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spk05: Welcome to the ASAC Company's second quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker 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 your speaker today, John Skelly, Senior Vice President, Strategy and Execution. Thank you. Please go ahead.
spk08: Thank you. Good morning, everyone. We issued our earnings press release this morning to the investor relations portion of our website at investors.azetco.com, as well as via 8K on the SEC's website. I'm joined today by Jesse Singh, our Chief Executive Officer, Ralph Nicoletti, our Chief Financial Officer, Greg Jorgensen, our Chief Accounting Officer, and Amanda Smaglia, our Vice President of ESG. Before we begin, I would like to remind everyone that during this call, ASIC management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act 1995. These include remarks about future expectations, anticipation, beliefs, estimates, forecasts, plans, and prospects. Such statements are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the company's earnings release posted on the website and will be provided in our Form 10-Q for the second quarter of fiscal 2021 as filed with the Securities and Exchange Commission. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, the company will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of adjusted EBITDA to net income calculated under GAAP and adjusted gross profit to gross profit calculated under GAAP, as well as reconciliations for other non-GAAP measures discussed on this call, can be found in our earnings release, which is posted on our website and will be included in our Form 10-Q for our second quarter of fiscal year 2021. I would now like to turn the call over to Jesse Singh.
spk09: Good morning. I'd like to welcome everyone to today's call. As we approach the one-year anniversary of our IPO, I couldn't be more excited about where we are as a company and the opportunities in front of us. We continue to demonstrate that we are a unique growth company with the broadest portfolio and the most differentiated products in the marketplace. We are driving growth through innovation and delivered another quarter of double digit net sales and adjusted EBITDA growth. Demand and material conversion trends in our key outdoor living and exteriors markets remain strong. We continue to see record levels of consumer sample order activity and positive contractor sentiment. Our team continues to execute against our key strategic initiatives to deliver on growth, and margin expansion objectives. All this while managing through the near-term supply chain disruptions and inflationary pressures. Today, we are even more confident in our outlook for the second half of fiscal 2021. And as a result, we are increasing our guidance for the year. We are increasingly optimistic about the long-term market dynamics and are upsizing our investments in capacity, and key strategic initiatives for the remainder of fiscal 2021. Specifically, we will be adding an additional 15% of decking capacity, which we expect will come online in early fiscal 2022. This is on top of the previously announced 70% incremental capacity expansion program. During the quarter, we experienced a continuation of the strong performance we saw during prior quarters. Within our residential segment, the demand environment remained highly favorable, and we continued to drive downstream conversions through our industry-leading sales team. Given this strong demand in the marketplace, we are focused on customer service and production, and our capacity expansion initiatives remain on track. We also continue to make strong progress against our recycling and continuous improvement initiatives. We experienced inflationary headwinds in the quarter, and we expect the pricing and productivity actions we took during the quarter will allow us to offset these costs by the end of the fiscal year. I am proud of the team's performance and our results during the quarter are further reflection of the strength of our business model and our ability to drive strong results while investing in the future. We continue to invest in our core strengths of brand, manufacturing, R&D, and customer connection. I am particularly proud that TimberTech was once again recognized as number one in quality in the builder brand new study. Our advanced technology allows us to have the most differentiated and realistic looking decking products on the market. As an example, Our recently launched landmark decking collection incorporates our most advanced capping technology combined with visuals inspired by the on-trend look of rustic reclaimed wood. The collection has been well received and is gaining momentum in the marketplace. We remain focused on our key initiatives to achieve our long-term performance objectives. Those initiatives include growth through innovation, margin expansion through recycle and continuous improvement, and positively impacting the world through our commitments to ESG stewardship. We are driving differentiated innovation in the marketplace across our portfolio with award-winning products. ASEC's shingle siding with PaintPro Technology was named as a Best New Product of 2021 by LMC. We continue to launch new products with the best aesthetics that address customer needs, increase contractor productivity, and expand our market penetration. We also recently announced the selection of Boise, Idaho as a location for our new Western United States manufacturing facility. A combination of a location, available, highly skilled workforce, and common values around sustainability and growth were key criteria for selecting Boise. Construction is underway, and we are on track to be fully operational in 2022. Earlier this week, we released our inaugural ESG report, an important milestone in our company history. This report, titled Full Circle, amplifies our collective and ambitious commitment to create a lasting positive impact on our products, our people, and our planet. A few of the highlights from the report include the results of our inaugural carbon footprint inventory detailing a 9.2% reduction in carbon intensity from fiscal 2019 to fiscal 2020. This is measured in tons of CO2 per $1 million of net sales. In other words, we produced and sold more products in fiscal 2020 but emitted less carbon across the value chain, primarily as a result of using more recycled and less virgin raw material inputs. You will also see the results of the first-ever peer-reviewed lifecycle assessment for decking, which showed that our TimberTech decking lines have a lower carbon footprint than their sustainably harvested treated pine alternatives. From a social impact perspective, our employee engagement scores continue to increase year over year, and we have begun formalizing our framework for