Earnings call: AZEK sees robust growth with record EBITDA margin in Q3

The AZEK Company (NYSE: AZEK), a leading manufacturer of outdoor living products, has reported a significant increase in net sales and profitability for its fiscal third quarter of 2024. Net sales climbed by 12% year-over-year, reaching $434 million, with an even stronger growth rate of 18% when excluding the divestment of the Vycom business. This performance was largely fueled by the residential segment, particularly in deck, rails, and accessories.

The adjusted EBITDA margin reached a record high of 27.5%, reflecting the company’s successful initiatives in productivity, cost management, and recycled material usage. With solid cash generation, AZEK’s Board of Directors has approved a $600 million expansion of the share repurchase program. Looking ahead, the company is confident in its long-term growth prospects and has increased its fiscal 2024 guidance for consolidated net sales and adjusted EBITDA.

Key Takeaways

• AZEK’s net sales increased by 12% year-over-year to $434 million in Q3, with an 18% increase excluding the Vycom divestiture.
• The residential segment, particularly deck, rails, and accessories, drove strong sales growth.
• Adjusted EBITDA grew by 23% to $119 million, and the margin expanded to a record 27.5%.
• The Board authorized a $600 million expansion of the share repurchase program.
• The company raised its fiscal 2024 guidance, expecting consolidated net sales between $1.422 million and $1.438 million and adjusted EBITDA between $370 million and $380 million.

Company Outlook

• AZEK anticipates long-term growth opportunities in repair and remodel and new housing markets.
• New product innovations are planned for the 2025 building season.
• The company aims to outgrow the market by 5% to 7% and achieve similar growth in 2025 through growth initiatives.

Bearish Highlights

• The exteriors business exhibited weakness, especially in the Northeast region.
• The R&R market is expected to be modestly negative in fiscal Q4, marking seven consecutive quarters of decline.

Bullish Highlights

• Strong gross margins were supported by higher sales, cost savings, and stable commodity prices.
• The Boise facility completed a significant decking production line milestone.
• Double-digit production level increases year-over-year were reported.

Misses

• The commercial segment experienced a 49% net sales decrease due to the Vycom business divestiture.

Q&A Highlights

• AZEK expects to leverage SG&A investments in marketing and brand awareness for future growth.
• Inventory levels are in line with historical norms, with some expected reduction in Q4.
• The new Texas facility will enhance recycling capabilities in the exteriors business.

The AZEK Company’s strong performance in the third quarter reflects its strategic focus on driving productivity and leveraging favorable market conditions. The company’s robust financial results, along with its optimistic outlook and planned initiatives, position it well for continued growth in the competitive outdoor living products market.

AZEK’s commitment to innovation and market expansion, particularly through new partnerships and product launches, underscores its proactive approach to navigating the dynamic industry landscape. Despite some challenges in the exteriors business and the broader R&R market, AZEK’s leadership remains confident in the company’s ability to deliver value and growth to its stakeholders.

InvestingPro Insights

AZEK’s strong fiscal third quarter performance is further illuminated by key metrics and insights from InvestingPro. The company’s market capitalization stands at $5.36 billion, highlighting its significant presence in the outdoor living products industry. Despite recent volatility, with a 15.3% decrease in the stock price over the last week and an 18.05% decrease over the last three months, AZEK’s management has shown confidence in the company’s value by aggressively buying back shares, as noted in one of the InvestingPro Tips.

The company’s P/E ratio, which is currently at 36.11, suggests that investors are willing to pay a higher price for earnings, potentially due to expectations of future growth. This aligns with another InvestingPro Tip indicating that net income is expected to grow this year. Furthermore, AZEK’s revenue has grown by approximately 10.95% over the last twelve months as of Q2 2024, demonstrating the company’s ability to increase sales amidst a competitive market.

InvestingPro also notes that AZEK operates with a moderate level of debt and has liquid assets exceeding short-term obligations, which may offer some reassurance to investors concerned about the company’s financial health in the face of recent market challenges.

For readers interested in a deeper dive into AZEK’s financial outlook, there are additional InvestingPro Tips available at including insights on stock price volatility, analysts’ profitability predictions, and the company’s dividend policy.

As AZEK continues to navigate the market and expand its operations, these InvestingPro Insights provide a valuable perspective on the company’s financial standing and future potential.

Full transcript – Azek Company Inc (AZEK) Q3 2024:

Operator: Ladies and gentlemen, welcome to the AZEK Company’s Third Quarter Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. And I would now like to hand the conference over to Eric Robinson. Please go ahead, Eric.

Eric Robinson: Thank you, and good afternoon. We issued our earnings press release and a supplemental earnings presentation this afternoon to the Investor Relations portion of our website at investors.azekco.com. The earnings press release was also furnished via 8-K on the SEC’s website. I’m joined today by Jesse Singh, our Chief Executive Officer; and Peter Clifford, our Chief Operations Officer and Chief Financial Officer. I would like to remind everyone that during this call, we may make certain statements that constitute forward-looking statements within the meaning of the federal securities laws, including remarks about future expectations, beliefs, estimates, forecasts, plans and prospects. Such statements are subject to a variety of risks and uncertainties as described in our periodic reports filed with the Securities and Exchange Commission that could cause actual results to differ materially. We do not undertake any duty to update such forward-looking statements. Additionally, during today’s call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. These non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of such non-GAAP measures can be found in our earnings press release and a supplemental earnings presentation, which are posted on our website. Now let me turn the call over to AZEK’s CEO, Jesse Singh.

