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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the AZEK Company's First Quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. Please be advised that today's conference is being recorded.
I'd now like to hand the conference over to Amanda Cimaglia, Vice President of ESG. Please go ahead, Amanda.
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 Peter Clifford, 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 Form 10-Q for our first fiscal quarter 2022 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 income 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-Q for our first quarter of 2022.
At this point, I would like to turn the call over to Jesse Singh.
Good morning, and thanks for joining us on today's call.
We're off to a solid start to fiscal 2022 delivering strong first quarter results and focused execution against our strategic priorities. We continue to see consistent demand across our portfolio and strong results from our initiatives and new products.
I'd like to take a moment to thank both our employees and supplier partners for their focus and dedication, operating through a challenging and complex environment. Their commitment has allowed us to continue to meet end-market demand and uphold high service levels, providing an industry leading customer experience in a difficult environment.
AZEK's momentum is driven by a clear and focused strategy to revolutionize outdoor living and create a more sustainable future. We have been operating with a specific set of initiatives that include driving above market growth and accelerating material conversion by investing in new product innovation and expanding our downstream focused sales and marketing teams, expanding our margins through the use of recycled materials in our manufacturing processes and through our continuous improvement programs positively impacting the world through our commitments to ESG stewardship, investing in our core strength, which include brand, material science, integrated manufacturing and customer connections.
We continue to see a strong underlying market driven by positive demographic trends increasing focus on outdoor living and the ongoing conversion away from wood towards our types of low maintenance, high performance alternative materials. In decking as an example, we see our market opportunity is almost five times the current market, including wood.
We see a similar opportunity in other segments such as exteriors where we have seen strong momentum in wood replacement. Our core markets are nearly $9 billion currently and we see an adjacent opportunity within outdoor living of an additional $11 billion.
We also see an opportunity to positively impact the planet, as well as our margins through the expanded use of recycled materials underpinned by our ESG ambition to divert and utilized 1 billion pounds of recycled materials annually by the end of 2026. Against this market opportunity, we have a focused strategy and have invested in capacity, innovation in new products, people and acquisitions.
We believe that through these actions, we have not simply delivered against our short-term objectives, but we have meaningfully strengthened our position in the marketplace and the capability of the company to continue to meet and exceed our long-term goals.
During the fiscal quarter, we saw continued demand across our portfolio and we benefited from our increased capacity to position the company for future growth. Our capacity service levels and new products have put us in a position to pick up additional share and accelerate wood conversion in key markets.
We recently executed a successful early buy season this year with our pro-dealers. During this process, we expanded our stocking position at a number of key dealers and we converted a number of new dealers to our products.
As a reminder, early buy is the process of engaging pro-dealers in the winter months where they decide which products and brands to stock for the following selling season and where they place pre-season or early buy orders to stage inventory prior to the building season. Our success in this early stage of the season is a result of our continued focus on our customers increasingly reliable service levels in our broad and differentiated portfolio. As we exit the capacities constrained environment in the recent past, we remained on the offensive and are pursuing new business opportunities to expand our channel, geographic reach and customer relationships.
We also introduced a number of new products in the first quarter, including our TimberTech AZEK Landmark Collection decking in French white oak and TimberTech Edge Prime Plus decking in dark cocoa, along with the new Edge Hidden cliff [indiscernible]. These products once again highlight our focus on leveraging our unique technologies to create beautiful natural looking products.
Our new capacity has allowed us to scale previously launched products more broadly. And we are expanding the availability of our Edge and Landmark decking collections. We will be showcasing a few of these at the upcoming International Builders' Show in Orlando, Florida featured alongside StruXure Pergola X and Cabana X solutions, the newest addition to the AZEK portfolio.
Our exteriors business continues to deliver with good momentum and demand across its end markets. The breadth of our exteriors portfolio including our recently launched innovative, paintable trim and shingle siding, both available with our PaintPro technology is driving material conversion and share gain in historically under penetrated markets. Sales of these new product innovations have more than doubled in the last quarter with customers appreciating the low maintenance, high performance characteristics of the products over wood competitors.
Our PaintPro technology was launched in 2020 and highlights the strength of our new product development model in driving growth in our core and in adjacencies. Additionally, as customers become more aware and better educated of the performance characteristics and benefits of our AZEK and Versatex trim and siding, it enables increased penetration of our broader portfolio. As part of our focus on expanding our position in outdoor living and positioning ourselves in fast growing adjacencies, in December, we acquired StruXure Outdoor.
StruXure is a designer and manufacturer of high quality and innovative aluminum pergolas and cabanas. StruXure is the premium player in an identified market adjacency estimated to be nearly $1 billion and one that is experiencing similar long-term secular growth and material conversion trends away from wood. StruXure's products are highly complementary to our TimberTech decking and we know that each company's products are already being installed together on projects by contractors across the country.
StruXure's products also enhance outdoor hardscapes as they have a strong presence in Southern quote small states. We believe this will further open new adjacent opportunities for our combined companies. StruXure's shares our focused on ESG with each of StruXure's existing product lines being made from up to 50% recycled aluminum. We planned to leverage AZEK's expertise in sourcing, operations, research and development and material science to improve StruXure's already impressive performance. We also see significant revenue synergies from leveraging our combined portfolio across our broader customer base. We are excited to welcome StruXure to the AZEK family and look forward to working with the team in the months and years ahead.
