The AZEK Company Inc. (NYSE:AZEK) Q2 2024 Earnings Call Transcript

The AZEK Company Inc. (NYSE:AZEK) Q2 2024 Earnings Call Transcript May 8, 2024

The AZEK Company Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the AZEK Company’s Second Quarter Fiscal 2024 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 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 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 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, which is posted on our website. Now, let me turn the call over to AZEK’s CEO, Jesse Singh.

Jesse Singh: Thank you for joining us today. The AZEK Company delivered strong performance this quarter and once again outperformed the market with double-digit residential sell-through growth driven by outstanding execution of our growth initiatives. We continue to see the momentum, strength and resilience of AZEK business model and our team continues to deliver results ahead of our planning assumptions. Based on our recent performance and increased confidence in our execution, we are raising our fiscal year 2024 net sales and adjusted EBITDA outlooks. Before we go into more details on our quarterly performance and the updated outlook, I’d like to have Pete provide some background on why we are delaying our Form 10-Q filing.

Peter Clifford: Thank you, Jesse, and good evening everyone. During our March 2024 quarter-end close process, a plant accountant took over certain inventory related responsibilities from an employee who had recently left the company and discovered a gap between the company’s balance sheet and physical inventory sub-ledger. As soon as we identified the issue, the Audit Committee initiated a thorough independent investigation with outside counsel and independent accounting advisers with the diligent support of management and other employees. The investigation determined that the recently departed employee had been recording unsupported manual journal entries that ultimately increase the value of inventory and decrease the cost of bids sold.

The investigation also identified no evidence of involvement by anyone other than a single former employee and found no indication that there were any affected accounts other than inventory and cost of goods sold. The investigation is now substantially complete and we have identified the specific adjustments needed. For more details please see the Form 8-K we filed today. We are confident that our preliminary year-to-date 2Q 24 financials reflect the entire impact for fiscal year 2024. The impact on fiscal ’24 is caused by FIFO accounting estimates being revised due to the restatement of inventory used in a rollback which caused approximately $4 million of additional costs not previously planned for and our year-to-date 2Q results. I want to emphasize there is no impact on net sales or the underlying fundamentals of the business.

Actions are underway to strengthen reporting process and internal controls to prevent this from happening in the future. I now hand the call back to Jesse to provide an update on the businesses and progress against our strategic initiatives.

Jesse Singh: Thank you, Pete. I’d like to thank members of our finance team that identify the issue and acted quickly to raise the matter and support the investigation. With the investigation substantially complete, we are confident that we understand the scope of the adjustments. To reiterate what Pete said earlier, this matter has no impact on net sales for the strength of our underlying business operations and we are confident in our updated and increased fiscal 2024 outlook. Our team continues to remain focused on execution to drive above-market growth and margin expansion in fiscal year 2024 and beyond. Over the last 12 months, our residential segment has grown 19% year-over-year, driven by strong channel contractor and consumer demand for our residential product portfolio.

Through the first six months ended March 31, 2024, our residential segment has grown 20% year-over-year and demand for our products remains strong, as we enter the 2024 building season. Over the last several years, we have invested and will continue to invest in our core strengths of research and development, innovation, brand awareness, customer relationships and our world-class manufacturing operations, all of which advances and strengthens our position as the category leader and allows us to provide the best service to our customers. Our TimberTech brand is strengthening across all channels. Sample orders are up year-over-year as well as website visit. We’ve also added more than 1000 contractors into our TimberTech loyalty program year-to-date and several of our products are being recognized by industry and design leaders alike.

For example, our new TimberTech Composite Terrain Plus collection received Green Builders 2024 Sustainable Product of the Year Award and was named HGTV Magazine’s 2024 green list. We are experiencing incremental growth from some of our newest product innovations such as our TimberTech Composite Terrain Plus, horizontal cable railing and TimberTech Aluminum Framing Substructure. This new product is driving contractor productivity and giving homeowners a long-lasting solid deck substructure that is superior to wood and other alternatives. In addition, our new siding and railing products continue to gain share and drive incremental growth. Last month, our TimberTech advanced PBC vintage and landmark decking collections. We’re the first in the composite decking industry to receive an ignition-resistant designation from California State Fire Marshal.

In addition to the new ignition-resistant designation, these collections hold a Class A flame spread rating in the wooly [ph] compliance the combination of which sets the industry standard for fire resistance. With more than 46 million homes across 70,000 communities across the US at risk from the impacts of wildfire, products across AZEK’s portfolio can help consumers increase resistance to heat, flames and embers that are typical of most wildfires. No other decking features this level of fire rating beauty and performance of these premium collections. We also continue to benefit from our shelf space gains over the last few years in both the pro and retail channels. We are excited about some recent and incremental gains that will support our growth in 2025, drives incremental material conversion and allow us to continue to build on the brand momentum of TimberTech and AZEK.

