The AZEK Company Inc. (AZEK) Earnings Call Transcript & Summary

Good afternoon. I'm Ketan Mamtora, BMO's Building Products Analyst, and we are very pleased to have with us today, AZEK. Joining us from AZEK are CEO: Jesse Singh; are CFO, Pete Clifford; and Eric Robinson from Investor Relations. Most of you are quite familiar with what AZEK does, but sort of very briefly, they are -- they participate in the outdoor living market. They are the second largest producer of composite decking in North America. So what I'll ask Jesse to do today is just -- spend just a couple of minutes and give a brief overview about the company and strategy. And after that, we will open it up for questions. So, Jesse, thank you, and take it away.

Sounds great. Thanks for having me today. Just in summary, our focus is on revolutionizing outdoor living and using recycled materials to do that. Simplistically, we take low use recycled polyethylene and PVC and convert it into decking, rail accessories on one side, and we've got a product line that's called exteriors, which is really the accent on top of siding on the outside of home. So the way to think of it is, as we define outdoor living, it is the floor with the decking, the accessories around that, the rail, that's the safety, pergolas, which is overhead, and the wall which sits up against the house through our exteriors business. In general, it's a $14 billion market. Each of the components I laid out are meaningful in there. We also see $10 billion from adjacency. We've grown 18% through 2021, a 10-year CAGR. We have a track record of growth, and that's really driven by a combination of a few key elements. Number one is underlying R&R market. On top of that, we play in markets that have a material conversion opportunity, primarily wood, which allows us to be additive to that. On top of that, we are an innovator. And what I mean by that is, every year that goes by, new products are a part of what we do, which allows us to continue to expand the TAM, the addressable markets that we see, and that's been a key part of our growth. And then the last component is, we selectively add acquisitions. We laid out a 5-year plan in June. That plan involved adding 500 basis points from a 2019 baseline of EBITDA to get us to about 27.5% EBITDA. And in general, we view ourselves as consistently over a long period of time, having a CAGR -- basically a double-digit CAGR as a company. And once again, we've had 18% over the last 10 years. We believe in a portfolio of actions to achieve our objectives. On the growth side, as I mentioned, repair and remodel. On top of that, outdoor living is a focus, it has been for a decade as people don't want to stand and sit on grass. They want to have a nice outdoor space. They don't want those old green lawn chairs. They want an outdoor living space. So that's been a trend that has existed. On top of that, every year that goes by, we increase the amount of our materials versus wood. That provides us our own analog to digital conversion. We're adding adjacencies. We are expanding our channel position and then selective acquisitions. And then on the margin front, it's really built on 2 key platforms. One is expanding the use of our recycled materials, and then the second is continuous improvement through our AIMS plan. I'm sure there'll be some questions on inflation and pricing. What has -- what we've worked through over the last 18 months is about $220 million of raw material inflation that we have priced against and there's a lag in there. So, as we move forward, we believe that, that will also be additive to our base story. So with that, just high level last thing I'll just say is, our main differentiation in the market is aesthetics, and we tend to skew higher end. And when we drive wood conversion, it's really around either productivity in our exteriors business or driving the right kind of look in our deck rail and accessories business. And, of course, that's on top of not having to paint stain or maintain any of our products, right? So with that, Ketan, I'll turn it over to you for questions.

Excellent. No, that's a great overview, Jesse.

So what I'll do today is -- sort of with my questions -- Some are kind of more near-term focus while some of the others are kind of more medium-term, longer-term opportunity in terms of where AZEK is going. Maybe to start with, let's talk a little bit about where you are with inventory destocking. I mean, that's been a pretty kind of important topic that we've talked a lot about in the last couple of quarters or so. So as you stand here today, where do you expect to be with inventory destocking by the end of this calendar year?

Great. Pete, you want to walk through that?

Yes, absolutely. So look, as we articulated, we made a lot of progress in the fourth quarter. We had hoped to get about $90 million channel inventory on the fourth quarter, one of being about $85 million. We're targeting $45 million in the first quarter. And again, to remind everybody, we had a prior year build in 1Q at '22 about $30 million, hence, sort of have $75 million of kind of destocking that we've been talking about. That $45 million being incrementally different than the 0 to $35 million. Again, think of the $10 million difference between the $35 million and the $45 million is $5 million moving from 4Q. And then we had a slightly lower expectation of future demand for the rest of the year with the 10% down, which caused some recalibration of a little bit incremental inventory out at the end of the first quarter. And our ambition all along was to position ourselves to get to be about 10% down from days on hand sort of pre-pandemic. So looking at 2017 through 2009, we've had the ambition to get, again, below that in a fairly meaningful way. And the best way we know how to de-risk the year is to make sure we've got the right amount of inventory in the system, and we feel very strongly that we will get there by the end of the calendar year.

