The AZEK Company - Earnings Call - Q2 2025

Executive Summary

• Q2 FY25 delivered 8% YoY net sales growth to $452.2M, GAAP EPS of $0.37 (+$0.03 YoY), and Adjusted EBITDA of $124.4M with margin expansion to 27.5% (+40 bps YoY) as Residential led with 9% growth; gross margin ticked down 40 bps YoY on new product ramp costs and Commercial softness.
• Management reaffirmed FY25 guidance: net sales $1.52–$1.55B (+5–8% YoY) and Adjusted EBITDA $403–$418M (+6–10% YoY); FY25 capex was raised to $110–$120M (from $85–$95M) due to a Pennsylvania plant purchase.
• Residential sell-through grew mid-single digits in Q2, channel inventories remained below historical norms, and contractor backlogs were ~7 weeks; Q3 guidance: sales $413–$429M and Adj. EBITDA $115–$123M (margin 27.8–28.7%).
• Merger with James Hardie remains a key 2025 catalyst (target close 2H CY25), with management highlighting $125M cost and $500M commercial synergy opportunities and reaffirming confidence in FY25 outlook.

What Went Well and What Went Wrong

What Went Well

• Residential strength: Segment net sales +9% YoY to $437.0M; segment Adj. EBITDA +11% YoY to $122.5M with margin +60 bps to 28.0% on channel expansion and new products.
• Margin execution: Company Adjusted EBITDA margin expanded 40 bps YoY to 27.5% despite growth investments; CFO noted performance was ahead of guidance (and said margin was ahead of consensus), with steady demand indicators (web sessions and contractor leads up double digits).
• Strategic progress and awards: New product launches (Harvest+, Reliance Rail, Fulton Rail) continued to gain traction; sustainability recognition from Barron’s and Green Builder Media reinforces brand momentum.

What Went Wrong

• Gross margin pressure: GAAP gross margin declined 40 bps YoY to 37.1% and Adjusted gross margin declined 60 bps to 37.8%, driven by start-up/ramp costs for new products and weakness in Commercial (Scranton Products).
• Commercial drag: Commercial net sales -4.3% YoY to $15.2M; segment Adj. EBITDA -34.4% YoY to $1.9M; margin fell to 12.5% on input cost pressure (improvement expected in 2H25).
• Higher FY25 capex: Guidance raised to $110–$120M (from $85–$95M) due to opportunistic Pennsylvania site purchase; near-term FCF for Q2 was ~$0.7M, reflecting elevated capex.

Transcript

Operator (participant)

Ladies and gentlemen, I'd like to welcome you to the AZEK Company's Q2 2025 earnings call. At this time, all participants are in a listen-only mode, and after the speaker's presentation, there will be a question and answer session. We'll give you more instructions about how to ask a question at that time. Please also be advised that today's conference is being recorded. With that, I would now like to hand the call over to Eric Robinson with Investor Relations. Eric, you may begin.

Eric Robinson (Head of Investor Relations)

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.azekco.com. The earnings press release was also furnished by 8K on the SEC's website. I'm joined today by Jesse Singh, our President and Chief Executive Officer; Ryan Lada, our Chief Financial Officer and Treasurer; and Jonathan Skelly, our President of AZEK's Residential and Commercial Segments. I would like to remind everyone that during this call, we may make certain statements that constitute forward-looking statements within the meanings 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 do not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. These non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of such non-GAAP measures can be found in our earnings press release and a supplemental earnings presentation, which are posted to our website. Now, let me turn the call over to AZEK's CEO, Jesse Singh.

Jesse Singh (President and CEO)

Good afternoon, and thank you for joining us. The AZEK team delivered another strong quarter, once again executing well in a dynamic market backdrop. In the second quarter of fiscal 2025, we achieved 9% year-over-year growth in our residential segment. This is driven by positive mid-single-digit residential sell-through growth, along with our continued expansion of our channel presence and new product launches across our TimberTech, AZEK Exteriors, and Versatex brands. Through the first half of the fiscal year, we have grown our residential segment 13% year-over-year, driven by high single-digit sell-through growth. Our focus on material conversion, product innovation, improving the customer journey, growing brand awareness, and channel expansion continues to drive our success and our market outperformance. Our consistent ability to outperform the broader repair and remodel market highlights the effectiveness of our business model, the attractiveness of our products, and the disciplined execution by the AZEK team.

