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Operator
company's third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Amanda Simaglia, Vice President, ESG. Please go ahead.
spk01
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, Pete Clifford, our incoming Chief Financial Officer, John Skelly, our Senior Vice President of Customer Experience, and Greg Jorgensen, our Chief Accounting Officer. Before we begin, I would like to remind everyone that during this call, ASEC management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 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 our third 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 third quarter of fiscal year 2021. I would like to now turn the call over to Jesse Singh.
Jesse Singh
Good morning, everyone. And thanks for joining us today. Before we begin, I'd like to officially welcome Pete Clifford, our incoming CFO to the call. Pete was most recently CFO and then president and COO of Cantel Medical. We're fortunate to have an overlap in both Pete and Ralph's time with the company, which is sure to facilitate a smooth transition. Pete, thank you for joining us. And I look forward to working with you for many years to come. I'll start by recognizing the impressive efforts of our team, which delivered strong revenue and EBITDA growth in the fiscal third quarter. This builds upon the momentum of our business as seen over the last several years. Since completing our IPO just over a year ago, we believe we have demonstrated the flexibility of our differentiated business model, the agility of our team, and our commitment to investing for growth and delivering against our long-term sales and margin expansion goals. We believe that the breadth of our portfolio and the strength of our market presence allows us to uniquely benefit from secular growth and material conversion opportunities. We are not only growing and expanding in decking, railing, and accessories, but are seeing strong growth and market conversion in our exteriors portfolio. This includes a broad mix of complementary products that are benefiting from wood conversion. More specifically to today's update, we continue to experience favorable end market demand in our residential segment, and we have started to see improving sales trends in the commercial segment. We continue to execute and invest against our strategic initiatives to deliver long-term growth and margin expansion while managing through near-term supply chain and inflationary pressures. We remain confident in our outlook for the remainder of the year and are once again raising our fiscal 2021 guidance. We believe that we are well positioned to continue to grow in fiscal year 22 and are well positioned to achieve and exceed our long-term growth and margin objectives. During the quarter, we saw strong growth across the residential portfolio. As market demand remained strong, additional capacity came online, and we modestly improved our inventory position at our dealer base. Our SG&A returned to more normalized levels and included additional public company costs and strategic investments. We made additional investments to ensure labor, transportation, and raw material availability to meet strong customer demand and saw increasing raw material and inflationary pressures as we progressed through the quarter. We have taken additional pricing and productivity actions that we expect to fully offset these headwinds in early 2022. Given recent investments in capacity in our exteriors business, Combined with strong sourcing and operational execution, we've been able to provide strong service levels and support to our customers in meeting increased demand. We also improved our service levels to our contractors and dealers for our decking products. However, our distribution channel continues to operate at below normal stocking levels. We continue to make progress on key initiatives that will drive long-term value creation through growth, and margin expansion as a reminder these initiatives include first drive above market growth and accelerate material conversion by investing in new product innovation and expanding our downstream focus sales and marketing team ongoing product innovation supports our core and adjacency market expansion our new landmark and reserve decking lines wood replacement trim panelized aluminum rail, and canvas series tongue and groove products all performed well and position us for ongoing future growth and wood conversion. Second, expand our margins through the use of recycled materials in our manufacturing processes and through our continuous improvement programs. We continue to expand our recycling capacity and develop strategic partnerships with various OEMs. We are finding new sources of otherwise hard to recycle materials that we are uniquely positioned to recycle into our products. We have recently expanded our use of a certain type of PVC product, which has historically been landfilled, providing us with lower cost sources of PVC and reducing environmental impacts. Third, positively impact the world through our commitment to ESG stewardship. In recognition of our ESG leadership within the vinyl industry, we recently achieved Vantage Vinyl Certification by the Vinyl Sustainability Council. The Vantage Vinyl Certification underscores and validates our strong efforts to be a leader in the recycle of PVC materials. Diversity, equity, and inclusion continues to remain a key focus of our full circle ESG strategy. In June, we formalized and communicated our DE&I commitment statement, which serves as the foundation upon which we build out our DE&I framework. In short, we are committed to providing a diverse, equitable, and inclusive workplace where diversity of all kinds is sought out, valued, respected, and appreciated. We believe this fuels our innovation, drives operational excellence, and is a source of our competitive differentiation fourth invest in our core strengths which include brand material science integrated manufacturing and customer connection during the quarter we successfully brought on phase two of our 230 million dollar multi-phase capacity expansion program increasing our total decking capacity by 40 percent compared to the end of 2019 Our previously announced upsized investments in capacity are on track to deliver an incremental 15% more decking capacity by the end of the calendar year. Our third phase, the opening of our new facility in Boise, is expected to be fully operational during fiscal 2022, adding approximately 30% more decking capacity for a total of an 85% increase in decking capacity versus a baseline of 2019. We are making these investments against the backdrop of expanding market opportunity. We recently conducted a proprietary consumer market research study, which showed that nearly half of consumers in the market for wood decking would consider our types of high performance, low maintenance materials. This leads to a non-wood market that we believe