The AZEK Company Inc. (NYSE:AZEK) Q1 2025 Earnings Call Transcript

The AZEK Company Inc. (NYSE:AZEK) Q1 2025 Earnings Call Transcript February 4, 2025

The AZEK Company Inc. beats earnings expectations. Reported EPS is $0.17, expectations were $0.14.

Operator: Welcome to The AZEK Company’s First Quarter Fiscal 2025 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference call is being recorded. I would now like to hand the conference over to Eric Robinson. Please go ahead, Eric.

Eric Robinson: 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 President and Chief Executive Officer and Ryan Lada, our Chief Financial Officer and Treasurer. 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 will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. These non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of such non-GAAP measures can be found in our earnings press release and supplemental earnings presentation, which are posted on our website. Now let me turn the call over to AZEK’s CEO, Jesse Singh.

Jesse Singh: Good afternoon, and thank you for joining us. We are pleased to report a good start to fiscal 2025 with first quarter results, again demonstrating the effectiveness of our growth initiatives and disciplined operational execution. Our residential segment grew net sales by 22% year-over-year, driven by double digit sell-through growth in the quarter and expanded market presence across our deck, rail and accessories and exteriors product categories. During the quarter, deck, rail and accessories sell-through grew at a double-digit pace with each of the product lines within the portfolio growing double-digits. Exterior sell-through grew high-single-digits as we saw some market stability during the quarter. Our focus on wood conversion, product innovation, improving the customer journey, growing brand awareness and channel expansion continues to drive our success and our performance.

We also delivered strong residential segment adjusted EBITDA growth of 24% year-over-year and expanded our segment adjusted EBITDA margin by 40 basis points year-over-year to 23.7% while making investments in new products and channel expansion to drive future growth. AZEK’s multiyear track record of success would not be possible without the dedication, collaboration and support of our team members and business partners, and I would like to express my sincere gratitude. We continue to make progress against our key strategic initiatives. Our 2025 new product launches, including TimberTech Fulton Rail, TimberTech Reliance Rail, Versatex XCEED Siding, and TrimLogic are being well received in the market and will allow us to address a wider range of price points and consumer needs to drive wood conversion.

These new products are generating excitement from our contractor and dealer partners with our rail and siding products being stocked in a number of new locations ahead of the busy part of the season. During the quarter, we invested in and began ramping up production of these products, modestly impacting our first quarter margins. We expect these start-up investments to continue during our second quarter as we scale and position these terrific new product platforms to drive future growth. We also continue to see strong demand for our advanced PVC vintage and landmark decking collections, which have the best aesthetics and fire resistance in the industry. We recently completed the majority of our seasonal early buy negotiations with our pro channel partners and continue to strengthen these relationships.

We believe we have once again expanded our presence in the market and gained initial stocking positions for our new products. Our recently announced distribution partnerships expand our reach in the Western United States and Canadian markets. We’re excited about the growth opportunities these present to better position us to service the pro contractors in these geographies and we look forward to our ongoing success with all of our key channel partners. During the second quarter, we are making incremental investments to support these channel and product expansions, including incremental merchandising and digital tools to enhance the customer experience. We also continue to invest in our recycle capabilities and acquired a regional PVC and polyethylene recycling operation in Indiana during the first quarter.

This acquisition not only expands our waste material sourcing network but also expands our capabilities to process hard-to-recycle materials through unique recycled segregation and processing technologies. We are excited about the capabilities and capacity this acquisition offers as we continue to expand our usage of lower-cost recycle streams. In December, TimberTech was named one of Fast Company’s 2024 Brands That Matter in the Benchmark Brands category. This prestigious recognition celebrates TimberTech’s success in marketing its innovative decking and railing products in ways that resonate deeply with consumers, redefining expectations around outdoor living. This year, we also celebrate the 25th anniversary of AZEK Trim, the product that pioneered the PVC Trim category.

For 25 years, it has set the standard for durability, low maintenance, and design flexibility, offering a superior alternative to wood. We’ll be celebrating this unique milestone in many industry events this year, including the upcoming NAHB International Builders Show and JLC Live. While the outlook for the broader housing and repair and remodel markets remain uncertain, we continue to see consistent demand for our outdoor living product portfolio. We continue to see positive residential sell-through growth, positive demand signals from digital metrics and customer surveys, and contractor backlogs in the six to seven-week range. We ended the quarter with channel inventory levels once again conservatively below historical averages and we have ample manufacturing capacity to effectively service our customers.

We see positive momentum on our margin initiatives as we drive our continuous improvement programs, recycle initiatives, and sourcing savings. These 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. Given the solid first quarter performance, we are modestly raising the top and bottom end of our fiscal full year 2025 outlook. Our planning assumptions reflect residential segment net sales growth in the range of 6% to 8% year-over-year and residential segment adjusted EBITDA growth of 7% to 11% year-over-year. Overall, on a consolidated basis, we expect to grow our net sales in the range of 5% to 8% year-over-year and adjusted EBITDA in the 6% to 10% range as we see a modestly dilutive impact from our commercial business.

Our fiscal 2025 planning assumptions continue to assume a relatively flat repair and remodel market and mid-single-digit residential sell-through growth for the remainder of the year, driven by AZEK’s specific growth initiatives. I’m excited to welcome Ryan Lada, our new Chief Financial Officer and Treasurer to today’s call. Ryan has been a trusted partner since joining The AZEK team nearly three years ago. He brings extensive financial experience and a deep understanding of our business, having most recently served as the CFO of our Residential segment. Many of you have met Ryan and he’s already making a significant impact. I’m confident in his ability to lead our financial organization and support our continued growth. We also wish our former COO and CFO, Pete Clifford well as he starts his next journey.

