The AZEK Company Inc.
Q4 2020 Earnings Call Transcript

Published: 3 Dec 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the AZEK's company's Fourth Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be question-and-answer session. Please be advised that today's conference is being recorded. . I'd now like to hand the conference over to your speaker today, Jon Skelly, Senior Vice President Strategy & Execution. Thank you please go ahead sir.

[Jon Skelly:]

Thank you. Good morning everyone. We issued our earnings press release this morning in investor relations portion of our Web site at investors.azekco.com as well as via 8-K on the SEC's Web site. I'm joined today by Jesse Singh, our Chief Executive Officer and Ralph Nicoletti, our Chief Financial Officer. Before we begin, I would like to remind everyone that during this call, AZEK management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, anticipations, 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 Web site and provided in our annual report on Form 10-K for our fiscal year 2020 as filed with the Securities and Exchange Commission. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, the company will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered an isolation or as a substitute for results prepared in accordance with GAAP. Reconciliation of adjusted EBITDA to net loss calculated under GAAP and adjusted gross profit to gross profit calculated under GAAP, as well as reconciliations for other non-GAAP measures discussed on this call can be found in our earnings release, which is posted on our Web site and will be included in our Form 10-K for our fiscal year 2020. I would now like to turn the call over to Jesse Singh.

[Jesse Singh:]

Good morning. It's great to be speaking with you all again and thank you for joining us today. I hope that everyone continues to be safe and healthy. I am very proud of the AZEK team as we continue to make progress against our long-term goals of consistent growth, adjusted EBITDA margin expansion and positively impacting society through our unique business model and our increased focus on ESG. The fourth quarter was a very good quarter, ending a strong 2020, and more importantly, was another big step in our long-term journey. We made good progress in fiscal 2020 which included double-digit sales growth and more than 100 basis points of adjusted EBITDA margin expansion.

[Ralph Nicoletti:]