Jesse Singh: Good afternoon, and thank you for joining us. The AZEK team once again delivered strong results in our fiscal third quarter of 2024, including a 12% net sales increase year-over-year. Excluding the recently divested Vycom business, net sales increased 18% year-over-year, driven by excellent performance in our residential segment, which also grew 18% year-over-year, driven by strength in deck, rails and accessories. Our growth playbook and AZEK-specific initiatives continue to demonstrate our ability to outgrow the underlying market, reinforcing our position as the industry leader. As we continue to expand and engage the market in a broader way, we are even more optimistic about the long-term opportunity for growth and material conversion. Adjusted EBITDA grew substantially year-over-year and adjusted EBITDA margin expanded 260 basis points to a record 27.5%, driven by strong gross margin performance that was partially offset by increased growth investments. Our residential segment, which includes our corporate costs, delivered an even stronger growth of 33% year-over-year and achieved a segment adjusted EBITDA margin of 28.1%. Our margin performance reflects the multi-year execution of our strategy of driving productivity, favorable price costs, recycled material inclusion and continuous improvement programs. The strength in our margins has enabled us to reinvest in the business while being well on our way towards achieving our annual adjusted EBITDA target of 27.5%. We also delivered strong cash generation this quarter, and our Board of Directors recently authorized a $600 million expansion of our share repurchase program. Our results this quarter are a testament to the dedication and passion of AZEK’s team members and partners to deliver the best products and the best experience for our customers. And I want to thank all of them for their contributions. During the quarter, we saw double-digit year-over-year sell-through growth in deck, rail and accessories and mid-single-digit sell-through growth overall in our residential segment, as our initiatives drove incremental growth. As a reminder, our definition of sell-through includes a blend of what our dealers are buying from our distributors to service existing demand, combined with point-of-sale data of what contractors and consumers are buying from retail channel partners. We saw growth within each of our deck, rail and accessories product line, as we continue to see the benefits from channel expansion initiatives, new products and downstream sales engagement and brand investments. These actions are driving our sales and converting the market to our products. We are especially proud of this performance and the execution of our teams given the uncertain macro-environment. Our exteriors product line has grown at a strong 16% CAGR from 2019 to 2023. This business, which partially participates in the residential new construction market experienced some market-driven softness in the quarter after delivering strong growth in the last few years. We continue to see great long-term opportunities for this business, as we target material conversion with innovative trim and siding products and capitalize on the significant pent-up demand for housing. Overall, we remain confident about the key long-term opportunities in our markets, as we continue to see underinvestment and pent-up demand in repair and remodel and new housing. Market trends, including an aging housing stock, the expansion of millennials as homeowners, a shift to more sustainable materials and an increased focus on outdoor living should provide a growth environment for years to come. We continue to invest across our core strengths in research and development, innovation, brand awareness, customer relationships and our world-class manufacturing operations. We are seeing great momentum in our 2024 new product launches, including TimberTech composite, Terrain+ decking and TimberTech aluminum framing substructure. Most recently, we began a regional launch of our first galvanized steel railing solution, TimberTech Fulton Rail, which further expands our multi-option railing portfolio across price points. We are on track to launch more new product innovations across both our deck, rail and accessories and exterior’s portfolio for the 2025 building season, which you’ll hear more about later. Our brand awareness and momentum are accelerating as a result of our continued marketing investments and recent channel expansion gains, further reinforcing our position as the leader in sustainable outdoor living building materials. Once again, our TimberTech brand was recognized by industry experts, including by U.S. News and World Report as the composite decking brand with the best natural wood look and by Good Housekeeping, Home Improvement and Outdoor Lab as the best overall engineered decking pick. We recently launched our new deck-building resource center on timbertech.com with expanded content and resources to serve both our experienced contractor and DIY customers with helpful guides, how-to’s and tips developed by our installation experts. These investments in the consumer journey and branding are part of our strategy to educate consumers, drive material conversion and fuel channel expansion. We have also announced an expansion of our distribution partnership with Doman Building Materials, which will enable us to more aggressively expand the availability of TimberTech decking in and convert the Canadian market. Doman has been a strong partner for us in California and we’re excited about the expansion, which will help drive incremental growth in fiscal year 2025 and beyond. Progress continues at our new exterior’s manufacturing facility outside of Pittsburgh. We expect this building to be operational in 2025 and provide additional trim and new siding production capacity at our existing Versatex exteriors manufacturing campus. Across our manufacturing and recycle footprint, we continue to make investments in each of our facilities that allow us to accommodate new products on our roadmap that will support future growth and expand the use of recycled materials. Our recycle introduction rates are getting closer to the 40% level for our AZEK exteriors brand and in the low-to mid-60s range for our TimberTech advanced PVC decking products. We believe there is more opportunity to drive the recycled content higher and we will continue to invest in our R&D capabilities to lead through innovation. Turning to our internal demand indicators, we continue to experience strong growth in digital activity, digital engagement, sample orders and contractor leads. Contractor backlogs from our customer surveys have remained consistent with the prior quarter. Both contractor and dealer sentiment remains positive while also being more cautious on the near-term outlook. As we look to the remainder of the fiscal year, we are reaffirming our outlook for the second half of fiscal 2024 and raising the midpoint of our full-year fiscal 2024 guidance. Our fiscal 2024 residential segment guidance implies a 10% to 12% year-over-year net sales growth and a 42% to 45% year-over-year segment adjusted EBITDA growth. For the fiscal fourth quarter, we continue to assume residential sell-through growth to be in the mid-single digits as we expect our AZEK-specific growth initiatives to drive continued outperformance relative to the anticipated softer trends in the broader repair and remodel markets. Over the last few months, we have seen some choppiness in the overall construction economy and are assuming a down repair and remodel market for the remainder of fiscal year 2024. We expect our channel partners to end the fiscal year at or below historical inventory days on hand. The strong growth in our internal digital and engagement metrics lead us to believe that there is pent-up demand. We remain confident in our ability to drive double-digit growth over the long term as we continue to prove the resiliency and growth potential that is an outcome of the AZEK business model and having the best team in the industry. I’ll now turn the call over to Pete to provide some additional context on our financial results and outlook.