Pete did a great job of setting up the business and the finance team for future success. I know Pete is listening and we sincerely want to thank him for his contributions to The AZEK Company. I will now turn the call over to Ryan to discuss our financial results and outlook in more detail.

Ryan Lada: Thanks, Jesse, and good afternoon, everyone. Thanks for joining us today. I am honored to step into the role of Chief Financial Officer at AZEK and thrilled to expand my finance leadership at such an exciting time for the company. I look forward to continuing to collaborate with Jesse and the team to execute our business and financial strategy as we shape the future of the industry and continue to drive growth and long-term value for our shareholders. Before we get into first quarter results, I wanted to share some perspective on the operating environment. In the quarter, we experienced double-digit sell-through growth as a result of continued customer demand for our products and execution of The AZEK growth playbook.

This includes material conversion, channel expansion efforts, downstream initiatives, new product releases, and improving the consumer journey. We had a successful early buy process and are pleased with the results. We believe we drove shelf-space wins and expansion within the pro channel building on momentum from previous years. From a channel inventory perspective, we ended the quarter down roughly 15% from historical average days on hand. As for demand indicators, positive momentum continued across the KPIs we track. Our pro contractor and dealer surveys indicated that outlook sentiment improved and current project backlogs are in the six to seven weeks range. On the digital side, our engagement efforts remain effective. We saw robust growth in website sessions, contractor leads, and sample orders year-over-year.

As a reminder, our fiscal first quarter is traditionally our lowest production quarter and our production levels were relatively consistent year-over-year. During the quarter, we started ramping production to support several new product launches in fiscal year 2025. In addition, we prepared our new facilities to commission additional capacity for our exteriors and rail businesses in the second quarter. Material input costs remained stable in our residential business and we continue to execute our traditional annual recycling, product configuration, sourcing, and AIMS programs. This positions us well to drive ongoing margin expansion. In terms of SG&A, our results reflect a more normalized spend profile year-over-year with modestly lower sales and marketing costs as a result of lapping prior year expenses associated with the customer and branding event.

The strength of double-digit residential sell-through growth and continued execution of our merger programs helped us deliver strong results in the first quarter. For the first quarter of fiscal 2025, we delivered consolidated net sales of $285 million. Our first quarter net sales were driven by double-digit sell-through growth and the expansion of our channel positions, partially offset by the $3 million net impact from the divestiture of our Vycom business in our Commercial segment. First quarter gross profit was $104 million, an increase of $13 million year-over-year and gross margin was 36.3%. First quarter adjusted gross profit was $107 million, an increase of $12 million year-over-year, and adjusted gross profit margin was 37.4%. The adjusted gross profit margin decline was driven primarily by the previously mentioned costs related to new product expansion, lower plant utilization levels, and weakness in our Commercial segment’s Scranton Products business.

GAAP SG&A expenses decreased by $2 million year-over-year to $75 million. The decrease is primarily driven by a normalization of marketing expense as well as modest reductions in administrative costs. Adjusted SG&A expenses increased by $2 million year-over-year to $64 million. Adjusted EBITDA for the first quarter increased by $11 million or 20% year-over-year to $66 million. Adjusted EBITDA margin for the quarter increased 30 basis points year-over-year to 23.1%. Net income for the first quarter decreased year-over-year by $7 million to $18 million or $0.12 per share. As a reminder, the prior year period included the $38.5 million gain on sale from the Vycom divestiture, which we are now lapping. In addition, our tax rate came in favorable at 7.5% versus 39.9% in prior year, primarily driven by tax benefits related to a higher proportion of stock options exercised and the removal of the tax effects related to the sale of the Vycom business.

Adjusted net income for the first quarter, which excluded the Vycom divestiture gain on sale in the prior year increased year-over-year by $10 million to $25 million. Adjusted diluted EPS increased $0.07 year-over-year to $0.17 per share. Now turning to our segment results. Residential segment net sales for the first quarter were $272 million, up 22% year-over-year, driven by the previously discussed timing of channel partner purchases. Residential segment adjusted EBITDA for the first quarter was $64 million, up 24% year-over-year. Residential segment adjusted EBITDA margin was 23.7%. Commercial segment net sales for the quarter were $13 million, down 23% year-over-year, primarily due to the sale of Vycom business last fiscal year and weaker demand in our Scranton Products business.

Commercial segment adjusted EBITDA for the quarter was $1.5 million, a decrease of $1.4 million year-over-year, again, primarily driven by the disposition of the Vycom business, weaker demand, and increases in our material input costs. We have taken appropriate pricing and cost actions in this business to offset the pressure and expect to return to more traditional margin levels in the third and fourth quarters of fiscal 2025. From a balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $148 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 $243 million, up $18 million year-over-year.

We ended the quarter with gross debt of $534 million, which included approximately $95 million of finance leases. Net debt was $386 million and our net leverage ratio stood at 1x at the end of the first quarter. Net cash from operating activities was $14 million during the first quarter, an increase of $30 million year-over-year. Capital expenditures for the quarter were approximately $22 million and we deployed $11 million of capital to acquire a new regional recycling operation to support our long-term recycling capabilities and ambitions. For the first quarter, free cash flow was negative $8 million, an improvement of $26 million year-over-year. 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 pursuant to our existing share repurchase authorization.

