The AZEK Company - Q4 2021
November 17, 2021
Transcript
Speaker 0
Good morning. My name is Chantal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Glavac Company's 4th Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Press star 1 again. Thank you. Amanda Seygal, Vice President of ESG, you may begin your conference.
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. Execco.com as well as via 8 ks on the SEC website. I am joined today by Jesse Singh, our Chief Executive Officer and Peter Clifford, our Chief Financial Officer.
Before we begin, I would like to remind everyone that during this call, AVAC 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 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 posted on the website and will be provided in our Form 10 ks for our Q4 and fiscal year end 2021 as filed with the Securities and Exchange Commission. The Company does not undertake any duty update such forward looking statements.
Additionally, during today's call, the company will discuss non GAAP measures, which we believe will be useful in evaluating our performance. This presentation of this additional information should not be considered in isolation core as a substitute for results prepared in accordance with GAAP. Reconciliations of adjusted EBITDA to net income calculated under GAAP and adjusted gross profit to gross profit calculated under GAAP, as well as reconciliations to other non GAAP measures discussed on this call can be found in our earnings release that is posted on our website and will be included in our Form 10 ks for our Q4 fiscal year end 2021. At this point, I would like to turn the call over to Jesse Sain.
Speaker 2
Good morning. I would like to welcome everyone to today's call and it's great to be speaking with you today. We are proud to announce that we once again delivered a record 4th quarter with strong growth in net sales, adjusted EBITDA and adjusted EPS. Our results were driven by continued robust demand in both of our segments and Industry Leading Operational Execution. During the Q4, we meaningfully improved service to our customers, made progress against our decking capacity expansions and completed additional investments to drive long term growth.
Our teams have done a great job navigating what has been a challenging environment to deliver strong results and we exit the year in a strong position to service our customers in 2022 and to continue to gain market share from Wood and other direct and indirect competitors. Our strategy is to drive growth and share through a combination of product innovation, commercial execution and targeted acquisitions. Given the breadth of our portfolio, which includes a leading exteriors business and the most differentiated decking products on the market, We believe that we are uniquely positioned to win. We have a proven track record of results and continue to believe our strategy and investments will drive sustained long term growth and margin expansion. This confidence is underpinned by the continued tailwinds we are experiencing as a company, including strong repair and remodel activity, sustained interest in outdoor living and an acceleration in wood conversion trends.
In our last call, we Discuss the extensive research we conducted on wood replacement and the drivers of wood conversion in the decking market. Our research indicates that there is an opportunity to convert approximately 50% of the market to natural looking alternative materials. With an unmatched portfolio of the highest quality and most natural looking desi products on the market, driven by innovation in R and D, We believe AVAC is in a unique position to benefit from these underlying trends. In addition to previously announced capacity additions, We are announcing a 4th phase of decking expansion that we expect to be completed during calendar year 2022, bringing our overall decking capacity increase to over 100% from the 2019 baseline. This additional phase will take advantage of our expanded footprint in Boise, Idaho and highlights the speed and flexibility of the AVAC team to respond to market opportunities.
We believe this combination of investment and execution places APAC in a position to aggressively engage the market as we move into fiscal 2022. More importantly, our existing footprint gives us the flexibility to add additional lines as needed and we expect to exit 2022 with enough space to double our Boyd's team manufacturing capacity within the existing footprint. These capacity expansions come at the right time and enable us to aggressively go after new market and wood conversion opportunities. Turning to fiscal year 2021 highlights. In our 1st year as a public company, we delivered record financial results and achieved a number of milestones.
We saw acceleration in the residential segment, driven by strong end market demand combined with initiatives, share gains and price realization. Our decking product line grew in the mid-40s range and our exterior business grew Q3 of 2018. We delivered the first two phases of our multi phase capacity expansion plan, all while Improving throughput in our existing operations. While capacity increased by 40% in decking, our actual output CAFD Company. Capability increased meaningfully above that driven by increased efficiency.
In an unprecedented inflationary environment, The team was able to offset raw material inflation through price and productivity gains. We expanded our consumption and supply of recycled materials to meet increasing demand and are well positioned to achieve our 2026 goal of recycling £1,000,000,000 annually. In fiscal 2021, we also launched a number of new products. We also strengthened an already strong management team expanded leadership in sales, marketing and corporate functions and with continued investments in sales, marketing, brand and consumer engagement, which will continue in fiscal 2022. We experienced high quality digital engagement throughout the year and leads increased over 40% year over year.
We continue to focus on our core value of doing the right thing and building out our focus on ESG. We issued our inaugural Full Circle ESG report and are making progress on multiple initiatives within each part of the E, the S and the G. In addition to our most recent Board member announcements, We continue to make progress on our ongoing effort to create a more inclusive company. We recently held the Tipper Tech Championship in Boca Raton, Florida, which is an event benefiting local area hospitals and is part of the PGA Tour Champions.
