The AZEK Company Inc.

Participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to Eric Robinson. Please go ahead, Eric.

Thank you, and good afternoon, everyone. We issued our earnings press release and a supplemental earnings presentation this afternoon to the investor relations portion of our website at investors.azitco.com. The earnings pressure lease was also furnished by 8K on the SEC's website. I'm joined today by Jesse Singh, our President and Chief Executive Officer, and Ryan Latta, our Chief Financial Officer and Treasurer. I would like to remind everyone that during this call, we may make certain statements that constitute forward-looking statements within the meaning of the federal securities laws, including remarks about future expectations, beliefs, estimates, forecasts, plans, and prospects. Such statements are subject to a variety of risks and uncertainties, as described in our periodic reports filed with the Securities and Exchange Commission, that could cause actual results to differ materially. We do not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. These non-GAAP measures should not be considered an 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 and supplemental earnings presentation, which are posted on our website. Now, let me turn the call over to ASIC's CEO, Jesse Singh.

Good afternoon, and thank you for joining us. We are pleased to report a good start to fiscal 2025 with first quarter results again demonstrating the effectiveness of our growth initiatives and disciplined operational execution. Our residential segment grew net sales by 22% year-over-year, driven by double-digit sell-through growth in the quarter and expanded market presence across our deck, rail, and accessories and exteriors product categories. During the quarter, deck rail and accessories sell-through grew at a double-digit pace with each of the product lines within the portfolio growing double digits. Exterior sell-through grew high single digits as we saw some market stability during the quarter. Our focus on wood conversion, product innovation, improving the customer journey, growing brand awareness, and channel expansion continues to drive our success and our performance. We also delivered strong residential segment adjusted EBITDA growth of 24% year-over-year and expanded our segment adjusted EBITDA margin by 40 basis points year-over-year to 23.7% while making investments in new products and channel expansion to drive future growth. azac's multi-year track record of success would not be possible without the dedication collaboration and support of our team members and business partners and i would like to express my sincere gratitude we continue to make progress against our key strategic initiatives our 2025 new product launches including timber tech fulton rail TimberTech Reliance Rail, Versatex Exceed Siding, and TrimLogic are being well received in the market and will allow us to address a wider range of price points and consumer needs to drive wood conversion. These new products are generating excitement from our contractor and dealer partners with our rail and siding products being stocked in a number of new locations ahead of the busy part of the season. During the quarter, we invested in and began ramping up production of these products, modestly impacting our first quarter margins. We expect these startup investments to continue during our second quarter as we scale and position these terrific new product platforms to drive future growth. We also continue to see strong demand for our advanced PVC vintage and landmark decking collections, which have the best aesthetics and fire resistance in the industry. We recently completed the majority of our seasonal early buy negotiations with our pro-channel partners and continue to strengthen these relationships. We believe we have once again expanded our presence in the market and gained initial stocking positions for our new products. Our recently announced distribution partnerships expand our reach in the Western United States and Canadian markets. We're excited about