We expect to invest approximately $4.5 million in our fiscal fourth quarter to support these incremental gains, which is embedded in our updated outlook. The investments we have made in our sales team, the TimberTech brand, new products and new capacity have put us in a position of increasing relevance to the consumer, the contractor and the channel. On the recycling and operational front, we continue to focus on expanding our sourcing network, increasing the usage of recycled materials and lowering our conversion costs. We recently expanded our geographic recycling footprint with the addition of a new Texas-based operation. The initiative expands our sourcing reach, adds processing capacity, reduces logistical and transportation costs and adds new collection points to our full circle recycling program.

This program currently has more than 1000 bins placed throughout the country. Our newer Boise decking manufacturing facility is also nearing the utilization and production levels we had planned for its initial build-out phase. This is an important component to some of our recent shelf space wins. Across our manufacturing and recycling network, we are aggressively leaning into our AZEK integrated management system to improve efficiency and drive continuous improvements that support our long-term margin expansion initiatives. As we look to the remainder of the year, we continue to be optimistic about our ability to drive above-market growth and margin expansion. Year-to-date, we have had strong double-digit sell-through growth in our residential segment.

Channel inventories are healthy and remain below historical averages. We think it is prudent to continue to assume a flattish repair and remodel market in a mid-single-digit sell-through growth through the remainder of the fiscal year and our updated 2024 outlook. The results of our recent survey of over 500 dealers and over 1000 contractors showed that our partners remain positive and balanced in their outlook. Contractor backlogs remain stable and sentiment is positive with continued expectations for growth in 2024. Internally, key awareness and demand indicators including sample orders and website sessions continue to show double-digit growth and contractor conversions are up. We are raising our fiscal 2024 outlook for the year driven by our fiscal second quarter performance.

The demand for our products we have experienced year-to-date and our increased visibility to our margins. We now expect adjusted EBITDA margins will range between 25.8% and 26.4% for the year demonstrating strong progress to our 27.5% objective. We will continue to execute our strategy for the remainder of fiscal 2024 and believe that we are well-positioned to continue to drive above-market growth in 2025. I will now turn the call back over to Pete to provide some additional context on our financial results and outlook.

Peter Clifford: Thanks, Jesse. As Eric highlighted at the beginning of the call, we have uploaded a supplemental presentation on the Investor Relations portion of our website. Before we get into the second quarter results, I wanted to provide some context on the second quarter demand. First on sell-through we continue to experience approximately double-digit sell-through growth in fiscal 2024. This is the result of continued execution of the AZEK growth playbook including downstream material conversion initiatives, channel expansion efforts, new product development and shelf space gains. We ended the quarter with channel inventories down approximately 15% versus the historical average days on hand. Retail point-of-sale data continues to experience healthy growth year-over-year.

The total retail POS remained above our pro channel sell-through growth. These results underscore the strength of our retail partnerships, the continued demand for our products in store as well as the accretive growth opportunity in front of us in the retail channel. From an operating perspective, we continue to execute our traditional annual recycling and product configuration initiatives. Commodity prices and our conversion costs remained stable and we continue to see additional sourcing savings opportunities. In terms of SG&A, our preliminary results reflected normalized spend levels and we continue to invest opportunistically to drive future growth and brand awareness. The combination of approximately double-digit residential sell-through growth coupled with strong execution of our material savings conversion costs and recycling initiatives helped us drive strong performance in the second quarter.

Turning to the preliminary results. For the second fiscal quarter consolidated net sales increased 11% year-over-year to $418 million and adjusted net sales excluding results from the divestiture of the Vycom increased 17% year-over-year. Residential segment net sales increased 18% year-over-year driven by double-digit sell-through growth, solid demand for our products and our positioning for the building season. For the six months ended March 31, 2024 consolidated net sales increased 11% year-over-year to $658.9 million and adjusted net sales excluding results for the divested Vycom business increased 19% year-over-year. For that period, we expect net income in the range of $74 million to $75 million and net profit margin in the range of 11.2% and to 11.4%.

We expect adjusted EBITDA in the range of $167 million to $169 million and adjusted EBITDA margins in the range of 25.3% to 25.6%. From the balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $227 million and approximately $148 million available for future borrowings under our revolving credit facility. We ended the quarter with gross debt of $669 million which included approximately $78 million of finance leases. Net debt was $441 million and capital expenditures for the quarter were approximately $19.2 million. During the three months ended March 31, 2024, the company repurchased approximately 0.5 million shares of its Class A common stock on the open market, totaling approximately $25.2 million reacquisition costs.