Peter Clifford: Thanks, Jesse, and good afternoon, everyone. As Eric highlighted at the beginning of the call, we have uploaded a supplemental earnings presentation on the Investor Relations portion of our website. Before we get into the results, I want to provide some context on the third quarter operating environment. From a demand perspective, we continue to experience approximately double-digit sell-through growth in fiscal 3Q ’24 in our deck, rail and accessories portfolio, including our structured business. Our overall residential sell-through, including our exteriors business was in line with our previously guided expectations for mid-single digits. In June, our channel partners purchased approximately $35 million of product earlier than in prior year to ensure strong service levels throughout the build season, which resulted in channel inventories ending the quarter in line with historical average days on hand. The timing of these purchases by the channel added approximately 9% to our 3Q ’24 sales growth. Consistent with past quarters, we surveyed a broad base of our pro-contractors and dealers to understand the environment on the ground. Our contractors reported stable project backlogs of seven-plus weeks just above pre-pandemic levels. From a sediment perspective, our contractors and dealers communicated relatively consistent views of both current market sentiment and expectations for growth, compared to the prior quarter’s survey. On the digital side, we continue to see robust growth in both samples and contractor leads, as well as brand awareness. The investments that we’ve been making in sales and marketing are continuing to drive momentum across our digital metrics even in a down market. For our U.S. pro and retail channel expansion, combined with our new pro-channel Canadian distribution partner, Doman Building Materials, will provide important incremental growth in fiscal 2025. These are yet more examples of the accretive growth opportunities that we have in front of us. From an operating perspective, our production levels were up double-digits year-over-year after lapping the inventory drawdown experienced last year. Production levels in the quarter drove strong utilization and cost absorption in the quarter. We continue to execute our recycling and product configuration initiatives, sourcing and material savings continue to provide a benefit and commodities remained relatively stable. Ultimately, these combined levers have allowed us to deliver strong gross margins. This quarter also marks another milestone in our Boise facility, where we have commissioned the last decking production line from our original Phase I capacity expansion project, which began in 2021. As utilization continues to increase, we expect to drive meaningful conversion cost-per-pound improvements out of this strategically important facility. In terms of SG&A, we continue to invest in the front end of the business to build our brand and expand our capabilities to drive above-market growth. In fiscal 3Q ’24, we grew consolidated net sales by 12% year-over-year to $434 million, which was partially impacted by the timing of the channel partner purchases as described earlier. Excluding the impact of the Vycom divestiture, our net sales were up 18% year-over-year. The 3Q ’24 growth was driven by our residential segment increasing 18% year-over-year, partially offset by the $19 million net impact from the divestiture of our Vycom business in our commercial segment. 3Q ’24 gross profit increased by $32 million or approximately 25% year-over-year to $164 million. 3Q ’24 adjusted gross profit increased by $32 million or 23% year-over-year to $168 million. Our adjusted gross profit margin percentage increased 350 basis points year-over-year to finish at 38.7%. The adjusted gross profit increase was driven primarily by higher sales, stronger utilization in our plants, continued execution of recycling and product configuration initiatives and benefited from both sourcing savings and material savings. GAAP SG&A expenses increased by $16 million year-over-year to $89 million. The increase is primarily driven by residential segment SG&A investments in marketing and brand awareness initiatives and approximately $5 million of one-time costs. Adjusted EBITDA for 3Q ’24 increased by $23 million or up 23% year-over-year to $119 million. The adjusted EBITDA margin rate for the quarter increased 260 basis points year-over-year to 27.5%, driven by gross margin expansion, partially offset by SG&A investments. Net income for 3Q ’24 increased by $15 million to $50 million or $0.34 per share. Adjusted net income for 3Q ’24 increased by $17 million to $62 million or adjusted diluted EPS of $0.42 per share. Now turning to our segment results. Residential segment net sales for 3Q ’24 were $416 million, up 18% year over year. Residential segment adjusted EBITDA for 3Q ’24 came in at $117 million, up approximately 33% year-over-year. Residential segment-adjusted EBITDA margins were up 310 basis points year over year to 28.1%. Commercial segment net sales for the quarter were $18 million, down 49% year over year, primarily due to the sale of the Vycom business. Commercial segment adjusted EBITDA for the quarter came in at $2.5 million, a decrease of $6.3 million year over year. The decrease was primarily driven by the disposition of the Vycom business. From a balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $347 million and approximately $148 million available for future borrowings under our revolving credit facility. Working capital, defined as inventory, plus accounts receivable minus accounts payable, was $208 million, down $12 million year over year. We ended the quarter with gross debt of $667 million, which included $77 million of finance leases. Net debt was $320 million and our net leverage ratio stood at 0.8 times at the end of 3Q ’24. Net cash from operating activities was $195 million during the third quarter, an increase of $23 million year over year. Capital expenditures for the quarter were approximately $18 million. For the third quarter, free cash flow was $178 million, an increase of $13 million year over year. As we previously announced, we completed a $50 million accelerated share repurchase program in June. Under the terms of the agreement, the company retired approximately 1.2 million shares with the balance settled on August 5, 2024. The remaining authorization under our share repurchase program is approximately $625 million. 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. Shifting towards our outlook, I wanted to share some perspective on the assumptions heading into the fourth quarter. We expect to see a negative R&R market in 4Q ’24. We see residential sell-through in the mid-single digits. In Q3, we’ve seen some regional softness in exteriors, and expect this to continue through the fourth quarter. We continue to focus on driving above-market growth through our conversion and share gain initiatives. We expect to manage channel inventories conservatively through our fiscal year end to be at or below historical averages. On margin side, our fourth quarter will be positively impacted by normalized production levels, increased utilization with our Boise facility, cost absorption and stable material input costs. We see benefits from our focus on sourcing and recycling initiatives to drive lower input costs to our gross margins. In SG&A, we will continue to support organic growth through sales and marketing initiatives. With that context, let me move to our updated guidance for fiscal 2024. Given our outperformance in the first nine months, we are raising the bottom of our guidance for full-year consolidated net sales to range between $1.422 million to $1.438 million, and increasing our full-year adjusted EBITDA range to between $370 million to $380 million. Our net sales guidance range would imply 10% to 11% growth year-over-year adjusting for the Vycom sale and 30% to 34% year-over-year growth in adjusted EBITDA. Our residential segment planning assumption for the year is $1.351 million to $1.365 million in net sales and $358 million to $367 million, and segment-adjusted EBITDA, representing 10% to 12% sales growth year-over-year and 42% to 45% segment-adjusted EBITDA growth when combining corporate expenses with our residential reporting segment as mentioned earlier this fiscal year. A few assumptions to share include the following. As a reminder, we expect to see $2 million to $4 million of one-time greater gross-to-net sales discounts in the quarter to support the channel expansion communicated last quarter. We are expecting a capital expenditure range of between $90 million to $95 million, consistent with our publicly stated target of CapEx of approximately 5% to 7% of revenue. We are expecting depreciation of approximately $90 million to $92 million. We are expecting a GAAP tax rate for the full year of approximately 29%. And finally, for the full-year fiscal 2024, we expect to deliver another strong year of free cash-flow generation. For additional guidance assumptions to assist with modeling fiscal 2024, please refer to the supplemental earnings presentation we have posted on our Investor Relations website. For the fourth quarter, we are expecting sell-through growth in the mid-single-digit range. It is important to highlight that we are reaffirming our second-half of fiscal 2024 sales outlook and raising the bottom end of the guidance, which now assumes 3% to 5% year-over-year growth. We expect channel partners’ behavior to follow traditional seasonal patterns of modest inventory drawdowns as we approach the winter months. We saw approximately $35 million of sales impact from the timing of channel purchases into the third quarter from the fourth quarter, impacting fourth-quarter sales by 9%. Taking these factors into consideration, our guidance for the quarter is $329 million to $345 million in revenue, and $82 million to $92 million in adjusted EBITDA. We are expecting an effective tax rate of approximately 26% for the quarter. With that, I will now turn the call back to Jesse for closing remarks.