the growth opportunities these present to better position us to service the pro contractors in these geographies, and we look forward to our ongoing success with all of our key channel partners. During the second quarter, we are making incremental investments to support these channel and product expansions including incremental merchandising and digital tools to enhance the customer experience. We also continue to invest in our recycle capabilities and acquired a regional PVC and polyethylene recycling operation in Indiana during the first quarter. This acquisition not only expands our waste material sourcing network, but also expands our capabilities to process hard to recycle materials through unique recycle segregation and processing technologies. We are excited about the capabilities and capacity this acquisition offers as we continue to expand our usage of lower-cost recycle streams. In December, TimberTech was named one of FAST Company's 2024 Brands That Matter in the Benchmark Brands category. This prestigious recognition celebrates TimberTech's success in marketing its innovative decking and railing products in ways that resonate deeply with consumers, redefining expectations around outdoor living. This year, we also celebrate the 25th anniversary of AZEK Trim, the product that pioneered the PVC trim category. For 25 years, it has set the standard for durability low maintenance, and design flexibility, offering a superior alternative to wood. We'll be celebrating this unique milestone at many industry events this year, including the upcoming NAHB International Builders Show and JLC Live. While the outlook for the broader housing and repair and remodel markets remain uncertain, we continue to see consistent demand for our outdoor living product portfolio. We continue to see positive residential sell-through growth, positive demand signals from digital metrics and customer surveys, and contractor backlogs in the six- to seven-week range. We ended the quarter with channel inventory levels once again conservatively below historical averages, and we have ample manufacturing capacity to effectively service our customers. We see positive momentum on our margin initiatives as we drive our continuous improvement programs, recycle initiatives, and sourcing savings. These margin initiatives put us in a good position to sustain and expand margins while making investments to drive new product growth, channel growth, and brand awareness. Given the solid first quarter performance, we are modestly raising the top and bottom end of our fiscal full year 2025 outlook. Our planning assumptions reflect residential segment net sales growth in the range of 6% to 8% year-over-year and residential segment adjusted EBITDA growth of 7% to 11% year-over-year. Overall, on a consolidated basis, we expect to grow our net sales in the range of 5% to 8% year-over-year and adjusted EBITDA in the 6% to 10% range as we see a modestly dilutive impact from our commercial business. Our fiscal 2025 planning assumptions continue to assume a relatively flat repair and remodel market and mid-single-digit residential sell-through growth for the remainder of the year, driven by ASEC-specific growth initiatives. I'm excited to welcome Ryan Latta, our new Chief Financial Officer and Treasurer, to today's call. Ryan has been a trusted partner since joining the ASAC team nearly three years ago. He brings extensive financial experience and a deep understanding of our business, having most recently served as the CFO of our residential segment. Many of you have met Ryan, and he's already making a significant impact. I'm confident in his ability to lead our financial organization and support our continued growth. We also wish our former COO and CFO Pete Clifford well as he starts his next journey. Pete did a great job of setting up the business and the finance team for future success. I know Pete is listening, and we sincerely want to thank him for his contributions to the AZAC company. I will now turn the call over to Ryan to discuss our financial results and outlook in more detail.