diversity, equity, and inclusion. We are committed to permanently increasing the minimum wage for our hourly employees to $15 an hour by the end of the calendar year. With an ambitious outlook ahead, we have a goal to reach 1 billion pounds of recycled materials annually by the end of 2026. We are committed to set science-based greenhouse gas emission reduction targets, and we have added ESG as a component of individual performance under our 2021 Management Annual Incentive Plan. We continue to focus on doing the right thing with respect to recycling. Our full-circle PVC recycling program received an honorable mention on Fast Company's 2021 list of world-changing ideas. While we believe that we are leading the industry in innovation, transparency, and accountability, in many ways we are still early on in our journey and look forward to communicating our ESG progress in the months and years ahead. Turning to our second quarter results. we delivered strong sales and adjusted EBITDA growth. Our residential business grew approximately 25% compared to the second quarter a year ago, while our commercial segment declined approximately 13%. Consolidated adjusted EBITDA grew approximately 28% year over year, and adjusted EBITDA margins expanded 170 basis points over the same period. The growth environment remains very positive, driven by strong end-user demand for our differentiated product offerings. Our adjusted EBITDA margins benefited in the quarter from the higher rate of sales, operational execution and pricing partially offset by higher costs. Within our residential business, we experienced broad-based demand and saw housing and repair and remodel activity continuing to strengthen. Sell-through in the quarter exceeded our sales growth, and inventory days in the channel still remain below typical levels. We are focused on working closely with our customers to provide the highest service levels possible and ensure we have broad product availability to meet end-user demand. We also have added additional capacity coming online during the next quarter, which will further allow us to improve service levels during the busy deck building season. We are seeing continued improvements across our digital and marketing programs, and during the quarter experienced significant double digit increases in consumer samples and leads with very strong conversion rates. As a reminder, these are key leading indicators of future demand. Our commercial business declined for the quarter on a year-over-year basis, but saw improvements in margin as the cost structure changes we made last year took hold. We are starting to see improvement in certain end markets and expect to see this business return to growth later this year. As a reminder, this business tends to track more closely to GDP and the broader economy, which has been improving. Operationally, the team continued to execute against our core initiatives of expansion of manufacturing capacity, the increased use of recycled raw materials, and continuous improvement programs while managing a difficult and dynamic period of raw material inflation and supply chain disruptions. The unusual winter storms in February that impacted Texas and Louisiana resulted in constrained supply and meaningful inflation in raw materials such as PVC resin. We worked with our key supplier partners to maintain adequate supply of raw materials to minimize any production disruptions and continue to service our customers. Conditions have improved. and availability of supply is increasing with inflation stabilizing at elevated levels. Our facilities are running full out to meet accelerated demand. Phase two of our previously announced $180 million capacity expansion program is scheduled to be completed by the end of the third quarter of our fiscal 2021, providing cumulatively 40% more decking capacity. Given the very strong demand environment, operationally, we remain focused on customer service. To position us for additional long-term growth and conversion opportunity, we are further upsizing our capacity investments by approximately $50 to $60 million for the remainder of fiscal 2021. This will enable both an expansion of our recycle capabilities and an incremental 15% of decking capacity This on top of the 40% expected as a result of phase one and phase two combined. The vast majority of this upsize investment is supporting incremental capacity that will come online early in our fiscal 2022. In addition, construction is underway at our newly announced facility in Boise, which is expected to deliver 30% incremental decking capacity during 2022. we continue to evaluate additional opportunities to maximize our capacity. We are very focused on the customer impact of the inflationary environment and have taken appropriate actions to offset this inflation with the least amount of disruption to our customer base through a combination of pricing and continued productivity initiatives. As it relates to pricing, During the fourth quarter of fiscal 2020, we announced a low single-digit price increase that went into effect at the beginning of the calendar year. During our fiscal second quarter, we implemented an additional price increase in the low single-digit range that will begin flowing through in late fiscal Q3. And we recently announced a third price increase across both our residential and commercial businesses that will begin to take effect during fiscal Q4. We expect the combination of our price increases and our productivity initiatives to fully offset inflation during Q4. Now, turning to our outlook. We are raising our net sales and adjusted EBITDA growth guidance for fiscal year 2021. This increased guidance underscores our conviction in the sustained underlying demand we are seeing across outdoor living and exteriors markets. As previously discussed, our outlook is fundamentally driven by a number of internal and external factors. We continue to see positive signals in our internal digital and website metrics, sample order activity, as well as dealer and contractor survey checks, and channel inventory remains below historic levels. Our current outlook is built on meeting customer demand and doesn't contemplate significant inventory build in the channel. The macroeconomic indicators that most highly correlate to our business, such as repair and remodel activity and new housing construction activity, continue to strengthen during the second quarter. We continue to be diligent in evaluating short and long-term market conditions. To sum up, we are increasing our investments to further enable long-term growth potential, and we have confidence in our business model and strategic positioning that allow us to deliver strong results. With that, I'd like to turn the call over to Ralph, who will discuss our financial results and outlook in greater detail.
