The AZEK Company - Q4 2024

Executive Summary

• Q4 2024 revenue was $348.2M, down 10% YoY due to a ~$35M timing shift and Vycom divestiture, but above consensus and the top of guidance; adjusted EBITDA was $91.8M (26.3% margin) and adjusted diluted EPS was $0.29, with GAAP diluted EPS at $0.19.
• Residential sell-through grew high single digits YoY in Q4; channel inventories exited the year below historical averages, supporting conservative staging into Q1 FY25.
• FY25 outlook: consolidated net sales $1.51–$1.54B (+5–7%), adjusted EBITDA $400–$415M (+5–9%), margin 26.5–27.0%; Q1 FY25 revenue $260–$266M and adjusted EBITDA $58–$60M.
• Strategic catalysts: new product platforms (Reliance vinyl rail, Fulton steel rail, TrimLogic PVC trim) expanding ~$2B addressable market, and Capital Lumber distribution partnership in the U.S. West; management flagged potential ~$10M upside from Western distribution (~$5M possibly in Q1).

What Went Well and What Went Wrong

• What Went Well
  • Revenue topped both consensus and the top of guidance; Q4 adjusted EBITDA margin expanded +10bps YoY to 26.3% despite lower volumes.
  • Residential sell-through grew high single digits in Q4; Deck/Rail sell-through grew high single digits while Exteriors rose low single digits, showing momentum into FY25.
  • New platforms (Reliance Rail, Fulton Rail, TrimLogic) broaden price points and materially increase addressable market; “we’re accelerating our market expansion into fiscal year 2025” (CEO).
• What Went Wrong
  • Q4 consolidated net sales fell 10% YoY to $348.2M; Residential -6% YoY and Commercial -47% YoY, primarily due to channel timing and Vycom sale; GAAP net income decreased by $10.9M YoY to $28.4M.
  • Quarterly cash generation softened: Q4 cash from operations $60.5M vs $126.6M prior year; Q4 free cash flow $37.8M vs $92.2M prior year.
  • Macro caution persists: FY25 planning assumes flat repair & remodel (R&R); management noted modest Exteriors softness and conservative channel inventories, implying near-term demand normalization rather than acceleration.

Transcript

Operator (participant)

Welcome to the AZEK Company's Fourth Quarter Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Eric Robinson. Please go ahead, Eric.

Eric Robinson (VP of Finance and 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 via 8-K on the SEC's website. I'm joined today by Jesse Singh, our Chief Executive Officer, and Peter Clifford, our Chief Operations Officer and Chief Financial Officer. I would like to remind everyone that during this call, we may make certain statements that constitute forward-looking statements within the meaning of the federal securities laws, including remarks about future expectations, beliefs, estimates, forecasts, plans, and prospects. Such statements are subject to a variety of risks and uncertainties, as described in our periodic reports filed with the Securities and Exchange Commission, that could cause actual results to differ materially. We do not undertake any duty to update such forward-looking statements.

Additionally, during today's call, we'll 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 supplemental earnings presentation, which are posted on our website. Now, let me turn the call over to AZEK's CEO, Jesse Singh.

Jesse Singh (CEO)

Good afternoon, and thank you for joining us. The AZEK team delivered another strong year, achieving record financial results that reflect our team's dedication to our mission of revolutionizing outdoor living and delivering sustained growth and margin expansion. The successful execution of our strategic growth initiatives in fiscal 2024 led to high single-digit year-over-year residential sell-through growth and 12% year-over-year net sales growth. This 12% growth was achieved on top of growing the Residential business 5% in 2023 and 12% in 2022. Since 2020, our Residential business has grown 77%. We have delivered nine consecutive years of Residential segment growth, and in 2024, we once again outperformed the broader repair and remodel market. Our Deck, Rail & Accessories business continues to lead the industry and delivered 18% sales growth for fiscal 2024.

Our continued focus on manufacturing productivity, cost reduction initiatives, sourcing, and operating leverage enabled us to deliver net profit margin expansion of 600 basis points year-over-year to 10.6% and adjusted EBITDA margin expansion of 560 basis points year-over-year to a record 26.3%. We expanded our margins while making incremental investments in SG&A, expanding our production, and launching new products. We generated strong cash flow, invested in future manufacturing and recycling capacity, and returned $243 million to shareholders through our share repurchase program. Our multi-year track record and demonstrated ability to outperform across various market backdrops give us confidence in our ability to continue driving growth and margin expansion through AZEK-specific initiatives in fiscal 2025 and beyond. Once again, I would like to thank our dedicated team members and business partners who share our vision to drive material conversion toward our types of sustainable, low-maintenance engineered materials.

Our performance is a result of the dedication and passion of AZEK's team members and partners to deliver the best products and experience to our customers. For the full year, fiscal 2024, Deck, Rail & Accessories sell-through grew double digits year-over-year, with each of the product lines growing over 10%. Overall, Residential segment sell-through grew high single digits for the year, including the Exteriors business, which, as discussed, saw some softness in the back half of the year. Our growth is a direct result of our new products, channel expansion initiatives, downstream sales engagement, and brand investments. During the fiscal fourth quarter, Deck, Rail & Accessories sell-through grew high single digits, and Exteriors grew low single digits year-over-year, improving modestly from the previous quarter. As we progressed through the fourth quarter, we saw improvement in sell-through growth. We have seen strength across pro and retail channel sell-through.