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We committed to making
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it a 0 waste event and we were the 1st and only tournament and the PGA Tour Champions to do so. We were also recognized as one of Chicago Tribune's top workplaces for creating a culture where employees feel highly engaged, appreciated and fulfilled. Turning to our fiscal Q4 results. Despite ongoing inflation in the quarter, We once again delivered very strong net sales and adjusted EBITDA. A combination of new manufacturing capacity and a strong execution enabled improvements in channel inventory and sets us up for growth heading into fiscal 2022.
Our teams continue to navigate supply chain challenges, including Hurricane Ida, extremely well as we continue to prioritize service to our customers. We benefited from pricing that offset inflation on a dollar basis and we have incremental pricing that will be realized in Q1 of fiscal year 2022. We believe that our pricing and productivity actions position us well for ongoing margin expansion. We continue to make progress during the quarter on key initiatives to drive long term value creation. Our core products in our portfolio as well as our new Reserve and Landmark decking collections, PayFac Paint Pro and panelized aluminum rail products all performed well during the quarter.
2 of our newest product innovations were recently recognized by HBS Steeler, which awarded our TimberTech Landmark Decking Collection and AVEC Shingle Siding with the Golden Hammer Awards for their value, innovation and shelf appeal. Our landmark collection of decking also to the inaugural Design for Reuse award from the Vinyl Sustainability Institute. We are excited to continue this culture of innovation by announcing the launch of several new products this quarter for fiscal 2022. We are also excited to have announced a partnership with YardGen, a leading technology enabled landscape design company where customers can design the yard of their dreams, incorporating Cymbotek Materials in the design process. This partnership will allow us to better access and grow an alternative channel while expanding our customer journey.
We recently completed customer events that coincided with the Super Tech Championship where we engaged a significant number of our contractors and dealers on future strategy and growth opportunities. Continue to be optimistic about
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the outlook for growth in fiscal 2022
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and the long term. A validated data from our recent contractor and dealer survey, which highlighted ongoing optimism and strong backlogs. We continue to make progress on recycled and finding new sources of otherwise hard to recycle materials to incorporate into our products. We are proud to That we diverted approximately £500,000,000 of scrap and waste from landfills through our recycling programs in fiscal 2021, on approximately 25% increase from £400,000,000 in 2020. Recycled materials made up approximately 56% of our extruded product portfolio weight, up from 54% last year.
In fiscal 2022, we will continue to invest in our recycling capabilities and expect both our use of recycle and the cost benefit from recycling to continue to expand. Our innovative full circle PDC program is gaining momentum in the marketplace and has strengthened our position as the industry leading recycler of PBC. For the benefit of our expanded capacity, we are now able to more effectively expand our channel, geographic reach and customer relationships. We are pleased to have recently expanded our distribution relationship with a key distribution partner, Weyerhaeuser. The expansion allows for TimberTech products and KVAC Exterior's full product line offering to be available throughout the Texas market through warehouses Dallas Houston based distribution centers.
The portfolio expansion increases AVAC's relationship with Weyerhaeuser to 13 facilities nationwide. We would like to thank Weyerhaeuser and all of our channel partners for their tremendous support and look forward to our continued partnership
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in the future. To our outlook,
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for fiscal year 2022, we expect we will grow net sales at a mid teens rate, driven by growth in our core and new products and previously announced price increases. We expect to deliver high teens growth in adjusted EBITDA year over year, inclusive of the startup costs associated with our capital investment programs. Our recent actions combined with ongoing productivity and recycle expansion position us well for fiscal year 2022. As raw material prices normalize, We believe we are well positioned to achieve our margin objectives. In summary, we continue to be confident about our position in the market and the opportunity for the ASAC Company heading into fiscal 2022.
Repair and remodel activity remains strong with a number of housing related and home remodeling indices showing continued and projected future strength. There continues to be a strong interest in outdoor living and we see wood conversion trends accelerating. In addition, our contractor and dealer engagement and survey reflects ongoing optimism and backlog. AZEK has Continually invested in innovation and R and D to create the highest quality, most natural looking products and the breadth of our portfolio, including Experian and Outdoor Living, give us a competitive advantage as we continue to penetrate an almost $20,000,000,000 market opportunity. We believe we are investing ahead of increased demand with capital investments coming online to service incremental demand and we believe we provide the best service in the industry.
We believe the future is bright for the AFAC company and we are excited to execute our strategy in the coming years with the support of our loyal team members, channel partners and shareholders. With that, I'd like to turn the call over to Pete, who will discuss our financial results and our outlook in greater detail. Pete?
Speaker 3
Thanks, Jesse, and good morning, everyone. Let's take a few minutes to walk through our 4Q 'twenty one and full year 'twenty one financial results. As a reminder, that our 4Q and fiscal year 'twenty one results are through September period. The actions that we've taken with pricing, capacity expansion as well as investments in our core have us exiting 2021 with awesome momentum and position us to outperform in 2022 and beyond. On a consolidated basis, net sales for the quarter increased 31.1 percent year over year to $346,000,000 for 4Q 'twenty one.
