Q1 2023 Azek Company Inc Earnings Call
Welcome to the <unk> company's first quarter 2023 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. Please be advised that today's conference is being recorded I would now like to hand over the conference to Eric Robinson. Please go ahead Eric.
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 <unk> Com dotcom.
The earnings press release was also furnished by 8-K on the SEC's website.
I'm joined today by Jessie, saying, 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 the federal securities laws, including remarks about future expectations beliefs estimates forecast.
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 our performance.
These non-GAAP measure should not be considered in isolation or as a substitute for results prepared in accordance with GAAP reckon.
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 Sutton.
Good afternoon, and thank you for joining us.
The exact team delivered financial results modestly ahead of our guidance for the fiscal first quarter of 2023, driven by favorable sales combined with strong operational execution.
As previously discussed our results were impacted by the residential segment channel inventory correction.
Primarily within our deck rail and accessories business.
During the quarter, we saw steady CRO and retail sell through demand and we achieved normalized levels of inventory in the channel, which are at or below historical average days on hand based on expected demand for 2023.
As a reminder, our sell through demand is typically the best indicator. We have is the actual end user consumption of our products.
Our teams have done a great job in an unusual environment and we have had strong execution within the quarter from our operations and sales and marketing teams, enabling us to effectively navigate through the channel inventory correction.
We are on track with our plans for 2023 and believe that our focus on the customer while aggressively getting short term inventory adjustments behind us will put us in a strong position for the balance of 2023 and then the next year.
In the first quarter of 2023, we generated $216 3 million of net sales and $15 1 million of adjusted EBITDA and we increased our cash from operating activities by approximately $37 million year over year to six.
Corn milling in the fiscal first quarter.
As we progress through this year and into fiscal 2024, we see opportunities to increase our cash conversion through a reduction of working capital and a moderation of capital expenditure from the heavy investment period over the last couple of years as a company we continually monitor.
There are several internal and external data points.
Understand the health of the industry and our business in particular.
The key digital metrics remained steady and continuing to show interest in the category consistent with secular trends around the outdoor living.
Material conversion.
At a company level APAC continues to perform well with web traffic growth positive year over year and more importantly sample orders were up significantly over the same period last year.
During the quarter, we once again conducted a survey evaluating the sentiment of our thousands of dealers and contractors to understand downstream demand.
<unk> expressed cautious optimism that they could sustain growth in 2023.
Our contractors are also reported similar views with backlogs at approximately eight five weeks roughly the same as last quarter and consistent with the same period in the year prior.
Overall, our pro survey results are largely similar to slightly positive on their outlook for 2023 versus the October results with the most common concern being the uncertain macro economic environment.
These data points are consistent with what we experienced in the first quarter with residential sell through volumes coming in positive on a dollar basis and marginally better than our full year volume planning assumptions.
This is an encouraging trend to kick off the fiscal year. We are still several months away from the start of the primary outdoor living building season, and recognize the continued economic and geopolitical uncertainty.
These results and our execution against our strategic initiatives gives us increased confidence in the year and we are reaffirming our 2023 planning assumptions.
Turning to an update on our initiatives, we made significant progress in the quarter and continued to execute against our strategic growth initiatives picking up incremental shelf space across both pro and retail channels.
These wins will phase in over the next few quarter positioning us well heading into the spring selling season, this year and into 2024.
From a branding perspective, we completed a refresh of timber tech ASIC exteriors and structure connecting these brands together under consistent messaging to better serve our customers.
Our upgraded branding and product positioning highlights our market, leading portfolio, which includes our timber tech composite decking and our proprietary timber tech advanced PVC decking with unique performance characteristics we.
We are excited by the brand refresh and look forward to continuing to build our strong outdoor living and exterior brands together in the future.
Equally exciting after previewing the 2023, new products late last fall at customer events. During the timber Craig Championship. We are seeing strong customer receptivity to the new color in our timber tech second portfolio as well as our new timber tech furniture.
Collection.
We also simplified and upgraded our railing portfolio and have announced two new high performance PVC options.
Statement rail and Pinnacle rail, adding a high end PVC railing options to our already strong portfolio of aluminum and composite offerings.
Our recent acquisition of <unk> combined with our acquisition of structure last year puts us in a terrific position to continue to drive core and adjacent growth in outdoor living.
And exterior where we have seen particular resiliency to date, we continue to see.
Strong positive feedback from our captivate pre finished trim and siding launch and are adding additional resources to increase capacity and take on incremental demand.
Each of these new products in decking and railing and exteriors highlights how brands are under the age of that company can expand our total addressable market size further advanced material conversion and inspire homeowners to create beautiful low maintenance and sustainable outdoor living space.
Yeah.
During the quarter. We also continued our progress on increasing the use of recycling and our products.
An example of this is the ongoing increase of PV say recycling and our advanced PVC decking products, where we are now running more than 60% recycle and the core of our boards.
In addition, we announced two new partnerships, one with online clothing reseller threat up and which we will collect <unk> polyethylene plastic mailer bags as well as their post industrial plastic film waste and transport them to ASX vertically integrated polyethylene recycling facility.