over time could reach a conversion level of nearly 50% of the total decking market versus today's approximately 22%. We believe this favorable material conversion opportunity exists in all of the outdoor living markets in which we play, including our railing and exteriors markets. This research strengthens our confidence in the long-term secular growth opportunities ahead enabled by our leadership and innovation and investment in our key strategic initiatives. Turning to our third quarter results, we delivered strong sales and adjusted EBITDA growth. The growth environment remains robust, and we were able to incrementally ship more product as new capacity came online during the quarter. We are also lapping an unusual Q3 in 2020, where we saw modest growth and lower spending constrained by the pandemic. The combination of spend normalization, additional investments, and public company costs combined with the previously discussed inflation versus price lag led to an EBITDA margin compression within the quarter. We are appropriately focused on meeting customer demand and improving service, and we prioritized manufacturing output and product delivery. We are operating in an unusual environment with material, labor, and transportation, where incremental volume can lead to an increased rather than decreased cost and lower volume leverage. We view this margin compression as transitory and have taken pricing actions to offset these headwinds beginning in Q4 and continuing as we move through fiscal Q1. For our residential business, we exited the quarter with improved service but had meaningfully lower levels of inventory in our distribution channel than historical norms. While overall web traffic has returned to typical seasonal patterns, we saw higher quality digital engagement activity on our website and an approximately 25% increase in leads. Contractor backlogs remain extended and above historic levels. Repair and remodel activity strengthened during the third quarter, and housing inventory remains near record lows. With elevated buyer demand, we expect a continued tailwind resulting from homeowners investing in and renovating their homes and outdoor spaces. We also continue to see strong sentiment from dealers and contractors as people continue to invest in larger repair and remodel projects. As previously indicated, the strategic actions we took within our commercial segment, coupled with an improvement in certain end market conditions, started to show through in the quarter. Net sales in our commercial segment increased by approximately 17 percent year over year, as we are starting to see some demand returning. We've also seen nice margin recovery in this business throughout the fiscal year, driven by our team's focused execution on productivity and pricing action. As a reminder, this business tends to track more closely to GDP and the broader economy, which continues to improve. Now, turning to our outlook for the full year of fiscal 2021. we are raising our consolidated net sales outlook and increasing the midpoint of the range for our full-year adjusted EBITDA guidance. This increased guidance underscores our conviction in the underlying demand we are seeing across outdoor living and exteriors markets. While we saw additional inflation during Q3, we also executed additional price changes and productivity actions to cover the increased costs. As we look at current inflation and supply chain dynamics, we expect pricing actions to offset inflation as we exit fiscal Q1 2022. We feel that we have and will continue to manage through this unique period by prioritizing customer service while maintaining our focus on delivering against our long-term growth and margin expansion objectives. To sum up, demand in our markets remains strong with a long runway to capture the expected growth in our markets. We continue to invest in our core strengths of brand, manufacturing, R&D, and customer connection supported by the best team and underpinned by our commitment to ESG leadership. We have confidence in our differentiated business model operational execution, and strategic positioning in large and growing markets that we expect will allow us to deliver sustainable, above-market growth and achieve our long-term margin expansion goals. With that, I'd like to turn the call over to Ralph, who will discuss our financial results and outlook in greater detail.
Pete Clifford
Thank you, Jeffy. As I discuss our results, all comparisons made will be on a year-over-year basis compared to the same period ending June 30th of 2020. For the third quarter of 2021, we delivered net sales growth of 46% year-over-year to $327.5 million with strong growth in both our residential and commercial segments. Gross profits for the third quarter of fiscal 21 increased by $31.7 million or approximately 42%, to $106.9 million. The increase in gross profit was primarily driven by the strong sales results in the residential and commercial segments, pricing and manufacturing productivity partially offset by higher raw material and manufacturing costs. Gross profit margin decreased to 32.6% for the three months ended June 30th of 2021 compared to 33.6% for the three months ended at June 30th of 2020. As expected, adjusted gross profit margin decreased 290 basis points to 37.9% compared to 40.8% for the prior year period. As we have discussed on our last two earnings calls, we have been experiencing significant inflation as well as disruption in our supply chain, both driving up the cost of service, these strong demand levels. During the third quarter, cost increases intensified and have reduced the progress we were expecting on incremental margins in our fourth quarter as we prioritize servicing customers. We implemented an additional price increase on August 1st, which will take effect October 1st. Cumulatively, our pricing actions this year represent a mid-teens increase. Selling general and administrative expenses increased by $5.1 million to $70.3 million, or 21.5% of net sales for the third quarter. Excluding the effect of lower stock-based compensation expense, SG&A increased by approximately $18 million. The increase was primarily driven by higher personnel costs, public company costs, professional fees supporting strategic research, and marketing expenses. As a reminder, last year in Q3, we significantly pulled back on marketing and travel with the onset of the COVID-19 pandemic. Net income increased by $73.9 million to $21.8 million for the quarter, compared to a net loss of $52.1 million for the same period last year, primarily due to strong operating results and a decrease in interest expense resulting from the reduced principal amount outstanding under our term loan agreement and an absence of the $37 million loss on debt extinguishment of our formerly outstanding senior notes. Adjusted net income was $40.5 million, worth 26 cents a share for the third quarter, compared to adjusted net income of $6.2 million, worth 5 cents a share