The AZEK Company Inc.

Q2 2024 Earnings Conference Call

5/8/2024

spk10: press release and a supplemental earnings presentation this afternoon to the investor relations portion of our website at .azitco.com. The earnings press release was also furnished by 8K on the SEC's website. I'm joined today by Jesse Singh, our Chief Executive Officer, and Peter Clifford, our Chief Operations Officer and Chief Financial Officer. I would like to remind everyone that during this call, we may make certain statements that constitute forward-looking statements within the meaning of federal security laws, including remarks about future expectations, beliefs, estimates, forecasts, plans, and prospects. Such statements are subject to a variety of risks and uncertainties as described in our periodic reports filed with the Securities and Exchange Commission that could cause actual results to differ materially. We do not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. These non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliation of such non-GAAP measures can be found in our earnings press release, which is also posted on our website. Now let me turn the call over to ASIC's CEO, Jesse Singh.
spk12: Thank you for joining us today. The ASIC company delivered strong performance this quarter and once again outperformed the market with double-digit residential sell-through growth driven by outstanding execution of our growth initiatives. We continue to see the momentum, strength, and resilience of ASIC's business model, and our team continues to deliver results ahead of our planning assumptions. Based on our recent performance and increased confidence in our execution, we are raising our fiscal year 2024 net sales and adjusted EBITDA outlooks. Before we go into more details on our quarterly performance and the updated outlook, I'd like to have Pete provide some background on why we are delaying our Form 10-Q filing.
spk14: Thank you, Jesse, and good evening, everyone. During our March 2024 quarter-end closed process, a plant accountant took over certain inventory-related responsibilities from an employee who had recently left the company and discovered a gap between the company's balance sheet and fiscal inventory subledger. As soon as we identified the issue, the audit committee initiated a thorough independent investigation with outside counsel and independent accounting advisors with the diligent support of management and other employees. The investigation determined that the recently departed employee had been recording unsupported manual journal entries that ultimately increased the value of inventory and decreased the cost of goods sold. The investigation also identified no evidence of involvement by anyone other than a single former employee and found no indication that there were any affected accounts other than inventory and cost of goods sold. The investigation is now substantially complete and we have identified the specific adjustments needed. For more details, please see the Form 8-K we filed today. We are confident that our preliminary -to-date 2Q24 financials reflect the entire impact for fiscal year 2024. The impact on fiscal 2024 is caused by FICO accounting estimates being revised due to $4 million of additional costs not previously planned for in our -to-date 2Q results. I want to emphasize there is no impact on net sales for the underlying fundamentals of the business. Actions are underway to strengthen reporting processes and internal controls to prevent this from happening in the future. I now hand the call back to Jesse to provide an update on the businesses and progress against our strategic initiatives.
spk12: Thank you, Pete. I'd like to thank members of our finance team that identified the issue and acted quickly to raise the matter and support the investigation. With the investigation substantially complete, we are confident that we understand the scope of the adjustments. To reiterate what Pete said earlier, this matter has no impact on net sales or the strength of our underlying business operations, and we are confident in our updated and increased fiscal 2024 outlook. Our team continues to remain focused on execution to drive above-market growth and margin expansion in fiscal year 2024 and beyond. Over the last 12 months, our residential segment has grown 19% -over-year, driven by strong channel, contractor, and consumer demand for our residential product portfolio. Through the first six months and in March 31, 2024, our residential segment has grown 20% -over-year, and demand for our products remains strong as we enter the 2024 building season. Over the last several years, we have invested and will continue to invest in our core strengths of research and development, innovation, brand awareness, customer relationships, and our world-class manufacturing operations, all of which advances and strengthens our position as the category leader and allows us to provide the best service to our customers. Our TimberTech brand is strengthening across all channels. Sample orders are up -over-year as well as website visits. We've also added more than 1,000 contractors into our TimberTech loyalty program -to-date, and several of our products are being recognized by industry and design leaders alike. For example, our new TimberTech Composite Terrain Plus collection received Green Builders 2024 Sustainable Product of the Year Award and was named HDTV Magazine's 2024 Green List. We are experiencing incremental growth from some of our newest product innovations, such as our TimberTech Composite Terrain Plus, horizontal cable railing, and TimberTech aluminum framing substructure. This new product is driving contractor productivity and giving homeowners a long-lasting, solid deck substructure that is superior to wood and other alternatives. In addition, our new siding and railing products continue to gain share and drive incremental growth. Last month, our TimberTech Advanced PVC Vintage and Landmark Decking Collections were the composite decking industry to receive an ignition-resistant designation from California State Fire Marshalls. In addition to