Q3 2023 The AZEK Company Inc Earnings Call

August 8, 2023

Okay.

After the Speakers' presentation there'll be a question and answer session. Please.

Please be advised.

Today's conference is being recorded I would like to hand, the conference over 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 Dot Asia co Dot com.

The earnings press release was also furnished via 8-K on the SEC's website.

I'm joined today by Jessie Singh, our Chief Executive Officer, and Peter Clifford, Our Chief Financial Officer.

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 that could cause actual results to differ materially we.

We do not undertake any duty to update such forward looking statements. Additionally.

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 rec.

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 thing.

Good afternoon, and thank you for joining us.

<unk> delivered strong financial results driven by continued execution of our growth and productivity initiatives operational performance and double digit residential sell through I.

I am very proud of the team as we delivered these results through our continued focus on growth through new product material conversion and customer expansion.

We also drove significant margin expansion through operational excellence.

Sourcing savings and recycling initiatives.

Our results this quarter demonstrate the strength and resiliency of our business and our team's focus on execution to drive above market growth and margin expansion across varying market conditions.

Our leading deck rail and accessories and exteriors categories delivered strong sell through growth in an uncertain repair and remodel market driven in part by wood conversion and new business wins as we have highlighted in the past we believe that we have a resilient business model and.

Can outgrow the underlying R&R market through the combination of material conversion and our portfolio of growth initiatives.

Overall, we remain confident in our long term strategy to outgrow the market through innovation, new product development and channel expansion supported by secular trends around wood conversion outdoor living and demographic shifts increasing the need for housing.

In the third quarter of fiscal 2023, we generated 387 6 million of net sales and delivered double digit net income and adjusted EBITDA growth.

As expected our fiscal Q3 margins improved significantly and we delivered 310 basis points of adjusted EBITDA margin expansion to 25% as we realize the benefits of ongoing cost savings initiatives.

We continued to see the impact from our increased focus on cash conversion and disciplined capital expenditures and in the third quarter generated free cash flow of $161 million growing $52 $4 million year over year.

Our cash flow generation during the quarter supported approximately $48 million worth of share repurchases.

During the quarter, we saw double digit year over year residential segment sell through growth, including strong growth across our exteriors category and our deck rail and accessories category.

We also saw strong growth in both our residential pro and our retail channels.

These categories saw sequential improvement versus the prior quarter and highlight stronger in season demand versus our flattish sell through growth during the first half of the fiscal year.

We believe that our performance is a combination of category resilience relative to other parts of the repair and remodel industry combined with <unk> specific growth programs, including our shelf gains and expansion of new products.

Demand signals, including our digital marketing metrics and feedback from our contractor and dealer surveys also provide a positive backdrop for the remainder of the building season and our fiscal year.

We meaningfully expanded our margins within the quarter as we realize the benefits of cost and sourcing actions.

And more normalized production levels versus the first half of the fiscal year, when we aggressively reduced our production to draw down inventory in our channel and within our own walls.

In addition, we were challenged with having to work through higher cost inventory on the balance sheet that math the cost reductions that we had already implemented.

We expanded our adjusted EBITDA margin sequentially by 570 basis points and year over year by 310 basis points.

Results within the quarter reflects strong execution by our operations team and our current cost structure.

Supply chains have normalized and we continue to work with our channel partners to maintain appropriate residential channel inventory, while continuing to focus on delivering industry, leading service <unk>.

During the quarter, we saw a sequential drop in channel inventory and consistent with our last two quarters ended the quarter below our average 2017, the 2019 days on hand in the channel.

On the commercial segment side as we've indicated over the last couple of quarters, we've seen a more challenging environment, resulting from a combination of channel destocking and softer demand in certain nonresidential and industrial end markets.

Christian we were challenged with having to work through higher cost inventory on the balance sheet that masked the cost reductions that we had already implemented.

The inventory Recalibration in our commercial business is proceeding as expected and we continue to expect the impact from channel destocking to be substantially complete by year end.

We expanded our adjusted EBITDA margin sequentially by 570 basis points and year over year by 310 basis points.

Results within the quarter reflects strong execution by our operations team and our current cost structure.

During the quarter, we continued to make progress against our strategic initiatives and saw the benefits of our new products and our expanded shelf gains.

Supply chains have normalized and we continue to work with our channel partners to maintain appropriate residential channel inventory.

The new products, we have launched in 2023 on top of our previous years of launches add to our industry, leading premium portfolio of products that utilize our proprietary recycled PVC and color technology capabilities.

While continuing to focus on delivering industry leading service.

During the quarter, we saw a sequential drop in channel inventory and consistent with our last two quarters ended the quarter below our average 2017, the 2019 days on hand in the channel.

These product innovations position us to drive incremental growth in our core markets and access outdoor living adjacencies.

Within our railing business new colors in our classic composite series rail and vertical cable rail solutions are seeing strong adoption and feedback from our customers.

In exteriors, we continue to see strong performance across our core <unk> and versus the tech brands and value added product innovations like paper or trim and captivate, citing that expand our market opportunity. Our exteriors team has done a great job of capitalizing.

The inventory Recalibration in our commercial business is proceeding as expected and we continue to expect the impact from channel destocking to be substantially complete by year end.

During the quarter, we continued to make progress against our strategic initiatives and saw the benefits of our new products and our expanded shelf gains.

On new business wins, this year and outperforming the market by delivering best in class service to our customers.

We also saw strong momentum for both our timber tech brand and our <unk> brand.

In the most recent J L. C 2023 brand New study results recently published by Zander, Tim protect decking timber tech railing in APAC exterior trim were ranked as the number one most used brands in the last two years in each of their respective categories Tim.

These product innovations position us to drive incremental growth in our core markets and access outdoor living adjacencies.

Within our railing business new colors in our classic composite series rail and vertical cable rail solutions are seeing strong adoption and feedback from our customers.

Protect composite PVC decking also ranked number one in quality, making it both number one in quality and number one most of us.

We believe that our ongoing focus on new products branding and customer focus is enabling us to win and gain mind share with our customers.

In exteriors, we continue to see strong performance across our core <unk> and versus the tech brands and value added product innovations like paint pro trim and captivate, citing that expand our market opportunity. Our exteriors team has done a great job of capitalizing.

During the quarter, we also expanded our PVC recycling capacity increase the amount of recycle we consume in our exterior products.

On new business wins, this year and outperforming the market by delivering best in class service to our customers.

<unk> expanded our full circle recycling sourcing network.

Full circle PVC recycling program collect scrap generated from construction sites.

We also saw strong momentum for both our timber tech brand and our <unk> brand.

And we are adding larger format collection bins to address larger scrap like vinyl siding collected through construction and demolition rates.

These investments are key enablers to support the recycling of millions of pounds of waste and scrap PVC annually and increasing recycle content of our products consistent with our long term recycling and margin objectives.

Protect composite PVC decking also ranked number one in quality, making it the number one in quality and number one most use.

We believe that our ongoing focus on new products branding and customer focus is enabling us to win and gain mind share with our customers.

<unk> was once again proud to be recognized with New awards. This quarter first <unk> was named in USA today, its first ever list of America's climate leaders.

During the quarter, we also expanded our PVC recycling capacity increase the amount of recycle we consume in our exterior products.

The list highlights leading companies that have shown meaningful reductions in their greenhouse gas emission intensity as measured by greenhouse gases relative to revenue.

<unk> expanded our full circle recycling sourcing network.

<unk> has reduced its scope, one and scope two carbon intensity by approximately 15% between 2019 in 2021.

Full circle PVC recycling program collect scrap generated from construction sites.

And we are adding larger format collection bins to address larger scrap like vinyl siding collected through construction and demolition streets.

Additionally, timber tech advanced PVC decking was named a 2023 winter and the prestigious environment and energy leader product of the year award in recognition of its sustainability attributes, including having a lower lifecycle carbon footprint versus traditional wood decking.

These recognitions combined with our recently published 2022 full circle ESG report.

Illustrate <unk> positive momentum and reflect our commitment to positively impacting our products our people and the planet.