a year ago. adjusted EBITDA for the quarter increased by $14.9 million, approximately 26 percent to $72.7 million. The increase was mainly driven by higher sales growth in both our residential and commercial segments and higher gross profit. As expected, adjusted EBITDA margin declined 360 basis points to 22.2 percent from 25.8 percent last year, given the mismatch of pricing relative to cost increases and SG&A expenses. Now turning to our segment results, residential segment net sales for the quarter increased by $98.6 million, or 51% to $291.2 million. A strong increase was primarily attributable to higher net sales in both our deck rail and accessories and exteriors businesses, which grew at comparable levels. Our year-over-year sales growth benefited from strong underlying demand a lapping of pandemic-related headwinds experienced during the same quarter of last year, and pricing, as well as a modest increase in channel inventory at the dealer level. Inventory at the distributor level remains significantly below historical levels. And given the demand pattern, it could be another quarter or more before inventory levels get healthier in the channels. Residential segment adjusted EBITDA after the quarter increased by $20.2 million, or approximately 32%, to $82.5 million. The increase was primarily driven by higher sales and manufacturing productivity, partially offset by higher raw material and manufacturing costs and selling and general administrative expenses. Commercial segment net sales for the quarter increased by $5.1 million, or 16.5%, to $36.2 million. The increase was primarily driven by higher net sales in our Vicon business, partially offset by decreased net sales in our Scranton Products business. We are seeing solid demand from outdoor living, marine and semiconductor end markets, and also starting to see modest recovery with trade show customers. Commercial segment adjusted EBITDA for the quarter was $6.3 million. The $1.3 million increase year over year was primarily driven by sales performance in the Vicon business and net manufacturing productivity. Looking at our balance sheet and cash flow as of June 30th of 2021, we had cash and cash equivalents of $220.5 million and approximately $145.6 million available for future borrowings under a revolving credit facility. Total debt, as of June 30th of 2021 was $467.7 million, and we have not drawn on a revolving credit facility. Our net leverage ratio stood at one times at the end of fiscal Q3. Net cash provided by operating activities was $118.7 million for the nine months ending June of 21 versus $11.3 million for the nine months ended June 30th of 2020. Turning to our outlook for fiscal Q4, we expect total company net sales growth to be in the range of 22 to 27% year over year with the residential segment growing in the mid to high 20s range and the commercial segment growing in the low to mid single digit range. And we expect adjusted EBITDA growth in the 19 to 25% range. I would like to provide some additional color regarding margin progression as we exit fiscal 21 and into 2022. As I discussed earlier in my remarks, the combination of inflation and supply chain disruption has significantly increased our cost-to-service continuing strong demand. In fact, we have seen over $10 million of additional costs since our last earnings call with a portion impacting Q4 incremental margins. Importantly, as we saw costs escalating, We took action and in August implemented another price increase effective in October in order to offset our higher costs and position us well for fiscal 2022. Given our pricing actions and productivity programs with the current raw material and supply conditions, we expect incremental EBITDA margins to improve from the low 20% range in Q4 to about the mid to high 20% range as we exit Q1. excluding the anticipated startup costs we project primarily for the new factory in Boise. These costs are expected to be in the $3 million to $4 million range in the first quarter. Importantly, we believe that we have covered the dollar cost of this current high-cost environment and are well-positioned to expand margins during 2022. Turning to the full year of fiscal 21, we now expect total company net sales to increase 28 to 30% year over year, and have raised our outlook on adjusted EBITDA growth guidance to be in the 27 to 29% range year over year. From a segment perspective, we expect full year residential segment net sales growth in the low to mid 30% range year over year. In the commercial segment, we are starting to see some economic stability in certain end markets, with our projection of net sales declining at a low single-digit rate year-over-year, an improvement compared to our previous outlook of a mid-single-digits decline. To assist in modeling, we continue to expect approximately $175 to $185 million in capital expenditures and $21 to $22 million of interest expense for the full year of 2021, and our tax rate for 2021 is now estimated to be approximately 27% as a result of higher non-deductible compensation expenses. And our full-year weighted average diluted share count is unchanged at approximately 157 million shares. I will now turn the call back to Jesse for some closing remarks.
Jesse Singh
Thanks, Ralph. And as you near your well-deserved retirement, I want to personally thank you for your leadership, hard work, and dedication. You've been an instrumental part of the team, helping to ensure our organization is set up for success, especially now as a public company. You've been a terrific business partner, and I'm proud to have worked alongside you for these last several years. While we're going to miss you, we are excited to welcome Pete Clifford to the team and are looking forward to more formally introducing Pete to our shareholders in the weeks and months ahead.
Pete Clifford
Thank you, Jesse. I am grateful to have worked alongside of you for several years and look forward to following the next phase of ASIC's growth under yours and Pete's leadership.
Jesse Singh
Thanks, Ralph. I'd also like to take a moment to thank our entire ASIC team and our partners for their agility and unwavering dedication to our customers, especially during such a challenging and unprecedented time. As we recently celebrated the one-year anniversary of our IPO, Revolutionizing the industry to create a more sustainable future is only possible with their continued focus and dedication. In closing, we are investing in the future, investing in our brand, in our capacity, in our recycling and continuous improvement initiatives. When you combine this with the long-term trends underpinning our end market growth, including material conversion opportunities, R&R trends and demographic shifts, our conviction to deliver on strong growth and margin improvement is high going into fiscal year 2022 and beyond. We continue to remain excited about the opportunity that's in front of us. With that, operator, please open the line for questions.
