Q2 2023 The AZEK Company Inc Earnings Call
Please standby we're about to begin.
Good afternoon, ladies and gentlemen, welcome to the AVX Company second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode and please be advised that this call is being recorded after the speakers' prepared remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one.
One on your telephone keypad and if you would like to withdraw your question simply press Star One again and now at this time I would like to turn the call over to Mr. Eric Robinson VP of Investor Relations. Please go ahead Sir.
Thank you and good afternoon, everyone. We issued our earnings press release and a supplemental earnings presentation. This afternoon, and the Investor Relations portion of our website at investors is it co dot com. The earnings press release was also furnished via 8-K on the SEC's website.
I am joined today by Jessie Zheng, 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 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.
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 measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
Reconciliations of such non-GAAP measures can be found in our earnings press release, which is posted on our website.
Now, let me turn the call over to ASIC CEO Jesse.
Good afternoon, and thank you for joining us.
<unk> delivered financial results modestly ahead of our guidance for the fiscal second quarter of 2023, driven by steady residential end market demand disciplined operational management and an ongoing execution of our initiatives.
I am very proud of the team as we navigate the year and lay the foundation for a strong performance for years to come.
Our team continues to execute our strategy and further strengthen our industry leading presence across the U S and Canada. We are on track to deliver against our strategic initiatives, including driving accelerated material conversion and growth through new product development and channel expansion.
We continue to be excited by the opportunities within our approximately $14 billion core markets as well as the potential for growth in our Adjacencies.
We are confident in our growth strategy supported by the long term trends of what conversion outdoor living and demographic shifts increasing the need for housing.
With our proven ability to drive growth through innovation and other initiatives.
In the second quarter of 2023, we generated $377 7 million of net sales and 72 8 million of adjusted EBITDA.
And we increased our operating cash flow by approximately $94 million year over year to $56 7 million in the fiscal second quarter.
As we expected our Q2 margins improved sequentially versus Q1, driven by modestly improved production volumes and the team's focus on cost savings initiatives.
Disciplined operational execution resulted in a nearly $50 million reduction in APAC balance sheet inventory from the close of fiscal 2022 to the second quarter fiscal 2023.
As we progress through this year and into fiscal 2024, we will continue to focus on free cash flow generation via working capital initiatives and a disciplined approach to capital expenditures.
After the heavy investment period over the last few years.
During the quarter, we saw relatively stable demand from our residential business with sell through coming in modestly above our assumptions.
As a reminder, sell through is the metric of what is sold into our dealer base from our distributors and as a key indicator of end market demand for our products.
As we expected our residential channel partners purchased less than last year, which certain dealer partners, taking a more conservative approach.
This was partially offset by the initial impact of our shelf gain highlighted on the last call right.
Residential channel inventories are below last year, and approximately 15% below that 2017 to 2019 to historical average days on hand.
We continue to believe that the channel inventory correction in our residential segment is behind us and we are well positioned for the second half of 2023.
In addition to managing both internal and external inventory more effectively we were able to deliver high service levels and are in continuous dialogue with our channel partners to ensure we are getting product to our customers where needed.
On the commercial side as we indicated last quarter, we've seen a more challenging environment, resulting from a combination of channel destocking and softer demand in certain commercial end markets, which we expect will be a headwind versus our original planning assumptions.
Overall, we remain confident in our ability to deliver against the adjusted EBITDA range of $250 million to $265 million outlined in our fiscal 2023 planning assumptions as we expand margins in the second half of the year.
In combination with an increased focus on operating cash and lower capital investments, we expect to create meaningful free cash flow in fiscal 2023.
Turning to an update on our strategic initiatives.
Launch of <unk>, 2023, new products, including our new on trend colors, and our premium timber tech decking and new solutions in our composite and aluminum railing collections have all been well received by our customers and we are excited about the uptake we have seen today.
Additionally, we are excited about this year's introduction of our timber tech outdoor furniture collection, a premium product produced from high performance materials by our commercial division and fabricated in our Scranton, Pennsylvania facility.
These new product introductions collectively are a strong complement to our deck rail hurdles and accessories platform offered through our timber tax structure ultra lots and in tax brands and positions us to drive incremental growth in our core markets.
And access additional adjacencies and outdoor living.
And exteriors, we continue to see steady demand and performance across our exterior trim and value added solutions, our exteriors business, which tends to have a larger mix of residential new construction projects versus decking has continued to deliver solid results driven by new biz.
This wins.
New products like our captivate, prefinished trim and siding and downstream wood conversion.
Overall, our residential sales and marketing initiatives include ongoing downstream market conversion and the successful execution of the pro and retail channel wins, we highlighted earlier this year.
New shelf space positions will continue to ramp up over the next few quarters and support our ongoing efforts to generate above market growth.
Wood conversion and expansion through new products during the quarter. We continued our progress on increasing the use of recycled materials in our products, including increasing the amount of recycle in our advanced PVC decking and achieving certain milestones as we move to a lower cost formulations.