<unk> was once again proud to be recognized with New awards. This quarter first <unk> was named in USA today, its first ever list of America's climate leaders.

Turning to outlook, we continue to be confident in our business strategy and our ability to deliver within the current fiscal year and for years to come.

The list highlights leading companies that have shown meaningful reductions in their greenhouse gas emission intensity as measured by greenhouse gases relative to revenue.

Our improved residential segment visibility and cost savings initiatives give us confidence to raise our outlook for fiscal year 2023.

As that has reduced its scope, one and scope two carbon intensity by approximately 15% between 2019 in 2021.

We exited the quarter with a stronger margin profile and we are in a great position to build upon these games, while continuing to drive incremental cost savings against our long term goals.

Key digital metrics highlight increased interest in our timber tech brand and we continue to see growing customer engagement with website traffic and sample orders showing healthy year over year growth during the quarter.

These recognitions combined with our recently published 2022 full circle ESG report.

Our quarterly pro contractor and dealer surveys showed sustained contractor backlogs of approximately eight weeks and expectations for continued demand for the remainder of the building season.

Illustrates <unk> positive momentum and reflect our commitment to positively impacting our products our people and the planet.

Turning to outlook, we continue to be confident in our business strategy and our ability to deliver within the current fiscal year and for years to come.

These results are consistent with prior surveys with contractors expecting modest revenue growth in 2023, and also citing labor shortages as their biggest pain points.

Our improved residential segment visibility and cost savings initiatives give us confidence to raise our outlook for fiscal year 2023.

Our dealer survey saw similar positive sentiment with our dealers incrementally more confident in the outlook for 2023 and expecting modest revenue growth.

We exited the quarter with a stronger margin profile and we are in a great position to build upon these games, while continuing to drive incremental cost savings against our long term goals.

In addition to the stability of our existing contractors and dealers, we continue to expand our network, allowing us to access more of the market and drive incremental share in wood conversion.

We have added over 800 contractors into our system year to date and are seeing incremental growth from our expanded dealer and retail network.

In summary, our growth and cost savings initiatives are on track, we're experiencing positive results in our residential segment.

Our quarterly pro contractor and dealer surveys showed sustained contractor backlogs of approximately eight weeks and expectations for continued demand for the remainder of the building season.

And we have increased visibility for the 2023 season.

We now expect to deliver adjusted EBITDA in a range between 275 million to $280 million, an increase from our planning assumption range of 250 million to $265 million we.

These results are consistent with prior surveys with contractors expecting modest revenue growth in 2023, and also citing labor shortages as their biggest pain points.

Our dealer survey saw similar positive sentiment with our dealers incrementally more confident in the outlook for 2023 and expecting modest revenue growth in.

We expect year over year, adjusted EBITDA margin expansion in the fourth quarter that is accretive versus the prior quarter and year over year as we progress through the balance of the year and into fiscal 2024, we will continue to focus on growth opportunities margin expansion.

<unk> to the stability of our existing contractors and dealers, we continue to expand our network, allowing us to access more of the market and drive incremental share in wood conversion. We have added over 800 contractors into our system year to date and are seeing incremental growth.

And cash flow generation against our previously discussed 2027 financial objectives.

Our team and external partners have done a great job and we really appreciate their efforts.

From our expanded dealer and retail network.

We continue to see the opportunity to drive above market growth and margin expansion.

In summary, our growth and cost savings initiatives are on track, we're experiencing positive results in our residential segment and we have increased visibility for the 2023 season.

This quarter was an important step in the journey and we are focused on delivering improved results in the future.

I will now turn the call over to Pete to provide some additional context on our financial results and outlook.

We now expect to deliver adjusted EBITDA in a range between 275 million to $280 million, an increase from our planning assumption range of 250 million to $265 million.

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 third quarter results I want to provide some color on the operating environment during the quarter.

We expect year over year, adjusted EBITDA margin expansion in the fourth quarter that is accretive versus the prior quarter and year over year as we progress through the balance of the year and into fiscal 'twenty 'twenty. Four we will continue to focus on growth opportunities margin expansion.

From a high level perspective, we're continuing to see a positive demand environment in our residential business year to date.

<unk> business is effectively managing its way through the channel Destocking impacts, which we expect to be substantially completed by the end of the fiscal year.

And cash flow generation against our previously discussed 2027 financial objectives.

From an operating perspective.

We're starting to see a production volume levels normalized in the quarter, given us opportunities to drive leverage and conversion costs as expected production volume levels were down approximately 10% year over year in the quarter driven primarily by our continued inventory reduction efforts on their own balance sheet.

Our team and external partners have done a great job and we really appreciate their efforts.

We continue to see the opportunity to drive above market growth and margin expansion.

This quarter was an important step in the journey and we are focused on delivering improved results in the future.

On the commodities fund key raw materials have stabilized around our original planning assumptions.

I will now turn the call over to Pete to provide some additional context on our financial results and outlook.

And those lower input costs are being realized in our financial results.

Thank you Jesse 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.

We continue to drive disciplined cost management of our discretionary spending supporting key investments in the future.

Factors drove the anticipated margin acceleration that we saw in the quarter exceeding our previously communicated expectations.

Before we get into the third quarter results I want to provide some color on the operating environment during the quarter.

Lastly, our teams continue to outperform expectations against our working capital initiatives.

From a high level perspective, we're continuing to see a positive demand environment in our residential business year to date.

For the third quarter of 2023, we saw net sales of $387 6 million, which was modestly above our guidance expectations.

<unk> business is effectively managing its way through the channel Destocking patch, which we expect to be substantially completed by the end of the fiscal year.

Net sales declined one 9% year over year.

From an operating perspective.

Third quarter included a volume decline of approximately $20 million, which was primarily driven by our commercial segment, partially offset by positive contributions from very modest carryover pricing and M&A.

We're starting to see our production volume levels normalized in the quarter, given us opportunities to drive leverage and conversion costs as expected production volume levels were down approximately 10% year over year in the quarter driven primarily by our continued inventory reduction efforts on their own balance sheet.

<unk> 23, gross profit increased by $5 8 million or four 6% year over year to $132 2 million.

On the commodity spot key raw materials have stabilized around our original planning assumptions.

Third quarter 'twenty three adjusted gross profit increased by $8 6 million or <unk>.

And those lower input costs are being realized in our financial results.

Five 8% year over year to $156 2 million.

We continue to drive disciplined cost management of our discretionary spending supporting key investments in the future.

Our adjusted gross profit margin percent increased 290 basis points year over year to finish at 43%.

Factors drove the anticipated margin acceleration that we saw in the quarter exceeding our previously communicated expectations.

The adjusted gross profit increase was driven primarily by material deflation more normalized production levels and execution against cost saving initiatives.

Lastly, our teams continue to outperform expectations against our working capital initiatives.

Selling general and administrative expenses decreased by $5 1 million to $73 7 million the bulk of the year over year decrease was driven by lower acquisition costs as well as disciplined cost management within the quarter.

For the third quarter of 2023, we saw net sales of $387 6 million, which was modestly above our guidance expectations.

Net sales declined one 9% year over year.

Adjusted EBITDA for the quarter increased by $10 4 million.

12, 1% to $97 million, the adjusted EBITDA margin rate for the quarter increased 310 basis points to 25% from $21 nine in the prior year.

<unk> 23, gross profit increased by $5 8 million or four 6% year over year to $132 2 million.

The primary driver of the year over year change in adjusted EBITDA was the impact of material deflation, a more normalized production environment and execution against cost savings initiatives.

Third quarter 2003, adjusted gross profit increased by $8 6 million or <unk>.

<unk>, 8% year over year to $156 2 million.

Net income for the quarter was $34 9 million or 23 per share.

Our adjusted gross profit margin percent increased 290 basis points year over year to finish at 43%.

Adjusted net income for the quarter was $45 million or adjusted diluted EPS of <unk> 30 per share.

The adjusted gross profit increase was driven primarily by material deflation more normalized production levels and execution against cost saving initiatives.

Now turning to our segment results.

The residential segment net sales for the quarter was $352 million up two 5% year over year we.

