Azek Company Inc (AZEK) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to The AZEK Company's Fourth Quarter 2020 Earnings Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions) I would now like to hand the conference over to your speaker today, Jon Skelly, Senior Vice President, Strategy and Execution.

Thank you.

Please go ahead, sir.

Thank you.

Good morning, everyone.

We issued our earnings press release this morning to the Investor Relations portion of our website at investors.azekco.com as well as via 8-K on the SEC's website.

I'm joined today by Jesse Singh, our Chief Executive Officer; and Ralph Nicoletti, our Chief Financial Officer.

Before we begin, I would like to remind everyone that during this call, AZEK management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These include remarks about future expectations, anticipation, beliefs, estimates, forecasts, plans and prospects.

Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements.

Such risks and other factors are set forth in the company's earnings release posted on the website and will be provided in our annual report on Form 10-K for our fiscal year 2020 as filed with the Securities and Exchange Commission.

The company does not undertake any duty to update such forward-looking statements.

Additionally, during today's call, the company will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.

Reconciliations of adjusted EBITDA to net loss calculated under GAAP and adjusted gross profit to gross profit calculated under GAAP as well as reconciliations for other non-GAAP measures discussed on this call can be found in our earnings release, which is posted on our website and will be included in our Form 10-K for our fiscal year 2020.

I would now like to turn the call over to Jesse Singh.

Good morning.

It's great to be speaking with you all again, and thank you for joining us today.

I hope that everyone continues to be safe and healthy.

I am very proud of the AZEK team as we continue to make progress against our long-term goals of consistent growth, adjusted EBITDA margin expansion and positively impacting society through our unique business model and our increased focus on ESG.

The fourth quarter was a very good quarter, ending a strong 2020, and more importantly, was another big step in our long-term journey.

We made good progress in fiscal 2020, which included double-digit sales growth and more than 100 basis points of adjusted EBITDA margin expansion.

As mentioned in earlier calls, we have a stated long-term revenue growth objective of 8% to 10% and EBITDA growth objective of 10% to 14%.

And we see 500 basis points of long-term adjusted EBITDA margin expansion opportunity off a 2019 baseline.

We believe that AZEK is a unique company with a compelling long-term secular growth story.

We are focused on large growing markets that are benefiting from multiyear secular trends, driven by continuing conversion from wood to our types of materials and consumers' increasing focus on outdoor living.

We are known as the innovation leader in outdoor living, driven by our technology, design and superior aesthetics.

Our U.S. manufacturing footprint uses an increasing amount of recycled materials, which furthers our sustainability strategy and enhances our profitability.

ESG principles are at the core of what we do, and we are committed to its fundamentals of sustainability, positive social impact and sound governance.

We continue to invest in our core strengths of brand, manufacturing, R&D and customer connection.

And we remain focused on our key initiatives to achieve long-term performance objectives: growth through innovation; margin expansion through recycle and continuous improvement; and positively impacting the world through ESG.

First, we have multiple levers to drive above-market growth and accelerate material conversion, including investing in new product introductions and leveraging downstream-focused sales and marketing teams.

During 2020, we added 2 new decking product lines in addition to new rail and exteriors products.

Our new Reserve and Prime+ decking product lines have been well received and have contributed in a meaningful way to our growth, and we expect that to continue.

Earlier this week, we announced a series of new exterior product innovations for 2021, including accent shingle siding and our AZEK capped polymer cladding products, which further differentiates our product portfolio and creates additional growth platforms for our business.

We also expanded our downstream sales efforts and made strides in improving our consumer experience.

And we upgraded our digital platform with improved technology and expanded content.

As part of our focus on sustainability and margin expansion, we have made great progress with our recycling initiatives, which include increasing our use of recycled materials, in-sourcing the processing of recycled materials and moving to lower-cost formulations.

We have fully transitioned to recycled plastics in the core of our capped composite products and have moved to approximately 50% recycled materials in the core of our capped polymer decking products.

During the year, our use of recycled materials in our extrusion processes expanded from 44% in 2019 to 54% in 2020.

Overall, in fiscal 2020, we used approximately 400 million pounds of recycled materials, an increase of over 100 million pounds from the approximately 290 million pounds we used in 2019.

Our acquisition of Return Polymers allowed us to accelerate our PVC recycling initiatives by in-sourcing our PVC recycling capabilities for use across our product lines.

More recently, the Return Polymers acquisition facilitated the launch of our AZEK FULL-CIRCLE PVC Collection Recycling Program.

FULL-CIRCLE was officially launched in November after a pilot program this summer, and is a first of its kind program that works directly with dealers, contractors and fabricators to collect, return and recycle scrap PVC from fabrication shops, construction sites and remodeling projects.

This innovative program represents another step in AZEK's ongoing commitment to building a more sustainable future.

In 2020, we also made significant progress in improving our social and environmental impact and corporate governance through our core value, Do The Right Thing.

We are committed to achieving a high level of environmental and social responsibility as well as leading by example with diversity and strong corporate governance.