In addition to StruXure in November we closed an acquisition of a regional PVC recycler offering full service, recycled material sourcing, processing, logistics and scrap management programs. The acquisition is a vertical integration that complements the return polymers team and adds new sources of PVC scrap material, a key input in our polymer-based decking boards and trim and one that will allow for continued progress towards our goal of utilizing 1 billion pounds of recycled material annually by the end of 2026.
Going forward, we will continue to invest organically and through M&A to achieve both our business and ESG objectives. We are committed to investing ahead of the curve to put ourselves in a position to drive growth and increased conversion in the market. As part of that focus, we continue to make progress against our new capacity adds in our core facilities and our Boise facility build out. We successfully commissioned additional decking capacity in our core facility in Ohio and these lines are currently in production.
As a reminder this combined with previous phases brings our total completed capacity adds to over 55% against our 2019 baseline. In our new Boise facility, our supply chain and operations teams have also done well to operate through a difficult environment since we have broken ground and we are on track on the build-out of the facility with our modular manufacturing processes. Boise is a strategic investment for the company and we will provide much needed capacity and flexibility and we are very excited by the additional opportunities that the Boise expansion will provide.
In total, our announced decking capacity additions will bring our total capacity increase to 100% versus a 2019 baseline. We also continued to be focused on expanding the depth and breadth of our team. We recently announced the appointment of Dan Boss as Senior Vice President of Research and Development. Dan is joining us from GAF industries and has a long career in R&D through positions of increasing responsibility and will be an asset to our organization as he assumes leadership of our R&D functions. He will be focused on introducing the next phase of AZEK in TimberTech products to our already strong portfolio.
Another key appointment to the AZEK management team is Sam Toole, as our Chief Marketing Officer. Sam joins AZEK from California Closets, where she served as CMO and drove significant growth by developing a multi-touch point marketing strategy increasing the use of digital tools and data and overseeing the production of award-winning content.
We are excited by the timing of Sam's arrival as we continue to drive our next phase of growth in wood conversion. She will draw on her collective and varied experiences to improve the customer journey and expand our consumer-driven growth engine. We are excited about the addition of these two strong world-class leaders whose skills and experience will complement the existing management team and enable our next phase of growth.
Turning to first quarter results, AZEK's net sales and adjusted EBITDA increased 22% and 21% respectively in the first quarter of 2022 over the same period in the prior year. Net sales in our residential segment increased 19% driven by a strong performance across our deck railing accessories and exteriors business.
As a reminder, we exited 2021 with an improved channel inventory position and our growth in the quarter reflected more normalized seasonal demand and inventory. Sell-through in this traditionally slower part of the season grew modestly year-over-year, and notably accelerated into the month of December. A particular source of strength was our decking business, which grew at higher rates than the company average.
As previously mentioned, our exteriors business also saw strong performance and continues to benefit from a concerted focus on new product development. Our rail business continues to operate through material and supply chain issues which constrained growth to low-single digits as previously anticipated. Net sales in our commercial segment saw a strong performance increasing by approximately 45% year-over-year due in part to the pricing actions and robust demand in comparison to an easier comparable period last year. We saw particular strength in certain markets including outdoor living, marine, industrial and semiconductor end markets.
As we transition to the outlook, I want to provide some context on our results and typical seasonality. AZEK's fiscal first and second quarters are generally considered to be stocking quarters in which distributors and dealers filled the channel with inventory in preparation for the start of the spring selling season.
We've had strong operational execution over the past few quarters and have successfully been able to support our dealers and distributors with increasing service levels. Our distributors and dealers now have the inventory on hand to aggressively drive growth in the market. This has put us in a terrific position to service our end customers, and to incrementally pick up share.
Heading into the balance of the fiscal year, underlying demand or sell-through will determine net sales. As mentioned earlier, we are excited by our progress through early buy and expect to see the benefits over the next few quarters. This combined with our ongoing investments and pricing set us up for another strong year. From a market perspective, we see continued favorable trends in our internal and external forward looking demand indicators. AZEK's total website traffic increased double digits year-over-year and overall increased over 50% over the same period in the prior year.
Externally, our contractor and dealer engagement surveys reflects continued optimism with persistent project backlog similar to prior quarters. Our confidence is underpinned by external demand indicators around repair and remodel activity continues interest in outdoor living and wood conversion accelerating over the past few years. In addition to these positive internal and external data points, we believe our focused strategy and consistent execution are continuing to drive success as witnessed by our strong performance in early buy.
Now I'll turn the call over to Pete to talk through the financials and guidance.
Thanks, Jesse, and good morning everyone.
Before we get into the first quarter results, I wanted to provide some color on the operating environment that we've been seeing in the last couple of months. As expected, we continue to see strong price realization from our pricing actions that took effect at the beginning of the first quarter.
On the material side, commodity prices have and as a general matter stabilized over the last three to four months. And our major commodities polyethylene seems to peak late in the summer and early fall, and it started to recede in the first quarter while PVC prices appear to be flattening out this winter.
Certain specialty materials remain challenge from both the pricing, as well as a supply perspective. We are optimistic that what we can see in the markets today supports the modest deflation assumptions that we adopted in our guidance. Our recycling strategy continues to be our defense against virgin supply challenges and serves as a natural buffer to inflation. Our capabilities to source, convert, validate, formulate and deployed recycled materials and our manufacturing processes for PVC products continues to be a differentiator for us.
Now let's discuss our first quarter '22 results in more detail. Overall, revenue was in line with expectations for the quarter, while margins were modestly better than expected given some inventory capitalization timing. We continue to see price realization offset material inflation dollars and start to get very close to offsetting rate as we expected in Q1 '22. For the first quarter of '22, we delivered net sales growth of 22% year-over-year to $259.7 million with strong and broad-based growth in both our residential and commercial segments.
