quarters right. We know we're getting a lot behind us in Q1.
And.
We.
Have estimates that we talked about.
The market being down 10.
The aggregate market being down tennis.
Unit volume basis, as we work our way through those final three quarters and then based on that it's really a discussion of geography and clearly.
We'll give you clarity on that but I think the.
Takeaway here is that we're very confident in our ability to deliver those three quarters and manage through that given the margin tailwind so that start to come in as we lap our way through more expensive inventory.
Okay. Okay. Good and then and then I guess as a follow up.
What is the pricing carryover that you're assuming for 'twenty three.
That will be kind of mid to mid single digits low to mid single digits for the year. Obviously all of it is really in the first half of the year, but the full year impact is kind of low single digits.
Okay, Okay, great. Thanks.
Thanks, guys I appreciate it.
Your next question comes from the line of Steve.
Phil <unk> with Jefferies. Your line is now open.
Hey, guys I appreciate all the color not easy in this environment I guess the first question I have is the destock and production curtailment impact is obviously to be more heavily weighted in <unk> any way to size up the split between <unk> versus <unk>.
And should we expect EBITDA to be at least flat in <unk> on a year over year basis.
Okay.
Yes.
Thank you.
We're going to steer clear of kind of getting formal guidance on <unk> I think we want to get closer to that I'm highly confident we can say, we expect the quality of earnings to sequentially meaningfully improve from <unk> to <unk>.
So I would think about as much as we probably can responsibly say.
Okay and.
Maybe another kind of wave.
Help me out on that is we're saying that theres, a fair amount that's going to impact Q1.
There is certainly going to be some that impacts.
Q2.
Although not pronounced at the same level so.
We need to work our way through to see how that flows through and we need to see what the revenue is.
Got you Okay. That's helpful.
Pete I think last quarter, you were talking about a $30 million price cost potential tailwind for 2023, you threw out a few numbers today at $30 million for 2023 on an annualized basis 50.
Does this 30 compared to last quarter 30, or does it just because some of the timing difference because since you have given the guidance to your point some of the inputs are fallen and certainly PVC prices have fallen.
Pretty minimal.
Hopefully from the peak levels that I think was embedded in that $30 million number that you called out last quarter.
I mean part of it is the four five month lag of of the timing of it some of it moving into 2024.
And the other piece to a smaller extent is look we've had some other overhead type inflation in 2023, that's kind of new on the horizon and it's really kind of two two things specifically one or.
Our energy costs have moved up pretty substantially and then secondarily.
Property insurance property insurance markets have been pretty brutal last two years and we've seen significant inflation there as well.
Yes.
But to answer your <unk>.
Question.
What.
Way to think of it is the $30 million.
Plus.
But what Pete is highlighting which is $50 million on a.
On an annualized basis right. So so there are two different elements one is.
The price raw material carryover that we've talked about at 30 and what we're talking about is.
Additional.
Cost and sourcing actions that add up to that 50% from where we sit now and then as Pete pointed out some of that will get consumed with certain elements of inflation, but its additive.
Okay. That's helpful Great color guys.
Your next question comes from the line of John Lovallo with UBS. Your line is now open.
Hey, guys. Good afternoon. This is actually Spencer Kaufman on for John Thank you for the questions.
Maybe the first ones.
What gives you guys the confidence that the inventory adjustment will be done by the end of your first quarter and do you think that you know maybe price can become more of a lever for the composite decking manufacturer Seither gained share just maintain reasonable volume levels.
Yes, So let me take the latter and I'll ask.
Yes.
Pete take the former.
Just as a reminder.
Of.
The structure of the market, we've got good better best premium.
We strongly believe that we have the right portfolio.
The best way for Us.
To gain market share is to show the value of our offerings and to drive material conversion in each of the segments that we play in.
And to either expand.
Position.
Core to continue to drive.
Conversion, so thats expanding position with contractors.
And.
And dealers.
And and retailers and then continuing to drive conversion at both the contractor and the consumer level in doing that.
You need the right products for the right segment, and we don't believe lowering price is.