the new ignition-resistant designation, these collections hold a Class A flame spread rating and meet WUE compliance, the combination of which sets the industry standard for fire resistance. With more than 46 million homes across 70,000 communities across the U.S. at risk from the impacts of wildfire, products across ASEC's portfolio can help consumers increase resistance to heat, flames, and embers that are typical of most wildfires. No other decking features this level of fire rating, beauty, and performance of these premium collections. We also continue to benefit from our shelf space gains over the last few years in both the pro and retail channels. We are excited about some recent and incremental gains that will support our growth in 2025, drive incremental material conversion, and allow us to continue to build on the brand momentum of TimberTech and ASEC. We expect to invest approximately $4.5 million in our fiscal fourth quarter to support these incremental gains, which is embedded in our updated outlook. The investments we have made in our sales team, the TimberTech brand, new products, and new capacity have put us in a position of increasing relevance to the consumer, the contractor, and the channel. On the recycling and operational front, we continue to focus on expanding our sourcing network, increasing the usage of recycled materials, and lowering our conversion costs. We recently expanded our geographic recycling footprint with the addition of a new Texas-based operation. The initiative expands our sourcing reach, adds processing capacity, reduces logistical and transportation costs, and adds new collection points to our full circle recycling program. This program currently has more than 1,000 bins placed throughout the country. Our newer Boise decking manufacturing facility is also nearing the utilization and production levels we had planned for its initial build-out phase. This is an important component to some of our recent shelf space wins. Across our manufacturing and recycling network, we are aggressively leaning in to our ASEC integrated management system to improve efficiency and drive continuous improvement that support our long-term margin expansion initiatives. As we look to the remainder of the year, we continue to be optimistic about our ability to drive above-market growth and margin expansion. -to-date, we have had strong double-digit sell-through growth in our residential segment. Channel inventories are healthy and remain below historical averages. We think it is prudent to continue to assume a flattish repair and remodel market and a -single-digit sell-through growth through the remainder of the fiscal year in our updated 2024 outlook. The results of our recent survey of over 500 dealers and over 1,000 contractors showed that our partners remained positive and balanced in their outlook. Contractor backlogs remain stable and sentiment is positive with continued expectations for growth in 2024. Internally, key awareness and demand indicators, including sample orders and website sessions, continue to show double-digit growth and contractor conversions are up. We are raising our fiscal 2024 outlook for the year driven by our fiscal second quarter performance, the demand for our products we have experienced -to-date, and our increased visibility to our margins. We now expect adjusted EBITDA margins will range between .8% and .4% for the year, demonstrating strong progress to our .5% objective. We will continue to execute our strategy for the remainder of fiscal 2024 and believe that we are well positioned to continue to drive above-market growth in 2025. I will now turn the call back over to Pete to provide some additional context on our financial results and outlook.
spk14: Thanks, Jesse. As Eric highlighted at the beginning of the call, we have uploaded a supplemental presentation on the investor relations portion of our website. Before we get into the second quarter results, I wanted to provide some context on the second quarter demand. First, on sell-through, we continued to experience approximately double-digit sell-through growth in fiscal 2Q24. This is the result of continued execution of the ASAC growth playbook, including downstream material conversion initiatives, channel expansion efforts, new product development, and shelf space gains. We ended the quarter with channel inventories down approximately 15% versus the historical average days on hand. Retail point of sale data continues to experience healthy growth year over year. The total retail POS remained above our pro-channel sell-through growth. These results underscore the strength of our retail partnerships, the continued demand for our products in store, as well as the accretive growth opportunity in front of us in the retail channel. From an operating perspective, we continue to execute our traditional annual recycling and product configuration initiatives. Commodity prices and our conversion costs remain stable, and we continue to see additional sourcing savings opportunities. In terms of SG&A, our preliminary results reflected normalized spend levels, and we continue to invest opportunistically to drive future growth and brand awareness. The combination of approximately double-digit residential sell-through growth coupled with strong execution of our material savings, conversion costs, and recycling initiatives helped us drive strong performance in the second quarter. Turning to the preliminary results, for the second fiscal quarter, consolidated net sales increased 11% year over year to $418 million, and adjusted net sales, excluding results from the divestiture of Viacom, increased 17% year over year. Residential segment net sales increased 18% year over year driven by double-digit sell-through growth, solid demand for our products, and our positioning for the building season. For the six months ended March 31, 2024, consolidated net sales increased 11% year over year to $658.9 million, and adjusted net sales, excluding results for the divested Viacom business, increased 19% year over year. For that same period, we expect net income in the range of $74 