spk10: Ralph Fischer Thank you, Jesse. As I discuss our results, all comparisons made will be on a year-over-year basis compared to the same period ending March 31, 2020. For the second quarter of 2021, net sales increased by $47.5 million, or 19%, to $293.1 million. The increase was primarily driven by sales growth in our residential segment, partially offset by a decrease in our commercial segment of 13 percent year over year. Gross profit for the second quarter of fiscal 21 increased by $18.5 million, or 23.3 percent, to $97.9 million. Adjusted gross profit for the second quarter of fiscal 21 increased by $19.4 million, or 20.3 percent, to $114.7 million. Adjusted gross profit margin was 39.1%, an increase of approximately 30 basis points compared to the prior year period. During the quarter, we were able to offset inflation and startup costs through a combination of pricing and productivity. As we discussed on our call in February, we said we were experiencing additional inflationary costs in fiscal Q2, and expected the higher raw material prices to flow through our P&L even more in the balance of the year. Since our last call, we have experienced additional inflationary headwinds, mainly from the freeze in Texas, and we have taken additional pricing to offset the impact. Selling general and administrative expenses increased by $10.2 million to $59.9 million, or 20.4% as a percentage of total sales for the second quarter. The increase was primarily driven by higher stock-based compensation expense as a result of our IPO in June of 2020, ongoing public company expenses, and personnel costs. Net income increased by $18.6 million to net income of $22.7 million for the three months ended March 31st of 2021, compared to $4.1 million for the three months ended March 31st of 2020. primarily due to higher net sales and lower interest expense. Adjusted net income was $39.3 million, or 25 cents a share, for the second quarter, compared to adjusted net income of $18.4 million, or 17 cents per share, a year ago. Adjusted EBITDA for the second quarter of fiscal 21 increased by 15.7 million, or 28 percent, to $71.5 million. Adjusted EBITDA margin expanded 170 basis points to 24.4% from 22.7% a year ago. Now, turning to our segment results. Residential segment net sales for the second quarter of fiscal 21 increased by $52 million, or 25%, to $262.2 million. Residential segment adjusted EBITDA for the second quarter of fiscal 21 increased by $18.9 million, or 30.1%, to $81.7 million. The increase was primarily driven by higher sales. Commercial segment net sales for the second quarter of fiscal 21 decreased by $4.4 million, or 13%, to $30.9 million. The decrease was primarily driven by declining sales in our Scranton products and Vicon businesses as the effects of COVID-19 continue to impact certain end markets. Commercial segment adjusted EBITDA for the second quarter of fiscal 21 was $3.7 million. The $600,000 increase year over year was primarily driven by manufacturing productivity and lower selling general and administrative expenses, partially offset by lower sales. Looking at our balance sheet and cash flow as of March 31st of 21, we had cash and cash equivalents of $151.3 million and approximately $145.6 million available for future borrowings under our revolving credit facility. Total debt as of March 31st of 21 was $467.7 million, and we have not drawn on a revolving credit facility. Our net leverage ratio stood at 1.3 times at the end of fiscal Q2. Net cash provided by operating activities was $7 million for the six-month ended March 31st of 21 versus a use of approximately $68 million for the six months ended of March 31st of 2020. Turning to our outlook, as Jesse mentioned, we are increasing our investments in capacity and now expect total capital expenditures in fiscal 21 to be in the $175 to $185 million range, providing both additional recycling capability and 15% more decking capacity as we further invest in our future growth opportunities. For fiscal Q3, we expect total company net sales growth to be in the range of 29% to 32% year-over-year, with the residential segment growing in the mid-30s range and adjusted EBITDA growth in the 15 to 18 percent range. I'd like to provide some additional color regarding the margin progression from fiscal Q3 through the balance of the year. Entering the second quarter, we saw significantly higher inflation, driven even higher with the impact of the severe weather in Texas, which is expected to significantly impact Q3 and Q4. We took two additional pricing actions, which only partially benefit Q3, and for which we expect to realize the full benefit in Q4. As a result, our third quarter margins are forecasted to decline year over year due to the timing of pricing realization relative to the cost increases, as well as a return to a normalized level of SG&A investment. We expect to fully offset our anticipated inflation and startup costs in Q4 from pricing and productivity. On a run rate basis, we are exiting the year positioned to cover our higher costs. Turning to the full year of fiscal 21, we expect total company net sales to increase 23 to 26% year over year and adjusted EBITDA growth in the 25 to 29% range year over year. This results in continuing adjusted EBITDA margin improvement as additional costs, including startup from our capacity expansion, incremental raw material and labor inflation, a normalization of marketing and SG&A expenses, and cost of being a public company are all more than offset by pricing and manufacturing productivity. From a segment perspective, based on our leading indicators, we expect full-year residential segment net sales growth of around 30% year-over-year. In the commercial segment, we are assuming there will be economic stability with some improvement in the second half of the fiscal year, leading to our projection of net sales declining at a mid-single-digit rate year-over-year, consistent with our prior outlook. To assist in modeling, we continue to expect approximately $21 to $22 million of interest expense for the full year in 2021. Our tax rate for 2021 is estimated to be approximately 25%. and our full-year weighted average diluted share count is unchanged at approximately 157 million shares. I'll now turn the call back to Jesse for some closing remarks.