Gross profit for the first quarter of '22 increased $15.6 million or approximately 21% to $88.6 million. Gross profit margin rates decreased to 34.1% in 1Q '22 compared to 34.4% in the prior year. Adjusted gross profit for the first quarter of '22 increased by $18.3 million or approximately 21% to $107.1 million. Adjusted gross profit margin percent decreased to 41.2% in 1Q '22 compared to 41.8% in the prior year. Selling and general administrative expenses increased by $9.7 million to $63.2 million or 24.3% of sales.
Adjusted EBITDA for the quarter increased by $10.1 million or up 28% to $58.5 billion adjusted EBITDA margin rates for the quarter declined 30 basis points, to 22.5% from 22.8% in the prior year. Net income increased by $6.6 million to $16.7 million for the quarter compared to $10.1 million for the same period last year.
Earnings per share increased by $0.04 per share to $0.11 for the quarter compared to $0.07 per share for the same period last year. Adjusted net income was $28.8 million or $0.18 per share for the first quarter compared to adjusted net income of $23.1 million or $0.15 per share a year ago.
Now turning to our segment results, residential segment, sales for the quarter increased by $35.5 million or approximately 19% to $221.1 million. The increase was primarily attributable to broad-based growth and deck railing accessories and exteriors growing at comparable rates.
Residential segment adjusted EBITDA for the quarter increased by $10.7 million or approximately 18% to $69.4 million. Commercial segment net sales for the quarter increased $11.9 million or 44.8% to $38.6 million. The increase was primarily attributable to higher net sales in both the Viacom and Scranton products businesses.
While each grew well in excess of the company average, we saw an acceleration of Viacom business with continued strength in outdoor living marine and semiconductor end markets continuing to trend from the prior quarter.
Commercial segment adjusted EBITDA for the quarter increased by $1.4 million or approximately 43% to $4.7 million. From a balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $66.1 million at approximately $146.7 million available for future borrowings under our credit facility.
Working capital, current assets minus current liabilities was $274.5 million. Gross debt as of 12/31/2021 was $467.7 million and our credit facility remains undrawn. Net debt was $401.6 million and our net leverage ratio stood at 1.4% at the end of the first quarter. Capital expenditures for the quarter reached $65 million, largely driven by timing of cash outflows related to the capacity expansion programs.
Net cash consumed and operating activities was $30.6 million during the quarter, versus net cash generated by operating activities of $20.3 million during the prior year. I want to provide some context to how we are viewing the second quarter in early view of the second half.
As Jesse noted, we believe the combination of healthier channel inventory levels, improved lead times and strong early buy participation positions us well for the upcoming season. We anticipate that supply chain and logistics environment remained unchanged through the first half of the year, and our teams are prepared to deal with that complexity as they have over the last several quarters.
Omicron did bring an added level of complexity to our business in supply chain in December and January, and we are appropriately managing through it. Commodity prices as we have mentioned have stabilized. Availability of major commodities is improving gradually and we expect that to continue.
The current environment supports our assumption of modest raw material deflation in the back half of this year. As detailed last quarter, we framed up the full year in two parts. The first half was slight margin dilution, followed by a stronger second half with margin accretion excluding the impact of StruXure.
We still see the first-half '22 coming in line with our expectations, and more importantly, we see organic business margin accretion in the second half of the fiscal year. As a reminder during first quarter '22, we had moderate start-up costs that drove 70 basis points of headwind into our reported margins. Finally, with our latest acquisition of structure, we are excited to have acquired such a strong growing business in an identified adjacency. The purchase price was $90 million and with revenue and cost synergies, we believe it will equate to a sub 10x multiple. The management team at StruXure is terrific, and they are incentivized to deliver for the combined company in the future years.
To that end, we believe this business will grow at or above our long-term residential growth rates, and we believe it has the ability to expand margins to approach our corporate average over time while providing a strong return on invested capital to our shareholders.
Now turning to our guidance, for full year fiscal '22, we now expect consolidated net sales to increase approximately 17% to 21% year-over-year including $40 million of structure related net sales contribution or 3 points of growth to fiscal '22. Inclusive of the start-up costs associated with our capital investment programs, we expect to deliver approximately 18% to 22% adjusted EBITDA growth year-over-year including nearly $5 million of structure-related EBITDA's contribution.
With the full-year EBITDA margin dilution impact from the structure acquisition of approximately 30 to 40 basis points for the second quarter of 2022, we expect consolidated net sales growth of approximately 24% to 27% year-over-year, including approximately $8 million of structure related net sales contribution. From an adjusted EBITDA perspective, which include start-up costs, we expect growth of approximately 17% to 20% year-over-year including approximately 50 basis points of structure-related EBITDA margin dilution impact.
The quarter also includes approximately $2 million of start-up expenses, which equates to approximately 50 basis points of our EBITDA margin. As a reminder, given seasonality and other factors, we expect the acquisitions will breakeven from a profitability perspective in the quarter, looking forward for the entire business and similar to our commentary at last quarter's call, we expect to see organic business leverage on our bottom line starting in the third quarter of 2022 accelerating throughout the second half of 2022.
To assist in modeling, we are reiterating our expectation of approximately $180 million to $200 million in capital expenditures for fiscal 2022. We continue to expect $21 million to $22 million of interest expense for the full year. Our tax rate for 2022 is estimated to be approximately 25%. Our full-year, weighted average diluted share count is expected to be approximately $157 million to $158 million shares.