The materials will then be processed and incorporated into new timber tech decking.
Return polymers business had also announced the partnership with trust score to leverage our full circle recycling program.
As part of the partnership we will collect grind and recycled trust core PVC material, helping to ensure that as much waste and scrap as possible is recycle and used to make new PVC products.
Each of these partnerships highlights the unique ways in which we are executing against our goal of diverting 1 billion pounds of waste and scrap materials annually as we seek to create a more sustainable and circular future.
We're also proud to announce a number of awards in the quarter and the real leader 2023 impact Awards APAC ranked number 40 out of 300 public and private companies and ranked number four in our home and lifestyle category. This award recognizes a diverse group of companies from around the world.
It proves that businesses can both thrive and help build a better world.
Additionally, <unk> has been short listed on the inaugural World 50, IMD impact awards for the progress transparency and communication of our Eni initiatives with winners to be announced in March of 2023.
Finally, just capital ranked <unk> in the top 25% of the largest publicly traded companies addressing the issues Americans care, most about from wages to workforce retention to impact this in such as ethical leadership and carbon reduction and pollution control.
Among others.
Would like to thank the entire APAC team for their contributions to these awards a testament to the companywide commitment to our purpose of revolutionizing outdoor living to create a more sustainable future.
<unk> has a broad portfolio and as we discussed last quarter. It is overwhelmingly driven by repair and remodel spend we.
We estimate that within our residential segment repair and remodel represents approximately 85% of net sales.
And that new home construction comprises approximately 15% of net sales.
Recall that our planning assumption that we shared on our last call.
The year assumes a 10% decline in residential sell through volume in fiscal 2023.
While our sell through volume trends to date have been modestly better we are not changing our assumptions our view of fiscal year 2023.
It is early in the season and we continue to operate in an uncertain environment.
Under the planning assumptions, we would expect to deliver 250 to 265 million.
Adjusted EBITDA in fiscal year 2023.
As a reminder, we exited fiscal 2022, well positioned to deliver against our margin expansion plan, including positive price carryover recycle benefit improving productivity and a moderating raw material environment.
Given our lower production levels in the first half of 2023 and the balance sheet lag, we would expect to see the benefit of our margin and sourcing programs in the second half of the year as we work through higher cost inventory and under utilization.
Exiting fiscal Q1, we are now at normalized inventory levels with our channel partners, where we are at or below historical average days on hand.
In the quarter, we were once again able to secure additional shelf space and product placement as an outcome of our winter negotiations.
Our focus on having the combination of the best products. The best sales team and a broad portfolio combined with increased capacity puts us in a great position to continue to gain incremental shelf space in both the pro and retail channels.
Our fiscal second quarter is traditionally a channel replenishment period for our industry ahead of the building season.
We have improved our lead times and given the current environment. We are working closely with our channel partners in a disciplined manner to maintain lower inventory levels coming into the season.
We expect channel inventory replenishment to be meaningfully lower than Q2, 2022, which we believe is prudent and better positions us for the second half of the year.
If demand during the season comes in stronger we are confident that our capacity there.
<unk> goods inventory.
Flexibility of our plants and the overall health of the supply chain will enable us to service customer demand without an increase in lead times.
As we communicated on the last call. We expect the majority of our revenue contraction will occur in the first half of the fiscal year with a combination of tier one inventory destocking in our channel and more modest preseason build in Q2 compare.
<unk> to the prior year.
As we move into the back half of fiscal 2023, we expect to have lower levels of inventory in the channel and we will also be lapping the prior year channel Destocking in Q4.
Our assumptions for the second half of the fiscal year also include the benefits from continued price realization.
Sourcing benefits that we are already experiencing completed productivity gains and our current recycle rates.
Starting this quarter. We are also plan on lowering our internal balance sheet inventory levels as volume seasonally adjust higher.
And we've sustained production levels lower than demand levels.
The second half tailwind I, just highlighted combined with company's specific strengths around new product innovation portfolio breadth and category leadership with best in class aesthetics gives us increased confidence in our ability to navigate the next few quarters.
<unk>, the adjusted EBITDA range outlined with our planning assumptions and expand our margins in the back half of the year I will now 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 the Investor relations portion of our website.
Before we get into the first quarter results I wanted to provide some color on the operating environment during the quarter.
The demand environment has remained stable and consistent with the fourth quarter.
Sell through profile was positive on a dollar basis and down mid single digits on a unit volume basis.
This consistent demand environment allowed us to complete our targeted inventory reductions in the channel during <unk> 2003.
Inventory days on hand are at or below pre pandemic levels across the portfolio from.
From an operating perspective, the focal points for <unk> 'twenty three around managing our conversion costs down to match the reduction in production levels without impacting service levels to our customers.
<unk> levels in the quarter were down over 40% plus across most of our facilities year over year.
On the commodities front.
We saw the bulk of our purchase portfolio stabilized during the quarter at cost profiles to support or deflation assumptions.
With the deflation we've seen we continue to add to our carryover deflation benefit for fiscal 2024 based upon our current raw materials balance sheet lag.