Jesse Singh: Thanks, Pete. I would again like to thank our dedicated team members, channel and supplier partners and contractors for your continued dedication to the AZEK Company. We believe we are well-positioned to win across any market scenario and continue to see substantial opportunities for material conversion to our types of low-maintenance, long-lasting materials. Our residential segment five-year CAGR from 2018 to 2023 is 18% and our 10-year CAGR from 2013 to 2023 is 12%. Consistent with our multi-year track-record, we expect to deliver 10% to 12% growth in our residential segment in 2024, and we are well-positioned to drive above-market growth in fiscal year 2025 and over the long-term by continuing to execute our growth strategy. We continue to see significant opportunity on the cost reduction, recycling and productivity fronts and expect to build upon the multi-year margin initiatives we have executed upon to achieve our annual adjusted EBITDA margin target of 27.5%. With that, Operator, please open the line for questions.

Operator: [Operator Instructions] And your first question comes from the line of Philip Ng with Jefferies. Your line is open.

Philip Ng: Hi, guys. Congrats on a really strong quarter and the outlook is really impressive, just given how choppy the consumer and the macro backdrop is. So great job from a team perspective. Jesse, I guess historically, you’ve been skewed more towards the higher end of the consumer. Can you just give us some color on how orders and backlogs have progressed through the quarter and into July and how perhaps the high and low-end or mid-end of your customer portfolio is kind of broken out and how they’re kind of performing?