I'll now turn it back to Jesse for some closing remarks.
Thanks, Pete.
AZEK has consistently outperformed over the last several of years through strong focus, agility and execution combined with relentless focus on our customers. We are building upon that momentum and remain excited about the long-term opportunities in front of us. We have invested ahead of demand in our position to increase market share through an innovative and differentiated product portfolio in best-in-class sales execution and a culture of continuous improvement. Combined with strong repair and remodel activity, sustained interest in outdoor living and an acceleration in wood conversion trends we believe we will deliver above-market sales growth and margin improvement. In other words, we believe we are well positioned to win for the long term.
Thanks again to all of our employees, our partners, our suppliers, our customers and our contractors. We look forward to continuing to work together to build a brighter future.
With that, operator, please open the lines for questions.
[Operator Instructions] Your first question comes from the line of Philip Ng with Jefferies. Your line is now open.
I was curious, have you announced any incremental price increases since October and November timeframe, essentially last quarter and stripping out some of the noise from the acquisition is the price cost, margin recovery, path tracking pretty much in line with what you thought appreciating it's a pretty complex environment to operate in.
Thanks Philip, this is Peter. Yes, I think our ratio on price versus inflation here as we look at the remainder of the year is entirely intact with how we guided. We still expect to see price realization covering all four quarters of inflation dollars and we expect here very late 2Q to start covering the rate and maintain that throughout the back half of the year.
As far as any additional price increases, we did take some very small, targeted increases as part of our year-end kind of price maintenance process, and really it was a - very select products, really those products impacted by the 4Q 2021 PVC increases that were a result of the hurricane Ida situation. So again, in total those price increases were very nominal compared to our 2021 price increases.
Got it that's really helpful. And what is this recent acquisition that you made on the recycling side, yes on the capabilities in terms of where you're going to shake out from a recycling goals standpoint. I think last quarter you were kind of 54% to 56% range, if I remember correctly. And any color how to think about the EBITDA contribution from this deal?
Yes, so I think first and foremost what this acquisition provides us is secure sourcing of the product. So this is a great avenue for us first and foremost, again to help get bringing in some high quality recycled PVC. Second thing is that it adds capacity and just material flow that we think over time, this acquisition increases our PVC recycling capacity and access the product by about approximately 20%.
As far as it impacts on 2022, the way we're thinking about it is we would expect a modest cost savings in 4Q 2022, but the bulk of this is really going to be a 2023 impact. And that's really just due to the formulation and validation work that we will be starting here this quarter and carrying over into the third quarter.
Okay, thanks a lot.
I think - the only I would add to that is, the addition of our new capacity has allowed us to return our focus on expanding our use of recycled materials. And so, we are now able to both service our customers and expand our formulation work, so we're not going to guide specifically, but we're in a really good position now as we look out over the next few quarters to continue to expand our use of recycled materials and obviously this is helpful.
Your next question comes from the line of Matthew Bouley with Barclays. Your line is now open.
Thank you for taking the questions and for all the detail in the prepared remarks, as always. So as that capacity has come online. It sounds like you've made real tangible progress in improving service levels and I'm hearing you correctly, your ability to target new customers is really crystallizing?
So, can you outline a little bit what that new customer opportunity is, are there any pricing implications from going after new customers and I guess specifically, if there's anything embedded in the revenue guide related to that? Thank you.
Well, clearly, the addition of capacity and improved service gives us an opportunity to make sure that we service our existing customer base and that's really provided a benefit and that we are now fully able to service current demand able to meet the demand that we've built out over a number of years. But as you pointed out, we're able to now incrementally take on additional business. Yes, so I would break it into really three different chunks.
The first one is, we've had opportunities to add to our dealer network, both in-depth at our existing dealers, but also add new dealers that really see the benefit of our differentiated product, we have had to constrain that over the last few years. We were more able to do that during this particular early buy season and as such we gained additional position. I think the second component is when you're constrained on capacity as we mentioned on the last call.
We haven't fully been able to launch our new products and specifically we called out in the prepared remarks, our Edge product line Prime Plus and Prime in addition to our Landmark product line in our more premium segment. Both those products have been constrained, even though they have been launched. We now have and ability to unconstrained that which will lead to natural growth.
And really the third bucket is really around, let's call it newer channels and expanding geographically and I'm not going to get into specifics there, but we do have additional opportunity over the long-term that we can now aggressively go after. So two buckets, where I can, provide some clarity and I'll leave you a little bit of fuzzy third bucket.
Okay well that's great detail there, Jesse, thank you for that. So I want to follow up on the acquisition of the PVC recycler, but maybe at a higher level. Obviously you did return polymers, a couple of years ago. I just think it's important to kind of lay this all out helping investors kind of understand what you're doing on the PVC side?
So can you kind of frame for us just the state of the PVC recycling market as it stands. And then just generally how your own efforts to do this internally will sort of expand that opportunity over time? Thank you.
Yes, just taking the recycle market at a high level. So if you look at, I mean we really get with two streams of recycle as you mentioned, one is on the polyethylene side and that is a relatively well-developed market whether it'd be high-density polyethylene or low-density polyethylene or the variance in between, so there is an established market. As we look at the PVC market, it is just a less established market.
There are less players able to use recycled PVC and as such there is an opportunity for us to continue to build out our own capability and build out our use of recycled PVC and it's just a less developed market, and in that environment, it's really important that we continue to build our own infrastructure to be able to access all of that material that's being landfilled.