We do expect to gradually compress our current balance sheet lag of five months back closer to four months by year end.
For the first quarter of 2023, we saw net sales of $216 million, which was modestly above our guidance.
Net sales declined 17% year over year, driven by the previously communicated channel inventory reduction.
The sales bridge elements for the first quarter included a volume decline of approximately $85 million, partially offset by positive contributions from carryover pricing in the high single digit range and $21 million from carryover M&A.
<unk> 23, gross profit decreased by $41 million or <unk>, 46% year over year to $47 6 million.
<unk> 23, adjusted gross profit decreased by $35 million or 33% year over year to $71 9 million.
The adjusted gross profit decline was in line with the decline in net sales and higher decremental margins from lower production levels.
Note there is approximately a two month lag on our labor and overhead which will push some of the lower production level cost pressure and statistical <unk> 23.
Selling general and administrative expenses increased by $10 3 million to $73 4 million the bulk of the year over year increase was driven by SG&A contribution from recent M&A and transaction related expenses.
Adjusted EBITDA for the quarter was $15 1 million modestly above our guidance and compares to $58 5 million in the prior year comparable period.
The primary driver of the year over year change in adjusted EBITDA was the significant volume reduction caused by our channel Destocking efforts, which caused large declines in both production and net sales levels.
Net income for the quarter was a loss of $25 8 million.
Our negative <unk> 17 per share driven by the previously mentioned volume reductions given the channel inventory reduction.
Adjusted net income for the quarter was a loss of $13 9 million or adjusted diluted EPS of negative <unk> <unk> per share.
Now turning to our segment results.
Our residential segment net sales for the quarter were $179 million down 18, 8% year over year, driven by the previously mentioned channel inventory calibration impact, which was largely in our deck rail and accessories business.
The exterior business saw positive growth year over year.
Recent acquisitions contributed $21 million in the first quarter.
Residential segment adjusted EBITDA for the quarter came in at $26 million, which was down approximately 60% year over year.
Commercial segment net sales for the quarter were $36 8 million down four 7% year over year.
We saw similar performance in both our Viacom in Scranton products businesses as end markets, including marine graphics and semi conductor.
Channel Destocking in the December quarter, and we expect that to continue in the near term.
Commercial segment adjusted EBITDA for the quarter came in at $5 2 million, an increase of $400000 year over year.
Segment, adjusted EBITDA margin expansion of 170 basis points year over year was driven by favorable price commodity performance.
From a balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $86 9 million and approximately $147 2 million available for future borrowings under our revolving credit facility.
Working capital defined as inventory plus or minus AP.
With $340 6 million, we ended the quarter with gross debt of $677 7 million.
Which included approximately $79 2 million of finance leases.
Net debt was $598 million and our net leverage ratio stood at two three times at the end of the first quarter.
Net cash from operating activities was $6 4 million during the quarter versus negative net cash from operating activities of $30 6 million in the prior year period.
Capital expenditures for the quarter were approximately $30 million down $35 million versus the prior year period.
During the quarter, we repurchased 353000 shares of our common stock for approximately $7 5 billion.
Or an average purchase price of $21 and 23.
The remaining authorization under our share repurchase program is approximately $311 million.
As we have communicated we are mindful of our long term net leverage ratio remaining in that two to two and a half range and as a result, we will likely push our repurchase activity to later this fiscal year.
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.
We are now one quarter into the fiscal year.
The selling season is still a few months away we are reaffirming our 2023 planning assumptions outlined last quarter.
As a reminder, our planning assumptions from our last call we are safe.
Sales unit volume down approximately 10%.
Carryover pricing for the year, and a 3% to 5% range with M&A, adding approximately two points of growth.
It is important to note that the bulk of our net volume reduction for the year is in the first half of 2023.
We are expecting a <unk> volume decline, which will be offset with positive volume growth in <unk> 'twenty three as we lap the prior year channel destock.
SG&A, increasing approximately 2% to 3% year over year.
With a net increase primarily driven by the SG&A contribution from recent M&A and.
And normalization of incentive compensation.
Strong free cash flow generation, driven by return to more traditional capex levels of $70 million to $80 million as well as progress against our targeted working capital reductions and inventory.
Under these planning assumptions, we expect adjusted EBITDA in the $250 million to $265 million range for the full year fiscal 2023.
From a segment expectations perspective, we believe our residential business performance and modestly better deflation will offset any softness in our commercial business, which is seeing some channel inventory correction.
Before we turn to our guide for the second quarter.
I wanted to provide context for the operating environment, we expect in fiscal <unk> 23.
Channel inventories are at normalized levels to start <unk> 23.
As a reminder, <unk> is historically a channel replenishment quarter for industry ahead of the traditional building season and fiscal 2023 with lower lead times available capacity, coupled with our own finished goods inventory levels and our sell through demand assumption of volumes down 10% for the year.
We are intentionally working with our partners to manage the amount of inventory entering the channel ahead of the season in a very disciplined and measured way.