spk09: Jesse Lee Thanks, Ralph. I want to thank our team for their relentless focus on execution, innovation, and operational excellence. We are a business with tremendous growth opportunity and are investing for the future. We are committed to driving lasting sources of value for all of our stakeholders as we seek to revolutionize and lead the industry in creating a more sustainable future. With that, operator, please open the line for questions.
spk05: As a reminder, to ask a question, you need to press star 1 on your telephone. To withdraw your question, press the pound key. Please limit yourself to one question and one follow-up question. Your first question line is Philip Ng from Jefferies LLC.
spk11: Hey, guys. Congrats on a really strong quarter. So, Jesse, with some of the incremental capex you're spending this year, will you be able to speed up or unlock more capacity this year? And does the incremental 15% capacity you're announcing signal any – wins from any of your channel partners?
spk09: First off, thanks, Phil, for your earlier comments. First off, relative to specifically any wins in the market, we've continued to really focus on executing our business model and continue to focus downstream on And so we're going through a constant series of engagement, either through our new products or through our downstream sales force relative to adding new business. So that's just always part of our process. I think the way to think about capacity, just as a reminder, we have additional capacity that is coming online as part of that phase two near the end or during this quarter. The machines are actually in. And they're going through the ramp-up phase as we speak. So we expect to see the benefit of that actually near the end of this month. And then this additional capacity, what it allows us to do is bring an additional 15% online in the fall, into the winter. And that then gives us additional flexibility in terms of how we use our inventory to and how we continue to service our customer as that comes online and in some cases prior to that capacity coming online.
spk11: Okay. That's helpful. In the move in virgin resin prices, I mean, this is pretty unprecedented. Great to see the team managed inflation well and certainly on the supply constraints as well. Any color on the magnitude of the third price increase? I may have missed it on the call. And in the past, Jesse, when you've seen a surge in resin prices and let's say it reverses, Have you been able to hold on to your pricing, whether it's on your resi side or commercial as well? Next slide.
spk09: Yeah, I'll take the latter part of that. And, Ralph, if you could take the specifics. In general, if you look at our pricing actions in the residential business, and this is over a long arc, we typically appropriately raise prices such that, you know, they maintain their position in the marketplace for the long term. So I'll just leave it at that. Ralph, do you want to touch upon some of the specifics?
spk10: Sure. Good morning, Phil. Yeah, so first on the – let me just kind of go back to the inflation side. You know, as you recall from our last earnings call, you know, we said, you know, we were seeing a lot of – you know, a lot of inflation. And, you know, at that point in time, you know, we had announced our second price increase to address that, largely taking effect later part of Q3 and then in full in Q4. Since the last earnings call, you know, just for perspective, we – We've seen $30 million, about $30 million in additional inflation, largely driven by the, you know, the freeze situation, you know, in Texas and Louisiana. But we saw, you know, we've seen resins in particular spike, you know, very substantially. And, you know, and now they've stabilized, but at a pretty high level, very high level. So we took that, we took a third price increase. It's largely, you know, it's really an impact Q4. on that one that we recently announced. And in order of magnitude, it's a mid-single-digit price increase on an annualized basis. And we'll get a portion of that, obviously, in fiscal 21 in the fourth quarter.
spk11: And, Ralph, that $30 million additional inflation, is that a quarterly run rate or a full-year run rate?
spk10: That's just for perspective of just what we experienced since the last earnings call in this fiscal year. How it plays out ultimately, you know, I think really depends on, you know, with the, you know, with the inflation outlook, you know, comes to bear, you know, as we move forward. But, you know, with this pricing, you know, as we said in our remarks, you know, we've offset our costs in 21 and positioned ourselves, you know, we think well, you know, exiting the year because we have the costs that we see today covered. Okay. Excellent, guys.
spk05: And your next question line of Matthew Boulay from Barclays.