During the quarter, deck rail and accessories' net sales grew 11% year-over-year, with each of the product lines growing high single digits to double digits. Exteriors' net sales grew 2% year-over-year, as that business has experienced relative stability while navigating a slower R&R and new construction market. During the quarter overall, we saw solid residential sell-through growth numbers in January, a slower February followed by a stronger March, which has continued into April. We expanded our adjusted EBITDA margin by 40 basis points year-over-year to 27.5%, while continuing to invest in our long-term growth initiatives and vertically integrated recycling network. During the quarter, we also made investments in merchandising, display, and samples to support our geographic channel and shelf expansions. We also delivered strong residential segment adjusted EBITDA growth of 11% year-over-year and expanded our segment-adjusted EBITDA margin by 60 basis points year-over-year to 28%, inclusive of these investments.

For those new to the story, I want to take the opportunity to briefly highlight AZEK's unique growth and margin expansion strategy and the compelling fundamentals behind our sustained outperformance. AZEK is well-positioned to capitalize on the large and growing shift from traditional materials such as wood to low-maintenance, high-performance, and sustainably engineered building materials across the outdoor living and exteriors categories. As an example, wood and engineered wood represents more than 75% of decking, 60% of rail, and 50% of exterior trim units sold annually. We have a proven multi-year track record of driving above-market growth, margin expansion, and cash generation through various market cycles. AZEK's product offerings include industry-leading brands like TimberTech, AZEK Exteriors, and Versatex. With award-winning innovation, a resilient business model, and a clear strategy focused on material conversion, product leadership, channel expansion, and sustainability, we are targeting double-digit long-term growth and sustained margin expansion.

Over the last seven years, through fiscal 2024, we have delivered a 15% compounded annual growth rate in our residential segment. Our proposed merger with James Hardie enhances our strategy to accelerate material conversion, provide our contractors and customers with expanded solutions, benefit from significant synergies, accelerate our growth, and deliver even greater value for our shareholders. Together, we are creating a premier growth platform with leading brands across siding, decking, railing, trim, and accessories. This platform will unlock significant wood and other material conversion opportunities across a large and expanding addressable market. In addition to the growth platform I just described, AZEK brings a category-leading outdoor living portfolio, one of the largest and most effective sales organizations in the industry, and a vertically integrated recycling network.

James Hardie is a leader in siding and similarly has a compelling material conversion growth story and a strong focus on contractors, customers, and branding. It has an even larger sales force and a strong, proven track record. All true shareholder value comes from customer value, and the combination of our two companies will allow us to provide a more complete solution and create more value and growth for our current and future customers. Early feedback from our customers and contractors has been overwhelmingly positive. We've heard many of them express the value of partnering with an innovative manufacturer for their home exteriors and outdoor living needs. We are highly confident that together we will unlock $125 million in cost synergies and $500 million in incremental sales synergies, with the potential for even greater upsides as we integrate our complementary capabilities and scale.

These benefits would be on top of the already compelling growth, margin, and free cash flow profile of the Proforma Company. While we remain confident in our standalone business, this combination provides our shareholders an even greater opportunity to realize significant long-term value. As always, our people remain at the center of our success, and I want to thank the AZEK team for their outstanding work and focus as we execute through this exciting period. AZEK's long track record of growth and outperformance, margin expansion, and value creation would not be possible without the dedication, collaboration, and support of our team members and business partners. I would once again like to express my sincere gratitude, and I know we are all energized by the significant opportunities ahead. I will now shift to an update on AZEK's strategic initiatives.

Our 2024 and 2025 new product launches, including TimberTech Harvest Plus Decking, TimberTech Reliance Rail, TimberTech Fulton Rail, and TrimLogic High Recycle Content Exterior Trim, are ramping up well. Contractor and dealer feedback has been highly positive, and we have expanded our shelf presence with new and existing partners as part of our recently completed 2025 early buy negotiations. Each of these new products allows us to expand our addressable market and address a wider range of price points, consumer needs, and drive increased wood conversion. Investments in these new product platforms continued during the quarter, modestly impacting our second quarter margins. We expect these startup investments to moderate in the second half of the fiscal year as we scale and position these new product platforms to drive future growth.

Recycled materials represent the largest raw material input we use to manufacture our products, and today we believe we are the largest vertically integrated recycler of PVC in the U.S. As we continue to grow and scale our recycling infrastructure, we're excited to welcome Northwest Polymers to the AZEK team. Northwest Polymers is an industry-leading post-industrial and post-consumer plastic recycler based in Oregon. The acquisition expands AZEK's in-house capacity in the western part of the U.S. to source and process recycled materials to support our long-term growth strategy and margin expansion objectives. Our continued investments support our goal to further increase recycled content in our products, reduce input costs, and reduce our greenhouse gas emissions over time. We are also proud to be named to Barron's 100 Most Sustainable U.S. Companies list for the first time ever.