So, Pete, by the end of the year, do you expect channel to be -- channel and your inventory to be back to kind of normal levels, sort of pre-pandemic? Would it still be above those kind of normal levels below? How would you characterize that?

Yes. Our target the last 2, 3 quarters has been to get the ambition of looking at the 17 to 19 days on hand and trying to get ideally about 10% below that.

Got it. Switching over to the demand side. Obviously, you've talked about kind of 10% in terms of your FY '23 budget. Can you talk to kind of what you guys are seeing out there in terms of current sell-through? What are you hearing from your contractors in terms of what they are kind of expecting demand in the coming 2 or 3 quarters?

Yes, Pete, I can take that. So as you look at our current profile -- and we're trying to be a little bit more transparent on units versus dollars, right. So if you look at our sell-through trends over the last few months, and really for the last few quarters, it's been positive on dollars and modestly negative, call it, low to mid-single-digits on units, and that's across our -- the entirety of our residential business. It has continued at that pace. And so, as we sit here today and as we've talked about, we have about a 10-week visibility through our contractors where they're communicating their backlogs and contractor backlogs have maintained in that 8 to 10-week range. That has consistently been there. Now, as we move into 2023, as you highlighted, what we talked about on our call was a planning assumption of down 10%. That 10% was really driven by 2 variables. One is high teen -- an assumption of high teens decline in new construction, and only 15% of our business is new construction. But -- our estimate is, and -- but premise #1 was a high-teens decline in that. And that really just is an assumption on housing starts. The other assumption we were using, and have used in our planning, is that we would see high single-digit declines in repair and remodel. So if you add that up, that gets you to an assumed decline of 10%. Now once again, we are using what I would say on the new construction is pretty talked about numbers. On the repair and remodel, there's a wide range right now, of assumptions, and we probably are using some of the more conservative or bearish assumptions right now on repair and remodel. And the way we think of that planning is -- we have initiatives that I talked about, and we are confident that those initiatives will deliver something positive on top of the underlying growth. But we also understand that there's going to be variability. And so, we think it's a variability in our demand assumptions. There could be more negative -- And -- so if you roll all that out, planning assumption of 10%, we're using our initiatives as a buffer against some volatility on that. And against that, you saw what we had as a planning assumption on our EBITDA.

Got it. So it's fair to say that you've not seen any kind of change in that underlying sell-through from what you've been seeing recently, which is kind of down low single digits, in terms of this pure volume?

Well, we currently said -- Now to be upfront, it's really important to understand, people are expecting some change to that. So I don't want to imply that our contractors don't see the potential for negative. It's just not there right now.

Perfect. No, that's absolutely clear. Okay. And then, shifting to the recycling side, Jesse. At the Analyst Day, you all talked about sort of the margin improvement potential, and you pointed to about 350 basis points. And I recognize it's not sort of linear, that it kind of happens 50 basis points every 6 months or whatever. But what is the right way to think about sort of as broad mile markers when I think about your shift to LDP or having more recycled content in PVC? What is the right way for us to -- sort of the framework in terms of how we get that 350 basis points?

I think, at a high level -- and I'll keep it high level, and we can clearly go more detailed. Think of it as we have a portfolio of actions that we are taking. We laid that out at the investor meeting. The recycle side adds up to 350. In aggregate, I think we indicated that we feel comfortable with 100 basis points a year of delivering. And depending on the quarter and the year, it might come from different elements. And so the way I would think of it is, we've been transparent on the key elements, right, which is increasing the use of recycle and using lower cost recycle. Those are kind of the 2 key driving elements. Against that, you should expect that on the PVC side, that incrementally, we will creep up our percentage of usage of PVC every year. And then on the transition between higher cost high-density polyethylene and lower cost low-density polyethylene, that there will, once a year be a step change of -- maybe not 20, 30 percentage points, but once a year, there'll be more of a step change in that direction. And then our -- so if you add all that up, that's why we feel very comfortable on that 100 basis points a year. And that also includes our ability to have continuous improvement, which we feel very confident about. So I think we provided a lot of detail, but I think it's -- when you just step back, ultimately, it's about delivering margin expansion every year. And I think what we've laid out is, we have enough levers to manage through that. Obviously, we need to work our way through the next couple of quarters, and then it's -- we'll start to see the benefit of that.