Thanks, Jesse, and good afternoon, everyone. Thanks for joining us today. I am honored to step into the role of Chief Financial Officer at ASEC and thrilled to expand my finance leadership at such an exciting time for the company. I look forward to continuing to collaborate with Jesse and the team to execute our business and financial strategy as we shape the future of the industry and continue to drive growth and long-term value for our shareholders. Before we get into first quarter results, I wanted to share some perspective on the operating environment. In the quarter, we experienced double-digit sell-through growth as a result of continued customer demand for our products and execution of the AZEC growth playbook. This includes material conversion, channel expansion efforts, downstream initiatives, new product releases, and improving the consumer journey. We had a successful early by-process and are pleased with the results. We believe we drove shelf-space wins and expansion within the Pro channel, building on momentum from previous years. From a channel inventory perspective, we ended the quarter down roughly 15% from historical average days on hand. As for demand indicators, positive momentum continued across the KPIs we track. Our pro contractor and dealer surveys indicated that outlook sentiment improved and current project backlogs are in the six to seven weeks range. On the digital side, our engagement efforts remain effective. We saw robust growth in website sessions, contractor leads, and sample orders year over year. As a reminder, our fiscal first quarter is traditionally our lowest production quarter, and our production levels were relatively consistent year over year. During the quarter, we started ramping production to support several new product launches in fiscal year 2025. In addition, we prepared our new facilities to commission additional capacity for our exteriors and rail businesses in the second quarter. Material input costs remain stable in our residential business, and we continue to execute our traditional annual recycling, product configuration, sourcing, and AIMS programs. This positions us well to drive ongoing margin expansion. In terms of SG&A, our results reflect a more normalized spend profile year over year, with modestly lower sales and marketing costs as a result of lapping prior year expenses associated with a customer and branding event. The strength of double-digit residential sell-through growth and continued execution of our margin programs helped us deliver strong results in the first quarter. For the first quarter of fiscal 2025, we delivered consolidated net sales of $285 million. Our first quarter net sales were driven by double-digit sell-through growth and the expansion of our channel positions, partially offset by the $3 million net impact from the divestiture of our Viacom business and our commercial segments. First quarter gross profit was $104 million, an increase of $13 million year over year, and gross margin was 36.3%. First quarter adjusted gross profit was $107 million, an increase of $12 million year over year, and adjusted gross profit margin was 37.4%. The adjusted gross profit margin decline was driven primarily by the previously mentioned costs related to new product expansion lower plant utilization levels, and weakness in our commercial segments grant and products business. GAAP SG&A expenses decreased by $2 million year-over-year to $75 million. The decrease is primarily driven by a normalization of marketing expense as well as modest reductions in administrative costs. Adjusted SG&A expenses increased by $2 million year-over-year to $64 million. Adjusted EBITDA for the first quarter increased by $11 million or 20% year-over-year to $66 million. Adjusted EBITDA margin for the quarter increased 30 basis points year-over-year to 23.1%. Net income for the first quarter decreased year-over-year by $7 million to $18 million or $0.12 per share. As a reminder, the prior year period included the $38.5 million gain on sale from the ViCom divestiture, which we are now lapping. In addition, our tax rate came in favorable at 7.5% versus 39.9% in prior year, primarily driven by tax benefits related to a higher proportion of stock options exercise and the removal of the tax effects related to the sale of the ViCom business. Adjusted net income for the first quarter, which excluded the VICOM divestiture gain on sale in the prior year, increased year-over-year by $10 million to $25 million. Adjusted diluted EPS increased $0.07 year-over-year to $0.17 per share. Now turning to our segment results. Residential segment net sales for the first quarter were $272 million, up 22% year-over-year, driven by the previously discussed timing of channel partner purchases. Residential segment adjusted EBITDA for the first quarter was $64 million, up 24% year-over-year. Residential segment adjusted EBITDA margin was 23.7%. Commercial segment