Fiscal year-to-date, the company has repurchased $125 million worth of shares. The remaining authorization under our share repurchase program is approximately $76 million, and we expect to be active on the share repurchase front for the remainder of the year. As a reminder, 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 color on what we are seeing and assuming for the balance of the fiscal year. We continue to expect the R&R market in fiscal ’24 to remain flattish, and we see our residential sell-through in the mid single digits for the balance of the fiscal year.

We continue to focus on driving above-market growth for our strategic initiatives, including market conversion and share gains. We are pleased with the results of our first half of fiscal 2024 and the impact from shelf space wins and expansion in both the pro and retail channel. These wins, coupled with double-digit residential sell-through over the first six months provides confidence in our second half of the year and generates a tailwind that fiscal 2025 for us to continue to outperformed the market. From a channel perspective, we continue to managed the channel conservatively while maintaining high service levels and short lead times. On the margin side, we continue to see benefits from our margin expansion initiatives and remain focused on expanding our sourcing and recycling programs while lowering our conversion costs to further benefit our gross margins in future quarters.

On SG&A, we will continue to support organic growth through sales and marketing initiatives. With our outperformance in the first half and demand seen to-date, coupled with increased visibility to our margin drivers, we are increasing our guidance for full year consolidated net sales to range between $1.407 billion to $1.438 billion and increasing our full year adjusted EBITDA range to between $364 million to $380 million. The updated adjusted EBITDA range includes the $4 million of first half fiscal 2024 LIFO accounting charges, which were not contemplated at our last guide. And $4.5 million of incremental investment related to recent retail and Pro channel wins, which will show in the gross margin rate as a reduction in sales. We are excited about the growth opportunity this adds to our fiscal year 2025 and beyond.

Excluding the approximately $4.5 million impact from this channel investment in 4Q, our second half of fiscal 2024, adjusted EBITDA margin would be in the range of 26.6% to 27.7%. Adjusting for the Vycom sale, our consolidated net sales guidance range would imply 9% to 11% growth year-over-year. Our residential segment planning assumptions for the year is $1.337 billion to $1.364 billion in net sales, representing 9% to 12% sales growth year-over-year and adjusted segment EBITDA between $350 million to $365 million. A few other assumptions for full year 2024 to share include the following: we are expecting a capital expenditure range of between $85 million to $95 million, consistent with our stated target of CapEx of approximately 5% to 7% of revenue.

We are expecting depreciation of approximately $90 million to $93 million. We are targeting a working capital reduction of approximately $10 million to $20 million for the year. We are expecting a GAAP tax rate for the full year of 29% to 30%. And finally, for the full year fiscal 2024, we expect to deliver another strong year of free cash flow generation. For additional planning assumptions to assist with modeling fiscal 2024, please refer to the supplemental presentation we have posted on our Investor Relations website. Our three key revenue guidance assumes sell-through growth in mid-single-digit range. Our guidance for the quarter is $385 million to $400 million in revenue and $103 million to $110 million in adjusted EBITDA. We are expecting an effective tax rate of approximately 27% for the quarter.

With that, I’ll now turn the call back to Jesse for some closing remarks.

Jesse Singh: Thanks, Pete. I would again like to thank our dedicated team members, channel and supplier partners and contractors that support The AZEK Company. AZEK’s success and momentum are a testament to the hard work of our exceptional team and partners. I would like to express my gratitude for their continued commitment and execution. Our margin expansion initiatives and trends remain strong. We believe we are well positioned to achieve our adjusted EBITDA margin objective of 27.5% earlier than planned and continue to invest to deliver 5% to 7% above market growth. We remain focused and excited about the long-term growth and material conversion opportunity ahead of us in both our fast-growing $14 billion core outdoor living market and in our $10 billion of near adjacent market.

The expansion of our product portfolio, combined with the continued execution of our growth strategy and share gains put us in a great position for the rest of fiscal 2024 and fiscal 2025. With that, operator, please open the line for questions.

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Q&A Session

Operator: Thank you [Operator Instructions] Your first question comes from the line of Keith Hughes with Truist. Your line is open.

Q – Keith Hughes: Thank you. My question is on the sell-through. You’re discussing a deceleration from double-digit sell-through in this quarter to single digit over the next couple of quarters. If you could talk about why you think that’s occurring? And has that already started to occur here in April?

Jesse Singh: Just to answer your latter question, that has not occurred. And similar to our last earnings call, we believe it’s prudent to assume a flat R&R market and to assume that our sell-through growth would be 5 points over that. I think as you look at what we highlighted in the most recent quarter that we ended that sell-through growth was right around double digits. And without getting into too much detail, it’s safe to say that that level has continued to date. So once again, it’s a very similar assumption that we had in our last call.