Now let’s turn to our outlook. Consistent with our prior assumptions, we are modeling a relatively flat R&R market for the full year 2025. We are raising our net sales planning assumptions by $10 million on the bottom and top ends of the range, reflecting the stronger first quarter demand. At the midpoint of our updated planning assumptions, residential net sales are expected to grow roughly 7% year-over-year in fiscal 2025. We continue to plan residential sell-through in the mid-single-digit range for the remainder of the fiscal year. For this update, our planning assumptions for fiscal 2025 are $1.52 billion to $1.55 billion in consolidated net sales and $403 million to $418 million in adjusted EBITDA. Our net sales planning assumption range would imply roughly 5% to 8% year-over-year growth and roughly 6% to 10% year-over-year growth in adjusted EBITDA.

Our Residential segment planning assumptions for the year is $1.452 billion to $1.479 billion in net sales and $392 million to $405 million in segment adjusted EBITDA, representing 6% to 8% net sales growth year-over-year and 7% to 11% segment adjusted EBITDA growth. A few other assumptions for fiscal ’25 to share include the following. We are expecting a capital expenditure range of $85 million to $95 million, consistent with our publicly stated CapEx target of approximately 5% to 7% of revenue. As we have mentioned in the past, we may choose to go above this range at an opportunistic scenarios such as purchasing property or assets that fit into our long-term strategy. And finally, we are expecting a GAAP tax rate for the full year between 25% to 26%.

For additional planning assumptions to assist with modeling fiscal year 2025, please refer to the supplemental earnings presentation we have posted on our Investor Relations website. For our fiscal second quarter, our consolidated guidance for the quarter is $437 million to $448 million in net sales and $115 million to $120 million in adjusted EBITDA. Our consolidated net sales guidance range would imply 4% to 7% year-over-year growth and 2% to 6% year-over-year growth in adjusted EBITDA. Our Residential segment guidance for the quarter is $422 million to $432 million in net sales and $114 million to $118.5 million in adjusted EBITDA. Our net sales guidance range would imply 5% to 7% year-over-year growth and 3% to 7% year-over-year growth in segment adjusted EBITDA.

We are assuming residential sell-through growth in the mid-single-digit range in the fiscal second quarter. We are expecting an effective tax rate of approximately 26% for the quarter. We expect our Commercial segment will have one more quarter of margin pressure and that the actions we have taken will normalize in our fiscal third quarter and return margins back to expectations in the back half of fiscal 2025. We continue to target segment adjusted EBITDA margin in the 20% range for this business. We are well-positioned to execute in the fiscal second quarter and the remainder of fiscal 2025. With that, I’ll now turn the call back to Jesse for some closing remarks.

Jesse Singh: Thanks, Ryan. In closing, we’re off to a good start in fiscal 2025 and we’re confident in our ability to navigate the current market dynamics and deliver strong financial performance. We continue to lead with innovative sustainable solutions across our entire portfolio while remaining focused on our financial priorities of delivering profitable double-digit net sales growth and margin expansion, all while investing in the future and creating long-term value for our shareholders. With that, operator, please open the line for questions.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Susan Maklari. Please go ahead.

Susan Maklari: Good afternoon, everyone. Thanks for taking the question. Can we start, Jesse, with maybe talking a bit about the demand? You mentioned that sell-through was up double-digits in the quarter. You did take up the guide for the annual revenues and yet the annual outlook still implies mid-single-digit sell-through for the year, can you just help us bridge how you’re getting to that and where there possibly could be some conservatism?

Jesse Singh: Yes. Thanks for the question, Susan. If you just step back and you think overall, the way we plan our year is we have an assumption right now that the underlying growth rate of the market is give or take zero of R&R and then we stack on top of that what we can see is our growth programs, which we put at mid-single-digits. Q1 came in as we highlighted better than that. We raised the guide, but it’s still really early to assess 2025. And so the way to think of it is we are just holding to our core assumptions that the market is flat and then we’ll be able to deliver 5% to 7% above that. So the way to think of it is, there’s just really no change in the underlying assumptions, but we felt it appropriate to adjust for the one quarter that’s already completed.

Susan Maklari: Okay. That’s helpful. And then maybe just turning to the new products, you mentioned that there are some investments that are going in there, just anything we should be thinking about in terms of the cadence over the next couple of quarters? And how we should think about the momentum too that those products will start to gain in the coming quarters?

Jesse Singh: Yes. At a high level, I think you’re in a stage right now where we’re starting up the ramp of these products, and so there’s some inefficiencies there. And then specifically, we have a new facility that’s making vinyl rail for us and so that starts up and has been running with effectively no shipped volume until recently. So you’re left with a bit of extra costs before you see the revenue. And I think as you think about the way those new products flow through the system, it will be on a very normal cadence of just the rest of the core business, which is that we start taking orders, we begin shipping this quarter to stage the inventory, and then obviously, it starts selling through and being replenished as we move into the out quarters.

Susan Maklari: Okay. Thanks for the color and good luck with everything.

Jesse Singh: Appreciate it. Thanks, Susan.

Operator: Your next question comes from the line of Michael Rehaut of JPMorgan. Please go ahead.

Michael Rehaut: Thanks. Good afternoon, everyone. Thanks for taking my questions.

Jesse Singh: Thanks, Mike.