net sales for the quarter were $13 million, down 23% year-over-year, primarily due to the sale of Viacom business last fiscal year and weaker demand in our Scranton Products business. Commercial segment adjusted EBITDA for the quarter was $1.5 million, a decrease of $1.4 million year-over-year, again, primarily driven by the disposition of the ViCom business, weaker demand, and increases in our material input costs. We have taken appropriate pricing and cost actions in this business to offset the pressure and expect to return to more traditional margin levels in the third and fourth quarters of fiscal 2025. From a balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $148 million and approximately $373 million available for future borrowings under a revolving credit facility. Working capital, defined as inventory plus accounts receivable minus accounts payable, was $243 million, up $18 million year over year. We ended the quarter with gross debt of $534 million, which included approximately $95 million of financial leases. Net debt was $386 million, and our net leverage ratio stood at 1x at the end of the first quarter. Net cash from operating activities was $14 million during the first quarter, an increase of $30 million year over year. Capital expenditures for the quarter were approximately $22 million, and we deployed $11 million of capital to acquire a new regional recycling operation to support our long-term recycling capabilities and ambitions. For the first quarter, free cash flow was negative $8 million, an improvement of $26 million year over year. Our capital allocation priorities remain the same as we previously communicated. We will continue to invest in our business, both organically and inorganically, And to the extent we have excess cash flow, we will look to repurchase shares opportunistically pursuant to our existing share repurchase authorization. Now let's turn to our outlook. Consistent with our prior assumptions, we are modeling a relatively flat R&R market for the full year 2025. We are raising our net sales planning assumptions by $10 million on the bottom and top ends of the range, reflecting the stronger first quarter demand. At the midpoint of our updated planning assumptions, residential net sales are expected to grow roughly 7% year-over-year in fiscal 2025. We continue to plan residential sell-through in the mid-single digit range for the remainder of the fiscal year. For this update, our planning assumptions for fiscal 2025 are $1.52 billion to $1.55 billion in consolidated net sales and $403 million to $418 million in adjusted EBITDA. Our net sales planning assumption range would imply roughly 5% to 8% year-over-year growth and roughly 6% to 10% year-over-year growth in adjusted EBITDA. Our residential segment planning assumptions for the year is $1.452 billion to $1.479 billion in net sales and $392 million to $405 million in segment adjusted EBITDA. representing 6% to 8% net sales growth year-over-year and 7% to 11% segment-adjusted EBITDA growth. A few other assumptions for fiscal 25 to share include the following. We are expecting a capital expenditure range of $85 to $95 million, consistent with our publicly stated CapEx target of approximately 5% to 7% of revenues. As we have mentioned in the past, we may choose to go above this range in opportunistic scenarios such as purchasing property or assets that fit into our long-term strategy. And finally, we are expecting a gap tax rate for the full year between 25% to 26%. For additional planning assumptions to assist with modeling fiscal year 2025, please refer to the supplemental earnings presentation we have posted on our investor relations website. For our fiscal second quarter, our consolidated guidance for the quarter is 437 million to 448 million in net sales and 115 million to 120 million in adjusted EBITDA. Our consolidated net sales guidance range would imply 4% to 7% year-over-year growth and 2% to 6% year-over-year growth in adjusted EBITDA. Our residential segment guidance for the quarter is 422 million to $432 million in net sales and $114 million to $118.5 million in adjusted EBITDA. Our net sales guidance range would imply 5% to 7% year-over-year growth and 3% to 7% year-over-year growth in segment adjusted EBITDA. We are assuming residential sell-through growth in the mid-single-digit range in the fiscal second quarter. We are expecting an effective tax rate of approximately 26% for the quarter. We expect our commercial segment will have one more quarter of margin pressure and that the actions we have taken will normalize in our fiscal third quarter and return margins back to expectations in the back half of fiscal 2025. We continue to target segment adjusted EBITDA margin in the 20% range for this business. We are well positioned to execute in the fiscal second quarter and the remainder of fiscal 2025. With that, I'll now turn the call back to Jesse for some closing remarks.