Keith Hughes: Okay. And then finally just one second topic. In the September quarter, the fourth quarter the implied guidance there is flattish revenue again, that would be below sell-through that you just discussed. Is that just taking inventory off? Or how would you move down there?

Jesse Singh: Yes. So I think as we said on the last call, in the second quarter, we would expect to build some modest inventory ahead of the season and as you look at our implied Q4, if our sell-through stays at 5%, we think it’s appropriate to be conservative on that inventory coming back out and bringing us back to what we’ve talked about all year, which is a decline in days on hand compared to our historical average and really ending the year this particular guide assumes that we’re going to end the year at that 10% to 15%, down from historical average maybe even a little higher.

Keith Hughes: Okay. Thanks very much.

Operator: Your next question comes from the line of Tim Wojs with Baird. Your line is open.

Tim Wojs: Hey, good afternoon, guys. Maybe just to start on some of the new business wins that you talked about Jesse. I guess is there any way to kind of ring-fence or kind of size what the incremental business is? At a similar to what you’ve seen over the last couple of years? Or is there anything in there that’s kind of new?

Jesse Singh: Thanks for the question. As we’ve highlighted in our prepared remarks, the wins are really both in retail and in the Pro. I think from a sizing standpoint, as we look at next year, it is the first time we’ve called out some incremental costs associated with that transition. And I think as we look at 2025, I would think some of the incremental positions that we gain give us a lot of confidence to be able to really articulate that we’re in a good position to continue to outgrow the market by 5%. So we’re not sizing it specifically but clearly it’s something that is probably a bit larger than what we’ve talked about in the past and really sets us up for 2025.

Tim Wojs: Okay. Great. That’s helpful. And then just thinking about the investments is that really just channel kind of servicing sales rep those types of things? Or are there other kind of structural investments that you need to make just given where the new business is?

Jesse Singh: I would think of it as – any time you have a meaningful gain in either the Pro or the retail channel. In some cases you need to support that transition. And so I would think of it as a transition cost as we move forward.

Tim Wojs: Okay. Okay. Very good. Thanks a lot for the color guys.

Operator: Your next question comes from the line of Philip Ng with Jefferies. Your line is open.

Philip Ng: Hey, Jesse, exciting news on some of the share gains. I guess a really simple question, what are you guys doing that you think that’s driving some of these share gains? And sorry to dig a little more. Last year, the share gains was a little more on the retail side. Any more color if this is a little more balanced between the channel? Any color on type of product? Is this more on the high end? Good, bad, or bad side of the portfolio? Any color on that front would be helpful as well.

Jesse Singh: Sure. I think as we’ve talked about over the last really two years, we’ve had a really balanced execution of increasing our position in the market on both the pro and on the retail side. And obviously, we’ve highlighted that that will continue into 2025. And I think it really comes down to the investments we’ve made in terms of expanding our product portfolio, the investments we’ve made on our downstream sales force. And we’ve had some meaningful step ups in SG&A investment, I think, as you look over the last couple of years. And then I think as you consider your question on mix, I think we’ve always and will continue to drive expansion in the more premium segments of the market. We’ve done that nicely over the last few years.

And we called out the ignition resistance of a designation from California, which we believe we’re the only player out there that has that. And so those things really secure our position in the premium. And then obviously, on certain shelves, it’s important that we’re able to provide the entirety of the portfolio, which includes more of the mid-price point products. So I would say, as you consider next year, it’s pretty balanced. But we have typically been underpenetrated in more on the good and better parts of the category. And we believe we’re taking steps to not only grow in the premium, but close that gap of being underpenetrated in those segments.

Philip Ng: And Jesse, it sounds like your guidance speaks in a fair amount of conservatism with sellout, perhaps, moderating, which is not what you’re seeing. And then inventory coming down to 10% to 15% below historical levels, maybe even higher. Has the channel actually kind of signaled to you that we want to manage inventory a lot more conservatively? Because actually, coming into the year, it sounds like they were quite bullish. And they were building more inventory than normal, especially during the winter bias. So I just want to make sure this is more conservatism on your end versus what your channel partners are kind of signaling at this point?

Jesse Singh: As we’ve talked about over the last couple of years, I think it’s important, as our service levels have been consistent, that we work with our channel partners to make sure that they have an appropriate level of inventory in the channel. And as we’ve talked about the last few quarters, really, as we ended 2023, our intent is not to put any more inventory in the channel that is absolutely necessary. What I would say is, in terms of channel behavior, it is pretty normal. They want enough product to be able to service their customers, but they don’t want too much product that has an impact on their return on investment. And so I would just say it’s a pretty normal conversation and a pretty normal year. I think our lower lead times and the consistent execution of those lower lead times gives us an opportunity to have high service levels with less inventory in the channel. And if anything, we’re probably an advocate of that.