Drivers for the Q4 net sales for our residential segment also increased by 31.1% year over year, driven by strong net results. The Commercial segment increased 31.3% year over year as well. Net sales for the year increased 31.1 year over year to $1,179,000,000 for the full year 'twenty one. Drivers for the year included broad based growth in both our residential
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as well as commercial provisions. Gross margins for
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the quarter. GAAP gross margin dollars expanded by $22,000,000 up 24.4 percent year over year, while adjusted gross margin dollars grew by $24,300,000 were up 22.9% year over year. Adjusted gross margin rates contracted 250 basis points to 37.7% versus 40.2% from the prior year. Gross margins for the full year, GAAP gross margin dollars expanded by 93,900,000 were up 31.7% year over year, while adjusted gross margin dollars grew by $98,900,000 for up 27.5 percent year over year. Adjusted gross margin rates contracted 110 basis points of 38.8% versus 39.9% in the prior year.
Our margin rate performance year over year is primarily driven by the fact that we've seen significant material commodity inflation, which we've offset the power impact of national accretion or national margin rate. Our gross margin rates were stable sequentially from 3Q to 4Q as our pricing has exceeded inflation dollars in both 3Q 'twenty one and 4Q 'twenty one. Our last price increase was effectively an October 1st increase, so we expect pricing to continue to exceed inflation powers in 1Q 'twenty 2. Lastly, we remain confident we are positioned for structural margin change and material commodity prices we have to receive. SG and A expenses for the quarter.
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SG and A expenses decreased $89,500,000
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or down 59.7% year over year. The decrease was primarily attributable to lower stock based compensation expense, partially offset by investments in higher personnel costs, professional fees and other public company costs. SG and A expenses for the full year, SG and A expenses decreased 64,100,000 were down 20.8% year over year. The decrease was primarily attributable to lower stock based compensation expense, partially offset by investments in higher personnel costs, marketing and branding, professional fees and other ongoing operating expenses. Adjusted EBITDA for the quarter.
Adjusted EBITDA dollars for the quarter increased by $15,400,000 or up approximately 23.4 percent to $81,500,000 Adjusted EBITDA margin rates for the quarter declined 150 basis points to 23.5 percent to 25% of prior year. As previously mentioned, the primary driver of the EBITDA impact was price realization, offset material inflation dollar for dollar on a percentage basis. Adjusted EBITDA for the full year, Adjusted EBITDA dollars for the year increased by $60,700,000 or 28.4 percent to $274,200,000 Adjusted EBITDA margin rates for the year declined by 40 basis points to 23.3% from 23.7% in the prior year. Note, material commodity inflation did not start to accelerate until the middle of 2Q 'twenty one, so we had a relatively normal fiscal 1Q21 year over year. Net income and EPS for the quarter GAAP net income increased by $103,000,000 at $38,600,000 or $0.25 per share compared to a loss of $0.43 per share in the prior year period.
Adjusted net income increased by $5,400,000 or up 12.3 percent to 49,800,000 for adjusted diluted EPS of $0.32 per share compared to $0.29 per share in the prior year period. Peter Advers, strong operating performance year over year, coupled with prior year debt extinguishment impact on our formerly outstanding senior notes. Net income for the year, GAAP net income increased by $215,400,000 to $93,200,000 or $0.59 per share compared to $1.01 loss consistent 2020. Adjusted net income increased by $80,300,000 to $152,900,000 or adjusted diluted EPS of 0.98 dollars per share compared to $0.59 per share in fiscal 2020. Key drivers saw operating performance year over year, interest expense reduction of $51,000,000 year over year and the elimination of certain expenses associated with the Company's initial public offering 2020.
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Offering balance sheet,
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cash flow and CapEx, our balance sheet remains incredibly strong
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with significant capacity. We have
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over $146,000,000 unused credit facility at ninethirtythirty 1. We ended the quarter with $250,500,000 of cash and cash equivalents and $362,000,000 of working capital. Gross ended the quarter at $267,700,000 Net debt came in at $217,100,000 and our debt leverage ratio came in less than 1 times at 0.8. CapEx
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pending for
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the quarter reached 59,000,000 CapEx for the year reached $175,000,000 at the low end of our annual guidance, largely driven by timing of cash outflows related to our the expansion programs. Cash from ops for the year came in at $207,700,000 or up 111% year over year. Now, for segment results. For our residential segment, sales for the quarter grew 31.1 percent to 305,000,000 Generic drivers for both the quarter and the full year are similar. We have benefited from strong underlying demand and price realization enabled by the commodity environment and some rightsizing of channel inventory.
The sell to was driven by broad based strength in deck rail and 3 is at 33% and exterior is at 25%. Between capacity expansions and machine efficiency improvements, we delivered more product, which allowed us to make progress on driving service levels and filming channel partnering for a closer to desired levels during the quarter. Telstra for the full year grew 35.4 percent to $1,044,000,000 Telstra was driven by broad based strength in deck rail and accessories at 37% and exteriors at 31%. While tech grew in the mid-40s range, Our rail business was constrained during the year by certain material and supply chain issues. Channel inventory improved at year end as new capacity came online and we made improvements to service levels.