Moving to our outlook, we continue to see steady demand across our outdoor living portfolio. Our residential sell-through trends in March grew high single digits, improving from a softer February, and April has trended positively with double-digit sell-through growth. While our contractor backlogs remain stable at approximately seven weeks, and our surveys highlight a steady market, the contractors and dealers responding to our surveys have expressed some concern about the uncertain macro environment and the potential impact on future behavior of their customers. We exited the quarter with channel inventory levels once again below historical averages, and we will continue to focus on maintaining a conservative level of inventory in the channel. On the margin front, we continue to see positive momentum through our recycling expansion, sourcing savings, and continuous improvement initiatives.

These actions position us to sustain our margins over time while simultaneously investing in our new product introductions, channel expansion, and brand building to support our long-term growth trajectory. We are a domestic manufacturer with primarily locally sourced raw materials and expect a limited direct impact from the recently announced tariffs. We are reaffirming our fiscal 2025 guidance, reflecting strong residential segment net sales growth and strong residential segment adjusted EBITDA growth. While we have seen mid-single digit to double-digit residential sell-through growth recently, we acknowledge that there is uncertainty in the broader economy. We believe we can continue to outperform the market, and if the market gets weaker, we are well-positioned to continue delivering against our adjusted EBITDA targets.

Our fiscal 2025 guidance considers residential sell-through growth scenarios in the low single digit to mid-single digit range in the second half of the fiscal year while still maintaining conservative channel inventory positioning. Our track record over the past several years demonstrates our ability to navigate varied economic cycles while continuing to grow, underscoring our ability to manage through uncertainty. We've been operating in an environment for more than two years that has been negative for the repair and remodel and new construction markets. We expect AZEK's differentiated model to remain resilient, backed by strong momentum from our growing brand awareness, new product platforms, continued shelf gains, and a unique focus on material conversion driven by our differentiated technology and digital investments.

These elements, combined with our industry-leading sales force and best-in-class customer service, as well as our strong focus on R&R, pro contractors, and differentiated segments, have led to our consistent outperformance of the market. We are well-positioned to sustain and further expand our margins, and we are close to achieving our annual 27.5% adjusted EBITDA margin target, well ahead of our fiscal year 2027 milestone. We are confident in our ability to deliver results in fiscal 2025 and deliver sustained value for our shareholders. I will now turn the call over to Ryan to discuss our financial results and outlook in more detail.

Ryan Lada (CFO and Treasurer)

Thanks, Jesse, and good afternoon, everyone. Thanks for joining us today. AZEK's second quarter performance is another strong validation of our disciplined execution as we continued to outperform a choppy repair and remodel market through targeted growth initiatives and operational rigor.

In Q2, we delivered residential segment net sales growth of 8.6% year-over-year and drove mid-single digit overall sell-through in line with our expectations. We continue to see stable demand trends with no significant shifts in customer behavior. Year-to-date, over 1,000 new contractors have joined our loyalty program. During the quarter, digital indicators such as website sessions and contractor leads grew double digits year-over-year. Feedback from our survey of nearly 2,000 contractors and dealers showed consistent and positive sentiment, though also highlighted some concern about macroeconomic uncertainty potentially weighing on growth expectations. We delivered strong margin performance in the quarter, with adjusted EBITDA margins reaching 27.5%, a 40 basis point improvement year-over-year, and ahead of both guidance and consensus. Our demand and operations were steady through the quarter, and our team executed well while investing in key growth initiatives.

Our balance sheet remained strong and flexible, and we generated solid free cash flow in what is typically a seasonal usage quarter. We are reaffirming our full-year fiscal 2025 outlook based on our strong first-half execution, visibility into our early buy momentum, and conservative channel inventories that remain positioned below historical averages. The majority of our supply chain is U.S.-based, and we believe we are well-positioned to navigate through current or future tariffs. For the second quarter of fiscal 2025, we delivered consolidated net sales of $452 million, an increase of 8% year-over-year. Our Q2 net sales were driven by positive mid-single digit residential sell-through growth, along with continued expansion of our channel presence and new product launches across our deck, rail, and accessories and exteriors businesses. Q2 gross profit was $168 million, an increase of $11 million year-over-year, and gross margin was 37.1%.

Q2 adjusted gross profit was $171 million, an increase of $10 million year-over-year, and adjusted gross profit margin was 37.8%. The adjusted gross profit margin decline was driven primarily by the previously mentioned costs related to new product expansion, channel expansion and investment, and weakness in our commercial segments grant and products business. GAAP SG&A expenses increased $5 million year-over-year to $88 million, primarily driven by acquisition-related expenses due to the proposed merger with James Hardie. Adjusted SG&A expenses increased $1 million year-over-year to $71 million, primarily driven by marketing and branding investments. Adjusted EBITDA for Q2 increased $11 million, or 10% year-over-year, to $124 million. Adjusted EBITDA margin for the quarter expanded 40 basis points year-over-year to 27.5%. Net income for Q2 increased year-over-year by $5 million-$54 million, or $0.37 per share. Adjusted net income for Q2 increased year-over-year by $7 million-$66 million.