Philip Ng: Okay. Great color. Appreciate guys.

Operator: Next question comes from the line of Susan Maklari with Goldman Sachs. Your line is open.

Susan Maklari: Thank you. Good afternoon, everyone. My first question is just around demand generally. It sounds like R&R activity started a bit softer for some product categories this year. I guess, how would you characterize what you’re hearing from customers, what you’re seeing in perhaps some of your more recent surveys? And anything else that suggests the health of the consumer and the pace of demand we could see as we get into the summer?

Jesse Singh: It’s been — the general feedback as we highlighted on our surveys has been relatively steady. I think certainly in dialogue with the market in general you would have an R&R rate, a feeling of a flattish R&R rate as we’ve highlighted. And I think there’s certainly a sense that there’s an opportunity for some acceleration when interest rates come down. But the word I would continue to use is steady and there’s always going to be geographic or weather variations. But in general, I think what we’re seeing is at least in our consumer segment, a pretty steady set of activity. And clearly we’re benefiting from our activities of growing above the market. And so that’s the word I would use is steady. And Pete I don’t know if you’ve got the data in front of you. I don’t know if you’ve got any incremental comments there.

Peter Clifford: Just from our quarterly surveys with our channel partners, the sentiment from the dealers is incrementally more positive from last quarter, growth expectations on the dealer set is modestly better than last quarter. Contractor side, backlogs are still in that seven to eight weeks. So again really steady over the last six to eight quarters.

Susan Maklari: Okay. All right. That’s great color. And then maybe turning to exterior specifically, I guess anything that you would highlight there? And I know last quarter you had mentioned that you’re in the process of adding capacity. Just any incremental update on how that’s coming along and anything new?

Jesse Singh: No. Pete, why don’t you go ahead and take that?

Peter Clifford: Yeah. Just first on the utilization and capacity as we’ve talked about previously, we’re probably in that 85% to 90% range in handsets, whereas, some capital is being deployed here especially in the back half of this year to expand capacity for 2025. Again, we are approaching completion of phase one on Boise, and capacity utilization on our decking business is pretty steady here at probably 65% to 70%.

Jesse Singh: Yeah. And as I pointed out the incremental capacity we brought online was within our Versatex and our exteriors business. And that capacity is not only in some of our traditional exterior products, but it’s also to help us continue to service the market on some of our new siding products. And what I would say is that that siding capacity expansion is certainly on track. We’re in the early days of that particular business. It’s a very high-end niche kind of a siding play. But we certainly have capacity to service that business as it continues to get seated and grow as we move into 2025.

Susan Maklari: Okay. All right. That’s great color. Thank you both and good luck.

Jesse Singh: Appreciate it. Thanks, Susan.

Operator: Your next question comes from the line of Trey Grooms with Stephens Inc. Your line is open.

Trey Grooms: Good afternoon. So the margin excluding some of these expenses, it looks like it’s going to be 26.6 to 27.7 this year. So you’re basically knocking on the door here of your long-term target and/or if not hitting it maybe. And Jesse, I know you said you guys feel confident that you could hit that early which was a 27% target that 27.5%. So maybe what would it take to maybe update that longer-term target? And maybe what that could look like in a few years?

Peter Clifford: Yeah. As we’ve said Trey in the past, if you go back to our 2022 Investor Day, we felt like on the recycling side, I think back then we laid out about 350 basis points of an opportunity. We still probably see half of that or more ahead of us and as well on the product configuration side I think we had idea about 200 basis points of incremental projects and pathway expansion. And again, I think we’re probably that mid-innings in tackling that. So we still feel like as we look out over the next couple of years we’ve got headroom to expand gross margins.

Trey Grooms: Okay. And maybe just housekeeping, — Thanks for that Pete. Housekeeping, it sounds like the $4 million FIFO impact, would that all have been in 1Q? Or is some of that going to be in the 2Q as well?

Peter Clifford: Yeah. It’s a great question, Trey. So part of why we’re providing kind of year-to-date numbers here as we will likely restate 1Q. And so we’re very comfortable on the year-to-date results, but there could be some modest movements from 1Q to 2Q. So that’s the color I can provide.

Trey Grooms: Okay. Thanks for the color.

Operator: Your next question comes from the line of Matthew Bouley with Barclays. Your line is open.