Segment adjusted EBITDA. Adjusted EBITDA for the quarter grew $17,600,000 or up 23.7 percent to 91,600,000 Adjusted EBITDA for the full year grew $76,500,000 or up 32.1 percent to $314,600,000 As we have articulated, the margin impact is driven by timing lag and price realization versus commodity inflation impact, where we have lost a dollar impact from accretion of our natural margin rate. For our Commercial segment, Sales for the quarter grew 31.3 percent to $31,000,000 Sales for the full year grew 5.3 percent to $134,800,000 The strength in revenue from both the quarter the year was primarily attributable to higher net sales in our Viacom business. We are seeing solid demand in marine, outdoor living and semiconductor end markets. Segment adjusted EBITDA for the quarter grew $2,100,000 or up 55.4 percent to 6,000,000 Adjusted EBITDA for the full year was $4,300,000 or up 28.4 percent to 19,300,000 Our commercial business did an excellent job recovering margin and profitability during the year, primarily driven by commercial mix, plan for Tivity as well as pricing actions.
Before I close with some color on guidance, I wanted to provide some context on the Q4 'twenty one Q1 of 'twenty two. Q4 'twenty one was in line with our expectations. We keep positive to note on the quarter. 1st 1 month revenue perspective, we continue to see strong demand and making progress in improving pro channel inventory and service Platform activity performance improved as we moved past our start up costs from the Phase 1 and Phase 2 capacity projects. 3rd, our teams executed extremely well with the supply chain disruptions caused by Hurricane Ida.
Finally, we continue to offset new commodity inflation and price realization dollar for dollar. As we entered the Q1 of 'twenty two, there are several positives coming out of the Q4 of 'twenty With our price actions are now in place, we expect pricing to exceed material inflation dollars in every quarter in 2022 complete basis on current commodity pricing expectations. 2, we are experiencing solid trends in our digital engagement and contractor backlogs, healthy demand environment. 3, we continue to make progress on Phase 3, the new Phase 4 capacity expansion project. Finally, we are hitting the point in which the cost of an incremental dollar of sales have normalized versus the dilution in the last few quarters.
Now, thanks to our outlook last year, we believe we are well positioned to deliver on mid teens revenue growth in 2022, driven by a strong demand environment underpinned by material conversion and outdoor living trends, stereo pricing, Our innovative product portfolio and improved service levels will position us to win combined with our key growth initiatives, including new product launches. We are confident in our ability to execute on our margin expansion objectives driven by continued progress with our recycling initiatives and recycle reformulations and pre plant productivity and continuous improvement programs supported by more stable manufacturing operations, Operating leverage tailwinds provide strong end market demand and modest SG and A leverage as we lap the addition of new public company expenses. Additionally, our long term opportunity on structural margin improvements remains intact with regard to the price material inflation equation. For the full year fiscal 'twenty two, we expect consolidated net sales to increase by teens year over year. Due to the start up costs associated with our capital investment programs, we expect to deliver high teens adjusted EBITDA growth year over year and associated margin expansion.
For the Q1 of 2022, our total company guidance calls for net sales growth of 18% to 21%. From an adjusted EBITDA perspective, which improves start up costs, we expect year over year growth in the 14% to 17% range. The quarter includes approximately $2,000,000 plus of start up expenses, but also a bit of a lag in net price versus cost margin recovery. As a reminder, Q1 'twenty one had minimal inflation pressure. We expect to see leverage on our bottom line starting in late 20 22 and accelerate range throughout the second half of 'twenty two.
As previously highlighted, We are adding incremental capacity, which should be considered Phase 4, which brings us over 100% capacity increase by the end of calendar year 'twenty two when combined with the first three phases relative to the 2019 baseline capacity. In fiscal 2022, our capital expenditures will include the remainder of Phase 2b and Phase 3 as well as Phase 4 expansion and other initiatives. With the system of modeling, we expect approximately $180,000,000 to 200,000,000 and capital expenditures for fiscal 2022. We expect $21,000,000 to $22,000,000 of interest expense for the full year 'twenty two. Effective tax rate for 2022 is estimated to be approximately 25%.
The full year weighted average diluted share count is expected to be approximately 158,000,000 shares.
Speaker 2
Thank you, Keith. Once again, I'd like to take a moment to thank our entire AVEC team for their ability to achieve strong quarterly and full year results. Thank you to our customers and partners as well for their continued support of the ASAC Company. As we enter 2022, we will continue to build on our existing strategy and investments across people, manufacturing capacity and innovation, and we believe this positions the Company well for strong net sales and adjusted EBITDA growth. We remain excited about the many opportunities in front of us and believe we are well positioned to win in the industry.
With that operator, please open the line for questions.
Speaker 3
Yes, we can hear you. Okay.
Speaker 4
So, next quarter, guys. I think the first question is just, Jeff, the outlook for mid teens revenue growth, obviously, maybe 12% to 15% price complete Q2, that can leave a lot of volume growth. Can you just unpack that a little bit?