Jesse Singh: Yes. So thanks, Phil, for the question. Let me just give you a couple of high-level data points that will put things in perspective. As we’ve talked about, we are a predominantly pro-business where give or take only about 5% of our decking is actually in stock at retail. The rest is either special order at retail or in the pro, so we are relatively limited in our exposure on stock decking, and it — and it’s been an expanding program for us. And then I think the other general data point, which you’re highlighting, is a meaningful part of our business sits in what we would define as a best or premium of — upwards of 60% of our business sits a bit more in that category. And so, as you look at the makeup of our — we are disproportionately compared to others in the industry disproportionately focused on pro and those types of products that fit the pro. So relative to trends, as we talked about at the last call, we had seen overall roughly double-digit trends in April. That moderated modestly across the portfolio, where we did see some modest slowdown, in particular, our exteriors business. But as we highlighted on the deck, rail and accessories business we ended the quarter at double-digit growth. Now that’s actually down a little bit from earlier in the year, where we defined it as strong double-digit growth, which would have been, closer to kind of teens growth. So it was down modestly. And as we highlighted in the call, the backlog from our contractors continues to be relatively steady across, in particular, the deck, rail and accessories area. And then once again, as we called out on the call, we’ve seen some of geographic weakness in our exteriors business. So, in effect, that’s how you get the mid-single-digit sell-through growth that we expect to see in Q4.

Philip Ng: Okay. Thanks for the great color, Jesse.

Jesse Singh: Appreciate it. Thank you.

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

Michael Rehaut: Hi, thanks. Good morning. Good afternoon. Thanks for taking my question. I wanted to just get a sense of the — your expected sell-through trend for the fourth quarter, up mid-single digits. I assume that’s kind of — it looks like an all-in sell-through trend for residential versus – I’d love to kind of get the comp of that versus the third quarter because you kind of broke out in the — in the third quarter sell-through double-digits on deck, rail and accessories, offset by softer trends. What I’m trying to get at is, if the 4Q sell-through trend is kind of similar to the all-in residential sell-through in the third quarter or if there’s a little bit of deceleration embedded in that? And if so, why? And, just secondly, any more color on why exteriors is a little softer than deck, rail in the third quarter. Usually, I believe it’s largely within a spitting distance of each other. And so just kind of curious if there’s any specific drivers to the exteriors softness relative to deck and rail?

Jesse Singh: Yes. I think high level, and then I’ll ask Pete to chime in. The way to think of the fourth quarter from what we can see on sell-through trends how do we get to the mid-single digit, it looks generally like the third-quarter, meaning deck, rail and accessories is above mid-single digits and exteriors would be below mid-single digits. As a reminder, exteriors, give or take, is 25% of the business. So it has a smaller impact relative to that. So you should think of it there. And once again, remember, as we look at our growth profile, we have a number of initiatives that I called out, new products, shelf gain, downstream contractor wins, all of those kinds of things from our 200-person sales force that lead to those kind of sell-through growth. So then relative to your question on exteriors, Pete, I don’t know if you want to take that, just at a high level, and then I can add color if needed.

Peter Clifford: Yes, macro, how I would describe is, look, the industry has a large concentration in the Northeast, so it’s parallel housing market dynamics of the Northeast pretty closely. We are hearing and seeing from many of our customers that there has been a elongation, if you want to call it that of the lag between sort of starts and completions, especially in the Northeast. And that’s kind of what we see, generally speaking from an exteriors perspective. And then maybe just to double click again on sort of sell-through, how I would think about it, Mike, is in the first-half of the year, you should think of deck, rail and accessories, as Jesse said, being sort of low-teens. And in the first half of the year, the exteriors kind of being flat to up maybe low-single digits. In the back-half of the year, that looks like high-single-digits, approaching double-digit for deck, rail and accessories and where exteriors is probably flat to modestly down low-single digits. So that’s kind of the high-level kind of math.

Michael Rehaut: Great. Thank you.

Jesse Singh: Appreciate it. Thanks, Mike.

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

Tim Wojs: Hi, guys. Good afternoon, and, yes, nice job in a dynamic environment. Maybe just on channel expansion, I don’t know if you kind of fully quantified this for 2024, but just kind of — kind of thinking about what the channel expansion, I don’t know if you want to call that shelf space or others, parts of the market has kind of contributed to growth this year. And I think you do probably have some decent visibility to what that looks like at this point for next year. So just trying to think about, how we should — how we should, kind of — kind if think about the channel expansion or shelf expansion, kind of share gains, this year and then kind of going into next.

Jesse Singh: Yes, I — as we’ve talked about, our intent is to, outgrow the market, give or take by 5% to 7%. Now we think as we look back, we may have done a bit better than that, over the last 18 months. But as you know, we built the growth plan, I think of it as in that 5% to 7%, that is really built on some conversion, but then a few points of what we call initiative, call it, 2% to 3%, I think we’ve talked about last year or 2024 that being closer to, 5% in terms of just self-help initiatives. And then you should think of channel expansion both in the retail and the Pro as contributing, a meaningful part of that 5%. And as you mentioned, with what we announced yesterday and what we announced on the last call, as we look at 2025, we’re going to have a similar target of self-help between new products and channel expansion of — in that, call it, I think on our growth stack, we say 2% to 3%, we’re obviously targeting something like 5% growth, with the channel discussion that we’ve had to date and we disclosed, that gives us, I’d say, a little bit better start to 2025 than we had last year relative to visibility.