Thank you, Jesse. As I discuss our results, all comparisons made will be on a year-over-year basis, compared to the same period ending September 30, 2019. In short, we finished our fiscal year of 2020 with strong results and good momentum entering fiscal 2021. For the fiscal fourth quarter of 2020, net sales increased by $48.4 million, or 22% to $263.9 million. For the full fiscal year 2020, net sales increased by 105.1 million, or 13% to $899.3 million. The increase for both periods was driven by sales growth in our residential segment. For the fourth quarter, net sales for our residential segment increased by 30% year-over-year, driven by deck rail and accessories growth of 35% and exteriors growth of 18%. This growth was partially offset by a decrease in our commercial segment of 14% year-over-year. For the fiscal year 2020, net sales for our residential segment increased by $115.7 million, or 17.7% to $771.2 million. The increase was primarily attributable to higher sales growth in both our deck rail accessories and exteriors businesses, driven by continued market growth, success of new products across the portfolio and the benefit from investments in downstream selling capabilities. Gross profit for the fourth quarter of fiscal 2020 increased by $20.8 million, or 30% to $90.3 million. For the fiscal year 2020, gross profit increased by $42.9 million or 17% to $296 million. Adjusted gross profit for the fourth quarter of fiscal '20 increased by $19.4 million or 22% to $106.1 million. Adjusted gross profit margin was 40.2% unchanged from last year as higher residential segment sales and favorable price mix are offset by raw material inflation, additional expenses related to our capacity expansion and COVID-19 related cost. For the fiscal year 2020, adjusted gross profit increased $44.2 million or 14% to $359.1 million. Adjusted gross profit margin expanded 30 basis points to 39.9%. The increase in gross profit was driven by higher residential segment sales and manufacturing productivity, partially offset by the impact of COVID-19 related costs. Selling, general and administrative expenses increased by $103.4 million to $149.9 million or 56.8% of net sales for the fourth quarter of fiscal 2020. For the fiscal year of 2020, selling, general and administrative expenses increased by $124.7 million or 68% to $308.3 million or 34.3% of net sales. The increase was primarily driven by $120.5 million of stock-based compensation expense related to our initial public offering and the accelerated vesting of stock-based compensation resulting from the secondary offering. Additional ongoing costs related to operating as a public company partially offset by lower marketing and selling expenses during the initial COVID-19 disruption. We recorded net loss of $64.4 million for the fourth quarter of fiscal 2020 compared to a net loss of $0.9 million a year ago. For the fiscal year of 2020, we recorded a net loss of 122.2 million, compared to a net loss of 20.2 million in the fiscal year of 2019. Primarily due to increased selling, general and administrative expenses as discussed previously, as well as $37.6 million of expenses related to the extinguishment of debt in the fiscal third quarter. Please note that effective as of September 30, 2020, we revised the definition of adjusted net income to no longer include depreciation expense as an adjustment. For fiscal 2020, depreciation expense was approximately $45 million. We have recast the prior periods in our earnings release posted on our Web site and in our upcoming 10-K filing to reflect the change. Adjusted net income was $44.4 million or $0.29 per share for the fourth quarter of fiscal 2020 compared to adjusted net income of $16.8 million or $0.16 a share a year ago. For fiscal year 2020, we recorded adjusted net income of $72.6 million compared to adjusted net income of $46.7 million in the fiscal year 2019. Adjusted net income would have been 117.3 million, approximately $45 million higher in 2020 and increased by approximately $34 million to $80.4 million in 2019, if we had included depreciation expense as an adjustment. Adjusted EBITDA for the fourth quarter of fiscal 2020 increased by $13.6 million or 26% to $66.1 million and adjusted EBITDA margin expanded 60 basis points to 25% from 24.4% a year ago. For the fiscal year 2020, adjusted EBITDA increased by $33.9 million, or 19% to $213.5 million. Adjusted EBITDA margin for the fiscal year 2020 expanded 110 basis points to 23.7% from 22.6% in 2019. Now, turning to more detail on our segment results, residential segment net sales for the fourth quarter of fiscal 2020 increased by $53.6 million, or 30% to 232.7 million. We are continuing to see strong acceptance of our new deck rail and exterior trim products. And we are benefiting from downstream salesforce investments we have made in our exteriors and retail channel teams. For the fiscal year '20, net sales for our residential segment increased by $115.7 million, or 17.7% to $771.2 million. The increase was primarily driven by higher sales in both our deck rail and accessories and exteriors businesses. Residential segment adjusted EBITDA for the fourth quarter of fiscal 2020 increased by $20 million, or 37.3% to $74 million. For fiscal year 2020, residential segment adjusted EBITDA increased by 49.3 million, or 26.1% to 238.1 million, mainly driven by higher sales, and net manufacturing productivity improvements partially offset by higher COVID-19 related production cost. Commercial segment net sales for the fourth quarter of fiscal 2020 decreased by 5.3 million or 14% to $31.3 million. For the fiscal year of 2020, net sales of the commercial segment decreased by 10.7 million, or 8% to 128.1 million, the decrease was primarily driven by lower sales in our Vycom business, as the effects of COVID-19 continued to impact certain end market demand. This business was affected by the slowdown in commercial repair and remodel as well as certain challenged end markets such as retail and trade shows. Commercial segment adjusted EBITDA for the fourth quarter of fiscal 2020 decreased 3.2 million to $3.9 million. For the fiscal year of 2020, commercial segment adjusted EBITDA decreased by 6.4 million to $15.1 million. The decrease was primarily driven by lower sales in the Vycom business, partially offset by lower manufacturing costs and reductions in selling, general and administrative expenses. Looking at our balance sheet and cash flow as of September 30, 2020, we had cash and cash equivalents of $215 million and approximately 129.4 million of availability for future borrowings under our revolving credit facility. Total debt as of September 30, 2020, was $467.7 million and we have not drawn on a revolving credit facility. Net cash provided by operating activities was 98.4 million and 94.9 million for the 12 months ended September 30, 2020 and 2019, respectively. Now turning to our outlook, our outlook is based on current strong demand within our residential segment, we remain encouraged by our current strong demand trends, external demand signals such as housing starts, repair and remodeling activity and internal signals like web traffic and sample order growth. We have previously communicated that we would expect low double-digit sales growth in Q1 '21. Given the strength in the residential market, we now expect total company net sales growth in fiscal Q1 to be in the low 20% range year-over-year and adjusted EBITDA growth in the high 20% range year-over-year. As it relates to the commercial segment, we continued to see weakness into the first quarter of 2021. And we expect this business to be down in the high teens range. For the full fiscal year of 2021, we expect total company net sales to increase 10% to 14% year-over-year, and adjusted EBITDA growth in the mid-teens range year-over-year following 19% growth in fiscal 2020. These results and continuing adjusted EBITDA margin improvement as additional costs, including startup from our capacity expansion, raw material and labor inflation and cost of being a public company are more than offset with pricing and manufacturing cost savings from our recycling initiatives. From a segment perspective, based on our leading indicators, we expect residential segment net sales growth in the range of low to mid-teens year-over-year. This outlook reflects the visibility we have for the next three to six months and recognizes macro uncertainty and the strong performance we saw in the second half of fiscal 2020. In the commercial segment, we are assuming there will be economic stability with some improvements in the second half of the fiscal year leading to our projection of net sales declining at the mid-single digit range year-over-year. We expect total capital to be in the 125 million to $235 million range, as we work through our capacity program primarily in decking and the addition of a third low density polyethylene recycling line. To assist in modeling, our tax rates for 2021 is estimated to be approximately 26%. And our diluted share count is estimated to be approximately 157 million shares. I'll now turn the call back to Jesse for some closing remarks.