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

Ladies and gentlemen, we will now begin the question and answer session. We ask that you please limit your input to one question and one follow-up. At this time, I would like to remind everyone to ask a question, press star, followed by the number one on your telephone keypad. One moment, please, for your first question. Your first question comes from the line of Susan McCleary. Please go ahead.

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

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

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

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

OK, thanks for the color and good luck with everything.

Appreciate it. Thanks, Susan.

Your next question comes from the line of Michael Rehaut of JP Morgan. Please go ahead.

Thanks. Good afternoon, everyone. Thanks for taking my question. Thanks, Mike. I wanted to start with the acquisition. It seems like another kind of tuck in in your efforts around, you know, augmenting your recycling capacity. I just wonder in terms of, you know, what that might uh in how that might impact you know the the income statement this year and or next year does it change at all your the upside potential in terms of you know what you expect to get from you know further you know recycling benefits or is it kind of just in some ways add to the visibility of the plans you've laid out over the last you know going forward

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

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

Uh, yeah, yeah. I'll, I'll try to provide some insight. So, you know, it starts with some of my prepared comments, right? So if you think about, um, our growth stack. One is we talk about, in particular in this quarter and recent quarters, pro shelf gains. And that really is an outcome of having the right products, having the right sales coverage, having the right contractor coverage, and then doing a better job of supporting a dealer base as they look at growth opportunities. So you could perceive that our position in the market in the pro channel is expanding. Now, hopefully we're doing that in a growing market. So I think it's important to recognize when we look at share, it's how much of wood can we get? How can we make sure we are well positioned for future growth? So I think that equation in particular, as we've gone through this year versus previous years is probably a bit stronger um, this year, um, than last year, but kind of in the, in the same ballpark. I think the second component, which is interrelated that, um, is, you know, we're launching, um, a few different platforms into the market as we speak, uh, two different rail platforms, uh, you know, uh, uh, a siding platform and a wood conversion, uh, trim platform. And as you launch those platforms, it helps you get a position at a dealer base, but it also helps you start to do a better job of getting share of wallet and providing a more complete solution to your contractor. I think we're seeing some benefit initially, but that's really a much longer term. a much longer process as you get some product in the channel, and then you work with your contractors to continue to have them fulfill. So for us, as we look at our types of initiatives, we feel like both of those are in particular contributing this year. Underlying all that, we've got a downstream sales force and a pretty active set of marketing activities. And, you know, that's consumer by consumer where you happen to engage better, they recognize your brand. It's a lot harder to get at that, except that we do believe it's additive. So, you know, those are the elements that we've talked about in the past. And I think they're, you know, they're very much intact as we look at the last quarter, this current quarter and subsequent future quarters.

Great, thanks. One last quick one, if I could. Any exposure to tariffs on the supply chain that may or may not come out? Anything about Canada or Mexico?

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

Yeah, think of it as, you know, very low volumes to Ryan's point. You know, single-digit millions out of, you know, both Canada – I'm sorry, out of Mexico and China. And then, you know, our sourcing in Canada, the particular types of products we have there, we have other alternatives if we need to go that route.

Perfect. Thank you so much.

Your next question comes from the line of Keith Hughes. My apologies, Keith Hughes of Truist. Please go ahead.

Thank you. It seems like several months you've been stringing together double-digit sellout and decking and railing. Was January as strong as what you saw in the December quarter?

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

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

Yeah, I mean, it's a good question. The way we think of, you know, our, you know, call it shelf expansion is, you know, we had some really good pro shelf expansion as we talked about last year. That has a natural carryover. You know, obviously that starts, you know, February, March, April. We're getting the benefit of that as we speak. And then with the new wins, and uh the new expansion we'll start seeing the benefit of that as we flow this quarter so the way to think of it is you know if you do it um if you do it consistently it ends up being uh more of a consistent um expansion since we've been doing it um over the last three years and then you know incrementally you should think of as i mentioned uh on the earlier question that you'll start to you're seeing a little bit of the new product flow now you'll see more and more of that as we flow through the year and it gets adopted. And obviously, it depends on the type of product. But in general, you just see a gradual expansion. There's a bit of inventory, but then a gradual expansion as we work our way through the year. Okay. Thank you. Appreciate it. Thanks, Keith.

Your next question comes from the line of dealing of Jeffries. Please go ahead.

Hey, guys. Congrats, Ryan, on the new role and good job on a good quarter, guys. I guess first thing, perhaps, Jesse, I think you've been making a bigger push onto the railing side. Can you talk about that process of leveraging perhaps on your exclusive distributions and the level of engagement you're seeing? You know, you do have a few platforms you called out on the railing side for new products. Just kind of help us think through what that opportunity could present this year and beyond.

Yeah, I think we called out on our prepared remarks in the last quarter that, you know, something like a vinyl rail presents almost $300 million of market opportunity and steel rail presents additional opportunity and that there is much more 40, I'm sorry, 60% of the market in rail is wood and vinyl rail, if done right, can help facilitate wood conversion. So you start with the macro of what the overall opportunity is. As I think most folks know, when we deal with our distribution partners, for the majority of our product lines, we have been exclusive. There were times where we didn't have the right railing portfolio, in particular vinyl rail, where we had certain distributors that had a need to source from other suppliers. I think as we've worked our way through in collaboration with our channel, um, you know, where it makes sense, which is the vast majority of our, uh, channel partners, almost all, um, you know, we have, uh, we have now become the supplier of that distribution partner for, uh, vinyl and, and steel rails. So, um, so, you know, we're getting at a market segment, um, our channel partners, uh, uh, our current channel partners, um, you know, are, are a key part of making sure that we cover the market appropriately. And then obviously our 200-person sales force is downstream, working with dealers and contractors to generate demand. And the way I would just sum all that up and the way to think of it is we've had really good growth in the product categories. We've talked about deck rail and accessories. We continue to see nice growth in decking. This will just be another additive component that ensures strong growth in our railing business as we move forward. And we had really good growth last year without these products. And so, you know, we expect that growth rate to continue.