Is a is a good strategy nor one that we would consider executing as we move forward and I'll, let Pete take the front part of that yeah, and just to add on I mean, I think what gives us confidence as we were planning on seeing more of the destock happened in the fourth quarter, which we did see.
<unk>.
Two as you know we have about a one month lag on sort of getting data from our channel partners to <unk>.
Really dial in inventory, so we've been kind of stay and cost out obviously each month.
And we see the data real time.
Then lastly, I think prudently with our view of demand in unit volume being down, 10%, which is 5% incrementally lower than what we were thinking.
Or suggesting last time, one of the consequences of that is it does drive us to take out more inventory to.
To get to a lower level on both dollars and days and we think being conservative on inventory right now.
Reduces the risk for the full year.
Okay. Okay I appreciate all the color there guys as.
As my follow up question just on the share repo as you guys obviously.
Purchasing shares in the quarter.
But.
I guess why not be more aggressive here, especially with kind of capex coming down and the stock under pressure.
Yes look I think the thing that excites us about 'twenty. Three is is look one thing we know for certain is that our capex profile for 'twenty three is going to be meaningfully down.
We think it'll be down closer to $100 million sequentially from 22 to 'twenty three as we've talked about and some of the pain, we're experiencing in <unk>.
And really part of <unk> of not building inventory as we know we have the opportunity to take some cash off the balance sheet with working capital. So our goal is to continue to support.
The share repurchase program and I think the strength of the free cash flow in 'twenty three allows us to do that while maintaining a responsible net leverage ratio.
But as we've said.
Not going to see us.
Go far outside of the bounds of the two to two five times leverage that we've talked about historically.
Okay. Thanks, Pete Good luck guys.
Yeah.
Your next question comes from the line of Ryan Merkel with William Blair. Your line is now open.
Hey, everyone. Thanks for taking the question.
Just wanted to start off with a clarification question it sounds like Youre not really.
Okay.
<unk>, but for planning purposes, you think by <unk> volumes would be down 10%. So I have that right Hey, Ryan could you repeat that because you broke up a little bit.
Yes, it sounds like Youre, not seeing unit sell through really slow yet in <unk>, but for planning purposes, you think by QQ volumes are down 10% just wanted to make sure I heard that right.
Yes.
We are.
We are seeing consistent.
Consistent pattern right now that we've seen over the last few months.
Which is positive.
Dollar sales and modestly negative unit volume varies by it varies by geography channel and product, but in general that's what we're seeing.
I think what we're telling you is from a planning assumption standpoint, given the market indicators.
That are out there.
That people are chatting about we think it's fair to assume for the year it would be down 10% on our core volume. So how that flows through obviously, we just told you the inventory correction that were taken in Q1. If you just do the math is.
Now have more than half of <unk>.
Kind of that correction.
And then and then we see the benefit of that on our Q4.
Exactly when.
It manifests in how it manifests.
We'll see but we're just telling you it's a planning assumption.
Yes, okay that makes sense.
Follow up Jeff are you seeing any signs that would conversion is slowing or is it steady as she goes.
The wood conversion data can can get a <unk>.
What I would say is.
And the customer sets that we deal with.
We continue to see.
A focus on more composites not less.
Right. So we havent.
Which to us shows that that conversion continues to sustain.
And we see it in our mix, we see it and like the pattern that we've seen.
Continues.
And once again, we talked about how that's a that's a long term effect that people getting the right visuals that network effect all those other elements that layer in converting contractors.
Converting architects all that right and we continue to see that flow.
Perfect. Thanks.
Thanks, Brian .
Your next.
Question comes from the line of Susan Mcclary with Goldman Sachs. Your line is now open.
So we can't hear you if you're on mute.
Sorry can you hear me now we can we can.
Sorry about that.
The first question is just around the mix and you talk to customers are you hearing about any shift or any move down in products or is it more of just an overall delay as the market recovers from the level of demand we saw in the last two years or so.
Yes.
So as you as you think about the market, it's very similar to what we said on the last call which is in effect.
Our core contractors and the core participants in the market continue to operate full right. They still have backlogs.
They are still busy their crews are still busy.