And so it is really important for us that we continue to build our own internal capability to source, to process and to utilize increasing amounts of recycled PVC and this is just another step in that direction in addition to previously announced capital expansions that we have ongoing in our existing facilities and within return polymers.
Your next question comes from the line of Tim Wojs with Baird. Your line is open.
Maybe just on, back on the early buy programs, Jesse. I guess what drives a dealer stock inventory versus a competitor, is there availability at this point or is there payment term incentives. And I guess, just wondering with stocking conversion to best seem like you'll be able to kind of gain sell out share this year if that's the idea so I'm correct in assuming that?
Yes - any time. So let me answer that last question first. Obviously, being able to have access to more position in the market and more availability and more access to shelf space you would hope that that would convert to ongoing growth in the market, key execution point is not only getting on the shelf, but doing what we do and what we're most proud of which is working with our contractors, working with consumers to make sure they see the value of the product.
So that we can pull it off the shelf, but clearly it is a - in our mind, a positive step in the process of continuing to drive share against wood and other types of materials. Relative to the decision process, I think every one of our partners has a different set of criteria. Typically, these are reasonably sophisticated and well sophisticated companies. They want to make sure they partner with companies that have the ability to provide good service.
The ability to have a product that's going to sell and also the ability to continue to work with them to grow their business and I would say in a lot of cases, those are the major drivers, the combination of service, the right product and the ability to drive their growth in the marketplace for the long-term, and that's really - with our more realistic looking decking product in our better wood conversion exteriors products.
We are able to provide a better long-term value incrementally on the incentives we operate within a reasonable set of incentives to make sure that we're supporting long-term growth. But in general, we're not a price driven or incentive driven kind of a business. Our dealers are sophisticated enough to know that they're building something for the long term.
And then I guess just on the year around SG&A as a percentage of revenue how would you kind of balance that relative to maybe revenue growth and kind of maybe some increased brand spending as you kind of - increase that to as you layer in capacity.
Well, look, I think in the back half of the year, we will continue as we have through the first half to make strategic investments in sales and marketing, we are a growth company, and so that has stepped up a bit in the first quarter year-over-year, especially with a more normalized kind of TimberTech Championship event and again, as we see creating our own demand in the back half of the year. Marketing is going to be a focal point here throughout the year.
Okay. Could you get leverage.
Sorry. I'll just add, I think it's important for us to continue to support our growth and part of this is being appropriate on leverage, but a key part of it is also, we see opportunity, we're going to continue to invest against that opportunity as we're building this for the long term. I'm sorry, I cut you off there, Tim on your second question.
So, no, I was just wondering, would you be able to get. SG&A leverage this year, do you think it might grow just a little faster than sales.
Yes, I mean historically we've found articulated the ambition that in most years, we'd like to see ourselves get modest SG&A leverage Okay that's not stock going to be. Every quarter, but as a year that's kind of our ambition.
Your next question comes from the line of Michael Rehaut with JP Morgan. Your line is now open.
Hi, this is Maggie on for Mike. First, just a couple questions related to the capacity expansion. I believe you said in 1Q start-up costs were 70 bps headwind and there it's expected it 50 bps in 2Q, so that as you go through this year, what is your full year guidance contemplating in terms of start-up costs.
Yes, so let me take.
Yes, go ahead.
Yes, as we kind articulated on the full year guidance call, we're looking at $8 million to $10 million. I think that's still the right range for the full year, which sort of implies that dilution range of kind of call it 50 to 70 basis points.
Got it, and second, another quick one. As the capacity comes online, you mentioned three buckets of kind of sales growth opportunities and he third fuzzy that you didn't want to get into or it's newer channels and expanding geographically. Do you have any sort of a timeframe on when you might start exploring those opportunities, more.
Yes, you know, I think the key for us is if you look at our portfolio of growth actions. downstream sales and marketing continue to expand our channel, new products, and acquisitions. You know that portfolio of actions on growth is just something we are continually working on, and I just want to highlight a lot of what we do may seem transactional, but even in the situation where we had some positive early by wins we've been working with those accounts for a couple of years and in some cases, multiple years, do I think the way to think of our growth scenarios is we do things continually and we're doing things over the long haul, and in those buckets, I talked about.
So it's an ongoing process, and as we have this additional capacity, we can execute against it and that's something I referred to on the last call.
Your next question comes from the line of Ryan Merkel with William Blair. Your line is now open.
Thanks and good morning, Jesse. First off, I was hoping you could address two concerns that investors have potential for pull forward demand just given everyone rush to do back living. And then also higher prices if there's going to be any impact on demand from that, any evidence, what's your view?
Yes know as we've looked at our, as we've looked at our leading indicators, and our activity in the market, there has been really nice consistent activity and growth, and as we talked about during the calls over the last 18 months, we do believe that as people continue to use our types of materials. So, take decking as an example. As they focus on outdoor living, they continue to expand the use of our types of materials.
What you see is that material on the ground leads to other people trying to being aware of that material and using that material and it gets back to that neighborhood effect, right? Someone in your neighborhood has installed our product, we've got a beautiful TimberTech deck, the perception historically may have been compositive, looked that good, neighbors come over and they start then moving in that direction.