We saw growth with both at centers as well as deck rail and accessories.

Residential segment adjusted EBITDA for the quarter came in at $105 5 million up approximately 16% year over year.

Adjusted EBITDA for the quarter increased by $10 4 million.

Residential adjusted EBITDA margins were up 350 basis points to 30%.

Up 12, 1% to $97 million the adjusted.

<unk> segment net sales for the quarter were $35 9 million down approximately 31% year over year.

EBITDA margin rate for the quarter increased 310 basis points to 25% from 21 nine in the prior year.

These results were in line with our previous quarters commentary and expectations.

Primary driver of the year over year change in adjusted EBITDA was the impact of material deflation, a more normalized production environment and execution against cost savings initiatives.

Commercial segment adjusted EBITDA for the quarter came in at $8 8 million, a decrease of $3 5 million year over year.

It is important to note that despite this channel destocking backdrop, we were able to hold our EBIT margins above 24% in the quarter.

Net income for the quarter was $34 9 million or 23 per share.

Adjusted net income for the quarter was $45 million or adjusted diluted EPS of <unk> 30 per share.

From a balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $244 6 million and approximately $147 2 million available for future borrowings under our revolving credit facility working.

Now turning to our segment results.

Residential segment net sales for the quarter was $352 million up two 5% year over year we.

Working capital defined as inventory plus or minus AP.

We saw growth in both at centers as well as deck rail and accessories.

Was $241 2 million, we ended the quarter with gross debt.

Residential segment adjusted EBITDA for the quarter came in at $105 5 million up approximately 16% year over year.

$673 9 million, which included approximately $78 4 million of finance leases net debt was $429 3 million and our net leverage ratio stood at one seven times at the end of the third quarter.

Residential adjusted EBITDA margins were up 350 basis points to 30%.

<unk> segment net sales for the quarter were $35 9 million down approximately 31% year over year.

Net cash from operating activities was $166 9 million during the quarter.

These results were in line with our previous quarters commentary and expectations.

Versus net cash from operating activities of $133 2 million in the prior year period.

Commercial segment adjusted EBITDA for the quarter came in at $8 8 million, a decrease of $3 5 million year over year.

Expenditures for the quarter were approximately $7 million down $19 million versus the prior year period.

It is important to note that despite this channel destocking backdrop, we were able to hold our EBIT margins above 24% in the quarter.

Overall free cash flow in the first nine months of the fiscal year was up $250 million year over year.

From a balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $244 6 million on approximately $147 2 million available for future borrowings under our revolving credit facility.

As expected we were active during the quarter with our share repurchase program.

We're purchasing approximately $48 million worth of shares at a weighted average of $24 90 per share.

Working capital defined as inventory plus or minus AP was $241 2 million, we ended the quarter with gross debt of <unk>.

Given the strength of our cash position, we expect to be active again in the fourth quarter with our share repurchases activity.

As a reminder, the remaining authorization under our share repurchase program is approximately $263 million.

$673 9 million, which included approximately $78 4 million of finance leases net debt was $429 3 million and our net leverage ratio stood at one seven times at the end of the third quarter.

Our capital allocation priorities remain the same as we previously communicated we will continue to invest in our business, both organically and Inorganically and to the extent, we have excess cash flow, you'll look to repurchase shares opportunistically.

Net cash from operating activities was $166 $9 million during the quarter.

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.

Versus net cash from operating activities of $133 2 million in the prior year period.

We have now seen enough of the season in residential to confidently call of the year. The commercial segments second half is coming in as expected and communicated on our last call.

Expenditures for the quarter were approximately $7 million down $19 million versus the prior year period.

Overall free cash flow in the first nine months of the fiscal year was up $250 million year over year.

We are confident that the commercial channel Destocking will be substantially completed by the end of <unk> 'twenty three.

As expected we were active during the quarter with our share repurchase program.

To remind folks of the full year commercial segment impact that we're expecting in our outlook.

We're purchasing approximately $48 million worth of shares at a weighted average of $24 90 per share.

As to have sales and EBIT are down approximately 20% year over year with the bulk of that pressure in the second half of the year.

Given the strength of our cash position, we expect to be active again in the fourth quarter with our share repurchases activity.

We expect full year commercial EBITDA margins above 20%.

As a reminder, the remaining authorization under our share repurchase program is approximately $263 million.

With improved residential segment visibility coupled with a stable commercial segment, we are raising our full year 2003, adjusted EBITDA range to 275 million to $280 million as we have previously communicated we expect to see healthy margin expansion in the second half of the year with a four.

Margins accretive to <unk> 23 in the prior 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.

Our margin drivers remain lower raw material costs improved production volumes and execution against our cost savings initiatives.

We have now seen enough of the season in residential to confidently call of the year. The commercial segments second half is coming in as expected and communicated on our last call.

Before discussing fourth quarter guidance I want to reflect on the fiscal year to date.

<unk>, our planning assumptions in November 2022, we were operating in an uncertain environment with the unknown impact of the feds cumulative interest rates on both the repair and remodel spend and consumer sentiment against this backdrop. The key focus areas for our business, we're around our ability to navigate the channel destocking.

We are confident that the commercial channel Destocking will be substantially completed by the end of <unk> 'twenty three.

To remind folks of the full year commercial segment impact that we're expecting in our outlook.

It has to have sales and EBIT down approximately 20% year over year with the bulk of that pressure in the second half of the year.

<unk> sustained pricing in our core markets deliver.

We expect full year commercial EBITDA margins above 20%.

Deliver on sourcing savings and manage our conversion costs, while protecting capacity and lead times to service our market.

Through three quarters I am proud of the way the team has executed well at the same time, providing strong service to the market.

Spanning our position across channels and reducing working capital.

Channel inventory levels at the end of June were lower than fiscal 2017 to 2019 average days on hand.

Margins accretive to <unk> 23 in the prior year.

Our margin drivers remain lower raw material costs improved production volumes and execution against our cost savings initiatives.

We are confident that our current lead times will allow us to service demand.

As Jesse mentioned upfront contractor backlogs remained consistent with the prior quarter at roughly eight weeks and both contractor and dealer sentiment remain above average and were consistent with prior quarter survey.

Before discussing fourth quarter guidance I want to reflect on the fiscal year to date when offering our planning assumptions in November 2022, we were operating in an uncertain environment with the unknown impact of the feds cumulative interest rates on both the repair and remodel spend and consumer sentiment against this backdrop.

Additional context around our <unk> 'twenty three guidance includes we expect both sales volume as well as production volume levels to be up meaningfully year over year as we lap a prior year channel Destocking.

The key focus areas for our business, we're around our ability to navigate the channel destocking sustained pricing in our core markets deliver.

Key raw materials and commodity projections continue to be in line with our planning assumptions as expected. We will continue to see lower cost inventory roll off the balance sheet and <unk> 23.

Deliver on sourcing savings and manage our conversion costs, while protecting capacity and lead times to service our market.

Capital expenditures are expected to end the full year at around $85 million, representing a very modest increase in our earlier capex expectations. As stated before we will continue to invest incremental capital as we see growth and margin opportunity across our residential business.

Through three quarters I am proud of the way the team has executed well at the same time, providing strong service to the market expanding our position across channels and reducing working capital at.

At present channel inventory levels at the end of June were lower than fiscal 2017 to 2019 average days on hand.

Cash conversion and working capital initiatives remain a priority for us.

We are confident that our current lead times will allow us to service demand.

With all that in mind for <unk> 'twenty three we expect consolidated net sales between $356 million to $376 million and we are.

Expect adjusted EBITDA between 90 million and $95 million with that I'll now turn the call back to Jesse for closing remarks.

Thanks Pete.

I would again like to thank our dedicated team members channel and supplier partners and contractors that support Va's at company. Thank you for your commitment and contribution we are in an excellent position to outperform the market in any environment and realize the margin benefits of our <unk>.

Key raw materials and commodity projections continue to be in line with our planning assumptions as expected. We will continue to see lower cost inventory roll off the balance sheet and <unk> 23.

<unk> and recycling initiatives.