If demand is stronger we are confident that our capacity position the flexibility of our plants and the overall health of the supply chain will enable us to serve customer demand without an increase in lead times.
Additional context on our <unk> guidance includes.
Sales volumes are expected to decline in the approximate $55 million to $70 million range, partially offset by positive contribution from carryover pricing in the high single digit range production.
Production levels will start to normalize in the back half of two to 'twenty. Three we expect production levels will be down approximately 30% year over year versus the 40% plus decline seen in <unk> 'twenty three.
By the end of the first half of 2023, the bulk of the Underutilization will fully flowed through for labor and overhead.
<unk> inventory levels on our balance sheet, we will start to decline consistent with our previous commentary for <unk> 'twenty three we expect consolidated net sales between $340 million to $365 million.
We expect adjusted EBITDA between 57 million to $63 million.
In closing it is important to highlight some of the key elements in our implied outlook for the balance of fiscal 2023 between <unk> and <unk>, which include <unk>.
Number one the residential channel inventory normalization has been completed.
Two material input costs have settled at price points that support our 2023 deflation assumptions that will now carryover modestly more deflation into 2024.
We expect to start seeing the benefit of lower raw material prices and <unk> 23.
Three we expect production levels to normalize in the second half positively impacting utilization and setting the stage for plant productivity.
Four we anticipate sales volumes will recover significantly from the <unk> 23, seasonally low and channel Destocking impacted profile.
We expect to hold price in our core markets and lastly, six with channel inventory reductions complete we will start reducing inventory on our balance sheet and expect to finish the fiscal year with approximately $40 million lower inventory year over year. As a result of this reduction we will see compression.
And our balance sheet lag on inventory, enabling raw material deflation to flow more quickly from the balance sheet to the income statement in fiscal 2024.
With that I'll now turn it back to Jesse for some closing remarks.
Thanks, Pete I would like to take a moment to again recognize and thank our dedicated team members.
General and supplier partners and contractors that support the age that company.
Thank you for your continued focus and dedication and your contribution to the result in the first quarter.
Our execution in Q1, including our shelf space gains combined with the continued progress we expect to make in Q2 increases our confidence in our ability to deliver above market growth in margins in an uncertain environment. We.
We are well positioned to realize the benefits of our recycling and sourcing initiatives late in Q2 and through the balance of the year.
The fundamentals of our business are strong as is our confidence in our future.
With the residential channel inventory normalization behind US we are focused on our strategic growth and margin expansion initiatives that will enable us to deliver against the planning assumptions, we laid out for 2023.
We 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.
That operator, please open the line for questions.
At this time. Please ask one question along with a follow up and to ask a question press star one on your telephone keypad.
Our first question comes from Keith Hughes with <unk> Securities.
Thank you.
Question on inventory you talked a lot about the channel being a mine and I think towards the end of the prepared remarks, you talked about another $40 million I guess coming off your inventory. So I heard that right can you just talk about how your internal inventories should shape. The next couple of quarters with the kind of demand view that you've laid out.
Yes, Keith this is Peter roughly.
Roughly speaking, we would expect to take about $30 million of inventory out of.
Our system here in the second quarter, obviously, we built $20 million in the first quarter, so we'd be down net 10.
Which means over the third and fourth quarter, we'd be taken on an additional $30 million of inventory.
And that's the case.
Me too.
And one other inventory question on exteriors exteriors was I think it was said it was up in the quarter in terms of sales how do you feel like Youre exterior as inventory is and where the.
Where distribution is out there.
Yeah, our exterior business has been steady.
And so as you consider the progression over the last.
Really few quarters and over the last few years, we have had.
Proprium supply to be able to meet external demand as such it's been very consistent.
And within normal ranges.
Really.
Over the last few quarters, and we continue to see that.
Okay, Great I'll turn it over to others. Thank you.
Our next question comes from Matthew Bouley with Barclays.
Good evening, everyone. Thanks for taking the questions.
Question on the on the volume outlook.
I know you said the bulk of the unit volume declines.
The first half and I think you said that the expectation is that volumes should eventually turn positive in your fiscal fourth quarter I'm. Just curious if you can expand a little on the confidence in that.
What are the assumptions behind that I guess.
For volumes to be positive by then does that assume sell through also needs to be positive or are you kind of taking a view on the progression of channel inventories through the year, just any color on that kind of second half volume outlook. Thank you.
Sure sure Thanks, Matt.
At a high level, if you consider what we said on our planning assumptions, which is that we expect sell through volume to be down 10%.
For the year now that sell through that is not what we're talking about specifically relative to our sell in obviously the revenue we book.
What we sell in into distribution and the way to think of it as we have in the first half of the year.
<unk> brought in Q1 brought our distribution and channel inventory down significantly and then as we commented on Q2.
Our not inflating the inventory as much as either last year or.
Against.
A little on the low side compared to historical norms.
That combined with the fact that we are not.
That we are lapping an inventory draw down in Q4.
You do the math the sell through assumptions of minus 10% lead to revenue.
Stability.
In the back half of the year.
Got you Okay. Thank you for that Jesse.
One just.