Our channel partners, sales team, and operations have worked together and done a great job of managing inventory while delivering very high service levels to our customers. We continue to see strong growth in our internal digital and engagement metrics and believe that there is underlying demand in repair and remodel and new construction markets that will be realized as the broader market and consumer confidence improve. Market trends, including an aging housing stock, the expansion of millennials as homeowners, a shift to more sustainable materials, and an increased focus on outdoor living should provide a growth environment for years to come. As part of our continuing strategy, we are investing across our core strengths of research and development, innovation, brand, customer relationships, and our world-class manufacturing operations.

In 2024, we saw incremental growth from new products and expect that these recent product launches will contribute to incremental growth in 2025. We recently announced three new product platforms for 2025 and believe that these launches will have an even greater impact on our future revenue opportunity. Collectively, our 2024 and 2025 new products will allow us to access more than $2 billion of addressable market opportunity. As part of sustaining our decking portfolio leadership, we recently launched the TimberTech Harvest+ Collection that offers homeowners the benefits of advanced PVC decking, which combines cool touch and fire-resistant functionality with a beautifully aged natural visual. In our Exteriors business, we continue to expand last year's launch of the Versatex XCEED lap siding product, which provides a premium alternative to vinyl siding. This product line will be manufactured in our new exteriors capacity expansion in Aliquippa, Pennsylvania.

In addition to ongoing line extensions in the business, we launched an entirely new trim platform, TrimLogic, a paintable PVC exterior trim targeting wood replacement in the more value-oriented part of the market. This new technology leverages our proprietary recycled technology and is made with up to 95% recycled PVC material. This is a major breakthrough in sustainable building materials and puts us in an even greater position to access and convert the over $1 billion part of the trim market that is still wood. In our railing portfolio, we are launching two new platforms to access a much broader percentage of the rail market. We discussed the Fulton Steel Rail in our last call, but we are also excited about our new TimberTech Reliance Rail, which is a premium aesthetic, value-oriented vinyl rail product.

Earlier this year, we acquired a vinyl railing OEM and made investments to create this exciting new product. This product leverages our proprietary PVC recycling capability and our differentiated PVC aesthetic to create a competitive alternative to other vinyl and wood railing products. With this product launch, we will be able to access the larger Good segment of the rail market and more aggressively target the approximately 65% of the market that is still wood. We believe we are in a terrific position to go after the approximately $275 million vinyl rail market and the over $1 billion wood rail market. The launch of these new products highlights our ability to offer a balanced portfolio across decking, railing, and exterior categories at multiple price points and features. New products are fundamental to what we do, and innovation is a core value.

The expense associated with our new product launches is part of our ongoing investments in SG&A, and we do expect to see some modest impact on our gross margins as we ramp up these exciting new products. During the quarter, we welcome Rakesh Mohan to our team as our Chief Digital and Technology Officer. Rakesh brings years of technology and AI experience to our team and joins us from Lennox International. Behind the scenes, we have been making investments and believe that these investments in technology-enabled solutions will expand our customer solutions in the coming months and years. Our investments in marketing and sales are driving significant momentum in our brand awareness among both homeowners and professional contractors.

TimberTech Decking and Railing and AZEK Trim were recently recognized by both Builder and Remodeler magazines' brand use studies as number one or number two in the brand awareness and brand most used in the last two years categories. TimberTech was also recognized by Good Housekeeping's 2025 Home Renovation Awards for our innovative TimberTech Vintage Collection, leveraging our advanced PVC fire-resistant technology. As mentioned on our last call, we are uniquely positioned with not only a Class A flame designation, but also in being designated as ignition resistant in the state of California. We recently made certain distribution changes that we believe will better align our company for the next phase of growth and material conversion. We have terrific partners and believe that our recent changes will increase the penetration of underserved markets and the expansion of our product portfolio.

Our new product platforms have put us in a great position to work with our channel partners and our contractors to provide a higher value and more complete solution to our customers. We will continue to optimize our business and channels to better position ourselves for future growth, brand building, market penetration, and material conversion. As we move into fiscal 2025, we expect our company-specific initiatives to once again provide us with an opportunity to outperform the market. We are seeing the benefit of our multi-year brand and consumer journey investments and our focus on broad material conversion. Residential sell-through growth continues to be positive, and channel inventories exiting the fiscal year were below historical averages. We believe that there is underlying R&R demand that will be realized as the broader market improves.

Our fiscal year 2025 planning assumptions assume an approximately flat repair and remodel market, and consistent with our historical track record, we would expect to outperform the market, again driven by AZEK-specific initiatives. While not currently in our assumption, if we start to see a recovery of the broader R&R market, we would expect to see a benefit during the year. We have started the year similar to how we ended 2024, with double-digit sell-through growth in October year-over-year and a planning assumption of mid-single-digit sell-through growth in fiscal year 2025. We continue to see positive momentum on our margins as we drive our continuous improvement, recycling initiatives, and leverage. Our margin initiatives put us in a good position to sustain and expand margins while making investments to drive new product growth, channel growth, and brand awareness.

Our current planning assumption is to grow our Residential segment by 5%-7% and Residential segment adjusted EBITDA by 6%-10% year-over-year. Overall, on a consolidated basis, we expect to grow our net sales 5%-7% year-over-year and our adjusted EBITDA in the 5%-9% range. I will now turn the call over to Peter to provide some additional context on our financial results and outlook.

Peter Clifford (COO and CFO)

Thanks, Jesse, and good afternoon, everyone. As Eric highlighted at the beginning of the call, we have uploaded a supplemental earnings presentation on the investor relations portion of our website. Before we get into the fourth quarter and full year 2024 results, I wanted to take a moment to reflect on the past year. When we offered our planning assumptions back in November 2023, we were facing uncertainty in the macro environment.