Tim Wojs: Okay. That’s helpful. And then maybe just on the margins. Let’s say the market gets a little weaker or more weaker from here. I guess, how would you kind of manage the margins or what type of levers would you pull — could you accelerate some of your internal margin initiatives? How would you kind of treat, marketing and branding, those types of things?

Peter Clifford: Yes, Tim. This is Peter. I think as we’ve talked about all the way back to the Investor Day in 2022, we’ve kind of laid out the pathway to a, meaningful margin expansion. I think on the last call or two, we kind of added that. We probably have executed about half of that opportunity and half still remains. So we still see plenty of opportunities to execute against, whether it be, increasing recycling content, continuing to move the cheaper lower grades or recycle, challenging our conversion costs within recycling as well as within our plants. We’ve got an opportunity now with Boise positioned to be fully utilized here going forward and we expect a lot of productivity out of that plant, lean and sourcing initiatives from our AIMS categories. So we still feel like we’ve got a lot of levers in front of us. And candidly, we’ve had the opportunity for the last four to five quarters to be aggressive and invest and ahead of the business a bit as we saw kind of performance and growth beyond sort of market and beyond expectations. So, we’ve said consistently at some point, we really do believe we can get modest SG&A leverage from this business in the future. And so, that’s really been something that we’ve — we really haven’t been tapping into here in the last kind of four to six quarters.

Tim Wojs: Okay.

Jesse Singh: Yes. And just to add to what Pete said, our SG&A investment modestly brought down our EBITDA margins this year. So, instead of being part of the productivity equation, we used our productivity performance and gross margin performance to give us an opportunity to incrementally spend additional — as a percent of sales.

Tim Wojs: Okay. Great. Thanks for the time guys.

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

Matthew Bouley: Good evening, everyone. Thank you for taking the question. So just you mentioned the $35 million moving to June from July. I mean that seems very plainly explainable. But just in the context that there’s probably going to be some sensitivity to these things here. Maybe if you could just sort of be clear around channel inventories? And, to the extent, is there — is there a scenario where your channel could be destocking, to a greater degree than seasonal? And if there’s any reason to think that might persist into your fiscal Q1? Thank you.

Peter Clifford: Yes. I mean, I’ll start, Jesse,

Jesse Singh: Go ahead, Pete. Sorry.

Peter Clifford: But ultimately on the $35 million, just to give a double click, I do think, two things kind of drove that. One, as we talked about through the first-half of the year, certainly through May, sell-through was kind of low-teens on deck, rail and accessories. So that’s the backdrop of people making decisions in June on when they buy or when they place their order. Second thing is really the falling of the 4th of July weekend was kind of critical that with our customer shutdowns as well as ours, you’re sort of confronted with the decision of, do I want product by Friday June 28 or do I want to wait until Monday, July 8? And I think a lot of customers, given the strength of the demand that they were seeing, certainly wanted to have that product in place to be positioned well for the start of the busy season. And then secondarily, as we had in our prepared remarks, we ended the quarter kind of in-line with historical inventory levels. Even with that $35 million being put into the channel, we fully expect that some of that’s going to come out in the fourth-quarter and that we would expect the end of the fiscal year inventory within the channel to be at or below as it has been most of the last six quarters, those historical pre-pandemic levels.

Matthew Bouley: All right. Thanks, Pete. Good luck, guys.

Peter Clifford: Yes.

Jesse Singh: Thanks.

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

Mike Dahl: Hi, thanks for taking my question. Just a follow-up on that timing dynamic. It sounds like if it was a matter of a couple of days, this may not be an issue, but did you have to adjust your production levels at all? So is production swinging from one quarter to another? I’m just trying to think about if there’s some additional margin impact in 3Q versus 4Q?

Peter Clifford: Yes, Mike, this is Peter. Really the only cost occurred that’s unusual is we probably worked a little bit more overtime on the logistics side to get the product out the door before the 4th of July weekend. But from a production perspective, it had, almost no kind of absorption or production efficiency impact.

Mike Dahl: Okay. And Pete, just given this year was kind of unique in terms of the comps on production and now the market dynamics you’re talking about, any early glimpse into how you’re thinking about planning your production into ’25?

Peter Clifford: It’s a little early. What I can say is at least for the third quarter, again, our production volumes were up about at close to 20% on the core will be up modestly in the fourth-quarter. And again, I think as we look at the macro for next year, the one thing for certain that we can see is we’re going to utilize our Boise facility almost certainly in a very different way than we have over the last two years, which should be a nice tailwind for us.

Jesse Singh: Yes, I think the other thing just relative to running of the factories is the shelf gains we have highlighted will necessitate some inventory modest — it’s in whatever we’ve called out through Q4 into Q1, just to be able to handle the fill associated during the first half of, in particular the first quarter, but during the first half of next year. So, yet, we don’t see much volatility in our factories as we look out till the end of the calendar year. Once again, we’re not talking about ’25, but you have to consider the volume perspective we do have where we’re going to need that capacity to be able to service customer demand.

Mike Dahl: Yes. Okay. That’s helpful. Thanks, Jesse. Thanks, Pete.

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

Susan Maklari: Thank you. Good afternoon, everyone. My first question is, can you talk a bit about how you’re seeing the new products coming through, the success that is realizing, and how that positions you for growth in 2025, even if the macro stays a little choppier?