As part of this commitment, we are a signatory to the United Nations Global Compact, a global initiative focused on advancing sustainable and responsible business practices related to human rights, labor, the environment and anticorruption.

We recently welcomed 3 new board members, including Fumbi Chima, Howard Heckes and Romeo Leemrijse, each of whom brings incredible leadership, unique experience and diverse perspectives to help guide us in achieving our long-term objectives.

Diversity and inclusion is part of our DNA, and we are committed to supporting and enhancing a diverse board of directors, management team and employee base.

We are making strong progress on multiple fronts around our ESG efforts and expect to release our inaugural ESG report early in the new calendar year.

Finally, we continue to invest in our core brand, manufacturing, R&D and customer connection strengths.

In 2020, we have made significant progress against our capacity expansion.

As mentioned on our last call, we initiated our $180 million capacity expansion program, which includes important construction and expansion activities across our manufacturing and recycled facilities, each in advance of a new planned western U.S. manufacturing facility anticipated in early 2022.

During the quarter, we completed the first phase of our capacity expansion program and saw a gradual increase in our capacity.

And we expect that to continue as we bring additional capacity online over the next few quarters.

Taken together, our market opportunity, growth drivers, operational excellence and margin execution during the year clearly demonstrates the strength and resiliency of our business model.

Our execution is on track.

And I couldn't be more proud of the way our team has continued to respond and perform, all while managing through a pandemic and becoming a public company.

Turning to our fourth quarter results.

We delivered strong sales and adjusted EBITDA growth.

Our Residential business grew 30% compared to the fourth quarter a year ago, while our Commercial segment declined approximately 14%.

Adjusted EBITDA grew 26% year-on-year and adjusted EBITDA margin expanded 60 basis points over the same period.

These results were on top of very strong growth the previous year.

The strong trends we saw in the second half of our third quarter continued throughout the fourth quarter as consumers remain focused on improving and investing in their homes and outdoor living.

We believe that the increased consumer engagement and awareness that we generated in fiscal 2020 will provide long-term benefits to the category and our performance.

Within the Residential business, we experienced strong demand through the quarter.

Repair and remodel and new construction benefited from favorable tailwinds.

And both the pro and retail channels saw a significant growth this quarter.

Sales within our Exteriors business grew approximately 18% year-over-year and our Deck, Rail & Accessories business grew approximately 35% year-over-year.

We saw strong, broad-based demand across our Residential product portfolio, including our new product launches like TimberTech PRO reserve and EDGE Prime+, which have been well received since their launch in early 2020.

Channel sell-through growth in the fourth quarter was comparable to our reported Residential net sales growth.

And inventory days in the channel exiting the quarter remained below levels at the same time last year.

Our investments in digital, branding and improving the overall consumer experience continue to drive strong returns.

Key demand metrics we track, such as website sessions and sample orders, all saw a tremendous growth in Q4 relative to the same period last year.

At the end of October, we had an opportunity to sponsor the TimberTech Championship held at the Old Course at the Broken Sound in Boca Raton, Florida.

The event was a great opportunity to partner with the PGA Tour champions to raise funds for local area hospital and also showcased our brand in broad range of beautiful outdoor living products to millions of viewers.

Our Commercial business declined for the quarter on a year-over-year basis but continues to perform relatively well in a difficult market.

While we are starting to see improvements in certain end markets like marine, we expect Commercial to remain challenged, especially for trade shows and retail, through at least the first half of next year.

As a reminder, this business tends to track more closely to GDP and the broader economy.

Our Commercial business has some great products that include high-privacy bathroom partitions and barrier products that could become increasingly necessary as well as innovative OEM solutions that are utilized in faster-growing outdoor living applications.

Our team is doing a great job of navigating the difficult macro backdrop.

And while we still see some near-term challenges on this front, we expect to see some stabilization in the back half of 2021.

Operationally, our team once again worked tirelessly to respond to customer demand while continuing to execute against key operational initiatives.

These initiatives are on track with what we shared with you last quarter and during the IPO process.

They include the expansion of manufacturing capacity, the increased use of recycled raw materials and the execution of our continuous improvement programs.

In addition to the overall recycling initiative progress I mentioned earlier, during the quarter, we implemented a strategic recycled material supply relationship with Berry Plastics for approximately 30 million pounds of various types of scrap plastics annually.

These materials will be recycled and repurposed into the production of our high-quality sustainable building products materials such as composite decking.

We are also proud to have received the 2020 Vinyl Recycling Award from the Vinyl Sustainability Council in recognition of our sustainable manufacturing and recycling innovations in our TimberTech AZEK decking product line.

On the capacity front, we remain on schedule with our accelerated $180 million capacity expansion program, which will support the strong demand we continue to experience and future market demand from the continued conversion from wood.

The first phase of our capacity expansion program came online during the fourth quarter and production is ramping up according to plan.

