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The AZEK Company Inc. (AZEK) Q1 2021 Earnings Call Transcript

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AZEK earnings call for the period ending December 31, 2020.

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The AZEK Company Inc. (AZEK 3.88%)
Q1 2021 Earnings Call
Feb 11, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the AZEK Company Q1 2021 earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker today, Jon Skelly, SVP of strategy and execution. Thank you. Please go ahead.

Jon Skelly -- Senior Vice President of Strategy and Execution

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; Ralph Nicoletti, our chief financial officer; Greg Jorgensen, our chief accounting officer; and Amanda Cimaglia, our vice president of ESG.

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 quarter of fiscal 2021 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 in our GAAP and adjusted gross profit to gross profit calculated in our GAAP, as well as reconciliations for other non-GAAP measures discussed on this call can be found in our earnings release, which is posted to our website, and will be included in our Form 10-Q for our first fiscal quarter of fiscal year 2021.

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

Jesse Singh -- Chief Executive Officer

Good morning. I'd like to welcome everyone who has joined today's call. We are off to a strong start to our fiscal 2021, building off the momentum we saw both pre-pandemic and as we exited 2020. Our results this quarter were driven by robust end-market demand for our products in our residential segment, operational execution on our capacity expansion and recycling plants and downstream sales investments.

Given the last few months, we continue to remain confident about the future, the strength of our business model and our ability to drive value in various market environments. We also remain committed to making a positive contribution to society and expanding our recycling capabilities to further divert waste from landfills. Consistent with that commitment, we are announcing today a goal of utilizing 1 billion pounds of recycled scrap and waste annually in the manufacturing of our products by the end of 2026. This is an ambitious target that builds upon the 400 million pounds of scrap waste that AZEK diverted from landfills in fiscal 2020 and highlights our ongoing commitment to ESG and sustainability.

Achieving 1 billion pounds of recycled consumption will be a guidepost for us and drive our future behavior, including the ongoing reengineering of our current product portfolio and the launching of new products that use an increased amount of recycled material content. In many cases, these steps have the added benefit of reducing our cost position. We believe that we can revolutionize outdoor living by building a more sustainable future. We continue to make progress executing our strategy and key initiatives.

We have been investing in our core strengths of brand, manufacturing, R&D and customer connection, and we remain focused on our key initiatives to achieve our long-term performance objectives: growth through innovation, margin expansion through recycle and continuous improvement, and positively impacting the world through our commitments to ESG stewardship. First, we have multiple levers to drive above-market growth and accelerate material conversion, including investing in new products and leveraging downstream-focused sales and marketing teams. We are making meaningful progress on these levers and see continued growth in our internal leading indicators. As part of our innovation pipeline, we recently announced the launch of our exciting new TimberTech AZEK Landmark Collection, which is the latest extension of our premium cap polymer decking and leverages advanced technology to create the most natural-looking in-demand look of rustic, reclaimed wood.

We also announced new railing products to complement our high-performance decking, including new top rail options for TimberTech Impression Rail Express and new aluminum baluster options for TimberTech Radiance Rail Express. Second, as part of our focus on sustainability and margin expansion, we have made great progress with our recycling initiatives. During the quarter, we brought our third polyethylene recycling line into production in Wilmington. Our Azek AZEK FULL-CIRCLE PVC collection and recycling program, which launched in November 2020, continues to gain in momentum, and we are honored to have been recently recognized for the program as a 2021 Green Innovation of the Year Award winner by Green Builder Media.

Third, we continue to make significant progress in improving our social and environmental impact and corporate governance. Our core value of always do the right thing serves as the guiding principle of our culture and commitments to environmental, social and governance excellence. It's part of our corporate DNA. We are building the AZEK Company in a way that drives long-term value creation for all stakeholders.

And as such, our business and sustainability objectives are highly complementary. We are excited to have recently brought on Amanda Cimaglia as Vice President of ESG. With this newly created role, our goal is to formalize and further accelerate the implementation of ESG programs throughout the organization and across key stakeholders. We will soon be releasing our inaugural ESG report, which will contain more details on our performance and targets.

In many ways, we view this just as the start of our journey. Put simply, we not only look at the FULL-CIRCLE, we bring things full circle, and we believe we are uniquely positioned to pursue sustainability initiatives that positively impact our products, our people and our planet. Finally, we continue to invest in our core brand manufacturing, R&D and customer connection strengths. We have made significant progress against our capacity expansion, which will be detailed later in the call.

These strengths serve as the foundation of our differentiated business model, and we continue to see opportunity arising from our ongoing investments. As we continue to operate through the pandemic and the early innings of as a public company, our recent success and track record serves as evidence of the attractive market opportunity and our ability to enhance our growth drivers through conversion and product innovation, along with operational excellence and margin execution. Turning to our first-quarter results. We delivered strong sales and adjusted EBITDA growth.

Our residential business grew 37% compared to the first quarter a year ago while our commercial segment declined approximately 12%. Adjusted EBITDA grew 43% year over year, and adjusted EBITDA margin expanded 240 basis points over the same period. As a reminder, our fiscal Q1 is a seasonally smaller net sales quarter where we traditionally build internal inventory in our residential business to service future quarters. The strong trends that we saw in the second half of fiscal 2020 continued throughout the first quarter as consumers remain focused on improving and investing in their homes, and channel demand remained robust, driven by strong end demand and lower-than-normal inventory levels.