At the time, we said our ambitions were clear that we wanted to execute at a high level against the following. From a growth perspective, we wanted to outperform the R&R market by 5%-7% via our growth playbook. From a margin perspective, we wanted to make significant progress executing against our margin expansion opportunities. From a portfolio perspective, we wanted to continue to drive the portfolio closer to pure play residential focus. From a free cash flow perspective, we wanted to generate attractive free cash flow via strong cash conversion as well as disciplined CapEx. From a capital deployment perspective, we wanted to be good stewards of our capital. And lastly, from a sustainability perspective, we wanted to make progress on our journey to utilize more landfill-bound recycled materials in our products.

On all these points, the AZEK team was able to effectively manage the business and outperform expectations in fiscal 2024. From a growth perspective, our growth playbook enabled high single-digit residential sell-through growth, all while experiencing a flattish decking market and a modestly negative exteriors market. From a margin perspective, we expanded our adjusted EBITDA margins by 560 basis points while still investing in growth initiatives within SG&A. From a portfolio perspective, we found a better owner of a Vycom business at a reasonable valuation. From a cash generation perspective, we generated $224 million of cash from operations and approximately $150 million of free cash flow during the year. From a capital deployment perspective, with the strength of our cash generation coupled with the proceeds from the sale of the Vycom business, we repurchased $243 million of stock during the year.

As well, we approved the new $600 million share repurchase program, refinanced our Term Loan B, retired $150 million in debt, and expanded our capacity by $225 million with a new cash flow revolver. And lastly, from a sustainability perspective, we increased the recycled content of our extruded products from approximately 57% in full year 2023 to approximately 64% in full year 2024. In Q4 2024, we experienced high single-digit sell-through growth in our Deck, Rail & Accessories portfolio, including our Pergola business, and a low single-digit positive sell-through in our Exteriors portfolio to bring total residential sell-through to approximately high single digits. In 4Q, we continued to work with our channel partners to keep channel inventory levels low given our compressed manufacturing lead times. We ended September with channel inventory days on hand approximately 10% below historical levels and similar days on hand versus the prior year.

Consistent with past quarters, we surveyed a broad base of both our contractors as well as our dealers to better understand the environment on the ground. We pride ourselves on being a company that stays close to its customers. Our contractors reported continued stability, with their backlogs remaining at seven-plus weeks, just above pre-pandemic levels. From a sentiment perspective, our contractors and dealers continue to see a constructive growth environment in the quarter and through the near term. On the digital side, we saw strength in both samples and contractor leads. From an operating perspective, we continue to see stability in our manufacturing environment. Production levels were consistent with the prior year. Material input cost remained stable and non-inflationary, and we continued to make incremental advances in our productivity, sourcing savings, and recycling initiatives to drive gross margin expansion year-over-year.

For the fourth quarter of fiscal 2024, we delivered consolidated net sales of $348 million, which was above both consensus as well as the top of our guidance range. Our 4Q 2024 net sales were impacted by the previously discussed timing of channel partner purchases to achieve higher service levels in the prior quarter and the $18 million net impact from the divestiture of our Vycom business in our Commercial segment. 4Q 2024 gross profit came in at $130 million, and gross margin was 37.3%. 4Q adjusted gross profit came in at $134 million, and adjusted gross profit margin percent was 38.4%. The adjusted gross profit decline was driven primarily by the previously mentioned lower sales volume. GAAP SG&A expenses decreased by $6 million year-over-year to $79 million. The decrease is primarily driven by a normalization of marketing expense as well as modest reductions in administrative costs.

Adjusted SG&A expenses decreased by $5 million year-over-year to $66 million. Adjusted EBITDA for 4Q 2024 decreased by $10 million, or 10% year-over-year, to $92 million. The adjusted EBITDA rate for the quarter increased 10 basis points year-over-year to 26.3%. Net income for 4Q 2024 decreased year-over-year by $11 million to $28 million, or $0.19 per share. Adjusted net income for 4Q 2024 decreased year-over-year by $9 million to $42 million, or adjusted diluted EPS of $0.29 per share. Now turning to our segment results, Residential segment net sales for 4Q 2024 were $327 million, down 6% year-over-year, driven by the previously discussed timing of channel partner purchases to achieve higher service levels than the prior quarter. Residential segment adjusted EBITDA for Q4 2024 came in at $86 million, down 7% year-over-year. Residential segment adjusted EBITDA margins were 26.3%.

Commercial segment net sales for the quarter were $21 million, down 47% year-over-year, primarily due to the sale of the Vycom business earlier in the fiscal year. Commercial segment adjusted EBITDA for the quarter came in at $5.8 million, a decrease of $3.4 million year-over-year, again primarily driven by the disposition of the Vycom business. From the balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $164 million and approximately $373 million available for future borrowings under our revolving credit facility. Working capital, defined as inventory plus accounts receivable minus accounts payable, was $216 million, up $19 million year-over-year. We ended the quarter with gross debt of $529 million, which included approximately $89 million of finance leases. Net debt was $365 million, and our net leverage ratio stood at one times at the end of 4Q 2024.

Net cash from operations was $60 million during the fourth quarter, a decrease of $66 million year-over-year. Capital expenditures for the quarter were approximately $23 million. For the fourth quarter, free cash flow was $38 million, a decrease of $54 million year-over-year. As previously announced, we initiated a $50 million accelerated share repurchase in August. Under the terms of the agreement, the company received an initial one million shares, with final settlement expected in the first quarter of 2025. The company also repurchased an additional 448,000 shares in open market transactions for an aggregate purchase price of approximately $18 million. The remaining authorization under our share repurchase program is approximately $560 million. Our capital allocation priorities remain the same, as we previously communicated.

