Azek Company Inc (AZEK) 2024 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Azek Company's third quarter fiscal 2024 earnings call.

(Operator Instructions) 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.

Thank you, and good afternoon.

We issued our earnings press release and 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 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.

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 continued 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 cost, 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 in 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 the 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 the 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 lines as we continue to see the benefits from the 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 execution of out 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 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 Exteriors 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 US 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 guide, how to, 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 less to more aggressively expand the availability of TimberTech decking in and kind of 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 exteriors manufacturing facility outside of Pittsburgh.

We expect this building to be operational in 2025, and provide additional trend 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 recycled introduction rates are getting closer to the fore 80% level for our Azek's exteriors brand and then the low to mid 60s range for our timber tech advanced PBC 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 leagues.

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 improve the resiliency and growth potential that as 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.

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 wanted to provide some context on the third quarter operating environment.

From the 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 structure business.

Our overall residential sell through including exteriors business was in line with our previously guided expectations for mid-single digits.

In June, our channel partners to purchase 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 sentiment perspective, our contractors and dealers communicated relatively consistent views of both current market sentiment and expectations for growth compared to the prior quarter survey.

On the digital side, we continue to see robust growth in both samples and contractor leads as well as brand awareness.

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 US Pro and retail channel expansion, combined with our new pro channel Canadian distribution partner Doman Building Materials will provide an 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 of material savings continue to provide a benefit and commodities remain relatively stable.

Ultimately, these combined leverage allowed us to deliver strong gross margins.

This quarter also marks another milestone in our Boise facility, where we have commissioned last decking production line from our original phase one 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 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 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 per se 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 was primarily driven by our 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 for 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 Vycom business.

Commercial segment, adjusted EBITDA for the year quarter came in at $2.5 billion, 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 grow organically.

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 and exteriors and expect this to continue through the fourth quarter.

We continue to focus on driving above market growth for 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.

Our 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, 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 and 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 in 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 residents to reporting segment, as mentioned earlier, this fiscal year.

A few assumptions to share include the following.

As a reminder, are we expect to see two 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 to 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 were posted on our Investor Relations website.

For the fourth quarter, we are expecting sell-through growth in the mid-single digit range 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.

Thanks, Peter.

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 through 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 Instructions) Philip Ng, Jefferies

.

Hey, guys, congrats on a really strong quarter at the outlooks.

Really impresses just given how choppy the consumer and the macro backdrop is so great.

Great job for from a team perspective.

Jesse, I guess, historically been skewed more towards the higher end of the consumer.

Can you just give some color on how orders and backlogs have progressed through the quarter and into July?

And how perhaps to high and low end or middle of your customers portfolio is kind of broken out and how they're kind of performing?

Yeah.

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's been expanding program for us.

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 on best or premium, upwards of 60% of our business sits 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 in 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 some on the call, we've seen some 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.

Okay, thanks for the great color.

Appreciate it.

Michael Rehaut, JPMorgan.

Hi, thanks.

Good afternoon, thanks for taking my question.

I wanted to just get a sense of your expected sell-through trends for the fourth quarter up mid single digits.

I assume that's kind of -- it looks like in all in sell through trends 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 third quarter sell to double digits on deck, rail and accessories offset by softer trends.

What I am 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 of this, 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 a decking, rail in the third quarter.

Usually, I believe it's largely within, 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?

Yeah.

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 from is above mid-single digits and exteriors would be below mid-single digits.

As a reminder, exteriors, give or take us 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 come from our 200 person sales force that lead to those kind of a 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?

Macro, you know how I would describe as well as the industry has a large concentration in the Northeast.

So at current levels of housing market dynamics of the Northeast pretty closely.

We are hearing and seeing from many of our customers that there has been an elongation, if you want to call that, a lag between sort of starts and completions to 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 our I would think about it, Mike, is in the first half of the year, you should think a 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 we're exteriors is probably flat to modestly down low single digits.

That's kind of a high level kind of math.

Great.

Thank you.

Appreciate it.

Tim Wojs, Baird.

Hey, guys.

Good afternoon.

Nice job in a dynamic environment.

Maybe just on on channel expansion.

I don't know if you kind of fully quantify 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 other parts of the market, has kind of contributed to growth this year?

And I think you probably have some decent visibility to think about, and I think it's the channel expansion, the shelf extension kind of share gain this year and then kind of going into that?