Michael Rehaut: I wanted to start with the acquisition. It seems like another kind of tuck-in in your efforts around augmenting your recycling capacity. I just wonder in terms of what that might impact — how that might impact the income statement this year and/or next year, does it change at all you’re — the upside potential in terms of, you know, what you expect to get from further recycling benefits or is it kind of just in some ways add to the visibility of the plans you’ve laid out over the last — going forward?

Ryan Lada: Hi, Mike, it’s Ryan. I think it adds to kind of the plans we’ve laid out in the past. So with the recent acquisition, I think it’s exciting on multiple fronts. We gained new technology that allows us to separate a lower-grade mixed polymer material that we weren’t able to do in the past. Second, it adds additional recycling sourcing streams. And then third, we still have a mixture of what we can convert internally and then what we source. This adds additional capacity to allow us to move to that internal recycled conversion faster, which provides headwind or tailwinds to the future periods in terms of savings.

Michael Rehaut: Okay, great. I appreciate that. I guess secondly, Jesse, you talked a little bit about kind of sticking to the mid-single digit, roughly sell-through, and kind of the algorithm, how you think about the end markets for the full year. At the same time, obviously, first quarter came in a little bit better than you were hoping for. I’m trying to get a sense of if you’re thinking about perhaps — how you’re thinking about share gains or how you’re executing in the market relative to the broader markets? If there’s any specific channels, end markets or regions where you think perhaps you’re potentially gaining some share? Any kind of color around either distribution channel, product, or region would be really helpful.

Jesse Singh: Yes. I’ll try to provide some insight. So it starts with some of my prepared comments, right? So if you think about our growth stack, one is, we talk about, in particular, in this quarter and recent quarters pro, shelf gains, and that really is an outcome of having the right products, having the right sales coverage, having the right contractor coverage and then doing a better job of supporting a dealer base as they look at growth opportunities. So you could perceive that our position in the market in the pro channel is expanding. Now, hopefully, we’re doing that in a growing market. So I think it’s important to recognize when we look at share, it’s how much of wood can we get, how can we make sure we are well-positioned for future growth.

So I think that equation, in particular, as we’ve gone through this year versus previous years is probably a bit stronger this year than last year, but kind of in the same ballpark. I think the second component, which is interrelated that is we’re launching a few different platforms into the market as we speak, two different rail platforms, a siding platform and a wood conversion trim platform, and as you launch those platforms, it helps you get a position at a dealer base, but it also helps you start to do a better job of getting share of wallet and providing a more complete solution to your contractor. I think we’re seeing some benefit initially, but that’s really a much longer process as you get some product in the channel and then you work with your contractors to continue to have them fulfill.

So for us, as we look at our types of initiatives, we feel like both of those are, in particular, contributing this year. Underlying all that, we’ve got a downstream salesforce and a pretty active set of marketing activities, and that’s consumer by consumer where you happen to engage better or they recognize your brand. It’s a lot harder to get at that except that we do believe it’s additive. So those are the elements that we’ve talked about in the past and I think they’re very much intact as we look at the last quarter, this current quarter, and subsequent future quarters.

Michael Rehaut: Great. Thanks. One last quick one, if I could. Any exposure to tariffs on the supply chain that may or may not come out when you think about Canada or Mexico?

Ryan Lada: Yes. I think with our recent growth this year, we source up to about $120 million of material and products internationally. Exposure to Mexico and China are modest and Canada as well. So in the current form, we think it would have a relatively small impact on our year.

Jesse Singh: Yes. Think of it as very low volumes to Ryan’s point, you know, single-digit millions out of, both Canada — I’m sorry, out of Mexico and China. And then our sourcing in Canada, the particular types of products we have there, we have other alternatives, so for me to go that route.

Michael Rehaut: Perfect. Thank you so much.

Operator: Your next question comes from the line of Keith Hughes — my apologies, Keith Hughes of Truist. Please go ahead.

Keith Hughes: Thank you. It seems like several months you’ve been stringing together double-digit sell-out in decking and railing, was January as strong as what you saw in the December quarter?

Jesse Singh: Yes. I mean the challenge of kind of talking about month-to-month at this point in the season is you don’t want to overindex on one week here and there. Having said that, January was consistent with both our guide, but also what we’ve seen historically. So you should read into that that January sell-through didn’t create any kind of a concern and we left there feeling comfortable.

Keith Hughes: Okay, great. And the residential guide for the fiscal year, how much are the new products and new share wins you discussed in the early buy period? How much in that — how much of the year is that going to contribute?

Jesse Singh: Yes. I mean, it’s a good question. The way — the way we think of our, call it, shelf expansion is, we had some really good pro shelf expansion as we talked about last year, that has a natural carryover. Obviously, that starts in February, March, April, we’re getting the benefit of that as we speak, and then with the new wins and the new expansion, we’ll start seeing the benefit of that as we flow this quarter. So the way to think of it is, if you do it consistently, it ends up being more of a consistent expansion since we’ve been doing it over the last three years. And then, incrementally, you should think of, as I mentioned on the earlier question that you’ll start to, you’re seeing a little bit of the new products flow now.

You’ll see more and more of that as we flow through the year and it gets adopted, and obviously, it depends on the type of product. But in general, you just see a gradual expansion. There’s a bit of inventory, but then a gradual expansion as we work our way through the year.

Keith Hughes: Okay. Thank you.

Jesse Singh: Appreciate it. Thanks, Keith.