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

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

Got it. Implicit for 25, your guidance, are you making any incremental price increase in the marketplace? I found there was some out there. And then based on your winner by thus far, appreciating you guys managed channel-free conservatively, how does that inform you in terms of this year? Are your channel partners expecting sell-out in the mid-single-digit range or perhaps even a little more upbeat?

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

Appreciate all the great color guys.

Thank you.

Appreciate it. Thanks Phil.

The next question comes from the line of Matthew Bully, Barclays. Please go ahead.

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

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

Okay, got it. Thank you for that, Ryan. And then, yeah, I wanted to ask on capital lumber. You know, was capital now included in the guide? I think it was in last quarter. Any of that happen in Q1 versus Q2? So just anything there on the model, but then higher level, I'm just curious, you know, how that ramp is going now on the West Coast there. Thank you.

Yeah, I mean, the way to, you know, as we highlighted, we expected, you know, a bit of fill in the first half of the year. You know, that fill is materializing. Now, it didn't, you know, it was contemplated. uh, as, uh, as we talked about in, um, in our last guide. And also the way to think of that is, you know, that's Phil, it's got to sell out and, um, and it's positioning and inventory. So, you know, we, in general, we're not going to adjust our guide because of Phil, we're going to make sure you understand kind of the staging part of it, but it's got to sell through, which will happen, um, in subsequent quarters. And then relative to, um, you know, the expected benefit and support that they have provided in addition to, you know, our existing distribution network. It's very much been as expected. It's been very collaborative. And, you know, as we look to both shelf expansion and improved service to our existing customers, that is very much on track. And we're excited by the opportunity that's there. As I think Ryan highlighted on his comments, we are making some incremental investments there to support, you know, the ongoing expansion of our position in the marketplace. And I would just make, you know, one little highlight. A lot of the areas that are covered by our Western distributors, you know, for hardening against fires. And, and obviously there's some, you know, a lot of tragic stuff has happened recently. And, but in general, there has been a focus on making sure that we're providing the right products to, to make sure that we try to reduce the impact of, of these kinds of natural disasters. And, you know, in particular, our Western distribution, is actively making sure that they support their consumers and understanding the options that we provide and the potential benefit of those options as we've got an ignition-resistant product and a Class A flame set of products that can support that.

Got it. Thanks, Jesse. Good luck, guys.

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

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

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

Yeah. And Ryan, over, I mean, over the years, you've heard us talk about the, you know, the impact of lower utilization quarters on the subsequent quarter. You should think that that's clearly part of this. Our utilization was, you know, in Q1 was the lowest it's going to be.

and uh you know we've already ramped up that utilization in q2 and we'll see some of the benefit in q3 from the q2 utilization got it all right so jesse answered my second question which was you know gross margins year-over-year in the first quarter were down a little more than i thought um but it sounds like qq and the rest of the way the utilization comes up you know that we should go back to expansion or how should we think about the progression of gross margins

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

Got it. All right. Thanks. I'll pass it on. Appreciate it. Thanks, Brian.