All of that is there I think some of what you've seen in fiscal 2022, as we move through at some of what you've seen as kind of a modest.
We talked about single single digit kind of unit declines is more of the intermittent participants.
People that may do bathrooms, they may do general projects they come in they do.
They do a few Dax and then they they do whatever right. Some of that has left the system.
But in general we continue to see.
With our core contractor base very much business.
As usual in general, Yes look you can talk to someone and they may have had someone switch from the most premium line.
One of our other markets, but in general if you just look at the data in our conversations it has very much been business as usual with our core contractor set.
Okay.
And then following up you talked a little bit about working capital and the ability to generate cash as we think about the initiatives on inventories and some of the company specifics on recycling and those types of things.
Additional thoughts on how we should be thinking about the ability of the business to generate cash and how that could potentially compare to more recent history or even what you would think of as a more normalized level of generation.
Yeah.
I think again, we feel comfortable that we could support our repurchase program in a similar fashion and that's really going to come from the fact that we think we can generate our traditional cash from operations.
Yes.
$101 million less in Capex.
We haven't really formalized a target externally for working capital, but we know that over the last year year and a half we probably put $40 billion to $45 billion of inventory on the balance sheet that we'd like to eventually over the next four five quarters get off.
Okay. Thank you.
Your next question comes from the line of Keith Ventura with BMO. Your line is now open.
Good afternoon, and thanks for taking my question I, just wanted to come back to the 2023 EBITDA Bridge.
Sorry, if I add up what are the big pieces, you've got $30 million of positive price, you've got $13 million of cost deflation.
We had the benefit on the M&A side and the startup cost that will not occur again in 2023, and then we've got more recycle PVC and kind of more NDP. All these if I just out of these pieces that gets us startup positive call. It rough numbers $890 million and then you've got the.
Offset on the on the volume side can you talk about the decorative decremental margins what are the other big piece that I am missing because that's still there.
Does not get kind of closer to that 50 to 65 number that you've got out here.
Looking at a high level numbers, yeah high level numbers I mean, obviously you can do the math on the volume and the under utilization I think in that bucket for people and overhead inflation.
Look you should think about $8 million of energy inflation and about $5 million of property insurance.
And then on the all other you're really dealing with the update and the change in process on.
On inventory coupled with the change in SG&A.
Yes, I think.
I think the other key component here and it starts to get kind of yet I think we will probably add a little bit where we started.
You can start to see why we feel confident about our ability to manage as we move into the back half of the year.
Comments related to some of the positives that we have are all there I think the challenge we have with those positive not challenge Theres a timing component right. So if you think about the introduction of recycle and you think about.
The opportunity we have with.
A meaningful stabilization in our raw material pricing that we talked about theres, a four and a half month lag on those components.
Which is why we're talking about sometime during Q2 as we move into Q3, you start to see.
The profile of the business to reflect some of these components that youre talking about so the way that the component I would add on top of that is there's a timing component where you've got some components that have a four five month delay.
Got it that's helpful. And then can you talk a little bit about the trends that youre seeing on the exteriors.
<unk>.
Yeah on the exterior side of the business.
It has been.
Steady consistent with what we've described which is modestly negative unit volume and positive.
As as we've gone through we've continued to launch new products, we continue to drive penetration.
<unk> has been a buffer against modest changes in the market I think on the exteriors business.
We talk about.
Our.
Sure.
Exposure to new construction.
The exterior business has some exposure to new construction and so as we extrapolate out.
Once again, we feel really good about our ability to continue to drive market penetration in wood conversion and new products between our verse attack in our HVAC business there.
But as new housing starts.
Yes, I'll start to slowdown.
A portion of that business will be impacted and so if there is a slowdown in exterior we would probably expect to see at some time as we move through the second and third quarter.
Got it that's helpful I'll turn it over.
Okay.
This concludes our Q&A session for today I would like to turn the call back to Jessie Zheng.
Thank you all once again for taking the time this evening.
Have a dialogue with us.
Look forward to both the follow up questions and sessions and also to chatting with you again early next year.
And have a great evening.
That concludes today's conference call. Thank you for attending you may now disconnect.
Please wait the conference will begin shortly.
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