Adjusted diluted EPS increased $0.06 year-over-year to $0.45 per share. Now turning to our segment results, residential segment net sales for Q2 were $437 million, up 9% year-over-year, driven by the previously mentioned sell-through growth, channel expansion, and new products. Residential segment adjusted EBITDA for Q2 was $122 million, up 11% year-over-year. Residential segment adjusted EBITDA margin was 28%. Commercial segment net sales for the quarter were $15 million, down 4% year-over-year, primarily due to the weaker demand in our spring products business. Commercial segment adjusted EBITDA for the quarter was $1.9 million, a decrease of $1 million year-over-year, again primarily driven by weaker demand and increases in material input costs. We have taken appropriate pricing and cost actions in this business to offset the pressure and expect to return to more traditional margin levels by the third and fourth quarters of fiscal 2025.

From a balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $147 million and approximately $373 million available for future borrowing under our revolving credit facility. Working capital defined as inventory plus accounts receivable minus accounts payable was $300 million, up $4.8 million year-over-year. We ended the quarter with gross debt of $538 million, which included approximately $99 million of financial ETs. Net debt was $392 million, and our net leverage ratio stood at 1X at the end of our second quarter. Net cash from operating activities was $47 million during the second quarter, an increase of $62 million year-over-year. Capital expenditures for the quarter were approximately $46 million, including the $25 million facility purchase in Scranton, Pennsylvania, and we deployed $7.2 million capital to acquire a new regional recycling operation to support our long-term recycling capabilities and ambitions.

For the second quarter, free cash flow was $1 million, an increase of $35 million year-over-year. Our capital allocation priorities remain the same as we previously communicated, primarily investing in our business both organically and inorganically. Now let's turn to our outlook. For full-year 2025, we are reaffirming our guidance with consolidated net sales between $1.52 billion-$1.55 billion, representing 5%-8% year-over-year sales growth, with consolidated adjusted EBITDA between $403 million-$418 million, representing an increase of 6%-10% year-over-year. Since our last call, we have taken some modest pricing actions to offset the impact of tariffs on our internationally sourced materials and other increases in additive costs. For residential, our guidance for net sales of $1.452 billion-$1.479 billion, representing 6%-8% year-over-year growth, with adjusted EBITDA between $392 million and $406 million, representing approximately 7%-11% year-over-year growth.

Our planning assumption considers residential sell-through growth scenarios in the low single digit to mid-single digit range for the remainder of the fiscal year while maintaining conservative channel inventory positioning. Once again, we have yet to see a slowdown in sell-through growth but are acknowledging the macro uncertainty. A few other assumptions for fiscal 2025 to share include the following: we are expecting a capital expenditure range of $110 million-$120 million. The increase is driven by the $25 million opportunistic purchase of our Scranton, Pennsylvania facility we completed in our fiscal second quarter. We expect depreciation in the range of $98 million-$102 million. Finally, we are expecting an effective tax rate for the full year between 25%-26%.

For the second half of fiscal 2025, we expect net sales growth of 0%-4% year-over-year on a consolidated basis and 0%-5% year-over-year in the residential segment. Our planning assumptions consider residential sell-through growth scenarios in the low to mid-single digit range year-over-year and normal inventory seasonality in the second half of our fiscal year. We expect to end the year with channel inventory levels once again below historical averages. Adjusted EBITDA is expected to grow 1%-8% year-over-year on a consolidated basis, and adjusted EBITDA margin is expected to be in the range of 27.2%-28%. To help with modeling, recall we will be lapping approximately $35 million of sales impact in the prior year from the timing of channel purchases ahead of the July 4 holiday into the third quarter of 2024 from the fourth quarter.

We expect fiscal third quarter consolidated net sales in the range of $413 million-$429 million. Consolidated adjusted EBITDA is expected to be between $115 million-$123 million, and adjusted EBITDA margin is expected to be in the range of 27.8%-28.7%. Our residential segment guidance for the quarter is $396 million-$410 million in net sales, with segment adjusted EBITDA between $112 million-$119 million. We are assuming residential sell-through growth in the low single digit to mid-single digit range in the third quarter. We are expecting an effective tax rate of approximately 25%-26%. Despite facing some macro uncertainty, we are well-positioned to execute for the remainder of fiscal 2025 and beyond. For additional planning assumptions to assist with modeling fiscal year 2025, please refer to the supplemental earnings presentation we have posted on our investor relations website.

Now I'll turn the call back to Jesse for some closing remarks.