Our focus working capital improvement and meaningful free cash flow generation put us in a great position from a capital allocation perspective to opportunistically participate in share repurchases.

Fundamentals of our business are strong as is our confidence in the long term growth material conversion and margin expansion opportunity, we have a clear strategy and as X specific initiatives to drive above market growth.

Cash conversion and working capital initiatives remain a priority for us.

With all that in mind for <unk> 'twenty three we expect consolidated net sales between $356 million to $376 million and we expect adjusted EBITDA between 90 million and $95 million.

With that operator, please open the line for questions.

Thank you.

Please limit your questions to one to accommodate the people in the queue. The first question comes from Phil Meng from Jefferies you have.

With that I'll now turn the call back to Jesse for closing remarks.

Thanks Pete.

Before.

Hey, guys congrats on a really strong quarter, especially on the margin for outperformance so.

So my question really centers around that.

If I look at your guidance, you're assuming roughly 25% EBITDA margin in the back half.

I appreciate there is some seasonality in the business, but is that a bad way to think about.

Thing and recycling initiatives.

Our focus working capital improvement and meaningful free cash flow generation put us in a great position from a capital allocation perspective to opportunistically participate in share repurchases.

Good luck in 2024, if you get some leverage.

How do you see that cadence progressing to your longer term 27, 5% EBITDA margin.

Target by 2027, it seems like there could be some upside here.

<unk> of our business are strong as is our confidence in the long term growth material conversion and margin expansion opportunity, we have a clear strategy and as X specific initiatives to drive above market growth.

Hey, Phil this is Peter so obviously.

The results here in the third quarter and what we expect in the fourth quarter. It gives us a tremendous amount of confidence that we're not only on track but.

Exactly where we'd like to be in pacing.

With that operator, please open the line for questions.

To hit the 27, 5% in 2027.

Thank you.

As far as sort of a.

Please limit your questions to one to accommodate the people in the queue. The first question comes from Phil Meng from Jefferies you have the floor.

Let's call it a baseline I think what I would share.

That we've communicated previously that might be helpful. As youre thinking about next year.

What we do know about margin impacts as between the accounting change in estimate and the Underutilization in the first half of the year was about $20 million impact that won't reoccur.

Hey, guys congrats on a really strong quarter, especially on the margin for our performance.

So my question really centers around that.

The second thing that we've articulated is that we expect to leave about $20 million of deflation on the balance sheet here at fiscal year end 2023.

If I look at your guidance, you're assuming roughly 25% EBITDA margin in the back half I. Appreciate there is some seasonality in the business, but is that a bad way to think about.

Would roll off in 2024.

Good luck in 2024, if you get some leverage.

It's approximately $40 million.

How do you see that cadence progressing to your longer term 27, 5% EBITDA margin.

Keep in mind, we would expect to make some investments against that $40 million, but thats, probably a good way of framing out for thinking about.

Target by 2027, it seems like there could be some upside here.

Exits.

Okay I appreciate the color.

Okay.

Hey, Phil this is Peter so obviously.

Thank you next question comes from Michael Rehaut, Rehaut, sorry from Jpmorgan you have the floor.

The results here in the third quarter and what we expect in the fourth quarter. It gives us a tremendous amount of confidence that we're not only on track but.

Exactly where we'd like to be in pacing.

To hit the 27, 5% in 2027.

Mike you there.

Okay.

As far as sort of.

Let's call it a baseline I think what I would share.

Can you hear me.

Yes, now we can go ahead, okay, great sorry about that.

That we've communicated previously that might be helpful. As youre thinking about next year.

I wanted to.

What we do know about margin impacts as between the accounting change in estimate and the Underutilization in the first half of the year. It was about a $20 million impact that won't reoccur.

Maybe kind of shift you're talking about and I apologize. If this might have been hit on the last question, but.

Thinking.

Into next year.

The second thing that we've articulated is that we expect to leave about $20 million of deflation on the balance sheet here at fiscal year end 2023.

Trying to think about the.

Takes.

The pluses and minuses.

A tailwind the headwinds different drivers that might influence the margin.

Would roll off in 2024.

It's approximately $40 million.

As you sit here today, and again kind of looking at your back half performance.

Keep in mind, we would expect to make some investments against that $40 million, but thats, probably a good way of framing out for thinking about.

In particular, I'm thinking about any incremental carryover on the price cost side.

Exits.

Okay I appreciate the color.

Productivity raw materials, those types of things and sorry, if we're just sneaking in a second small one just curious on how you said that sell through was up double double digits in <unk>.

Thank you next question comes from Michael Rehaut, Rehaut, sorry from Jpmorgan you have the floor.

Mike you there.

What does your fourth quarter guidance reflect in that area.

Okay.

Yes.

Can you hear me.

Mike.

Yes, now we can go ahead, okay, great sorry about that.

May not have heard it peaks just answer that first one I'll summarize as.

I wanted to.

What Pete just highlighted as a reminder, under utilization.

Maybe kind of shift you're talking about and I apologize if this might have been hit on and the last question, but.

Some of the onetime accounting impacts are 20 million plus an additional.

Thinking.

Excuse me $20 million on the balance sheet coming into 'twenty, four and and I think as we've talked about throughout the entirety of the year, we're really focused on obviously delivering delivering the year, but making sure we're really well set up.

Into next year.

Trying to think about the.

Takes.

The pluses and minuses.

A tailwind the headwinds different drivers that might influence the margin.

As you sit here today, and again kind of looking at your back half performance.

For 24, and then on your second question.

Relative to what we're assuming on sell through I think in the materials that are posted online we stayed positive.

In particular I'm thinking about any.

Incremental carryover on the price cost side.

Productivity raw materials, those types of things and sorry for just sneaking in a second small one just curious on how you said that sell through was up double double digits in <unk>.

Sell through.

And really the way to think of it as we're not going to give a specific range on assumption except that anything that's positive is.

<unk> is really what we're expecting.

<unk>.

<unk> will give us an opportunity.

What does your fourth quarter guidance reflect in that area.

To deliver the the range that we've highlighted.

Yes.

Mike.

You may not have heard it peaks just answer that first one I'll summarize as.

What Pete just highlighted as a reminder, under utilization.

Just a question to answer.

Alright, yes. Thank you maybe just squeeze in one last one and I apologize that I was repetitive on the prior question.

Some of the onetime accounting impacts are 20 million plus an additional.

Excuse me 20 million on the balance sheet coming into 'twenty, four and and I think as we've talked about throughout the entirety of the year, we're really focused on obviously delivering delivering the year, but making sure we're really well set up.

Thinking about growth initiatives for next year, you talked about adding distributors in various other growth initiatives your portfolio product portfolio any way to think about.

How that.

How that might add to growth in addition to underlying market growth for the segment.

For 24, and then on your second question.

Relative to what we're assuming on sell through I think in the materials that are posted online we stayed positive.

For the sector sorry.

Yes, so let's start with where we are now.

I appreciate the question. So if you take a look at our trailing 12, I think one of the things that both Pete and I tried to comment on this.

Sell through.

And really the way to think of it as we're not going to give a specific range on assumption except that anything that's positive.

Is is really what we're expecting and what.

Scripted portion of the call is that our inventory.

It will give us an opportunity to.

Correction is behind US we've we've taken the appropriate steps in and so as you look back and you look at our 22 growth rate in our residential business. It was 12%. If you look at the guide we have for our residential business the midpoint of the guide or the range of the <unk>.

To deliver the range.

We've highlighted.

Just a question to answer.

Alright, yes. Thank you.

Just to squeeze in one last one and I apologize that I was repetitive on the prior question.

It really stacks up to our residential business being at 2% to 3%. Despite some of the inventory corrections.

Thinking about growth initiatives for next year, you talked about adding distributors in various other growth initiatives your portfolio product portfolio any way to think about.

Four.

For the fiscal year now against that we've also said that we are seeing double digit growth and I think if you think about the underlying R&R market.

How that.

How that might add to growth in addition to underlying market growth for the segment.

In many cases, many people talked about that as as being negative there are some other discussion about our particular sector.