Got it. Okay. No, that's helpful. And then sticking with recycling, you are at sort of mid 50%, 56% recycled content. As you look ahead next 3 years, 5 years, where do you think you can get that number to be? Sort of -- there is a PVC element, which is -- which I would imagine, takes a little longer to take it up. So as you look at the portfolio on a combined basis, where do you think that recycled content could be next 5 years, let's say?

Yes. I mean, we haven't guided specifically, but it's fair to say from what we can see from execution, that, we would see the potential for it to be in the 60s, if we're in the 56% now. And as you pointed out, the way to think of our composite decking is, we're effectively where we need to be on the recycled percentage. We're 100% recycled plastic in the core. Now we can go to cheaper recycled plastics and do certain other things, but the recycled percentage is right. And so, what that leaves -- and it's in the 80s -- And so what that leaves is -- our PVC business -- PVC decking, for example, which is a big product line for us, we've gone from 50% to 60% in the last couple of years. We would expect that to creep up every year. And then, likewise, in our exteriors business, which has lower percentages of recycle, it -- we would expect that to creep up every year And so, that combination is really what gets you into the 60s.

Got it. And then, on the recycling side, we've talked about sort of the shift to LDP, we've talked about recycled PVC. I'm curious, what else you can do, whether it's on the sourcing side or on the sorting side, collection side? Do you think you've got sort of runway there in terms of what you can do to kind of help either lower the cost, get more efficient? Sort of what is the kind of roadmap?

Absolutely. I mean, we are not -- we talk about being in the earlier innings, right? So on the PVC side, we are vertically integrated. We directly source from those that provide the sources. We are -- now having said that, on the PVC side, you are always looking for lower and lower cost sources. And for us, the key unlock on both sides is getting at materials that are landfilled. So for example, on the PVC side, we've announced a relationship with a construction recycler, which is post construction recycle, post demolition recycle. PVC, they do a good job with metals and certain other things. But historically, PVC has not been one where, in a demolition -- that we've had the right kind of infrastructure. The more we do that versus the better for the environment, but you're offsetting something where someone's got to pay to have something landfilled as opposed -- So in effect, we're replacing a landfill. I think, similarly, on the polyethylene side, there is a lot of opportunity for us to do a better job of sourcing and vertical integration. We are not fully vertically integrated on the polyethylene side. We are not always sourcing directly from the sources. Now, in general, that's okay because it makes sense to pay that modest payment, because you're getting the benefit from increasing recycling. But there is a long tail of continuous improvement where we can improve it, and I think there's a proven track record of that.

Got it. And then, Pete, switching to the cost side. On the call, you talked about sort of $50 million annualized but $30 million impact in '23 from lower sort of raw material cost. Is there a way for us to think about sort of the sensitivity to lower resin prices? And I recognize there is a lag component, you've talked about it. But for us on the outside, is there a way to think about the sensitivity to lower resin prices, if things were to fall, let's say, in the coming months and quarters?

Yes. I mean, I think, I would start with circling back to -- look, we've seen about $220 million of inflation over kind of this 20 to 24-month period. We've kind of set out a lot about half of that as PVC-based. So as you think about where PVC kind of was at end of this summer, from an index perspective, it's probably fallen about just under 30% since the peaks at the end of the summer. Most of the momentum, if you can call it that, in the last 45 to 60 days, is a general statement. And the commodity markets has been positive for us. So meaning, our outlook was obviously formed 45 to 60 days ago. And I would say our positioning since then in terms of what we've seen in the marketplace is only really supportive of, if not better than what we articulated, from our outlook perspective. So at PVC, down $30 million, is it far-fetched to think that PVC could possibly fall 50% this year? I don't think that's out of the realm just given -- we've kind of said we expected this to happen, that if the economy slowed at all, and specifically if construction spend were impacted, that's the catalyst or the best proxy for us to look at sort of future PVC prices. So it's kind of unfolded as we expected. It's probably happened a month or 2 faster than maybe what we expected. But I think we have a chance to see some structural change to our margins that we've kind of talked about at our Investor Day that besides recycling -- that there would be a margin opportunity that would surface if commodities -- if and when they rolled over.

Got it. And then one other question that I have gotten quite a bit recently is, if the market overall is not just sort of composite decking market, but if the economy is slowing -- we've had really strong results, volume growth the last couple of years. We've had more supply that's come into the market. If things are just kind of easing a little bit, why wouldn't the competitive dynamics in the industry not change?