Operator: Your next question comes from the line of Phil Ng of Jefferies. Please go ahead.

Phil Ng: Hi, guys. Congrats, Ryan, on the new role and good job on another good quarter, guys. I guess first thing or perhaps, Jesse, I think you’ve been making a bigger push onto the railing side, can you talk about that process of leveraging perhaps on your exclusive distributions and the level of engagement you’re seeing? You do have a few platforms you called out on the railing side from new products, just kind of help us think through what that opportunity could present this year and beyond.

Jesse Singh: Yes. I think we called out on our prepared remarks in the last quarter that something like a vinyl rail presents almost $300 million of market opportunity and steel rail presents additional opportunity and that there is much more 40 — I’m sorry, 60% of the market in rail is wood, and vinyl rail, if done right, can help facilitate wood conversion. So you start with the macro of what the overall opportunity is. As you — I think most folks know, when we deal with our distribution partners, for the majority of our product lines, we have been exclusive. There were times as — where we didn’t have the right railing portfolio, in particular, vinyl rail, where we had certain distributors that had a need to source from other suppliers.

I think as we’ve worked our way through in collaboration with our channel, where it makes sense, which is the vast majority of our channel partners, almost all, we have now become the supplier of that distribution partner for vinyl and steel rail. So we’re getting at a market segment. Our channel partners — our current channel partners are a key part of making sure that we cover the market appropriately, and then obviously, our 200% salesforce is downstream working with dealers and contractors to generate demand. And the way I would just sum all that up and the way to think of it is, we’ve had really good growth in the product categories. We’ve talked about deck rail and accessories. We continue to see nice growth in decking. This will just be another additive component that ensures strong growth in our Railing business as we move forward.

We had really good growth last year without these products and so we expect that growth rate to continue.

Phil Ng: Jesse, where are you from attachment rate standpoint on the railing side at this point?

Jesse Singh: We don’t disclose specifically, and attachment gets a little wonky, but think of it is, in general, I would say, we’re less than 20%, kind of mid to high teens depending on the geography. Now that doesn’t mean attachment should be 100%, but I think the more important thing for us is understanding where — when there is a job being completed, where someone has had to go to a different alternative product to either get the right visual or the right cost position, and what can we do to make sure that our dealers and our contractors can meet the consumer needs. And so we certainly with the new products we’ve launched expect to incrementally have some benefits as we can increase the solution set that we provide to our consumers.

Phil Ng: Got it. And then implicit for ’25, your guidance, are you baking any incremental price increase in the marketplace? If not there was some out there? And then based on your winter buy thus far, appreciating you guys manage channel pretty conservatively, how does that inform you in terms of this year? Is you — are your channel partners expecting sell-out in the mid-single-digit range or perhaps even a little more upbeat?

Ryan Lada: Yes. I’d say first on the pricing part, similar to what we communicated on the last call, we did some modest price increases on decking and other products and then we offset that with modest gross to net adjustments on our exteriors business. So for the full year, we expect kind of flat to modest price increase. And then from an early buy perspective, I think we were encouraged by the process. I think we drove some nice shelf-space wins and expansion in the pro channel. I think building on momentum from previous years, we had both our dealer and contractor summits in the last quarter and kind of sentiment and outlook from those were extremely positive and there’s a lot of excitement for our new products in the financial year.

Phil Ng: Okay. Appreciate all the great color, guys. Thank you.

Jesse Singh: Appreciate it. Thanks, Phil.

Operator: The next question comes from the line of Matthew Bouley with Barclays. Please go ahead.

Matthew Bouley: Hi, good afternoon, everyone. So wanted to ask on the new product growth investments. Just kind of a high-level question on how you’re thinking about the balance of these growth investments here. So are these investments, I guess, kind of greater than what you had previously envisioned this year or is this kind of in line with the plan? Is it greater than prior years? Or I guess what I’m getting at, is this something that you’re kind of pushing more on to take advantage of the growth backdrop that you have today? So just any more color along those lines. Thank you.

Ryan Lada: Yes. I would say there, it’s no different than new products in prior years besides the fact we added new capacity to do that. So on the vinyl rail side, we actually acquired a facility to do that so that’s not an incremental line we’re turning on in an existing factory. Similarly, on our exterior side for siding, we added an entire new facility in Aliquippa that’s coming online. So those are a little bit more disproportionate than just turning on a line in an existing factory. I think that’s — that was contemplated during our AOP and planning session. So I think it’s pretty consistent with our guide.

Matthew Bouley: Okay. Got it. Thank you for that, Ryan. And then, yes, I wanted to ask on Capital Lumber. Was capital now included in the guide? I think it wasn’t last quarter, any of that happened in Q1 versus Q2. So just anything there on the model, but then higher level, I’m just curious how that ramp is going now on the West Coast there. Thank you.

Jesse Singh: Yes. I mean the way to — as we highlighted, we expected a bit of fill in the first half of the year. That fill is materializing. Now it didn’t — it was contemplated as we talked about in our last guide and also the way to think of that is, that’s filled, it’s got to sell-out and it’s positioning of inventory. So we — in general, we’re not going to adjust our guide because of fill. We’re going to make sure you understand kind of the staging part of it, but it’s got to sell-through, which will happen in subsequent quarters. And then relative to the expected benefit and support that they have provided in addition to our existing distribution network. It’s very much been as expected. It’s been very collaborative.