to $75 million, and net profit margin in the range of .2% to 11.4%. We expect adjusted EBITDA in the range of $167 to $169 million, and adjusted EBITDA margins in the range of .3% to 25.6%. From the balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $227 million and approximately $148 million available for future borrowings under a revolving credit facility. We ended the quarter with gross debt of $669 million, which included approximately $78 million of finance leases. Net debt was $441 million, and capital expenditures for the quarter were approximately $19.2 million. During the three months ended March 31, 2024, the company repurchased approximately a half a million shares of its Class A common stock on the open market, totaling approximately $25.2 million reacquisition costs. This clear year to date, the company has repurchased $125 million worth of shares. The remaining authorization under our share repurchase program is approximately $76 million, and we expect to be active on the share repurchase front for the remainder of the year. As a reminder, our capital allocation priorities remain the same as we previously communicated. We will continue to invest in our business both organically and inorganically, and to the extent we have excess cash flow, we will look to repurchase shares opportunistically. As we turn to the outlook, let me provide some color on what we are seeing and assuming for the balance of the fiscal year. We continue to expect the R&R market and fiscal 24 to remain flattish, and we see our residential sell-through in the mid-single digits for the balance of the fiscal year. We continue to focus on driving above-market growth for our strategic initiatives, including market conversion and share gains. We are pleased with the results of our first half of fiscal 24 and the impact from shelf space wins and expansion in both the pro and retail channel. These wins, coupled with double-digit residential sell-through over the first six months, provides confidence in our second half of the year and generates a tailwind to fiscal 25 for us to continue to outperform the market. From a channel inventory perspective, we continue to manage the channel conservatively while maintaining high service levels and short lead times. On the margin side, we continue to see benefits from our margin expansion initiatives and remain focused on expanding our sourcing and recycling programs while lowering our conversion costs to further benefit our gross margins in future quarters. On SG&A, we will continue to support organic growth through sales and marketing initiatives. With our outperformance in the first half and demand seen to date, coupled with increased visibility to our margin drivers, we are increasing our guidance for full-year consolidated net sales to range between ,000,000 to ,000,000 and increasing our full-year adjusted EBITDA range to between ,000,000 to ,000,000. The updated adjusted EBITDA range includes the ,000,000 of first half fiscal 24 life old accounting charges, which were not contemplated at our last guide, and $4.5 million of incremental investment related to recent retail and pro-channel wins, which will show in the gross margin rate as a reduction in sales. We are excited about the growth opportunity. This adds to our fiscal year 25 and beyond. Excluding the approximately $4.5 million impact from this channel investment in 4Q, our second half of fiscal 24 adjusted EBITDA margin would be in the range of .6% to 27.7%. Adjusting for the ViCOM sale, our consolidated net sales guidance range would imply 9% to 11% growth year over year. A residential segment planning assumption for the year is ,000,000 to ,000,000 in net sales, representing 9% to 12% sales growth year over year, and adjusted segment EBITDA between $350,000 to ,000,000. A few other assumptions for full year 24 to share include the following. We are expecting a capital expenditure range of between $85 to $95 million, consistent with our stated target of capex of approximately 5% to 7% of revenue. We are expecting depreciation of approximately $90 million to $93 million. We are targeting a working capital reduction of approximately $10 to $20 million for the year. We are expecting a gap tax rate for the full year of 29% to 30%. And finally, for the full year of fiscal 24, we expect to deliver another strong year of free cash flow generation. For additional planning assumptions to assist with modeling fiscal 24, please refer to the supplemental presentation we have posted on our investor relations website. Our three key revenue guidance assumes sell through growth in -single-digit range. Our guidance for the quarter is $385 million to $400 million in revenue and $103 million to $110 million in adjusted EBITDA. We are expecting an effective tax rate of approximately 27% for the quarter. With that, I'll now turn the call back to Jesse for some closing remarks.
spk12: Thanks, Pete. I would again like to thank our dedicated team members, channel and supplier partners, and contractors that support the ASAC company. ASAC's success and momentum are a testament to the hard work of our exceptional team and partners. I would like to express my gratitude for their continued commitment and execution. Our margin expansion initiatives and trends remain strong. We believe we are well positioned to achieve our adjusted EBITDA margin objective of .5% earlier than planned and continue to invest to deliver -7% above market growth. We remain focused and excited about the long-term growth and material conversion opportunity ahead of us in both our fast-growing $14 billion core outdoor living market and in our $10 billion of near-adjacent markets. The expansion of our product portfolio combined with the continued execution of our growth strategy and share gains put us in a great position for the rest of fiscal 2024 and fiscal 2025. With that, operator, please open the line for questions.
spk01: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. We ask that you please limit yourself to one question. Your first question comes from the line of Keith Hughes with Truist. Your line is open.