[Jesse Singh:]

Thanks, Ralph. I would also like to recognize our team for their continued leadership and our response to the pandemic and its impact. Consistent with our core value, do the right thing. Our first priority has been and will continue to be the safety of our employees, our customers and our communities. Thank you to the entire AZEK team and our channel partners for your commitment and dedication. With that operator, please open the line for questions.

[Operator:]

Our first question comes from Matthew Blair from Barclays.

[Matthew Blair:]

Congrats on the results and thanks for taking the questions. The first one on the '21 revenue guidance of 10% to 14% growth. So you're guiding Q1 in the low 20s. So suggesting the balance of the year is perhaps in the 10% range. You've got new capacity coming online, there's presumably some price flowing through in there. Is there anything specific that would cause some deceleration on the volume side offsetting those, thinking about maybe the sustainability of this type of demand in a post vaccine world or mainly just kind of general conservatism at this early point in the year. Thank you.

[Jesse Singh:]

Look, as we've talked about, we see some really, really positive signs relative to the signals that we see strong demand profiles, strong backlog currently. And we see, the leading indicators, very, very positive. As we've mapped this out, we take all of that into account. And, specifically the forecast that we've laid out, we think reflects, the combination of these positive factors. Also understanding that, we've got some strong quarters in the back half of the year. I'll pause there, Ralph, is there any additional color you'd like to add to that?

[Ralph Nicoletti:]

Just the visibility, the tight visibility we clearly have is in the first three to six months of the fiscal year. So, we factor that in and we're very mindful of -- we're providing guidance on a full year, most of the visibility sits in the first half of the year at this point in time. But, all the indicators, as Jesse mentioned are positive in terms of leading indicators, we just wanted to be appropriate in terms of looking at that far.

[Matthew Blair:]

Understood. Okay. Thank you both for that. Second one on the pricing side, you disclosed the low single-digit price increase, I guess, is the second year in a row that you've now raised price. So going forward, do you think pricing is going to kind of remain that sort of opportunistic tool that I think it once was, or you kind of looking to condition the industry to more consistent annual price increases? Thank you.

[Jesse Singh:]

Yes. I think as you look at the structure of the market, we believe that we're in a market that provides the right kind of value equation such that we should be able to appropriately offset inflationary costs with pricing actions. And as you mentioned, it's really been three out of the last four years that that we've taken pricing actions as there's been both labor and raw material inflation. But we believe we're in that type of an industry.

[Operator:]

Your next question comes from Susan Maklari from Goldman Sachs.

[Susan Maklari:]

My question is also on thinking a little bit about the revenue guide for fiscal 2021. With that, 10% to 14%, can you give us some color on how you factored in the incremental capacity that's coming online over the course of next year into that? And does that suggest that maybe there's some potential upside, as we think about that range that you've provided?

[Ralph Nicoletti:]

Susan, as the capacity comes online, as we talked about, it's a 70% increase over the next, now 15 to 18 months or so coming on. So, that is factored in, we leave, but it builds during the year particularly as we get into the second half of our fiscal year and calendar year in '21. So, some of that factored in as you would expect, we put guidance out there that we clearly have a line of sight to be able to produce to and have some room to go above that. But that's how we factored it in.