Given the sustained level of demand we saw during the quarter, we continued to be in a position where we are unable to fully meet demand for our deck and rail products and expect gradual improvement as new capacity comes online in the first half of 2021.

We remain on track for additional capacity to come online during the second and third quarters of our fiscal 2021.

As a reminder, the strategic capacity expansion plan includes an incremental decking production capacity of approximately 70% and a new manufacturing facility over the next 15 to 21 months.

During our fourth quarter of fiscal 2020, we announced a low single-digit price increase across the majority of our product portfolio within our Residential segment as well as across our Commercial product portfolio.

These increases will take effect at the beginning of the new calendar year and will enable us to cover cost increases across our business.

Now let me turn to our outlook, which is influenced by a number of factors, indicators and macroeconomic variables.

As a reminder, we integrate and share data with our channel partners and regularly survey our dealer and contractor customers to understand their activity levels and backlogs, which continue to show considerable strength.

We conduct detailed analysis on our sell-through and inventory in the channel, which currently is below levels at the same time last year.

We also evaluate consumer engagement activity, such as web activity, sample orders and quote requests, which, as mentioned earlier, remain at record levels.

Finally, we utilize forecasts that correlate to our business such as repair and remodel and new housing data combined with traditional macroeconomic variables for short and long-term visibility on potential demand and demographic trends.

While we see many positives, including an expanded focus on the home and outdoor living, we also recognize that we are in the midst of a highly unusual macroeconomic environment.

Taken in their totality, these factors influence our favorable near-term outlook for our Residential business.

We remain highly confident in the long-term market opportunity for our business driven by secular trends, the large material conversion opportunity and our own execution.

With that, I'd like to turn the call over to Ralph, who will discuss our financial results and outlook in greater detail.

Thank you, Jesse.

As I discuss our results, all comparisons made will be on a year-over-year basis compared to the same period ending September 30, 2019.

In short, we finished our fiscal year of 2020 with strong results and good momentum entering fiscal 2021.

For the fiscal fourth quarter of 2020, net sales increased by $48.4 million or 22% to $263.9 million.

For the full fiscal year of 2020, net sales increased by $105.1 million or 13% to $899.3 million.

The increase for both periods was driven by sales growth in our Residential segment.

For the fourth quarter, net sales for our Residential segment increased by 30% year-over-year, driven by Deck, Rail & Accessories growth of 35% and Exteriors growth of 18%.

This growth was partially offset by a decrease in our Commercial segment of 14% year-over-year.

For the fiscal year 2020, net sales for our Residential segment increased by $115.7 million or 17.7% to $771.2 million.

The increase was primarily attributable to higher sales growth in both our Deck, Rail & Accessories and Exteriors businesses driven by continued market growth, success of new products across the portfolio and the benefit from investments in downstream selling capabilities.

Gross profit for the fourth quarter of fiscal 2020 increased by $20.8 million or 30% to $90.3 million.

For the fiscal year 2020, gross profit increased by $42.9 million or 17% to $296 million.

Adjusted gross profit for the fourth quarter of fiscal '20 increased by $19.4 million or 22% to $106.1 million.

Adjusted gross profit margin was 40.2%, unchanged from last year, as higher Residential segment sales and favorable price/mix were offset by raw material inflation, additional expenses related to our capacity expansion and COVID-19 related costs.

For the fiscal year 2020, adjusted gross profit increased $44.2 million or 14% to $359.1 million.

Adjusted gross profit margin expanded 30 basis points to 39.9%.

The increase in gross profit was driven by higher Residential segment sales and manufacturing productivity, partially offset by the impact of COVID-19 related costs.

Selling, general and administrative expenses increased by $103.4 to $149.9 million or 56.8% of net sales for the fourth quarter of fiscal 2020.

For the fiscal year of 2020, selling, general and administrative expenses increased by $124.7 million or 68% to $308.3 million or 34.3% of net sales.

The increase was primarily driven by $120.5 million of stock-based compensation expense related to our initial public offering and the accelerated vesting of stock-based compensation resulting from the secondary offering.

Additional ongoing costs related to operating as a public company, partially offset by lower marketing and selling expenses during the initial COVID-19 disruption.

We recorded a net loss of $64.4 million for the fourth quarter of fiscal 2020 compared to a net loss of $0.9 million a year ago.

For the fiscal year of 2020, we recorded a net loss of $122.2 million compared to a net loss of $20.2 million in the fiscal year of 2019 primarily due to increased selling, general and administrative expenses as discussed previously as well as $37.6 million of expenses related to the extinguishment of debt in the fiscal third quarter.

Please note that effective as of September 30, 2020, we revised the definition of adjusted net income to no longer include depreciation expense as an adjustment.

For fiscal 2020, depreciation expense was approximately $45 million.

We have recast the prior periods in our earnings release posted on our website and in our upcoming 10-K filing to reflect the change.

Adjusted net income was $44.4 million or $0.29 per share for the fourth quarter of fiscal 2020 compared to adjusted net income of $16.8 million or $0.16 a share a year ago.