The growth initiatives, you spoke about progress with shelf space of pro and retail I'm. Just curious if you can get into.
How meaningful are those wins and kind of how those play into the volume guidance. Thanks, everyone.
Yes, no I appreciate the question as we've talked about are we operate with a portfolio of initiatives.
What we said is the intent.
Our initiatives is to drive.
Call. It two to three points of growth on an annualized basis now thats new product Adjacencies.
That's what we're doing downstream relative to increasing the number of contractors and consumers and it also includes the benefit of increasing shelf space.
Which potentially gives us access.
And.
More ability to.
Get after certain geographies and customer basis.
So the way to think of our initiatives as we are on track.
With what.
What we've described in total.
Against that 2% to 3%.
Alright, Thanks, Jessica good luck.
All right. Thanks, Matt.
Our next question comes from Tim <unk> with Baird.
Hey, good afternoon, guys. So that's a new one.
So if.
I guess, just thinking about kind of the pre season kind of selling period.
Being being kind of below normal is is that kind of what youre hearing from your distributors that they want to stock below normal or is that more intention on your part I can't tell.
Yes.
As we as we consider the dialogue.
With our channel partners, both distributors and dealers.
It's a bit of a push pull.
And I would say it varies by channel partner.
<unk>.
With certain channel partners in particular, some of our dealers there is an intent to be.
More cash efficient.
Coming into the season.
And then our dialogue with our distribution base is and we will continue to be what's the right.
Inventory level to have in stock to be able to service your customers in our joint customers and to make sure that we have incredibly high service levels.
And also making sure that we are a bit more cautious then.
So we don't get into the same.
Situation that we may have had in previous quarters, and so I would say, it's a dialogue I think if anything.
As a manufacturer are probably being a little bit more conservative.
Then some of our channel partners.
As we make sure that we're trying to put the right inventory in at.
At the right time ill just reiterate.
What we see from an aggregate standpoint.
From the marketplace is stable and pretty normalized.
We are lapping an elevated time period of inventory build and we want to make sure that where appropriate.
So we really set ourselves up for a strong performance in the back half of the year.
Okay. Okay. That's good and then just on the on the.
Raw material deflation timing.
Would you expect that to be positive for the full quarter. In Q2 is that more you will turn positive as you kind of exited the quarter in Q2, yes, it'll be the ladder as we communicated on the last call with <unk>.
With the business slowing a bit.
<unk> has elongated a bit closer to five months.
So we're highly confident we can see the deflation that we're putting onto the balance sheet here.
Through the first four months of the year, and we expected meet or exceed the $30 million of second half 'twenty three deflation that we are articulated on the last call and candidly, we can already see some upside to the carryover on 2024.
And I think that number was $50 million annualized before any sense of what it is now.
I would just say, it's fine it's favorable to the $50 million and the bulk of its carrying forward to 2024.
Okay. Okay, good start to the year guys.
I appreciate it thanks, Tim.
Our next question comes from Sue.
With Jefferies.
Hey, guys. Just you guys gave us a lot of different numbers, you had kind of unpack how demand kind of progressing I think your guide is calling for a 10% decline in sell throughs, but your channel partners I think are calling seeing mid single digit declines in the survey implies the dealers are expecting maybe positive growth can you kind of help us unpack.
Does that kind of imply is your base case assumptions at least currently feel relatively conservative.
Yes.
First off I'll just stress we are very early in the season, we're sitting here in February trying to assess.
Where we will be.
As we exit September and I think what we're just trying to do is be prudent.
As we look at the market assumptions that we highlighted which is really related to <unk>.
<unk>.
High teens in new construction and.
Down.
Mid to high single digits in R&R.
That rolls into are down 10% assumption, we think it's prudent to hold to that.
Having said that you're what we're seeing as we work our way through the first three to four months.
As our channel partners.
Modestly more optimistic than that from where we sit at this point and through.
So we're three months our.
Through through some lower seasons, our sell through is more positive than that so we just think it's really prudent.
Select the season play out and operate under the macro assumptions.
So hopefully that gives you a little bit of perspective on how we're seeing things.
That's helpful color.
I guess, perhaps a question for Jesse <unk>.
<unk> guide implies decrementals in the 70% range I mean, obviously youre still curtailing production pretty heavily.
Heavily.
Three Q should we assume decrementals are more normalizing youre largely done curtailing inventory at year end and when we look at EBITDA on a year over year basis will it be up year over year or is it really more of a <unk> event, where we see the year over year inflection.
Yes, Phil this is Peter so.
Think about the cadence of the year from a production perspective. So obviously, we were down close to 47% actually in the first quarter on the core kind of production volume.
It's closer to down 30.
In the second quarter, and and really we're still down modestly in the third quarter, but were up in the four so it's kind of a consistent story of our sales volume is kind of flat in the back half of the year. So as our production volumes. So really what's different when you think about the back half of the year margins as a couple of things so one.
First and foremost the channel Destocking is completely behind us, which was obviously, causing a lot of churn on the manufacturing facilities and really a key driver of probably about $10 million a quarter of.