We will continue to invest in our business both organically and inorganically, and to the extent we have excess cash flow, we will look to repurchase shares opportunistically. As we turn to the outlook, let me provide some context and color on our key planning assumptions for the upcoming fiscal 2025. We are assuming for the full year 2025 that the R&R market will be approximately flattish. Even with a flat market, we are incredibly confident that our AZEK growth playbook and specific AZEK carryover wins will enable us to continue to drive above-market growth. Our planning assumptions have incorporated the potential impact of retail and pro-channel activity for the year. We expect to grow our residential net sales by approximately 6% year-over-year in fiscal 2025 at the midpoint of our planning assumptions.

The sum of these carryover impacts and growth assumptions drives our high-level planning assumptions for fiscal 2025 to $1.51 billion-$1.54 billion in revenue and $400 million-$415 million in Adjusted EBITDA. Our net sales guidance range would imply 5%-7% year-over-year growth and 5%-9% year-over-year growth in our adjusted EBITDA. Our Residential segment planning assumption for the year is $1.439 billion-$1.466 billion in net sales and $388 million-$401 million in segment-adjusted EBITDA, representing 5%-7% net sales growth year-over-year and 6%-10% segment-adjusted EBITDA growth. A few other assumptions for fiscal 2025 to share include the following. We are expecting a capital expenditure range of $85 million-$95 million, consistent with our publicly stated target of CapEx of approximately 5%-7% of revenue. We are expecting depreciation of approximately $94 million-$98 million.

We are expecting interest expense of approximately $27 million-$31 million. We are targeting working capital approximately flat as a percent of sales at 15%. And finally, as detailed earlier, we are expecting a GAAP tax rate for the full year of approximately 27%. For additional planning assumptions to assist with modeling fiscal year 2025, please refer to the supplemental earnings presentation we had posted on our investor relations website. Before we turn to our guide for the first quarter, I wanted to provide context for the operating environment we expect in fiscal 1Q 2025. For the quarter, we are expecting residential sell-through growth in the mid to high single-digit range. From an inventory staging perspective, we expect our channel to remain conservative and exit the first quarter with channel inventory at or below historical days on hand, in line with the last couple of years' behavior.

As a reminder, this is the period of the year in which the industry negotiates shelf-space positions and stages inventory in the channel ahead of the upcoming building season. AZEK historically ships channel inventory replenishment, otherwise known as early buy, in our second fiscal quarter, and we are assuming that effectively all of this volume will ship in fiscal 2Q 2025. Channel inventories were positioned conservatively at fiscal year-end, and we are proactively managing our own finished goods inventory levels to maintain high levels of service. I want to note that our guidance does not include the impact of our Western distribution alignment, which could be modestly favorable for the first half of 2025, but we are not certain of the timing between fiscal 1Q 2025 and fiscal 2Q at this time. From an operating perspective, we expect continued stability in our manufacturing environment.

We expect stable and non-inflationary material input costs, production levels relatively flat compared to the prior year, and continued progress against our productivity initiatives. Taking these factors into consideration, our guidance for the quarter is $260 million-$266 million in revenue and $58 million-$60 million in adjusted EBITDA. Our net sales guidance range would imply 8%-11% year-over-year growth and 6%-9% year-over-year growth in adjusted EBITDA. As a reminder, our prior year 1Q 2024 results included one month of our Vycom ownership, which contributed approximately $3 million of net sales and negligible adjusted EBITDA for the quarter's results prior to the divestiture. Our Residential segment guidance for the quarter is $247 million-$252 million in net sales and $57 million-$59 million in adjusted EBITDA.

Our net sales guidance range would imply 11%-13% year-over-year growth and 9%-13% year-over-year growth in segment-adjusted EBITDA. We are expecting an effective tax rate of approximately 27% for the quarter. Our team is excited, engaged, and well-prepared to tackle the environment in front of us in fiscal 2025. With that, I'll now turn the call back to Jesse for some closing remarks.

Jesse Singh (CEO)

Thanks, Pete. We delivered another strong year of financial performance thanks to our dedicated team members, channel and supplier partners, contractors, and homeowners that share the same vision as the AZEK Company. We are well-positioned to drive growth in fiscal year 2025 and double-digit growth and margin expansion over the long term by continuing to execute our strategy. With that, Operator, please open the line for questions.

Operator (participant)

Thank you. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Please limit to just one question per caller so we can get to everyone in the queue. Your first question comes from the line of Matthew Bouley with Barclays. Please go ahead.

Anika Dholakia (Assistant VP of Equity Research)

Good evening. Anika Dholakia on for Matt today. Thank you for taking my question. So I just wanted to hone in on sell-through a little bit. On your fiscal year 2025 assumption for mid-single-digit sell-through, wondering if you can parse out how we should think about this in terms of deck versus exterior. And then wondering if there's any read-throughs from higher channel partners or thinking about inventories or just their overall outlook for 2025. Thanks.

Jesse Singh (CEO)

Yeah, thanks for the question.

I'll just start with, as we highlighted, 5% is very similar to the number we started with last year at this time. It's assuming a zero growth market, and then on top of that, we have an intent to drive growth above that. And so that's how you get to the 5%. We're not necessarily parsing out between the two businesses. I think if you look at our track record over the long horizon, the two businesses have been relatively similar. I think if you look at us in our most recent quarters, you would see decking being a bit higher, as we have called out, than our Exteriors business. So it's safe to assume that modestly decking might be higher, but once again, we're not at that level of specificity. And then relative to channel sentiment, it's positive. I think people are waiting for the season to unfold.