[Jesse Singh:]

And just to add, as we bring capacity online, clearly in the short-term, that capacity is needed. As we highlighted on the call, as we move into the out months, we also want to make sure that we have capacity to continue to provide appropriate service to our customers. And so, as you think in the back half of the year of the capacity coming online, it's a combination of meeting demand, but also making sure that we're in a good position to serve those customers.

[Susan Maklari:]

And then, my follow-up question is just, as we think about the very low levels of inventory that are sitting across the channel in there, how are you thinking about seasonality for '21? Are there any changes that we should be aware of as we kind of think about the modeling and perhaps the cadence of the quarters next year?

[Jesse Singh:]

Typically, what you -- just to remind folks on the call, typically, what you see from a seasonality perspective, with us is a slowing end demand as northern climates, compress their activity and a process by which stocking increases at the various stages in the channel system. And so at a high level, that thesis and that normalcy will play out, I think the variability that you might see this year, just has to do with the two key elements I highlighted, right? What's the demand process, which you have in any year? What's the demand as you move into seasonal months? And what's the inventory level in the channel? So I think that there's normal seasonality, I think you're just dealing with slightly different variables, which you will every year.

[Operator:]

Your next question comes from Phil Ng from Jefferies.

[Phil Ng:]

Congrats on a very impressive quarter. Hey, Jesse, I think you kind of flagged in the call that some of the greenfield capacity you're adding right now is going to be his target on the west, which was new for me. Does that open door for new opportunities that perhaps wasn't available previously, now that you have more of a national footprint out west? Does that provide any real cost savings on the logistics and transportation side of things?

[Jesse Singh:]

Yes. First off, we had a really nice national footprint, actually a footprint that strengthen last year with some of the distribution changes. So we've been in a good position to service the market, just because we maintained inventory through our distributors on the ground. Obviously, when you put a facility closer to a customer set, that potentially gives some advantages relative to what you highlighted, right, shorter transportation times, lower logistics costs. So I think incrementally, it's a natural part of our expansion, as a company that continue to get capacity closer to the customers. So, I think incrementally there might be a benefit, but I want to highlight that we were well positioned prior to this, but, but getting that capacity out there, we just -- we like the potential benefit of adding additional capacity closer to various customer sets.

[Phil Ng:]

Got it. That makes a lot of sense. And in some strength that you're seeing, at least in the first quarter for your residential business, are you seeing a lift perhaps from some pre buying ahead of your price increase any load in, you talked about how inventory levels are still relatively low on a year-by-year basis? When you kind of expect your channel partners to have inventory level is at a more normalized level?

[Ralph Nicoletti:]

Yes. With respect to whether or not there's pre buy, we really don't view that as impacting our results right now. We announced the, you know, the pricing changes we talked about. Actually, last quarter and, it's just working its way through the system. And we give relatively long lead times, to our channel partners to make sure that that they can appropriately adjust what they need to adjust. And I forgot your second question. I'm sorry.

[Phil Ng:]

You talked about how inventory levels are still kind of lower on a year-over-year basis, as you kind of ramp up this capacity. Is there a good way to think about how -- when you expect that to be at a more normalized level in terms of inventory at your channel partners or lead times in general?

[Jesse Singh:]

Yes. I think, as I mentioned earlier, it's really an outcome of what's our demand and our ability to service that demand. We continue to see and expect over the next three to six months, that we'll have an opportunity to continue to ramp up some of the inventory at our channel partners to come to more normalized and preseason levels. So we would expect that to occur, on a normalized pace during the next quarter. The specifics of whether or not we get the exact number is really going to be dependent on the demand cycle, that we see relative to the amount of inventory that's going to be placed.

[Operator:]

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

[Mike Dahl:]

Hi, thanks for taking my questions. I wanted to ask first about recycling. It sounds like just on the numbers you laid out, I think you hit where your targets were about 54% of recycled overall. And you talked about the split between the products, obviously, you're continuing to integrate return polymers, it sounds like there's some other initiatives. Can you just give us a sense of -- as we think out over the next year and potentially beyond how we should be thinking about the kind of continued migration towards recycling and any qualification you give there?