Underutilized manufacturing costs in both the first and second quarter that don't recur in the back half of the year.
And then as we articulated on the call last quarter. The change in accounting was almost entirely a first half of the year nuance and mostly a first quarter.
That is still on pace to beat or was about $6 million in the first quarter likely wrap up the remainder of that which will be about $2 million to $3 million in the second quarter. So you've got about $28 million of course, thats sort of not recurring in the back half of the year and then as we just stated on on some of the commentary previous questions were.
Really confident in the $30 million of deflation that we committed to and hit in the second half of the year.
Okay.
Yes.
Sorry, Phil if I could just add.
We havent intentionality too.
As we talked about on the last call that within the first half of the year.
To make sure that we are at an appropriate and appropriately conservative inventory position in the channel.
Which we feel we are very much on track to do.
And also that we start to make progress about bringing against bringing our own inventory levels down and there was an intentionality of having for lack of a better word.
<unk> utilization associated with that.
Be more and hopefully primarily concentrated in the first half of the year and so.
You will see improvement in the Decrementals in Q2.
Partially because of volume partially because.
Some of what Pete just described is a little less.
And then as the intent is to get that behind us and then be able to focus.
Moving forward on real demand.
And appropriate utilization and then obviously getting the benefit of what Pete just highlighted.
Got you that's helpful. I mean, I don't want to put words in your mouth, but I mean, you're talking about $30 million of deflation 20 billion politics kind of goes away and Thats nonrecurring. It does feel like <unk> EBITDA to be up year over year or at least flat or are we thinking about it correctly.
I think the way you could think about it as everybody is doing their math and can kind of back into the back half of the year quality of earnings for.
For the average of that I think the third quarter will be modestly below that average, but above the prior year and then certainly in the fourth quarter, we're going to be above that average and obviously well above the prior year.
Okay Super Thank you.
Our next question comes from Michael Rehaut with JP Morgan.
Great. Thanks for taking my questions.
First I just wanted to clarify Jesse.
And Pete I mean.
Talk about your planning assumptions for the year end.
Having a one point if you look on the slide it says net sales assumes down 10% unit volume.
<unk> also returned to refer to that as your outlook for the market itself.
And really sell through.
So.
Or are we talking about the same thing here in terms of what you expect the <unk> sales volumes to be that.
In effect they are in line with the market sell through outlook or are there any other nuanced differences here in <unk>.
Part of what I'm getting at is also the propensity for any potential share gains in the market given some of the new products that you've described earlier.
Yes, the way.
I'll start with we're operating.
In an uncertain environment and it's really important.
We acknowledge the assumptions and our assumption is as you pointed out that the market will be down 10% and that our sell through will be down 10%. The way to think of the initiatives that we described.
And some of the good things that we were doing relative to volume on the organic side is that those are elements that give us increased confidence that we can manage through any volatility against that 10%.
So another way of saying that is if the market stays steady.
And we have perfect internal execution.
From an organic standpoint.
In theory, we could be better than that 10%, but there is a lot we're in the first quarter.
And we happen to be in the time of an upcoming Super Bowl, but yes, theres a lot of game left to play here and we want to make sure that we.
We are providing appropriate assumptions.
And then our capability to deliver against those.
Those assumptions I'll make one other minor point.
That 10% sell through.
Is not inclusive of price and not inclusive.
Our acquisitions, which are modest is as Pete said in his prepared remarks, it's primarily a Q1 thing on the acquisitions and that becomes very modest and then as we move into the back half of the year pricing.
Year over year.
<unk> is no longer.
And added development, so hopefully that gives you.
Our perspective.
Reiterate its a planning assumption and our intent is to execute.
Against that planning assumption and make sure that we're in a good position to.
To deliver with confidence.
That's very helpful. Jeff, Yes, I understand.
What youre, saying there so thank you for that.
I guess secondly.
Just trying to think about the some of the benefits that you've highlighted that will hit.
Much more so in the back half of 'twenty three.
And I think just to sit on an earlier question around <unk>.
While material benefit where.
I think initially you had talked about $30 million of deflation hitting the back half.
<unk> added about $50 million annualized number so.
I would point to maybe $20 million.
Additional incremental benefit to be realized in 2024.
Now it sounds like Theres, a little bit of upside perhaps to both of those numbers.
Correct me, if I'm wrong Pete.
But also how to think about the sourcing benefit as well you highlighted in the slide that it's a $30 million benefit in the back half of 'twenty three.
Would that also be a similar type of wood.
Just kind of double that to get to an annualized and you could see a similar incremental.
Amount realized in 2024.
Just trying to think about those two things.
I mean, the timing if youre going to shift, but I mean, again, I'm not going to monetize and give guidance on 'twenty four but I would say look we've got off to a good start there is modest upside that's not a relevant already carrying into 2024.
Probably a little bit into 2023.
Some of that might be being conservative in terms of breakage in other places we haven't seen any in the <unk> results, but I think it's still early.
The one point I, just want to clarify and Mike on.
Just to make sure we're clean on the question.
Are you sourcing and deflation as is.