We've had good demand in the quarter that we're in. We ended last quarter with good demand. And I think they're setting up similar to this year for us. They are setting up to have a relatively normal year, and I think they're approaching their buying patterns and how they view the opportunity in a very normalized fashion. So you should expect, and we expect, a pretty normal progression as we go through 2025.

Anika Dholakia (Assistant VP of Equity Research)

Great. Thank you. Good luck.

Jesse Singh (CEO)

Thank you.

Operator (participant)

Our next question comes from Susan Maklari with Goldman Sachs. Please go ahead.

Susan Maklari (Senior Equity Research Analyst)

Thank you. Good afternoon, everyone. My first question is thinking just a bit about the SG&A as we move through the year.

Given the new product launches and the efforts to support some of these distribution wins, just any thought on the marketing, the sales effort, and how that will flow through over the next couple of quarters?

Peter Clifford (COO and CFO)

Yeah. I think one of the things that we did very well this year was continue to invest and double down on growth opportunities within the marketplace. And what gave us that flexibility was the strong execution on the gross margins. And I think that's a philosophy that we would carry forward to 2025. Any extra strength we might see in gross margins, we would want to withhold the right to continue to invest some of that back into growth on the SG&A side. So I'd say more of the same, Sue.

Jesse Singh (CEO)

Yeah. I think, and I called it out in our prepared remarks, we have been launching new products and bringing new solutions to the market pretty consistently over the last few years. That, I would say, is embedded in our SG&A. It's part of how we operate. And so this level of activity, albeit a little higher this year with the terrific new product launches we have, is not unusual for us in that we constantly invest in expansion.

Susan Maklari (Senior Equity Research Analyst)

Okay. That's helpful. Then you mentioned that your overall guide implies a flat R&R, so there's potential that you could see some upside there if that does end up being a bit stronger than you expect. What are you thinking of the setup that could drive some of that recovery in R&R? And how do you think about the potential that decking could outperform just broader R&R on its own in there and what that could imply for your growth this year?

Jesse Singh (CEO)

Yeah. I think in general, if you step back and you look at our growth thesis, and once again, we've got a 10-year track record now of 12% CAGR. If you look at that growth thesis, it's typically R&R. On top of that, you get a benefit in material conversion, which benefits us on both of our products. And then you get a bit more of an emphasis on outdoor living, which historically has outgrown that. And then, of course, you've got company-specific initiatives. So all of that is what historically we've stacked up to our 11+% growth algorithm.

So I think as we look at the market moving forward, there's certainly a fair amount of third parties that are talking about increased R&R growth. I think for us, as we come into the year, we just think it's prudent to assume flat. It would be unusual to have three straight years of either flat or negative in the R&R space, almost unprecedented. But as a planning assumption starting out, similar to what we did last year, we think it's appropriate to assume a flattish market and then see where the market ends up.

Susan Maklari (Senior Equity Research Analyst)

Yeah. Okay. Thank you both for the color. Good luck with everything.

Jesse Singh (CEO)

Appreciate it. Thank you.

Operator (participant)

All right. Our next question comes from the line of Michael Rehaut with JPMorgan. Please go ahead.

Andrew Azzi (VP of Equity Research)

Hi, everyone. This is Andrew Azzi on for Michael Rehaut. Appreciate you taking my questions.

I just wanted to—I would love to get a better sense of how sales are trending by price point, maybe within your good, better, best category framework.

Peter Clifford (COO and CFO)

Yeah. This is Peter. Just in terms of premium versus entry, what I would say is, look, we're not seeing anything meaningful from a mixdown perspective. That's been pretty consistent all year. The premium category growth rates are robust. Our Good category, as we've called out for the last couple of quarters, is growing modestly faster, and we view that really as share pickup. We've been out of that entry price point largely coming out of the pandemic when we didn't have capacity. And we've relaunched kind of Prime and Prime+ and supported that with capacity, and that's paying dividends.

Andrew Azzi (VP of Equity Research)

Thank you. I appreciate that.

And then from, if I could get a rough sense of the sales impact from kind of your distribution expansion within Canada and even very recently your partnership with Capital Lumber in the West, would love to get some way to think about kind of the sales impact from that.

Jesse Singh (CEO)

Yeah. At a high level, we haven't necessarily called that out. I think if you look at what we talked about on the last call in Canada with Doman, that gives us access where we had single distribution, and we now have double distribution, and it gives us access to the western part of Canada. I think on the Capital front, it really sets us up with their downstream focus to continue to drive more conversion.

I think what Pete called out in his prepared remarks is we do expect some benefit in the first half of the year from our western distribution expansion. And so we will see some incremental volume as we progress in Q1 and Q2. And that would potentially be upside to our guide. And just to frame that a bit, it's about approximately $10 million, and that's potential upside of $5 million within Q1.

Andrew Azzi (VP of Equity Research)

Got it. Very exciting. I appreciate it. I'll pass it on.

Operator (participant)

Our next question comes from the line of Tim Wojs with Baird. Please go ahead.

Tim Wojs (Senior Research Analyst)

Hey, guys. Good evening. Nice job.

I guess maybe just first question, Jesse, if you just kind of step back and you look at the sell-through numbers kind of re-accelerating here, kind of Q3 to Q4 and I guess into Q1, anything as you've kind of looked at data or kind of talked to your channel partners that would kind of drive the reasons behind that re-acceleration?