For the sector sorry.

Yes, so let's start with where we are now.

Being flat and then against that.

I appreciate the question. So if you take a look at our trailing 12, I think one of the things that both Pete and I tried to comment on Germany.

When you start to look at our trailing 12 or trailing 12 on our guide and you extrapolate.

What would be logical as you incorporate a more normalized fourth quarter, what youll start to see is a trailing 12 across each of those areas that really reflects.

The scripted portion of the call is that our inventory.

Our execution.

Then.

Within our market expansion and so I think it's key to recognize.

Within the industry.

That we are showing right now the benefit of that share.

It really stacks up to our residential business being at 2% to 3%. Despite some of the inventory corrections.

And new product growth and new growth initiatives.

Conversation on our year to date, and we will continue to expect that.

Four.

For the fiscal year now against that we've also said that we are seeing double digit growth in and I think if you think about the underlying R&R market.

As as we move forward.

Great. Thank you very much.

Thank you very much.

In many cases, many people talked about that as being negative there are some other discussion about our particular sector.

Next question from Ryan Merkel from William Blair. Your line is open.

Hey, everyone I had a question on early thoughts on the early buy.

Being flat and then against that.

When you start to look at our trailing 12 or trailing 12 on our Guy and you extrapolate.

Can you just comment on what you're hearing and thinking for distributors and pro dealers and one of the reasons I ask is one of your competitors mentioned that pro dealers might.

What would be logical as you incorporate a more normalized fourth quarter, what youll start to see is a trailing 12 across each of those areas that really reflects.

It might push some of the stocking into calendar first quarter 'twenty four just curious if you've heard something similar.

Yes.

Our execution.

What.

Then.

I'm, sorry, Pete I'll I'll take it in that.

Within our market expansion and so I think it's key to recognize.

Just as as you step back and consider what we said at the end of calendar 'twenty two at the end of our first quarter.

Within the industry.

That we are showing right now the benefit of that.

Sure.

This year, we said that we were operating under a very conservative environment.

And new product growth and new growth initiatives.

Our conversation on our year to date, and we would continue to expect that.

And that.

We were working with our dealer partners and our distributors.

As as we move forward.

To make sure that we had the right inventory levels and the right staging.

Great. Thank you very much.

Thank you very much.

And so as we move into the season, we are now in a position where we are lapping conservatism.

Next question from Ryan Merkel from William Blair. Your line is open.

Hey, everyone I had a question on early thoughts on the early buy.

And as we look at the market, we don't expect any additional.

Can you just comment on what you're hearing and thinking for distributors and pro dealers and one of the reasons I ask is one of your competitors mentioned that pro dealers might.

Conservatism barring any meaningful change in the market I think the other key element to highlight is we operated under a more normalized call. It appropriately conservative early buy last year.

It might push some of the stocking into calendar first quarter 'twenty four just curious if you've heard something similar.

And so we are now moving into a.

Yes.

What.

A lapping of that early buy and we do very very little on our early buy in the <unk>.

I'm, sorry, Pete I'll I'll take it in that.

Just as as you step back and consider what we said at the end of calendar 'twenty two at the end of our first quarter.

And the.

Calendar first quarter.

Got it thanks Jessy.

Thank you.

This year, we said that we were operating under a very conservative environment.

The next question comes from Keith Hughes from Truest. Your line is open.

And that.

Yes.

We were working with our dealer partners and our distributors.

Okay.

Just building on that last question.

To make sure that we had the right inventory levels and the right staging.

It seems as though the run rate here is very strong.

And so as we move into the season, we are now in a position where we are lapping conservatism.

Several several questions.

Okay.

It seems as though the channel would really start to build a lot of inventory or police get ready for the season next year.

And as we look at the market, we don't expect any additional.

I don't know if you hear mixed things on that.

What are you hearing from the channel about next year, what do they think it's going to look like and what kind of position.

Conservatism barring any meaningful change in the market I think the other key element to highlight is we operated under a more normalized call.

Yeah, It is extremely difficult.

Call it appropriately conservative early buy last year.

Start.

Talk about next.

It's extremely.

And so we are now moving into a lapping.

Difficult to talk about next year I think as.

Lapping of that early buy and we do very very little on our early buy in the <unk>.

As you look at what we have gone through this year I would say it is a it has been a relatively normal pacing a relatively normal year.

And.

And the cash.

Calendar first quarter.

Got it thanks Jessy.

With as Pete pointed out a very conservative set point relative to <unk>.

Thank you.

The next question comes from Keith Hughes from Truest. Your line is open.

What is.

Yeah.

The inventory that people took on and how we work with our channel to make sure that it was a appropriately conservative I think as we look at next year.

Okay.

Just building on that last question.

It seems as though the run rate here is very strong.

So several questions.

We're focused on continuing to build on this year end.

Okay.

It seems as though the channel would really start to build a lot of inventory or at least get ready for the season next year.

Aside from that.

We're excited about what we can continue to do from an a mall from a momentum standpoint.

Although you hear mixed things on that.

What are you hearing from the channel about next year, what do they think it's going to look like and what kind of position.

Okay and one other question on <unk>, you highlighted most numbers for us.

You are headwinds that are going away are those mostly going to be exhausted. After the first half of the year.

Yes, it is extremely difficult.

Start to talk about next.

Yes.

Yes, Keith that's actually accurate.

It's extremely difficult to tell.

Terry over about half a year's deflation. So most of them are carryover is all going to be <unk>.

Talk about next year I think as.

As you look at what we have gone through this year I would say it is a it has been a relatively normal pacing a relatively normal year.

Comp perspective, and obviously.

The bulk of the Underutilization was on first half of the year.

Yes.

It will be even during the quarter as a lot of slant towards the first or.

With as Pete pointed out a very conservative set point relative to what is.

It will weigh a little heavier Keith <unk>, just because of the accounting change in estimate was about $6 million and that was all in <unk>.

Sure.

The inventory that people took on and how we work with our channel to make sure that it was a appropriately conservative I think as we look at next year.

Okay, great. Thank you.

Thank you.

Next question comes from Tim worse from Baird. Your line is open.

Yeah, Hey, good afternoon, guys. Thanks very much.

We're focused on continuing to build on this year end.

Okay.

Aside from that.

Maybe just my question I guess Jesse could you just kind of maybe as you look at double digit sellout I know this is not a.

We're excited about what we can continue to do from an a mall from a momentum standpoint.

Scientific thing, it's more of an hour but.

Okay and one other question on fee you highlights most numbers for us.

Is there a way to kind of think about what a like for like sellout number is versus maybe what youre, adding front from new products or new shelf space.

You are headwinds that are going away are those mostly going to be exhausted. After the first half of the year.

Yeah.

Yes, Keith that's actually accurate.

I think it's a good question.

Terry over about half a year's deflation. So most of them are carryover is all going to be <unk>.

What I would say.

Is what we've said in the past is that our initiatives incrementally would drive give or take 3% to 5%.

Comp perspective, and obviously.

The bulk of the Underutilization was on first half of the year.

Yes.

It will be even during the quarter as a lot of slant towards the first or.

And.

Depending on the year, depending on the timing et cetera.

It will be a little heavier Keith to <unk>, just because the accounting change in estimate was about $6 million of that was on <unk>.

I think from what we can see in the general underlying data.

Okay, great. Thank you.

Yeah.

Between all of our initiatives.

Thank you.

Question comes from Tim worse from Baird. Your line is open.

Probably at least 3% to 5% from where we stand right now and once again that is.

Yes, Hey, good afternoon, guys, so im not sure.

A broad brush that's part of that <unk>.

Okay.

Maybe just my question I guess, Jesse could you just kind of maybe as you look at double digit sellout.

Revenue stack that we've provided over the years.

Okay very good when you look on the rest of the year.

No this is not it.

Scientific thing, it's more of an art, but.

Great. Thanks, Tim.

Thank you.

Is there a way to kind of think about what a like for like sellout number is versus maybe what youre, adding front from new products or new shelf space.

Next question from Susan Mcclary Goldman Sachs. Your line is open.