Speaker 2
Yes. First, let's just step back and take a look at the market and the opportunity that we see. As we talked about, we're adding capacity. We're in a great position to start to drive new volume growth. And we're in a terrific position to be able to get after new growth opportunities.
Relative to the modeling, specifically, Pete can get into that specifically. We are going to be lapping some additional pricing. So, I think the way to think of the guide roughly is about half price and I think we've indicated
Speaker 4
Got it. Okay. That's helpful. And then my second question, Any signs of slower thinking sell through or trade down given all the price increases?
Speaker 2
As we look at our data overall. We've seen very, very good growth in all of the
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segments that we play in.
Speaker 2
I think one of the challenges We've had last year is because of capacity constraints, we haven't really been able to service all of the community that's out there and all the volumes out there. So as we move forward, an example of that would be Landmark, right? So Landmark, we launched, We had to constrain that launch to certain geographies just because we didn't have capacity to service that. I think as we move forward, We continue to see opportunities with our innovation to be able to drive growth in really all the segments. And so As you look at decking in particular, we had really, really strong growth last year and we believe we're in a position to drive Really, really broad based growth coming forward.
And a lot of the data we see at a macro level and also in our own data supports Really continued growth on the vacuum side.
Speaker 0
Your next question comes from Tim Roche. Your line is open.
Speaker 3
Hey, guys. Good morning. Nice job.
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Just thinking about kind of the impact and thinking about seasonality
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a little bit, it's been a pretty kind of dynamic couple of years just in terms of quarterly cadence for
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revenue. At this point, how are you thinking about seasonality fiscal 'twenty two relative to normal. It does look like you
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see there's some kind of normal sequential seasonality that
Speaker 2
Tim, that's a great point. I think as just as a reminder in terms of the seasonality of our types of businesses and our business specifically, Typically, when you get into our 1st fiscal quarter into the 2nd fiscal quarter, you're dealing with really 2 quarters that involve aging for the subsequent year, right. So, you'll typically see in a normal environment, You'll typically see some inventory drawdown within our channel in our fiscal Q1, calendar Q4. And then you'll start to see a reinflation of that inventory as they prepare for the season in the second quarter. I think as we have done a great job of servicing the market, we see a more normalized progression moving forward as our capacity is catching up with macro market demand.
Okay. That's helpful. And then when you think about just on the recycling side, It looks like you made
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some really good progress on just the amount of materials that you're recycling. The percent
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That can you recycle for 66% I mean, where do you kind
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of see that going over the intermediate term? And just
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what are the biggest opportunities moving forward?
Speaker 2
Once again, great question. As you pointed out, we made a lot of progress in terms of expanding our sourcing of recycle and our processing of recycle. The challenge we had in 2021 was just our volume growth And really being able to keep up our recycle expansion again. As we move into 'twenty two, we have made additional investments in recycle and we would expect to be able to continue to expand our use of recycled materials. So, you should think of that percentage as having an opportunity to be above where we currently are.
And we haven't given a specific number, but We clearly see a path to
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be in the 60s over
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a period of time. And so as we are able to build up more internal capability and supply and do the reformulation work, we should be able to get there. And I think the second component is as we bring additional capacity online, That gives us line capacity to be able to finish the formulation and ramp up work to be able to increase percentage of recycled, but I think that's importantly validate and move forward with lower cost cycle. Okay. Is it fair to think that the focus there kind of incrementally, You kind of have more incremental focus on that kind of
Speaker 3
forward just to get things kind of normalized versus kind of trying to just have enough material in terms of Sourcing, can you confirm to the last couple of years?
Speaker 2
Yes, I think that's the right way to think of it. I mean, if you look at a macro environment, I'll use PVC as an example. There has been a lot of disruption in the virgin PVC market. Our expanded internal recycling of PDC put us in a great position to sustain supply and also balance some of the cost pressures on the Virgin. As we bring more capacity online, it certainly gives us the opportunity to really be able to And our use of recycled.
So I think it's the right way of thinking it.
Speaker 3
Okay. Okay, sounds good. Thanks guys. Appreciate the time. Appreciate it.
Thanks guys.
Speaker 0
Our next question comes from Matthew Bouley with Barclays. Your line is open.
Speaker 1
Hi. This is actually Ashley Kim on for Matt today. So, Tim, come back to the top line, DRISAT-twenty 2. Is now attending on new capacity today online or is that achievable on each of these capacities?
Speaker 2
Yes. I would say our capacity plan that we've laid out, and just as a reminder, we have fleet. That incremental 15% coming online by the end of the calendar year. We've got an additional 30% coming online, our Phase 3 at Boise, and we've just announced additional capacity of an incremental 15 that comes online by the end of calendar 'twenty two. We certainly have enough capacity with what we have and the modest adds that we've got coming in the next couple of months to be able to meet and exceed our guidance and then the additional capacity we've got coming online above that puts us in a position to be able to continue to aggressively stand in the market.
Speaker 1
That's much appreciated. And then just kind of staying on the top line, how confident are you that you'll be able to source the necessary labor and materials consumer recycled and offside in order to have a great utilization on those lines.
