The AZEK Company(AZEK)2024-05-09 03:34Financial Data and Key Metrics - Consolidated net sales for Q2 increased 11% YoY to $418 million, with adjusted net sales (excluding Vycom divestiture) up 17% YoY [22] - Residential segment net sales grew 18% YoY, driven by double-digit sell-through growth and strong demand [22] - For the six months ended March 31, 2024, consolidated net sales increased 11% YoY to $658.9 million, with adjusted net sales up 19% YoY [22] - Adjusted EBITDA for Q2 is expected to range between $167 million to $169 million, with margins between 25.3% to 25.6% [23] - Full-year 2024 guidance for consolidated net sales is raised to $1.407 billion to $1.438 billion, and adjusted EBITDA to $364 million to $380 million [27] Business Line Performance - Residential segment grew 19% YoY over the last 12 months and 20% YoY for the first six months of fiscal 2024 [12] - TimberTech brand saw increased sample orders, website visits, and over 1,000 new contractors added to its loyalty program [13] - New product innovations like TimberTech Composite Terrain Plus and horizontal cable railing are driving contractor productivity and incremental growth [14] - Siding and railing products are gaining market share and contributing to growth [14] Market Performance - Retail point-of-sale data showed healthy growth YoY, with total retail POS growth exceeding pro channel sell-through growth [21] - Channel inventories are down approximately 15% compared to historical averages [20] - The company expanded its recycling footprint with a new Texas-based operation, improving sourcing and reducing logistical costs [17] Strategic Initiatives and Industry Competition - The company is investing in R&D, innovation, brand awareness, and manufacturing operations to strengthen its position as a category leader [13] - TimberTech products received industry recognition, including the Green Builders 2024 Sustainable Product of the Year Award and HGTV Magazine's 2024 green list [14] - The company is focusing on expanding its recycling network, increasing the use of recycled materials, and lowering conversion costs [17] - Investments in new capacity, such as the Boise decking facility, are nearing planned utilization levels [17] Management Commentary on Operating Environment and Future Outlook - Management remains optimistic about driving above-market growth and margin expansion, with strong double-digit sell-through growth in the residential segment [18] - The company raised its fiscal 2024 outlook due to strong Q2 performance and increased confidence in execution [7] - Management expects the R&R market to remain flat, with mid-single-digit sell-through growth for the remainder of the fiscal year [25] - The company is targeting adjusted EBITDA margins of 27.5% earlier than planned, driven by margin expansion initiatives [31] Other Important Information - The company identified a $4 million FIFO accounting impact due to inventory restatement, which affected Q2 results [11] - Share repurchases totaled $25.2 million in Q2, with $125 million repurchased year-to-date and $76 million remaining under the authorization [24] - Capital expenditures for fiscal 2024 are expected to range between $85 million to $95 million, consistent with the target of 5% to 7% of revenue [29] Q&A Session Summary Question: Sell-through deceleration from double-digit to single-digit growth - Management clarified that the deceleration has not yet occurred and is based on a conservative assumption of a flat R&R market [35] - The company expects to end the year with channel inventories 10% to 15% below historical averages [37] Question: New business wins and incremental investments - The company highlighted recent wins in both retail and pro channels, with incremental costs associated with these transitions [40] - Investments are primarily focused on supporting channel transitions, including sales rep and servicing costs [42] Question: Drivers of market share gains - Share gains are attributed to product portfolio expansion, downstream sales force investments, and SG&A increases over the past two years [46] - The company is focusing on premium segments, with products like TimberTech receiving industry-leading fire resistance ratings [47] Question: Demand trends and consumer health - Management described demand as steady, with positive dealer sentiment and stable contractor backlogs [52][53] - The company expects potential acceleration in demand if interest rates decline [52] Question: Margin expansion and long-term targets - The company is confident in achieving its 27.5% adjusted EBITDA margin target earlier than planned, with further opportunities in recycling and product configuration [60] - Gross margins are expected to benefit from sourcing and recycling initiatives, as well as lower conversion costs [61] Question: Impact of inventory restatement on future profitability - The $4 million FIFO impact is the only expected effect on future profitability, with no further impacts anticipated [75][76] Question: Cost trends and pricing - Commodity prices and conversion costs remain stable, with no significant inflation or deflation expected [78] - Pricing is expected to remain flat for the remainder of fiscal 2024, with potential for more traditional pricing opportunities in 2025 [93] Question: Inorganic growth opportunities - The company is focused on tuck-in acquisitions that strengthen its core residential business and expand its recycling capabilities [96][97] Question: Composite decking market growth - The composite decking market is estimated to be growing around 5% YoY, with the company outperforming this growth rate [99]