Thank you and good afternoon, everyone.

Yeah.

In your commentary you mentioned.

I think it's a good question.

The deflation productivity cost savings, where some of the key elements and the margin performance that you saw this quarter can you give any more color on the role of each of those and then thoughts on the utilization rate that you expect to have coming out of this year and the potential for further upside in 'twenty, four and what that perhaps could mean from a margin perspective.

What I would say.

Is what we've said in the past is that our initiatives incrementally would drive give or take 3% to 5%.

And.

Depending on the year, depending on the timing et cetera, I think from what we can see in the general underlying data.

Yes, Susan this is Peter look.

Thank the easiest way to answer the question is.

Yes.

From a sequential step up perspective, we've kind of highlighted look from a first half to back half about 60% of the lift is the $30 million in deflation and about 40% of sort of the underutilization and change in accounting.

Between all of our initiatives.

Probably at least 3% to 5% from where we stand right now and once again that is.

A broad brush that's part of that.

Revenue stack that we've provided over the years.

As far as.

Expectations for next year certainly.

Okay very good.

Are you guys.

We don't know what the volume equation is going to look like but we would almost certainly want to be or need to be positive from a production volume perspective, which would obviously.

Appreciate it thanks, Tim.

Thank you.

Next question from Susan Mcclary Goldman Sachs. Your line is open.

Thank you and good afternoon, everyone.

It'd be a nice backdrop for our production plants to run beyond.

Pete.

You commentary you mentioned.

Okay. Thanks for the current good luck with everything.

On the deflation productivity cost savings, where some of the key elements and the margin performance that you saw this.

Thank you next question comes from Troy.

This quarter can you give any more color on the role of each of those and then I'll have thoughts on the utilization rate that you expect to have coming out of this year and the potential for further upside in 'twenty, four and what that perhaps could mean from a margin perspective.

<unk> from Stephens Your line is open.

Yes, good afternoon, everyone.

So.

Just quick on the commercial update.

You mentioned that the Destocking was substantially behind us by year end, but is there any way to kind of parse out I'm, sorry, if I missed it kind of parse out how much of the decline in the quarter was driven by softer demand versus Destocking and then I think you mentioned stable commercial environment.

Yes, Susan this is Peter look I think the easiest way to answer the question is.

From a sequential step up perspective, we've kind of highlighted look from a first half to back half.

About 60% of the lift is the $30 million in deflation and about 40% of sort of the underutilization and change in accounting.

Im misheard that but.

Is that to say that it's kind of stabilized here.

Sure levels.

As far as.

In the back half and maybe any early thoughts from talking to customers and maybe their backlogs any any thoughts on maybe when you might start to see some demand improvement there in that segment, yes, Trey This is Peter I.

Expectations for next year certainly.

We don't know what the volume equation is going to look like but we would almost certainly want to be or need to be positive from a production volume perspective, which would obviously.

I think we said on our last call and it's still holds here is little over half of the impact on the commercial business in the back half of the year as channel Destock.

A nice backdrop for our productions plants to run beyond.

Okay. Thanks for the current good luck with everything.

Thank you next question comes from Trey Grooms.

The other piece is demand.

As far as just color on the bulk of the industrial markets.

<unk> from Stephens Your line is open.

Yes, good afternoon, everyone.

Our already through channel Destocking as we exited three Q here the loan market that we're wrestling with and in the fourth quarter that we feel comfortable it will materially complete the destocking is semi comp.

So.

Just a quick one on the commercial update.

So I hope that helps in terms of color on as far as stabilization I think the comment was just really around the fact that we see the business still kind of exactly as we called out last quarter.

We mentioned for the full year, we thought top and bottom line would be down about 20% year over year.

Im misheard that but.

Is that to say that it's kind of stabilized here.

So are our guide right now and we feel comfortable with it and we also feel comfortable and holding EBITDA margins above 20%.

<unk> levels.

In the back half and maybe any early thoughts from talking to customers and maybe their backlogs any any thoughts on maybe when you might have.

Alright, Thanks, Peter Thanks for the color to take care.

To start to see some demand improvement there in that segment, yes, Trey This is Peter I.

Thank you.

Next question comes from John Lovallo.

I think we said on our last call and it's still holds here is little over half of the impact on the commercial business in the back half of the year's channel Destock.

Your line is open.

Hi, guys. Thank you for taking my question as well.

As you look beyond this year in terms of industry pricing I think you've talked in the past that you think that this industry could sort of garner 2% to 3%.

The other pieces is demand.

As far as just color on the bulk of the industrial markets.

Our already through channel Destocking as we exited three Q here.

<unk> on an annual basis, just given the distributor model.

The loan market that we're wrestling with in the fourth quarter that we feel comfortable it will materially complete the destocking in semicon.

I believe that that's true and if so I mean is that contemplated in that 27, 5% 2027, EBITDA margin or would that actually be upside from there.

So I hope that helps in terms of color on as far as stabilization I think the comment was just really around the fact that we see the business still kind of exactly as we called out last quarter.

Yes look I think as our conversations in the past with our product portfolio with these statics branding just differentiated products in general as long as well as the strength of our channel presence I think there should be a business, where we can offset let's just see.

We mentioned for the full year, we thought top and bottom line would be down about 20% year over year.

So are our guide right now on where we feel comfortable with it and we also feel comfortable and holding EBITDA margins above 20%.

A normal inflation in the marketplace, whether that's a point or two.

Certainly.

Alright, Thanks, Peter Thanks for the color take care.

It's certainly something that we're aspiring to as.

Thank you.

As far as our gross fact, we've kind of said look our gross that is ex M&A and it's X price. So conceptually anything that we can get there as well.

Next question comes from John Lovallo.

Your line is open.

Hi, guys. Thank you for taking my question as well.

Let's say a hedge against any of the other levers right with drive a portfolio of actions getting the 27, 5% so.

As you look beyond this year in terms of industry pricing I think you've talked in the past that you think that this industry could sort of garner 2% to 3%.

You could think of as its defense against ensuring that we can deliver on the 27, 5%.

<unk> on an annual basis, just given the distributor model.

I think the only other thing I would add John is.

Still believe that that's true and if so I mean is that contemplated in that 27, 5% 2027, EBITDA margin or would that actually be upside from there.

As we look at the value add we have from.

From the string of new products that we have launch and will continue to launch.

That really adds differentiated value in the market.

And we believe that's a really important factor in being able to sustain.

The value and therefore, the price that we get for.

Say normal inflation in the marketplace, whether thats a point or two.

For our products and it really ends up over the long term.

Certainly.

It's certainly something that we're aspiring to.

Being a value proposition for the consumer and we feel really really good with all of the efforts over the last few years of launching multiple new product lines that we're adding a lot of really differentiated value at the consumer level.

As far as our gross stack, we've kind of said look our gross debt is ex M&A and it's X price. So conceptually anything that we can get there as well.

Let's say a hedge against any.

Any of the other levers right would drive a portfolio of actions getting the 27, 5% so.

Thank you guys.

Yes.

You could think of as its defense against ensuring that we can deliver on the 27, 5%.

Yeah.

Thank you.

Next question.

I think the only other thing I would add John is.

Adam Baumgarten from Zelman <unk> Associates your line is open.

As we look at the value add we have.

Hey, good afternoon guys.

From the string of new products that we have launch and will continue to launch.

It looks like your residential sell through was above your biggest competitor at least in the quarter and Andy mentioned some of those initiatives contributing to the to the outgrowth.

That really adds differentiated value in the market.

Can you also touch on really how sell through looked in exteriors was it actually above decorating and accessories.

And we believe that's a really important factor in being able to sustain.

I think I can take a look at.

The value and therefore, the price that we get for.

Our.

Guide for the year. There is some noise in terms of inventory move that on deck rail and accessories, but if you look at.

For our products and it really ends up over the long term.

Our guide I mentioned and.

Being a value proposition for the consumer and we feel really really good with all of the efforts over the last few years of launching multiple new product lines that that we're adding a lot of really differentiated value at the consumer level.

