Company Overview
The AZEK Company Inc. (AZEK) is an industry-leading designer and manufacturer of beautiful, low-maintenance, and environmentally sustainable outdoor living products. With a focus on innovation, AZEK has positioned itself as a trailblazer in the industry, offering a diverse portfolio of high-quality products that cater to the evolving needs of homeowners and contractors alike.
History and Growth
Founded in 2001 as CPG International LLC, AZEK has a rich history of driving progress in the outdoor living space. The company initially focused on producing high-performance PVC and composite deck and railing systems under the TimberTech brand. Over the next decade, AZEK expanded its product offerings to include trim, moulding, and other exterior building products. In 2013, the company made a significant move by acquiring VERSATEX Building Products, a leading manufacturer of cellular PVC trim, which strengthened its position in the siding and exterior trim markets. Around this time, AZEK also introduced its AZEK Trim and AZEK Moulding product lines.
The company's growth journey continued with its initial public offering in 2017, raising capital to fund continued growth and innovation. Shortly after going public, AZEK made another strategic acquisition, purchasing INTEX Millwork Solutions, a maker of high-quality exterior millwork products. These strategic moves have helped AZEK establish itself as an industry leader in attractive, low-maintenance outdoor living solutions, with a portfolio of premium brands including TimberTech, VERSATEX, and AZEK Trim.
Sustainability Commitment
AZEK's commitment to sustainability is a hallmark of its business, as the company continues to increase the use of recycled materials in its products, with its AZEK Exteriors brand incorporating up to 40% recycled content and its TimberTech Advanced PVC decking products reaching up to 60-65% recycled content.
Financials
AZEK's financial performance has been impressive, with the company reporting robust revenue and earnings growth in recent years. In its fiscal year 2023, the company generated $1.37 billion in revenue, a 7.8% increase from the prior year, and net income of $62.36 million. The company's operating cash flow (OCF) for fiscal 2023 was $362.54 million, with free cash flow (FCF) of $274.00 million.
In its most recent quarter (Q3 2024), AZEK reported revenue of $434.37 million, representing a 12.1% year-over-year increase. Net income for the quarter was $50.11 million, up 44.7% from the same period last year. Operating cash flow reached $195.07 million, a 13.6% increase, while free cash flow grew by 7.6% to $177.52 million. The revenue and cash flow growth was primarily driven by strong demand in the Residential segment, partially offset by the divestiture of the Vycom business in the Commercial segment. The significant increase in net income was attributed to higher sales, lower raw material costs, and improved plant utilization.
AZEK's strong balance sheet, with a net debt-to-EBITDA ratio of 1.2x as of September 30, 2023, provides the company with the financial flexibility to continue investing in its growth initiatives. The company's liquidity position remains solid, with a debt-to-equity ratio of 0.42, cash reserves of $346.95 million, and an available credit line of $147.80 million under its $150 million Revolving Credit Facility. AZEK's current ratio of 3.07 and quick ratio of 2.11 further underscore its strong financial health.
Innovation and Product Development
One of the key drivers of AZEK's success has been its focus on innovation and product development. The company consistently introduces new and improved products, such as its recently launched TimberTech Terrain+ decking and TimberTech Fulton Rail, a galvanized steel railing solution, which have been well-received by customers. AZEK's ability to stay ahead of industry trends and meet the evolving needs of its customers has been a crucial factor in its market share gains.
Strategic Expansion
AZEK's growth strategy also includes strategic channel expansion and partnerships. In 2023, the company announced an expansion of its distribution partnership with Doman Building Materials, which will enable AZEK to further penetrate the Canadian market and drive incremental growth in fiscal year 2025 and beyond. These types of strategic initiatives highlight AZEK's commitment to expanding its reach and enhancing its market position.