Jesse Singh: Yes, the staging, in general, of new products, it really depends, right? So on a, let’s call it, new to the market-type product like our aluminum substructure, you typically go in our siding products. You typically go through a phase where year one and even year two is building the market and you start to harvest the building of that market in year two and year three. And I think in particular, as you take a look at some of our exteriors products, our siding products that once again are niche, high-end specialty siding and then some of the other products that we have, those will do better in year two than in year-one. And then you look at the core product launches that you have. In our case, our terrain product, our Terrain+ product, which was upgrading our oldest product line. That brings some unique aesthetic benefits that are not really seen in the market at a very specific price point. On that particular one, we have seen really nice growth this year in terms of adoption, and we would expect that growth to continue into next year. And then the third component, I would say, is as we look at next year, we talked about Fulton Rail — TimberTech Fulton Rail, which is a steel rail system that we just launched into the market. That type of product, because it’s a known product in the market, will see really good adoption through the first year into the second year. I would say, without being specific, we have other products that are more in our core that address certain segments where we’re not playing that we would expect to see a more immediate benefit next year, both in our exteriors business and in our deck, rail and accessories business.

Susan Maklari: Okay. That’s great color. Thank you. And then you also mentioned in your prepared remarks about the recycling content across the different offerings that you have. As you think about the Texas facility coming online, any thoughts on how that recycling content will change over the coming quarters?

Jesse Singh: Yes, I would just answer it simply as the facility we have, as you highlighted in Texas, allows us to get more product that allows us to expand, recycle in our exteriors business, which is typically more white recycle. So it really sets us up to be able to continue to expand, recycle in our more premium exteriors products. And then the investments we are making in — I have made in the other areas allow us to do that, but also give us capacity on deck and other painted exteriors products. So, it’s not only increasing content, but it’s also giving us an opportunity to continue to launch new products.

Susan Maklari: Okay. Thanks for the color and good luck with everything.

Jesse Singh: Appreciate it. Thanks.

Operator: And your next question comes from the line of Ryan Merkel with William Blair. Your line is open.

Ryan Merkel: Hi, everyone. Just a couple of cleanups for me. First off, are you seeing any pressure at the entry or mid-price point products, whether that’s at the retail or in the pro? And then my second question is, you lowered the outlook for R&R, but you didn’t change, your guidance for 4Q. Is that because you’re tied to the higher-end consumer or is it just as much your growth initiatives?

Jesse Singh: I — us — either one of us can answer, but I’ll take it and let Pete chime in. Just in terms of the entry level products that we have, as I mentioned, it’s really low as a percentage of our business and it’s also an area where we have seen expansion. And while there — while there might be some softness there in the market, our growth in that segment is more than offsetting any market growth. So if you’re not playing in a segment, you’re entering a segment and that segment is a little softer. For us, it’s growth either way. And I just forgot your second question. I apologize.

Peter Clifford: I’d pile in here. Just what I could say is on a POS perspective, certainly special order is much stronger than sort of the stock position. And as Jesse said I – – look when you think about our good category, we’re under-indexed there. And when you think of what’s pure OPP, it is a very, very small part of our business.

Ryan Merkel: Okay. No, that is — that is helpful. Yes, the second question was just you lowered the outlook for R&R, but you did not change your mid-single-digit sell-through expectations. So I was trying to zero in, is that because you’re tied to the higher end consumer that’s holding up better or is it just as much share gains and new products and other things you’re doing?

Jesse Singh: I think it probably has more to do with our philosophy on guidance. So we were coming in at high, single-digit, double-digit sell-through growth. And after the last call, if anything, we had a lot of questions, you’re at double-digit sell-through growth, why are you assuming mid-single-digit sell-through growth? And I think for us, we tried to build a guidance that accounted for variations in the underlying economy, and that’s why we have a range, and that’s why even though we were tracking better than that for two quarters in a row, we basically said we believe that the underlying market could be at mid-single digits. And so even though we saw a slowdown, we had accounted for that. We weren’t assuming that would happen. We just thought it was appropriate to plan for that. So that’s really it. We did see a slowdown. Had we not seen a slowdown we may be raising our guidance, but we did see, as we talked about a modest slowdown and as such, that’s — was incorporated in our assumptions.

Ryan Merkel: Got it. Thanks.

Operator: And your next question comes from the line of Keith Hughes with Truist. Your line is open.

Keith Hughes: Yes. Thank you. As you survey your contractors and customers and they always think about the year in a calendar year, do they have enough backlog to carry through at this — the sell-out rate you’ve been discussing for the rest of the year?

Peter Clifford: Yes, Keith, this is Peter. As mentioned early in the call here from what we’ve seen in terms of sell-through in July, I can tell you it supports our guidance here that we’ve communicated today. Obviously, on the decking side, and that’s where our surveys are certainly bit deck, rail and accessories centric. So at seven-plus weeks backlog, there’s enough visibility, generally speaking, when we get that survey filled out in the middle of July that it’s a pretty good proxy for at least what they think they’re going to need through the season firmly. The exteriors business is a little bit shorter cycle and in terms of probably more like two weekly times. So we’ve got a little bit less visibility there.

Keith Hughes: Okay. And second question on — you sort of answered this, but on your production scheduling and decking and railing, we — if we look at sequential production rates, will they remain consistent to what we saw in the June quarter in September and December?