For fiscal year 2020, we recorded adjusted net income of $72.6 million compared to adjusted net income of $46.7 million in the fiscal year of 2019.

Adjusted net income would have been $117.3 million, approximately $45 million higher in 2020, an increase by approximately $34 million to $80.4 million in 2019 if we had included depreciation expense as an adjustment.

Adjusted EBITDA for the fourth quarter of fiscal 2020 increased by $13.6 million or 26% to $66.1 million, and adjusted EBITDA margin expanded 60 basis points to 25% from 24.4% a year ago.

For the fiscal year 2020, adjusted EBITDA increased by $33.9 million or 19% to $213.5 million.

Adjusted EBITDA margin for the fiscal year of 2020 expanded 110 basis points to 23.7% from 22.6% in 2019.

Now turning to more detail on our segment results.

Residential segment net sales for the fourth quarter of fiscal 2020 increased by $53.6 million or 30% to $232.7 million.

We are continuing to see strong acceptance of our new deck, rail and exterior trim products, and we are benefiting from downstream sales force investments we have made in our exteriors and retail channel teams.

For the fiscal year 2020, net sales for our Residential segment increased by $115.7 million or 17.7% to $771.2 million.

The increase was primarily driven by higher sales in both our Deck, Rail & Accessories and Exteriors businesses.

Residential segment adjusted EBITDA for the fourth quarter of fiscal 2020 increased by $20 million or 37.3% to $74 million.

For fiscal year 2020, Residential segment adjusted EBITDA increased by $49.3 million or 26.1% to $238.1 million, mainly driven by higher sales and manufacturing productivity improvements, partially offset by higher COVID-19 related production costs.

Commercial segment net sales for the fourth quarter of fiscal 2020 decreased by $5.3 million or 14% to $31.3 million.

For the fiscal year of 2020, net sales of the Commercial segment decreased by $10.7 million or 8% to $128.1 million.

The decrease was primarily driven by lower sales in our Vycom business as the effects of COVID-19 continued to impact certain end market demand.

This business was affected by the slowdown in commercial repair and remodel as well as certain challenged end markets, such as retail and trade shows.

Commercial segment adjusted EBITDA for the fourth quarter of fiscal 2020 decreased $3.2 million to $3.9 million.

For the fiscal year of 2020, Commercial segment adjusted EBITDA decreased by $6.4 to $15.1 million.

The decrease was primarily driven by lower sales in the Vycom business partially offset by lower manufacturing costs and reductions in selling, general and administrative expenses.

Looking at our balance sheet and cash flow.

As of September 30, 2020, we had cash and cash equivalents of $215 million and approximately $129.4 million of availability for future borrowings under our revolving credit facility.

Total debt as of September 30, 2020, was $467.7 million and we have not drawn on our revolving credit facility.

Net cash provided by operating activities was $98.4 million and $94.9 million for the 12 months ended September 30, 2020, and 2019, respectively.

Now turning to our outlook.

Our outlook is based on current strong demand within our Residential segment.

We remain encouraged by our current strong demand trends, external demand signals such as housing starts, repair and remodeling activity and internal signals like web traffic and sample order growth.

We have previously communicated that we would expect low double-digit sales growth in Q1 '21.

Given the strength in the Residential market, we now expect total company net sales growth in fiscal Q1 to be in the low 20% range year-over-year and adjusted EBITDA growth in the high 20% range year-over-year.

As it relates to the Commercial segment, we continue to see weakness into the first quarter of 2021, and we expect this business to be down in the high teens range.

For the full fiscal year of 2021, we expect total company net sales to increase 10% to 14% year-over-year and adjusted EBITDA growth in the mid-teens range year-over-year, following 19% growth in fiscal 2020.

This results in continuing adjusted EBITDA margin improvement as additional costs, including start-up from our capacity expansion, raw material and labor inflation and costs of being a public company, are more than offset with pricing and manufacturing cost savings from our recycling initiatives.

From a segment perspective, based on our leading indicators, we expect Residential segment net sales growth in the range of low to mid-teens year-over-year.

This outlook reflects the visibility we have for the next 3 to 6 months and recognizes macro uncertainty and the strong performance we saw in the second half of fiscal 2020.

In the Commercial segment, we are assuming there will be economic stability, with some improvement in the second half of the fiscal year, leading to our projection of net sales declining at the mid-single-digit range year-over-year.

We expect total capital to be in the $125 million to $135 million range as we work through our capacity program, primarily in decking and the addition of a third low-density polyethylene recycling line.

To assist in modeling, our tax rate for 2021 is estimated to be approximately 26% and our diluted share count is estimated to be approximately 157 million shares.

I'll now turn the call back to Jesse for some closing remarks.

Thanks, Ralph.

I would also like to recognize our team for their continued leadership in our response to the pandemic and its impact.

Consistent with our core value, Do The Right Thing, our first priority has been and will continue to be the safety of our employees, our customers and our communities.