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

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

Yeah, so just on the retail front, the way I would think of it as we're moving forward, we do expect, given our position in the marketplace, to continue to see growth. But as you point out, as we transition to be fully in stock in one retailer and transition, which we've already done, to not be in stock, in the other retailer, those two in effect balance out. So you should think of that as, you know, a normalized progression as we move through the season. And then as you look at, you know, as you question on Q1, the simple way to think of it is if you think about, you know, double digit, and it's really strong double digit, which means it's north of 10% sell through growth. That accounts for, you know, give or take, you know, the beat that we talked about or think of it as, you know, incremental sales above what we guided. And then if you think of that remaining, you know, give or take 10%, you know, high single digit percentage, That is a combination of the staging you highlighted, in particular making sure that we've got the product stage for our new distribution, combined with a little bit of normalization, call it a couple days of more inventory as we came in a bit lower than we wanted at the end of last year. So on the margins, you should think of it as the elements we talked about. There's really not much you could start getting down to single-digit million parsing. But in general, that's what it is. And as Ryan pointed out on the commentary, we're at 15% below where we were on a historic basis. And then as we look at Q2, it's nothing more than assuming a 5% to 7% growth on top of last year. which means it's a very normalized process. And as I said, there's things that offset and go up and down in there. But in general, you should think of Q2 as the combination of early buy will be very normalized combined with sell-through, and that gets you to our Q2 guide. And once again, as we do this, you know, if we do end up having to ship a little bit more inventory into the quarter or, you know, There's always some stuff on the border, plus or minus. You know, that all relates to the totality of the guide.

Okay. That's very helpful. And then I guess just a second question. You alluded to kind of the tragedy happening out in L.A. You know, obviously from a longer-term standpoint, there's an awareness dynamic that um you know your product plays into but from a near-term standpoint that's been a pretty fast growing region for you in terms of the west coast in general so is there any is there any sort of near-term disruption any quantification uh you know as you look at kind of the the very near term 2q or 3q that you're contemplating here

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

Okay.

Thank you. Your next question comes from the line of John Lovallo of UBS. Please go ahead.

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

Yeah, I'd say, you know, 1Q is typically our lowest cash generation quarter of the year, and we also retired some debt at the end of fiscal Q4 of 2014. You know, with the recycle acquisition we made, and we actually have a couple other opportunities we are looking to pursue in the near term potentially, you know, I think, you know, the strategy would be the same for the year. I think it would just be weighted a little bit more normal to the back half of the year like we would have done previously. Last year, if you recall, we had the proceeds from the VICOM divestiture in one queue, which we utilized, and that obviously didn't repeat this year. So I think that, you know, no change in strategy, just probably a little bit of phasing on the timing.

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

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

the most part just looking at you know how do we augment that with additional tuck-in acquisitions okay thanks jesse appreciate it your next question comes from the line of trade groups of stephens please go ahead hey good afternoon thanks for taking my question so i guess uh looking back to the you know earlier in in 24 the demand for, you know, your premium or higher-end products where you guys primarily play had been holding in much better, you know, versus the entry level. And has that continued to be the case, or have you seen any change as you look at, you know, where you're seeing the outperformance in demand, you know, with your overall sell-through continuing to be pretty strong?

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

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

Yeah, I think as we exited the calendar year here with our physical one-year results, we did build some inventory from our year end. That's really just prepping to ship early by in our second fiscal quarter and really to balance production to the extent that we can. I wouldn't think there's really any other major changes to that from a full-year perspective. We would still look at targeting roughly flat year-over-year on the inventory level. But I think given kind of the phasing, maintaining our four-week lead times and ensuring product availability there,

to the channel um you know that's that's really why we build in one queue and then we deplete it as the season starts got it super helpful uh thanks a lot best luck thank you appreciate it thanks your next question comes from the line of ketan montoro of bmo capital markets please go ahead uh good afternoon and thanks for taking my question um just maybe to start with can you talk a little bit about um your strategy on the siding um you know side you know, there are obviously a couple of established players out there. So kind of, you know, can you talk about sort of, you know, what's the strategy and kind of what are you targeting and siding?