So clearly the activity that we've seen during the pandemic has led to a greater interest and we see that as an opportunity as basically additional locations that can drive additional growth. I think some of the volatility that you're going to see in some of the numbers quarter-to-quarter across our industry has much to do with channel fill and I think if you peel back the underlying demand you would see pretty strong consistent demand quarter-to-quarter and as we project moving forward, we continue to assume that kind of activity will continue and I forgot your second question, I'm sorry.
Just higher prices, have you seen that impact demand maybe even for PVC, since it's such a high-end product, any risk there?
Yes, we, as we looked at our activity in the marketplace and we got a lot of analytics related to our value in-market of our products. We continue to see a great value proposition in each of the categories that we play given the pricing that we have and we continue to see that play out. We have not seen a slowdown of momentum. And just as a reminder, if you go to our investor deck, you can see on a relative basis. The cost of our types of material on a deck or a small part of the overall cost of the deck and we have multiple pricing options depending on where our consumers are.
I think the other key thing for us, we've got such great-looking products that we do tend to skew a little bit more to a less price sensitive consumers, especially as you're looking at the price over the long term and we see a similar opportunity as we're driving wood penetration and wood conversion in our exteriors business.
Got it. That's helpful. All right. And then a quick follow-up, I know guidance for the year assumes high single-digit volume growth. My question is, it sell through a stronger do you have the capacity to deliver upside to that high single-digit, it sounds like yes, but I just want to confirm.
Yes. Yes, I mean our capacity right now, we are now and we mentioned this on the last call that that was going to be the case. With the additional capacity that we have brought online in our fiscal first quarter, we now have the ability to meet and exceed production against what we see as our future demand profile and we have additional capacity coming online. So, we are very much in a position where - which is where we said we wanted to be where we can service meaningfully larger volumes for this year and certainly into next year.
Your next question comes from the line of Susan Maklari with Goldman Sachs. Your line is now open.
Thank you. Good morning, everyone. My first question. Obviously, there's been a lot of sort of uncertainty around the housing market in general as we face the potential for a rising rate environment. Can you talk about the ability to continue to drive growth, even if the housing complex does change and I guess with that any commentary on how most consumers tend to fund these projects and what is the role of then having to perhaps borrow against the house or other methods of them sort of financing these things.
Yes, you know on that - on the latter comment. We typically don't see our consumers, and this is paid, it's hard to get exact data, but on the data that we have, we typically don't see consumers financing our types of repair and remodel projects. Drawing on the equity of their homes and then relative to the macro environment, on a relative basis, and you're going to hear this probably from a number of building products and homebuilder CEOs and earnings call, on a relative basis, we still see incredible strength in this particular segment.
If you look at the dynamics of the interest rate environment we're in., it is still at historically low levels, we see a historically low level of inventory on the market, we see really strong housing values and we continue to see the demographic dynamics of more homeowners coming into the market, and for the foreseeable future from what we can see from the data we are the housing sector in the repair and remodel sector is in a nice position to continue focus and growth in the future and I think more specifically, at our sector you're dealing with a increased focus on outdoor living and you're also dealing with the opportunity that we have that I mentioned on the call that we will talk about probably on every call, which is, there is a lot of sales right now in products that should be our types of products, right?
We continue to see an opportunity to convert would in all of our products and convert other types of materials and so against that backdrop there is certainly interest rate noise, but we continue to see a multi-year opportunity here with the combination of the macro environment. And then our more specific environment, which is driven by material conversion new products and a focus on outdoor living.
Okay, that's very helpful color. Thank you. And then following up, you talked a lot about the exteriors business in your commentary, Can you give us a little bit more color on your ability to service that market and how you're thinking about the future growth rates there in any other sort of upcoming initiatives that we should be aware of or thinking of.
Yes, we're - we're really excited by what we've been able to do in that business. As a reminder, in that particular business. We have two major brands AZEK and Versatex and both of those brands, bring innovation to market and that innovation is it's really driven around driving contractor productivity and driven around providing a great alternative to wood and if you think about all the aging of the home, yes, it's that the paint peeling on your Trim that could be, some of the most annoying in the pay tailing on the outside of the house and we have solutions that drive contractor productivity and at the same time, provide a terrific consumer benefit.
So against that, we continue to invest in new products, we continue to invest in channel expansion and we continue to invest in our downstream sales and marketing efforts with not only with consumers, but the other elements of the chain, and as I pointed out in my prepared remarks, we're really seeing benefits of that once people get used to using our types of materials in new geographies, they tend to it's not a one-time purchase, they tend to use that material and then they tend to expand the use of that material and so we're excited by the beachheads that we need to establish over the last year and expect to continue to establish relative to specific growth rate.
We haven't guided on that particular business outside of our deck rail and accessories business and now our Hercules business, but we are where we view that the growth opportunities are similar in all of our outdoor living and residential businesses.
Your next question comes from the line of Ketan Mamtora with BMO Capital Markets. Your line is now open.
Good morning and thanks for taking my question. Just a first question on the structure acquisition, you kind of what makes this an attractive category as you guys look at the broader outdoor living space and maybe talk about the material conversion opportunity that's in front of you, when you look at sort of the, the pergolas and the cabanas business and even the, so the multi-year margin improvement runway.
Yes, I'll take the market, and I'll have Pete touch upon what we've done with other acquisitions in the margin progression there. So the way to think of it and what got us our project on for this particular acquisition was called Project Scott and I think it's apropos right. So right now we produce effectively and outdoor decking product, which is the flooring we've got an exteriors product, which let's call it the walls of an outdoor living space.