For our cap composite decking.
We are also nearing the completion of our capacity expansion investments at our return polymers PVC recycling plant and Ashland, Ohio.
This will roughly triple our PVC recycling capacity since return polymers joined <unk> in January of 2020.
These investments are key enablers to support the recycle content expansion of our advanced PVC decking and exterior products and long term recycling and margin objectives.
The APAC company. Once again was recognized for a number of awards in the quarter that highlight our leadership in the industry.
First the as that company received two sustainable product of the year Awards in the 2023 Green builder survey.
One for our timber tech advanced PVC decking, and one core age that captivate prefinished sighting and trends.
These independent awards validate our consistent and ongoing investment in R&D to launch new product innovations that provide unique benefits to our customers and our more environmentally sustainable.
In addition, our proprietary timber tech advanced PVC decking was named a winner in the prestigious 2023 sustainable innovation awards by good housekeeping.
We are excited to be recognized by good housekeeping Institute.
And all of lab professionals, and sustainability experts, who evaluated our products on rigorous criteria, including energy and water reduction recycled content recyclability and more.
Judges were also unprecedented timber tech advanced PVC decking exceptional durability.
Dunning aesthetics and remarkable sustainability features.
Finally, we were also named the number one brand in composite decking by House beautiful.
These awards illustrate the positive momentum that our brand awareness has experienced over the last few years as validated by multiple third parties, including Zander as recent 2023 builder brand use study report our progress is a reflection of the tremendous efforts of <unk>.
The APAC team and I would like to thank them all for their commitment to our purpose of revolutionizing outdoor living to create a more sustainable future.
Moving to outlook.
Let me provide some perspective on what we're seeing from our demand indicators and our residential business.
As we move into the core of our season, we continually monitor external and internal data points to understand sentiment and potential demand shifts.
Key digital metrics show sustained interest in the category.
Outdoor living and composite material popularity are supporting material conversion away from wood.
As that continues to exhibit consistent consumer engagement with website leads and samples showing healthy year over year growth within the quarter.
Consistent with prior quarters, we again surveyed our pro contractor and dealer basis to understand sentiment and downstream demand.
Overall conditions remained largely unchanged with contractor backlogs at approximately eight weeks in this quarter's survey.
Contractors have noted that the current backlog level remains modestly higher than the pre pandemic average backlog.
<unk> with prior surveys contractors are expecting modest revenue growth and site, both labor shortages and economic uncertainty as the biggest pain points.
Our dealer survey saw similar sentiment with our dealers expecting modest revenue growth in 2023.
Is that dealers rated both current and expected future business conditions and project demand at slightly above average.
These survey results are supportive of the steady demand we've seen so far in our residential business.
We feel it's prudent to balance the constructive sentiment with a cautious view of the back half of the year and our plan given continued market and economic uncertainty and the fact that we're early in the season.
While our residential sell through volume trends have been modestly better to date, our commercial segment is experiencing some incremental challenges around channel destocking.
Softness across certain end markets the.
The channel Destocking as we signaled last quarter is primarily concentrated in certain end markets and is consistent with the broader industrial market.
As a reminder, our commercial business grew nearly 40% year over year in fiscal 2022 and continues to deliver attractive margins, which we have worked to improve dramatically over the past two years.
We believe that this business can operate at or above 20% segment adjusted EBITDA margins and we are confident that once we are through the destocking that this business will return to normalized growth in 2024, given its strong leadership positions and its respective markets.
We expect the commercial business headwinds versus our original planning assumptions to be approximately $15 million of segment adjusted EBITDA for the fiscal year.
We are also targeting incremental balance sheet inventory reductions as part of our focus on working capital.
As a reminder, our original planning assumptions call for a $40 million reduction in inventory and we exceeded this target in Q2 by reducing nearly $50 million of inventory versus the end of fiscal 2022.
We see an opportunity to further reduce our current balance sheet inventory by an additional $5 million to $10 million, resulting in modest incremental costs, which are factored into our outlook.
In summary, our cost reduction and recycling initiatives are on track, we've experienced modestly better results in the residential segment and our more challenge in our commercial market that we initially assumed.
Together, we have multiple levers to achieve our full year planning assumptions of 2023 adjusted EBITDA in the range of $250 million to $265 million and remain confident in our execution capability.
From a sequential progression in the back half of the year. We continue to expect adjusted EBITDA margin improvement through the balance of fiscal 2023, including year over year adjusted EBITDA margin expansion in the fiscal third and fourth quarters as we realize the benefits of sourcing.
This sequential volume improvements and costs down recycled programs within our results.
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 at the beginning of the call. We have uploaded a supplemental earnings presentation on the Investor Relations portion of our website before we get into the second quarter results I wanted to provide some color on the operating environment during the quarter.