spk10: Morning, everyone. Congrats on the results. Thanks for taking the question. Let me go back to the capacity add. Just firstly, the incremental 15% in early fiscal 22, does that suggest it's coming at an existing facility rather than Boise, if you could confirm that? But then the broader question is, you know, you said in the prepared remarks, Jesse, about
spk09: evaluating additional opportunities um can you elaborate a little bit on that are these type of mid-teens increments uh the right way to think about how are you all looking at it going forward thank you yeah to answer your first question uh yeah the the additional 15 uh is really an outcome of of just the flexibility and the capability of our uh manufacturing team uh you know we uh we will be deploying that at our existing facilities. And then relative to your question on future capacity ads, just as a reminder, the facility that we have, that we talk about in Boise, has a relatively large footprint, 350,000 square feet. And we have the capability to add additional equipment if we so choose to do that into that facility beyond what we've highlighted we're planning on doing in 2022. And once again, as a reminder, which is why we're able to deploy the 15% and also, you know, potential flexibility in the future, our manufacturing tends to be pretty modular. And so we have an ability to scale it on a relatively rapid basis, and it gives us a lot of flexibility in terms of meeting demand and managing through our capacity.
spk10: That's great, Culler, really helpful there. Second one, I wanted to ask about sales and marketing investment. It sounds like in the near term that there's some SG&A normalization upcoming, but I'm more curious about the longer term. What do you think you need to do from a scaling your sales force and marketing perspective as you continue to get bigger on the capacity side? Thank you.
spk09: Yeah, first, appreciate the question. As we talked about over the last year, we feel like we've got an industry-leading downstream sales force. We've got almost 200 people, or actually probably over 200 salespeople now, focused in our residential business. That is a large, powerful footprint that allows us to continue to drive market penetration. And we feel really good about the structure that we have. Now, having said that, incrementally, we're always going to look for opportunities to accelerate growth and customer service. Relative to marketing, as you can see, we've continued to take steps up in our marketing investment. We feel really good about the progress that we've made, both on the brand and the digital front. And we'll continue to make sure that we're well prepared and well positioned for the future as we continue those investments. Great. Well, thank you for that, Jesse, and good luck. Appreciate it. Thanks, Matt.
spk05: Your next question line of Mike Dahl from RBC Capital Markets.
spk10: This is actually Chris Claude on from Mike. Thanks for taking my questions. My first question is just to clarify, that incremental $30 million in costs that you guys saw from last quarter, is that just coming from the virgin PBC inflation you're seeing? And if so, any way you could provide either on a dollar percentage basis, what's the total cost inflation you're currently experiencing and what's embedded in your guide? Thanks. So, you know, I can add a little bit more, you know, perspective to it. You know, first, I think just stepping back, you know, we're seeing inflation in a lot of places. I mean, we're seeing it in labor, we're seeing it in freight, we're seeing it in certainly in our raw materials, you know, as we talk about, and obviously raw materials being the largest part of our cost structure, you know, that has a large impact. But there's, you know, there's inflation, you know, that we're seeing across the board. The majority of that $30 million you know, incremental since the last call, you know, for this year is in the resin side. And frankly, we're seeing even the cost to, you know, get the recycled material, you know, delivered to our factories and for processing has gone up too. So, you know, we're seeing it in all places. And, you know, so that gives you the, you know, some color on what we're seeing You know, in aggregate, you know, really not get too specific on, you know, what the full year inflation is. But I think, you know, maybe a way to help you think about it a little bit is, you know, we've taken three price increases, you know, this year. You know, two sort of, you know, low single-digit ones, which we previously announced in one mid-single-digit one that I had mentioned earlier. And so when you kind of cumulatively think about that, you know, in aggregate, you know, that on a run rate basis, we felt was sufficient to cover and we're seeing it's sufficient to cover inflation, you know, on the year and certainly the run rate in the fourth quarter. So I think that might help you a little bit.
spk09: Yeah. And if I could just add, as Ralph mentioned on the call, you know, In our view, the balance that Ralph's talking about is a relatively short-term move. Just to reiterate, we feel really good about our position as we move into Q4, and in particular as we exit Q4. we'll be back in a really nice position. And as a reminder, over the last trailing 12 months, we've expanded our EBITDA margins by 160 to 170 basis points. And our guidance, as you dissect it, implies some additional benefit as we move into next year. Got it.
spk10: That's helpful color. And for my follow-up, I guess given the price-cost neutrality exiting the year, Maybe some more color on some of the other moving pieces, like startup costs and the productivity bucket. What's any way you could help quantify what those startup costs could look like for the incremental capacity additions? And then when you think about the productivity offset, is that just from higher overhead leverage? Does that include the benefits from the recycling initiatives and the continuous improvement?
spk09: Yeah, you know, Ralph, I can just take it at a really high level. You know, in general, we have startup costs as we ramp the capacity we have coming online now. We will have additional, you know, relatively modest startup costs as we add an additional 15%, and we are very much on track with our productivity programs that we talked about. You know, as we chatted about in the past, we, you know, off a 2019 baseline, we've got 500 basis points of productivity and margin expansion that we have that we've talked about EBITDA margin expansion that we have in front of us based on a 2019 baseline. That's based on specific projects And as we move through these quarters, we continue to execute against those projects, and we continue to see benefit from them. Understood. Thanks for taking my questions.
spk05: Next question, line up, Tim Wise from Baird.