And as we continue to look at framing outdoor spaces, as you know from our creating an outdoor room a Pergola is a natural kind of demarcation and what structure really is about is creating comfort in outdoor living spaces. Right. It's got to - system it can let the Sun in when it's sunny it can louver to protect from the elements, if it's raining and what it does is, it's a natural step to creating comfort in the outdoor area and it's extremely complementary to what we have now, we have some custom Pergolas and so on, that are, that are out there right now, but this really gives us scale in that market.
And as you think about the long-term conversion opportunity, most Pergolas right now are constructed in a what we call, stick-built way. Right, it's fabricating products whether it's out of aluminum or out of wood and in some cases also lot of out of AZEK adverse effect, but it's really a fabricated process whereas what structure is doing. it is really it's making that process much more efficient and in their higher end products, making it more customizable and as we move to some of the other products will show at the Builder Show, it's more of a standard solution that can quickly be assembled onsite.
And so as we highlighted, we view the opportunity of really creating these outdoor overhead hurdle in cabanas as a growing trend. Think about think about houses, how much time we spend outdoors. Think about the other spaces that are out there in the commercial businesses, we view this as a $1 billion market opportunity and we also view the opportunity to create a lot of synergy with what we're already doing and what they can do and I think the other thing, this presents us is, as I mentioned on the call, their products also go down on hardscapes.
And so it allows us to get at certain geographies where there may not be a deck on the ground, but certainly they need some of the other aspects of what we can provide. So, and relative to the margin structure. I'll turn it over to Pete for just a couple of quick comments there.
Yes. Thanks, Stephen, ultimately look the margin expansion story for structure is very similar to AZEK. The levers that we see pulling it out as a team together, I'd put in a couple of buckets. First and foremost growth. We feel like we can accelerate an already fast growing business given our strength in the channel on our contracting partners, so certainly helping you with just leverage with faster growth. Second bucket, I would call sourcing as we know we've got a meaningful aluminum rail business ourselves when we look at the synergies together and purchasing power.
I think there is a way for us to buy more efficiently and effectively on a combined basis, third one is just. I think our ability to kind of drive some of the - Kind of toolbox, and so the structure business. I think it's going to help them drive more productivity and probably overall just stronger throughput in a way that they support their growth looking forward.
And then the last bucket. I would kind of say is, again, very similar to AZEK in this pricing flash commodity situation or the structural opportunity with margins, but the structure team is priced for value in the pergola space and as aluminum sits you're at historically very high prices when it recedes we see that same opportunity that we have on PVC that their pricing is going to be pretty sticky and they should have an opportunity again to kind of more meaningfully change their margin structure.
Your next question comes from the line of John Lovallo with UBS. Your line is now open.
Good morning everyone and thank you for taking my questions. The first one and maybe for you, Pete is can you quantify how much polyethylene deflation you experienced on a quarter-over-quarter basis and then how does this compare to what's embedded in the full-year outlook.
Yes, as we mentioned, we're not expecting a lot of deflation in the second quarter. That's kind of what most of the indexes project and that's kind of what we see as far as what we're anticipating seeing in the back half of the year, I can call it net debt, very similar to what we expected at the beginning of the year with our guidance, I would kind of say if there is anything that's modestly different.
I would say it's probably the slope on polyethylene deflation is probably a little slower, but there's probably an opportunity for modestly more PVC, but net, those were about a wash, as we think about the business. So again, I'd leave you with the takeaway of what we can see in front of us here, entering the second quarter I think supports the modest deflation that we've assumed in our guidance.
Okay. Maybe just a follow-up on that if we were to assume that polyethylene and PVC declined by, call it 10% from today's levels. How much would that benefit the second half margins.
Yes, I mean it's a good opportunity here for me to educate folks on when we think about our balance sheet lag as a business. Let's start there, so from a material perspective a rollback typically is three to four months and typically this time of year with inventory being a little bit elevated it's closer to the four months, we're labor and overhead tends to be pretty constant throughout the cycle, what about two months. So what that really implies is that ultimately if we see commodity prices dropped more steeply, but it comes after like let's say the middle of May.
It's very difficult for us to really recognize are seeing any impact in our '22 results, it just becomes upside for 2023.
Your next question comes from the line of Trey Grooms with Stephens. Your line is now open.
Thank you for taking my questions. So you just, I guess the first thing is on the supply chain issues out there. On the brought some challenges, you mentioned in December and January, are you seeing any changes in that they are you anticipating any change in the 2Q guide.
So I think embedded in our second quarter guide is the fact that again some of the favorability in 1Q was sort of timing that works its way through in the second quarter and that we see the first half of '22 kind expectations exactly where we expected. So, on Micron was definitely disrupted but look the last year and a half the two years very disruptive from a supply chain perspective.
So, we've said on previous calls teams have really done a nice job continuing demand, it's sure no matter what the environment is and so we think we're well prepared from our own visibility here in January or as we get to the first week of February, it feels like from an absentee perspective, most of our - of the varying impacts on of Crest wood in the third week of January, and we're starting to now see that taper off so long so we think the worst of it is behind us and we're optimistic about the second quarter.
Yes, if I would just stress. I would just stress, it's our team we try not to use too many superlatives right and because we're doing our jobs. But I think the team has done a remarkable job of managing through the volatility to the point that we're not talking about it much on the call. There has clearly been a lot of moving parts relative to things like labor supply chain, all of those elements, but we've been able to manage that within the operating cadence of the business such that we continue to service customers uninterrupted, we continue to deliver against our financial objectives and it really is an outcome of some really, really strong operational management and also planning for - planning for the volatility, which I think the team has done a nice job.