From a macro perspective, we are seeing a more constructive environment in our residential business year to date, while experiencing a more challenging environment for our commercial segment residential sale for demand continues to be modestly better than our original assumptions.
<unk> channel inventory is at levels that are well below 2017 to 2019 average days on hand.
And as a reminder, we intentionally worked with our channel partners to manage the inventory entering the system ahead of the building season, and a very disciplined way.
From an operating perspective, our focal points continues to be managing our conversion costs to match the lower production, while maintaining high service levels production volume levels were down 33% year over year in the quarter.
We manage our way through the final planned production trough in early <unk> and started to see production levels increased sequentially late in <unk> 'twenty three.
As we communicated previously we said post completion of the channel inventory reductions and <unk> 22, and <unk> 23 that we would pivot in <unk> 23 to reduce our own inventory on the balance sheet, which we did in a meaningful way during the quarter.
On the commodities front key raw materials have stabilized around our original planning assumptions.
For the second quarter of 2023, we saw net sales of $377 7 million, which was modestly above our guidance expectations.
Net sales declined four 7% year over year second quarter included a volume decline of approximately 58 million, partially offset by positive contributions from carryover pricing.
The high single digit range and carryover from M&A.
<unk> 23, gross profit decreased by $14 million or 12% year over year to $108 2 million.
<unk> 23, adjusted gross profit decreased by 13 million or 9% year over year to $130 7 million.
The adjusted gross profit decline was in line with the decline in net sales and higher decremental margins from the lower production levels and as we previously mentioned, we see the bulk of our Underutilization behind us.
Selling general and administrative expenses increased by $3 6 million to $74 5 billion. The bulk of the year over year increase was driven by SG&A contribution from recent M&A and increased marketing investments.
Adjusted EBITDA for the second quarter was $72 8 billion ahead of our guidance driven by the sales outperformance in comparison to $90 9 million in the prior year. The primary driver of the year over year change in adjusted EBITDA was the sales volume declines in both production and net sales levels.
Net income for the quarter was $16 3 million or <unk> 11 per share adjusts.
Adjusted net income for the quarter was 27 billion, our adjusted diluted EPS of <unk> 18 per share now.
Now turning to the segment results.
Residential net sales for the quarter were $342 million down two 4% year over year driven by the previously mentioned volume declines, partially offset by positive pricing and M&A contribution.
Our volume decline was driven by the combination of lower unit sell through volume as expected and the intentional management of channel inventory heading into the season residential.
Residential adjusted EBITDA for the quarter came in at $80 4 million, which was down approximately 18% year over year.
Commercial segment net sales for the quarter were $35 6 million down 22, 5% year over year as expected and articulated last quarter, we saw channel Destocking and our Viacom business and softness in some of our end markets. We expect channel Destocking in this segment to continue through the fourth.
Quarter of 2023.
Commercial segment adjusted EBITDA for the quarter came in at $7 8 million a decrease of $900000 year over year importantly, the business continues to benefit from the structural improvements made over the last six to eight quarters as we continue to hold our segment adjusted EBITDA margin rates at or above our 20%.
Plus target.
Our balance sheet perspective, and cash flow perspective, we ended the quarter with cash and cash equivalents of $126 3 million and approximately $147 2 million available for future borrowings under our revolving credit facility.
Working capital defined as inventory plus or minus AP was $351 8 million. We ended the quarter with gross debt of $675 8 million, which included $78 8 million of finance leases.
Net debt was $549 6 million and our net leverage ratio stood at two three times at the end of the second quarter.
Net cash from operating activities was $56 7 million during the quarter versus negative cash use in operating activities of $36 9 million in the prior year period capital expenditures for the quarter were approximately $17 million down $31 7 million versus the prior year period.
Overall free cash flow in the first six months of the fiscal year was up $197 million year over year.
As we communicated previously we expect to accelerate our share repurchase activity in the second half of the year.
We expect free cash flows to continue to expand in the second half of the year as we enter the seasonally strong cash generating quarters, while continuing to drive working capital efficiencies.
As a reminder, the remaining authorization under our share repurchase program is approximately a $311 million.
We expect to deploy capital Opportunistically, while being mindful of our long term debt leverage ratio target in the two to two five times range as.
As we turn to the outlook, let me provide some context and color on what we are assuming and I'm assuming for the balance of the fiscal year year to date, we've experienced slightly better results from the residential segment.
More challenged commercial market than what we assumed in our planning assumptions as Jenny mentioned.
We now expect our commercial business to be pressured by approximately $15 million.
Segment, adjusted EBITDA basis from our planning assumption profile. It is important to provide some context on our commercial business performance expected for the year.
First we expect channel destocking to be completed by the end of <unk> 'twenty three.
Second we expect approximately half of the sales impact to be driven by channel Destocking.
Third of the $15 million of commercial segment EBITDA pressure approximately $10 billion plus is expected in the third and fourth quarters of the fiscal year.
Finally.