spk03: Thank you. My question is on the sell-through. You're discussing a deceleration from double-digit sell-through in this quarter to single-digit over the next couple quarters. If you could talk about why you think that's occurring and has that already started to occur here in April?
spk12: Just to answer your latter question, that has not occurred. Similar to our last earnings call, we believe it's prudent to assume a flat R&R market and to assume that our sell-through growth would be five points over that. I think as you look at what we highlighted in the most recent quarter that we ended, that sell-through growth was right around double digits. Without getting into too much detail, it's safe to say that that level has continued to date. Once again, it's a very similar assumption that we had in our last call.
spk03: Finally, just on the same topic, in the September quarter, the fourth quarter, the implied value there is flat-ish revenue. Again, that would be below sell-through that you just discussed. Is that just taking inventory off or how would you end up down there?
spk12: Yes. So I think as we said on the last call, in the second quarter, we would expect to build some modest inventory ahead of the season. As you look at our implied Q4, if our sell-through stays at 5%, we think it's appropriate to be conservative on that inventory coming back out and bringing us back to what we talked about all year, which is a decline in days on hand compared to our historical average and really ending the year. This particular guide assumes that we're going to end the year at that 10% to 15% down from historical average, maybe even a little higher. Thank you very much.
spk01: Your next question comes from the line of Tim Weiss with Baird. Your line is open.
spk09: Hey, good afternoon, guys. Maybe just to start on some of the new business wins that you talked about, Jesse, I guess is there any way to kind of ring fence or kind of size what the incremental business is? I guess is it similar to what you've seen over the last couple of years or is there anything in there that's kind of new?
spk12: Thanks for the question. As we've highlighted in our prepared remarks, the wins are really both in retail and in the pro. I think from a sizing standpoint, as we look at next year, it is the first time we've called out some incremental costs associated with that transition. And I think as we look at 2025, I would think some of the incremental positions that we gain give us a lot of confidence to be able to really articulate that we're in a good position to continue to outgrow the market by 5%. So we're not sizing it specifically, but clearly it's larger than what we've talked about in the past and really sets us up for 2025.
spk09: Okay, great. That's helpful. And then just thinking about the investments, is that really just channel kind of servicing, sales rep, those types of things, or are there other kind of structural investments that you need to make just given where the new business is?
spk12: I would think of it as, anytime you have a meaningful gain in either the pro or the retail channel, in some cases you need to support that transition. And so I would think of it as transition costs as we move forward.
spk09: Okay. Okay. Very good. Thanks a lot for the color eyes.
spk01: Your next question comes from the line of Philip Ng with Jeffreys. Your line is open.
spk06: Hey, Jesse. Exciting news on some of the share gains. I guess a really simple question. What are you guys doing that you think that's driving some of these share gains? And sorry to kind of dig a little more. Last year the share gains was a little more on the retail side. Any more color, if this is a little more balanced between the channel, any color on type of product, this is more on the high end, a good better side of the portfolio, any color on that front would be helpful as well.
spk12: Sure. I think as we've talked about over the last really two years, we've had a really balanced execution of increasing our position in the market on both the pro and on the retail side. And obviously we've highlighted that that will continue into 2025. And I think it really comes down to the investments we've made in terms of expanding our product portfolio, the investments we've made on our downstream sales force. And we've had some meaningful step ups in SG&A investment, I think as you look over the last couple of years. And then I think as you consider your question on mix, I think we've always and will continue to drive expansion in the premium segments of the market. We've done that nicely over the last few years. And we called out the ignition resistance of a designation from California, which we believe we're the only player out there that has that. And so those things really secure our position in the premium. And then obviously on certain shelves, it's important that we're able to provide the entirety of the portfolio, which includes more of the mid price point product. So I would say as you consider next year, it's pretty balanced, but we have typically been under penetrated in more on the good and better parts of the category. And we believe we're taking steps to not only grow on premium, but close that gap of being under penetrated in those segments.
spk06: Jesse, it sounds like your guidance speaks in a fair amount of conservatism with sellout, perhaps, moderating, which is not what you're seeing. And then inventory coming down to 10 to 15% below historical levels, maybe even higher. Has the channel actually kind of signaled to you that we want to manage inventory a lot more conservatively? Because actually coming into year, it sounds like they were quite bullish and they were building more inventory than normal section during the window buyers. So I just want to make sure this is more conservatism on your end versus what your channel partners are kind of signaling at this point.