Our adjusted EBITDA margins benefited in the quarter from the higher rate of sales, operational excellence and carryover from 2020 pricing, partially offset by start-up costs related to our capacity expansion. Within our residential business, we experienced strong demand through the first quarter. Repair and remodel and new construction benefited from favorable tailwinds, and both the pro and retail channels saw significant growth this quarter. Sales within our exteriors business grew over 20% year over year, and our deck, rail and accessories business grew over 40% year over year.

We saw strong sell-through and demand was broad-based across our residential product portfolio, including our 2020 product launches like TimberTech PRO Reserve and EDGE Prime+. Inventory days in the channel improved exiting the quarter but remained below typical levels. While inventory in the channel is not where we would like it to be based on historical benchmarks, we are doing a better job at servicing our customers and getting them the right inventory. We continue to improve internal and channel inventory levels ahead of the prime deck building season that typically starts in the spring.

And we are working with our channel partners to ensure we have the right inventory at the right time in the right geographies. Our investments in digital, branding and improving the overall customer experience continue to drive strong returns. Key demand metrics we track, such as website sessions and sample orders, all saw strong growth in Q1 relative to the same period last year. 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 improvement 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 calendar year 2021. As a reminder, this business tends to track more closely to GDP and the broader economy. Our commercial business product portfolio includes high privacy bathroom partitions and barrier products with important antimicrobial and antiviral features 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 navigating the difficult macro backdrop.

And while we still see some near-term challenges on this front, we continue to expect to see some stabilization in the back half of fiscal 2021. Though, as you can imagine, certain end markets won't fully recover until the economy has fully reopened. 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 and include the expansion of manufacturing capacity, the increased use of recycled raw materials and the execution of our continuous improvement programs.

On the capacity front, we are encouraged by our early success with our capacity expansion program. Favorable operational execution led to the first phase of our capacity expansion plan coming online faster than planned during the quarter. Despite the sustained level of demand, we saw during the quarter, we are improving our ability to more fully meet total market demand and made progress on service levels during the quarter. We expect gradual continued improvement as new phase two capacity is on track to come online by the end of the third quarter of fiscal 2021 and we continue to evaluate opportunities to accelerate the third phase of our capacity expansion program.

As a reminder, the strategic capacity expansion plan includes an incremental decking production capacity of approximately 70% relative to the end of fiscal 2019, and a new manufacturing facility in the western part of the U.S. over the next 12 to 18 months. This is a multiphase investment that is modular and flexible and, importantly, will allow us to position ourselves for ongoing growth and market penetration. The growth from these investments, coupled with our recycle and continuous improvement initiatives, give us long-term confidence that we will continue to expand our adjusted EBITDA margins.

As you recall from our last update, during the 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 that went into effect at the beginning of the calendar year. During our fiscal second quarter, we have continued to experience incremental inflationary pressure in raw material pricing, particularly on the resin side, as well as inflationary pressures on the labor front. As such, we recently took action and implemented an additional price increase in the low single-digit range that will begin flowing through in late fiscal Q3 to offset this increased inflationary pressure. Now, turning to our outlook.

We are raising our net sales and adjusted EBITDA growth guidance for fiscal year 2021. As previously discussed, our outlook is fundamentally driven by a number of internal and external variables. We continue to see positive signs in our internal digital and website metrics, sample order activity, as well as dealer and contractor survey checks. The macroeconomic indicators that most highly correlate to our business such as repair and remodel activity and new housing construction activity, also continued to show positive signs.

This is balanced against the continued uncertainty in the overall economic environment. As we look ahead to the remainder of our fiscal 2021, we are increasingly confident in our outlook as steady demand continues across our residential segment. We have improved visibility on channel inventory levels, our pricing action and downstream demand from our preseason or early buy program. Taken together, this data and our more near-term visibility are the drivers behind our increased outlook for the fiscal year.

In summary, we are well positioned as a company to continue to perform strongly and remain optimistic about the opportunity that lies ahead. We play in growing markets, operate leading brands with category leadership and have multiple levers to drive growth and margin expansion, combined with a strong balance sheet. We are in the early innings of our multiyear value-creation strategy. With that, I'd like to turn the call over to Ralph, who will discuss our financial results and outlook in greater detail.

Ralph Nicoletti -- Chief Financial Officer

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 December 31, 2019. For the first fiscal quarter of 2021, net sales increased by $46.2 million, or 28%, to $212.3 million. The increase was primarily driven by sales growth in our residential segment, aided by favorable operational execution as the first phase of our capacity expansion plan came online faster than planned during the quarter.

For the first quarter, net sales for our residential segment increased by 37% year over year, driven by deck, rail and accessories growth of over 40% and exteriors growth of over 20%. Within deck, rail and accessories, we estimate consumer and contractor demand drove approximately three-quarters of the growth with the balance being attributable to rebuilding inventory in the distribution and dealer channels. Residential segment growth was partially offset by a decrease in our commercial segment of 12% year over year. Gross profit for the first quarter of fiscal 2021 increased by $21.7 million, or 42.3%, to $73 million.