Even with channel Destocking and associated impact to the P&L.
We are confident that the hard work that we've done on the business will allow us to hold our full year segment EBITDA margins at or above 20%.
We expect the remainder of the business to offset the commercial pressure and we are reaffirming our full year planning assumption of 2023, adjusted even a range between $250 million to $265 million.
As we have previously communicated we expect to see healthy margins in the second half of the year with third quarter margins accretive to <unk> 23 in the prior year and we expect to see fourth quarter margins accretive to <unk> 23 in the prior year.
Margin drivers remain raw material costs improved production volumes and cost down programs. Additionally.
Additionally, relevant for your planning assumptions include one we are expecting a <unk> 23 volume decline, which will be offset with positive volume growth in <unk> 'twenty three as we lapped the prior year channel Destock and two we expect strong free cash flow generation driven by a return to more traditional capex.
<unk> in the range between $70 million $80 million as well as progress against our targeted reductions in inventory.
Additionally, planning assumption context is also available in our supplemental earnings presentation.
Before we turn to our fiscal third quarter guidance I wanted to provide context for the operating environment, we expect in the quarter.
As a reminder, <unk> is historically the beginning of the building season.
At present channel inventory levels at the end of March are lower than the 2017 to 2019 average days on hand.
We are in constant communication with our distribution partners to ensure that the market has the products needed for the season.
We are confident that our current lead times will allow us to service any incremental customer demand.
As Jesse mentioned upfront contractor backlogs remained consistent with the prior quarter at roughly eight weeks.
And both our contractor and dealer sentiment remain above average and were consistent with the prior quarter survey.
These factors are balanced by continued macroeconomic uncertainty.
Additional context for three Q3 guidance includes.
Production levels have stabilized in the back half of <unk> 23, we expect production levels to be in line with demand in the second half of the fiscal year.
Key raw materials and commodity projections continue to be in line with our planning assumptions and we anticipate 30 million of net benefit in the second half of 2023 as lower cost inventory flows through our balance sheet.
We are comfortable that underutilization is fully flowed through in the first half of the year for labor and overhead.
Cash conversion and working capital improvements remain a priority for us in the second half of the year.
With all this in mind for <unk> 'twenty three we expect consolidated net sales between $358 million to $378 million and we expect adjusted EBITDA between $81 million and $89 million with that I'll now turn the call back to Jesse for closing remarks.
Thanks, Pete I would like to take a moment to again recognize and thank our dedicated team members channel and supplier partners and contractors that support the HVAC company. Thank you for your commitment and your contribution to the results this quarter.
We are in an excellent position to outperform the market in an uncertain environment and realize the margin benefits of our sourcing and recycling initiatives through the balance of the year or.
Our focused working capital improvements and expected meaningful free cash flow generation during the second half of the fiscal year put us in a great position from a cash perspective.
The fundamentals of our business are strong as is our confidence in our long term growth material conversion and margin expansion opportunity.
We have a clear strategy and <unk> specific initiatives to drive above market growth.
With that operator, please open the line for questions.
Thank you, Mr, saying, ladies and gentlemen at this time any question simply press Star One and just a reminder, if you find that your question has already been addressed you can remove yourself from the queue by pressing star one again, we will take our first question. This afternoon from Tim <unk> of Baird.
Hey, guys. Good afternoon. Thanks, Jeff.
Maybe just as you kind of look at the back half of the year Jesse I know it's.
The two quarters, so far finding your shoulder quarters, but I guess, what would you need to see or what do you want to see to kind of give you confidence that the kind of above trend demand that you've seen over the last not above trend above.
Demand that's better than you thought kind of initially over the last two quarters can kind of kind of show through in the back half of the year.
Yeah. Thanks for the question Tim from what we see now as we make commentary on the call.
We're planning on very modest.
Improvements from our planning assumption.
And as your question implies we're being conservative in our view relative to the back half of the year I think for US we just need the.
We need to continue to see the season hold.
As it's progressing right now we feel really good.
About what our contractors and dealers are telling us about their backlogs what they see on the ground.
So the communication is positive we just need to turn we just need to see that.
Positive momentum consistently convert to.
Revenue and we are hopeful, but it's early in the season and as such.
We want to see a few more cards.
Okay. That's great and then maybe just a second one just as you think about.
Kind of deflation on an annualized basis I mean, it sounds like you are kind of coalescing, a little bit around that kind of $50 million annualized number Pete is that the right message yeah.
If you remember at our last call. The November CDI is we're a little bit more optimistic than we thought we might have a little bit of upside.
The more recent CDI as a kind of falling back and really just support our original planning assumption. So we feel.
Passionate about our ability to be able to deliver the $50 million of total deflation in the $30 million of P&L impact.
In 2003.
Okay.
I think just an added comment Tim part of our focus on bringing our own inventory down is it puts us in a position.
If and when there is additional raw material opportunity.