[Jesse Singh:]

Yes. I'll give it to you at a high level. As I mentioned, on the call, the first stage and the first aspect of this is increasing our use of recycle. And as I highlighted on the call Return Polymers has really been an asset there. On our deck boards in particular on cap polymer, our PVC boards, there might be some additional opportunity to expand that over the next 18 months or so, in terms of the percentage. And there might be additional opportunity to expand our use of recycled in some of our non-decking products, which is where Return Polymers comes in. So at a very high level, we're in a really good spot on the percentage we use and there might be some additional opportunity there. Specifically on vertical integration, which is the second component I talked about. We have our third line, polyethylene line coming on online over the next few months. And that gives us some additional insourcing capability and will continue to expand and incrementally invest in Return Polymers to make sure we're in a good position there. So that's relative to insourcing. And then the third component relative to formulation that we talked about, which is basically moving to lower cost recycle materials. When we see an opportunity to do that through sourcing, and we talked about a couple of the initiatives that we have, we can continue to do that. And we'll continue to do that on an ongoing basis think of that as sourcing savings, that's an opportunity to continue -- that has a longer tail. Relative to the specific reformulations, we will, as we talked about on the last call, bring that in on a phased basis. And we need to make sure that's well aligned with our capacity addition. So just a very high level, those are the types of milestones that we work internally. In aggregate, as you can see, it gives us an opportunity for an ongoing execution across those three items.

[Mike Dahl:]

Okay, thanks, Jesse. My second one relates to competition. And clearly it's a unique and robust environment from a demand standpoint, and both you and your largest competitor can't even meet the demand as you've articulated. But we have seen a number of new product launches and introductions, I think, from not necessarily your largest peer, but some of the next tier down and maybe some newer entrance, particularly at the low end. So I understand that some of these aren't quite as broad as product offering, that you guys would have, but can you just speak to kind of competitive dynamics, what you're seeing on new entrants or expansions from some of your second or third tier competitors? And how we should be thinking about of your move against further penetration from those?

[Jesse Singh:]

Yes. As we've talked about, in general, we believe that we have significant strength in terms of our presence on the ground, and the contractors that we work with. In general, given the demand environment and some supply constraints, what you see, geography to geography, is in certain geographies, we pick up share against all competitors and in certain other geographies, there are some small transactional occurrences where, as you mentioned, some of the third tier players may pick up a job or a specific situation. In general, as we look at it in aggregate, I think it's important to see our growth rates, the fact that between ourselves and our nearest competitor, we make up a significant part of the market. And you can see from our growth rates, vis-à-vis the rest of the industry, that our share position at an aggregate level, we believe is in a really nice position and continues to be in a nice position. So hopefully that answers your question. In general, we don't -- to summarize, we're not seeing a significant shift in competitive dynamics. And I think that's borne out when you take a look at our deck rail and accessories grow, relative to the industry and also what we've guided you to.

[Mike Dahl:]

Yes. That helps. Appreciate the insight. Thanks.

[Jesse Singh:]

Yes. And one last, just quick comment here. On a relative basis, if someone launches a product and picks up a few jobs that is miniscule compared to really what we see as the aggregate competitive dynamic, which is continuing to drive conversion from wood to our types of materials. And in general, what I would say is day to day, that's really where we're focused is to make sure that we're expanding the market.

[Operator:]

Your next question comes from Keith Hughes from Truist.

[Keith Hughes:]

I want to dig into your recycling the 54% of inputs being recycled in 2020. Is that a combination of your polyethylene and PVC usage or what is that referring to?

[Jesse Singh:]

That refers to all extrusion that we do and so, extrusion roughly is 90% of what we sell. So think of extrusion as all of our products effectively, that's not the fabrication or the other elements. So that number is off a very large base.

[Keith Hughes:]

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

[Jesse Singh:]

So on our polyethylene, which is used in our cap, composite deck boards, we use 100% wood in the core and 100% recycled polyethylene in the core. We do use virgin in the cap that surrounds that core and we will continue to use virgin there. We find that the aesthetic and weathering performance is really what we like with having virgin in the core. Similarly, on the PVC side, on our PVC decking, we're right around 50% recycle in the core and that's primarily plastic with a little bit of adder in the core. And then, the cap once again is 100% virgin.

[Operator:]

Your next question comes from Ryan Merkel from William Blair.

[Ryan Merkel:]

Two questions for me. First 2021 guidance seems to imply flat or slightly higher resi segment EBIT down margins. So is this due to startup costs, offsetting AIMS and recycling ?