Jesse Singh (President and CEO)

Thanks, Ryan. Over the last 10 years through fiscal year 2024, we have delivered a 12% compounded annual growth rate in our residential segment with significant increases in profitability. We are incredibly excited about AZEK's future as we look to combine with James Hardie. Together, we will be able to provide a better value for our customers, grow the business faster, and operate more efficiently, leading to greater shareholder value. Our focus has always been about building a great business that benefits our customers, our employees, and our shareholders, and we are excited about the journey ahead. We have built a great company, and I know that the next phase will be even better. With that, Operator, please open the line for questions.

Operator (participant)

Thank you.

Ladies and gentlemen, at this time, if you would like to ask a question today, you need to hit star followed by the number one on your telephone keypad. We do ask that you limit yourself to a single question when you are given the opportunity to speak. Thank you. Our first question for today comes from the line of Keith Hughes with Truist. Your line is live.

Keith Hughes (Managing Director)

Thank you. It's Keith Hughes from Truist. Question on the guide in the second half. You've got some low single digit numbers out there. Can you talk about what you're expecting decking and railing versus exteriors in the second half?

Jesse Singh (President and CEO)

We're not giving specific guidance on that. I think as you look at, in aggregate, how we performed to date and how we performed in the second quarter, deck, rail, and accessories has clearly been outgrowing exteriors.

I think it comes down to the exposure difference between both geographic and markets.

Keith Hughes (Managing Director)

Okay. I just think one more in here on cost. There has been some talk of PVC prices going up. If you could talk about your cost bucket in your term, what it looks like for the next several months.

Jesse Singh (President and CEO)

Keith, by the way, we do know your name, so it is great to hear from you, Keith. I think you were asking about the cost bucket. I think the way to think of our cost structure right now, and Ryan, please comment, but I think the general comment is things have been pretty steady in aggregate. There are some items that are being impacted by some supply chain things, call it additives, and some of the small items that are impacted by tariffs. We are seeing some modest inflation that we have offset through price.

Keith Hughes (Managing Director)

Okay. Thank you.

Operator (participant)

Thank you for your question. Our next question is from the line of Michael Rehaut with JPMorgan. Your line is live.

Andrew Olsen (Portfolio Specialist)

Hi everyone. This is Andrew Olsen from Michael Rehaut. I appreciate taking my questions. I just wanted to ask in kind of in terms of how it relates to the expected sales synergies of the combined company. Is there any additional color you can provide on the strategy, knowing that it's a little early now, but of the integration of the teams and how the sales force will be organized?.

Jesse Singh (President and CEO)

Yeah. As you point out, it's really early. We are not prepared to talk about any specifics there. Here's what I would reaffirm, right, that we've talked about. I think number one, we see significant sales synergies through the combination.

Each business has a very, very good downstream sales force that's driving absolutely terrific activity. The most important thing as we go through this process is that we sustain our focus on our customers. If you extrapolate that out, you should assume that there's going to be a fair amount of stability in the sales organization, stability with our distribution, and a real focus on how we drive more material conversion. I think the second point is, as we've gotten into this, we're probably even more confident on some of the sales synergies. There's just a terrific opportunity in certain downstream segments to sell more to contractors and builders.

Andrew Olsen (Portfolio Specialist)

Thanks for that, Jesse.

I guess my second question is, in terms of acquiring additional recycling assets, how much is that part of your focus going forward, and what does the environment look like for that?. What kind of incremental cost reduction and recycling capacity do you expect to achieve from that?.

Jesse Singh (President and CEO)

Yeah. I think on the last call, we highlighted that from where we stood at that moment, we saw about an incremental $40 million as kind of the next milestone of cost savings on our recycle journey. We're going to continue to invest both to meet our volumes, but also to have supply and regional supply to continue to realize that incremental cost savings. In terms of the specific acquisition we made, that's really setting us up for 2026 as there's lags as we qualify.

We may see some benefit in '25, but that's really around a cost in this year that will benefit us in '26 as we localize our recycling around Boise.

Andrew Olsen (Portfolio Specialist)

Understood. I'll pass it on. Thanks so much for taking my questions.

Jesse Singh (President and CEO)

Thanks.

Operator (participant)

Thank you. Our next question is from the line of Matthew Bouley with Barclays. Your line is live.

Elizabeth Langan (Assitant VP of Equity Research)

Hello. You've got Elizabeth Langan on for Matt today. I was just wondering if you could touch on what you're seeing across your retail and pro channels, and if you could kind of categorize the demand across each category and what you're seeing, if there's any regions that kind of have relative strength or weakness.

Jesse Singh (President and CEO)

Yeah. I'll ask Jonathan Skelly to take that. Go ahead, Jonathan. Hi, Jonathan.