Speaker 2
Yes. We don't have In our ability to continue to scale, get the right raw materials and move down the path of recycling. The team has done a really nice job in arguably the most volatile environment already. And we feel really, really good about our opportunity to continue to execute at a high level and move Q and A So, we feel really, really good about it. We're always looking at it, but we feel confident.
Speaker 3
Yes. I'd just add again. I think our teams have adjusted really well to the new norms for the supply chain world from Cheap COGS and availability from the PVC side, I would describe the environment as capacity is back online. No concerns on availability. Be excited to see that healthier, I would describe this as, again, no availability concerns.
If anything, capacity
Speaker 0
Our next question comes from Phil Ng with Jefferies. Your line is open.
Speaker 3
Hi. This is actually Colin on for Phil. Thank you for taking my question. My first question, in your fiscal year 2022 guidance, what are you seeing on resin prices and availability with the contract prices and prices starting to fall off in recent months. Yes.
As far as what we're assuming Q3. For commodity prices, it's in line with most current TDIs. It's kind of embedded in that. It's kind of fairly stubborn PBC prices for the year 2022 and seeing some modest deflation on polyethylene in the back half of the year. And as mentioned on the supply chain comment, we actually feel pretty good right now about material availability and have no concerns on that.
Speaker 2
Okay, great. And then in terms of the startup costs, how can we think about the magnitude of those
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in the timing and cadence during fiscal year 2022?
Speaker 2
Yes. Look, that's going to move
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a ton of different project moves. But as we think about it right now, a good way to enough, if we think on an annual basis,
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it's about $8,000,000 to $10,000,000
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of start up costs. And we're calling the Q1 at about $2,000,000
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Our next question comes from Alex Rygiel with B. Riley Securities. Your line is open.
Speaker 3
Good morning and thank you for taking my questions. Jesse, in your prepared remarks, you stated aggressively go after new markets in wood conversion. What exactly did
Speaker 2
you mean by new markets? Well, so if you step back once again and you look at What we've gone through over the last 18 months, we have not been able, because of capacity constraints, to be able to go after new customer segments within our existing geographic footprint, Take us to U. S. And Canada. And so as we have seen opportunities to take on new dealers and new opportunities.
We have been constrained to that. And so, at one level, we see opportunity in certain geographies. And at another level, as I mentioned earlier, we have constrained certain products. And so as we have this additional capacity coming online, that will give us an opportunity to really go after some of those product segments that we've constrained. Some of those segments, downstream segments are somewhat obvious, Some are less obvious.
I'm not going to disclose any specifically, but we do see now that we have additional capacity to bring to bear, pretty meaningful opportunity at a number of of different contractors, dealers, customers and segments of products where we can be much more aggressive. So That's about as specific as I could get. That is helpful. And then you mentioned, I believe that leads were up 40% year over year. I'm sorry, was that measured over?
And
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what has
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your historical success rate in Palmeza and the leads. Yes, that's within Excuse me, that's within the fiscal year, in aggregate across the year. I think we've done analysis on our and John happens to be on also if he wants to comment. But as we've done As we've done analysis on the correlation between our digital activity and our sales, It is typically directional. We are at times able to validate whether or not a lead has closed and at other times not.
So we use that data as directional data and an indication of the future opportunity we have. And I think the opportunity or the challenge we have in that is just typically, As we talked about earlier, between a 2 14 month lead time from when a consumer engages on thinking about Building an outdoor living project and when they ask to execute. Thank you very much.
Speaker 0
The next question comes from Susan Baez of Goldman Sachs. Your line is open.
Speaker 3
Hey, good morning, everyone. This is Charles Perron in for Susan today. Congrats on the results and thanks for taking my question. The first question is on your capacity addition. Can you provide more detail there for the acquisition across product category?
You said that you were constrained in rail this year. Should you expect more additions going forward on the railings side that you've been taking? And also would like to know a little bit more about your exterior business. I mean, you said you're addressing 30% plus. And for Corning, can you talk
Speaker 2
about the need to add more capacity there as well? Yes. Let me take the latter question first. We have publicly disclosed on the decking side exactly how much capacity we've been adding. We have also been adding exterior capacity as part of our capital investment.
We just haven't disclosed So we had additional capacity on exteriors come online last year. We've got additional capacity coming online This year, both in our core products and our new products, and we've also had some terrific progress on both raw material sourcing and efficiency in that business. So once again, we've got it. It's in the capital numbers. We don't close specifically there.
We talked on your earlier question. On the rail side, We've made investments over the last 3 to 6 months, both on the supply chain, raw material and production side. We continue to ramp that up and we believe we'll be in a position as we move into Next calendar year to be able to continue to service that increased demand. And as you highlighted, we were somewhat constrained on that particular business in the last quarter, and we're bottlenecking some of that as we speak. And then on the decking side, I think We've disclosed that capacity progression.
And I'll just highlight, we have because of our new facility, we had a lot more room under our existing roof to expand our decking and rail capacity above what we've highlighted already. The buildings there, we have an opportunity to continue to expand.