Yes. Let me start with -- until 2019, if you look at composite decking and actually both our categories, there was excess capacity in the market. So composite decking, if you go back to 2012, rough numbers. Utilization was in the 30s. And so, everyone had capacity, and you had to build your market with excess capacity. And the market is really built by engaging millions of consumers, thousands of dealers -- I'm sorry, millions of consumers, tens of thousands of contractors, thousands of dealers, through an exclusive distribution network that allows you to deliver product to those dealers within 48 hours, right. So you think about what it takes to build that. And ultimately, it comes down to consumer choice and contractor choice. And against that backdrop, we've got good, better, best premium, and people tend to buy products based on the -- in the category that they're in from their general price point range, and then the product that they like. So ultimately, we've gone through multiple -- I've been here almost 7 years. We've gone through multiple cycles of competitors coming into the market, either established ones or new ones -- trying to compete on price. That's just given in the market, that there are always competitors that try it. And ultimately, what it comes down to is, you have to provide the value of the product that people want. And -- so that's kind of element #1. We're very used to operating with excess capacity. If I wanted to fill an additional factory, I can't get there through discounting. Like there's no -- the math does -- I can't -- like -- as a leader in the marketplace, all I would be doing is eroding my own margin. Like I'm going to get the business, I'm going to get -- And I -- fundamentally, I would summarize that as, it's a not commodity market. It's a market that's -- that people choose the product. And so I think the other element to consider is, the fixed cost structure of the business is relatively modest. I think we talked when we were at higher utilization rates, that 7% of our cost is fixed, the rest is variable. And so incrementally, getting some utilization is certainly helpful, but you can't do that at the expense of your margin profile. The math just doesn't work, right. And so, I think as -- we, of course, are concerned about the macro. We, of course, want to continue to grow, in particular, our deck rail and accessories business. We are incredibly comfortable with our ability to navigate any competitive dynamics, and our bigger focus is really around driving wood conversion and continuing to drive penetration in the market.

Got it. And then, Jesse, so over time, where do you think you can get that composite share to be over time? I mean, right now, we are at, call it, 24%-25% range as you look out. How big do you think this market can be?

Yes. So we've done a lot of research. We shared some of that at our Investor Day. So as you pointed out, 75% of the market is wood. Within that 75%, 1/3, give or take, or 25% -- I'm giving you rough numbers, it's just going to buy on price, right. So that particular segment of the market, they'll go into a big retailer and they'll see a wood product at a 100 and a composite at 110, it's close enough, I'll do it, or they're just going to go with whatever is cheaper. That is not our focus for wood conversion. When we look at the opportunity we have with wood conversion, we see half -- more than half of the wood market is -- fits the characteristic of what we already have. So think of it as, if it's 25% converted, there's another 50% that has similar buying characteristics as our current customer base. And so, we view the ability to convert half of that as realistic over a period of time. Now longer term, we hopefully could get to 75%. But the next logical focus for us is getting to 50%. And it's really getting people to see the product for what it is. I think people recognize the maintenance benefit, but they don't want a Fisher Price looking deck. They don't want a plastic deck. And once we're able to engage people so that they see that they can have the best of both worlds, something that will look over the long term more natural than nature over a period of time, and gives the look that they want, we convert it. And that's why we've been -- we continue to see conversion opportunities. So long-winded way of [ saying ]. I think for us, the next milestone is to get to 50%. Whether that happens in the next 10 years or less or more, it's taken us, give or take 20 years to get to 25%. We've shown some network effect of that conversion accelerating, but we certainly view doubling of the market in terms of its share position as a very realistic opportunity that we have line of sight on, and we're not saying it's going to happen next year, but we've got to continue to work against that.

Yes. Jesse, as that market -- as the composite side of the market starts to become bigger over time, do you think then the price of wood becomes -- sort of starts to come -- become more of a factor in discussion, especially when we've seen lumber prices fall as much as they have fallen recently, and you've got these set of customers that are probably on the fence trying to decide between composite and wood. So do you think at that point, people start to compare more with what's going on, on the wood price side? Or there are sort of other product innovations that are coming down the pike that kind of skews the balance again in favor of composite?