As we've talked about, our intent is to outgrow the market, give or take 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 we built the growth plan, think of it is 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's 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 can 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 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 of discussion that we've had today and we disclosed that gives us, I'd say, a little bit better start to 2025 on than we had last year relative to visibility.

Okay, that's helpful.

And then, maybe just on the margin on, let's say, the market gets a little weaker -- more weaker from here.

I guess, how would you kind of manage margins?

What type of leverage would you pull on?

Could you accelerate some of your internal most initiative?

How would you kind of treat marketing and branding effectively?

Yes.

Tim, this is Peter.

I think as we've talked about all the way back to the Investor Day in 2022, it kind of laid out the pathway to meaningful margin expansion.

I think on the last call or to the count ended at, we probably have executed about half of that opportunity and a 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, challenge in our conversion costs within recycling as well as within our plants.

We've got an opportunity now with Boise position to be fully utilized.

Here going forward, we expect a lot more productivity out of that plant, lean and source initiatives from a range of categories.

So we still feel like we've got a lot of levers in front of us.

And candidly, we've had the opportunity in the last four to five quarters to be aggressive and vast and at the end of the business, we saw kind of performance and growth beyond sort of the market beyond expectations.

So

we've said consistently at some point, we really do believe we can get modest SG&A leverage from this business and future.

And so that's really been something that we've really been tapping into here in the last kind of four to six quarters.

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 get us an opportunity to incrementally spend additional as a percentage of sales.

Okay, great.

Thanks and congrats.

Matthew Bouley, Barclays.

Good evening, everyone, and thank you for taking the question, so just you mentioned the 35 million moving to June from July.

I mean, I mean, that seems very plainly explainable.

But just in the context of is probably going to be some sensitivity to these things here.

Maybe if you could just sort of be clear around clear around channel inventories.

And to the extent 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 that might persist into your fiscal Q1?

Yes.

I mean, I'll start, Jesse.

But ultimately, on the $35 million, just to give it 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 buying decisions in June on when they buy or when they place their order.

A second thing is really the falling of the July 4 weekend was kind of critical, that with our customer shutdowns as well as ours.

We're sort of confronted with a decision, do I want product by Friday, June 28, or to what I want to wait until Monday, July 8.

And I think a lot of customers, given the strength of the demand that they are 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 end 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.

All right.

Thanks, Pete.

Good luck, guys.

Mike Dahl, RBC Capital Markets.

Thanks for taking my question.

Just to follow up on that timing dynamic.

It sounds like it does matter a couple of days, this may not be an issue.

But did you have to adjust your production levels that also is production swinging from one quarter to another?

Just trying to think about it as there's some additional margin impact in 3Q versus 4Q?

Yeah, of course, we are really the only cost incurred that's unusual as we probably worked a little bit more time on the logistics side to get the product out the door before the July 4 weekend.

But from a production perspective, it at almost no kind of absorption or production efficiency impact.

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 and into '25?

It's a little early.

What I can say is at least for the third quarter, again, our production volumes are up about at close to 20% on the floor 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 the facility almost certainly in a very different way than we have over the last two years, which should be a nice tailwind for us.

Yeah, I think the other thing just relative to factories is 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 particularly the first quarter, but during the first half of next year.

So yes, 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.

Okay.

That's helpful.

Thanks.

Susan Maklari, Goldman Sachs.

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 that is realizing, and how that positions you for growth in 2025, even if the macro stays a little choppier?

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 on our aluminum substructure, you typically go and 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 on the building up 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 our niche high end specialty siding, and then some of the other products on that 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+ plus product, which was upgrading our this product line.

That brings some unique set of benefits that's not really seeing 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.

Then the third component I would say is as we look at next year, we talked about full TimberTech 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.

Okay, that's great color.

Thank you.

And then it's worth mentioning 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?

Yeah, 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 wide recycle.

So it really sets us up to be able to continue to expand recycle in our more premium exterior products.

And then, the investments we are making in -- have made and the other areas allow us to do that, but also gives us capacity on deck and other painted exteriors product.

It's not only increasing content, but it's also giving us an opportunity to continue to launch new products.

Okay.

Thanks for the color, good luck with everything.

Appreciate it.

Thanks.

Ryan Merkel, William Blair.

Hey, 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 of growth initiatives?

HI, either one of us can answer, but I'll take it, 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 had seen expansion.

And while there might be some softness there in the market growth in that segment is more than offsetting any market growth.

