The AZEK Company - Q1 2022
February 2, 2022
Transcript
Speaker 0
Welcome to the AZEK Companies II Earnings Call. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Amanda Semaglia, Vice President, ESG.
Please go ahead, Amanda.
Speaker 1
Thank you. Good morning, everyone. We issued our earnings press release this morning to the Investor Relations portion of our website at investors.azecco.com as well as via 8 ks on the SEC's website. I am joined today by Jesse Singh, our Chief Executive And Peter Clifford, our Chief Financial Officer. Before we begin, I would like to remind everyone that during this call, ASEC management may make certain statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These include remarks about future expectations, anticipation, beliefs, estimates, forecasts, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the company's earnings release The company does not undertake any duty to update such forward looking statements. Additionally, during today's call, the company will discuss non GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in Adjusted gross profit to gross profit calculated under GAAP as well as reconciliations for other non GAAP measures discussed on this call Can be found in our earnings release, which is posted on our website and will be included in our Form 10 Q for our Q1 of 2022.
At this point, I would like to turn the call over to Jeffy Singh.
Speaker 2
Good morning and thanks for joining us on today's call. We're off to a solid start to fiscal 2022, delivering strong Q1 results and focused execution against our strategic priorities. We continue to see consistent demand across our portfolio and strong results from our initiatives and new products. I'd like to take a moment to thank both our employees and supplier partners for their focus and dedication operating through a challenging and complex Environment. Their commitment has allowed us to continue to meet end market demand and uphold high service levels, providing an industry leading customer experience in a difficult environment.
ASX momentum is driven by a Clear and focused strategy to revolutionize outdoor living and create a more sustainable future. We have been operating with a Specific set of initiatives that include driving above market growth and accelerating material conversion By investing in new product innovation and expanding our downstream focused sales and marketing teams, Expanding our margins through the use of recycled materials in our manufacturing processes and through our continuous improvement programs, Positively impacting the world through our commitment to ESG Stewardship investing in our core strengths, which include brand, material science, integrated manufacturing and customer connection. We continue to see a strong underlying market driven by positive demographic trends, increasing focus on outdoor living And the ongoing conversion away from wood towards our types of low maintenance, high performance alternative materials. In decking, as an example, we see our market opportunity is almost 5 times the current market, including wood. We see a similar opportunity in other segments such as exteriors, where we have seen strong momentum in wood replacement.
Our core markets are nearly $9,000,000,000 currently and we see an adjacent opportunity within outdoor living of an additional $11,000,000,000 We also see an opportunity to positively impact the planet as well as our margins through the expanded use of recycled materials, Underpinned by our ESG ambition to divert and utilize £1,000,000,000 of recycled materials annually by the end of 2026. Against this market opportunity, we have a focused strategy and have invested in capacity, innovation in new products, people and acquisitions. We believe that through these actions, We have not simply delivered against our short term objectives, but we have meaningfully strengthened our position in the marketplace and the capability of the company to continue to meet and exceed our long term goals. During the fiscal quarter, We saw continued demand across our portfolio and we benefited from our increased capacity to position the company for future growth. Our capacity, service levels and new products have put us in a position to pick up additional share and accelerate wood conversion in key markets.
We recently executed a successful early buy season this year with our pro dealers. During this process, we expanded our stocking position at a number of key dealers and we converted a number of new dealers to our products. As a reminder, early buy is the process of engaging pro dealers in the winter months where they decide which products and brands to stock For the following selling season and where they place pre season or early buy orders to stage inventory prior to the building season. Our success in this early stage of the season is a result of our continued focus on our customers, increasingly reliable service levels In our broad and differentiated portfolio, as we exit the capacities constrained environment in the recent past, We remain on the offensive and are pursuing new business opportunities that expand our channel, geographic reach and customer relationships. We also introduced a number of new products in the Q1, including our TimberTech Azac Landmark Collection decking in French white oak and TimberTech Edge Prime Plus decking in dark cocoa, along with the new Edge These products once again highlight our focus on leveraging our unique Technologies to create beautiful natural looking products.
Our new capacity has allowed us to scale previously launched products more broadly, And we are expanding the availability of our Edge and Landmark decking collections. We will be showcasing a few of these at the upcoming Builders Show in Orlando, Florida, featured alongside structured Pergola X and Cabana X solutions, The newest addition to the ASAC portfolio. Our exteriors business continues to deliver With good momentum and demand across its end markets, the breadth of our exteriors portfolio, including our recently launched Innovative paintable trim and shingle siding, both available with our PaintPro technology is driving material conversion and share gains In historically underpenetrated markets, sales of these new product innovations have more than doubled in the last quarter, With customers appreciating the low maintenance, high performance characteristics of the products over wood competitors. Our PaintPro technology was launched in 2020 and highlights the strength of our new product development model in driving growth in our core and in adjacencies. Additionally, as customers become more aware and better educated of the Performance characteristics and benefits of our AZEK and VERSATEC trim and siding, it enables increased penetration of our broader portfolio.
As part of our focus on expanding our position in outdoor living and positioning ourselves in fast growing adjacencies, In December, we acquired Structure Outdoor. Structure is a designer and manufacturer of high quality And innovative aluminum pergolas and cabanas. Structure is the premium player in an identified market We see estimated to be nearly $1,000,000,000 and one that is experiencing similar long term secular growth And material conversion trends away from wood. Structures products are highly complementary to our TimberTech decking, And we know that each company's products are already being installed together on projects by contractors across the country. Structures products also enhance outdoor hardscapes as they have a strong presence in Southern Smile States.
We believe this will further open new adjacent opportunities for our combined company. Structure shares our focus on ESG, with each of Structure's existing product lines being made from up to 50% recycled aluminum. We plan to leverage Apex expertise in sourcing, operations, research and development and material science to improve Structures already impressive We also see significant revenue synergies from leveraging our combined portfolio across our broader customer base. We are excited to welcome Structure to the Azak family and look forward to working with the team in the months years ahead. In addition to Structure, in November, we closed an acquisition of a regional PVC recycler offering full service recycled material sourcing, Processing, logistics and scrap management programs.