And as we look to both shelf expansion and improved service to our existing customers, that is very much on track and we’re excited by the opportunity that’s there. As I think Ryan highlighted on his comments, we are making some incremental investments there to support the ongoing expansion of our position in the marketplace. And I would just make one little highlight, a lot of the areas that are covered by our Western distributors, Doman and Capital in particular, have a concern for hardening against fires, and obviously, there’s some — a lot of tragic stuff has happened recently, and — but in general, there has been a focus on making sure that we’re providing the right products to make sure that we try to reduce the impact of these kinds of natural disasters.

And in particular, our Western distribution is actively making sure that they support their consumers and understanding the options that we provide and the potential benefit of those options as we’ve got a ignition and resistant product and a Class-A flame set of products that can support that.

Matthew Bouley: Got it. Thanks, Jesse. Good luck, guys.

Operator: Your next question comes from the line of Ryan Merkel with William Blair. Please go ahead.

Ryan Merkel: Hi, everyone. I wanted to ask on 2Q margins. They’re coming in a little bit below what I was thinking. Jesse, you mentioned investment in the new products, any way to quantify that? And I’m just trying to clarify if there’s anything else impacting the margins in the second quarter or if it’s just the investments that you’re making?

Ryan Lada: Yes. I would say it’s a few things that we’ve kind of already highlighted. So first, there was the new product facility ramp-up, the underutilization that was driven by that. Second, our first quarter is traditionally our lowest volume, and that inefficiency, some of that gets capitalized on the balance sheet and impacts our second quarter, so that traditionally rolls off in our second quarter as we return to more volume levels. The third thing is we do expect one more quarter of pressure on Scranton Products business. The pricing and cost actions we took place really won’t have an impact till the second half of the year. And then Jesse just alluded to it, but some of those commercial investments to support our new partners, whether that’s training, displays, merchandising, those things also will hit us in the second quarter that do not repeat moving forward in the back half of the year.

Jesse Singh: Yes. And Ryan, over — I mean, over the years, you’ve heard us talk about the impact of lower utilization quarters on the subsequent quarter, you should think that that’s clearly part of this. Our utilization was — in Q1 was the lowest it’s going to be. And we’ve already ramped-up that utilization in Q2, and we’ll see some of the benefit in Q3 from the Q2 utilization.

Ryan Merkel: Got it. All right. So, Jesse, you answered my second question, which was gross margins year-over-year in the first quarter were down a little more than I thought, but it sounds like 2Q and the rest of the way as the utilization comes up, that we should go back to expansion or how should we think about the progression of gross margins?

Ryan Lada: Yes. I would say that’s correct. Our first quarter being the lowest and then second quarter, we improved sequentially, and then that doesn’t create a headwind on the balance sheet for our third and fourth quarter, where volume and utilization is at its highest. So yes, I think that would be the natural progression that the back half improves.

Ryan Merkel: Got it. All right. Thanks. I’ll pass it on.

Jesse Singh: Appreciate it. Thanks, Ryan.

Operator: Your next question comes from the line of Mike Dahl, RBC Capital Markets. Please go ahead.

Mike Dahl: Hi, thanks for taking my questions. I want to go back to kind of some of the moving pieces in both 1Q and 2Q. Jesse, can you — I know you already expected some load in, not necessarily from Capital, but from your retail win and Doman in 1Q, so can you just give us an update on what actually impacted 1Q in terms of the load in and then there’s a few moving pieces in 2Q, if I recall between kind of Capital and then also one of your retail stocking positions phasing out. So just if you could help us kind of quantify on a net basis what those moving pieces in terms of the new business ramps from your other retail position, capital versus the phasing out of the other big box stocking position?

Jesse Singh: Yes. So just on the retail front, the way I would think of it as we’re moving forward, we do expect, given our position in the marketplace to continue to see some growth, but as you point out, as we transition to be fully in stock in one retailer and transition, which we’ve already done to not be in stock in the other retailer, those two in effect balance out. So you should think of that as a normalized progression as we move through the season. And then as you look at, as you question on Q1, the simple way to think of it is if you think about double-digit, and it’s really strong double-digit, which means it’s north of 10% sell-through growth, that accounts for, give or take, the beat that we talked about or think of it as incremental sales above what we guided and then if you think of that remaining, give or take 10%, high-single-digit percentage, that is a combination of the staging you highlighted, in particular, making sure that we’ve got the product stage for our new distribution combined with a little bit of normalization, call it, a couple of days of more inventory as we came in a bit lower than we wanted at the end of last year.

So on the margins, you should think of it is, the elements we talked about, there’s really not much that you could start getting down to single-digit million parsing, but in general, that’s what it is, and as Ryan pointed out on the commentary, we’re at 15% below where we were on a historic basis. And then as we look at Q2, it’s nothing more than assuming a 5% to 7% growth on top of last year, which means it’s a very normalized process. And as I said, there’s some — there’s things that offset and go up and down in there. But in general, you should think of Q2 as the combination of early buy will be very normalized combined with sell-through and that gets you to our Q2 guide. And once again, as we do this, if we do end up having to ship a little bit more inventory into the quarter or there’s always some stuff on the border plus or minus that all relates to the totality of the guide.

Mike Dahl: Okay. That’s very helpful. And then I guess just second question, you alluded to kind of the tragedy happening out in LA. Obviously, from a longer-term standpoint, there is an awareness dynamic that your product plays into, but from a near-term standpoint, that’s been a pretty fast-growing region for you in terms of the West Coast in general, so is there any sort of near term disruption, any quantification as you look at kind of the very near term 2Q or 3Q that you’re contemplating here?