So if you're not playing in a segment, you're entering this segment and that segments a little softer process, it's growth either way.

I just forgot your second question.

I will answer here.

Just What I can say is on a POS perspective, certainly, special order is much stronger than sort of the stock position.

And as Jeff said, look, I think when you think about our good category, we're under-indexed that when you think of what's pure OPP, it is a very, very small part of our business.

Okay, that is helpful.

Yes.

The second question was just you lowered the outlook for R&R, but you didn't change your mid single digit sell through expectations.

So I was trying to zero.

And 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?

I think it probably has more to do with our philosophy on guidance.

So we were coming in at a high single digit double-digit sell through growth.

And after the last call, if anything, we had a lot of questions, you are at double digits sell through growth, why are you assuming mid single digit sell-through growth.

And I think for us on we've 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 what happened, we just thought it was appropriate to plan for that.

So that's really that.

We did see a slowdown, had we not seen a slowdown, we may be raising our guidance of low down.

And as such, that was incorporated in our assumptions.

Got it.

Thanks.

Keith Hughes, Truist.

Thank you.

As you survey your contractors and customers and think about the account in the calendar year, do they have enough backlog to carry through at the sellout rates that you've been discussing for the rest of the year?

Keith, this is Peter.

As mentioned early in the call here from what we've seen in terms of sell through July, I can tell you it supports our guidance here that we've communicated today.

Obviously, the decking side, and that's where our surveys are deck, rail and accessories centric.

So of that seven plus weeks backlogs, there's enough visibility, generally speaking on we get that survey sold out in the middle of July.

But it's a pretty good proxy for at least what they think they're going to need through the season firmly?

You know, the exteriors businesses a little bit shorter cycle in terms of probably more like two weekly times.

So we've got a little bit less visibility there.

Second question on sort of answered this.

But on your production scheduling and decking and railing, we look at sequential production rates, will they remain consistent to what we saw in the June quarter in September and December?

Yeah, sequentially, I would expect the production levels to be pretty flat 3Q to 4Q.

And as Jesse said, we'll be busy a bit now for the load on the retail when it really starts to ramp in the first quarter of next year.

John Lovallo, UBS.

Hey, guys.

Thank you for taking my question.

I guess, you know, 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 on the quarter for you guys area?

In a market where demand maybe a little bit softer, how does that translate into pricing?

We move forward here?

Yes.

As far as pricing, I don't think that the macros 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 of now 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 who do we figure out how to grow 5% to 7% above whatever.

And if we do that successfully than we know, we're going to be rewarded.

And John, it we're not going to have tried to predict the R&R market.

To Pete's point, what I would say is we use the two main players that are out there.

And I think in general, they have downgraded their forecast.

And in general, I think the prevailing view is modestly negative in out fiscal fourth quarter with the potential to go positive.

What want to highlight is it will have been seven straight quarters of negative in the R&R market 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 at this ever needed.

But we will continue due 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 negative R&R market.

Rafe Jadrosich, Bank of America.

Hi, guys.

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 distribution wins there.

I think at this point, you're in both big box players with going into next year.

How do we think about from the penetration opportunity in that channel home 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?

Well, first, we -- as you pointed out or implied on, 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 -- yeah, given 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 will 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.

Trey Grooms, Stephens.

Hey, 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 is that a market where you could see more expansion opportunity, your shelf space opportunities?

And then just on the bigger picture for the Canadian market, as Jesse mentioned, conversion opportunity, is that opportunity similar in that market to what it is here that we're more familiar with?

I'm sorry, I'm just not as familiar with that Canadian market.

Thanks.

Sure.

First, we have a really nice Canadian business and our existing channel partner there has done a really nice job on 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 and or wood conversions.

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 gains.

In this particular case, it facilitates shelf gains in Canada as we move into 2025.

Right.

Okay.

Thanks for the detail on that.

Thank you.

Appreciate it.

Adam Baumgarten, Zelman & Associates.

Hey, 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 are really more so probably additional share repurchases?

Yes.

I think of look with the new program that we just had approved, I think our philosophy has been are always going to be up modestly programmatic and the repurchases, but allowing ourselves that our 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.

Got it.

Thanks, guys.

Best of luck.

Appreciate it.

Thanks, Ed.

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.

We look forward to conversations in the next few days or during the next call.

Thanks again and have a great evening.

And ladies and gentlemen, that concludes today's call, and we thank you for your participation.

You may now disconnect.