The acquisition is a vertical integration that complements the Return Polymers And adds new sources of PVC scrap material, a key input in our polymer based decking boards and trim And one that will allow for continued progress towards our goal of utilizing £1,000,000,000 of recycled material annually by the end of 2026. Going forward, we will continue to invest organically and through M and A to achieve both our business and ESG objectives. We are committed to investing ahead of the curve to put ourselves in a position to drive growth And increased conversion in the market. As part of that focus, we continue to make progress against our new capacity adds in our core facilities And our Boise facility build out. We successfully commissioned additional decking capacity in our core facility in Ohio And these lines are currently in production.
As a reminder, this combined with previous phases Brings our total completed capacity adds to over 55% against our 2019 baseline. In our new Boise facility, our supply chain and operations teams have also done well to operate through a difficult environment Since we have broken ground and we are on track on the build out of the facility with our modular manufacturing processes. Boise is a strategic investment for the company and will provide much needed capacity and flexibility, and we are very excited by the additional opportunities that the Boise expansion will provide. In total, our announced Decking capacity additions will bring our total capacity increase to 100% versus a 2019 baseline. We also continue to be focused on expanding the depth and breadth of our team.
We recently announced the appointment of Dan Boss As Senior Vice President of Research and Development, Dan is joining us from GAF Industries and has a long career in R and D positions of increasing responsibility and will be an asset to our organization as he assumes leadership of our R and D function. He will be focused on introducing the next phase of AZEK and TimberTech products to our already strong portfolio. Another key appointment to the Exact management team is Sam Toole as our Chief Marketing Officer. Sam joins Exact from California Closets, where she served as CMO and drove significant growth by developing a multi touchpoint marketing strategy, Increasing the use of digital tools and data and overseeing the production of award winning content. We are excited by the timing of Sam's arrival as we continue to drive our next phase of growth and wood conversion.
She will draw on her collective and varied experiences to improve the customer journey and expand our consumer driven growth engine. We are excited about the addition of these 2 strong world class leaders whose skills and experience We'll complement the existing management team and enable our next phase of growth. Turning to Q1 results. ASAC net sales and adjusted EBITDA increased 22% 21%, respectively, In the Q1 of 2022, over the same period in the prior year, net sales segment increased 19%, driven by a strong performance across our Deck Rail and Accessories and Exteriors business. As a reminder, we exited 2021 with an improved channel inventory position and our growth in the quarter reflected more normalized seasonal demand And inventory sell through in this traditionally slow part of the season grew modestly year over year and notably Accelerated into the month of December.
A particular source of strength was our decking business, which grew at higher rates than the company average. As previously mentioned, our Exteriors business also saw strong performance and continues to benefit from a concerted focus on new product development. Our Rail business continues to operate through material and supply chain issues, which constrain growth to low single digits as previously anticipated. Net sales in our Commercial segment saw strong performance increasing by approximately 45% year over year Due in part to pricing actions and robust demand in comparison to an easier comparable period last year, We saw particular strengths in certain markets, including outdoor living, marine, industrial and semiconductor end markets. As we transition to the outlook, I want to provide some context on our results and typical seasonality.
Azec's fiscal first and second quarters are generally considered to be stocking quarters in which distributors and dealers Fill the channel with inventory in preparation for the start of the spring selling season. We've had strong operational execution over the past few quarters and have successfully been able to support our dealers and distributors with increasing service levels. Our distributors and dealers now have the inventory on hand to aggressively drive growth in the market. This has put us in a terrific position to service our end customers and to incrementally pick up share. Heading into the balance of the fiscal year, underlying demand or sell through will determine net sales.
As mentioned earlier, we are excited by our progress through early buy and expect to see the benefits over the next few quarters. This combined with our ongoing investments and pricing set us up for another strong year. From a market perspective, we see continued favorable trends in our internal and external forward looking demand indicators. AJAX total website traffic increased double digits year over year and overall leads increased over 50% over the same period in the prior year. Externally, our contractor and dealer engagement surveys reflect continued optimism With persistent project backlog similar to prior quarters, our confidence is underpinned by external demand indicators around repair and remodel activity, Continued interest in outdoor living and wood conversion accelerating over the past few years.
In addition to these positive internal and external data points, we believe our focused strategy and consistent execution are continuing to drive success as witnessed by our strong performance in early buy. Now I'll turn the call over to Pete to talk through the financials and guidance.
Speaker 3
Thanks, Jesse, and good morning, everyone. Before we get into the Q1 results, I wanted to provide some color on the operating environment that we've been seeing in the last couple of months. As expected, we continue to see strong price realization from our pricing actions that took effect At the beginning of the Q1, on the material side, commodity prices have and as a general matter stabilized over the last 3 to 4 months. In our major commodities, polyethylene seems to peak late in the summer and early fall and has started to recede in the Q1, While PVC prices appear to be flattening out this winter, certain specialty materials remain challenged from both the pricing as well as a supply perspective. We are optimistic that what we can do with modest deflation assumptions that we have done.
The recycling strategy continues to be our defense against virgin supply challenges and serves as a natural buffer to inflation. Our capabilities to source, convert, Validate, formulate and deploy recycled materials in our manufacturing processes for PVC products continues to be a differentiator for us. Now let's discuss our Q1 2022 results in more detail. Overall, revenue was in line with expectations for the quarter, While margins were modestly better than expected given some inventory capitalization timing, we continue to see price realization offset material inflation dollars and start to get very close to offsetting rate as we expected in 1Q 2022. For the Q1 of 2022, We delivered net sales growth of 22% year over year to $259,700,000 with Strong and broad based growth in both our residential and commercial segments.