spk07: Hi, good morning. This is Josh Chan, filling in for Tim. Thanks for taking my questions. um i guess my my first question is on the demand side of things um to what extent does the backlog in this industry kind of carry into the following year so if a consumer is not able to get a project in this year either due to labor or material availability is it a brand new decision next year or is there an ability to carry some backlog that would contribute confidence into into the following following uh decking seasons
spk09: Yeah, you know, we survey both our contractors and our dealers relative to their backlog and the visibility that they have. And, you know, we, without getting specific, we see a really nice backlog of projects. People are planning now, and we fully expect to realize those projects, you know, over the next two to three to 12 months. And as a reminder, our leading indicators, our leading indicators based on historic data, they lead to 16 months, right? The decision making process on a deck, for example, our research shows can be up to 16 months. And so as such, we fully expect the activity that's occurring now will benefit us for many months in the future.
spk07: That's encouraging. And then on the recycling side, given the raw materials, I guess, could you kind of update us on where you stand in terms of the use of recycling across the product lines and then also any opportunity to accelerate the use of recycling based on how the costs have gone so far this year?
spk09: Yeah, as we highlighted, we continue to invest in our recycling capability. And as a reminder, for us, there's really three phases to our recycle. One aspect of it is increasing the use of recycle. The second is doing more in-house. And then the third is focused on cost-reducing and finding lower-cost sources of recycle. We continue to make progress on all of those fronts. You know, as you look at, you know, what we're doing without getting specific, even within the quarter, we've identified some additional lower-cost sources, and we continue to deploy and expand that effort. And we're investing to make sure that we have the capability to self-supply into the future.
spk07: That's great. Thanks for the color and good luck on the second half. Appreciate it.
spk09: Thank you.
spk05: Our next question is from Ryan Merkle from William Blair.
spk06: Hey, thanks for taking the questions. I guess first off, thanks for the color on margins and 3Q. I was hoping you could tell us how much of the year-over-year decline is price-cost timing versus new capacity versus SG&A. And if you don't want to get too specific, maybe you could just give us the rankings.
spk10: Ryan, thanks, Ralph. Hi. That's related to Q3. Just make sure I heard your question. Correct. So Q3, as we even indicated on the last call, we were going to have pressure on margins and the moving parts, which I think you got most of them. You know, here's how to think about, you know, this. You know, first, you know, the commodity, you know, the resins in particular, but overall inflation, but mainly resins even accelerated, you know, in terms of the impact, you know, which we've talked about now. And, you know, that is coming through the third quarter significantly. I'll come back to pricing in a minute. But, you know, you have inflation generally as well as, you know, a spike you know, an acceleration coming out of that freeze in Texas all hitting the quarter. We have startup costs as we're at a capacity, you know, clearly, you know, clearly in there. And, you know, that we're seeing in the quarter. You know, now from a pricing and productivity standpoint, you know, the productivity, you know, that we expected is on track and we're seeing that benefit in the third quarter. Pricing, you know, the first price increase, you know, that we took, you know, helped the third quarter. But, you know, the last two, you know, really more impact Q4 than Q3. So, you know, there was an imbalance on pricing relative to cost, which we had mentioned last time. But it was just even more magnified with the higher inflation. Now, having said all that, you know, there's also on the SG&A side public company costs. You know, we can't forget about that. We're, you know, we're now – about $2 million a quarter on SG&A higher just from being a public company and a return to a normalized level of SG&A investment, particularly in marketing and travel in the third quarter. So when you look at the third quarter and sum that up, you have pricing and productivity, you know, partially offsetting, you know, these other headwinds that I spoke about. Those are the moving pieces.
spk06: Got it. Thanks for that, Ralph. And then, Jesse, you said in the prepared remarks that underlying demand has continued to strengthen. Can you just unpack that a little bit more? And has the spike in lumber recently, has that been a driver as well?
spk09: Yeah, thanks for the question. You know, as we look at future demand, as I pointed out on the call, we look at a lot of different variables and And we look critically at those variables, but what we can see is the macro with repair and remodel in new housing and people being attracted to wanting new dwellings, all of that macro is manifesting itself on housing. on how we see the future. And so we continue to see a lot of interest in the category. We continue to see a lot of people wanting to focus on this part of the house. So that's really the macro backdrop. I think as you look at lumber prices, I think incrementally for us, One of the areas that the way we look at the market is we view the decking conversion and the opportunity we have for wood conversion to not only be driven by pricing, but also quality of the product and the visual of the product. And so as wood is difficult at times to get access to, we do see people considering their options. But in that, we see a lot of that going towards – a lot of that going towards our more premium product. And so the reason why I say all that is the dynamic is facilitating more consideration, and that consideration – we believe will benefit and pay dividends not only in the next couple of quarters, but as we move out into the out quarters and the out years.
spk06: Thanks, Jesse. Best of luck.
spk09: Appreciate it. Thank you.
spk05: Our next question line up, Michael Rehant from JP Morgan.