Jesse Singh: Yes. In general, as you point out and I’ve got some friends that have houses there in and around, and so obviously, our heart goes out to people that have to experience that kind of a tragedy and the elimination of major neighborhoods, and obviously, none of that is positive. I think from an aggregate standpoint, we’re large enough and diversified enough that there’s always, I would call it, ups and downs, whether it’s weather or hurricanes or that sort of stuff, that in general, in aggregate, because of our geographic diversification, there’s not one specific geography that has a disproportionate impact, so if — we don’t expect to have a meaningful impact from that situation.

Mike Dahl: Got it. Okay. Thank you.

Operator: Your next question comes from the line of John Lovallo of UBS. Please go ahead.

John Lovallo: Hi, guys, thank you for taking my questions as well. Ryan, I think you noted that the capital allocation priorities remain unchanged, but maybe just a couple of quick ones on capital allocation. No share repurchases during the quarter. I know you talked about being opportunistic. I mean, how do you see the opportunity for share repos as we move through the year?

Ryan Lada: Yes. I’d say 1Q is typically our lowest cash generation quarter of the year and we also retired some debt at the end of fiscal Q4 ’24. With the recycle acquisition we made and we actually have a couple of other opportunities we are looking to pursue in the near term potentially, I think the strategy would be the same for the year. I think it would just be weighted a little bit more normal to the back half of the year like we would have done previously. Last year, if you recall, we had the proceeds from the Vycom divestiture in 1Q, which we utilized and that obviously didn’t repeat this year. So I think that — no change in strategy, just probably a little bit of phasing on the timing.

John Lovallo: Okay, understood. And then what are you guys seeing on the M&A front? What type of deals are looking most attractive to you right now?

Jesse Singh: Yes. Obviously, we did one recycle deal. I think as — and I think Mike asked the question, it’s really important we put ourselves in a position to be able to meet increased demand and to localize our supply chains around our factories. And — so we’re certainly looking at additional — the potential for additional recycled assets that would help us localize and expand our capacity in a similar way. And then, as we look out, obviously, we laid out the market analysis in our Investor Day, you’ve seen our expansion in a number of different areas, we will continue to look for solid tuck-in type acquisitions that provide a, our consumer and contractor base with a broader array of solutions that help them. We really like our current focus, our current methodology for growth, and our current market position. So we’re, for the most part, just looking at how do we augment that with additional tuck-in acquisitions.

John Lovallo: Okay. Thanks, Jesse.

Jesse Singh: Appreciate it.

Operator: Your next question comes from the line of Trey Grooms of Stephens. Please go ahead.

Trey Grooms: Hi, good afternoon. Thanks for taking my question. So I guess looking back to earlier in ’24, the demand for your premium or higher-end products where you guys primarily play had been holding in much better versus the entry-level, and has that continued to be the case or have you seen any change as you look at where you’re seeing the outperformance in demand with your overall sell-through continue to be pretty strong?

Jesse Singh: Yes. I would just frame it as, as we look across both the portfolio and all the different types of channels that we play in, we’ve seen pretty good growth in all of our segments at this stage. So I don’t know that I can draw a specific hard-line distinction aside from the pro continues to be busy, the pro continues to expand and find new jobs, and we continue to see the benefit of that across the entirety of our portfolio.

Trey Grooms: All right. Thanks, Jesse. And then maybe one for Ryan. Inventory levels, you guys inventory specifically remains nicely in check, so how do you feel about your inventory levels as we move into the busier decking season? Is it about where you’d like it based on your demand expectations? And then, of course, especially in light of lower-than-normal channel inventory or is there any adjustments needed as we kind of move into the building season?

Ryan Lada: Yes, I think as we exited the calendar year here with our fiscal 1Q results, we did build some inventory from our year end, that’s really just prepping to ship early by in our second fiscal quarter and really to balance production to the extent that we can. I wouldn’t think there’s really any other major changes to that from a full-year perspective. We would still look at targeting roughly flat year-over-year on the inventory level. But I think given kind of the phasing, maintaining our four-week lead times, and ensuring product availability to the channel, that’s really why we build in 1Q and then we deplete it as the season starts.

Trey Grooms: Got it. Super helpful. Thanks a lot. Best of luck.

Ryan Lada: Thank you.

Jesse Singh: Appreciate it. Thanks.

Operator: Your next question comes from the line of Ketan Mamtora of BMO Capital Markets. Please go ahead.

Ketan Mamtora: Good afternoon and thanks for taking my question. Jesse, maybe to start with, can you talk a little bit about your strategy on the siding side? There are obviously a couple of established players out there, so kind of — can you talk about sort of what’s the strategy and kind of what are you targeting in siding?

Jesse Singh: Yes. So in general, if you step back and you look at our Exteriors business, it is an accent on top of the various siding players, right? So we’ve got corners and trim and column wraps, that sort of stuff, right? So our Exteriors’ business targets — there’s a disproportionate amount of wood on these accents that go into on top of siding. So our focus is to drive wood conversion on an accented basis. That’s been our exterior strategy. Now as you think about the most recent products we’ve launched, think of it as a premium alternative to that installs like vinyl siding, but a premium — super-premium alternative for those folks that want that either premium accent or premium look and want to take advantage of the technology that we have to achieve that premium.