Thank you to the entire AZEK team and our channel partners for your commitment and dedication.

With that, operator, please open the line for questions.

(Operator Instructions) Our first question comes from Matthew Bouley from Barclays.

Congrats on the results.

The first one, on the '21 revenue guidance of 10% to 14% growth.

So you're guiding Q1 in the low 20s, so suggesting the balance of the year is perhaps in the 10% range.

You've got new capacity coming online.

There's presumably some price flowing through in there.

Is there anything specific that would cause some deceleration on the volume side offsetting those?

Thinking about maybe the sustainability of this type of demand in a post vaccine world or mainly just kind of general conservatism at this early point in the year.

Look, as we've talked about, we see some really, really positive signs relative to the signals that we see.

We see strong demand profile, strong backlog currently.

And we see the leading indicators very, very positive.

As we've mapped this out, we take all of that into account.

And specifically, the forecast that we've laid out, we think, reflects the combination of these positive factors, also understanding that we've got some strong quarters in the back half of the year.

I'll pause there.

Ralph, is there any additional color you'd like to add to that?

Yes.

Just the visibility, the tight visibility we clearly have is in the first 3 to 6 months of the fiscal year, so we factor that in.

And we're very mindful of -- we're providing guidance on a full year when most of the visibility sits in the first half of the year at this point in time.

But all the indicators, as Jesse mentioned, are positive in terms of leading indicators.

We just want to be appropriate in terms of looking out that far.

Understood.

Okay.

Second one, on the pricing side.

You disclosed the low single-digit price increase.

I guess it's the second year in a row that you've now raised price.

So going forward, do you think pricing is going to kind of remain that sort of opportunistic tool that I think it once was?

Or are you kind of looking to condition the industry to more consistent annual price increases?

Yes.

I think as you look at the structure of the market, we believe that we're in a market that provides the right kind of value equation, such that we should be able to appropriately offset inflationary costs with pricing actions.

And as you mentioned, it's really been 3 out of the last 4 years that we've taken pricing actions as there's been both labor and raw material inflation.

But we believe we're in that type of an industry.

Your next question comes from Susan Maklari from Goldman Sachs.

My first question is also on -- thinking a little bit about the revenue guide for fiscal 2021.

With that 10% to 14%, can you give us some color on how you factored in the incremental capacity that's coming online over the course of next year into that?

And does that suggest that maybe there's some potential upside as we think about that range that you've provided?

Yes.

Susan, as the capacity comes online, as we talked about, it's a 70% increase over the next -- now 15 to 18 months or so coming on.

So that is factored in.

We leave -- but it builds during the year, particularly as we get into the second half of our fiscal year and calendar year in '21.

So some of that's factored in.

As you would expect, we've put guidance out there that we clearly have a line of sight to be able to produce to and have some room to go above that.

But that's how we factored it in.

Yes.

And just to add.

As we bring capacity online, clearly, in the short term, that capacity is needed as we highlighted on the call.

As we move into the out months, we also want to make sure that we have capacity to continue to provide appropriate service to our customers.

And so as you think in the back half of the year of the capacity coming online, it's a combination of meeting demand, but also making sure that we're in a good position to service customers.

Got you.

Okay.

And then my follow-up question is just, as we think about the very low levels of inventory that are sitting across the channel in there, how are you thinking about seasonality for '21?

Are there any changes that we should be aware of as we kind of think about the modeling and perhaps the cadence of the quarters next year?

Typically, what you -- just to remind folks on the call, typically, what you see from a seasonality perspective with us is a slowing end demand as northern climates compress their activity and a process by which stocking increases at the various stages in the channel system.

And so at a high level, that thesis and that normalcy will play out.

I think the variability that you might see this year just has to do with the 2 key elements I highlighted, right?

What's the demand process, which you have in any year?

What's the demand as you move into seasonal months?

And what's the inventory level in the channel?

So I think that there's normal seasonality.

I think you're just dealing with slightly different variables, which you will every year.

Your next question comes from Phil Ng from Jefferies.

Congrats on a very impressive quarter.

Jesse, I think you kind of flagged in the call that some of the greenfield capacity you're adding right now is going to be -- is targeted in the west, which was new for me.

Does that open a door for new opportunities that perhaps wasn't available previously now that you have more of a national footprint out west?

And does that provide any real cost savings on the logistics and transportation side of things?

Yes, yes.

First off, we've had a really nice national footprint, actually, a footprint that strengthened last year with some of the distribution changes.

So we've been in a good position to service the market just because we maintain inventory through our distributors on the ground.

Obviously, when you put a facility closer to a customer set, that potentially gives some advantages relative to what you highlighted, right, shorter transportation times, lower logistics costs.

So I think, incrementally, it's a natural part of our expansion as a company to continue to get capacity closer to the customers.

So I think, incrementally, there might be a benefit.

But I want to highlight that we were well positioned prior to this.

But getting that capacity out there, we just -- we like the potential benefit of adding additional capacity closer to various customer sets.