spk04: Hi. Congrats on the quarter. This is Maggie on for Mike. Following up on the last question and the impact that you've seen from some of the lumber price increases, I think you said that you've seen a lot of that demand going towards your premium product. But have you seen any shifts towards your lower-priced product, any mix shifts just given the higher lumber prices?
spk09: When we look at our growth, we continue to see growth broadly across the portfolio. So from a mixed standpoint, the demand pattern we see continues to reflect a really nice broad mix of interest.
spk04: Got it. Thank you. Second, and I apologize if I missed this in the prepared remarks, but did you break out the growth between deck rail and accessories versus exteriors?
spk09: We did not break that growth out. But just suffice it to say that we saw nice growth across the business.
spk04: Okay. And one more quick one, if I can. As you're seeing that nice growth, do you see any need going forward to add additional capacity across your rail or exteriors businesses?
spk09: Yeah, we continue. You know, when we talk about capacity ads, we highlight specifically some of the decking ads and the percentages associated with that. But along the way, the capacity ads that we've highlighted really include the entirety of the residential portfolio. So we've been adding capacity in our exteriors business and capacity in our rail business. And specifically in exteriors, we're in a really good position right now where we're able to service the market in a very differentiated way because, you know, we've been able to really deliver high service to our customers. So we're actually seeing the benefits of, you know, being able to supply our customers at a very high level.
spk04: Got it. Thank you.
spk05: Your next question is from Stanley Elliott from Stiefel.
spk10: Hey, good morning, everyone. Congratulations and thank you for the time. Just you mentioned on the contractor survey and some of the sampling activity, it sounds like you guys have pretty good visibility out even into 2022. And then at the same time, I thought you guys were talking about kind of within this guidance, did not really account for any sort of an inventory refill. So, if all of that's correct, are we looking at another kind of low inventory part of the start of the year into 2022, kind of given how strong demand has been?
spk09: The short answer is probably. And I think as we look at the dynamics of what's in the marketplace, as Ralph pointed out in his prepared remarks, is that the product that we're manufacturing is being used to meet end consumer needs. and dealer and market demand. And as such, we're doing a really improved job of servicing the market. But as we also pointed out in the call, the opportunity for us in this demand environment to replenish channel inventory is diminished.
spk10: And could you all comment on what you're seeing, if any, differences between kind of the big box and the pro channel? I'm assuming there's demands pretty evenly split, but would love to kind of get some commentary in any color you can provide.
spk09: Yeah, we see really nice demand for us on both sides. And obviously the makeup of the demand and how it manifests itself, you know, varies geography by geography. And, you know, and there are some nuances between the two sides. But in general, we see really strong demand and growth both in the pro and on the retail side for us. Great, guys. Thank you very much, and best of luck.
spk05: Your next question is from Trey Grooms from Stevens, Inc. Yeah.
spk02: Hey, good morning, guys. Thanks for taking my questions. First would be, I guess, on the normalization of SG&A you're talking about. Is the expectation that that will pretty well be caught up as we, you know, go into the, you know, through 4Q, fiscal 4Q, or should we expect to see that kind of normalization continue into next year as well?
spk10: Yeah, you know, Trey, you know, the – You think about this, you know, there's two pieces of it, you know, the larger piece being marketing related. And we've been investing, you know, we've been investing, you know, throughout the year and, you know, and certainly in the second half of this year into next year. You know, I think, you know, so that's I'll call normalized more. On the travel side, you know, I think it's beginning to normalize. you know, but it's a lesser part of the total SG&A. You know, and I think, you know, importantly, I think just as you think about, you know, what we've been saying is that, you know, through pricing and productivity, we've positioned ourselves, we feel well, you know, as we exit the year, going into next year to cover the costs that we see. But we're investing in SG&A, you know, to drive the business forward.
spk02: Great. Thank you for that. And, um, And then just for clarity, and sorry if I missed this, but the third increase that you've announced this year, mid-single digits, is that across all product lines or is it specific to certain product categories or class?
spk10: You know, go ahead, Ralph. Go ahead. Well, yeah, I was just saying, I mean, you know, generally, you know, it's it's a mix across, you know, you know, the different, the different categories, you know, so, you know, but it's, it's touching, it's touching a lot, you know, a lot of, a lot of the, a lot of the different product categories that vary at various different rates, but on average, you come to, you know, what I said was mid single digits.
spk02: Got it. Okay. All right. Well, thanks for taking my questions. I'll leave it at that and congrats on the good quarter and good luck.
spk05: Appreciate it. Thanks, Drake. Next question line of Jeff Stevenson from Loop Capital.
spk03: Hi. Thanks for taking my questions today. My first is just can you talk about commercial sales trends and the return to flat growth later this year? Is this a function of easier comps in the back half, or are you seeing a recovery in order patterns?