And so the way to think of it for us, obviously, it’s a huge market. It’s an accent siding product or a very kind of wood replacement, high-end niche siding product that we believe there is a market for and it’s consistent with our current contractor base. Whether or not it grows beyond a niche product, well, that remains to be seen. But for us, a small tiny niche of that market is additive to our new product growth in that Exteriors’ business.

Ketan Mamtora: Understood. That’s very helpful. And then just on — as a follow up, can you just remind us, Jesse, where you are with the HDP to LDP sort of conversion and then on the recycled PVC side as well, both for decking and exteriors?

Jesse Singh: Yes. So — and Ryan, please chime in. So on the transition from HD to LD, we continue on that transition. So every day that goes by, we’re cutting lines over. We’ve been pretty methodical on that. So we’re probably more than half converted and we continue to convert. Now as we’ve done that, one of the areas where we’re going to see some of the best savings is in the way in which we process the LD. And so what I would say, now that we’re converting into using a higher percentage of LD, we need to do a better job of processing the LD internally to fully realize the cost-savings, and so we’re certainly seeing savings right now. We’ve — since last year to this year, we’ve made meaningful improvements in terms of our ability to process that lower cost material internally.

And we expect — as the year progresses, as we move into next year that there’ll be a meaningful unlock in our ability to process the next set of recycled materials. And so from where we sit now, there’s a long cost reduction pipeline ahead of us as we continue to use and process that material better. And then on the PVC side, we continue to incrementally ramp up the percentage of PVC on all of our lines. We’ve got to a really good spot on our Exteriors business. We’ve gotten to a good spot on our Decking business. We’ve got to cost — similarly, we’ve got to kind of cost reduce raw material flow and how we process that recycle. And obviously, the acquisition we just did will be helpful in that. And then, as we start to continue to ramp-up the percentage of PVC, we’ve got to make some minor modifications to the lines, which we’ll be doing over the next 12 months to allow us to continue that step-up.

Ryan, I don’t know if you’ve got anything more to add?

Ryan Lada: No, I think you covered it all.

Jesse Singh: Appreciate it.

Ketan Mamtora: Perfect. Thanks, Jesse. Good luck.

Jesse Singh: Thanks.

Operator: Your next question comes from the line of Trevor Allinson of Wolfe Research. Please go ahead.

Trevor Allinson: Hi, good afternoon. Thank you for taking my questions. I wanted to revisit the margin question asked earlier maybe a little different way. In the past, you guys have talked about doing in the neighborhood of 100 basis points of EBITDA margin expansion per year, this year guiding to a little bit less than that, is that just primarily a function of your 100 basis points of margin expansion usually assumes you get closer to 10% top-line growth or some of these other factors that you guys have talked about, whether it be some of the inflation in Scranton or some of these new products that you’re bringing on, is that having as big of an impact on the margin year-over-year there as some of the lower leverage versus that 10% growth rate?

Ryan Lada: Yes. I would say it’s actually a combination of everything you mentioned. So first off, when we talk that 50 basis points to 100 basis points, that typically is the full volume and sales growth expectation. And then second, this year with all the new product launches, facility start-ups planned underutilization as well as the headwind on our Scranton products business, I think that fits into kind of why we had a lower number for the year. So nothing has really changed on the strategy. I think it’s just given the lower sales outlook versus the 10% to 12% growth and then those factors would contribute to why we’re modeling less than 100 basis points.

Jesse Singh: Yes. And I think the only thing I would add is, margin expansion, you would love for it to be perfectly linear quarter-to-quarter. And as Ryan pointed out, some of that is with respect to investments and ramp-up. And some of that’s really timing on some of the cost savings. And so as we move through the back half of the year, it’s not only utilization and the ramp-up of the new products, we also will start seeing some of the benefit, and in particular, as we move to the back end of the year into next year, some step-ups in some of our cost programs. So, in general, we have an ability to control our margin ramp-up as you’ve seen. We’re going to continue to expand margins. And it’s — at this stage, it’s a mix of what we’ve highlighted and also just timing of our cost reduction ramps.

And just to reiterate, obviously, as we looked at our five-year target, we’re pretty much on track to get there earlier and feel really confident about our ability to get there much earlier than we talked about.

Trevor Allinson: Yes, makes a lot of sense. Appreciate all that color. And then for a second question, I appreciate it’s small part of your business, but can you kind of quantify what the inflationary impacts in Scranton and what kind of impact that had on your margin in the first quarter? And then, what sort of pricing are you guys expecting to push here in the back half of the year to cover that? Thanks.

Ryan Lada: Yes. From the material side, right, the reality is when we sold the Vycom business in the prior year, we used to source the sheet directly from them to build the product, now it’s a source piece so the lag on the balance sheet caught up with that. So that was the majority of the headwind on the margin side from the Scranton Products business. And then from a pricing perspective on Scranton Products, it’s really a low single-digit increase. But given the backlog of that business, it takes a quarter and a half to two to materialize. So the reality of that doesn’t start impacting us until our third and fourth quarter of the fiscal year.

Trevor Allinson: Got it. Makes sense. Appreciate all the color and good luck moving forward.

Ryan Lada: Thank you.

Jesse Singh: Great. Thank you. I believe that’s the last question we had. I really appreciate everyone’s participation and we look forward to talking to and seeing many of you over the next few weeks at the various events, including IBS. So with that, thank you so much and we look forward to talking to you. Have a great evening.

Operator: Ladies and gentlemen, that concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.