In aggregate, we're going to end up at at 2% to 3% positive for residential given our guy and you consider the sell through numbers. We just told you it's been pretty balanced across both areas. So you should think.

Okay. Thank you guys.

As we move through the quarter, we just ended and as we move into the next quarter.

Yes.

Our sell through is is really balance.

Thank you.

Next question.

On a relative basis is between both those businesses.

Adam Baumgarten from Zelman and Associates your line is open.

Okay, Great best of luck.

Thank you.

Hey, good afternoon guys.

Thank you.

It looks like your residential sell through was above your biggest competitor at least in the quarter and Andy mentioned some of those initiatives contributing to the outgrowth.

The next question comes from Rafi.

Roche's.

From Bank of America. Your line is open.

Can you also touch on maybe how sell through looked in exteriors was it actually about decorating and accessories.

Great.

Hi, good afternoon, thanks for taking my questions.

I think if you take a look at.

Just following up on the sell out trends.

Our.

Can you just.

Guide for the year. There is some noise in terms of inventory move that on deck rail and accessories, but if you look at.

Jesse improve.

Improvement from flattish in the first half of the fiscal year to up double digit.

Our guide I mentioned and.

It's a pretty sharp acceleration and when we look across like R&R General I don't think we've seen acceleration like that in other categories. So what do you think is driving that.

Big improvement on.

On a sequential basis it was like the conversion rate going.

As we move through the quarter, we just ended and as we move into the next quarter.

Higher or is that just getting more shelf space, where there any specific customer wins, there and then just within the sell out is there any difference between mix between wholesale and retail. Thank you.

Our sell through is is really balance.

On a relative basis is between both those businesses.

Yes.

I think part of it when you start to talk about timing first half and second half.

Okay, Great best of luck.

Thank you.

Main distinction as our second half of the year, it's actually in the bulk of the season and so I think as we've talked about earlier, it's difficult to parse all parse out sell through in the fourth calendar quarter or in the first.

The next question comes from Rafi.

Roche's.

From Bank of America. Your line is open.

Great.

Hi, good afternoon, thanks for taking my questions.

So just following up on the sellout trends.

Calendar quarter, because there is it's a bit of off season in certain geographies and there's a lot of movement there.

Can you just.

Jessica the improvement from flattish in the first half of the fiscal year to up double digit.

I think certainly we feel really good about.

It's a pretty sharp acceleration and when we look across like R&R in general I don't think we've seen acceleration like that in other categories. So what do you think is driving that.

The season, and our aggregate sell through as well.

We end the year and so I'll give you just a couple of perspectives relative to.

Big improvement.

On a sequential basis is like the conversion rate going.

Other parts of R&R as we've talked about in the past we do believe the sectors that we play in are more resilient and I think as you look back to 2019, and what we're guiding to now.

Our residential business is materially bigger 80 plus percent larger.

Yes.

I think part of it when you start to talk about timing first half and second half.

And that's really a reflection of.

Main distinction as our second half of the year, it's actually in the bulk of the season.

Of.

The resiliency.

The market segment, we play in so I'll start there combined with company specific initiatives and I think we talked about in earlier calls that we had picked up some additional share.

And so I think as we've talked about earlier, it's difficult to parse all parse out sell through in the fourth calendar quarter or in the first.

Calendar quarter, because there is it's a bit of off season in certain geographies.

Self space and both.

Both our pro channel and also within retail.

And Theres a lot of movement there.

I think certainly we feel really good about.

And.

And so you have the backdrop of a resilient business some incremental.

The season, and our aggregate sell through as.

Self positions, which allow you to access wood conversion. It allows you to engage broader.

We end the year and so I'll give you just a couple of perspectives relative to.

Customers and then layer on top of that.

Other parts of R&R as we've talked about in the past we do believe the sectors that we play in are more resilient and I think as you look back to 2019 and what we're guiding to now our residential business is materially bigger 80 plus percent larger.

There is additional wood conversion that we.

Believe it's happening and we get incremental benefit from our new products in particular in our exteriors area, where that part of the R&R market. As you can hear from some of the other folks that have reported is a bit weaker.

And that's really a reflection of.

And yet we still delivered strong performance and so I think it is.

<unk>.

The resiliency.

The market segment, we play in so I'll start there combined with company specific initiatives and I think we talked about in earlier calls that we had picked up some additional <unk>.

As Pete said, it's a portfolio of actions on top of a very resilient sector that we've talked about for years within the market.

Great. Thank you.

Thank you.

Shelf space and both.

Next question comes from Joe <unk> Deutsche Bank. Your line is open.

Both our pro channel and also.

Within retail.

Thanks, Good evening everybody.

And.

And so you have the backdrop of a resilient business some incremental <unk>.

I just wanted to ask about mix within the sell through up double digits could you talk about any current benefit youre getting from mix people choosing higher value products higher price point products and then just any opportunity for that to be a continued part of the algorithm for growth going forward.

Self positions, which allow you to access wood conversion. It allows you to engage broader.

Customers and then layer on top of that.

There is additional wood conversion that we.

Okay.

Yes, Joe This is Peter what I would say is look with added capacity here in 2023, we've done a kind of modest relaunch of our prime and Prime plus we were under indexed at the kind of good category.

I believe it's happening and we get incremental benefit from our new products in particular in our exteriors area, where that part of the R&R market. As you can hear from some of the other folks that have reported is a bit weaker.

Over the last two years, just due to lack of capacity.

And yet we still delivered strong performance and so I think it's a pizza.

As we have pushed those products. This year, we've obviously picked up some share.

<unk> said, it's a portfolio of actions on top of a very resilient sector that we've talked about for years within the market.

Along the way and.

Have felt the impact of a modest mix impact of picking up more at the good category level.

Great. Thank you.

Thank you.

Meaning you actually had a mix headwind if it was if you are talking.

Next question comes from Joe <unk> Deutsche Bank. Your line is open.

It is modest trade down as we've picked up share with the new capacity.

Thanks, Good evening everybody.

Yes, I will add though that the way to think of it as well.

We've seen nice growth in our premium segment also but what Pete's talking about is.

The opportunity we had to access business that we hadn't already had.

In aggregate.

Okay.

Anything leads to a very very modest.

Yes, Joe This is Peter what I would say is look with added capacity here in 2023, we've done a kind of modest relaunch of our prime and Prime plus we were under indexed at the kind of good category over the last two years, just due to lack of capacity.

Almost indistinguishable on the P&L.

Mix impact from growth of the more entry level products.

That makes sense. Thanks for the context, there and then just on the commercial margins.

Facing weaker demand and destock, but yet you've held margins basically flat year over year kind of guiding to that flat year over year ish for the year.

As we have pushed those products. This year, we have obviously picked up some share.

Along the way and.

Can you talk us through how you were able to do that because obviously the result was a little different than the residential destock.

Have felt the impact of a modest mix impact of picking up more at the good category level.

Yes, I think that.

Meaning you actually had a mix headwind if it was if you are talking.

As we talk about.

That team has done an absolutely terrific job.

And as Bart modest trade down as we've picked up share with the new capacity.

Developing value added segments of being able to scale the.

I will add though that the way to think of it is.

The factory appropriately without yes, it's it's a more.

We've seen nice growth in our premium segment also but what Pete's talking about is the.

It's a it's a narrower factory and a narrower footprint and so it has an ability to scale up and down relative to volume changes incredibly efficiently.

The opportunity we had to access business that we hadn't already had.

Yes.

In aggregate if anything leads to a very very modest.

And I think they've just done a really nice job of that.

Almost indistinguishable on the P&L.

Both of those things managing through volume.

Some volume volatility and decline while they continue to drive value added products and and so it's been a really nice business performance as you highlighted.

The mix impact from growth of the more entry level products.

That makes sense. Thanks for the context, there and then just on the commercial margins.

For that team as they manage through.

Facing weaker demand and destock, but yet you've held margins basically flat year over year kind of guiding to that flat year over year ish for the year.

Destock, that's occurring in many parts of of the rest of the economy.

You talk us through how you were able to do that because obviously the result was a little different than the residential destock.