They're the same thing we happen depending on what Youre reading in the tax.
Those you should consider those two is the exact same thing so theyre not additive it's just.
A different way to describe it because we're getting some of the deflation because of some aggressive sourcing action and so.
Those two are the same and they're not additive. So you may not have meant that but I thought I'd at least clarify that.
Got it.
Helpful. Thank you one last quick one amortization expense for the year can you give us any guidance on that that'd be helpful.
I'd say, it's kind of flat to modestly up $2 million to $3 million from last year.
Okay. Thanks again.
Our next question comes from Susan <unk> with Goldman Sachs.
Thank you good afternoon, everyone.
My second question is you mentioned in your.
In your comments that sample orders have been up meaningfully we've seen that there's been any change in terms of demand or the end market interest as we've seen lumber prices move off of their low and perhaps continue to move higher through the spring.
Okay.
I would say I don't know that I can correlate sample activity.
To lumber prices, specifically I think they're at times had has had been a little bit of a lull in some of our digital activity.
But what we see in general as we pointed out we've seen growth. We saw growth last year. We've continued to see growth on the sample side, it's really an outcome in our case.
Really two things one general interest in the category.
And then.
Specific marketing capability and efforts on our part.
That have at times disproportionately benefited us.
Versus the industry and so you should think of it as an indication of consumer engagement.
Between ourselves and.
The large potential mass Av.
The large mass of potential customers.
Okay, Alright, that's helpful. And then following up can you talk a little bit about the exteriors business and the strength that you've seen there in the winter and how youre thinking about the outlook for that as we get into the spring in the summer.
Yes, we don't breakout outlook, specifically for any of our businesses.
Having said that.
Key characteristics on exteriors ads as I answered in the previous question one of the previous questions. The exteriors business has been nicely match between supply and demand. So it hasn't had that same kind of volatility, it's been make and sell within the quarter and theirs.
Much less inventory.
And has been much less inventory in the system, we have with our initiatives.
Pretty consistently been able to expand our position in the marketplace.
Given our position with two terrific businesses.
In that sector.
We've continued to secure.
Not only additional shelf space, but launch new products that allow us to incrementally access.
More of the market and the.
The other element there as we've talked about that business has.
<unk> has and is exposed a bit more too.
To new construction and in those areas.
Where we have we have exposure to new construction, we have seen.
Those volumes come in but they've been offset.
With really good performance in the rest of the core driven by.
By some of the elements, we've talked about but I'll come back to once again, it's in its entirety, we're assuming relatively.
We're assuming that down 10% across all of residential even though as we've highlighted we haven't yet seen it.
Okay. Thank you and good luck.
Thank you.
Our next question comes from Cotan mentor with BMO capital markets.
Thank you Jesse.
Just the first question can you talk a little bit about how the structure acquisition is going especially as you.
Get the products out and the reception would be.
On the retail side, and even sort of on the distributor side if at all that this call.
Dan.
Yeah really.
<unk> the question and for those of you that were at Ibs.
You would have seen that we combined both the timber tech and.
And structure presence just because they are quite natural there.
So if you take a look at structures core business.
It has.
Made meaningful progress since we've owned that business.
As we talked about when we bought it in Debottlenecking.
Are you factoring upgrading manufacturing.
And putting that business.
And a very high service levels. So we've unlocked a lot of capacity there.
So within that core business.
It has a steady and growing core.
And it continues to penetrate.
The commercial market.
With increased resources, so think of hotels campuses.
<unk> campuses.
And other opportunities their restaurants.
As people convert their outdoor living spaces from.
From temporary spaces to more permanent spaces, so that business continues to do quite well in.
In particular on the commercial side and.
What we've done in the last couple of months has launched a.
Uh huh.
A kind of a pre fab.
Standard <unk> system that we are selling both through the structure.
Channels, but also through the timber tech channels, and we continue to gain traction.
With those products being placed it's still early.
With those products, both expanding within structures core, but also selectively being placed into.
Our dealer base that is selling.
Outdoor living products and so we've had really good reception.
With both our contractors and our dealer base and we would expect that expansion of that product coming into our core channels to continue.
Sure.
Got it that's helpful I've done a door.
I appreciate it thank you.
Our next question comes from Mike Dahl with RBC capital markets.
Hi, Thanks for squeezing me in a couple of quick ones here.
In terms of the second quarter price carryover high single digits.
I guess when we looked at it we were thinking that you are lapping one price increase from last year that still is benefiting the fiscal first quarter and so if price has been relatively stable.
Can you help us understand the carryover effects still being high single digits versus dropping down and just I know you've got the.
The guide for the year implies that it falls off through the year, but maybe just give us a little more color on the cadence, yes, we were actually lapping two price increases. So one was kind of low single digits and then back in May we basically had a.
Call it mid single digits.
Nice increase.
Okay got it.
And so basically that may one and youre, saying the.
That's when he officially lap.
Okay.
Thanks, and then there'll be a very.
Third quarter, and then none in the fourth quarter.
Right. Okay. So timing some timing difference there in terms of the kind of subjective impacting P&L and things like that.