Operator
Okay. Ladies and gentlemen, as a reminder, to ask a question, you will need to press R. followed by the number 1 on your telephone keypad. Again, that's star 1 to ask a question. We have our first question with Team Wolf with Baird. Your line is open.
Tim
Hey, guys. Thanks. Good morning, and nice job on the results. Ralph, best wishes, and Pete, welcome.
Pete Clifford
Yeah. Thanks. Thanks. Appreciate it.
Tim
I guess maybe just first on the pricing side of things, you know, Ralph, you talked about mid-teens price increases from the actions that you've taken this year. I was just hoping if you could kind of break down what's actually being realized in sales in fiscal 21 for pricing and how much of that flows through actually into 22 at this point.
Pete Clifford
Yeah. So, Tim, you know, The mid-teens pricing is what we have in place by the end of the year. And, you know, as we mentioned in the remarks, we added more incrementally that's going to take effect in Q1. You know, and that positions us very well, you know, for 22. So 22 is going to benefit from that. You know, we'll share more about, you know, 22 as we guide 22. But, you know, this year with the pricing actions that we've taken, you know, cumulatively, you know, we're exiting the year at the mid-teens level. And again, you know, well positioned for 22.
Tim
Okay, okay, that's good to hear. And then I guess just on a capture basis historically, I know each cycle can be different, but could you just remind us about your ability to kind of hang on to pricing if you would kind of see a more deflationary environment on the raw material side at some point?
Pete Clifford
Yeah, you know, if you just look back at our recent history, and, you know, we've been taking pricing over the last several years, you know, those prices, you know, hold in the market. You know, I think, you know, obviously, again, we're not guiding to 22, but particularly on deck rail and accessories, but also to some degree on exteriors, you know, we're pricing to value. And we also, you know, I think, you know, importantly, and you heard this a little bit in our remarks, you know, we, you know, We're pretty analytical about this in terms of our approach. We actually even invested in some pricing analytics work. So we're comfortable with the pricing we have in the market and how we're positioned on value across our product lines.
Tim
Okay. Okay, that's good. Well, good luck on the next chapter, Ralph, and I'll hop back in queue. Thanks, guys. Thanks, Tim. Thanks, Tim.
Ralph
and next question we have matthew bully with barclays everyone uh thank you for taking the questions um again uh echo congratulations uh to ralph and welcome pete um so the uh jesse you gave the stat um around that market study you did that non-wood materials can reach uh 50 of the market one day um if i heard you correctly i'm just curious if there's any more detail or context you could give there, maybe if there's any way to glean from that study how consumers' perceptions have changed over time. And then even on the 50 percent that presumably just wants wood, could you tell kind of what's holding them back? Thank you.
Jesse Singh
Yeah, thanks, Matt. And so just to give a perspective, we did a really in-depth study of the wood buyers, and we had done a study three years ago. So I think one thing to consider is the number of folks that are generally buying wood has declined. So I think when we did the study, a few years back, what you saw was high teens, people identifying themselves as composite buyers. That has progressed into the low 20s, which I think is a reflection of what we're seeing borne out in the market. As we look at, to call someone a wood buyer, I think it's a bit of a misnomer, right? What it is is people in various points of how they consider the attributes. As we look at that totality, in general, much of that, even above 50%, is still an opportunity. I think where we're focusing is where we can see the greatest opportunity. And so that 50% is really made up of folks that are positively inclined There's a portion of that that are positively inclined, but there's some kind of a barrier, right? That barrier might be a perception of composites being plasticky. That might be related to a perception of where we are in the environmental journey. um and and so a portion of that are of the wood what was great in the research is a portion of the wood buyers are positively inclined they just need to be educated um and i i think that um there's a another portion of that um uh of that 50 we're we're talking about that that kind of defaults to wood but fit the right characteristics and and demographics of someone that should be buying composites And once again, I'll come back to it's an education process. What's interesting in the research is we're not including the price buyers only in that 50%. And I think it's important when we look at wood conversion, we're really looking at it in its totality based on the combination of aesthetics, value, education, And that's really where we're defining that 50%. There's another portion of that not 50% that's effectively a price buyer. And that's someone who just wants to price right at the beginning. That's not included in that 50%. So what's interesting for us is really the opportunity here with new product development and messaging to continue to educate and aggressively convert the market.
Ralph
Wonderful. No, that's very, very helpful color there. Thank you for that, Jesse. Second one to zoom in a little on the margins. You know, you spoke to conviction to margin improvement in 22. But it sounds like, you know, you mentioned some pressure from the startup costs early in the early part of next year. Just given you did daylight that sort of expectation for expansion on a full year basis, and correct me if I didn't hear that correctly, but what's kind of the visibility to, I guess, the pace of incremental margins as you go through on a quarterly basis next year?
Pete Clifford
You know, Matt, just think about the year and first where we are in the cost environment. You know, We've seen a lot of inflation, you know, as we've talked about, and, in fact, you know, seen a lot of inflation even since, you know, since the last earnings call, you know, which we took action and addressed on. But, you know, that leads, though, to the first couple quarters, you know, of fiscal 22 has a lot of the peak of what we're seeing right now, you know, still flowing through it. Again, we've positioned ourselves well from a price standpoint to address that. But you have in the first couple quarters of the year, you know, the combination of still elevated costs. And then, you know, as we've talked about before, you know, We've worked through startup costs, you know, all during 2021. You know, we've added 40% capacity, and there were startup costs associated with that. But we've worked through that with offsets. You know, Boise's a new facility, and, you know, we're starting it up in our first fiscal quarter, and that's why we thought it was important, you know, to kind of highlight that a little bit more for you because that would be a, you know, we're expecting it to be a more significant startup. Again, all contemplated on our outlooks and the discussions we've had. But the first half, because Boise startup is going to be really in the first half of fiscal 22, the first half will be weighed a little bit more than the second half in terms of the margin progression.