Jon Skelly (President)

Thanks. Yeah. So again, we are seeing growth across both categories.

We continue to see slightly higher growth in the pro channel versus retail channel. Within retail, again, we continue to see positive momentum from a point of sale perspective. Regionally, across the business, both in retail and the pro channel, pretty good results across the U.S. A little bit of weakness, slight weakness in the Northeast. They were very severely impacted by weather early in the spring. We have seen a nice rebound in activity since some of that weather has cleared.

Elizabeth Langan (Assitant VP of Equity Research)

Thank you very much. I know that you mentioned that tariffs are, it's a pretty limited impact given that your supply chains are predominantly domestic. Would you be able to quantify that, what you are expecting, and if there's any, in terms of the cadence of that impact through the back half of the year as well?.

Jon Skelly (President)

Yeah.

With the current tariff exposure on an annualized basis, it's anywhere between $12 million and $15 million. We source roughly $100 million-$120 million outside the US. On our fiscal year, we kind of plan that as more of a $4 million-$6 million impact in the year, which we were able to price against with modest increases.

Jesse Singh (President and CEO)

Yeah. We would expect that that particular type of pricing will carry through into subsequent years to have us continue to offset any of those types of increases.

Jon Skelly (President)

Great. Thanks.

Jesse Singh (President and CEO)

Great. Thank you.

Operator (participant)

Thank you for your questions. Our next question is from the line of Tim Wojs with Baird. Your line is live.

Tim Wojs (Senior Research Analyst)

Hey, guys. Good afternoon. Somebody put an H in there.

I guess really the question I have is I was just kind of hoping you could kind of expand a little bit, Jesse, on just some of the customer reactions to the James Hardie and the AZEK combinations. If you could just kind of expand a little bit on kind of what you're hearing from them and maybe kind of some early maybe opportunities on the sales synergy side.

Jesse Singh (President and CEO)

Yeah. I'm going to use my wife, Linda, and I have done a number of remodels in the Midwest. In those remodels, we have used general contractors. Think of them as they are the core contractors for James Hardie, right?. They do exteriors. They do broad remodels. Those contractors are very familiar with James Hardie. In each of those instances, they were installing wood decks.

Because they were working with me and my wife's turned into one of our best salespeople, we had them move towards TimberTech and AZEK types of materials. Now, that's an isolated incident. There are meaningful numbers of contractors that install siding that have communicated that they historically have either installed wood decks or an alternative decking material. I would say that there's a very specific instance of a contractor that was installing Hardie that called us and said, "Hey, I'm a Hardie installer. I should be calling you because I was going to put a wood deck on this job." It happens to be for a Hardie executive. We are starting to get those sorts of communications. The flip side is also true where we have channel partners that are communicating to us that they're really excited about the combination.

Long-winded way of saying, we are hearing directly from both contractors and channel partners on that. Jon's here. Jon, do you want to elaborate any more?

Jon Skelly (President)

Yeah. I mean, Tim, we've obviously been visiting with customers across the country. The feedback was, first off, you guys did a really nice job of keeping it quiet. We hadn't even thought about it. Now that it's been announced, it's obvious to us. I think it's been really nice to see the validation from the point of view of the customer that they see the strategic combination benefits. It's obvious to them. They get it. They're excited to start working with us together.

Tim Wojs (Senior Research Analyst)

Okay. Okay. No, that's great.

Just on the sell-through side in the back half of the year, the low to mid-single digits, I mean, I think that was probably a little bit softer than maybe what we saw last quarter. Is that preemptive in your mind, just trying to kind of bake in a kind of more volatile macro, or is that something that you're actually seeing in the order book?.

Jesse Singh (President and CEO)

We are not seeing that. As I said on the prepared remarks, think of it as high single digit year to date. April was double digit. We just think what we're trying to communicate is within our guide, you should, we're assuming low to mid-single digits within our guide. Now, we can go down even a bit below that, closer to zero sell-through and still be within the guide.

Even though we're not seeing it, what we're trying to communicate is just the resilience of our guide. In order, our sell-through is just an additive element to the underlying market. All of our growth programs are intact, etc. The market would have to go negative and negative in a decent way for us to have sell-through that goes negative. That is all it was. It's not even preemptive. It's just giving you our assumptions. Now, if sell-through continues at the current rate, then we'll see where we end up. We think it's prudent given the macro to kind of lay out that if there is softening, our guide considers that.

Tim Wojs (Senior Research Analyst)

Okay. Great. Thanks, everybody.

Operator (participant)

Tim, thanks for your question. Apologies for the name. Our next question is from the line of Phil Ng with Jefferies. Your line is live.

Hey, guys.