Adjusted gross profit for the first quarter of fiscal 2021 increased by $22.3 million, or 34%, to $88.8 million. Adjusted gross profit margin was 41.8%, an increase of approximately 180 basis points compared to the prior-year period. The increase in adjusted gross profit was driven by higher residential segment sales, carryover pricing from 2020 and manufacturing productivity, partially offset by start-up costs related to our capacity expansion program. In the first quarter, we experienced a modest cost inflation impact and expect higher raw material prices will flow through our P&L in subsequent quarters.

Raw material prices have continued to increase further during our fiscal second quarter. And as Jesse noted, we have taken additional actions to offset the impact, including the recently announced incremental price increase. Selling, general and administrative expenses increased by $9.6 million to $53 million, or 25% of net sales for the first quarter of fiscal 2021. The increase was primarily driven by higher stock-based compensation expense, ongoing public company expenses and personnel costs.

Net income in the first quarter increased by $20 million to a net income of $10.2 million compared to a net loss of $9.8 million for the three months ended December 31, 2019, primarily due to higher net sales and lower interest expense. Adjusted net income was $23 million, or $0.15 a share for the first quarter of fiscal 2021 compared to adjusted net income of $3.6 million, or $0.03 a share a year ago. Adjusted EBITDA for the first quarter of fiscal 2021 increased by $14.6 million, or 43%, to $48.5 million. Adjusted EBITDA margin expanded 240 basis points to 22.8% from 20.4% a year ago.

Now, turning to more detail on our segment results. Residential segment net sales for the first quarter of fiscal 2021 increased by $50 million, or 37%, to $185.6 million. Residential segment adjusted EBITDA for the first quarter increased by $19.9 million, or 51%, to $58.8 million. The increase was mainly driven by higher sales and gross profit margin, partially offset by higher selling and general administrative expenses.

Commercial segment net sales for the first quarter of fiscal 2021 decreased by $3.7 million or 12% to $26.6 million. The decrease was primarily attributable to declining sales in our Scranton Products and Vycom businesses as the effects of COVID-19 continued to impact certain end markets. Commercial segment adjusted EBITDA for the first quarter was $3.3 million. The $300,000 increase year over year was primarily driven by lower manufacturing and selling, general and administrative expenses, offset by declining sales.

The steps the team took in the second half of last year to lower operating costs given the revenue challenges are starting to benefit the segment margin profile. Looking at our balance sheet and cash flow. As of December 31, 2020, we had cash and cash equivalents of $210 million and approximately $143.3 million available for future borrowings under our revolving credit facility. Total debt as of December 31, 2020, was $463.3 million, and we have not drawn on our revolving credit facility.

Our net leverage ratio stood at 1.1 times at the end of fiscal Q1. And notably, in early February, we refinanced the entire balance of our term loan, and we're able to realize over 100 basis points of interest rate savings. Net cash provided by operating activities was $20.1 million for the three months ended December 31, 2020. Turning to our outlook.

Our outlook is based on continued solid demand within our residential segment. We remain encouraged by our strong demand trends, including internal signals like web traffic, digital engagement and sample orders growth, as well as external demand signals, such as housing starts and repair and remodeling activity. To set some context, our second fiscal quarter is historically one where inventory is manufactured and positioned in the channel ahead of the building season. However, we expect this staging to extend more into the third fiscal quarter given demand and production dynamics this fiscal year.

For the fiscal second quarter, we expect total company net sales growth to be in the range of 13 to 15% year over year, with the residential segment growing in the high-teens range and adjusted EBITDA growth in the 18 to 22% range. For the full-year fiscal 2021, we expect total company net sales to increase 14 to 18% year over year and adjusted EBITDA growth in the 19% to 23% range year over year. This results in continued adjusted EBITDA margin improvement as additional costs, including start-up from our capacity expansion, incremental raw material and labor inflation, a normalization of marketing and SG&A expenses and costs of being the public company are more than offset with pricing and manufacturing cost savings from recycle initiatives. From a segment perspective, based on our leading indicators, we expect full-year residential segment net sales growth in the range of 17 to 21% year over year.

This outlook reflects the visibility we have for the next three to six months and recognizes continued macro uncertainty and the strong performance we saw in the first fiscal quarter of 2021 and in the second half of fiscal 2020. This outlook also assumes some channel inventory refilling for the full year. 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 a mid-single-digit rate year over year, consistent with our prior outlook. We continue to expect total capital expenditures to be in the 125 to $135 million range as we work through our capacity program, primarily in decking, and we continue to evaluate opportunities to accelerate the third phase of our capacity expansion program.

To assist in modeling, we expect approximately 21 to $22 million of interest expense for the full year of 2021, and our tax rate for 2021 is now estimated to be approximately 25%, and our full-year weighted average diluted share count is estimated to be approximately 157 million shares. I'll now turn the call back to Jesse for some closing remarks.

Jesse Singh -- Chief Executive Officer

Thank you, Ralph. I'd like to recognize our team, including Ralph and Jon, for their continued leadership in our response to the pandemic and its impact. Consistent with our core value of always 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.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Susan Maklari with Goldman Sachs. Your line is now open.

Susan Maklari -- Goldman Sachs -- Analyst

Thank you. Good morning. My first question is around just thinking about -- you've now announced two price increases over the last couple of quarters in there. Are you seeing any pull-forward of demand in the prebuy? And could that perhaps have any implications as we think about the seasonality as we move through the rest of this year?