That we're in a better position to realize that faster to the bottom line and so what we're doing relative inventory is very conscious to make sure that we're in a good position to take advantage of any additional opportunities not only this year, but as we move into 'twenty.
Sure.
Okay. Okay. Good.
I will jump back in queue.
Thanks, Tim.
Thank you. We'll go next now to key teams with <unk> Securities.
Thank you question for the third quarter guidance, what kind of pricing.
Do you expect a year over year pricing are you expecting in the residential segment.
Yes, Keith this is Peter as you know are kind of last price increase was taken in may. So we've really only got a partial quarter. So you should think of it as kind of low single digits from a price realization perspective.
And then in the fourth quarter was basically flat at that point yeah.
Okay, and how much in terms of acquisitions, how much did that add to the quarter.
Third quarter is really kind of the main lapping so it's about $6 million is how you can think of it.
Okay. Thank you.
We really seem to be heading towards some growth in the fourth quarter based on where your guidance.
Is trending in residential.
If that's correct is that going to be restock.
Think of that going to be actual sell through the contractors what's your.
Six month outlook on that topic.
Yes, Keith as you remember, we actually took down or tore down inventory last year in the fourth quarter.
So that's the main driver, but I think also relevant as Jesse said look in fairness as we look to see more of the cards.
Realistically, if we're going to see any strength in the residential demand.
That's almost certainly going to show up in the fourth quarter.
Yeah, great. Thank you Vicky here, Josh on that I think the key here as Pete pointed out is we're not as we move to the implied guide.
For the fourth quarter, we're not assuming.
Any.
Kind of sell through growth.
What we're assuming is modestly better than our.
Our initial 10%.
Down volume that we talked about and so that's what we mean about seeing additional cards as we need to see how it how the sell through holds up and.
And where we ultimately end up but the current guide the current implied guide is really that inventory refill plus R. R. A modest improvement on our assumptions.
Okay. Thank you.
And we will take our next question now from Matthew delay of Barclays.
Hey, guys. Good afternoon, thanks for taking the questions.
So I think I heard you say that in commercial the.
The 15 million full year impact, you're saying that $10 million of that would occur in the second half, but that you still expect margins of 20% for the full year, So I guess, implying a.
Sort of meaningful top line decline in the second half in commercial so I guess I'm just asking if you could put a finer point on that sort of where do you expect commercial revenues year over year in Q3.
In Q4 relative to <unk>. Thank you.
I would say Matt is for the full year, how we're thinking about the business.
In the <unk>.
On the guidance here is top line down about 20% for the full year and the bottom wind down about 20% for the full year.
Okay got it that's helpful and then.
So I guess.
Putting the math together it seems like you're assuming that residential earnings in the second half are roughly similar to how you were previously thinking and please correct me if I'm wrong, there, but just given some of the trends year to date.
<unk> had been a little bit better than your expectations at least in terms of sell through.
Maybe you are pushing forward on recycling is there any other pieces of the bridge pluses or minuses that are kind of keeping you from lifting that residential outlook.
Yeah, I mean, I wish there was a less boring story, but as we've kind of said look we feel like the.
The pricing picture is nearly identical to what we thought.
<unk> is nearly identical to what we thought were past the first half kind of one time costs of the underutilization.
This is really a story of the market's modestly better on the residential side, coupled with some initiatives.
Offsetting volume softness that's really the bulk of it driven by Destocking on the commercial side.
A story of volume being a bit better on residential lawn and covering and asking some softness on the commercial side.
Alright, Thanks, Pete Thanks, Jessica Good luck guys.
<unk>.
We'll take our next question now from Michael Rehaut at Jpmorgan.
Okay. Thanks, good afternoon, everyone.
Thanks for taking my questions.
Wanted to first just.
That kind of zero in on.
As you within residential as you kind of move this year through a lot of the different types of comparisons that create a bit of noise and youre actually looking at Pos backdrop, that's a lot more stable.
Assuming you know and it's obviously, a big assumption, but assuming.
24, Youre looking at a.
Kind of similar backdrop in the economy doesn't fall off.
Everything else equal I mean is it reasonable to.
Assume that residential will get back to a more normalized growth cadence.
And then specifically just kind of thinking about share gains here, either composite over wood or even your own efforts within the industry the gain share within composites.
Yeah, I would say my kids.
It's way too early we're about halfway through the year 'twenty three so it's way too early to give.
Any kind of commentary on.
23, I would just anchor back to what we've talked about which is we feel really good about our initiatives.
This year.
Both on the top and bottom line. This year, we've had some really nice momentum against those initiatives.
When you when you have.
When you have either product launches our shelf gains.
Or even margin initiatives when they hit within the year you get the benefit rolling into the following year and so it's difficult to really handicap, the the market and the environment next year and it wouldn't be prudent to do so.
But we feel really good about our ability to.
Execute the initiatives we talked about.
Five above market growth and we think we're really well positioned as and we continue to position ourselves.