Gross profit for the Q1 of 2022 Increased $15,600,000 or approximately 21 percent to $88,600,000 Gross profit margin rates decreased to 34.1 percent in 1Q 2022 compared to 34.4% in the prior year. Adjusted gross profit for the Q1 of 2022 increased by $18,300,000 or approximately 21% To $107,100,000 adjusted gross profit margin percent decreased to 41.2% in 1Q 2022 compared to 41.8 in the prior year. Selling and general administrative expenses increased by 9,700,000 to $63,200,000 or 24.3 percent of sales. Adjusted EBITDA for the quarter increased by $10,100,000 Or up 20.8 percent to $58,500,000,000 Adjusted EBITDAS margin rates for the quarter declined 30 basis points to 22.5% from 22.8% in the prior year. Net income increased by 6,600,000 to $16,700,000 for the quarter compared to $10,100,000 for the same period last year.
Earnings per share increased by $0.04 per share to $0.11 for the quarter compared to $0.07 per share for the same period last year. Adjusted net income was $28,800,000 or $0.18 per share for the Q1 compared to adjusted net income of $23,100,000 or $0.15 per share a year ago. Now turning to our segment results. Residential segment sales for the quarter Increased by $35,500,000 or approximately 19 percent to $221,100,000 The increase was primarily attributable to broad based growth in deck rail and accessories and exteriors growing at comparable rates.
Speaker 4
Residential segment adjusted EBITDA for
Speaker 3
the quarter increased by $10,700,000 or approximately 18% to $69,400,000,000 Commercial segment net sales for the quarter increased $11,900,000 or 44.8 percent to $38,600,000 The increase was primarily attributable to higher net sales in both the Viacom and Scranton Products businesses. While each grew well in excess of the company average, we saw an acceleration in the Viacom business with continued strength in outdoor living, Marine and semiconductor end markets continuing a trend from the prior quarter. Commercial segment adjusted EBITDA for the quarter Increased by $1,400,000 or approximately 43 percent to $4,700,000 From a balance sheet and cash flow perspective, We ended the quarter with cash and cash equivalents of $66,100,000 and approximately 146,700,000 available for future borrowings under our credit facility. Working capital, current assets minus current liabilities was $274,500,000 Gross debt as of twelvethirty onetwenty 21 was 467,700,000 and our credit facility remains undrawn. Net debt was $401,600,000 and our net leverage ratio stood at 1.4 at the end of the Q1.
Capital expenditures for the quarter reached $65,000,000 largely driven by timing of cash Outflows related to capacity expansion programs. Net cash consumed and operating activities was $30,600,000 during the quarter versus net cash generated by operating activities of $20,300,000 during the prior year. I want to provide some context to how we are viewing the 2nd quarter and early view of the second half. As Jesse noted, We believe the combination of healthier channel inventory levels, improved lead times and strong early buy Participation positions us well for the upcoming season. We anticipate that supply chain and logistics environment will remain unchanged through the first half of the year and our teams are prepared to deal with that complexity as they have over the last several quarters.
Omnicron did bring an added level of complexity to our business and supply chain in December January, and we are appropriately managing through it. Commodity prices, as we have mentioned, have stabilized. The availability of major commodities is improving gradually, and we expect that to continue. The current environment supports our assumption of modest raw material deflation in the back half of this year. As detailed last quarter, we framed up the full year in 2 parts.
The first half was slight margin dilution followed by a stronger second half with margin accretion excluding the impact of structure. We still see the first half twenty twenty two coming in line with our expectations and more importantly, we see organic business margin accretion in the second half of the fiscal year. As a reminder, during Q1 2022, we had moderate start up costs that drove 70 basis points of headwind into our reported margins. Finally, with our latest acquisition of Structure, we are excited to have acquired such a strong growing business and an identified adjacency. The purchase price was $90,000,000 and with revenue and cost synergies, We believe it will equate to a sub-tenx multiple.
The management team at Structur is terrific and they are incentivized to deliver for the combined company in the future years. To that end, we believe this business will grow at or above our long term residential growth rates and we believe it has the ability to expand margins to approach our corporate average over time while providing a strong return on invested capital to our shareholders. Now turning to our guidance. For full year fiscal 2022, we now expect consolidated net sales to increase approximately 17% to 21% year over year, including $40,000,000 of structure related net sales contribution or 3 points of growth to fiscal 2022. Inclusive of the start up costs associated with our capital investments programs, we expect to deliver approximately 18% to 22% adjusted EBITDA growth year over year, including nearly $5,000,000 of structure related EBITDAS contribution.
We see full year EBITDAS margin dilution impact from the Structural acquisition of approximately 30 basis points to 40 basis points. For the Q2 of 2022, we expect consolidated net sales growth of approximately 24% to 27% year over year, including approximately $8,000,000 of structure related net sales contribution. From an adjusted EBITDA perspective, which includes start up costs, We expect growth of approximately 17% to 20% year over year, including approximately 50 basis points Structure related EBITDAS margin dilution impact. The quarter also includes approximately 2,000,000 startup expenses, which equates to approximately 50 basis points of our EBITDAS margin. As a reminder, Given seasonality and other factors, we expect the acquisitions will breakeven from a profitability perspective in the quarter.
Looking forward for the entire business and similar to our commentary at last quarter's call, we expect to see organic business leverage on our bottom line To assist in modeling, We are reiterating our expectation of approximately $180,000,000 to $200,000,000 in capital expenditures for fiscal 2022. We continue to expect $21,000,000 to $22,000,000 of interest expense for the full year. Our tax rate for 20 Nearly 25%. Our full year weighted average diluted share count is expected to be approximately 157 158,000,000 shares. I'll now turn it back to Jesse for some closing remarks.