Got it.

That makes a lot of sense.

And then some of the strength that you're seeing at least in the first quarter for your Residential business, are you seeing any lift perhaps from some pre-buying ahead of your price increase, any load in?

You talked about how inventory levels are still relatively low on a year-over-year basis.

When do you kind of expect your channel partners to have inventory levels at a more normalized level?

Yes.

On the -- with respect to whether or not there's pre-buy, we really don't view that as impacting our results right now.

We announced the pricing changes we talked about actually last quarter, and it's just working its way through the system.

And we gave relatively long lead times to our channel partners to make sure that they can appropriately adjust what they need to adjust.

And I forgot your second question.

I'm sorry.

You talked about how inventory levels are still kind of lower on a year-over-year basis.

As you kind of ramp up this capacity, is there a good way to think about how and when that -- when do you expect that to be at a more normalized level in terms of inventory at your channel partners or lead times in general?

Yes.

I think, as I mentioned earlier, it's really an outcome of what's our demand and our ability to service that demand.

We continue to see and expect over the next 3 to 6 months that we'll have an opportunity to continue to ramp up some of the inventory at our channel partners to come to more normalized and preseason levels.

So we would expect that to occur on a normalized pace during the next quarter.

The specifics of whether or not we get to the exact number is really going to be dependent on the demand cycle that we see relative to the amount of inventory that's going to be placed.

Your next question comes from Mike Dahl from RBC Capital Markets.

I wanted to ask first about recycling.

It sounds like, just on the numbers you laid out, I think you hit where your targets were, about 54% of recycled overall, and you talked about the split between the products.

Obviously, you're continuing to integrate Return Polymers.

It sounds like there's some other initiatives.

Can you just give us a sense of, as we think out over the next year and potentially beyond, how we should be thinking about the kind of continued migration towards recycling?

And any quantification you can give there?

Yes.

I'll give it to you at a high level.

As we -- as I mentioned on the call, the first stage and the first aspect of this is increasing our use of recycle.

And as I highlighted on the call, Return Polymers has really been an asset there.

On our deck boards, in particular, on cap polymer, our PVC boards, there might be some additional opportunity to expand that over the next 18 months or so in terms of the percentage.

And there might be additional opportunity to expand our use of recycled in some of our non-decking products, which is where Return Polymers comes in.

So at a very high level, we're in a really good spot on the percentage we use, and there might be some additional opportunity there.

Specifically, on vertical integration, which is the second component I talked about, we have our third line, polyethylene line coming on online over the next few months, and that gives us some additional in-sourcing capability.

And we'll continue to expand and incrementally invest in Return Polymers to make sure we're in a good position there.

So that's relative to in-sourcing.

And then the third component, relative to formulation that we talked about, which is basically moving to lower-cost recycled materials.

When we see an opportunity to do that through sourcing, and we talked about a couple of the initiatives that we have, we can continue to do that and we'll continue to do that on an ongoing basis.

Think of that as sourcing savings.

That's an opportunity to continue to -- that has a longer tail.

Relative to the specific reformulations, we will, as we talked about on the last call, bring that in on a phased basis.

And we need to make sure that, that's well aligned with our capacity addition.

So just at a very high level, those are the types of milestones that we work internally.

In aggregate, as you can see, it gives us an opportunity for an ongoing execution across those 3 items.

Okay.

My second one relates to the competition.

And clearly, it's a unique and robust environment from a demand standpoint.

And both you and your largest competitor can't even meet the demand, as you've articulated.

But we have seen a number of new product launches and introductions, I think, from not necessarily your largest peer, but some of the next tier down and maybe some newer entrants, particularly at the low end.

So I understand that some of these aren't quite as broad as the product offering that you guys would have.

But can you just speak to kind of competitive dynamics?

What you're seeing on new entrants or expansions from some of your second or third tier competitors?

And how we should be thinking about kind of your moat against further penetration from those?

Yes.

As we talked about in general, we believe that we have significant strength in terms of our presence on the ground and the contractors that we work with.

In general, given the demand environment and some supply constraints, what you see geography to geography is, in certain geographies, we pick up share against all competitors.

And in certain other geographies, there are some small transactional occurrences where, as you mentioned, some of the third tier players may pick up a job or a specific situation.

In general, as we look at it in aggregate, I think it's important to see our growth rates -- the fact that, between ourselves and our nearest competitor, we make up a significant part of the market.

And you can see from our growth rates vis-à-vis the rest of the industry that our share position at an aggregate level, we believe, is in a really nice position and continues to be in a nice position.

So hopefully, that answers your question.

In general, we don't -- to summarize, we're not seeing a significant shift in competitive dynamics.

And I think that's borne out when you take a look at our Deck, Rail & Accessories growth relative to the industry and also what we've guided you to.

And one last just quick comment here.

On a relative basis, if someone launches a product and picks up a few jobs, that is minuscule compared to really what we see as the aggregate competitive dynamic, which is continuing to drive conversion from wood to our types of materials.