So that we can continue to take advantage of the opportunities that we see near the tail end of this year into next year and an example of that is.
We are not waiting to draw down our inventory.
We're taking steps to be prudent on that inventory drawdown, when and where we see opportunity and we believe that gives us more opportunity as we as we move into 'twenty, four really realize what might be available to us.
Right no no I understood.
I think secondly.
Pete you kind of referred to the fact that.
Youre going to be in a better position in the back half of the year with share repurchase standpoint.
Any type of Guardrails, you might offer up in terms of.
Degree of magnitude in terms of the amount of capital that you might have at your disposal in that area, obviously last year.
You did a little more than $80 billion of share repurchase in it.
It's going to be a pretty good free.
Free cash flow year this year so.
Any thoughts around.
To frame the <unk>.
Central for share repurchase in the back half.
Yeah, Mike This is Peter.
Yes to your point look I think our guard rail has historically been a desire to want to stay within.
Our leverage ratio targets two to two five times.
And just what that said given our.
EBITDA expansion in the back half of the year.
Suggest we can at least do as much as we did last year, possibly more and probably still stay.
Modestly below the two and a half times.
Okay, and Thats, two two to two and a half on a <unk>.
Debt to capital not.
Oh, I'm, sorry debt to EBITDA, not net debt to EBITDA correct, yes, correct.
Great. Thanks, so much.
Thank you well go next now to Philip <unk> Jefferies.
You guys just be helpful. If you could give a little more color on how sell through demand progressed through the quarter into April I know, it's coming a little better but any more explicit color would be helpful. You did mention that your channel partners are still having pretty low inventory have you started seeing them come back and restocking if things.
Our stronger can you build enough I guess to meet that demand this decking season.
Yeah.
As we on the on the latter point as we talked about.
We have a large amount of capacity and we are appropriately ramping.
Production in each of our areas. So we're well set up.
You know that the best we've ever been to be able to meet any incremental.
Demand.
And beyond.
Not only what we've guided to but above and beyond any conversations.
Of upside that we may have had.
With our partners relative to sell through demand.
I'm not going to parse out month by month, I would say that in general if you look across the.
The time period of let's call it year to date.
In general things have been relatively consistent.
As we look across that timeframe.
Now you're naturally going to ask a question because it's been published in a number of different areas.
We've seen weather et cetera, I would say that certainly some geographies.
Have.
Have you seen an impact of kind.
Timing and weather and those kinds of things.
But in general in our case, they have been offset by strength in other geographies and so you know.
As we look at things in totality.
We've seen pretty steady sell through growth.
With timing geography.
Kinds of variations, but in general we feel really we feel really good.
And that continues.
As we stand here today.
Super.
From a margin standpoint, perhaps for you Pete I think implicitly implies EBITDA margins in the back half are probably going to be.
In the mid 20% range.
Is that something we could build off when we look out to 2024, just because historically, there's not a ton of movement through the year first half was certainly very noisy. So can we work off the back half and if theres growth would there be leveraged to that how should we think about.
Looking out to 224 from margin standpoint, yes, I mean here.
I'd say Phil is look again, it's just a stated on you know I think we want to avoid sort of 2000 and for guidance, but what I think I would say is similar to last year.
If we can be transparent about what we see as sort of the items that kind of carryover to next year that.
Give us comfort or confidence. So obviously, we've already talked about the $20 million of carryover deflation. Obviously, we don't have the unusuals in the first half of 'twenty three reoccurring next year.
Not going to have the <unk> 23 channel inventory reduction in sales.
We should be seeing more closely a full year of our low density.
Packed in our cap composite so theres a number of things out there that we're confident.
That we can build on next year, but I think we want to get closer to year end before we.
I'll start.
Given folks the right jump off.
But Pete.
That we should think about not a lot of volatility in our margins through the year typically.
Other than <unk>, that's our kind of seasonal low so <unk> tends to be our lowest kind of gross margin quarter and then to your point.
I think theres a lot more sustainability <unk> typically.
Okay Super.
Thank you we'll go next to Ryan Merkel at William Blair.
Hey, guys wanted to go back to commercial can you just talk about some of the drivers of the sudden slowdown and then how do we how did you ring fence sort of the $15 million change to guidance.
Yes.
We take a very high level.
Our commercial business.
<unk> participates in a lot of markets and.
Yes.
In looking at the inventory in their channel.
I think we mentioned on the last call that we were seeing.
Some slowdown and some expected Destocking I think we specifically.
Made commentary on the last call that as we see.
Some more positives on the residential side that we might need that to offset some of the.
The destocking that might occur on the commercial side I think all you're hearing today.
Today is we're able to get much more specific data on it it is not unusual in certain markets and some commercial markets.
You can now get a better assessment of <unk>.
Whether or not there is excess and what that excess is.
And I think what we saw is as we move through.
The second quarter.
Our channel partners and in some cases, the Oems that use our products.