Speaker 2
Thanks, Pete. ASAC has consistently outperformed over the last several years through strong focus, agility and execution Combined with relentless focus on our customers, we are building upon that momentum and remain excited about the long term opportunities in front of us. We have invested ahead of demand and are positioned to increase market share through an innovative and differentiated product portfolio, Best in class sales execution in a culture of continuous improvement. Combined with strong repair and remodel activity, Sustained interest in outdoor living and an acceleration in wood conversion trends, we believe we will deliver above market sales growth And margin improvement. In other words, we believe we are well positioned to win for the long term.
Thanks again to all of our employees, our partners, our suppliers, our customers and our contractors. We look forward to continuing to work together to build a brighter future. With that, operator, please open the lines for questions.
Speaker 0
In the interest of time, we would ask participants to limit themselves to one question and one follow-up. Your first question comes from the line of Philip Ngai with Jefferies. Your line is now open.
Speaker 5
Hey guys, good morning.
Speaker 6
I was curious, have you announced any incremental price increases since October November timeframe, essentially last quarter and stripping out some of the noise from the acquisition, is the price cost, Margin recovery path tracking pretty much in line with what you thought, appreciating it's a pretty complex environment to operate in.
Speaker 3
Thanks, Phil. This is Peter. Yes, I think our ratio on price Inflation here as we look at the remainder of the year is entirely intact with how we guided. We still expect to see Price realization covering all four quarters of inflation dollars and we expect here very late 2Q to start covering the rate and maintain that throughout the back half of the year. As far as any additional price increases, we did take some very small targeted increases That's part of our year end kind of price maintenance process.
And really, it was a very select products, Really those products impacted by the 4Q 2021 PVC increases that were a result of the Hurricane Ida situation. So again, in total, those price increases were very nominal compared to our 2021 price increases.
Speaker 6
Got it. That's really helpful. And what is this recent acquisition that you made on the recycling side, do you on the capabilities and In terms of where you're going to shake out from a recycling goal standpoint, I think last quarter you were kind of in that 54%, 56% range, if I remember correctly. And any color how to think about the EBITDA contribution from this deal?
Speaker 3
Yes. So I think first and foremost, what this acquisition provides us is The secure sourcing of the product, so this is a great avenue for us 1st and foremost, Again, to help get bring in some high quality recycled PVC, second thing is it adds capacity and just material flow that we think over time, This acquisition increases our PVC recycling capacity and access to product by about approximately 20%. As far as an impact on 2022, the way we're thinking about it is we would expect a modest cost savings in 4Q 2022, but the bulk of this It's really going to be a 2023 impact and that's really just due to the formulation and validation work that we will be starting here this quarter and Carrying over into the Q3.
Speaker 5
Okay. Thanks
Speaker 2
a lot. The only thing I would add to that is the addition of Our new capacity has allowed us to return our focus on expanding our use of recycled materials. And so we are now able to both service our customers and expand our formulation work. So we're not going to guide Specifically, but we're in a really good position now as we look out over the next few quarters to continue to expand our use of recycled materials. And obviously, this is helpful.
Speaker 5
All right.
Speaker 6
Got it. Thanks a lot, Jesse.
Speaker 0
Your next question comes from the line of Matthew Bouley with Barclays. Your line is now open.
Speaker 6
Good morning, everyone. Thank you for taking the questions and for all the detail in the prepared remarks as always. So as that capacity has come online, it sounds like you've made real tangible progress in improving service levels. And I'm hearing you correctly, your ability to target new customers is really crystallizing. So can you outline a little bit what that new customer Are there any pricing implications from going after new customers?
And, I guess, specifically, if there's anything embedded in the revenue guide related to that? Thank you.
Speaker 2
Well, clearly, the addition of capacity and improved service gives us an opportunity to make sure that we Service our existing customer base and that's really provided a benefit in that we are now fully able to service current demand, Able to meet the demand that we've built out over a number of years. But as you pointed out, we're able to now Incrementally take on additional business. So I would break it into really 3 different chunks. The first one is, we've had opportunities to add to our dealer network, both in-depth at our existing dealers, but also add new dealers that really see the benefit of our differentiated product. We have had to constrain that over the last few years.
We were more able to do that during this I think the second component When you're constrained on capacity, as we mentioned on the last call, we haven't fully been able to launch our new products. And specifically, we called out in the prepared remarks, our Edge product line, Prime Plus and Prime, in addition to our Landmark product Klein, in our more premium segment, both those products have been constrained, even though they have been launched. We now have an ability to unconstrain that, which will lead to natural And really the 3rd bucket is really around, let's call it, newer channels And expanding geographically and I'm not going to get into specifics there, but we do have Additional opportunity over the long term that we can now aggressively go after. So, 2 buckets where I can provide some clarity and And I'll leave you a little bit of a fuzzy third bucket.
Speaker 6
Okay. Well, that's great detail there, Jesse. Thank you for that. So I want to follow-up on the acquisition of the PVC Recycler, maybe at a higher level. Obviously, you did return polymers a couple of years ago.
I just think it's important to kind of lay this all out, helping investors kind of understand what you're doing on the PVC side. So can you kind of frame for us just the state of the PVC recycling market as it stands? And then just generally, how your own efforts to do this internally will sort of expand that opportunity over time? Thank you.
Speaker 2
Yes. Just taking the recycled market at a high level. So if you look at I mean, we really deal with 2 streams of recycle As you mentioned, one is on the polyethylene side, and that is a relatively well developed market, whether it polyethylene or low density polyethylene or the variance in between. So there is an established market. As we look at The PVC market, it is just a less established market.
There are less players able to use recycled PVC. And as such, there's an opportunity for us to continue to build out our own capability and build out our use Recycle PVC and it's just a less developed market. And in that environment, it's really important that we continue to build Our own infrastructure to be able to access all of that material that's being landfilled. And so it is really important for us that we We continue to build our own internal capability to source, to process and to utilize increasing amounts And this is just another step in that direction in addition to previously announced capital expansions that we have ongoing at our existing
Speaker 0
Your next question comes from the line of Tim Wojs with Baird. Your line is open.