Jesse Singh
Matt, if I could just add one additional comment on top of that. I think it's important. as we look out into 22, the dynamics we're dealing with now and the way in which we're offsetting it, we believe structurally puts us in a stronger position against our long-term margin goals. And I think that's a really, you know, as we look at things over, you know, as we progress through 22 moving forward, the dynamics that we're seeing in the short term will lead to, you know, really long-term favorability, we believe, structurally. Got it.
Ralph
Well, thank you for that, Jesse, and best of luck, Ralph. Thanks, Matt.
Operator
Okay, next question. We have Mike Dahl with RBC Capital Markets. Good morning. Thanks for taking my questions.
Mike Dahl
Jesse, Ralph, just to pick up on the last point about margins, kind of thinking longer term, but also specific to 22. You know, given the pricing that's put in place and some of the carryover benefits, understand that, you know, there's still some cost pressures impacting the first half of the year. But if I exclude Start-up costs, let's treat those differently. Historically, you've done something that's more in the 30s on incremental EBITDA margins, and we've thought coming off the base that you're coming off of that was more impacted by a price-cost lag, that that would have been more of a reasonable, if not conservative, benchmark for the incremental margin performance next year. It sounds like at least in the first half you might be talking to something that's a little bit lower than that. So I guess just a little more clarity on, you know, again, excluding the startup costs. You know, why shouldn't incremental margins be even stronger going forward in 22 based on the pricing actions you've taken?
Pete Clifford
Yeah, Mike, you know, Let me address, you know, kind of your question in a couple of different ways. You know, first, you know, we clearly see, you know, and, you know, Jesse's remarks kind of highlighted it, you know, the line of sight to our long-term margin goals. You know, we clearly see that, you know, with the 500 basis points of EBITDA margin improvement. You know, we always said quarter to quarter there's going to be some lumpiness, particularly when you're kind of working through startup and things like that. So, you know, you're highlighting that. You know, we're not in a position to give, you know, 22 outlook just yet. But, you know, to your point, you know, we've been in the mid-30s on incremental margins, and, you know, and we still have, you know, a We still have a lot of runway on productivity and, you know, principally in recycle, but other areas of productivity still way ahead of us. We still, you know, we're well positioned from a price-cost standpoint entering 22, you know, which, you know, we feel right now this cost environment is pretty extraordinary and transitory, frankly. And so we think we're well positioned there. And, you know, we'll invest behind the business selectively. So, you know, so over an arc, you know, we'll get SG&A leverage over time as well. So, you know, that all leads us to, you know, we could get ourselves back, you know, into the mid-30s with a very clear path. But, you know, with our outlook long term, you know, we see our incremental margins going above the mid-30s. Okay.
Mike Dahl
Yeah, that helps, and that makes sense. It sounds like it'll be a good ramp. And then I guess the second question, and sorry, this also ventures into the 22 realm, but, you know, I think there's, Jesse, you made the comment that you're now expecting the 85% cumulative capacity increase in decking versus the baseline of And I think in the press release, there's a comment that refers to the expansion plan as 230 million. So I wanted to just clarify, is that the 230 million, does that represent the 85% capacity increase? And then when you think about the incremental, since you've been in this multi-phased approach in terms of what the number is in fiscal 22 versus 21, since you're since your second phase at least hasn't fully ramped in 21. Any way to think about how much will be incremental in 22 versus 21?
Jesse Singh
Well, so just as a reminder on, you know, on the three phases, you know, we're through the 40% phase. And as Ralph pointed out, you know, that we brought that online last quarter. We've got an additional 15%, which will be in fiscal 22, that will come online before the end of the year. And then an additional 30% that will come online during the early part of the 22 calendar year. So in aggregate, I think you should think of it as off a 2019 baseline, and we'll probably need to move away from that baseline and establish a new one, but off a 2019 baseline, you should consider that as we move into that next season, we'll have that 85% capacity available. Relative to, you know, what we've disclosed in terms of capital, we're not going to break it out specifically to what's in 22, what's in 21. What I would say is that that capital includes the 85% decking capacity that I just talked about, but it also includes other investments we're making including our exteriors business and including expanding some of our recycle capability. And so that number is inclusive of other capacity ads also. And obviously, if you take a look at the performance, not only of our decking business, but of our exteriors business, we're seeing really nice growth there. And the investments we've made to position us from a capacity and new product standpoint, you know, continue to reap benefits there also.
Mike Dahl
Just a quick follow-up, if I could, since you mentioned them potentially moving off 2019. I'm curious, is that the 85% number, is that a volume metric or is that a dollar metric that incorporates the pricing that you've put into place in the market as well?
Jesse Singh
Yeah, I mean, we typically will do it as a volume metric. But obviously, there's nuances in terms of, you know, these are directional metrics. But, yeah, I would consider it a volume metric.
Mike Dahl
Understood. Okay, great. Thank you.