Matthew Bouley: Good evening everyone. Thanks for taking my questions. So on AZEK’s growth relative to sell-through beyond just that quarter dynamic you spoke about earlier. Obviously the year-over-year growth has been very strong for the past three quarters and that reflected of course the comparison from the destock the prior year. But as we kind of get forward, and we look to more normalized channel inventory comps in the future, should we think that AZEK growth will settle out to sort of match industry sell-through plus your shelf wins, perhaps as we forecast out 2025? Or what could cause your quarterly growth to still remain somewhat lumpy? Thank you.

Jesse Singh: Yeah. So as you point out, we had some modest lapping. I think we called it out in the kind of 20 to 30, range in Q1. But really since then, you should assume that we’re operating under a normal inventory sell-through scenario. So as you look at what we delivered in 2Q and compare that to our fourth quarter, what you’re basically seeing is modestly filling the channel which is pretty normal at this time of the year 3Q sell-through, sell to being closed. There’s always a little bit of movement and then the inventory coming out in Q4. And once again, that’s against an assumption of only 5% sell-through growth and we’ve been operating at a level above that. I think as you move into next year, our focus and the equation is to be roughly 5 to 7 points over the market.

And over the underlying R&R market, I think you’ve seen that probably a little higher this year. In terms of our overall execution. My guess is decking is probably in the 4% to 5% growth range, and we’re five to six points over that which gets us in that double-digit sell-through range. If there’s any positive news as we move through 2025, we should stack on top of that. And so I’ll just leave it at the 5% to 7% above market that we talked about.

Matthew Bouley: Got it. Okay. That’s helpful, Jesse. And then secondly, I know you just spoke about some of the margin benefits of your recycling initiatives. But you called out in the comments sort of new operations in Texas, adding capacity and sourcing capabilities. I’m just curious if you can elaborate a little bit on what this will do to your mix of recycled product? And also if you got kind of anything else cooking for the future, I would love to hear it. Thank you.

Peter Clifford: Yeah. Specifically, the Texas asset is an opportunity for us to source some premium pure white PVC to the portfolio, which is obviously really important to us on the trim side of the business. We’ve got plenty of access to raw inputs on the recycling side. We’ve got plenty of capacity from a conversion perspective. So I think we’re positioned really well on the recycling side from a capacity perspective.

Jesse Singh: Yeah. And the only other thing, Matt, I’d call out just on the utilization side is clearly with a — with a solid season and an expectation of some incremental volume in 2025, our Boise facility is now running. I think we called that out in the comments. It’s running at an appropriate utilization. That’s ramping up very nicely. I think we’ve got an additional line coming online shortly there. But from a utilization standpoint, we’re moving back into a window where our aggregate utilization is moving towards historical norms. And we feel really good about that and our ability to service the market. And we’re always going to be focused on expanding our percentage of recycle. And as Pete pointed out, that high-quality recycle that we get really gives us an opportunity to increase the percentage in our exteriors business, in particular, the exteriors business that’s not painted.

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

Jesse Singh: Appreciate it. Thank you.

Operator: Your next question comes from the line of Michael Rehaut with JPMorgan. Your line is open.

Michael Rehaut: Thanks. Appreciate you taking my question. Good afternoon. First, I just wanted to drill down a little bit on the double-digit sell-through during the quarter. And I guess you said into April. Wanted to get a sense of if that was similar across your different channels, retail or wholesale pro and also the exteriors versus the decking and railing, if they were also kind of at similar growth rates? And any indications that those growth rates have changed at all as you’re looking into May?

Jesse Singh: Yes. I think as Pete pointed out on his comments, we given our position in the marketplace on a relative basis, we expect that just the nature of our expansion that retail will be accretive to our growth. And I think we certainly have seen that and we continue to see that and expect to see that moving forward. And we’ve had really nice growth within the pro channel. Now there’s some modest geo — within the pro channel I’d say there’s some modest geographic variations that you would expect this early in the season. But in aggregate it’s that double digit that we talked about. Across product lines if you look out over the last 18months or so you would have seen in a lot of cases our exteriors business or in multiple cases our exteriors business outgrowing the sell-through on our deck rail and accessories business.

And so we will have quarter-to-quarter variations I think on this quarter that we just reported we would — we’re showing our deck rail and accessories business outgrowing our exteriors business within the quarter. And so that’s just how it shakes out this quarter.

Michael Rehaut: Okay. Great. I appreciate that. And I guess just looking forward kind of with the adjustments that you’ve had to make to inventory over the past few years with the restatements. Just want to get a sense for you kind of alluded or highlighted the investigation and you put out all the different preliminary numbers about how it’s affected the past profitability. You know on a go-forward basis and particularly as it relates to the margin profile that you thought of just want to be crystal clear I guess that whatever was kind of uncovered over the past two or three years or more that whatever structure was or numbers that were out there doesn’t really affect the way you think about the business going forward? It appears that way but I just want to make sure that that’s kind of fully understood if there’s any other nuances to the business that maybe weren’t apparent prior to this.