Ralph Nicoletti -- Chief Financial Officer

Hi, Susan. Good morning. It's Ralph.

Jesse Singh -- Chief Executive Officer

Yeah. Go ahead, Ralph.

Ralph Nicoletti -- Chief Financial Officer

Yeah. Just as it relates to the price increase, we planned that and set the timing of orders and effective dates so that there isn't any pull-forward that's, in any material way, influencing the results. So I think as you look at our guidance and what we saw in the first quarter too, no real effect from pricing. And of course, as we've said before, the capacity relative to demand situation is tight.

So we had to take all that into consideration when we set the dates.

Jesse Singh -- Chief Executive Officer

Yeah. Our demand right now, and as you look at the the demand pattern that we have, is really driven by optimizing service at this point and making sure that we have the right inventory position with the right players at the right time. And as such, the pricing, and really, any other factors are less prevalent this year than they might be as we consider past years.

Susan Maklari -- Goldman Sachs -- Analyst

OK. That's helpful. And then, my next question is, you talked to the fact that your capacity. Some of your capacity came online a little sooner than you had expected in the quarter.

As we think about you're continuing to add some lines in there, how should we think about that flowing through as we move through the next couple of quarters? And is there the potential that we could see that coming online a little faster as well? And how does that kind of influence the revenue guide that you've put out there for this year?

Jesse Singh -- Chief Executive Officer

Yeah. Relative to the capacity adds, as we highlighted, we were very pleased with what the team did in the first quarter. As we add capacity, there's a normal ramp-up that occurs. There's staging that occurs, and there's expectations around that of when that capacity will become productive.

As we highlighted in Q1, that capacity became more productive, faster. As we look at the later stages, we have what we believe is a realistic plan for how that capacity comes online. And as such, our guidance is really based on that. And the way to think of our guidance throughout the entire year is we certainly have at least enough capacity to meet that guidance.

And as you would expect from any good management team, there's always opportunity to exceed that from a production capability standpoint. But in aggregate, for the year, we think our guidance is very appropriate given the timing of the production that we see coming online.

Susan Maklari -- Goldman Sachs -- Analyst

OK, that's helpful. Thank you and good luck.

Operator

Our next question comes from Mike Dahl with RBC Capital Markets. Your line is now open.

Mike Dahl -- RBC Capital Markets -- Analyst

Thanks for taking my question. My first question is sort of a follow-up around cadence. And I was hoping you could elaborate more on some of the timing when you talk about kind of demand and production influencing the timing between fiscal 2Q and 3Q. Because it sounds like end demand is still quite strong and channel inventories are low.

So is it a behavioral decision on the part of the customers? Or is it truly more your production constraints that are pushing the seasonal timing more toward 3Q this year?

Jesse Singh -- Chief Executive Officer

Yeah. So Ralph, I'll start and please chime in afterwards. So as you look at our demand pattern, the underlying demand in the market that we have seen has continued, and we expect to continue at a nice pace. So that's the underlying demand, consumers buying from contractors.

As you take a look at the channel itself, as you can see from our Q1 results, the channel has demand needs and is running at lower inventory levels. As we mentioned in the call, we took a step against that, a modest step in our deck, rail and accessories, to get a little bit healthier in the channel. But the vast majority of what we sold in Q1 was against underlying demand. And so, as you play that out into Q2 and Q3, you're dealing with a situation where there is strong demand and also a need to position inventory for the selling season.

And so the way to think of it is what we're highlighting for Q2 into Q3 is us managing our production, managing what we sell to our customers against that demand to make sure that inventory is well positioned such that we can meet end market demand. And when you do that, you time the load in a more efficient way -- well, not efficient necessarily, but in a more structured way against end demand. And so, if you roll all that up, what you see then is a flattening of that inventory build to progress during Q2 into Q3 that allows us to meet both end demand, but also give our channel partners what they need to service demand in season.

Mike Dahl -- RBC Capital Markets -- Analyst

Got it. OK. And then, my second question just relates to kind of timing of price cost. It's good to hear that you're getting out in front of the inflationary environment, second price increase.

Just remind us, the way that the resins and other cost of goods sold inflation flows through your P&L from a timing standpoint relative to when price takes effect. Does your guidance for the year incorporate pressure from price cost? Or do you think you manage the timing in a way such that it's going to be, yeah, price cost-neutral still for the year?

Ralph Nicoletti -- Chief Financial Officer

Yeah. Mike, great, great question and point because clearly, resin prices have been pretty dynamic here over the last several months, for sure. So first, to start with the endpoint. As we've looked at costs both inflation on the base labor plus the movements in resin, we've covered the costs in our outlook.

So based on the price increase that we announced early into the fiscal year, coupled with the incremental price increase that we just announced, we've covered the expected costs within our guidance. Having said that, a couple of points relative to how it flows through the P&L because this is important to understand. First, coming into the first quarter, if you recall, late in Q4 of 2020, we said there would be at least a quarter lag on how those costs flow through. And in Q4 2020, actually, there was a temporary decline in resin prices that in our first fiscal quarter, we got the benefit of.