This is Maggie on for Phil. I guess kind of going off that last question about the sell-through, that guide against the sales guide for 0%-5% sales growth in Resi maybe implies some additional inventory destocking from here, which inventories are already trending below historical levels. So maybe if you could just talk about how the channel is positioning themselves on inventory at this point, particularly given some of the macro uncertainty out there.

Jesse Singh (President and CEO)

Yeah. I think as we said on the call, we have been conservative, really, over the last couple of years. But we work with our channel to make sure that we are appropriately staging inventory. Jon, actually, do you want to touch upon that a little bit?.

Jon Skelly (President)

Yeah. Sure.

Again, from our standpoint, we're in the we finished early buy in a great position, and we've put a fair amount of inventory in the channel. While we're currently seeing the strong sell-through that we commented on, we always want to put ourselves in a position where we can provide great service without putting too much inventory in the channel. With an outlook that we shared with you of low to mid-single digit sell-through, if you operate under that assumption, we're going to be conservative on inventory levels and not have as much inventory in the channel as when we have double-digit sell-through.

Jesse Singh (President and CEO)

Yeah. Just one comment on your question. There's always seasonality in our business where we stage product and it flows through, etc. We are not seeing anything negative. There is not excess inventory in the channel.

Even if we went down to zero sell-through or towards zero sell-through, all of our numbers account for a sub-historical amount of inventory in the channel. I think it is important to note that we are including any inventory in all of our numbers. You do not have to worry that there is going to be another shoe to drop if things decelerate. I think that is an important distinction. We are in a normalized below-historical norm inventory level in the channel. '

Okay. Great. That is really helpful. I guess my second question, you have been seeing a lot of progress on your recycling targets. Maybe you could talk about the opportunity out there being part of a larger organization to expand or accelerate those efforts and how you are thinking about the related margin opportunity there.

Yeah.

What I would say is we've laid out cost targets as part of the merger. It considers a bit of SG&A optimization. It also considers the opportunity we're going to have just in terms of logistics and supply chain. I would say in our planning assumptions, we don't really have incrementally increased benefit from recycle above and beyond what we had in our plan. Now, having said that, I think that's going to be an interesting thing as we move into the future. At a minimum, it's going to be a customer value as one of the best recycle streams we have is vinyl PVC siding.

Insomuch as there is repair and remodel that removes that product, and that's part of the channel relationships that James Hardie has, I think that'll be a terrific sustainability opportunity and a terrific opportunity for us to really do the right thing for the environment. I'm not sure at this point that there would be a financial benefit to that.

Got it. Thanks for all the color.

Operator (participant)

Thank you for your questions. Our next question is from the line of Susan Maklari with Goldman Sachs. Your line is live.

Charles Perron (VP of Equity Research)

Hi everyone. This is Charles Perron in for Susan. Thanks for taking my question and congrats on a strong quarter. First, I want to ask a little bit about the low to mid-single digit sell-out assumptions for the back half. Can you talk about how do you expect this to compare to the broader R&R market?

When you consider your long-term outlook for double-digit annual net sales growth over the coming years, can you talk about your confidence to achieve this even if the R&R markets remain tepid considering the organic initiatives and the potential benefit from the merger?.

Jesse Singh (President and CEO)

Yeah. Let me reiterate. We are not saying that sell-through is going to decline. What we are doing is giving you the modeling capability to assume some slowdown, right?. I think it is important that our guide is contemplating, and it is really a guide that is kind of low single digit to mid-single digit sell-through, which is different than what we have seen. Now, relative to the R&R markets overall, we had assumed a flat R&R market really for the last two years. Last year, we grew 12%. This year, our guide is in the mid to high single digit range.

What that adds up to is, once again, what we're guiding you to is give or take 7 percentage points over the underlying R&R market. Once again, we delivered more than that last year. Our target is always double digits over the underlying R&R market. When we go out for our guide, we assume that it'll be 7%. In other words, if you go to that, if we're assuming only 2% sell-through in the back half, that would mean the R&R markets would need to decline, give or take, 5% on a year-over-year basis. That's the simple math there. In terms of the confidence moving forward, we've had three years of a flat to declining R&R market. You can take a look at our growth stack during that time.

As we move into next year, we certainly feel, if anything, even better on a standalone basis than we have in the past given the new products we've launched. If you add to that the potential synergy that we get through a combination, there are certainly scenarios where we are meaningfully higher than where we are now relative to our overall growth rate. Hopefully, that answers your question.

Charles Perron (VP of Equity Research)

It does. Thank you very much, Jesse.

Jesse Singh (President and CEO)

Thank you.

Charles Perron (VP of Equity Research)

Second, it was great to see the continued success from channel expansion and new products. Can you maybe expand on those channel wins and the adoption of new products across both retail and wholesale through the quarter?.