Peter Clifford: Mike, this is Peter. The only impact on 2024 right now is the FIFO impact of $4 million. There really was no disconnect actually in 2024. The FIFO impact is purely due to the fact that the inventory being restated causes the rollback period for us to be recomputed from a FIFO perspective. So the $4 million charge that we have absorbed our year-to-date 2Q results is the only impact that we see to our cost structure moving forward.

Jesse Singh: Yes. And just to highlight our business the way it’s running now we’re really happy how it’s running. And this particular issue while unfortunate is really historical in nature as Pete pointed out with the exception of the FIFO conversation. So moving forward we feel really good about the margin structure and what we’re guiding to and don’t expect any additional impact aside from what we called out on our future numbers. And I think the key here is the team uncovered it, we dealt with it and we’re in the process of documenting it and doing what’s appropriate and it really doesn’t have an impact on the future business.

Michael Rehaut: Great. Thank you.

Jesse Singh: Appreciate it. Thanks Mike.

Operator: Your next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is open.

Mike Dahl: Good evening. Thanks for my questions. Just back on the margin discussion. Can you just give us an update on what you’re seeing in terms of your kind of cost basket and you’re thinking about deflation inflation or price cost in total?

Peter Clifford: Yes. Mike, this is Peter. Everything we can see on the commodity side is, stability, I think is the word on the input cost side that I would use. As Jesse mentioned, we’re approaching the completion of Phase 1 here with the last line going into Boise, which is positioning us to start to get some more meaningful leverage on a conversion cost per pound basis as that plant continues to ramp and get more volume and become more productive that helps the entire system out. And then from a pricing perspective, really no surprises, we anticipated. Our pricing in the market to be approximately flat this year and through two quarters that’s what we can see and we don’t see a different pattern in the back half of the year.

Mike Dahl: Okay. Got it. And then just back on the investigation. I appreciate the color you’ve given. Maybe can you just go into a little bit more detail about describing the scope or depth of the investigation that’s giving you kind of the confidence or maybe the scope of the employees’ responsibility, what the motivation may or may not have been behind just specifically this being an inventory or COGS issue? And then in your initial documentation have you been in touch with SEC or other regulatory bodies? Anything you can share at this point?

Peter Clifford: Yes. Just some context on — it’s a former employee that started with the business back in 2016. They left in March. Our very first close after that employee leaving, a new accountant performed traditional account reconciliation for our policy and procedure, identified discrepancy during the close, immediately communicated that up through the channel and the chain got to me. I got out of a plane, investigated it immediately communicated Jesse, the issue which immediately turned a communication to our Audit Committee and our Chairman. At that time our Audit Committee initiated an independent investigation. That investigation is substantially complete here this week. And so, it has clearly laid out what we feel like the appropriate impact ranges are by year.

And based upon that information and the body of assessing that we really came to the conclusion that restatement was the proper outcome, and we filed the 8-K today to inform the SEC as well as our intentions to restate our financials for 2021, 2022 and 2023 and the first quarter of ’24.

Mike Dahl: Okay. Thanks.

Operator: Your next question comes from the line of Rafe Jadrosich with Bank of America. Your line is open.

Rafe Jadrosich: Hi, good afternoon. Thanks for taking my question. Peter, just appreciate all the detail you’ve provided so far on the inventory side. Just to through explicitly. Is there like which part of the financials do we have 100% confidence are correct and don’t need restatement? And is there any cash or cash flow impact or uncertainty around the cash balances? And then just on the FIFO accounting definition is this just related to inventory accounting before ’24 that you have to take higher COGS on in ’24 due to the FIFO accounting? Or are there still kind of accounting issues sort of running up into March?

Peter Clifford: Yes. Again, there will be no accounting issues or cost accounting impact beyond our year-to-date 2Q results. And again, you want to think of it as your FIFO calculation is based upon a rollback of your inventory that you have on hand obviously with the information we would have been using before which had inventory overstated. When you restate that inventory it becomes lower the rollback becomes shorter and that in essence you should think of it Rafe as it moved favorable FIFO from ’24 into ’23 and really the impact of the $4 million that we’re feeling in our year-to-date results that we wouldn’t have anticipated at our last guidance.

Rafe Jadrosich: Okay.

Jesse Singh: And then I think your question relative to cash, it doesn’t have any impact on cash on hand or any of that sort of accounting it’s really a statement of inventory in past years.

Peter Clifford: It’s also important to just communicate the investigation when it concluded there was no evidence of anyone else being implicated or any scope beyond sort of inventory and cost of goods sold. It was a long former employee and everything that we can see from the investigation conclusion is that they did not benefit in any way in terms of any cash flow or payments or anything like that. So this is a self-contained issue.