So there was very modest -- only a modest impact from inflation in our first quarter and while we benefited from some carryover pricing from the prior year in the first quarter. Now, as we moved into the early part of the second quarter here, resin stepped up quite a bit, big double-digit increases. And we have levers to pull here, and we executed another price increase. And so, the resin impact that started to really spike up in the beginning of the second quarter, that's going to impact Q3 and Q4 more pronounced.

And we took pricing, and on the year, we're covering the costs. But as you think about the quarterly flow, our pricing is not going to take effect in full until the latter part of Q3. So there's some imbalance between price and cost in the third quarter, but we fully recover that in the fourth quarter and on the full year. So that's an important consideration when you just think about the flow of the quarters, but on the full year, we've got it covered.

Mike Dahl -- RBC Capital Markets -- Analyst

OK. Thanks, Ralph. That's really helpful. Thanks, Ralph.

Thanks, Jesse.

Jesse Singh -- Chief Executive Officer

Yeah. And Mike, the only thing I would add is, just to reiterate what Ralph said, the benefit of how we're doing things and the benefit of the opportunity that we have is we have multiple levers by which we manage our margin and the profitability of the company. And so, we've talked a fair amount about recycle. We've talked about our ability, if needed, to offset inflation with price.

And I think as you see the actions we're taking -- and the inflation is also on the labor side. So as I think at a macro level as you see our performance, you're going to continue to see the ability that we have for the entirety of the year to appropriately manage both growth and margin.

Mike Dahl -- RBC Capital Markets -- Analyst

OK. Got it. Good. Good point.

Thanks.

Operator

Our next question comes from Phil Ng with Jefferies. Your line is now open.

Philip Ng -- Jefferies -- Analyst

Hey, guys. Congrats on a very, very strong quarter. A few of the R&R levered building product companies have actually reported results and have called out flat to down sales growth for the back half of calendar '21. Obviously, you guys are dealing with a different dynamic with some of the secular movements you're seeing.

But it'd be helpful to kind of give us a little perspective how your channel partners are echoing to you and how they're thinking about the shape of the year? It seems like they're looking to build inventory. So that's pretty encouraging. But any color on how you're expecting sell-through demand throughout the calendar year?

Jesse Singh -- Chief Executive Officer

Yeah. Thanks for the question, Phil. As -- we do surveys on a monthly basis, and our survey base is against 1,000 dealers and 1,000 contractors. And in general, what you see from their specific perspective is they continue to be very positive on their year over year expected growth, specifically around each of our debt builders expecting, in aggregate, close to double-digit growth at least as they look out.

Our channel partners are even a bit more bullish. And obviously, there's more folks focused on outdoor living. And so, there -- we continue to see data points that point to solid underlying growth trends. And our long-term indicators that we've talked about, which relate to web visits, housing starts, all of those continue to point to ongoing growth in the underlying market.

And as such, we continue to see in our market segments and expect ongoing growth as we move forward.

Philip Ng -- Jefferies -- Analyst

That's really helpful. And given the growth you're seeing and not just in decking, you're seeing it in your exterior business as well, Ralph, it would be helpful to help us think, do you need to add more capacity? And when we think about capex in the out years to sustain this level of growth, what's a good way to think about it? And then just given some of the movement you're seeing on the inflation front this year, any color on how we should think about working capital as well?

Ralph Nicoletti -- Chief Financial Officer

Sure. Phil, I guess on the two points. First, on capital, our program for adding capacity is adding 70%, seven-zero percent, capacity over the three phases that we've discussed. And so, that's a significant amount of capacity that will carry us going forward here into '22.

And frankly, the third phase of capacity, which we said we're putting in, in the first two fiscal quarters of 2022, as that ramps up, that's really going to help us in season for '22 and then set up '23. Having said all that, we're always looking at our outlook and the pace of demand. And we've said in our remarks, we're thinking through some options to perhaps accelerate some of the capacity availability in the third phase beyond what we have now. And from a total capex standpoint, guided to the 125 to $135 million.

If we need to add more because we see more growth opportunity beyond the timing of what we're looking at, then we'll add it -- we could add capital modularly. And in fact, the existing capacity plan does provide some more space in both our Wilmington and our to be named West facility to add more incrementally without a lot of extra infrastructure. So it will be added very efficiently there. Then as it relates to working capital, the movement up in resin prices, one, it tends to be cyclical.

So what we're seeing now in resin prices is largely due to demand and nearing demand, really, in the export side and some capacity on the PVC side coming off of force majeure situations. So there's some expectation over time that that could moderate. Even if it didn't moderate, we also have payables on the other side and it's a fairly short cycle there. So I don't think we'd have a meaningful impact on our return on assets or working capital overall as we manage through it.

Philip Ng -- Jefferies -- Analyst

Is there a need for capacity on the exterior side? I know you're well served on the decking side, you're adding a fair amount of capacity. But what about on the exterior side?

Ralph Nicoletti -- Chief Financial Officer

Yeah. We don't talk about it a lot, but we are adding some capacity. The dollars are not that significant. But we are adding some capacity on the exterior side and a little bit on rail as well because we have really good growth in those categories as well.

Philip Ng -- Jefferies -- Analyst

OK. Super. Thanks a lot. Appreciate it.