Speaker 3
Okay. That's super helpful color. Thanks, Jesse, for that. And then my follow-up is on the trade situation, Darren, considering the 1 100% capacity additions between 2019 2022. What is the ability for trade to support that growth?
And is there any measures that you can put in place in terms of product design or training that you can help to help see there on the labor and trade side?
Speaker 2
As it relates to our contractor base, one of our innovation has been on driving more productive products. And so on the exteriors business, we had a number of products that we have launched that are really focused On contractor productivity, whether that be our J channel trim or Corners or column rats. These are products effectively meant to solve some of the contractor productivity issues. And similarly, one of our fastest growing products is our penalized rail system on the deck rail and accessories business that solve that problem. And then lastly, as you point out, we continue to invest in contractor training And we will now have 4 contractor training facilities, Including a new one in our Boise facility.
I think as you survey contractors and we do at length, They are they continue to work through the labor challenges themselves and we work them on continuing to educate their new employees and support them in the field with our sales force.
Speaker 0
Our next question comes from Ketan Mamtora with BMO Capital Markets. Your line is open.
Speaker 3
The balance sheet is in a very good shape.
Speaker 2
And perhaps from an M and A standpoint, what is
Speaker 3
most interesting to you guys?
Speaker 2
Yes. I'll just repeat. As we look at our capital allocation, the best Q and A opportunity we have and highest return on investment is investing in ourselves with capacity expansion and innovation in new products. And we have a stated objective of continuing to bring our business model into a broader area as it relates to outdoor living. And we have the internal organic capability to get here through our new product development, which we're continuing to invest in, and you'll see that unfold over the next few years.
As it relates to M and A Specifically, that is our stated second objective of use of capital. And we continue to have a really nice robust pipeline. And we believe that there's going to be opportunity for us to solidify our We feel good about the pipeline and as those deals come to fruition, you'll hear about Just one more on the channel inventory side. Do you think that you've gotten to a point where It's kind
Speaker 3
of reached more normal levels to
Speaker 2
be able to service customers or you
Speaker 3
think there's kind of more to be done there?
Speaker 2
As we talked about on the last call, during Q3, we made progress on getting our dealer channel inventory healthcare. And then as we move through Q4, We were able to continue that progress and get our distribution channel inventory healthier. There is still some room as we move forward over the next few quarters to continue to support our channel partners on inventory. But I would say right now, we are in a great position to really be able to attack the market and to continue to expand our service capability. We believe right now as we We are in the best, if not one of the best positions of any of the players in the industry to be able to service existing and new volume, which we think sets us up well for growth in 'twenty two.
Speaker 3
Got it. I'll turn it over to Roxanne FY 'twenty two. Thank you.
Speaker 0
Our next question comes from Michael Rehaut with JPMorgan. Your line is open.
Speaker 4
Good morning, everyone, and congrats on the results.
Speaker 3
First question, I'd love to just circle back a bit
Speaker 4
To some of the thoughts around the composition of the sales guidance, Sales growth guidance for next year fiscal 'twenty two mid teens. I think you said roughly half price, half volume. Just wanted to get a sense in terms of thinking about the impact of price throughout this year, Just to give you just kind of walk through, I believe there's been 2 or 3 price increases. Perhaps we're thinking about mid single digits for each, but perhaps you could clarify on that. I believe there is further pricing actions expected to be taken later this year that you alluded to.
And I thought we've heard that might be a bit of a higher percentage increase. Just want to make sure that we're thinking about that right, because all our people, it could potentially point to, If you just kind of flow all that through, perhaps even like a low double digit impact of pricing on fiscal 'twenty two. And I just wanted to understand if there's parts of that methodology that I've kind of laid out that maybe we're
Speaker 2
a little off center on. Yes. Let me take that.
Speaker 3
From a pricing perspective, as we articulated, we did in fact exit the Q4 kind of mid teens. What embedded in the 'twenty one pricing is, 1, we had a price action really right at the end of fiscal 'twenty That obviously carried over almost completely into 2021. Obviously, that lasts right now and goes away. And ultimately, as we hit the first half of the year, 'twenty one price increases, it does level us back to a full year good high single digits. And as far as sort of what does that mean again by quarter, just in our prepared remarks, We had articulated the company at least on a dollar inflationary basis.
We cover all 4 quarters of 'twenty two with price dollars completely. And then what's unique from PaperHouse for the first time is in the Q2, late 2Q, we finally expect to have price not only see the inflation dollars, but I can start to treat the margin rates, gross margin rates a bit.
Speaker 4
Okay. That's great. That's very helpful. So then, I guess kind of the second question, Q and A You're thinking more high single digit price that would if you go out mid teens, Then you talked to something in the mid single digits, let's say mid to potentially high. Certainly, fiscal 'twenty one is a great growth year.