Speaker 7
Hey, good morning, everybody. Maybe just on back on the early buy programs, Jesse. I guess what drives a dealer to stock inventory versus the competitors. Is it availability at this point or is there kind of payment term incentives? And I guess just wondering with The stocking conversion, it does seem like you'll be able to kind of gain sellout share this year, if that's the idea.
So am I kind of correct in assuming that?
Speaker 2
Yes. Anytime so let me answer that last question first. Obviously, being able to have access to more position in the market and more availability and more access to shelf space, You would hope that that would convert to ongoing growth in the market. A key execution point is not only getting on the shelf, but doing what we do and what we're most proud of, which is working with our contractors, working with consumers To make sure they see the value of the product so that we can pull it off the shelf. But clearly, it is a, in our mind, a positive Seth in the process of continuing to drive share against wood and other types of materials.
Relative to the decision process, I think every one of our partners has a different set of criteria. Typically, These are reasonably sophisticated and well sophisticated companies. They want to make sure they partner with companies that have the ability to provide good Service, the ability to have a product that's going to sell, and also the ability to continue to
Speaker 4
And I would say in a lot of
Speaker 2
cases, those are the major drivers, the combination service, the right product and the ability to drive their growth in the marketplace for the long term. And that's really, with our more realistic Decking product and our better wood conversion exteriors products, we are able to provide a better long term value. Incrementally on the incentives, we operate within a reasonable set of incentives to make sure that we're supporting Long term growth, but in general, we're not a price driven or incentive driven kind of a business. Our dealers are sophisticated enough to know that they're building something for the long term.
Speaker 7
Okay, okay, good. That's helpful. And then I guess just on the year around SG and A as a percentage of revenue, how would you kind of balance that Relative to maybe revenue growth and kind of maybe some increased brand spending as you kind of increase that to as you layer in capacity?
Speaker 3
Look, I think in the back half of the year, we will continue as we have through the first half to make Strategic investments in sales and marketing, we are a growth company and so that has stepped up a bit in the Q1 Year over year, especially with a more normalized kind of TimberTech championship event. But again, as we see Creating our own demand in the back half of the year, marketing is going to be a focal point here throughout the year.
Speaker 7
Okay.
Speaker 2
Could you get leverage? Yes. And I'll just add, Tim. I'm sorry, I'll just add, Tim. I think it's important for us to And part of this is being appropriate on On leverage, but a key part of it is also if we see opportunity, we're going to continue to invest against that opportunity as we're building this I'm sorry, I cut you off there, Tim, on your second question.
Speaker 7
Yes. No, I was just wondering, would you be able to get SG and
Speaker 2
A leverage this year? Or do you think it might grow just
Speaker 3
a little faster than sales? Yes. I mean, historically, we've counter articulated the ambition that in most years, we'd like to see ourselves get modest SG and A leverage. Okay.
Speaker 7
Okay.
Speaker 3
That's not going to be Thanks, John. Listen every quarter, but as a year, that's kind of our ambition.
Speaker 7
Okay, great. Well, thanks for everything guys. Appreciate it.
Speaker 2
Appreciate it. Thanks, Tim.
Speaker 0
Your next Question comes from the line of Michael Rehaut with JPMorgan. Your line is now open.
Speaker 8
Hi. This is Maggie on for Mike. First, just a couple questions related to the capacity expansion. I believe you said in 1Q, startup costs were 70 bps headwind and there it's expected at 50 bps in 2Q. So as you go through this year, what is your full year guidance contemplating in terms of the start up costs?
Speaker 3
Yes. So let me take Yes.
Speaker 9
Go ahead.
Speaker 3
Yes. As we kind of articulated on the full year guidance call, Yes, we're looking at $8,000,000 to $10,000,000 I think that's still the right range for the full year, which sort of implies that dilution range of kind of call it 50 to 70 basis
Speaker 8
Got it. And second, another quick one. As the capacity It comes online. You mentioned those 3 buckets of kind of sales growth opportunities and the 3rd fuzzy bucket that you didn't want to get into and with newer channels and expanding geographically. Do you have any sort of a Time frame on when you might start exploring those opportunities
Speaker 2
more? Yes. I think the key for us is, if you look at our portfolio of growth actions, Right. Downstream sales and marketing continue to expand our channel new products and acquisitions. That portfolio of actions on growth is just something we are continually working on.
And I just want to highlight a lot of what We do may seem transactional, but even in the situation where we had some positive early buy wins, We've been working with those accounts for a couple of years and in some cases, multiple years. So I think The way to think of our growth scenarios is, we do things continually And we're doing things over the long haul in those buckets I talked about. So It's an ongoing process. And as we have this additional capacity, we can execute against it. And that's something I referred to on the last call.
Speaker 8
Got it. Thank you.
Speaker 0
Your next question comes from the line of Ryan Merkel with William Blair. Your line is now open.
Speaker 5
Thanks and good morning. Jesse, first off, I was hoping you could address 2 concerns that investors have potential for pull forward demand, Given everyone rush to do outdoor living and then also higher prices if there's going to be any impact on demand from that. Any evidence? What's your view?
Speaker 2
Yes. As we've looked at our leading indicators and Our activity in the market, there's been really nice consistent activity and growth. And as we talked about During the calls over the last 18 months, we do believe that as People continue to use our types of materials. So take decking as an example. As they focus on outdoor living, They continue to expand the use of our types of materials.
What you see is that material on the ground leads to other people trying to Being aware of that material and using that material. And it gets back to that neighborhood effect, right? Someone in your neighborhood has installed our product. They've got a beautiful TimberTech deck. The perception historically may have been composites didn't look that good.