Operator

Our next question comes from Matthew Bouley with Barclays. Your line is now open.

Matthew Bouley -- Barclays -- Analyst

Thanks for taking my questions. So my question is, I guess to the extent, obviously, a few of your competitors are ramping capacity as we speak and channel inventories are still light following the early buy season, is there any risk of some business changing hands, or to that end, maybe opportunities from your own perspective as you ramp your capacity successfully? Or is the customer dynamic relatively firm here?

Jesse Singh -- Chief Executive Officer

Yeah. We just -- thanks for the question, Matt. We just went through the early buy process, which is typically an alignment and negotiation with the dealer base. And we had a lot of really good discussions.

I think people are appreciative of both the capacity that we have and the capacity we have coming online. And so, in aggregate, we feel really good about our position with the dealer base that's out there and we continue to invest and service them effectively. So if you just step back, from our vantage point, our focus is on making sure we're the best that we can be at servicing our customers. And relative to the rest of the industry, we feel pretty good about where we are.

Specific competitive dynamics, in aggregate, when we make it through the year, you can see growth rates on a relative basis based on underlying demand. We believe that we're doing as good, if not better, in servicing our underlying demand than the other competitors that are out there.

Matthew Bouley -- Barclays -- Analyst

Got it. Second one, the western capacity add, you guys talk about sort of finalizing the site selection. My question is what are the characteristics that determine that? Is it distributor footprint? And what, I guess, markets out West do you see kind of the greatest conversion opportunity?

Jesse Singh -- Chief Executive Officer

Yeah. We have a nice and growing business in the western part of the U.S. And in aggregate, that part of the country, like other parts of the country, are certainly benefiting from a greater focus on rural or suburban housing and vacation homes and that type of activity. And so, we already have a really strong position there.

And we do view the western part of the U.S. as having really nice wood conversion opportunity, both on our exteriors business and also in our outdoor living business. So we're well set up right now to service it. The addition of a facility in that part of the U.S., of course, will be beneficial in terms of adding capacity and incrementally beneficial in terms of shortening supply chains out there.

In terms of characteristics, exactly what you would expect, a good location, the ability to have expansion beyond this next phase, I think one of the critical elements for us as we're looking at a facility. As Ralph has pointed out, we're adding 40%. But any facility we add needs to have significantly larger capability than that and a larger footprint to allow us to continue to expand. And then, a nice high-quality labor footprint.

And we feel really good that we found that. And hopefully, in the next few weeks, we can share that with you.

Matthew Bouley -- Barclays -- Analyst

Perfect. Thanks for the color. Appreciate it.

Operator

Our next question comes from Tim Wojs with Baird. Your line is now open.

Tim Wojs -- Baird -- Analyst

Hey, everybody. Nice job on the quarter and the outlook. Jesse, on recycling, just the billion pounds target of recycled materials that you put out there, I think relative to where you ended last year, that's something like a 15% or kind of 16% CAGR on your usage of recycled materials over time. So I guess two questions I have associated with that.

A, how much of that is kind of incremental kind of recycling that's going into your products versus just end market demand expansion? And then second, how do you think about sourcing that amount of material over time?

Jesse Singh -- Chief Executive Officer

Yeah. First, the intent of the billion pounds for us is to really put a target out there for our teams to align around in terms of how we can make a difference in the world. Recycled plastics versus virgin plastics, depending on the material itself, has something in the neighborhood of 70, 80% less carbon footprint. So there's an intentionality to put a target out there to give our teams an opportunity to really align around that.

And as you point out, part of that is ongoing growth of the business; and part of that will be expanding the use of recycle in our core products; and then part of that will be reengineering new products and new offerings across our entire portfolio to increase the use of recycle. Specific to what components or what, we're not going to disclose that right now. The intent really is to put a relatively big target out there. That's one that we can align our teams around to make a difference in the world.

Relative to sourcing, we continue to build out our sourcing organization. We have -- as you know, there is a lot of plastic generated in our types of materials, over 50 billion pounds, according to the numbers we see. And so, there is a tremendous opportunity to access a lot of materials that are going into the waste stream. We acquired Return Polymers.

Obviously, we are investing and expanding their footprint and investing and expanding their capability, in addition to investing in the expansion of our own capability to access more and more sources of lower-value landfill types of plastics. So obviously, we'll continue to share our progress there. But our plan -- our current plan and our future plans continue to involve making investments against that target.

Tim Wojs -- Baird -- Analyst

OK. OK. Great. And then, maybe just on SG&A investments, could you just kind of run through how you're thinking about SG&A this year from an investment standpoint? Maybe what happened in the first quarter? And then how are you thinking about incremental kind of demand-creation investments for the rest of '21?

Ralph Nicoletti -- Chief Financial Officer

Tim, on the SG&A side, I think, first, to your point about the first quarter and the full year, as we think about the full year and the guidance outlook that we provided, you saw in the first quarter, and that will flow through all quarters, the increase from public company costs, and that's consistent with what we've said in the past. We did also, in the first quarter, you just have some higher personnel-related and some marketing costs that led in the quarter. As you look at the full year, and let me take it a level up for a second, our EBITDA margins, if you just look at the outlook that we provided, we're expecting our EBITDA margins to continue to grow. We grow over 110 -- we grew about 110 basis points in 2020.