<unk> either being impacted by their end markets or realizing that they have enough production for a period of time and then communicating the specifics.
What the ramifications are to us so.
We signaled it on the last call and I think we sized it on on this call. So with that let me turn it over to you on the ring fence conversation.
Yeah, No I think Brian what gives us comfort is Jesse said look this wasn't just a conversation with our channel partners, we really tried to get down to end users and the Oems to understand inventory and the total system not just in the channel and and really get a lot of work to kind of parse up demand versus channel destocking. So.
This is the best information we have.
The team got exceptionally granular and in.
In their view to kind of get us to where we're at right now.
Okay.
That's helpful and then.
Looking at exteriors I know it sounds like things are pretty good there, but what's the risk of a destock in next year at some point in the near future.
Yeah exteriors.
Yeah.
Their inventory.
Correction, if you will first was modest.
And you have to look at the dynamics of that business, we really didn't have an inability to supply. The volume we were always able to supply the volume over the last three years and as such there was modest inventory build and that inventory build was really corrected a year ago.
And so we have been operating.
With our exteriors business for well over six months.
Secondly from the beginning of the fiscal year with our exteriors business really reflecting the actual.
Demand and I think that business is done.
Terrific job of.
Continuing to service customers and continuing to gain share.
Against wood through our new products, and that's really put us in a position where in that business, we believe that.
We can we can point to some clear areas, where we are outgrowing the market and as a reminder, that business does have some.
Modest exposure to new construction and through our initiatives.
So far we've been able to offset any kind of weakness we've seen in our in particular, our production new construction.
Part of the portfolio.
Got it I'll pass it on thanks.
I appreciate it thank you.
We'll take our next question now from Susan Mcclary at Goldman Sachs.
Thank you good afternoon, everyone.
Hi, My first question Hello, My first question is.
Can you talk a little bit about mix have you seen any changes to that.
We're going into the season and I guess, if there are any changes are there implications. There as you think about the price and how that will flow through in the next couple of quarters.
Yes, just on the on the price side is as Pete highlighted.
We we.
We feel really good about where we stand relative to price and everything.
That we are putting in our assumptions is pretty consistent with how we view things at a at the beginning of the year relative to mix.
Area that we're always probing and I think in our case.
And some of our specific product areas.
The mix, we have we sustained.
In certain cases, where we have picked up incremental position or incremental share in areas, where we were.
Unable to participate over the last few years.
In certain cases those would be at.
More of the good part of the portfolio.
So the way.
From what we can see right now from a <unk>.
Mixed standpoint, the mix is in general holding and some of the incremental that we gained.
Having a modest.
Ah <unk>.
Impact on our mix, but right now.
Our premium products continue to be premium products and the opportunity that we see is one that we're just taking advantage of in other segments.
Okay. That's helpful and then following up.
To the residential business growing at an 8% to 10% rate over time.
You think about where the business will be as you exit 'twenty three and think about 24 do you think that you can get back to that eight to 10 next year and is that still a good rate to think about over the longer term.
Yeah, I think certainly it's a good rate to think about over the longer term what underpins that number.
That we highlighted a year ago during our.
Investor Day, and analyst day is roughly a low to mid single digit R&R growth rates.
And I think if you look at estimates right now for R&R in 'twenty three they are negative.
And we're building on top of that.
I think as we move into 'twenty four we.
We certainly believe that if R&R returns back to the normal growth rate will have an opportunity with our initiatives.
To outgrow the underlying R&R market at the levels, we talked about so once again the way to think of it for us in a more normalized environment is we would certainly want to target call it 4% to 5% above the underlying R&R growth rate.
And.
Everything that we're seeing our new products, our new execution.
Our new opportunities.
That we've had this year I think put us in a good position to be able to deliver that.
Okay. Thank you good luck with everything thanks really appreciate it Susan.
And we'll go next now to John Mmabatho at Bank of America.
Hey, good afternoon, guys Who's actually Spencer Kaufman on for John Thank you for fitting me in here.
Maybe just the first one based on your <unk> guide and in our full year guide for EBITDA.
It implies pretty similar EBITDA in both the third and fourth quarter I was hoping you could just help us.
Through some of the puts and takes there and also just the timing of the $30 million of those cost savings.
Yeah. This is Peter look the split on the deflation is fairly balanced between the third and fourth quarter.
Again.
The drivers are still consistent with last quarter on how to think about the back half of the year.
Three pieces are again deflation second one is the kind of non reoccurring underutilization, an accounting change that in the first half of the year, coupled with additional volume in the back half of the year.
Thats purely driven by the seasonality of the third and fourth quarter I mean those are the.
Three three elements and there is still completely intact.
Okay understood.
You mentioned that channel inventory levels are about 15% below average levels from 2017 in 2019, I mean do you think that we can get back to those levels over the next 12 months or so.
And you know kind of what would what would need to happen to get there.
Yeah.