I appreciate it good luck guys.

Thank you. Thank you before we continue I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. The next question.

Yes, I think that.

As we talk about that.

That team has done an absolutely terrific job of developing value added segments of being able to scale.

Comes from Kurt Yinger D. A Davidson your line is open.

The factory appropriately without yes, it's it's a more it's.

Great. Thank you.

Just a two parter on recycling.

It's a it's a narrower factory and a narrower footprint and so it has an ability to scale up and down relative to volume changes incredibly efficiently.

First could you just remind us what the next mile marker is in terms of.

The low for for high density kind of recycled polyethylene substitution and then secondly, you touched on the full circle kind of PVC program in accessing some new materials. There is that something thats driving down kind of per pound cost of recycled PVC materials.

And I think they've just done a really nice job of that.

Both of those things managing through volume.

Some volume volatility and decline while they continue to drive value added products and and so it's been a really nice business performance as you highlighted.

At this stage or any color there.

Yes, let me.

For that team as they manage through a.

Let me start with the latter I think.

Destock, that's occurring in many parts of of the rest of the economy.

We've highlighted over.

The last year over the last couple of years.

I appreciate it good luck guys.

Thank you. Thank you before we continue I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. The next question.

<unk>, where you really have is the largest vertically integrated PVC recycler.

And the country and what that's allowed us to do is to really push and source.

Comes from Kurt Yinger D. A Davidson your line is open.

A lot of alternative materials, and our ability to use those materials within our products both on exteriors.

Great. Thank you.

And our deck rail and accessories business, we believe is pretty unique.

Just a two parter on recycling.

First could you just remind us what the next mile marker is in terms of.

And as such you should think of that journey within PDC recycling as being a combination of a few things one is increasing the percentage of recycle I think the second is of course, the optimizing the way we process recycle and I think the third element is you.

Using lower and lower cost recycle when we put these bins out there and we work with our channel partners and other construction and demolition companies. We are the alternative to landfill and it is a value add to our channel partners, but it's also obviously a very cost effective <unk>.

At this stage or any color there.

Yes, let me.

Let me start with the latter.

Thank you.

We've highlighted over the.

Last year over the last couple of years the.

The strength, we really have is the largest vertically integrated PVC recycler.

Michael stream, because it's just really the transport.

Of the product back and so it is certainly part of our ongoing effort to.

And the country and what that's allowed us to do is to really push and source.

Use lower and lower value.

A lot of alternative materials, and our ability to use those materials within our products both in exteriors.

Recycle within PVC I'll make a quick comment on the on the capped composite side.

And on some of the other initiatives we have I think in general you should think of us continuing to incrementally make progress on the PVC side and we currently have.

Our deck rail and accessories business.

We believe is pretty unique.

And as such you should think of that journey within PDC recycling as being a combination of a few things one is increasing the percentage of recycle.

Lower cost formulations running in our factory and shipping out.

I think the second is of course, the optimizing the way we process recycle and I think the third element is using lower and lower cost recycle when we put these bins out there and we work with our channel partners and other construction and demolition companies. We are the alternative to landfill.

To customers using.

A higher.

<unk> of low density products.

I think the staging of that.

Something that will continue to see.

Through 2024, so that's an ongoing process and ongoing conversion and it's really important that we not disrupt.

And it's a value add to our channel partners, but it's also obviously a very cost effective <unk>.

Our customers as we do that conversion as I mentioned, we've done some of that.

There's more to go and as we see windows to do that that conversion on our lines will continue to see that and as we said on the call on our exterior business, we've been able to.

Recycle stream because it's just really the transport.

Of the product back and so it is certainly part of our ongoing effort.

To use lower and lower value.

Incrementally increase our recycled content also which has had a nice positive environmental impact.

Recycle within PVC I'll make a quick comment on our.

On the Capp composite side.

And that business.

And on some of the other initiatives we have I think in general you should think of us continuing to incrementally make progress on the PVC side.

Got it okay, well thanks for all the color Jesse I appreciate it.

Thank you.

Next question comes from Steven Ramsey with Thompson Research Group. Your line is open.

We currently have.

Lower cost formulations wanting in our factory and shipping out.

Hi, good evening thinking about the context of your consumer indicators are positive contractor sentiment.

To customers using.

A higher percentage of low density products.

<unk> positive and more positive distributor sentiment and your sentiment aligns more with consumers and contractors. What do you think catalyzes the distributor distribution part of the chain to adopt a more positive sentiment at this point.

I think the staging of that is something that we'll continue to see.

Through 2024, so that's an ongoing process and ongoing conversion and it's really important that we not disrupt.

You mean, I think if I interpret your question was what is causing our channel partners to be more conservative is that how I should interpret the question.

Our customers as we do that conversion as I mentioned, we've done some of that.

There's more to go and as we see windows to do that that conversion on our lines will continue to see that and as we said on the call on our exterior business, we've been able to.

What's the catalyst at this point to get them over the line to your site.

Yeah. No look we are we are very aligned.

With our channel partners, it's really important to acknowledge that we've been able to recognize.

Incrementally increase our recycled content also which does have a nice positive environmental impact.

In aggregate growth in the market that doesn't mean every channel partner.

And that business.

Got it okay, well thanks for all the color Jesse I appreciate it.

Has equal growth, but as you expand channel partners as you work with channel partners.

Thank you.

Next question comes from Steven Ramsey with Thompson Research Group. Your line is open.

Yes, we have been able to realize.

Growth together I think what's key here is we continue to think it's appropriate to be conservative.

Hi, good evening thinking about the context of your consumer indicators are positive contractor sentiment.

On how we manage inventory together.

So that we can continue to drive higher and higher turns together, while servicing our customers. It also derisked the future.

You mean, I think if I interpret your question was what is causing our channel partners to be more conservative is that how I should interpret the question.

In case there are some additional.

Volatility. So I think you can live with the combination of of short term demand short term.

What's the catalyst at this point to get them over the line to your site.

Optimism in certain pockets and alright, yeah and in this case I would say short term continuity of demand, while also being concerned and acknowledging that it's appropriate to have.

Yeah. No look we are we are very aligned.

With our channel partners, it's really important to acknowledge that we've been able to recognize.

The right amount of inventory on the ground to not get ahead of ourselves and so I think the team our channel partners.

In aggregate growth in the market that doesn't mean every channel partner.

Has equal growth, but as you expand channel partners as you work with channel partners.

We feel really good that that we're working together to make sure that we've got that appropriate balance and I think that will set us up well.

Yes, we have been able to realize.

Growth together I think what's key here is we continue to think it's appropriate to be conservative.

As we move into 2024 and beyond as we're constantly going to be deal with dealing with.

On how we manage inventory together.

Appropriate.

<unk>.

So that we can continue to drive higher and higher turns together, while servicing our customers. It also de risks the future.

Conservative position as we work through that really sets us up and and to continue to just focus on downstream growth.

In case, there is some additional.

Great. Thank you.

Volatility. So I think you can live with the combination of of short term demand short term.

Thank you.

I'd now like to turn the line over to Jessie Zheng.

Really appreciate all of your time this evening and we look forward to chatting with many of you and have a great evening. Thank you.

Optimism in certain pockets and alright, and in this case I would say short term continuity of demand, while also being concerned and acknowledging that it's appropriate to have.

This concludes today's conference call you may now disconnect.

The right amount of inventory on the ground to not get ahead of ourselves and so I think the team our channel partners.

We feel really good that that we're working together to make sure that we've got that appropriate balance and I think that will set us up well.

As we move into 2024 and beyond as we're constantly going to be deal with dealing with some.

Appropriate.

Fences.

Conservative position as we work through that really sets us up and and you know to continue to just focus on downstream growth.

Great. Thank you.

Thank you.

I'd now like to turn the line over to Jessie Zheng.

Really appreciate all of your time this evening and we look forward to chatting with many of you and have a great evening. Thank you.

This concludes today's conference call you may now disconnect.

Okay.

Really appreciate all of your time this evening and we look forward to chatting with many of you.

Q3 2023 The AZEK Company Inc Earnings Call

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