And if you look at our outlook, there's going to be -- we're expecting continued EBITDA margin performance. As it relates to SG&A, I think importantly, I just want to kind of go back to last year. Last year in the second half, and particularly in our third quarter, we pulled back on SG&A, particularly marketing and T&E. As the COVID situation was onset.

And we normalized a little bit more in Q4. So in our guidance, we're assuming that we're returning to a more normalized level of SG&A in marketing, in particular, in Q3. So our Q3 EBITDA margins were I'll call it, our SG&A was abnormally low last year. So that's going to affect the flow.

On the full year though, we're making investments in SG&A, largely in the public company side. As we've said in the past, we'll continue to add SG&A selectively. But the big step function increases are largely behind us that we made in sales, marketing and R&D. But we'll selectively add to build our demand capabilities in the market.

But I just want to highlight, importantly, that the flow of the SG&A in the back half does reflect a more normalized level of spend versus what we had in the prior year, particularly in the third quarter.

Jesse Singh -- Chief Executive Officer

OK. The only other thing I'd add to that is specific types of investments, we're obviously building pretty significant brand momentum in the marketplace. And we continue to expand our footprint. And aligned with that, under the -- behind the scenes, we continue to invest in digital.

We continue to invest in our capability to reach and expand our presence and awareness with customers. And as such, we're building this company for a multiyear journey. We'll continue to look at opportunities and investments that allow us to accelerate that moving forward to continue to make sure that we sustain and expand our position for the long term.

Tim Wojs -- Baird -- Analyst

OK, great. Well, good luck on the rest the year guys. Thanks for the color.

Jesse Singh -- Chief Executive Officer

Appreciate it. Thanks, Tim.

Ralph Nicoletti -- Chief Financial Officer

Thanks, Tim.

Operator

Our next question comes from Ryan Merkel with William Blair. Your line is open.

Ryan Merkel -- William Blair -- Analyst

Hey, everyone. I guess, first off, I had a question on EBITDA margins in the back half. Should we be thinking flattish year over year in the third quarter with a little more lift in the fourth quarter just due to the price cost dynamics that Ralph was talking about and then capacity maybe turning on a bit?

Ralph Nicoletti -- Chief Financial Officer

Yeah. Ryan, without getting specific on quarters, I think your observation is right. The third quarter has pressure from two sides on EBITDA margins. One is the flow-through of commodity costs relative to pricing, which I remarked on earlier, that we're covering the inflation that we're seeing on the year through our pricing and cost actions.

But the pricing will come into effect in the latter part of the third quarter, so we're not fully getting there in Q3. And then Q3 was also pressured by what I've just mentioned regarding last year. Our SG&A was abnormally low, and then more normalized. But I think what's important, too, as you then look at the full year and the outlook that we provided, we're continuing to expect very solid EBITDA margin growth, following very solid EBITDA margin growth in 2020 toward the overall longer-term goal that we talked about of 500 basis points.

But there is some quarter-to-quarter fluctuation as you pointed out.

Ryan Merkel -- William Blair -- Analyst

All right. That's helpful. And just second, just maybe an update on the retail expansion. I'm assuming that the shortage of product maybe limited that a little bit.

But do you expect to continue to increase your stocking presence out in the future?

Jesse Singh -- Chief Executive Officer

Yeah. Ryan, as we've discussed in the past, we have a modest stocking position both in the U.S. and Canada. We continue to work with our retail partners to make sure that we are helping them meet the demand of their end consumers.

And we feel really good about our opportunity to continue to do that and work with them to continue to help them service their customers more specifically. Without getting into specific on what's stocking or what's in stock versus what special order, the way to think of that growth is it has been accretive and continues to be accretive to our aggregate residential growth. So even though we're showing some really nice growth numbers, we've continued to be able to support our channel partners in a way that we see stronger growth in the retail channel than we do in our aggregate growth. One other area I'll highlight is we not only participate with deck, rail and accessories in that category, but we also have our exteriors businesses that have done really, really nice job of having fantastic product availability and delivery that put us in a position to really grow that business with our channel partners also.

Ryan Merkel -- William Blair -- Analyst

Thanks, Jesse. Appreciate it.

Jesse Singh -- Chief Executive Officer

Appreciate it. Thanks, Ryan.

Operator

Our next question comes from Ketan Mamtora with BMO Capital Markets. Your line is open.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Good morning, Jesse. Thanks for taking my question. Coming back to the recycling side, I think last year, I think, from a mix standpoint, you were at about 54%. I'm just curious kind of what is the opportunity that you guys see over the next few years to take that recycle mix number higher.

I'm not looking for an exact percentage, but just sort of just some perspective on that could go.

Jesse Singh -- Chief Executive Officer

Yeah. Thanks for the question. So as you look at our business, a lot of the recycle numbers you hear from other parties really start to relate specifically to their deck, rail and accessories business and decking specifically. So on the decking side, our cast composite decking uses 100% recycled plastic and wood in the core.

So we're already there. Our opportunity there is to cost-reduce what's used from a recycle standpoint. On our cap polymer decking, we're at 50% recycle in the core. We see a meaningful opportunity to continue to expand that.