Neighbors come over And they start then moving in that direction. So clearly, the activity that we've seen during the pandemic I think some of the volatility that you're going to see in some of the numbers quarter to quarter across our 3, it has as much to do with channel fill. And I think if you peel back the underlying demand, you would see pretty Strong consistent demand quarter to quarter. And as we project moving forward, We continue to assume that that kind of activity will continue. And I forgot your second question.
I'm sorry.
Speaker 5
Just higher prices, have you seen that impact demand maybe even for PVC such a high end product, any risk there?
Speaker 2
Yes. We've as we've looked at our activity in the marketplace, and we've done a lot of analytics Related to our value in market of our products, we continue to see a great value proposition In each of the categories that we play, given the pricing that we have, and we continue to see that play out. We have not Seeing a slowdown of momentum. And just as a reminder, if you go to our investor deck, you can see on a relative basis, The cost of our types of material on a deck are a small part of the overall cost of a deck, And we have multiple pricing options, depending on where our consumers are. I think the other key thing for us, we've got such great looking products That we do tend to skew a little bit more to a less price sensitive consumer, especially as you're looking At the price over the long term.
And we see a similar opportunity, as we're driving wood penetration and wood conversion In our Exteriors business.
Speaker 5
Got it. That's helpful. All right. And then a quick follow-up. I know Guidance for the year assumes high single digit volume growth.
And my question is, if sell through is stronger, do you have the Capacity to deliver upside to that high single digit? It sounds like yes, but I just want to confirm.
Speaker 2
Yes. Yes. I mean, our capacity right now, We are now and we mentioned this on the last call that, that was going to be the case. With the additional capacity that we have brought online In our fiscal Q1, we now have the ability to meet and exceed production against What we see is our future demand profile and we have additional capacity coming online. So we are very much in a position where Which is where we said we wanted to be, where we can service meaningfully larger volumes for this year and certainly into next year.
Speaker 5
It's great to hear. I'll pass it on. Thanks, Jesse.
Speaker 0
Your next question comes from the line of Susan Maklari with Goldman Sachs. Your line is now open.
Speaker 8
Thank you. Good morning, everyone. My first question is, Obviously, there's been a lot of sort of uncertainty around the housing market in general as we face the potential for a rising rate environment. Can you talk about the ability to continue to drive growth even if the housing complex does change? And I guess with that, any commentary on how most consumers tend to fund these projects and what is the role of them having to perhaps borrow against the house or other methods of them sort of financing these things.
Speaker 2
Yes. On that on the latter comment, We typically don't see our consumers and this is it's hard to get exact data, but on the data that we have, typically don't see consumers financing our types of repair and remodel projects drawing on the equity of their homes. And then relative to the macro environment, on a relative basis, and you're going to hear this probably from a number of building products And Home Builder CEOs and earnings call on a relative basis, we still see incredible strength In this particular segment, if you look at the dynamics of the interest rate environment we're in, It is still at historically low levels. We see a historically low level of inventory on the market. We see really strong housing values and we continue to see the demographic Dynamics of more homeowners coming into the market and for the foreseeable future from what we can see from the data, We are the housing sector and the repair and remodel sector is in a nice position To continue focus in growth in the future and I think more specifically at our sector, you're dealing with an Increased focus on outdoor living and you're also dealing with the opportunity that we have that I mentioned on the call that we will talk about probably on every call, Which is there is a lot of sales right now in products that should be our types of products, right?
We continue to see An opportunity to convert wood in all of our products and convert other types of materials. And so against that backdrop, There's certainly interest rate noise, but we continue to see a multi year opportunity here with the combination of the macro environment and then Our more specific environment, which is driven by material conversion, new products and a focus on outdoor living.
Speaker 8
Okay. That's very helpful color. Thank you. And then following up, you talked a lot about the Exteriors business in your Commentary, can you give us a little bit more color on your ability to service that market? How you're thinking about the future growth rates Are there any other sort of upcoming initiatives that we should be aware of or thinking of?
Speaker 2
Yes. We're really excited by What we've been able to do in that business. As a reminder, in that particular business, we have 2 major brands, Azek and VersaTec. And both of those brands bring innovation to market
Speaker 4
and that
Speaker 2
innovation It's really driven around driving contractor productivity and driven around providing a great alternative to Wood. And if you think about all the aging of a home, it's that the paint peeling on your trim That can be some of the most annoying and the paid ceiling on the outside of the house. And we have solutions that drive contractor productivity And at the same time, provide a terrific consumer benefit. So against that, we continue to invest in new products. We continue to invest in channel expansion, and we continue to invest in our downstream sales and marketing efforts Not only with consumers, but the other elements of the chain.
And as I pointed out in my prepared remarks, We're really seeing benefits of that. Once people get used to using our types of materials in new geographies, they tend It's not a one time purchase. They tend to use that material and then they tend to expand the use of that material. And so we're excited by the beachheads that we've You need to establish over the last year and expect to continue to establish. Relative to specific growth rate, we haven't guided On that particular business, outside of our deck rail and accessories business and now our Pergolas business, but we all We view that the growth opportunities are similar in all of our outdoor living and residential businesses.
Speaker 8
Okay. Thank you. That's very helpful and good luck with everything.
Speaker 7
Thank you. Appreciate it.
Speaker 0
Your next question comes from the line Ketan Mamtora with BMO Capital Markets. Your line is now open.
Speaker 4
Good morning and thanks for taking my question. Just your first question On the structure acquisition, kind of what sort of what makes this an attractive category as you guys look at the broader Outdoor living space. And maybe talk about the material conversion opportunity that's in front of you when you look at sort of The pergolas and the Cabanas business and even the multiyear margin improvement runway.
Speaker 2
Yes. I'll take the market and I'll have Pete touch upon What we've done with other acquisitions and the margin progression there. So the way to think of it and what got us more, our project name on For this particular acquisition was called Project Sky. And I think it's apropos, right? So right now, we produce Effectively, an outdoor decking product, which is the flooring.