Yeah. So in general, if you step back and you look at our exteriors business, it is an accent on top of the various siding players, right? So we've got corners and trim and and column wraps, that sort of stuff, right? So our exteriors business targets, there's a disproportionate amount of wood on these accents that go on top of siding. So our focus is to drive wood conversion on an accented basis. That's been our exterior strategy. Now, as you think about the most recent products we've launched, you know, think of it as a premium alternative to, you know, that installs like vinyl siding, but a premium, super premium alternative for those folks that want that either premium accent or premium look and want to take advantage of the technology that we have to achieve that premium. And so the way to think of it for us, obviously it's a huge market It's an accent siding product or a very kind of wood replacement, high-end niche siding product that we believe there is a market for, and it's consistent with our current contractor base. Whether or not it grows beyond a niche product, that remains to be seen. But for us, a small... you know, tiny niche of that market is additive to our new product growth in that exteriors business.

Understood. That's very helpful. And then just as a follow-up, can you just remind us, Jesse, where you are with the HDPE to LDP sort of, you know, conversion and then on the recycled PVC side as well, both for decking and exteriors?

Yeah. uh so and ryan please chime in but so on the on the transition um from hd to ld um we continue on that transition so every day that goes by we're cutting lines over uh we've been pretty methodical on that so we're probably more than half converted um and we continue to convert um now as we've done that um You know, one of the areas where we're going to see some of the best savings is in the way in which we process the LD. And so what I would say now that we're converting into using a higher percentage of LD, we need to do a better job of processing the LD internally to fully realize the cost savings. And so we're certainly seeing savings right now. We've, you know, since last year to this year, We made meaningful improvements in terms of our ability to process that lower cost material internally. And we expect as the year progresses, as we move into next year, that there'll be a meaningful unlock in our ability to process the next set of recycled materials. And so from where we sit now, there's a long cost reduction pipeline ahead of us. as we continue to use and process that material better. And then on the PVC side, we continue to incrementally ramp up the percentage of PVC on all of our lines. We've gotten to a really good spot on our exteriors business. We've gotten to a good spot on our decking business. Similarly, we've got to kind of cost-reduce the raw material flow and how we process that recycle. And obviously the acquisition we just did will be helpful in that. And then as we start to continue to ramp up the percentage of PVC, we've got to make some minor modifications to the lines, which we'll be doing over the next 12 months to allow us to continue that step up. Ryan, I don't know if you've got anything more to add.

No, I think you've covered it all.

Appreciate it.

Perfect. Thanks, Jesse. Good luck. Thanks.

Your next question comes from the line of Trevor Allenson of Wolf Research. Please go ahead.

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

Yeah, I would say it's actually a combination of everything you mentioned. So first off, when we talk that 50 to 100 basis points, that typically is at the full volume and sales growth expectation. And then second this year, with all the new product launches, facility startups planned under utilization, as well as the headwind on our Scranton products business, I think that fits into kind of why we had a lower number for the year. So nothing's really changed on the strategy. I think it's just given the lower sales outlook versus the

the 10 to 12 percent growth and then those factors uh would contribute to why we're modeling less than 100 basis points yeah and i think the only thing i would add is um you know margin expansion uh you would love for it to be perfectly linear quarter to quarter And as Ryan pointed out, some of that is with respect to investments and ramp up. And some of that's really timing on some of the cost savings. And so as we move through the back half of the year, it's not only utilization and, you know, the ramp up of the new products. We also will start seeing some of the benefit and particular as we, you know, move to the back end of the year and the next year. of, you know, some step-ups in some of our cost programs. So, you know, in general, you know, we have an ability to control our margin ramp up, as you've seen. We're going to continue to expand margins. And it's, you know, at this stage, it's a mix of what we've highlighted and also just timing of our cost reduction ramps. And just to reiterate, Obviously, as we looked at our five-year target, we're pretty much on track to get there earlier and feel really confident about our ability to get there much earlier than we talked about.

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

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

Got it. Makes sense. Appreciate all the color and good luck moving forward. Thank you.

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

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