spk12: As we've talked about over the last couple of years, I think it's important as our service levels have been consistent, that we work with our channel partners to make sure that they have an appropriate level of inventory in the channel. And as we've talked about the last few quarters, really, as we ended 2023, our intent is not to put any more inventory in the channel that is absolutely necessary. What I would say is in terms of channel behavior, it is pretty normal. They want enough product to be able to service their customers, but they don't want too much product that has an impact on their return on investment. And so I would just say it's a pretty normal conversation in a pretty normal year. I think our lower lead times and the consistent execution of those lower lead times gives us an opportunity to have high service levels with less inventory in the channel. And if anything, we're probably an advocate of that.
spk06: Okay, great call. Appreciate it, guys.
spk01: Our next question comes from the line of Susan McClary with Goldman Sachs. Your line is open.
spk00: Thank you. Good afternoon, everyone. My first question is just around demand generally. It sounds like R&R activity started a bit softer for some product categories this year. I guess, how would you characterize what you're hearing from your customers, what you're seeing in perhaps your more recent surveys, and anything else that suggests the health of the consumer and the pace of demand that we could see as we get into the summer?
spk12: The general feedback, as we highlighted on our surveys, has been relatively steady. I think certainly in dialogue with the market, in general, you would have an R&R rate, a feeling of a flattish R&R rate as we've highlighted. And I think there's certainly a sense that there's an opportunity for some acceleration when interest rates come down. But the word I would continue to use is steady. And there's always going to be geographic or weather variations. But in general, I think what we're seeing is, at least in our consumer segment, a pretty steady set of activity. And clearly, we're benefiting from our activities of growing above the market. And so that's the word I would use, is steady. And Pete, I don't know if you've got the data in front of you. I don't know if you've got any incremental comments there. Yeah, just
spk14: from our quarterly surveys with our channel partners, the sentiment from the dealers is incrementally more positive from last quarter. Growth expectations on the dealer set is modestly better than last quarter. Contractor side backlogs are kind of still in that seven to eight weeks. So again, really steady over the last kind of six to eight quarters.
spk00: OK, all right. That's great color. And then maybe turning to exterior specifically, I guess anything that you would highlight there. And I know last quarter you'd mentioned that you're in the process of adding capacity. Just any incremental update on how that's coming along and anything new?
spk12: No, as Pete wants to go ahead and take that. Just
spk14: first on the utilization and capacity, as we've talked about previously, we're probably in that 85 to 90 percent range. And hence, that's where some capital is being deployed here, especially in the back half of this year to expand capacity. For 2025, again, we are approaching completion of phase one on Boise. And capacity utilization on our decking business is pretty steady here at probably 65 to 70 percent.
spk12: Yeah, and as you pointed out, the incremental capacity we brought online was within our Versatec and our exteriors business. And that capacity is not only in some of our traditional exteriors products, but it's also to help us continue to service the market on some of our new siding products. And what I would say is that siding capacity expansion is certainly on track. We're in the early days of that particular business. It's a very high-end niche kind of a siding play. But we certainly have capacity to service that business as it continues to get seeded and grow as we move into 2025.
spk00: Okay. All right. That's great color. Thank you both for that, and good luck.
spk12: Appreciate it. Thanks,
spk01: Susan. Your next question comes from the line of Trey Grooms with Stevens, Inc. Your line is open.
spk15: Good afternoon. So the margin excluding some of these expenses looks like it's going to be 26, to 27,7 this year. So you're basically knocking on the door here of your long-term target, or if not hitting it maybe. And Jesse, I know you said you guys feel confident that you could hit that early, which was a 27 target, that 27.5. So maybe what would it take to maybe update that longer-term target and maybe what that could look like in a few years?
spk14: Yeah. As we've said, Trey, in the past, if you go back to our 2022 kind of investor day, we felt like on the recycling side, I think back then we laid out about 350 base points of an opportunity. We still probably see half of that or more ahead of us. And as well on the product configuration side, I think we had ID'd about 200 base points of incremental projects and pathway to expansion. Again, I think we're probably at best sort of mid-innings in tackling that. So we still feel like as we look out over the next couple of years, we've got headroom to expand gross margins.
spk15: Okay. And maybe just housekeeping. Thanks for that, Pete. Housekeeping. Sounds like the 4 million FFO impact, is that, would that all have been in one queue or is some of that going to be in the two queue as well?
spk14: Yeah. It's a great question, Trey. So part of why we're providing kind of -to-date numbers here is we will likely restate one queue. And so we're very comfortable on the -to-date results, but there could be some modest movements from one queue to two queues. So that's the color I can provide.
spk15: Okay. Thanks for the color.
spk01: Okay. Your next question comes from the line of Matthew Buhle with Barclays. Your line is open.