First off I think from our vantage point.
[laughter].
Having a more conservative amount of inventory in the channel is a good thing at this point in time, when youre dealing with the potential for uncertainty or the potential I'm not saying it will manifest itself, but when youre dealing with the potential for <unk>.
Some market uncertainty.
Our key objective was to Derisk.
Both our own inventory and inventory in the channel.
De risk our future results by getting our inventory in a good spot I think what the channel ultimately carries.
Where it ends up I think will be an outcome of where we see.
The confidence and where we see the opportunity clearly if sell through.
It comes in.
Both are conservative.
SMS.
I don't need to be some additional inventory.
In the channel and that but that would still allow us to operate on on lower days on hand so.
It's a it's a good position to be and now it was a good position to be in at the end of Q2.
And as we move through the year.
Where we end up where we are assuming a conservative then too.
Channel inventory at the end of Q4.
And what's appropriate will really be based on.
How we see the future market.
Okay, and if I can just follow up on that quickly Jesse.
If you can just kind of think about all the capacity you have to pay three have added over the last few years Disney does does the channel need the same amount of inventory as before given that could probably get it quicker now or how should we think about that piece.
I think that you know from I'm I'm not going to speak to the other folks.
As I look at our own business I think we're in a better position.
Ourselves to carry less inventory ourselves.
Because historically, we have not had enough capacity.
<unk> always fulfill demand in season as such.
We've had to be heavier on inventory I think with the capacity adds we've had now.
We've already made it puts us in a position to be able to manage our own working capital.
Very much.
Much more effectively.
And.
It allows us to service our customers more effectively and I think.
Each customer has their own model relative to how they service their customers and they will determine what the right inventory level is for them I think at a minimum it sets ourselves up.
To be able to to operate with lower working capital.
Got it thanks guys.
And ladies ensure we have time for one more question. This afternoon will take that now from ear at Davidson.
Good afternoon, everyone.
I just wanted to go back on the full year guide it wasn't clear to me, what's kind of embedded at this stage because it doesn't sound like you've necessarily come off the original residential volume planning assumptions and Thats. Some of the conservatism you've referenced but you also believe you can kind of offset the downside in commercials.
So could you just maybe help me square those two things.
Yes, Curt this is Peter.
Look the easiest way to think about it is as we said at the beginning of the year. Our original planning assumptions were for kind of sell through unit volume closer to 10.
What's embedded in the residential view right now.
It's probably low single digits improvement on.
That downturn.
So that's the 40 million that we're covering on the commercial side and as Jesse mentioned look we're.
We're looking for more cards in the season and if.
If the demand environment's, a bit battery, you're likely to see that upside.
Surface in the fourth quarter.
Results.
Got it makes perfect sense.
And then just lastly in terms of the recycling opportunities could you maybe just give us a few mile markers to watch for over maybe the next year or so in terms of.
To increase recycled PVC utilization, maybe some formulation changes on the wood plastic composite side and are there any big hurdles that you still need to clear to kind of get there.
Uh huh.
Let me start at a at a high level.
Relative to wood plastic as we've talked about we're shifting our formulation from.
You know a mix of half high density polyethylene to have low density polyethylene.
And we're in process of.
Doing that were staging it appropriately.
And so.
Our expectations now.
Barring any delays and and.
We've used our extra capacity to get there is.
That's something that would be.
A positive shift in the portfolio as we move into 'twenty four and then I think as we've highlighted both on our exterior business.
And an hour.
A dec and rail business.
We see incremental opportunity to increase the percentage of recycled PVC used.
Now almost on a quarterly basis, and so you know.
For us that falls.
Into the bucket of.
Incremental improvements.
And we would expect that to continue which embedded in some of the.
Our performance over the last couple of years, and we would expect that to be embedded.
And the performance as we move into <unk> into 'twenty four.
Got it thanks for the color and for squeezing me in as well.
Appreciate it. Thank you I, just one clarifying point.
Pete mentioned.
Low single digits.
Improvement in I, just wanted to make sure that.
As we talk about sell through that that comes across clearly, where we were assuming close to a double digit negatives on sell through.
And we are seeing modest incremental improvement off the low <unk>.
We're off the double digits.
Ben Reed, we're now assuming.
Kind of mid to high.
Single digit.
Sell through declines.
Thank you and ladies and gentlemen that is all the time, we have for questions today, Mr. Seeing I'd like to turn things back to you for any closing of concluding remarks.
Thank you all for for joining the call. This evening, we look forward to to having many.
Many discussions over the next days and weeks and thank.
Thank you again, we'll chat with you soon.
Thank you Mr seeing ladies and gentlemen that will conclude the Asia company second quarter 2023 earnings call again, we'd like to thank you all so much for joining us and wish you all a great remainder of your day Goodbye.
Please wait the conference will begin shortly.
Sure.
Yes.
[music].
Yes.
Okay.
Yes.
Yeah.
[music].