AZEK CEO on sustainable deck demand during COVID-19

Yahoo Finance’s Brian Sozzi and Jared Blikre speak with AZEK CEO, Jesse Singh, on business uptick since the company’s June IPO, and demand during COVID-19.

Video Transcript

BRIAN SOZZI: All right, soaring home sales and everyone locked at home during the pandemic is likely good news for sustainable deck manufacturer AZEK. The company IPOed back in early June, and the market has been high on the stock ever since. Joining us now for his first interview since becoming a public company CEO is AZEK's Jesse Singh. Jesse, good to see you this morning. So your stock has been through the roof, no pun intended, since you IPOed. So I guess you're coming here to say sales have been through the roof after the quarter right?

JESSIE SINGH: Well, coming into the pandemic, we saw really strong sales. After a pause in April and May, we returned to growth. And so sales have been steady and actually accelerating as we went through the most recent quarter. And once again, these were trends that were strong coming into the pandemic as people focus on their outdoor living spaces.

BRIAN SOZZI: So your business is split into residential and commercial. Which side of the businesses has started to gain the most traction?

JESSIE SINGH: Certainly our residential business. Our commercial business, which is a small part of our business, right around 6% of our EBITDA, that business has been tied much more to GDP. And as such that has been under pressure, like many other companies. The residential side, though, as I mentioned, after a brief pause has really returned to growth. And as people stay at home and focus on outdoor spaces, it's really been a nice additive trend to us.

JARED BLIKRE: Hi, Jared--

BRIAN SOZZI: What types of decks are--

JARED BLIKRE: Sorry about that.

BRIAN SOZZI: Jesse, what type of decks are people buying? I know you've come out with colored platforms, but this is not-- it's not a cheap purchase. I mean, wood is still the cheapest. What are people spending their money on?

JESSIE SINGH: I mean, we see a wide variety of purchases, whether it be more entry-level product, where people, after one year of staining, it's more economical for them to actually have a composite deck that's made with recycled technology, all the way up to our more premium products that are priced at or above premium hardwoods. And what you see is people are trying to build rooms outside, and whatever variety you see on indoor rooms, you're seeing that same variety outside as people are creating outdoor living spaces.

JARED BLIKRE: Hi, Jared Blikre here. I wanted to ask you about your input costs. For instance, we're seeing lumber up 157% over the last five months. That's just one example. Are you experiencing anything like that?

JESSIE SINGH: Well, we're fortunate. A significant part on our decking business, of our raw material is recycled materials, effectively garbage-- think plastic bags-- and in fact, there's about 30,000, roughly, plastic bags in a 300-square-foot deck. So if you consider that, our raw material feed stream on that side has been relatively steady. What we've seen on the plastics side has also been relatively steady. And so we're fortunate that we primarily use sustainable products in our decking products.

BRIAN SOZZI: Jesse, you raised your capex, if I have this right, by $80 million on your last earnings report. I don't see a lot of companies raising their capex in this environment. Where's that extra money going? You're at around, what, $100 million before?

JESSIE SINGH: Yeah, that's actually just our capex for expanding capacity. So when we came out in June, we talked about $100 million investment in expanding our capacity. As we've gone through the pandemic, people's focus on this space has given us more confidence in the long term. We're still guiding to 8% to 10% long-term growth for the company.

But we thought it prudent to actually upsize our capital for capacity to be prepared for the long term. And so all of that is going to a 70% increase in capacity for our decking business, in addition to some capacity increases in our other lines.

BRIAN SOZZI: You have a longer-term goal to raise your adjusted operating profit margins by 500 basis points longer term. How do you get there? When I see a number like that, I'm thinking, here's a company that might expand into new product categories. Where else are you looking to get into?

JESSIE SINGH: Well, as I mentioned earlier, the fortunate thing about our business is recycle is a key feed stream. And we're relatively early in the recycle journey. So we have an ability to vertically integrate. We bought a recycle company. And that becomes a meaningful part of our margin expansion opportunity in the future. And we're very fortunate because sustainability and doing the right thing, in our case, actually leads to the potential for expanded margins as we move forward.

BRIAN SOZZI: Where are you positioned in the home centers?

JESSIE SINGH: Yeah, so as you consider the outdoor living market, and construction in general, about a third of the business is home centers, and about 2/3 of the business is the pro channel. We've got a nice position built out over 20 years in both channels. In the home center, you'd find us available in special order and in stock in a certain percentage of stores.

But one of the strengths of our company, and part of the reason for our long term success and positivity moving forward, is we've got almost 200 salespeople, and we cover both the home centers and what we define as that pro channel that really facilitates growth. And we've got a really strong ground game in the business.

BRIAN SOZZI: Having the-- I'm Home Depot every week-- not building a deck, but doing other things around the house. They've put in strong social distancing measures, Home Depot and Lowe's. And I imagine this product consumers need to get comfortable with buying. Has that impacted your business at all?

JESSIE SINGH: Well, to some extent. But one of the key characteristics, as you pointed out, of this business is really understanding it, visualizing it. We see a lot more digital activity right now. Our website visits are up almost 100%. We see people engage more in the category.

And one of the beneficial aspects to this category, too, is it's outside. So as our contractors engage consumers, they're actually able to work outside, in a distance way, show people the product, interact with the product, do all of the design activity outside. So this happens to be a category that has functioned pretty well, even while maintaining the safety of social distancing.