Yes. For -- with the exception of that 25%, give or take, for the most part, what the research shows is, price is not in the top 3 considerations, right. And think of it, right, you -- our current number, I think I saw was -- let's say, wood is -- the cheapest wood pressure treated is $1.20 or $1.30 a foot. Well, composites, give or take, start at $1.80 to $2.20, right? And -- so you're already within the range in the -- so in that construct, and that is the entry level, and then we go all the way up to 5x that. In that kind of entry or in that scenario, people continue to focus on having the right look. And the way to think of it is, the decking part of a composite deck might be 20% of the cost, maybe 25% of the cost of the job, right. And so, incremental -- an incremental cost to get the right look is relatively modest, right? And the other way to think of wood is that the price of a significant remaining part of that job, if it's 20% to 25% of the cost of a deck, is labor and wood, because so much of the -- all building has -- most building has some element of wood in it. So as wood gets cheaper, all repair and remodel gets more cost-effective. So it takes some of the inflation out of that. And so, we believe that there's a lot of runway before we start bumping up against the pure price barrier. Now it's going to be there on the opening price point, but the rest of the categories, we feel pretty good about.

Got it. And then, Jesse, can you give us a quick update on kind of how the integration of the structure business is going, the pergolas, cabanas, kind of having been in your portfolio for a little while? Kind of -- what kind of opportunity do you see there?

Yes, terrific. As we've talked about -- that business under our ownership has grown kind of -- step 1 was debottlenecking the factory. When we bought them, they had a really good team, a good product and perhaps less resources focused on continuous improvement in the factory. So, number one was get their production capability to be able to meet demand. They had grown pretty rapidly. That's complete. They continue to see solid growth as a business unit. They're a little bit more focused on commercial. So think of corporate campuses, hotels. If you go on their Instagram, there's a great one from Sunset Boulevard where they had a deployment. So as commercial needs more outdoor space, they're really in a good position. So they continue to grow that in their core business. I think what's exciting for us is, as I mentioned in my opening comments, you have a deck, you've got railing, you've got the house behind you with the accents that you need. But in a lot of cases, having either rain or sun protection extends the life of that outdoor space. And so, StruXure and TimberTech together have launched something called the Cabana X, which is a standard pergola -- smart Pergola in a box kind of a thing where a contractor could put it up in less than 2 hours. And they're standard sizes, and that immediately gives us in our existing channel an opportunity to continue to expand beyond the core business model that structure had built. And Peter, Eric, I don't know if you've got any additional comments on top of that.

Yes, I'd just say, look, we -- as we had mentioned, when we bought StruXure, the profitability was kind of low teens, and we'll -- our budget profile for this year is nearly at the corporate average. So we've made a lot of progress not only in growing the business, but getting it to look a lot more like the rest of the portfolio. So kudos, the team there has done a great job.

And is the go-to-market strategy in that one in terms of sort of channel participation, different from what you're doing on the decking side in terms of sort of big box presence versus kind of more pro presence? Is there any difference at all, Jesse?

Yes. It's a good question. And the way to think of -- it's actually occurred in all of our acquisitions. But the way to think of an acquisition strategy is, we're buying a really good business model. And so, for StruXure, their business model is a semi-custom build-out of smart pergolas. And against that, they have dedicated installers and dealers and showrooms. And that infrastructure -- and some of those installers had already included TimberTech contractors. And so, that model has continued. And think of it as, if I happen to be in Arizona right now, there's a very large showroom here where you could go in and see StruXure product, and they're actually expanding to putting TimberTech in that showroom. And it's a dedicated installer base that focuses in on that. So that model is more of a distinct kind of direct to custom consumer and direct to commercial model. And so what we're doing is we're basically adding to that and giving our contractors access to the semi-custom products so that they could become an installer and then creating this more standardized pergola in a box for our existing dealers and contractors. So leverage what we have and then add to it the channel benefit. We've done the same thing with Ultralox and we're doing the same thing with INTEX.

Got it. And then, maybe talk a little bit about sort of capital allocation priorities. You've done some share repurchases this fiscal year. 2023, certainly, there is economic uncertainty in terms of what's going on. So talk about sort of balancing -- having some sort of cash cushion if there were to be any opportunities versus having the right leverage on the balance sheet. Sort of how do you think about sort of balancing those 2 sites?

Pete, why don't you take that?