spk05: Good evening, everyone. Thanks for taking the questions. So on ASIC's growth relative to sell-through beyond just that fourth quarter dynamic you spoke about earlier, obviously the -over-year growth has been very strong for the past three quarters. And that reflected, of course, the comparison from the D-stock the prior year. But as we kind of get forward and we look to more normalized channel inventory comps in the future, should we think that ASIC's growth will settle out to sort of match industry sell-through plus your shelf wins, perhaps as we forecast out 2025? Or what could cause your quarterly growth to still remain somewhat lumpy? Thank you.
spk12: Yeah. So as you point out, we had some modest lapping. I think we called it out in the kind of 20 to 30 range in Q1. But really since then, you should assume that we're operating under a normal inventory sell-through scenario. So as you look at what we delivered in 2Q and compare that to our fourth quarter, what you're basically seeing is 2Q modestly filling the channel, which is pretty normal at this time of the year. 3Q sell-through, sell-through being close, there's always a little bit of movement. And then the inventory coming out in Q4. And once again, that's against an assumption of only 5% sell-through growth. And we've been operating at a level above that. I think as you move into next year, our focus and the equation is to be roughly five to seven points over the market and over the underlying R&R market. I think you've seen that probably a little higher this year in terms of our overall execution. My guess is decking is probably in the four to five percent growth range. And we're five to six points over that, which gets us in that double-digit sell-through range. If there's any positive news as we move through 25, we should stack on top of that. And so I'll just leave it the five to seven percent above market that we've talked about.
spk05: Got it. Okay, that's helpful, Jesse. Thank you for that. And then secondly, I know you just spoke about some of the margin benefits of your recycling initiatives, but you called out in the comments the sort of new operations in Texas, adding capacity and source and capabilities. I'm just curious if you can elaborate a little bit on what this will do to your mix of recycled product and also, you know, if you got kind of anything else cooking for the future, I would love to hear it. Thank you.
spk14: Yeah, specifically the Texas asset is an opportunity for us to source some premium pure white PVC to the portfolio, which is obviously really important to us on the trim side of the business. We've got plenty of access to raw inputs on the recycling side. We've got plenty of capacity from a conversion perspective. So I think we're positioned really well on the recycling side from a capacity perspective.
spk12: Yeah, and the only other thing, Matt, I'd call out just on the utilization side is, you know, clearly with a solid season and, you know, an expectation of some incremental volume in 25, our Boise facility is, you know, now running, I think we call that out in the comments, it's running at an appropriate utilization. You know, that's ramping up very nicely. I think we've got an additional line coming online shortly there. But, you know, from a utilization standpoint, we're moving back into a window where our aggregate utilization is moving towards, you know, historical norms. And, you know, we feel really good about that and our ability to service the market. And we're always going to be focused on expanding our percentage of recycle. And as Pete pointed out, that high quality recycle that we get really gives us an opportunity to increase the percentage in our exteriors business, in particular the exteriors business that's not painted.
spk05: Got it. Thanks, Jesse. Thanks, Pete. Good luck, guys. Appreciate it. Thank you.
spk01: Your next question comes from the line of Michael Rahote with JP Morgan. Your line is open.
spk11: Thanks. Appreciate you taking my questions. Good afternoon. First, just wanted to drill down a little bit on the double digit sell through during the quarter and I guess you said into April. Wanted to get a sense of if that was similar across both, you know, across your different channels, retail or wholesale pro and also the, you know, exteriors versus the decking and railing, if they were also kind of at similar growth rates. And, you know, any indications that those growth rates have changed at all as you're looking into May?
spk12: Yeah, I think as Pete pointed out on his comments, you know, we, given our position in the marketplace on a relative basis, we expect that just the nature of our expansion that retail will be accretive to our growth. And I think we certainly have seen that and we continue to see that and expect to see that moving forward. And we've had really nice growth within the pro channel. Now, there's some modest, within the pro channel, I'd say there's some modest geographic variations that you would expect this early in the season. But in aggregate, it's that double digit that we talked about. Across product lines, if you look out over the last 18 months or so, you would have seen, you know, in a lot of cases, our exteriors business, or in multiple cases, our exteriors business outgrowing the sell through on our deck rail and accessories business. And so we will have quarter to quarter variations. I think on this quarter that we just reported, we would, we're showing our deck rail and accessories business outgrowing our exteriors business within the quarter. And so that's just how it shakes out quarter.