spk10: You know, on the commercial business side, It's a little bit of both. You know, we're clearly seeing some recovery in order patterns on certain end markets. You know, an example would be in the marine side, on the outdoor side where we, you know, we service, we provide product to OEMs. You know, we're seeing, you know, we're seeing, you know, recovery there. You know, areas like trade shows, which we've always said had significantly increased you know, slowed, you know, that those haven't, those haven't recovered. So you have a combination of recovery and, and, you know, you, you see our comps from, you know, from the second half of last year. So there is an element to that, but we're seeing, you know, in select categories, some, some recovery, our focus there has been, you know, obviously on, on this piece we're talking about, but also, um, you know, taking some action that we took at the back end of last fiscal year to get the cost structure along to where the revenues are. And you see, you know, you see in our results some of the margin improvement, you know, coming out of that business. We're focused there as well. And just to remind you, you know, as a percent of our total business, it's, I think, on a PTM basis, only somewhere around 5% of our EBITDA and, you know, low double digits percentage of our sales.
spk03: Right, right. No, thanks for that. And my follow-up was on that. your capital allocation strategy after the increased CapEx investments you announced today. Just wondering if there was any update on your priorities moving forward and also any potential appetite for a share repurchase program.
spk09: I'll take that at a high level. If you connect the dots here, we continue to see a really nice market for us ahead of us. And as such, we're always going to, you know, continue to prioritize investing in our own business because we believe that that provides us adequate returns. And, you know, selectively, we will look at, you know, potential acquisitions that are accretive and add to our business model. And then the third component is, you know, we'll always evaluate whether or not there's additional capital actions we can take that would be beneficial to shareholders.
spk03: Great. Thank you.
spk05: Our next question, Colleen, of Keidan Manture from BMO.
spk01: Thank you for taking my questions. Just to follow up on that question around capital allocation, you know, you mentioned you've got, you know, a good sort of runway ahead. I'm just curious, what is the right way to think about, you know, sort of capital allocation, capital investment runway into the business? I'm not looking at a specific number, but just, you know, sort of some sort of a framework, you know, as you, you know, kind of increase capacity to meet this demand.
spk10: Yeah, you know, I'll take that one. The way we think about it, you know, first, as Jesse mentioned here, you know, we get a very strong return. You could look at our return on tangible assets, you know, being, you know, about 40%. We get a very strong return on our investments, in particular on capacity. So, you know, investing in the business as we've said and continue to say it's it's it's our first priority for for for deploying operating cash flow but you know the framework for you know going forward on capital network you know we're not we're not in a position today to guide you know into 22 and beyond but as you can see you know the the majority of our our uh cash flow this year is going towards that priority, you know, which is driving, you know, our capacity and supporting our future growth. And looking forward, you know, I've said modeling-wise on a kind of steady state basis, our CapEx as a percent of revenue would be somewhere in the 5% to 7% range. You know, we're not guiding 22 yet, but I'd say just sitting here today from what we're looking at, you know, we're going to be, you know, over 10% of revenue in 22. but again, you know, all supportive of, you know, continuing to drive the growth that we see.
spk01: Got it. That's helpful perspective. Good luck in the back half of the year. I'll turn it over. Thank you.
spk05: And your next question, a line of Anthony Pedroneri from Citigroup.
spk03: Good morning.
spk10: Does the Idaho facility, being your first big facility in the western U.S., does that open up opportunities in terms of regional market share, either with dealers or retailers, or is that not necessarily impactful? And then just generally, when we think about some of this capacity coming online across the network, where do you see sort of the incremental opportunity for you to gain share, you know, either geographically or in the dealer versus retailer channels?
spk09: Yeah, so as you look at our footprint right now, we've got terrific distribution that covers the western part of the U.S. We took some steps to upgrade that over the last few years. And they do a really nice job of being able to service that market. Now, having said that, obviously, putting additional capacity into in a geography, especially on the order of magnitude that we're putting in there, we expect will allow us to continue to grow at a rapid rate there. And then as you look at capacity coming online in general in the marketplace, I think it's fair to assume that the leaders in the marketplace, the two leaders in the marketplace As we bring capacity online, it will allow us to continue to grow the market and potentially either accelerate wood conversion or continue to gain share against inferior competition. And so as capacity comes online and as we bring capacity online, we do think it unlocks additional growth opportunity. And we see opportunity to launch new products. We see opportunities to continue to expand our footprint and to aggressively go after business, you know, across the various channels that are out there, including, you know, all channels, you know, international retail pro. Okay, that's very helpful.
spk10: And then just one follow up, if I could, I mean, this is kind of maybe more of a big picture question, but Outdoor living was doing very well before COVID. ASIC was doing very well before COVID. As we're sort of slowly emerging, hopefully from the pandemic, do you think about the experience over the last 12 months as something that permanently accelerated consumer interest in this category, in your products? Was there maybe sort of a one-time benefit as we reopen? Could that come back a little bit? Just from a big-picture perspective, how do you kind of think about the impact of the pandemic on your products and your industry?
spk09: Yeah, so thanks for pointing that out. Obviously, we had growth coming in, strong growth coming in.
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