Operator
Thank you. Next we have Philip with Jefferies LLC.
Ralph
Congrats on a good quarter and a challenging environment. And Pete, looking forward to working with you. And, Ralph, thank you for all the help this past year. I guess from a demand perspective, certainly 50% growth in Resi is very strong. You did mention that you were able to kind of replenish inventory at the dealer channel. Any way to kind of parse out how much of that 50% growth is tied to channel fill for Resi? And it sounds like inventory is still pretty depleted in the channel, particularly with distributors. Are you seeing your channel partners build inventory in fiscal fourth quarter? Just because that's typically when they usually draw down inventory. So, sorry, a lot to unpack there.
Pete Clifford
Yeah. Hi, Phil. Yeah, just on the third quarter, you know, with the 51% growth, and just to add within my remarks, you know, I mentioned, too, that importantly was broad-based. Deck rail accessories and our exteriors business grew at comparable levels in the quarter, albeit off of a low base from last year, if you recall. You know, our residential business you know, last year grew about 5.5%. But, you know, nonetheless, strong demand is the primary, you know, is the primary driver of that growth. And there is some pricing, but, you know, that wasn't a significant piece of it. And on inventory, you know, specific to your question, you know, we did make improvement in the dealer channel, you know, and, you know, But that's not work completely done, and we really didn't make any meaningful progress in the distributor channel yet. We still see that as tight, and at these demand levels – You know, as we go into, you know, Q1, it could be, you know, another quarter, you know, Q1 or even further out before we see, you know, before we see, you know, inventories recover and fully recover in the distributor channel. But we're making progress. We're servicing the market better than we were, you know, earlier in the year, you know, as we've added capacity. But the distributor channel, you know, still remains, you know, quite low.
Jesse Singh
And just to kind of cut to maybe the background on the question, as we look at Q4, we are not contemplating much channel replenishment in the numbers, right? Absolutely. So that's, you know, we continue to focus on meeting demand. And, you know, just to reiterate what Ralph said, you know, that replenishment, you know, when it occurs will potentially be in subsequent quarters.
Ralph
Got it. That's helpful, Jesse. And as you kind of face these behind you and you're going to work towards phase three by year end, do you have enough capacity to kind of meet that underlying demand? until your greenfield capacity comes on. And then as we kind of look out the next few years, just given how strong growth is despite all this capacity you're adding, are you starting to think about adding more capacity internally for, you know, potentially the next year as you kind of position yourself for 2023, 2024, just because of the growth profiles in 13 parts of here?
Jesse Singh
Yeah, so the timing of our capacity, Ed, we believe sets us up pretty well. We've got incremental volume to support us through this part of the season. As we move into typically the lower volume months, we've got additional capacity coming online, and that will help as we move through the slower part of the season. And then we've got additional capacity coming online to really set us up for, you know, as we move into the season in 22. We clearly are selling everything that we make, and we have demand for that. We would expect that to continue. But we do feel the timing of our capacity ads, you know, sets us up in a nice position as we move into next year. You know, the macro question of what's next, you know, we'll answer that question when appropriate. But I think the way to consider the Boise facility is you have 350,000 square feet, and the capacity we're adding into there right now is using up a portion of that facility and And it's a roof that gives us an opportunity to, on a relatively responsive basis, add more capacity. Okay.
Ralph
That's really helpful. Good luck on the court, guys.
Jesse Singh
Appreciate it. Thanks.
Operator
Thanks, Bill. Thank you. Next, we have Michael Wehab with J.P. Morgan.
Bill
Thanks. Good morning, everyone, and congrats, Ralph, and welcome, Pete. Look forward to working with you. First question, I just wanted perhaps a little bit more of a clarification, if possible, with regard to some of the headwinds and the timing of addressing those headwinds in the first quarter, obviously, of fiscal 22, not fully getting, I guess, the full benefit of the of the price increases as they're going to, I assume, kind of layer in. But, you know, at points, I heard you say that the challenges would be more in the first half as well. So, in other words, into the second quarter of fiscal two or into the first calendar quarter of 22. And I thought I heard that relates to startup costs as well. So just a little clarification there in terms of, you know, when the full offset would occur, because at points it did sound like exiting first quarter. So the second quarter, I presume you could expect a return to margin expansion.
Pete Clifford
Mike, I think, you know, maybe just to start, you know, everything we're talking about right here is timing. you know, structurally we're well positioned, you know, to grow our margins, you know, in 22 and beyond that. You know, we're well on track, you know, with our line of sight of our, you know, longer-term margin, you know, objective of or marker, if you will, of 500 basis points. So, you know, I think what we're working right now through is a transitory period of, you know, exceptionally higher costs and inflation, you know, and starting up a new facility, you know, largely in the first half of fiscal 22. You know, and so that's what, you know, I'll call a lot of the noises that we're kind of working through the quarters. You know, we want to give you some visibility to, you know, at least the first quarter on startup so you can start to get some sense of, you know, size and magnitude there. And again, you know, on the price-cost side, you know, we've covered the dollars of inflation that we're seeing, you know, at very peak levels and, you know, and well positioned, you know, for 22. So, you know, it's hard to kind of like pin down exact timing here. But if you think about, you know, long-term, we're well set up, you know, and, you know, and for 22. And the first half of the year has, you know, has more of these headwinds in it because of the, you know, startup of the new facility and just working through this, you know, incredibly high inflation environment that will, you know, begin to abate at a point in time.