We've got an exterior product, which let's call it the walls Of an outdoor living space. And as we continue to look at framing outdoor spaces from creating an outdoor room, A pergola is a natural kind of demarcation. And what Structure really is about is creating comfort in outdoor living spaces, right? It's got a louvered system. It can let the sun in.
When it's sunny, it can louver to protect from the elements if it's rainy. And what it does is it's a natural step to creating comfort in the outdoor area, and it's extremely complementary to what we have. Now we have some custom pergola kits And so on that are out there right now, but this really gives us scale in that market. And as you think about the long term conversion opportunity, most pergolas right now are constructed in In a what we call stick built way, right? It's fabricating products, whether it's out of aluminum or out of wood And in some cases, also out of AZEK and VersaTec.
But it's really a fabricated process, whereas what Structure is doing It's really it's making that process much more efficient. And in their higher end products, making it more customizable. And as we move to some of the other products we'll show at the Builders Show, it's more of a standard solution that can quickly be assembled on-site. And so as we highlighted, we view the opportunity of really creating these outdoor overhead Frugulas and Cabanas, as a growing trend, think about houses, how much time we spend outdoors, Think about the other spaces that are out there in the commercial businesses. We view this as a $1,000,000,000 market And we also view the opportunity to create a lot of synergy with what we're already doing and what they can do.
And I think the other thing this presents us is, As I mentioned on the call, their products also go down on hardscapes, right? And so it allows us to get at certain geographies Where there may not be a deck on the ground, but certainly they need some of the other aspects of what we can provide. So, and relative to the margin Structure, I'll turn it over to Pete for just a couple of quick comments there.
Speaker 3
Yes. Thanks, Ketan. Ultimately, look, the margin expansion story for Structures is very similar to AZEK. The levers that we see pulling as a team together, I'd put in a couple of buckets. 1st and foremost, growth, we feel like we can accelerate in already fast growing business Given our strength in the channel and our contracting partners, so certainly helping you with just leverage with faster growth.
2nd bucket I would call sourcing. As we know, we've got a meaningful aluminum rail business When we look at the synergies together and purchasing power, I think there's a way for us to buy more efficiently and effectively on a combined basis. 3rd one is just I think our ability to kind of drive some of the AIM's kind of ops toolbox into the structure business, I think it's going to help them drive more productivity and probably overall just stronger throughput in a way that they support their growth looking forward. And then the last bucket I would kind of say is again very similar to AZEK in this pricingcommodity situation or the structural Opportunity with margins that the structure team has priced for value in the pergola space. And as aluminum sits here at Historically, very high prices.
When it recedes, we see that same opportunity that we have on PVC that their pricing It's going to be pretty sticky, and they should have an opportunity again to kind of more meaningfully change their margin structure.
Speaker 0
Your next question comes from the line of John Lovallo With UBS, your line is now open.
Speaker 2
Good morning, everyone, and thank you for taking my questions. The first one, and maybe a few, Pete, Can you quantify how much polyethylene deflation you experienced on a quarter over quarter basis? And then how does this Compared to what's embedded in the full year outlook?
Speaker 3
Yes. As we mentioned, we're not Expecting a lot of deflation in the second quarter. That's kind of what most of the indexes project and that's kind of what we see. As far as what we're anticipating seeing in the back half of the year, I kind of call it net net very similar to what we Expected at the beginning of the year with our guidance, I would kind of say, if there's anything that's modestly different, I would say it's probably the slope On polyethylene deflation is probably a little slower, but there's probably an opportunity for modestly more PVC. But net net, those are about a wash as we think about the business.
So again, I'd leave you with the takeaway Of what we can see in front of us here entering the 2nd quarter, I think supports the modest deflation that we've assumed in our guidance.
Speaker 2
Okay. Maybe just a follow-up on that. If we were to assume that polyethylene and PVC declined by, call it, 10%, From today's levels, how much would that benefit the second half margins?
Speaker 3
Yes. I mean, it's a good here for me to educate folks on when we think about our balance sheet lag as a business, let's start there. So from a material perspective, A rollback typically is 3 to 4 months and typically this time of year with inventory being a little bit elevated, it's closer to the 4 months Where labor and overhead tends to be pretty constant throughout the cycle at about 2 months. So what that really implies is that Ultimately, if we see commodity prices drop more steeply, but it comes after like, let's say, the middle of May, It's very difficult for us to really recognize or see any of that impact in our 2022 results. It just becomes upside for 2023.
Speaker 9
Got it. Thank you.
Speaker 0
Your next question comes from the line of Trey Grooms with Stephens. Your line is now open.
Speaker 9
Hey, good morning. Thank you for taking my questions. So you just I guess the First thing is on the supply chain issues out there. Omicron brought some challenges you mentioned in December January. Are you seeing any changes in that there?
Are you anticipating any change in the 2Q guide?
Speaker 3
I think embedded in our Q2 guide is the fact that again some of the favorability in 1Q was Sort of timing that works its way through in the second quarter and that we see the first half of 'twenty two kind of expectations Exactly where we expected. So, Omicron was definitely disruptive, but look, the last year and a half The 2 years has been very disruptive from a supply chain perspective. So we've said on previous calls, our teams have really done a nice job. Continuing demand is true no matter what the environment is. And so we think we're well prepared from our Visibility here in January or as we get to the 1st week of February, it feels like from an absentee perspective, most Of the varying impact on Crested in the 3rd week of January, and we're starting to now see that taper off.
So So we think the worst of it is behind us and we're optimistic about the Q2.
Speaker 2
Yes. And I would just stress It's our team we try not to use too many superlatives, right, and because we're doing Our jobs, but I think the team has done a remarkable job of managing through the volatility To the point that we're not talking about it much on the call, there has clearly been a lot of moving parts Relative to things like labor, supply chain, all of those elements, but we've been able to manage that Within the operating cadence of the business such that we continue to service customers uninterrupted, we continue to deliver against Our financial objectives and it really is an outcome of some really, really strong operational management And also planning for the volatility, which I think the team has done a nice job of.