spk11: Okay, great. Appreciate that. And I guess,
spk07: just
spk11: looking forward, you know, kind of with the adjustments that you've had to make to the inventory over the past few years with the restatements, just want to get a sense for, you know, you kind of alluded or highlighted the investigation and you put out all the different preliminary numbers about how it's affected the past profitability. You know, on a go forward basis, you know, and particularly as it relates to, you know, the margin profile that you thought of, just want to be crystal clear, I guess, that, you know, whatever was kind of uncovered over the past, you know, two or three years or more, that, you know, whatever structure was or numbers that were out there doesn't really affect the way you think about the business going forward. It appears that way, but just want to make sure that that's kind of fully, you know, understood if there's any other nuances to the business that maybe weren't apparent prior to this.
spk14: Mike, this is Peter. The only impact on 2024 right now is the FIFO impact of $4 million. There really was no disconnect actually in 2024. The FIFO impact is purely in it due to the fact that the inventory being restated causes the rollback period for us to be recomputed from a FIFO perspective. So, the $4 million charge that we have absorbed in our year to date 2Q results is the only impact that we see to our cost structure moving forward.
spk12: Yeah, and just, you know, to highlight, you know, our business, the way it's running now, you know, we're really happy how it's running. And, you know, this particular issue, while unfortunate, is really historical in nature, as Pete pointed out, with the exception of the FIFO conversation. So, you know, moving forward, we feel really good about the margin structure and what we're guiding to. And, you know, don't expect any additional impact aside from what we've called out on our future numbers. And I think the key here is, you know, the team uncovered it, we dealt with it, and we're in the process of documenting it and doing what's appropriate, and it really doesn't have an impact on the future business.
spk11: Great. Thank you. Appreciate it. Thanks, Mike.
spk01: Your next question comes from Mike Dahl with RBC Capital Markets. Your line is open.
spk04: Good evening. Thanks for taking my questions. Just back on the margin discussion, can you just give us an update on what you're seeing in terms of your kind of cost basket and how you're thinking about, you know, deflation, inflation, or price cost in total?
spk14: Yeah, Mike, this is Peter. Everything we can see on the commodity side is stability, I think, is the word on the input cost side that I would use. As Jesse mentioned, we're approaching the completion of phase one here with the last line going into Boise, which is positioning us to start to get some more meaningful leverage on a conversion cost per pound basis as that plant continues to get more volume and become more productive and helps the entire system out. And then from a pricing perspective, really no surprises. We anticipated our pricing in the market to be approximately flat this year, and through two quarters, that's what we can see, and we don't see a different pattern in the back half of the year.
spk04: Okay. Thanks. And then, but just back on the investigation, I appreciate the color you've given. Maybe can you just go into a little bit more detail about describing the scope or depth of the investigation that's giving you kind of the confidence or maybe the scope of the employee's responsibility, what the motivation may or may not have been behind just specifically this being an inventory or COGS issue, and then in your initial documentation, have you been in touch with SEC or other regulatory bodies, anything you can share at this point?
spk14: Yeah, just some context on, you know, it's a former employee that started with the business back in 2016. They left in March, our very first close after that employee leaving, a new accountant performed a traditional account reconciliation per policy and procedure. Identified a discrepancy during the close. Immediately communicated that up through the channel and the chain got to me. I got on a plane and investigated it. Immediately communicated to Jesse the issue, which immediately turned the communication to our audit committee and our independent investigation. That investigation is substantially complete here this week. So it is clearly laid out what we feel like their appropriate impact ranges are by year. Based upon that information and the body of assessing that, we really came to the conclusion that restatement was the proper outcome. We filed the 8K today to inform the SEC as well our intentions to restate our financials for 2021, 2022, and 2023, and the first quarter of 2024.
spk07: Okay, thanks.
spk01: Your next question comes from the line of Rafe Jedrosic with Bank of America. Your line is open.
spk02: Hi, good afternoon. Thanks for taking my question. Peter, just to appreciate all of the detail you've provided so far on the inventory side. Just to sort of ask explicitly, is there like which part of the financials, like do we have sort of 100% confidence are correct and don't need restatement? And is there any cash or cash flow impact or uncertainty around the cash balances? And then just to like on the FIFO accounting definition, is this just related to inventory accounting before 2024 that you have to take higher COGS on in 2024 due to the FIFO accounting? Or are there still kind of accounting issues sort of running up into March?
spk14: Yeah, again, there'll be no accounting issues or cost impact beyond our year to date two key results. And again, you want to think of it as your FIFO calculation is based upon a rollback of your inventory that you have on hand. Obviously with the information we would have been using before, which had inventory overstated, when you restate that inventory, it becomes lower, the rollback becomes shorter. And that, in essence, you should think of it, Ray, as it moved favorable FIFO from 24 into 23. And that's really the impact of the $4 million that we're feeling in our year to date results that we wouldn't have anticipated at our last guide.
spk11: Okay.
spk12: And then I think your question relative to cash, it doesn't have any impact on cash on hand or any of that sort of accounting. It's really a statement of inventory in past years.