Jesse Singh
Yeah, if I could just add, just, you know, at a high level, think of it as our price has offset inflation by, And those two elements are offsetting in Q1. And the timing that Ralph's talking about is really around, you know, how long do certain costs extend, you know, how the adoption of the pricing and all that. But the way to think of it is the actions are offsetting the underlying inflation. And, you know, when appropriate, we'll disclose the specific timing of that.
Bill
Male Speaker Okay. Thanks for that. I guess, secondly, I'd love to hear your thoughts. Just, you know, you kind of mentioned earlier, Jesse, in your opening remarks about the potential for a 50 percent market share of alternative materials. I believe last year in 2020, you know, the composite DECI market took two points of share from, you know, versus in prior years, perhaps about one point of share per year. You know, there's been a lot of talk, obviously, in the last six to 12 months around, you know, maybe composite decking being a little bit more attractive, you know, from a cost basis given the run in lumber. Obviously, lumber is not fully round-tripped, but, you know, more or less on its way there. At the same time, you're putting through pretty solid price increases for composite decking. You know, you kind of said mid-teens. How did that change? How did those moving pieces affect the rate of adoption of composite decking? In other words, with this 2%, should we think about that as more of just all the stars aligning and maybe, you know, return to something more of a, you know, what you've seen in the past? Or, you know, by virtue of the lower price point options that yourself and your competitors have rolled out, you know, increase consumer marketing, consumer spend, consumer awareness, that maybe that 2% level is something that's more sustainable.
Jesse Singh
So let me just hit a couple of points on there. And it may drive a difference of dialogue between ourselves and our competitors. We do not believe that conversion is fundamentally based on price. Right. There are aspects. It is a component. But our research validates that there's a broader conversation going on that we have highlighted over the last year, which is the value, the aesthetics. um and and wanting to create a a certain type of environment so so i think at a macro level we should not assume that conversion is based on a relative um price uh in fact in our research i think price depending on the segment we looked at was number four on the on the criteria the two percent you referenced that conversion occurred before the most recent before the last 12 months of run up in in in wood pricing. So the 2% was when wood was in the, you know, roughly 300 range, you know, three to 400 range kind of that historical norm. We are above that now. We've been meaningfully above that. But I just want to highlight that the conversion that we saw and that number was occurring before. And I'll just stress that, you know, in our type of environment, there is a network effect. And so what we see in our research, what we see on the ground is wood conversion is occurring at all price points. and wood conversion is really around a mix of criteria. So hopefully that puts a perspective on it. Relative to recent price increases, you know, we make sure that as we increase pricing in our different categories, and once again, we've done additional research here, that's part of some of the strategic investment that Ralph talked about, that we're making sure that that we're putting ourselves in the right position depending on the category within which we play. Thank you.
Operator
Appreciate it. Thank you. Thank you. All right. Next we have Alex Rygel with B Riley. The line is open.
Alex Rygel
Thank you. A nice quarter, gentlemen. As it relates to new products, can you talk a little bit about annual contribution to sales that you think are going to be generated from new products? And talk a little bit about your new product pipeline without giving us too much information on it.
Jesse Singh
You know, on the specific contribution, you know, we haven't disclosed that in a while. I think it's a good question, and I think we'll evaluate that. how to disclose that directionally or in more detail in subsequent calls. What I would tell you is if you look at our last couple of years of growth, we've seen meaningful growth from the new products that we've introduced and And on the exterior side, you know, those of us, those of you that had a chance to see our initial analyst meeting saw the productivity solutions that we have that integrate functionality and improve the productivity on a job site. Those, you know, that category of products that we have right now that are targeting wood conversion has been a nice growing category. In fact, its growth has been accretive to our aggregate growth. This year on the decking side, the new products we've launched have put us in a great style position and wood conversion situation. So they are disproportionately contributing to what we see. And then on areas like rail, as an example, we also have productivity solutions there with our panelized rail system. that reduces labor for contractors and our other installers. And we're seeing really nice growth there. In terms of the pipeline, last year, despite the pandemic, we launched new products. We fully expect to launch new products again as the season approaches. But, you know, we're also balancing, you know, how to make sure that we create the right timeline in terms of staging of new products. So we've got a pretty broad pipeline. We're going to stage those introductions based on the opportunity for market introduction. So we'll, you know, it's a great question. We'll create more transparency both on our investor deck and on our next call relative to some metrics around that.
Alex Rygel
And then lastly, all across the industry, have you seen any notable market share shifts, and are there any notable line reviews ongoing or anticipated?
Jesse Singh
You know, relative to specific customer activity, you know, we'll let our customers or our results show that. You know, as we look at share, you know, we feel good about if you just look at our trailing 12 in our growth in both our company and our residential business and you do a comparative analysis, we feel good about. We feel good about, you know, what we've been able to do. You know, we talk a lot about decking. You know, we feel good about our position there. On the exteriors business, we've had both new products. and the capacity and the service levels to be able to supply the business. And so we feel very positive on the exterior side, too. So beyond that, you know, you'll see it in our results. So appreciate the question.
Operator
Thank you. Thank you. Next we have Susan McClary with Goldman Sachs.