[Ralph Nicoletti:]

Its Ralph. First just coming back to my remarks that I shared, we do expect in '21 continuing adjusted EBITDA margin improvement. And just to remind you that the puts and takes there are, we do have additional startup costs from capacity expansion. We also have raw material and labor inflation and importantly there's cost of being a public company. That's all in total, more than offset, with pricing and manufacturing costs savings from largely the recycling initiatives. The public company costs step up doesn't hit the segments. So when you look at that in a segment level, you'll get a little bit of a different view because our segments won't have most of the public company cost in them. So we feel good about the progress, we grew our EBITDA, margins, 110 basis points in 2020. And as I remarked, we're expecting an aggregate that we're expecting in aggregate improvement again in '21. But the segments aren't weighed down by some of the public company expenses that we have to take on.

[Jesse Singh:]

And just as a reminder, we only have one quarter really, a little more than a quarter as a public company. And so, we have additional year-over-year public company costs that will incur in '21. So, our guidance is all in relative to those increase in costs.

[Ryan Merkel:]

Perfect, that's helpful. And then secondly, Jesse maybe just talk a little bit more about the new products that you just announced, why is shingle siding and cladding attractive, what's the opportunity that you see?

[Jesse Singh:]

Yes. On the -- so when you take a look at our exteriors business, it is in fact a very niche selective exteriors business. We focus on trim, which is one of our core products and that market is still 40% wood. And so, trim is a great product for us, unlike siding, which is in the low teens, in terms of its wood percentage. So there's still a significant opportunity there. And then you add to that, the additional products that we have right now, which are value-added products, that provide some benefit on the outside of homes. And so for us, that's been things like column wraps and additional accents and corners on the outside of a house. So if you think of shingle siding, and the way it's positioned, it's typically a niche product that's used as an accent on the outside and in our value proposition fits really well in terms of much easier to handle, easier to install, you don't have some of the environmental concerns that you might with other products and it's very, very lightweight and paintable. And so it's a natural extension for us in terms of those high value added niche products. And then, similarly on the cladding side, our unique aesthetics relative to what we can do with our TimberTech and AZEK deck boards, whether it's wide width or the very high-end hardwood aesthetic, that particular aesthetic is, is becoming more and more important, either on commercial buildings as they look to refresh it or on houses, as people look to upgrade the exterior look. And in fact, we do AIA training and using our high-end deck boards, as cladding is one of the most sought after training modules that we have. And so, these are natural niche extensions of our product line that sustain the value and focus on wood replacement.

[Operator:]

Your next question comes from Seldon Clarke from Deutsche Bank.

[Seldon Clarke:]

So net leverage is well below what you kind of talked about coming out of your IPO, like just over, you know, one times net debt to EBITDA. So can you just give us a sense of how you're thinking about leverage moving forward, and maybe like, well, your appetite for M&A is from here.

[Ralph Nicoletti:]

Maybe I'll start there. Seldon, good morning. First, as you point out, our leverage is low especially relative to what we said is our ongoing sort of target range in the low to mid twos. So, we're in a great position, that gives us a lot of flexibility. So when you go back to our capital priorities, the first is and use of cash, it's to invest in the business to drive continued organic growth. And then, secondarily is, using cash to availability to fund selective M&A that strategically is additive to the core organic piece. So, it's a great opportunity for us and we're in a good position.

[Seldon Clarke:]

Okay. And when you talk about, I guess, some of those M&A potential opportunities, are you thinking more from a product category perspective? Or could that be more on the recycling side, again, like, you saw in the polymers investment, like how you kind of just thinking about the scale there?

[Jesse Singh:]

So, when we really, really like our business model, the ability to have branded products that have differentiated R&D that leverage integrated manufacturing and recycle that have sticky customers that play in this wood conversion, exteriors market. So given that we like that business model that really ends up being the filter for any acquisition, that we look at. And as you highlighted, if you look at our recent acquisitions, one was a bit of a market consolidation, one was a tuck-in product that's really given us some nice momentum in the rail business. And the third was a vertical integration on recycle. I think all of those are indicative of the types of acquisitions that we'll continue to look at. We really like our core. We really like the market opportunity here. And we believe that there could be opportunities to really strengthen that core value proposition.

[Operator:]

Your next question comes from Tim Wojs from Baird.