Rafe Jadrosich: Okay. That’s helpful. And then just on the residential guidance raise, I think you’re raising the revenue $20 million, the EBITDA is going up $9 million but I think that’s inclusive of a $4 million headwind from the inventory change plus another $4 million to $5 million in loading costs. Am I thinking about that right? It implies very high incremental margin almost 100%. Just how should we think about that high incremental margin? And am I doing the math right on the guidance raise?

Peter Clifford: Yes. I mean you’re doing the flow-through analysis properly. I mean as we’ve kind of said over the last two quarters when we — every incremental dollar sales brings an incremental pound of production which we get meaningful leverage on right now. It’s an incremental pound to get recycled savings on. It’s an incremental pound to get deflation on I’m not going to commit Rafe that 100% flow through is a target for us going forward. We kind of said that, look, our own expectation for the back half of the year was — if we got upside it would probably be closer to 40% to 50%.

Rafe Jadrosich: Thank you. Appreciate all the color.

Operator: Your next question comes from the line of John Lovallo with UBS. Your line is open.

Spencer Kaufman: Hey, guys. Good evening. This is actually Spencer Kaufman. I’m for John. Thank you for the questions. The first one, how much of retail strength in the quarter is driven from business wins versus “organic”? And then just thinking about the entire portfolio, did you guys see any material differences in demand across different price points?

Jesse Singh: Yeah. On the latter point on price points, I’d say it’s too early to tell. We’ve seen nice demand really across the portfolio. So I don’t know that we can give any color on mix at this point. Obviously, it’s something we look at. And then relative to the difference between, call it same store versus incremental ads, we saw nice growth in particular on the deck rail and accessory side within the same footprint in addition to the expansion that we’ve experienced in retail. So I would say the growth is really an outcome of both.

Spencer Kaufman: Okay. Fair enough. And pricing was flat in the first half and I think is expected to be flat in the back half here. Do you guys still view that pricing can become a more important part of the growth alga over time?

Jesse Singh: Yeah. As we’ve said on previous calls, I think as we approach 2025, I think we would expect a return back to more traditional pricing opportunities on an annual basis.

Operator: Your next question comes from the line of Adam Baumgarten with Zelman & Associates’. Your line is open.

Adam Baumgarten: Hey, guys. Good evening. I think you mentioned, the possibility at some point for inorganic growth. Maybe if you could give us a sense for kind of what types of products, and I’m assuming that’s in residential, but any additional color there would be great?

Jesse Singh: Yeah. Certainly, our focus is continuing to build out the residential business. The Investor Day in 2022, we laid out what we thought was a pretty good growth algorithm, but we also laid out the areas that we would define as core and adjacency. And if you just look at our track record, we for the most part have acquired tuck-in acquisitions, acquisitions where we can benefit from their existing customer base, but we can also take the product and move it into our existing channels and really leverage that. We’ve done that recently with INTEX and Structure. We’ve done that over a long period of time with the Ultralox acquisition, and so I think that kind of a feel of what we would look at, I think is gives you a good sense of the opportunity.

And then clearly there’s opportunities within the supply chain. We’ve continued to take advantage of the opportunity we see to expand our capability and recycling. And so those are directionally the areas that we would look at. I think the most important takeaway is we really like our business model. We’re really well set up to continue to drive above-market growth in our core. So anything we do is really going to be around strengthening the core and making sure that we set ourselves up for continued growth in the segment that we love, which is the segment that we planned.

Adam Baumgarten: Got it. Thanks. And then just back to the sell-through being up double digits. Maybe if you could put a finer point on how much you think the composite decking market is growing versus that number?

Jesse Singh: It’s — I don’t know that I have a great sense of that. I think if you look over the last give or take, 12 months. I think what you would have heard is, in general, probably, give or take, around 5%, and we’ve been growing 5% over that. I think, unfortunately, we’re in a market where you make judgments on market growth looking backwards. But I certainly think there’s enough data to show that as a market segment, we — the composite decking area, deck, rail and accessories is outgrowing the underlying R&R market. And I think it just highlights the resiliency and the continued material conversion.

Adam Baumgarten: Got it. Thanks.

Operator: And that concludes the question-and-answer session. I’ll turn the call to Jesse Singh for closing remarks.

Jesse Singh: Really appreciate everyone taking the time once again in the evening to have a discussion with us, as always, reach out with questions. We look forward to having ongoing dialogue and chatting with you again next quarter. Thanks, and have a great evening.

Operator: This concludes today’s conference call. Thank you for joining. You may now disconnect your lines.