Susan McClary
Thank you. Good morning, everyone. And let me add my congrats and best wishes to both Ralph and to Pete. Looking forward to working with you. My first question is around productivity. You know, you mentioned in your comments that you've also taken some additional productivity initiatives in the quarter. Can you give us a little bit more color on that and how we should be expecting those to come through?
Jesse Singh
Yeah, so I'll break it into a couple of different areas. On the recycle side, as we're dealing with working through supply and inflation, we've taken certain actions relative to finding lower-cost sources of recycling. that are available, and we have been incorporating those. I mentioned, you know, without getting into specifics, we're incorporating, I mentioned that on the call without being specific, we've been incorporating that into our products, and, you know, that will lead longer term to a lower cost stream As you look at specifics, you know, we continue to look at material utilization, uptime, OEE, and once again, those are aspects that we will see long-term benefits from as we cycle through some of these inflationary pressures.
Susan McClary
Okay, that's helpful. Thank you. My second question is around your recycling capacity. You know, as you have worked through this expansion plan, you also mentioned that to some extent that includes expanding the recycling production that you have. You know, I know you came into this year with about 55% of your inputs recycled. Can you talk to where you are today or where you expect to be to exit this year and how we should expect that to benefit the margins, especially maybe into next year?
Jesse Singh
Yeah, we've added meaningful capacity to our recycle capability. But one of the challenges has been that, you know, even though we have seen, even though we've made very strong progress Our growth has also been quite high. So as we add capacity, we need to add it at a disproportionate rate to our growth. And we are balanced right now relative to that. In certain cases, we have not been able to increase our use of recycle. You know, I'll give you PVC decking as an example. We could be at higher percentages of recycle, but, you know, given our growth rate there, scaling of our recycle operations to meet demand has not yet given us an ability to increase that. The good news in that is, you know, as we bring additional recycle capacity online, it'll allow us to increase our percentages, and we would expect that that would be something we could do as we move into 22.
Susan McClary
Gotcha. Okay. Thank you, and good luck, Ralph, with everything.
Operator
Appreciate it. Thank you. Thank you. Thank you. Last question, we have Ryan Markel with William Blair.
Ryan Markel
Hey, thanks for fitting me in. So two questions. First off, on raw material prices, have they leveled out recently? And just how much confidence can we have that won't be talking about pushing back margins again a quarter from now? And then secondly, one of your competitors mentioned labor shortages hurting production. Did you see that as well?
Jesse Singh
Ralph, let me answer the labor one first, and I'll have Ralph take the raw material. Certainly, it's a challenging labor environment. Our approach has been to be very aggressive in ensuring that we continue to staff our facilities in such a way that we can maintain their operations. And as such, we have seen some of the labor dynamics, but we feel that we've done a pretty good job of working our way through those dynamics. Now, incrementally, it's cost us a bit at times, but we believe that servicing our customers, that we'll take appropriate steps to ensure that we have continuity there.
Pete Clifford
And, Ryan, on the inflation side, you know, as I mentioned, you know, clearly since, you know, since last earnings call, we've seen, you know, a step up. You know, the virgin resins, you know, PVC and polyethylene, you know, since May have been increasing, but in a much lower rate than where we were versus a year ago. And on the supply side there in general, You know, there are no known outages, you know, so that no one's enforcement here. So the supplies are coming back, but inventories are tight. And, you know, and it takes some time to rebuild that. But the capacity is, you know, kind of back on and the supply lines there are getting better. You know, we did also see, you know, some increase in prices, at least typically lag. They're not linear, but they do lag. On the recycle side, you know, we've seen increases in recycle costs across, you know, polyethylene recycled material as well as PVC. So, you know, kind of to your question of, you know, when does it abate, you know, I think when you look at year on year or even since the last few months, you know, You know, things are leveling. There's still some increases out there. But I think importantly, you know, when we see these things emerging, we take action. And that's, you know, that's been our mode because it's important, you know, it's important to, you know, to cover our costs so we can continue to invest in the business. But, you know, but the environment – You just characterize as, you know, certainly supply improving, but inventories in general are low, you know, in these areas.
Ryan Markel
Got it. Well, thanks for the color. And, Ralph, best of luck.
Operator
Yeah, thanks, Ralph. Okay. The question and answer session is over. I will turn the call back over to Jesse Sings.
Jesse Singh
Well, thank you all for attending. I'll reiterate my thanks to Ralph and just the impact he's made. You know, someplace along the line, he's probably in a CFO Hall of Fame, having been a public company CFO five times. And we welcome Pete. Let me just reiterate a couple of points. that we hit. One, I think we are in a terrific position with capacity coming online and some of the opportunity that we see moving forward and some of the actions that we've taken that we believe put us in a really strong position. But that's really against a bigger backdrop of opportunity our core markets are near 10 billion dollars and that's with with trim deck rail and accessories and we view meaningful opportunity there but we also have adjacencies um that you know for the long term of the business that that we're building against which you know for us represent an additional 10 billion of uh of market opportunity and And as we continue to have a dialogue about the performance of the business, we will also continue to have a dialogue about the steps we are taking to continue to access accelerated growth in our core and also access that additional market opportunity. So really appreciate all of you taking the time once again, and we look forward to introducing Pete in a more direct conversation as we evolve over the next few weeks and months. Thank you so much. Take care.
Operator
Ladies and gentlemen, this concludes today's conference call.
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