Speaker 9
Great. Thanks for that, Jesse. And I guess earlier and I've dropped off the call, so apologies if you touched on this. But I think you mentioned sell through Grew modestly and accelerated through December. Did that acceleration continue through January or What did you see there?
And then the full year guide assumes high single digit volume growth. What is that for assumption for 2Q, if you could?
Speaker 4
Yes. I would just say at
Speaker 2
a high level, Relative to sell through, as you know, you've been around this industry, but We're in the low season, where, there's still clearly activity. We still see strong backlogs. We still see contractors Needing to work, and we still see consistent sell through. We're not going to get Specifics on either the quarter or what we see beyond what we've disclosed except to say that There's nothing inconsistent that we're seeing now with our expectations and we feel Pretty good about our ability, once we get into the full season to continue to meet our growth objectives and we're confident in our achieve our guide overall. We're not going to parse kind of the volume or anything specific sell through, especially at this time of the year.
As you might imagine, there's day to day volatility just based on the snow melted or The snow fell, but in general, it's been good.
Speaker 9
I understand that. And I just wanted to touch on it because I thought it interesting given the time of year that it actually accelerated through December, Given that it is a seasonally kind of cold, wet and holidays and that type of thing. So anyway, just wanted to touch on it. But thanks again for taking Questions and good luck.
Speaker 2
Yes. I mean, it's probably it is much I think we're going to move to a more normalized Conversation about the month to month sell through, which will be a mix of kind of backlog and weather and all those other Normal things at this time of the year. And so clearly, we've had a backlog. So that we expect to continue.
Speaker 9
Understood. Thank you again.
Speaker 0
Your next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is now
Speaker 10
open. Hi. Thanks for putting me in.
Speaker 7
I have a couple of
Speaker 10
follow-up questions around structure and M and A or adjacencies in general, the first question is kind of multipart. Jesse, can you talk more about Structures go to market, what their channel exposure is like and when you look at your customer base, your dealers, your retailers, what Percentage of your customers already stock some sort of product like this? And maybe could you also tie in what the capacity is currently for structure and do you need to make additional investments
Speaker 2
Clear. So let me start just at a high level. Structures, products Products that are delivered to people that install the product. And so the nature of a lot of the business is, the product is specified by someone who's going to install it. The orders then go through and the product is delivered.
And in some cases, you're using standard components. And so those products are inventoried by the installer. And so at a high level, where we see the current synergy is a number of our Tractors are structure installers, right? So they will produce or they will source our types of products Through their normal channel, they'll work directly with structure to have those kinds of products delivered. So, and then There's another set of folks that are structured dealers and installers.
If you go to the website, you Interact with one of them, they'll come out, give you a quote and do a really nice job of installing the product. So that's its Current state, I think without getting too specific, as we move forward, there's an opportunity to really Expand our position and Structures position, Especially with that contractor base, that contractor base in many cases, our contractor base, which is tens of 1,000, In many cases, might just be using or building their own or designing their own or needing a product like structures. So we see an opportunity from a synergy standpoint to continue to build out those Point of deployment, leveraging our current network and working together with Structures' current network. And there's a I won't get into specifics, but there's a portfolio difference. There's other implications relative to how we do that.
But over the long term, There's clearly opportunity there. And I'll just Pete, I'll just take the capacity Comment very high level on structure. Structure has is certainly at this point full. It's There is an opportunity to work with the Structured team to continue to Increased throughput, continue to reduce lead times, continue to expand their ability to meet market demand. And in some cases, that might be modest capital, but in a lot of cases, it's just debottlenecking their current process.
And so we see a great opportunity as a combined entity to not only get synergy On the margin side that Pete talked about through sourcing and Working through our AIMS program, but we also see an opportunity to scale their production capability to better meet the needs of customers. Some of that has to do with just Capital deployment, when I mean working capital, some of that has to do with which naturally we have a greater ability to do and some of that just has to do with Continue to invest in debottlenecking and improving their processes. Okay.
Speaker 10
That's really helpful. And then my second Question or follow-up. A little bit more holistically, you do have the aluminum rail business, but this It's an acquisition that kind of takes you further into additional material conversion When you're getting into metals and aluminum, when you look around the backyard of a house or the exterior of a house, There's still a lot of different verticals that would be potential for material conversion. How do you think about the broader opportunity? And at this point in your life cycle, kind of how aggressive Would you be willing to kind of go after further and maybe larger acquisitions in some of these adjacencies?
Speaker 2
We really like our business model. We like the opportunity for differentiated products That are where we can get paid for the value that we add. We like the opportunity for material replacement. We like the opportunity with the focus on outdoor living and that secular growth trend. And clearly, As the Structure acquisition highlights, we also like the opportunity to continue to expand our position there.
We are Comfortable already with the 3 material sets that we talked about, polyethylene, PVC and alumina. This just builds on that. And to your point, over the long term, we continue to see opportunities to be more relevant in that outdoor space, But we're going to want to stick to the growth margin branded price profile that we've had. And as we navigate through that, we'll selectively look at acquisitions that meet Those criteria and I think as I've said prior to these most recent two acquisitions, if you look at what we have acquired in the past, we're now at 5 acquisitions In the last few years, it's probably indicative of the kinds of things we would look at In the future, and we just see a huge runway and a huge opportunity to become the player, as we look at driving growth in our market segment.
Speaker 10
That's great. Thanks, Jesse.
Speaker 0
This concludes the question and answer session. I will now turn the call back over to Jesse Singh.
Speaker 2
Really appreciate all of you taking the time to join us today. And as always, feel free To follow-up with additional questions and for those of you that will be at the builder show, we will have a Nice outdoor living area for you to come spend some time with us. So thanks again for your time and have a great day.
Speaker 0
This concludes today's conference call. Thank you for attending. You may now disconnect.