Ryan Merkel: Got it. Okay. That makes sense. And then maybe a question for Jesse. I’m curious, how sensitive is decking to housing turnover? And the reason I ask is your results have been really impressive in sort of a tougher macro. And if housing turnover does improve, like many of us think it will, is that a boost to your business? Or should we not think of it that way?
Jesse Singh: It’s an interesting question. One of the research companies a few days ago issued a perspective on this. And I think what they highlighted was that the correlation between housing turnover and R&R has gotten to the 30s in the last few years. And so what I would say is what we’re seeing and what we continue to see is that people are investing where they live. And for us, we are not a business that’s about housing transactions. We’re a business about people expanding where they live. I think certainly, we live within the macroeconomic environment. And so as we’re sitting here and we’re guiding to mid-single-digit sell-through growth, that is below where we believe this business should be. And that’s really being driven by the underlying flat nature of the R&R market.
So certainly, if and when the R&R market normalizes to more of a growth position, that gives us an opportunity to continue to get back to where we’re guiding on double-digit growth kind of numbers pretty consistently. We’re getting close to that, obviously, with our current guide in residential this year. But it’s really determined by that underlying R&R market, whether that’s driven by consumer sentiment or housing turnover. We certainly think that there’s an opportunity for that underlying R&R market to accelerate.
Operator: And our next question comes from the line of Michael Rehaut with JPMorgan. Michael, please go ahead.
Michael Rehaut: Great. Thanks everyone and congrats on the results so far. First, I just wanted to make sure I’m properly appreciating the first half results and guide for 2Q and into the back half. When you look at full year residential sales, you’re looking at about 15%. You did 24% in the first quarter, you’re guiding to about 15% in the second. And that’s against sell-through of roughly 10%, I believe, in the first quarter and 5% in the second, and I believe mid-single digits for the full year. So I apologize if you kind of hit on some of this earlier, but just trying to get a sense of the delta, let’s say, of roughly 10 percentage points between sell-through for the year and your own residential growth guidance. How much of that might be share gains versus any channel inventory restock?
Jesse Singh: Yes. Let me make sure I’ve got the numbers. The numbers I’m looking at, our residential guide is between 7% and 10% for the year. We didn’t give exactly what our sell-through growth was in Q1. We said strong double digits. So you should assume it’s — that’s higher than 10%. So I think that’s certainly one equation, one part of the equation. And then Mike, simply, what we’re doing is we — for the second quarter, it’s a quarter where we have orders on hand as we stage over the next remaining two months. So the guide is inclusive of the orders we have on hand and the visibility we currently have. And then just from that point on, we are conservatively extrapolating that for the remaining three quarters, we’re going to be in that 5.5% sell-through with flat inventory as we work our way through flat year-over-year changes on inventory as we work our way through.
So if you break that out, it’s a larger number in the first quarter and then a certain — what we think is appropriately conservative number in the remaining three quarters with a guide in Q2 of what we see on hand. And as Pete pointed out, we exited Q1 with effectively a lower level of inventory than is required to be able to service the market and lower than on a days-on-hand basis than last year. As such, we do need to get some of that back to be able to service the market in addition to assuming that for the next nine months, sell-through will equal sell-to.
Michael Rehaut: I appreciate that, Jesse. I think I — it looks like I messed up my numbers looking at the total sales instead of the residential, so I appreciate the clarification there. I guess just secondly, moving on to the EBITDA margin upside. I believe earlier, you kind of hit on different drivers of what’s driving that higher margin versus relative to earlier expectations. I was hoping to get a little more clarity in terms of if it’s possible to kind of break it down between incremental leverage on the additional sales versus greater-than-expected savings on some of the margin initiatives around high recycled content and productivity, et cetera.
Peter Clifford: Yes, Michael. This is Peter. As we talked about kind of having our own budget or plan for the first quarter, we’re really only modestly better on the top line and modestly better from a margin perspective. And there really wasn’t any one lever that was meaningfully different than what we assumed. So generally speaking, we’ve just been executing pretty well against broad basket, whether it’s recycling, whether it’s continued to seize the utilization opportunity you have with the stronger volumes and leveraging conversion cost spend. We’ve done pretty well just on sourcing initiatives above and beyond commodities. So as a general statement, we just came in and the execution was really strong in the first quarter, and it was pretty consistent with what we expected.
Jesse Singh: And then as you look at the second quarter guide, it’s certainly — we are lapping some underutilization from last year. I think we called it out last year. And so certainly, in the second quarter, Pete, I don’t have that number in front of me, but I want to say it’s close to $10 million of benefit we’re getting in the second quarter from lapping pretty meaningful underutilization. And we had not fully experienced the benefit of the deflation. So in addition to the execution on top of that, the second quarter itself has some additional benefit. Peter, I don’t know if you want to get that for me..
Peter Clifford: We have communicated previously. For ’23, we had about $30 million of deflation that flowed through the balance sheet to the income statement. We said out loud that was basically about a half a year’s impact. So you’ve got, I believe, that equivalent here in the first quarter already or half of that, and you’ll get the other half really in the second quarter, if that helps.
Operator: And our next question comes from the line of Tim Wojs with Baird. Tim, please go ahead.
Robert Schultz: This is actually Robert Schultz on for Tim Wojs. It looks like you’ve raised the guide for Q1 upside and then your second quarter guidance is better than expectations. But just looking at the second half, has anything really changed there versus your original expectations?
Jesse Singh: No. Basically, it’s just to highlight what I — what we mentioned earlier. We need to see the season. We think a conservative assumption relative to the back half of the year is appropriate. So we continue to assume a flattish R&R market in the back half of the year. Now incrementally, certainly behind the scenes, we feel we’ve got some positives on some of our initiatives. But we’ve got to wait to see those flow through, and we’ve got to wait to see the season.
Peter Clifford: And I’d just add, we haven’t really seen anything in our digital kind of demand indicators that would point to any change.
Robert Schultz: Got it. And then you mentioned in the prepared remarks that sentiment for both dealers and contractors is modestly more positive than last quarter. What do you think has really changed since late November? And kind of what’s driven that incremental positivity you’re seeing in the market?
Jesse Singh: Well, we have highlighted over the years that — just a couple of things. Number one, typically, the market segments we play in tend to be a more affluent consumer, a consumer that has a house, a consumer that is maybe on their second or third house, as they tend to skew a little older. We’ve also highlighted that we believe and we’ve said this throughout, right, that we believe that asset value has an impact on repair and remodel in our segment, in our type of segment. So I think if you were to look back a few months or even last year at this time, there was certainly — there was a lot more uncertainty relative to the stability of the economy and a concern on the potential asset value. I think the sentiment of our dealer and contractor base is not too dissimilar from the sentiment that people see as they look at the macro economy and in particular, in the more asset-based segments, right?
The market is at a record high. Housing values are holding in there. And people still have jobs and continue to invest in their homes. And so that’s the backdrop. And we believe that those elements have modestly improved, and that is what we hear reflected back from our channel base and from our contractor base. And then I think the other basic element is anytime you move into a colder season for part of the country, people worry about whether or not they’re going to see a tail off on activity and backlog. And I think our — for the most part, our contractors feel really good, and I think other surveys have validated it. I feel really good about their backlog, the activity, the phone’s ringing, and they’re engaging folks on what’s possible in the future.
And then our own data continues to show that also from a digital perspective.
Operator: And our next question comes from the line of John Lovallo with UBS. John, please go ahead.
John Lovallo: Jesse, maybe just a follow-up on that last one about the contractor backlogs, I think they have been pretty stable at about eight weeks for three or four quarters now. Is there any change there that’s giving you guys more confidence?