Recent Performance
Despite the broader macroeconomic challenges, AZEK has demonstrated its resilience. In its fiscal third quarter of 2024, the company reported a 12% year-over-year increase in net sales, with its Residential segment delivering an 18% year-over-year sales growth, excluding the recently divested Vycom business. AZEK's ability to outperform the market and gain market share is a testament to the strength of its business model and the effectiveness of its growth strategies.
Future Outlook
Looking ahead, AZEK remains optimistic about its long-term prospects. The company has raised the bottom end of its fiscal 2024 guidance, expecting consolidated net sales in the range of $1.422 billion to $1.438 billion, implying 10% to 11% growth year-over-year when adjusting for the Vycom sale. Adjusted EBITDA is projected to be between $370 million and $380 million, representing 30% to 34% year-over-year growth.
For the Residential segment in fiscal 2024, AZEK anticipates net sales between $1.351 billion and $1.365 billion, representing 10% to 12% sales growth year-over-year. Segment adjusted EBITDA is expected to range from $358 million to $367 million, a 42% to 45% increase year-over-year.
In the fourth quarter of fiscal 2024, AZEK projects revenue between $329 million and $345 million, with adjusted EBITDA ranging from $82 million to $92 million. The company expects residential sell-through growth in the mid-single digit range for the fourth quarter.
AZEK's confidence in its ability to navigate the current macroeconomic environment and continue delivering strong results is bolstered by its robust pipeline of new product launches, its focus on driving brand awareness and material conversion, and its commitment to operational excellence.
Challenges
However, AZEK is not without its challenges. The company has faced some operational headwinds, including the impact of the COVID-19 pandemic on its supply chain and labor availability. Additionally, AZEK's exposure to the residential repair and remodel (R&R) market, which has seen some softness in recent quarters, could present a risk if the broader housing market weakens further.
Liquidity
AZEK's strong balance sheet, as mentioned earlier, provides a solid foundation for its financial stability. The company's net debt-to-EBITDA ratio of 1.2x as of September 30, 2023, indicates a healthy liquidity position, allowing AZEK to maintain flexibility in its operations and pursue growth opportunities as they arise.
Segment Performance
AZEK operates through two primary segments: Residential and Commercial.
The Residential segment is the company's primary business, manufacturing and distributing a variety of outdoor living products primarily for residential use. Key product categories include decking, railing, trim and exteriors, pergolas and cabanas, and accessories. This segment accounted for $1.04 billion, or 95.3%, of AZEK's total net sales in the first nine months of fiscal 2024, growing 19.3% year-over-year. Residential Adjusted EBITDA was $279.3 million, with an Adjusted EBITDA margin of 26.8%.
The Commercial segment manufactures and distributes highly engineered products primarily for commercial and institutional applications, including lockers and bathroom partitions. This segment accounted for $51.7 million, or 4.7%, of AZEK's total net sales in the first nine months of fiscal 2024, representing a 52.3% decrease from the prior year period, primarily due to the Vycom divestiture. Segment Adjusted EBITDA for the Commercial business was $8.3 million, with an Adjusted EBITDA margin of 16.0%.
Industry Trends
AZEK's Residential segment has delivered an 18% CAGR from 2018-2023 and a 12% CAGR from 2013-2023, demonstrating the company's ability to outperform the overall market. The company cites favorable industry trends such as an aging housing stock, the expansion of millennials as homeowners, a shift to more sustainable materials, and an increased focus on outdoor living as driving long-term growth opportunities.
Conclusion
Despite these challenges, AZEK's long-term growth prospects remain compelling. The company's focus on innovation, sustainability, and strategic partnerships, coupled with its strong financial position, position it well to continue capitalizing on the growing demand for outdoor living spaces and material conversion from traditional materials to engineered products.
In conclusion, The AZEK Company Inc. is a standout player in the outdoor living market, consistently demonstrating its ability to drive innovation, sustainable growth, and market share gains. With a proven track record, a robust product pipeline, and a clear strategic vision, AZEK appears poised to continue delivering value for its shareholders in the years to come.