I guess I wanted to get your updated take on your portfolio.
Done a lot on the residential side your competitor, obviously, just divested the commercial business.
Your commercial business has been decent.
Rebound.
Are you thinking about positioning for that business and the overall portfolio mix as it stands today.
Okay.
Yes, as you pointed out.
Our commercial business has done just a terrific job of navigating through.
The last two years of uncertainty as you might recall that business.
Was meaningfully impacted early on in the pandemic and made some structural changes and has done a really nice job of getting its profitability up.
And also.
<unk>.
Well positioned.
For us it's it's.
A core part of our business and.
Has has really been the founding of the company in.
We will continue to make sure that we manage the portfolio as a company appropriately in and invest where it makes sense.
And make sure we do the right thing not only for the business to continue to expand it but also for.
The long term health of our overall business.
Okay. Thanks, Jeff.
Our next question comes from John Lovallo.
Hi, guys. Thank you for taking my question first.
First one is can you just help us with the magnitude of the Viacom channel destock in the first quarter, maybe what youre thinking about for the second quarter and how we should sort of think about margins from this segment going forward.
Okay.
Yes.
I think the way to think about the balance of the year is look.
As we've kind of articulated a bit look we would hope to have a little bit of 2023, probably deflation upside and a little bit of strength in residential.
Any choppiness that we might see in the back half of the year on any channel Destocking on the commercial side that we could do.
Do we could handle and sustain that.
Okay and then.
I know, it's not certainly not your base case, but what would have to happen in your opinion for you not to be able to hold price in your key markets.
So John as we talked in the past.
We price to value and we feel really good.
About the value proposition, we have in the marketplace, whether it's our deck rail and accessories business or our exteriors business and we feel good about our ability to continue to manage.
Our value in the marketplace and continued.
Being able to optimize our margins based on all the great work, we've done on the sourcing and cost reduction side. So.
Nothing specific other than to say.
In general the way we operate is.
We we sustained price and we make sure we focus on driving the value for that price.
And I'd just add obviously, it's one quarter only but based upon performance metrics of one Q.
We didn't really see anything at all that would cause us to think about our planning assumptions for the rest of the year and pricing differently.
Got it thank you guys.
Thank you.
Our next question comes from Trey Grooms with Stephens, Inc.
Good afternoon.
So obviously, it's early but you mentioned.
Earlier that the sell through demand trends for residential had been modestly better than the planning assumptions is that pretty widespread across products or if not maybe what product lines are you seeing the better sell through.
Yes sure.
I'll answer it at a very high level.
It's pretty widespread.
As we look at our data.
Whether it's the pro channel or retail or we look at our exterior business or our deck rail and accessories business.
It's.
In aggregate.
The business has.
<unk> has performed incrementally better as we've highlighted on the call.
Yes, so pretty widespread okay. So I guess just following up on another question from earlier.
With the sample requests that you were talking about.
Mostly driven by continued interest in the space.
Can you talk about maybe what the sample request that youre that youre seeing and what you are sending out if theyre, suggesting any.
<unk> in appetite as far as like high end versus the more entry level or any.
Expected trade down from the consumer to more entry level product based on what Youre seeing there.
Yes.
We look at our sample data and I don't exactly have a mix in front of us and I'm operating a bit off of memory, but typically for the samples that we send out.
They tend to skew higher end.
So they tend to be our advanced PVC products that have terrific aesthetics.
And so in general historically and even more recently the segment.
A lot of the segment that we're servicing with the samples tends to skew.
A bit more premium and I think your underlying question might be or are there any leading indicators.
To really highlight any.
Any changes in mix.
I think as we've looked at it.
In general all of our categories.
<unk> continue to perform well.
We at times have.
We've been modestly under indexed in.
And the good part of the category in certain parts of our decking business.
And so we've been incrementally.
Been able to perform well there but in general.
You take a look at our core business.
Yeah.
It's operating within the same kind of price band, so there might be a little bit of movement between product and product.
But if youre in a premium band you stay within our premium ban if youre in a kind of an entry level band you stay within that entry level band.
Got it that's super helpful. Jesse Thanks for taking my question.
Great. Thank you.
Our next question comes from Adam Baumgarten with Zelman.
Hey, everyone. Thanks for taking my question I'm, just curious on the trends maybe youre seeing in January just because it sounds like there is a nice uplift in overall kind of housing related activity in the month, just curious if that translated into better trends in your business.
Yes, we don't.
We don't disclose any specifics.
Once a month.
What I would say is.
What we're seeing now is pretty consistent with what we've seen really over the last.
Over the last three months in aggregate so there's.
There's not anything meaningfully different we're seeing in the data as we highlighted we felt incrementally better about Q1, and there's nothing really that we're seeing that's changing the data right now.
Okay got it thanks.
I'll now turn the call over to Mr. Jesse seeing.
Yeah.
Really appreciate once again all of you taking the time to join US. This evening, we look forward to chatting with you.
Further as necessary and look forward to meet you again on the next call. Thanks and have a great evening.
Yes.