Jesse Singh (CEO)

Yeah. First, it's a good question. And we have chatted with a number of channel partners. And historically, when we came into August, late July into August, there would be a little bit of a pause, in particular, and think of Long Island and the Cape and areas where people are vacationing. There would be a bit of a slowdown in demand. And then seasonally, that demand would pick back up as in the fall, think of September, October, and if the weather's good into November.

And I think as we've seen this play out, it seems to be going back to a more seasonal pattern, almost a back-to-school kind of last working on the house pattern on the DIY side and then a similar set of activity in the contractor side. So I think we've seen positives throughout the year. And this pattern of a little bit of a slowdown in August and a bit more of a re-acceleration in the fall is not unusual. And we view this whole thing as coming back to normal. You might see and hear that there might have been a pause related to the election. I don't know that we can see that. We saw that pattern of things coming back prior to the election.

Tim Wojs (Senior Research Analyst)

Okay. Okay. That's helpful. Thanks.

And then just, I guess, as you kind of look at the price-cost equation, Pete, kind of in fiscal 2025, any kind of cuts and takes you would kind of outline there?

Peter Clifford (COO and CFO)

Yeah. I'd just say similar to 2024. I'd say the assumption on the pricing side for 2025 is not quite back to normal pricing on decking, but closer to it. And as we saw in 2024, we'll continue to have a little bit of backside kind of program management, primarily on the Exterior side, and that kind of 100-150 basis points. So let's call it net pricing positive, but negligible, probably less than a point. And so right now, just from a commodity perspective, it's the best news, I guess, that it's kind of boring right now, that ultimately, a couple of months ago, it felt like there might be some inflation creeping in.

And in the last 45-60 days, it feels like more of a stable deflationary environment, if anything.

Tim Wojs (Senior Research Analyst)

Okay. We'll take boring. Thanks a lot, guys.

Jesse Singh (CEO)

Great. Thanks, Tim.

Operator (participant)

Our next question comes from the line of Phil Ng with Jefferies. Please go ahead.

Phil Ng (Managing Director)

Hey, guys. Congrats on a solid quarter and strong finish to the year. I guess if I had a nitpick, I mean, certainly margins, you guys are calling for decent margin expansion, call it 20-60 basis points. But I would have thought with all the self-help initiatives, you could drive perhaps more than that. You did kind of lead to maybe some investments. Can you, Pete, perhaps call that out, how much of a drag that might be or a load-in? And as we look out longer term, you're not far from your longer-term margin targets.

What are some of the levers that you have at disposal? Just remind us where you are with the recycling and some of the product reconfiguration stuff.

Peter Clifford (COO and CFO)

Well, a couple of things that make sort of the fourth quarter a little bit unique. So obviously, last year we called out we had kind of a one-time benefit on some utility bills of about $1.8 million that didn't reoccur. We had the Lowe's kind of assistance on sort of the pricing on the transition on their inventory stocks. Those are a couple of things that are kind of both impacting the year-over-year kind of fourth-quarter quality of earnings. But as we look out to next year, I think the opportunity set is still the same that we laid out at 2022 Investor Day.

I think we've kind of said in general, a quarter or two ago, we probably executed against about half of that opportunity set. So there's still plenty of headroom across all three of the recycling opportunities, whether it be PVC deck, our Exteriors business, as well as sort of our move to low density. We're making good traction on product configuration. And certainly, I think we demonstrated very well this year that every incremental pound of sales gives us incremental pounds of production, which gives us a tremendous opportunity to leverage those in the plants. And as Jesse mentioned earlier, certainly if R&R is better than what we pegged, traditionally, we put out there an incremental margin rate of kind of mid-30s.

And depending upon the magnitude of that upside, if it were significant, again, I think we feel really positive that our plants have responded well to incremental pounds of production.

Jesse Singh (CEO)

And just your question on the target, obviously, we're well on our way to achieving that by 2027. I think the way you should look at it right now is, and once again, it's within our control investment, how we launch products, all of that. But you should look at it as we're on track to achieve that earlier.

Phil Ng (Managing Director)

Okay. Super. And from a cash flow standpoint, strong cash flow, you guys bought back a decent amount of stock. When you look at 2025, Jesse, how are you thinking about your priorities? Are you going to get back in the M&A market? Have you seen some opportunities out there that could be compelling versus buybacks? How do you think about it?

Jesse Singh (CEO)

Yeah. At a high level, the priorities continue to be the same, which is the best return we can get is if we see opportunities to continue to invest in the business. I highlighted that we acquired a small vinyl rail manufacturer. It was a relatively modest expense, and then we put a little bit more investment in there. Those sorts of, call it tuck-ins or adjacent, whether it be in recycle or whether it be in core or near-adjacent products, those where we can add value are just terrific uses of our capital. We continue to invest 5%-7% of our money against capital projects. All of those are really beneficial. And then, as you point out, we actually, by retiring debt, that gives us some opportunity to even be more efficient relative to cash generation with lower interest.

That leaves money left over. And I think as we consider it, we have been actively evaluating a number of acquisitions. We love our current business model. And I think it's important that anything we do is additive and fits our same investor day page. And so that's a pretty high bar. But once again, we found great opportunities, the one in May. And we expect that we'll continue to find smaller opportunities, and we'll see if there's something more significant that would fit it. So we're looking.

Peter Clifford (COO and CFO)

And I'd just add that anytime good recycling assets come on the market, you should expect us to be aggressive. The returns are great. And candidly, it's a way to extend the moat on our business and keep the verticality of our supply chain intact.