Given the macro uncertainty, are you seeing shift in the tone from channel partners about their willingness to ramp on inventory into the seasonally stronger part of the season for those new products?

Jon Skelly (President)

This is John. I think that was three questions within one, but I'll try. I think the first question from a shelf space gain and channel perspective, as I mentioned earlier, we had a highly successful early buy period where we achieved additional shelf space gains, as we've talked about before. Our new partnership with Capital Lumber continues to pay dividends. We've had a really great start with that new channel partner, and we're seeing the benefits of that. From a new product perspective, very well received. Again, as a reminder, we launched new rail products as well as some new decking products.

We're currently ahead of our expectations in terms of the launch of those products.

Operator (participant)

Thank you for your questions. Once again, ladies and gentlemen, if you would like to ask a question, remember it's star followed by the number one on your telephone keypad. We do ask that you please limit yourself to a single question when you're given the opportunity to speak. Our next question is from the line of Ryan Merkel with William Blair.

Ryan Merkel (Research Analyst)

Your line is live. Yeah. Hey, everyone. Wanted to dig in a little bit on the Q3 revenue guide. It was coming in a little bit below the street and down year over year. I think that's because of the $35 million last year's accomplish you. Just put some context to it because April's up double digits.

The sell-through is low single digits to mid-single digits, but you're guiding down 3% roughly year over year. Just help us a little bit with that.

Jesse Singh (President and CEO)

Yeah. Ryan can chime in too. I think you hit it on the head. It's just timing of when product ships, right?. Last year, we had the way 4th of July fell, a little bit more shipped into the third quarter. This year, a little less will ship into the third quarter, and we'll be in the fourth quarter. I think it's important to look at our guide as a back half guide. Once again, there's staging of inventory. There's drawdown of inventory, which is normally how this business operates. In general, I think you answered your own question, which is it's really the timing of when the product ships.

Ryan Merkel (Research Analyst)

Got it. All right. Thanks. You're passing on.

Operator (participant)

Thank you for your question. Our next question is from the line of Mike Dahl with RBC Capital Markets. Your line is live.

Hi. This is Chris on for Mike. It sounds like demand trends have remained pretty solid quarterly, but is there anything notably to point out on the mix front?. Are you seeing any pressures there emerge?. If I could sneak just a quick follow-up, the contractor backlogs, where are they at today?. Thanks.

Jesse Singh (President and CEO)

Yeah. I mean, I'll take it quickly. We've continued to operate with a pretty consistent mix. There's nothing meaningful shifting there. Contractor backlogs, we're steady with our last survey. In fact, they may have creeped up just a little bit. In general, they're pretty much right on where we would expect them to be at seven weeks.

Got it. Appreciate that.

Operator (participant)

Thank you for your question.

Our next question is from the line of Reuben Garner with Benchmark. Your line is live.

Reuben Garner (Equity Research Analyst)

Thank you. Good evening, guys. I wanted to ask about your concerns about affordability in the context of some of the other components that go into a deck, whether it be the substructure or some of the hardware that comes from overseas. How big of a concern would significant price increases in those portions of the deck be for you guys, I guess?.

Jon Skelly (President)

Yeah. You hit on the right products in terms of where we're feeling the tariff impact. As Jesse mentioned earlier, we've taken price in certain areas to offset some of that pressure. What we have done in certain situations is, in certain product lines, not taken the full amount of the tariff increase to remain competitive while trying to offset in other areas.

Jesse Singh (President and CEO)

Yeah.

I would just say, in general, the way the tariffs are falling right now, and there are certain exemptions without being specific. In general, for our types of jobs, with the exception of certain rail products that are imported from certain countries, in general, I do not know that there has been a large impact from tariffs in our types of jobs.

Reuben Garner (Equity Research Analyst)

Great. That is helpful. Good luck, guys.

Jesse Singh (President and CEO)

Great. Thank you.

Operator (participant)

Thank you for your question. Ladies and gentlemen, that will close out our Q&A session for today. I would like to turn it back over to Jesse for any closing comments.

Jesse Singh (President and CEO)

Yeah. I want to take a moment to thank all of our shareholders and analysts that have worked over the years to understand our business and to be great partners. We, as management, rarely compliment our shareholders and our analysts.

I think I can speak for the team by saying our analyst community and our shareholders have really impressed us and impressed us with their and your professionalism. It has been really good to see your understanding of the business. As always, I'd like to thank our partners and customers for their trust and support. Once again, I'd like to thank the AZEK team for being the best team in the industry and for working incredibly hard and always doing the right thing and putting our customers first. Thanks again to all of you for joining us, and we appreciate your continued support of AZEK. Take care. Thanks.