And in general, what I would say is, day-to-day, that's really where we're focused, is to make sure that we're expanding the market.

Your next question comes from Keith Hughes from Truist.

I want to dig into your recycling, the 54% of inputs being recycled in 2020.

Is that a combination of your polyethylene and PVC usage?

Or what is that referring to?

That refers to all extrusion that we do.

And so extrusion roughly is 90% of what we sell.

So think of extrusion as all of our products effectively.

That's not the fabrication or the other elements.

So that number is off a very large base.

So where do you stand right now on polyethylene versus PVC?

So on our polyethylene, which is used in our capped composite deck boards, we use 100% wood in the core and 100% recycled polyethylene in the core.

We do use virgin in the cap that surrounds that core, and we will continue to use virgin there.

We find that the aesthetic and weathering performance is really what we like with having virgin in the core.

Similarly, on the PVC side, on our PVC decking, we're right around 50% recycled in the core and that's primarily plastic with a little bit of adder in the core.

And then the cap, once again, is 100% virgin.

Your next question comes from Ryan Merkel from William Blair.

Two questions from me.

First, 2021 guidance seems to imply flat or slightly higher Resi segment EBITDA margins.

So is this due to start-up costs offsetting aims and recycling tailwinds?

Ryan, it's Ralph.

First, just coming back to my remarks that I shared, we do expect in '21 continuing adjusted EBITDA margin improvement.

And just to remind you, the puts and takes there are -- we do have additional start-up costs from capacity expansion.

We also have raw material and labor inflation.

And importantly, there's costs of being a public company.

That's all in total more than offset with pricing and manufacturing cost savings from largely the recycle initiatives.

The public company costs step-up doesn't hit the segments.

So when you look at that at a segment level, you'll get a little bit of a different view because our segments won't have most of the company -- public company costs in them.

So we feel good about the progress.

We grew our EBITDA margins 110 basis points in 2020.

And as I remarked, we're expecting in aggregate that -- we're expecting in aggregate improvement again in '21.

But the segments aren't weighed down by some of the public company expenses that we have to take on.

Yes.

And just as a reminder, we only had one quarter really, a little more than a quarter as a public company.

And so we have additional year-over-year public company costs that we'll incur in '21.

So our guidance is all-in relative to those increase in costs.

Perfect.

That's helpful.

And then secondly, Jesse, maybe just talk a little bit more about the new products that you just announced.

Why is shingle siding and cladding attractive?

What's the opportunity that you see?

Yes.

On the -- so when you take a look at our Exteriors business, it is, in effect, a very niche selective Exteriors business.

We focus on trim, which is one of our core products.

And that market is still 40% wood.

And so trim is a great product for us, unlike siding, which is in the low teens in terms of its wood percentage.

So there's still a significant opportunity there.

And then you add to that the additional products that we have right now, which are value-added products that provide some benefit on the outside of homes.

And so for us, that's been things like column wraps and additional accents and corners on the outside of the house.

So if you think of shingle siding and the way it's positioned, it's typically a niche product that's used as an accent on the outside.

And our value proposition fits really well in terms of much easier to handle, easier to install.

You don't have some of the environmental concerns that you might with other products.

And it's very, very lightweight and paintable.

And so it's a natural extension for us in terms of those high-value added niche products.

And then similarly, on the cladding side, our unique aesthetics relative to what we can do with our TimberTech and AZEK deck boards, whether it's wide width or the very high end hardwood aesthetic, that particular aesthetic is becoming more and more important either on commercial buildings as they look to refresh it or on houses as people look to upgrade the exterior look.

And in fact, we do AIA training.

And using our high-end deck boards as cladding is one the most sought-after training modules that we have.

And so these are natural niche extensions of our product line that sustain the value and focus on wood replacement.

Your next question comes from Seldon Clarke from Deutsche Bank.

So net leverage is well below what you kind of talked about coming out of your IPO at just over 1x net debt to EBITDA.

So can you just give us a sense of how you're thinking about leverage moving forward and maybe like what your appetite for M&A is from here?

Yes.

Maybe I'll start there, Seldon.

First, as you point out, our leverage is low, especially relative to what we said is our ongoing sort of target range, in the low to mid-2s.

So we're in a great position.

It gives a lot of flexibility.

And so when you go back to our capital priorities, the first is use of cash.

It's to invest in the business to drive continued organic growth.

And then secondarily is use using cash to availability to fund selective M&A that strategically is additive to the core organic piece.

So it's a great opportunity for us, and we're in a good position.

Okay.

And when you talk about, I guess, some of those M&A potential opportunities, are you thinking more from a product category perspective?

Or could that be more on the recycling side, again, like you saw in the Polymers investment?

Like how are you kind of just thinking about the scale there?

So when -- we really, really like our business model, the ability to have branded products that have differentiated R&D, that leverage integrated manufacturing and recycle, that have sticky customers, that play in this wood conversion exteriors market.