And from a repurchase perspective, similar to the last two years, if we are not able to deploy on M&A because we're going to remain disciplined, we will be both programmatic as well as opportunistic on the share repurchases against that new program that we just approved last quarter for $600 million.

Phil Ng (Managing Director)

Okay. Appreciate the color, guys.

Jesse Singh (CEO)

Thanks, Phil.

Operator (participant)

Our next question comes from the line of Keith Hughes with Truist. Please go ahead.

Keith Hughes (Managing Director of Sell Side Equity Research)

Thank you. I think you had said, Jesse, in the prepared remarks that sell-through was double-digit in October. If that's correct, I mean, that's a notable improvement of what we saw in the summer. Are there any products that in October they're moving? Or is there something about this that's unique and one-time in the month?

Jesse Singh (CEO)

I wouldn't say it's one-time. If you think about the previous answer to the question, there's always seasonality related.

Maybe there was a pause over the summer that accelerated, and so there's always some dynamics, but in general, if you look at the pattern that we had, we saw nice sell-through growth in a lot of our products.

Keith Hughes (Managing Director of Sell Side Equity Research)

Okay. Great. Thank you.

Operator (participant)

Our next question comes from the line of John Lovallo with UBS. Please go ahead.

John Lovallo (Managing Director and Senior Equity Analyst)

Good evening, guys. Thanks for taking my questions. The first one is, I thought when we spoke last quarter, there was a mention of $40 million of carryover from Doman and Lowe's expected in the first half of the year. Did I remember that incorrectly? If not, I mean, what does the cadence of that look like in the first half?

Jesse Singh (CEO)

Yeah. I would say high level. The way to think of it is coming into this year, we have talked about carryover on an annualized basis of a number of different things. Obviously, whatever shelf gains we had in the pro during the year, that carries over. Whatever shelf gains we've had in other areas, that carries over, and then additive to that is if we're able to turn some of these distribution additions into shelf gains at a dealer and contractor level, that also carries over into the year, and then add to that, some of these are some of the things I just described are also interrelated to new products, and so we had new products that launched last year. We've got new products that launched this year, and as those products come to market, that gives us a bit of a tailwind because they need to be placed within the market.

And then the last tailwind is really around our contractor and consumer wins. We added 2,000 contractors into our system in the last fiscal year. And we've had major step-ups in consumer engagements with samples and contractor leads, meaningful step-ups there. So when you think about tailwinds coming into the year, we're not going to specifically call out an aggregate number. But I think the wording may have been, "We're coming into this year with as high a confidence relative to the initiatives and the potential benefit in 2025 as we've had in any other year." And as that manifests itself, there's typically a little bit of fill on some of the distribution expansion. And then the rest of it flows through as the demand patterns emerge throughout the year.

Peter Clifford (COO and CFO)

And I'd just add, John. I mean, on the first quarter, if you looked at the difference between sort of sell-through and sell-in as not early buy, that's basically what you're asking about. It's the load-in on those two opportunities.

John Lovallo (Managing Director and Senior Equity Analyst)

Okay. Got it. And then just on that first quarter guide, it looks like it implies about an 18% year-over-year incremental margin versus what's normally closer to kind of mid-30s. Is there some investment spending going on there? What's kind of negatively impacting the incremental?

Peter Clifford (COO and CFO)

I mean, candidly, our siding products business is down a little bit year over year. There's been a little bit of inflation in that business, and we've taken pricing action now to kind of get that back.

John Lovallo (Managing Director and Senior Equity Analyst)

Okay. Thank you, guys.

Jesse Singh (CEO)

Thank you.

Operator (participant)

Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please go ahead.

Mike Dahl (Managing Director of Equity Research and Homebuilders and Building Products Analyst)

Hi.

Thanks for taking my question. I want to go back to the gross margin side, and I think Phil kind of asked around it, but just can you help us quantify? You alluded to some of the gross margin headwinds of the new products ramp. What specifically are those, and then the bigger picture question is, to the extent that some of these launches to expand your addressable market are expanding kind of your good part of the portfolio, so even if you're a premium vinyl, premium steel relative to the market, it's still in a different part of the market than you've played in the past. How should we be thinking about the margin profile on things like steel railing or vinyl railing or the paintable trim?

Jesse Singh (CEO)

Yeah. So I think if you step back, anytime you launch a new product platform, with the exception of if you change a color and decking, but almost any other new product platform has a ramp, right? So you start making the product, you make it at lower production levels, you scale that up. And even the running of trials for that product, so while you're tweaking the product, etc., you run higher scrap. All of that is an investment in the expansion of a new product. So when you're thinking about new products and investment, to some extent, we're always doing that. I'm just highlighting that it's something that we're offsetting, and we always offset as we expand our margin.

And then the long-term margin opportunity with the products we launch, we design our products in such a way, for the most part, that when we add a product to the portfolio, either near launch or we see a path towards getting to an appropriate margin for us. And that the vast majority of products, we're going to play in that same domain. And if you look specifically at a vinyl rail product for us, we have the ability to use recycled PVC. We blend our own PVC internally. And we also have a specific capstock. And we're pretty good at extruding and manufacturing PVC.

So even though we're coming into a different part of the market, not dissimilar from decking, we're bringing a lot of expertise and capability that will allow us to provide a terrific value for the consumer, but also put us in a really good position to continue to grow with good margins.

Mike Dahl (Managing Director of Equity Research and Homebuilders and Building Products Analyst)

Thanks, Jesse.