With the additional capacity and the continued material conversion plus the additional distribution with Firehauser and and continued gains from that perspective. What's the ability for that, let's say mid to potentially high single digit volume growth? To us, it seems somewhat conservative. And I just don't know if there's something I'm missing or if you're just trying to be Somewhat conservative at
Speaker 3
the onset of the year. We have a we've
Speaker 2
got a stated guidance Long term, a base of 10%. And we'll update that as the quarters progress. I think we're really, really optimistic about our ability to continue to make share in the market As
Speaker 4
we move
Speaker 2
into 'twenty two, I think those of you that have been around us as management, we want to make sure that We are setting ourselves up to continue to progress and win in the future. And so at this stage, We feel really good about both the market opportunity, our ability to win in a disproportionate way in the market, And also we feel good about our guidance.
Speaker 0
Our next question comes from Kurt Yinger with D. A. Davidson. Your line is open.
Speaker 3
Great. Thanks and good morning everyone. I just wanted to go back to an earlier question around kind of recycling constraints. And I was hoping you could maybe put a little bit more color around the investments you're making there to perhaps alleviate some of those challenges. And then just as a kind of clarification, are those constraints more on sourcing, drone internal processing capabilities or just lack of line time to kind of implement formulation changes.
Yes. If I could hit that one, I think one of the greatest stories about 2021, as Jesse alluded to earlier was the performance and execution by our PTC recycling teams. If you look at the product lines and categories that they were According in 'twenty one, many of those product categories were growing mid-twenty percent to 30% on a volume basis. So the team really rallied to be aggressive and tight in terms of developing and finding new sourcing alternatives for us to put product in. We set CapEx to expand our return polymers capacity.
And then ultimately, The reality is, they covered enormous volume growth every one of those pounds. If we hadn't chosen to get virgin PVC, we would have seen meaningful more inflation. So as we think about recycling as a margin expander, it's also one of our best leverage against inflation. And when we think about 'twenty two and what we've learned from how to source, but in 'twenty one, The capacity expansions that we've put in and returned polymers, now number 3, what's significantly different is the extrusion lines And the capacity expansions coming online, it makes that third piece of the equation that much more executable that we now have line time to showcase the validations and reformulations that are required as the Conestep to decrease percentage content, PVC recycling as an example. Got it.
Okay, That's very helpful. And then just my second one on kind of conversion trends from wood. Any thoughts about the impact labor prices have really normalized here at the same time as you and others in the industry are raising prices. And What are the biggest kind of controllable focus areas for you in terms of working to maintain the elevated rated conversion we've seen over the last 2 years.
Speaker 2
Yes, I'll take that. As we mentioned on our previous earnings call, We did an extensive amount of research on wood conversion and that really led us to defining the market opportunity for conversion CEO, over the next few years is hitting the 50%. And when you dive into that research, The key element here is that people want a more natural looking product. And when they're outside, they don't want to stand on what they perceive as plastic. They want to be on a sustainable material that gives them the warmth and the feel of wood.
And I think too many times, I think other players in the industry will continue to highlight A specific economic equation as the only driver, I think there is a broad based set of criteria. And the fact that some of our most expensive products, which are the most expensive products on the market, continue to do well with wood conversion, just really highlights that because they're the most realistic product on the market. Now having said all that, I think if you look at wood pricing visavisbas3 level composite pricing, We're still in a really, really positive range. The models were never built at that opening price point on wood being in the 1,000. And so the equation for that entry level conversion has held for the last few years and we expect it to hold, but we also believe that there's a broader opportunity that's really around aesthetics, quality and educating the market that you can have at all.
Speaker 3
Appreciate it. Thank you.
Speaker 0
Our next question comes from Mike Dahl with RBC Capital Markets. Your line is open.
Speaker 4
Hey, guys. This is Ryan Frank on for Mike. Thanks for squeezing me in here. I'm just going to ask you to one in the interest of time. You mentioned that inventory levels have been improving.
I just if you could just peek out what in there
Speaker 2
is improved service levels versus maybe normal seasonality
Speaker 4
and slowing of demand. And then what level of restocking is included in the 1Q sale guide? That's all for me. Thank you.
Speaker 2
I'll just answer it at a very, very high level. We exited the year with our channel partners getting closer to where they wanted to be In order to have inventory to service the market, there was an earlier question relative to normal seasonality. And we still believe that there is a bit more opportunity to continue to solidify inventory in the channel. But as we move through the calendar Q4 and the calendar Q1, the inventory dynamics Really start to move towards positioning inventory for the subsequent year. And I think that's probably the best way to answer it is that we are in a great position to stage inventory as we come through the Q2 to be able to drive growth in the market.
Speaker 4
Got it. And then,
Speaker 2
1Q restocking and put it in the guide? Yes.
Speaker 3
There's very modest inventory build assumption in the first half of the year.
Speaker 4
Got it. Thank you very much.
Speaker 3
That's all for me.
Speaker 2
Now, I'll turn the conference over
Speaker 0
to Jesse for closing remarks.
Speaker 2
Thank you again for participating in the call. We're really excited about the future and we're really excited about our position as we exit 'twenty one and enter fiscal year 'twenty two. With that, thanks and we'll chat with you next time. Have a good day.
Speaker 0
This concludes today's conference call. You may now disconnect.