Yes. So look, I think the keys for this year as we think about 2023 is first and foremost, CapEx returns to normal, and that's not just at [ 23% ]. That's probably a [ 24% ] comment as well that we would expect CapEx to kind of sit in that 5% to 7% of sales, which means about $100 million reduction year-over-year and free cash flow and CapEx alone. We've been transparent about the fact that we want to take some cash off the balance sheet, or inventory became elevated over the last 1.5 years, 2 years. So between those 2 levers, we feel like even if EBITDA is down this year, we can actually still support the share repurchase program that we have in place. I think from an M&A perspective, [ COGS ] is probably too strong a word. I would just say in the very near term, we're going to be really, really selective about deploying capital on the M&A side, just kind of given the macro uncertainty right now. So again, I think we can generate enough cash flow comfortably to support the program. As you're aware, as a general rule, where consumers of cash in our first and second quarter and sort of generate all of our cash in the third and fourth. I think what that will mean is -- we'll be supportive of the program, but probably lighter in the first half of the year. And assuming that the macro environment stays as we kind of see it, then we'd certainly be more participative in the back half of the year. And look, it's -- our [ sound ] barriers kind of been 2.5x. And I think you'd kind of -- see us kind of adhere to that, that I think it's prudent right now to keep a strong balance sheet for another couple of quarters until we kind of got really good, clear line of sight to the macro.

Got it. And then, Pete, I've got a question here for you. The question is, we've talked about the modular nature of production. We've talked about the business kind of being more variable in nature. So why in that case have we seen the decremental margins as high as what we are seeing in the first couple of quarters? Kind of what is the -- what are the key drivers which is causing such a big jump in the decremental margin?

Yes. I mean, we've been pretty consistent in the right way to think about the business as sort of the flow-through being about 45% on a normal drop in demand, and that was kind of just the prior year profile of [ 38% ] plus 10% of our COGS being fixed, which is about 7% of sales, kind of hence the [ 45% ]. We still think that's the right way to think about the business over a normal cycle of us being plus or minus, let's call it, even 10% to 15% down. The challenge that we have that we've talked about on the call is in the first quarter, we're literally down over 40% from a production perspective. So at that kind of magnitude of a drop, it's just the math that's very difficult for us to work. We've been very aggressive on the variable, [ hourly ] side of the equation to kind of get the folks directly tied to extrusion lines right sized. But at a time where labor is still pretty tight, given some of our locations, we've been smart in keeping our more experienced [ hourly ] folks. And as well, we haven't made rash decisions on sort of the salary. Given the fact that we are going to need people back in a couple of months, it just wasn't prudent to hit that quite as hard in June and July.

I think the other -- just from a utilization standpoint, the way to think of it for us is, as folks may know, we're going through 2 quarters of inventory correction in the channel rather than level loading our factory, where we would have seen less decremental. We decided to scale down hard early to the point where we are matching or below at times the volume declines in our channel. And the logic there is, it's a more conservative approach. You take a bit of the financial hit earlier. But then as -- even if volumes are down 10% to 15%, you just do the math versus down 40% or plus, right. You have to bring your factories up, and so you start to get utilization benefit in our back half of the year even if volume is down. And it's just -- we think it's a more conservative way to run the business, which is taking the pain earlier. And I think what you're going to see is, when we get to the back half, in particular, as we move through the third and fourth quarter, the concept of decrementals kind of -- it becomes less relevant because of the backlog of benefit that we have shown up in the back half of the year.

Got it. And then Jesse, maybe very quickly, can you talk a little bit about what you are seeing on the exterior side of the business? You've talked quite a bit on the decking side. Exteriors is a big piece for you guys as well. Can you talk about kind of what you're seeing there in terms of demand? It's -- I would imagine, a little more new resi focus than kind of composite decking. Are you starting to see kind of the impact of all these home buildings or of new construction slowing?

Yes. So the way to think of it is exteriors is a 1/3 of our business, and a lot of that 15% exposure we talked about earlier, in new construction, sits within exterior. So call it, 40% of exteriors, give or take. It might be a little less, a little more -- has -- is focused on new construction. We have yet to see a large impact. There might be impacts on the margin relative to the slowdown in new construction. There's a lot of backlog. We would expect to start seeing the slowdown of that particular business -- the part of that business that's new construction, if it were to occur, and we assume it will -- in one form or another, it will show up in probably March-April time frame. And then the offsetting aspects of that are obviously our initiatives. But we -- that's how we would expect that to flow. And once again, they -- that particular business has done a terrific job of using new products and share gain to position that business adequately, and we feel good about our ability to perform, but it will be impacted by new construction.

Got it. Okay. So we are right at time. So I want to end our discussion for today right here, and I want to thank the AZEK team for coming out and spending the afternoon with us. We really appreciate it.

Thank you.

Thank you so much.

Thanks, Ketan.

Okay. Thanks, Jesse. Thanks, Pete. Thanks, Eric.

Appreciate it. Bye-bye.