Operator (participant)

Our next question comes from the line of Adam Baumgarten with Zelman & Associates. Please go ahead.

Adam Baumgarten (Managing Director)

Hey, guys. Thanks. Just to clarify on SG&A, Peter, do you expect similarly, I guess relative to history, elevated levels on SG&A in fiscal 2025? And if that's the case, when do you think you'll really be able to kind of unlock the SG&A leverage more meaningfully going forward?

Peter Clifford (COO and CFO)

Yeah. I think that next year we will still achieve some modest leverage in SG&A.

Adam Baumgarten (Managing Director)

Okay. Got it. And then just curious on the near-term opportunity in railing.

I know you mentioned the vinyl product. One of your large competitors has some pretty bold plans in that part of the market. Maybe how are you thinking about the railing opportunity outside of just the size, which that was helpful, but the railing opportunity for AZEK specifically, and maybe how your strategy could be a little bit different, or maybe it is similar?

Jesse Singh (CEO)

Yeah. This is an area that is very core to us, and so we're Deck, Rail & Accessories. Six years ago, we bought an aluminum rail company that has scaled to be one of the best aluminum solutions. We bought a premium PVC rail company with Intex. We have differentiated technologies in PVC, which puts us in a position to be able to be very competitive in many parts of the market, so for us, when we look at rail, it's just core.

There was a few product offerings where we didn't, as we mentioned, good, better, best. We weren't necessarily where we wanted to be on the good side. And so we have addressed that with these most recent launches. And we just feel like we're in a really good position to continue to do in rail, in exteriors, and in decking what we have been doing, which is launching these new products, converting more of the market, securing more channel presence, and giving our customers the right alternative where we can provide them with a solution. And that's been very helpful as we've expanded and worked with our core distributors and new distributors. It's been very helpful as we engage our channel partners and our contractors.

Adam Baumgarten (Managing Director)

Okay. Thanks. Best of luck.

Jesse Singh (CEO)

Yeah.

The only other thing I would say is in the last couple of years, we haven't called it out specifically. Rail has been a really nice contributor to our growth.

Operator (participant)

All right. Our next question comes from the line of Ketan Mamtora with BMO Capital Markets. Please go ahead.

Ketan Mamtora (Director of Building Products Equity Research)

Good afternoon, and thanks for taking my question. You've talked about sort of your R&R assumption. I'm just curious, as you think about the Exteriors business, from a planning purpose, how are you thinking about new resi growth? Because if we see sort of demand pick up there, it could help your Exteriors business. So how are you thinking about that?

Jesse Singh (CEO)

It's a good question. I think in aggregate, we're thinking of both sides of the business as, for lack of a better term, status quo. We're not baking in an assumption of acceleration in either market.

Ketan Mamtora (Director of Building Products Equity Research)

Understood. Okay. That's perfect. I'll turn it over. Thank you.

Jesse Singh (CEO)

Great. Thank you.

Operator (participant)

Our next question comes from the line of Kurt Yinger with D.A. Davidson. Please go ahead.

Kurt Yinger (Senior Vice President and Research Analyst)

Great. Thank you. I just wanted to spend a minute on the competitive landscape. And you've discussed some of the distribution shifts. You guys have taken a not insignificant amount of retail business from some of your smaller peers here. Presumably, that will yield some competitive response. I guess, how are you thinking about the opportunity set out there going forward to continue to consolidate market share kind of on the offensive side while also being mindful of how others may react or respond from kind of a defensive perspective?

Jesse Singh (CEO)

Yeah. So the short answer is our focus is really on growth in the market.

And the best opportunity we see for growth in the market is putting ourselves in a position where we can drive more conversion in the market. We had that rail discussion just the earlier question. 65% of the rail market is wood. Decking's still 75%. A trim has a meaningful percent that's in wood or wood-like products. And so for us, as we're evaluating expansion in retail pro distribution, we're really looking to set ourselves up in a way that can drive growth for ourselves and potentially growth in the marketplace. I think as you look at the landscape, there's always competitive movement. And I think for us, our goal is to be a net beneficiary of movement in the channel, whether that be pro or retail.

And we're in a really good position, we believe, to really continue to expand and benefit from transitions that are going to occur in the marketplace.

Kurt Yinger (Senior Vice President and Research Analyst)

Got it. And maybe just following up on that material conversion dynamic, it's maybe a little bit lost in all of the other discussion. But beyond kind of year-in-year-out marketing at the consumer level, what else do you think is important in continuing to expand kind of that dynamic?

Jesse Singh (CEO)

As you highlight, there is consumer engagement. There are a lot of decision-makers involved in the process of choosing a material. It's really important that it's not just the consumer we engage, but all of the support infrastructure that a consumer, and in particular, high-end consumer, would use. So there's an investment there. And I do think that it's important to have the right products and the right look and the right characteristics.

So for example, in the western part of the U.S., wood is still predominant in many applications. But as people continue to either on their own or mandated harden their homes against fire, that puts us in a situation where we will continue to launch ignition-resistant and Class A flame-spread products to help us solve a problem while we expand. So it's a bit of dealing with the ecosystem, but it's also around having the right products. And there's always more we can do visually to facilitate that consumer journey.

Kurt Yinger (Senior Vice President and Research Analyst)

Got it. Okay. Appreciate the color. Thank you.

Jesse Singh (CEO)

Thank you.

Operator (participant)

All right. I will pass it back to Jesse Singh for closing remarks.

Jesse Singh (CEO)

Thank you so much for joining us this evening. We look forward to ongoing discussions. Have a great night. Thank you.