spk14: Yeah, I think it's also important to just communicate the investigation. When it concluded there was no evidence of anyone else being implicated, you know, or any scope beyond sort of inventory and cost of goods sold. It was a long formal employee. And everything that we can see from the investigation conclusion is that they did not benefit in any way in terms of any cash flow or payments or anything like that. So, this is a self-contained issue.
spk02: Okay, that's helpful. And then just on the residential guidance raise, I think you're raising the revenue $20 million. The EBITDA is going up $9 million, but I think that's inclusive of a $4 million headwind from the inventory change plus another $4 to $5 million in loading costs. Am I thinking about that, right? It sort of implies a very high incremental margin, almost 100%. Just how should we think about that high incremental margin? And am I doing the math right on the guidance raise?
spk14: Yeah, I mean, you're doing the flow through analysis properly. I mean, as we've kind of said over the last two quarters, when we, every incremental dollar of sales brings an incremental pound of production, which we get meaningful leverage on right now. It's an incremental pound to get recycle savings on. It's an incremental pound to get deflation on. I'm not going to commit, Rafe, that 100% flow through the target for us going forward. We kind of said that, look, our own expectation the back half of the year was if we got upside, it would probably be closer to 40 to 50%.
spk02: Thank you. Appreciate all the call here.
spk01: Your next question comes from the line of John Lovallo with UBS. Your line is open.
spk08: Hey, guys. Good evening. This is actually Spencer Kaufman on for John. Thank you for the questions. The first one, how much of retail strength in the order was driven from business wins versus quote unquote organic? And then just thinking about the entire portfolio, did you guys see any material differences in demand across different price points?
spk12: Yeah, on the latter point on price points, I'd say it's too early to tell. We've seen nice demand really across the portfolio. So I don't know that we can give any color on mix at this point. Obviously, it's something we look at. And then relative to the difference between call it same store versus incremental ads, we saw nice growth in particular on the deck rail and accessory side within the same footprint in addition to the expansion that we've experienced in retail. So I would say the growth is really an outcome of both.
spk08: Okay, fair enough. Your pricing was flat in the first half and I think is expected to be flat in the back half here. You guys still view that pricing can become a more important part of the growth algo over time?
spk14: Yeah, as we've said on previous calls, I think as we approach 2025, I think we would expect to return back to more traditional pricing opportunities on an annual basis.
spk01: Your next question comes from the line of Adam Baumgarden with Zelman and Associates. Your line is open.
spk13: Hey, guys. Good evening. Thank you. Mentioning the possibility at some point for inorganic growth. Maybe you could give us a sense for kind of what types of products and I'm assuming that's in residential, but any additional color there would be great.
spk12: Yeah, well, certainly our focus is continuing to build out the residential business. You know, the investor day in 2022, we laid out what we thought was a pretty good growth algorithm, but we also laid out the areas that we would define as core and adjacency. And if you just look at our track record, we for the most part have acquired tuck-in acquisitions, where we can benefit from their existing customer base, but we can also take the product and move it into our existing channels and really leverage that. And we've done that recently with with Intex and Structure. We've done that over a long period of time with the UltraLox acquisition. So I think that kind of a feel of what we would look at, I think gives you a good sense of the opportunity. And then clearly there's opportunities within the supply chain. We've continued to take advantage of the opportunity we see to expand our capability and recycling. And so those are directionally the areas that we would look at. I think the most important takeaway is we really like our business model. We're really well set up to continue to drive above market growth in our So anything we do is really going to be around strengthening the core and making sure that we set ourselves up for continued growth in the segment that we love, which is the segment that we plan.
spk13: Got it, thanks. And then just back to the sell through being up double digits, maybe if you could put a finer point on how much you think the composite decking market is growing versus that number.
spk12: You know, it's a I don't know that I have a great sense of that. I think if you look over the last give or take 12 months, I think what you would have heard is in general, probably, you know, give or take around 5%. And we've been growing 5% over that. I think unfortunately, we're in a market where you make judgments on market growth, looking backwards. But I certainly think there's enough data to show that as a market segment, the composite decking area deck rail and accessories is outgrowing the underlying R&R market. And I think it just highlights the resiliency and the continued material conversion.
spk07: Got it, thanks.
spk01: And that concludes the question and answer session. I'll turn the call to Jesse Singh for closing remarks.
spk12: I really appreciate everyone taking the time once again in the evening to have a discussion with us. As always, reach out with questions. We look forward to having ongoing dialogue and chatting with you again next quarter. Thanks and have a great evening.
spk01: This concludes today's conference call. Thank you for joining. You may now disconnect your lines.
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