So given that we like that business model, that really ends up being the filter for any acquisition that we look at.

And as you highlighted, if you look at our recent acquisitions, one was a bit of a market consolidation.

One was a tuck-in product that's really given us some nice momentum in the rail business.

And the third was a vertical integration on recycle.

I think all of those are indicative of the types of acquisitions that we'll continue to look at.

We really like our core.

We really like the market opportunity here.

And we believe that there could be opportunities to really strengthen that core value proposition.

Your next question comes from Tim Wojs from Baird.

Just a couple of quick ones.

I guess, first, on trim relative to DR&A as you give out the outlook, any meaningful difference in growth rates there from your perspective?

And then the second is, on price costs, do you expect price cost to be positive in your guidance?

Or do you expect most of the incremental costs from raw materials and just some people costs kind of ease the way at that?

Yes, yes.

Let me take the first one and Ralph, you can take the second one.

We are -- we've obviously talked about Deck, Rail & Accessories, and you can see the growth rate there.

Our Exteriors business has been doing quite well.

The combination of new products, wood conversion, and a really nice share position and a solidifying share position, all of those variables have led to above market growth.

So as you look back, we would -- without giving specifics on the breakdown between the 2 businesses, I think what would be relevant is just to look back historically and see how we've done there, and we fully expect to be able to continue to grow both businesses at a healthy level.

So Ralph, I'll turn it over to you for the other question.

Yes.

Tim, the -- as it relates to pricing, clearly, we're seeing raw material and labor inflation.

That clearly factored into the timing and depth of pricing that we took.

Again, as I come back to -- just if you step back on overall EBITDA margins that we're also managing, we do expect some improvement in '21, as I said in my remarks.

But -- so the pricing that we took is a lever.

Clearly, the cost savings and -- from recycling and our AIMS initiatives are a lever to help offset the raw material and labor and some of the costs that we'll see related to the capacity expansion and the public company costs.

So when you put that together, we feel like we're continuing to move our margin improvement program well.

(Operator Instructions) your next question comes from Alex Rygiel from B. Riley Securities.

One quick question.

You mentioned in your prepared remarks, demand is greater than current capacity.

What is your current lead time today?

And what is your target?

And when do you think you might achieve that target?

Yes.

We -- relative to that, we happen to be -- if there's a pause on my part, we happen to be in an early buy period.

And when we're in that period, we work with our channel partners to make sure that we're creating a schedule of shipments.

So at this time of the year, the concept of lead time is not as relevant as it might be in season.

It's really, really important that we continue to work with our channel partners such that they have the right inventory in place to offer the right service to their customers.

In general, I would say, lead time depends on specific products.

And typically, we -- historically, we've been in, let's say, 3- to 4-week lead time scenario.

And as we rebuild inventory in the channel and as we bring additional capacity online, we hope to be in a position over the summer to start moving back to that sort of direction.

But as we talked about on the call right now, we see robust demand.

We've got additional capacity coming online.

And it's really that combination that will determine the specific timing of when that occurs.

Your last question will come from Trey Grooms from Stephens.

One for me.

It's really around the recycling -- recycled material.

Just diving into that just a little bit further.

So on the composite decking piece, you're at 80% recycled content in the capped composite products.

And you noted in the presentation and you've talked about it in the past, optimizing the formulation there from high-density polyethylene to low density.

Where are we right now in that process?

Kind of what's the mix?

And where do you see that going over time and kind of what's the opportunity there?

Yes.

We don't disclose specifics relative to that.

Let's just say that, from a journey perspective, we're still some place in the first half of that journey.

And as we bring capacity online, we will stage in the transition to the lower cost formulations.

And so the specifics of that, as I mentioned, it's a subcomponent of the aggregate recycling.

The specifics of that, we're not disclosing, except to say that we are very much on track with that execution.

You can see it in our margin structure and you can see it in the fact that we continue to see positive leverage in aggregate as we move forward.

But over the long run, we should expect to continue to see that, both percentage shift and also the way in which we source those lower cost materials improve.

Okay.

Got it.

And so I guess with the new capacity coming on, it will be kind of a step function in that initiative to increase that lower cost material content.

We -- once again, I want to make sure we highlight.

We're not giving any specifics on that, except to say that we're staging that conversion to be consistent with getting our capacity up and running.

So in some cases, we do it before.

Some cases, we do it after.

So those are staged, not necessarily always in sync.

We are out of time for questions today.

I would like to turn the call back over to Mr. Jesse Singh for any closing remarks.

Thank you all for taking the time.

Really appreciate it.

As you can tell, we're pretty excited about the opportunity that we see ahead of us.

And we're excited about our execution.

So just once again, I want to thank all of -- not only all of you on the phone, but all of the great associates we have within the company and our great customers for partnering with us and growing with us during a very unique and challenging year.

And we look forward to more of that to come.

So thank you, and we'll chat with you on the next call.

Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation.

You may now disconnect.