Great, thanks for that Jessie and I guess earlier and I dropped off the call. So, apologies if you touched on this, but I think you mentioned sell through grew modestly and accelerated through December, did that acceleration continue through January or what did you see there. And then the full year guide assumes high single-digit volume growth, what is that for assumption for 2Q, if you could?
Yes, I would just say at a high level relative to sell through, as you know, you've been around this industry, but we're in the low season where there is still clearly activity, we still see strong backlogs. We still see contractors needing to work and we still see consistent sell through, we're not going to get into specifics on either the quarter or what we see beyond what we've disclosed except to say that there's nothing inconsistent that we're seeing now with our expectations.
And we feel pretty good about our ability, once we get into the fall season to continue to meet our growth objectives and we're confident in our ability to achieve our guide overall. We're not going to parse kind of the volume or anything specific sell through, especially at this time of the year. As you might imagine there's day-to-day volatility just based on the snow melted or the snow fell, but in general, it's been good.
I understand. And I just wanted to touch on it, because I thought it interesting, given the time a year that it actually accelerated to December given that it is a seasonally kind of cold, wet and holidays and that type of thing so anyway, just wanted to touch on it, but, thanks again for taking my questions and good luck.
Yes I mean, it probably - it is, much I think we're going to move to a more normalized conversation about the month-to-month sell through, which will be a mix of kind of backlog and weather and all those other normal things at, at this time of the year. And so, clearly, we've had a backlog, so that we expect to continue.
Your next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is now open.
Thanks for letting me in. I have a couple of follow-up questions around StruXure and M&A or adjacencies in general. The first question kind of multi-part, and Jessie, can you talk more about StruXures go-to-market, what their channel exposure is like. And when you look at your customer base, your dealers or retailers?
What percentage of your customers are ready-stock some sort of product like this and maybe could you also tie what the capacity is currently for StruXure and do you need to make additional investments there?
So let me start just at a high level StruXure's products are products that are delivered to people that install the product. And so the nature of a lot of the business is, the product is specified by someone who is going to install it. The orders then go through and the product is delivered, and in some cases, you're using standard components. And so, those products are inventoried by the installer.
And so at a high level where we see the current synergy is, a number of our contractors, our StruXure installers, right. So they will produce or they will source our types of products through the normal channel that work directly with StruXure to add those kinds of products delivered. So, and then there is another set of folks that are StruXure dealers and installers. If you go to the website, you can interact with one of them.
They will come out, give you a quote and do a really nice job of installing the product. So, that's its current state, I think without getting too specific as we move forward, there is an opportunity to really expand our position and StruXure's position, especially with that contractor base - that contractor base in many cases our contractor base which is tens of thousands in many cases might just be - using or building their own or designing their own or needing a product like StruXure.
So, we see an opportunity from a synergy standpoint to continue to build out those points of deployment leveraging our current network and working together with StruXure's current network. And there is, I won't get into specifics, but there is a portfolio difference there is - other implications relative to how we do that. But over the long-term, there is clearly opportunity there, and I'll just - Pete, I'll just take the capacity comment very high level on StruXure.
StruXure has it's certainly at this point full. There is an opportunity to work with the StruXure team to continue to increase throughput, continue to reduce lead times, continue to expand their ability to meet market demand and in some cases, that might be modest capital, but in a lot of cases it's just debottlenecking their current process. And so, we see a great opportunity as a combined entity to not only get synergy on the margin side that Pete talked about through sourcing and working through our AIMS program.
But we also see an opportunity to scale their production capability to better meet the needs of customers, some of that has to do with just capital deployment, what I mean working capital. Some of that has to do which naturally we have a greater ability to do, and some of that just has to do with continuing to invest in debottlenecking and improving their processes.
Okay that's really helpful. And then my second question or follow-up a little bit more holistically, you do have the aluminum rail business. But this is an acquisition that kind of takes you further into additional material conversion, when you're getting into metals and aluminum. When you look around the backyard of a house or the exterior of the house?
There is still a lot of different verticals that would be potential for material conversion, how do you think about the broader opportunity, and at this point in your lifecycle, kind of, how aggressive which you'd be willing to go after further and maybe larger acquisitions in some of these adjacencies?
We really like our business model. We like the opportunity for differentiated products that are where we can get paid for the value that we add. We like the opportunity for material replacement. We like the opportunity with the focus on outdoor living and that secular growth trend and clearly at the StruXure acquisition highlights. We also like the opportunity to continue to expand our position there.
We are comfortable already with the three material sets that we talked about polyethylene PVC and alumina. This just builds on that and to your point over the long-term we continue to see opportunities to be more relevant in that outdoor space. But we're going to want to stick to the gross margin, branded, price, profile that we've had, and as we navigate through that, we'll selectively look at acquisitions that meet those criteria.
And I think as I've said, prior to these most recent two acquisitions if you look at what we have acquired in the past, we're now at five acquisitions. In the last few years, it's probably indicative of the kinds of things we would look at in the future. And we just see a huge runway in a huge opportunity to become the player as we look at driving growth in our market segment.
This concludes the question-and-answer session. I will now turn the call back over to Jesse Singh.
Really appreciate all of you taking the time to join us today, and as always, feel free to follow-up with additional questions. And for those of you that will be at the Builder's Show, we will have a nice outdoor living area for you to come spend some time with us. So, thanks again for your time and have a great day.
This concludes today's conference call. Thank you for attending. You may now disconnect.