Peter Clifford: Yes. Sequentially, I would expect the production levels to be pretty flat 3Q to 4Q. And as Jesse said, we’ll be — we’re busy a bit now for the load end on the retail win that really starts to ramp in the first quarter of next year.

Keith Hughes: Okay, great. Thank you.

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

John Lovallo: Hi, guys. Thank you for taking my question. I guess, you’re talking about R&R being down in the fiscal fourth quarter. Curious by how much and maybe how you’re thinking about R&R as we progress into fiscal year ’25, which is right around the corner for you guys. In a market where demand may be a little bit softer, how does that translate into pricing as we move forward here?

Peter Clifford: Yes. As far as pricing, I don’t think that the macro is going to have a meaningful impact as to what we do with pricing. We’ve kind of said, look, in a lot of years, maybe not every year, we would hope to get modest price increases to offset customary inflation. And as far as being fixated on macro right now, I think as Jesse said earlier in the call, I think what’s very different about us is we wake up every morning with the mission, how do we figure out, how to grow 5% to 7% above whatever R&R is. And if we do that successfully, then we know we’re going to be rewarded.

Jesse Singh: Yes. And, John, we’re not going to try to predict the R&R market. To Pete’s point, yet, what I would say is, we use the two main players that are out there. And I think, in general, they have — they downgraded their forecast. And in general, I think the prevailing view is modestly negative in our fiscal fourth quarter with the potential to go positive. And what I want to highlight is, it will have been seven straight quarters of negative in the R&R markets. And I would just say that’s highly unusual. And I think as we look at ’25, we’re going to focus, as Pete said, on the initiatives we can control and the initiatives and, in our case, when I say control what you can control, I’m talking about growth programs in this context. Obviously, cost is an option if it’s ever needed. But, we continue to be focused on growth initiatives, and we feel pretty good about that. I would say it would be highly unusual, almost unprecedented to have three years in a row of a negative R&R market.

John Lovallo: Thanks, guys.

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

Rafe Jadrosich: Hi, good afternoon. Thanks for taking my question. I know retail is relatively small for you today, but you are expanding in that channel and you’ve announced kind — distribution wins there. I think at this point, you’re in both big box players going into next year. How do we think about the penetration opportunity in that channel longer term versus where your penetration is today? And do you see additional shelf space opportunity in that channel or do you think you’re more underpenetrated in other places?

Jesse Singh: Well, first, we — as you pointed out or implied, I mean, we see penetration opportunity in the pro channel, we see penetration opportunity in the retail channel, we see wood conversion in both channels, and we see tremendous opportunity if we develop the right products and have the right downstream efforts to grow the market. I think what we would say and have said over the last five years is we do believe that, our products, given the impact we can make on the pro, that there should be accretive opportunities — accretive to our core growth rate opportunities in the retail channels where we can support them as they look to expand their growth strategies. More specific than that, we’ll see how things unfold, but we continue to believe in growth in both channels, and we continue to believe that there’s opportunity for us to add value to both sets of those customers.

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

Trey Grooms: Hi, good afternoon, everyone. I just wanted to touch on the Doman partnership expansion there and the Canadian market. Maybe if you could touch on the magnitude of the opportunity there and a — is that a — is that a market where you could see, more expansion opportunity or shelf space opportunities? And then just on the bigger picture for the Canadian market Jesse, you mentioned a conversion opportunity, is that opportunity similar in that market to what it is here, that we’re more familiar with them? Sorry, I’m just not as familiar with that Canadian market. Thanks.

Jesse Singh: Sure. First, we have a really nice Canadian business, and our existing channel partner there has done a really nice job of helping us grow in the market. And effectively what we’re doing is expanding our presence in the Western, in particular, in the western part of the country. And it gives us an opportunity to continue to drive conversion either competitive conversion in a more aggressive way or — and/or wood conversion. So to your point, we have a good existing business in Canada. Now the combination of two of the strongest channel partners and distributors there puts us in a position where we can gain incrementally. And as part of this expansion, we were — we had clearly defined gains that could be had for both of us as we make this transition. So, normally, we don’t talk about distribution as a shelf gain. In this particular case, it facilitates shelf gains in Canada as we move into 2025.

Trey Grooms: Okay. Thanks for the detail on that. Thank you.

Jesse Singh: Appreciate it. Thanks for the question.

Operator: And your final question comes from the line of Adam Baumgarten with Zelman & Associates. Your line is open.

Adam Baumgarten: Hi guys. Just a quick one for me just on the balance sheet. Leverage is really quite low here. I guess maybe any update on your appetite for additional acquisitions or really more so probably additional share repurchases?

Peter Clifford: Yes. I think, look, with the new program that we just had approved, I think our philosophy has been we’re always going to be modestly programmatic in the repurchases, but allowing ourselves enough flexibility to be opportunistic, obviously, with the market or the sector being dislocated. Right now, I think you should feel comfortable that we’ll be opportunistic here this quarter.

Adam Baumgarten: Got it. Thanks guys. Best of luck.

Jesse Singh: Appreciate it. Thanks, Adam. With that, sorry, I’ll go ahead and wrap up since I’m talking anyways. Thank you all so much for your attendance this evening, and we look forward to conversations in the next few days or during the next call. Thanks again and have a great evening.

Operator: And ladies and gentlemen, that concludes today’s call and we thank you for your participation. You may now disconnect.

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