[Tim Wojs:]

Just a couple of quick ones. I guess first on trim relative to DRNA, to give up the outlook any meaningful difference in growth rates there from your perspective? And then the second is, on price cost, do expect price cost would be positive in your guidance and you expect most of the incremental costs from raw materials and just some people costs kind of ?

[Jesse Singh:]

Yes. Let me take the first one and Ralph, you can you can take the second one. We've obviously talked about deck rail on accessories and you can see the growth rate there. Our exteriors business has been doing you know quite well the combination of new products wood conversion, and a really nice share position and solidifying share position all of those variables, have led to above market growth. So, as you as you look back we would, without giving specifics on the breakdown between the two businesses. I think what would be relevant is just to look back historically and see how we've done there. And we fully expect to be able to continue to grow both businesses at a healthy level. So Ralph, I will turn it over to you for the other question.

[Ralph Nicoletti:]

As it relates to pricing, clearly we're seeing raw material and labor inflation, that clearly factored into, the timing and depths of pricing that we took. Again, as it come back to, just what if you had stepped back on overall EBITDA margins that we're also managing. We do expect some improvement in '21, as I said, in my remarks, but so the pricing, that we took is a lever, clearly the cost savings in from recycling and our AIMS initiatives are a lever to help offset that raw material labor and some of the costs that we'll see related to the capacity expansion and the public company costs. So, when you put that together, we feel like we're continuing to move our margin improvement program well.

[Operator:]

Your next question comes from Alex Rygiel from B. Riley Securities.

[Alex Rygiel:]

One quick question. You mentioned in your prepared remarks demand is greater than current capacity. What is your current lead time today? And what is your targets? And when do you think you might achieve that target?

[Jesse Singh:]

Yes. Relative to that, we happen to be -- if there's a pause on my part, we happen to be in a early buy, period. And when we're in that period, we work with our channel partners to make sure that we're creating a schedule of shipments. So at this time of the year, the concept of lead time, is not as relevant as it might be in season, it's really, really important that we continue to work with our channel partners, such that they have the right inventory in place to offer the right service to their customers. In general, I would say lead time depends on specific products. And typically, we've, historically we've been in, let's say, three to four-week lead time scenario. And as we rebuild inventory in the channel, and as we bring additional capacity online, we hope to be in a position over the summer to start moving back to that sort of direction. But as we've talked about on the on the call right now, we see robust demand, we've got additional capacity coming online and it's really that combination that will determine the specific timing of when that occurs.

[Operator:]

Your last question will come from Trey Grooms from Stephens.

[Trey Grooms:]

One for me, it's really around the recycling a recycled material. Just diving into that just a little bit further. So on the composite decking piece, you're at 80% recycled content in the cap composite products. And you note in the presentation and you've talked about it in the past, optimizing the formulation there from high density polyethylene to low density. Where are we, right now in that process? We kind of what's the mix? And where do you see that going over time? And kind of what's the opportunity there?

[Jesse Singh:]

Yes. We don't disclose specifics relative to that, let's just say that from a journey perspective, we're still someplace in the first half of, of that journey. And as we bring capacity online, we will stage in the transition to the lower cost formulations. And so, the specifics of that, you know, as I mentioned, it's a sub component of the aggregate recycling the specifics of that. We're not disclosing except to say that we are very much on track with that execution, you can see it in our margin structure. And you can see it in, the fact that we continue to see positive leverage in aggregate, as we move forward. But over the long run, we should expect to continue to see that both percentage shift and also the way in which we source those lower cost materials improve. Okay, got it.

[Ralph Nicoletti:]

And so, I guess with the new capacity coming on, it will be a kind of a step function in that initiative to increase that lower cost, material content. We, once again, I want to make sure, we highlight, we're not given any specifics on that except to say that we're staging that conversion to be consistent with getting our capacity up and running. So in some cases, we do it before, some cases we do it after. So, those are stage not necessarily always in sync.

[Operator:]

We're out of time for questions today. I would like to turn the call back over to Mr. Jesse Singh for any closing remarks.

[Jesse Singh:]

Thank you all for taking the time. Really appreciate it. As you can tell, we're pretty excited about, the opportunity that we see ahead of us. And we're excited about our execution. So just, once again, I want to thank all of not only all of you on the phone, but all of the great associates we have within the company and in our great customers for partnering with us and growing with us during a very unique and challenging year. And we look forward to more of that to come. So thank you and we'll chat with you on the next call.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.