Just the nature of the product is -- it might be difficult to get to 100%. But we certainly see an opportunity to continue to move that percentage up over time. And then the -- and so, if you add that up, that's higher than 54%. The 54% number really relates to the entirety of our business and it also relates to the opportunity.

So to your point, without getting specific, we truly believe and hope that through some reengineering and continued focus, that we would be able to get that into the 60s generally. But right now, that's part of our billion-pound ambition. We need to do a lot of work to move into that area given all of the other businesses that we have that don't naturally lend themselves as much to the use of recycled materials. So there's some engineering work that needs to get into that.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Got it. That's helpful. And then, my second question, are you seeing any acceleration in share gains from wood? Lumber is at an all-time high right now. And I appreciate the value proposition is not based just on price, but I'm just curious what you are hearing from your customers with sort of where lumber is right now?

Jesse Singh -- Chief Executive Officer

Yeah, you're certainly right. If we look at the dynamics in the lumber market, you're dealing with prices that in many materials, whether that's pressure-treated or cedar or Redwood. In some cases, availability is an issue. In other cases, the price has moved to such a point that it makes composites very attractive right out of the gate.

And we believe that there's conversion that's occurring there. If we look back in history, when these types of events have occurred, it has facilitated conversion. But similar to price, once the underlying structure goes back, the conversion doesn't necessarily go back. So right now, it's difficult to give you an exact data point, except to say that we certainly believe that there is meaningfully -- there's a meaningful opportunity from a demand standpoint to accelerate that conversion.

We don't yet have the exact data. And I think as we -- as an industry scale manufacturing, that will also facilitate that conversion.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Got it. That's very helpful perspective. Good luck in the back half of the year.

Jesse Singh -- Chief Executive Officer

Thank you. Appreciate it.

Operator

Our next question comes from Stanley Elliott with Stifel. Your line is open.

Stanley Elliott -- Stifel Financial Corp. -- Analyst

Hey, good morning, guys. Thank you for squeezing me in. Jesse, in the past, you guys have talked about 500 basis points plus of margin. Just curious how that relates to the billion pounds you're talking now about recycling? Just trying to frame and square up those two together.

Jesse Singh -- Chief Executive Officer

Yeah. As we've highlighted, the 500 basis points, and we took a step toward that last year. And if you look at our guidance, it implies that we're going to take another step toward that this year. As you look at the underlying elements, we haven't disclosed specifically what's SG&A leverage and what is gross margin.

But a meaningful part of the gross margin that we're talking about will come from our execution of recycling. I would once again separate the billion pounds. I think the billion pounds for us is aspirational. And it's something that we can, hopefully, get to aggressively.

If we do that that would -- part of that would be in the 500 basis points. Another part of that could be additive as we progress against that target.

Stanley Elliott -- Stifel Financial Corp. -- Analyst

Perfect. And then, I apologize if you all mentioned it, but did you talk about -- I mean, we talked about softer inventories or lighter inventories in the channel. Is there a way to quantify that by any way? Or I guess is it fair to assume that most of the pro channel is still on allocation at this point?

Jesse Singh -- Chief Executive Officer

Yeah. We have -- we've got very detailed data on what -- so we go through two steps of distribution. Our distributor customer partners, we have very good data on what they have in inventory and what their sales are out the door. And as such, we're able to not only look at the raw inventory on the ground, we're able to look at days on hand given their current and expected sales momentum.

So when we refer to days on hand at distribution, that's really based on solid data and solid math. As we look at inventory at the dealer base, that is a softer number for us, but dealers typically carry less inventory and turn the inventory much faster. So when we talk about, in the first quarter, having lower inventory levels, it was both at distributors and at dealers. And we believe we took a step toward supporting our dealer base in replenishing their inventory, and we expect to take additional steps this quarter on providing them with the inventory that they need as we move forward.

So hopefully, that gives you a perspective on the underlying data and analytics that we're using to determine what's the right inventory level.

Stanley Elliott -- Stifel Financial Corp. -- Analyst

Perfect, guys. Thanks for the time. Appreciate it, and best of luck.

Jesse Singh -- Chief Executive Officer

Thank you.

Operator

That's all the time we have for questions today. I'll turn the call over to Jesse Singh for closing comments.

Jesse Singh -- Chief Executive Officer

Great. Thank you all for taking the time this morning. As you can see, our strategy and operational execution are on track, and it's allowing us to benefit from long-term secular trends in the markets that we play in. And as highlighted on the call, we continue to become more confident about the opportunity that we have ahead of us given long-term trends in outdoor living and other demographic trends that are around us.

Thank you again to all of you, and thank you again to the AZEK team, our channel partners and our customers for such a great effort and for their partnership. Look forward to talking to you next time around. Thank you.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

Jon Skelly -- Senior Vice President of Strategy and Execution

Jesse Singh -- Chief Executive Officer

Ralph Nicoletti -- Chief Financial Officer

Susan Maklari -- Goldman Sachs -- Analyst

Mike Dahl -- RBC Capital Markets -- Analyst

Philip Ng -- Jefferies -- Analyst

Matthew Bouley -- Barclays -- Analyst

Tim Wojs -- Baird -- Analyst

Ryan Merkel -- William Blair -- Analyst

Ketan Mamtora -- BMO Capital Markets -- Analyst

Stanley Elliott -- Stifel Financial Corp. -- Analyst

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