Azek goes public eyes increased use of recycled plastic

Chicago-based Azek Co. Inc., a composite decking and building products manufacturer, raised $765 million by offering 33.3 million shares at $23 as it launched its initial public offering.

That's 2 million shares more than expected, priced above the anticipated range of $19 to $21, which would have raised $625 million and been used mostly to pay down debt.

At this pricing, Azek commands a fully diluted market value of $3.4 billion, according to Renaissance Capital.

The manufacturer of cellular PVC and composite decking, PVC trim and other outdoor building products began selling Class A common stock June 12 on the New York Stock Exchange under the ticker symbol AZEK. By the end of the trading day on June 12 it was priced at $27.11.

Azek plans to use proceeds from its IPO to redeem senior notes then prepay the outstanding principal, according to its prospectus. Azek's total debt of $1.25 billion includes $804.3 million under a term loan credit agreement, $129 million under a revolving credit agreement and $315 million of 2013 notes.

After paying down debt, the prospectus says any additional proceeds raised in the IPO will be used for general corporate purposes, including working capital, operating expense, capital expenditures, acquisitions or other strategic investments.

"It's great to see investors have a strong interest in the Azek company and our long-term growth prospects," Jon Skelly, Azek's senior vice president of strategy and execution, said in a phone interview. "First and foremost, it is a great opportunity for all the members of our team. We've all been working over 30 years to build this business and bring it to where we have today creating beautiful outdoor living products."

The IPO will allow Azek to improve its capital structure, he added.

"We will continue to invest in our long-term growth, which you've seen from us in the past with new products, entering new channels and putting more sellers on the streets to service our customers. We're really excited about this next chapter of our corporate career," Skelly said.

Founded in 1983, Azek, formerly CPG Newco LLC, generally holds one of the top two market share positions by sales in its product categories. Azek saw sales increase 16.5 percent to $794.2 million for the fiscal year that ended Sept. 30.

The company manufactures Azek-, TimberTech- and Versatex-brand decking, rail, trim and specialty products for the residential segment, which generated sales of $655 million, as well as Scranton- and Vyvom-brand sheet products, bathroom partitions and lockers for the commercial segment, which brought in $139 million.

Net sales for the 2019 fiscal year had increased by $112.4 million compared to 2018 thanks to an increase in organic sales volume and $50.8 million from the acquisitions of Versatex Holdings LLC, which broadened Azek's lines of cellular PVC exterior trim and mouldings, and Wes LLC, which designs and sells aluminum railing branded as Ultralox.

However, Azek posted a loss of $20.2 million because the cost of sales increased by $61.2 million to $541 million for the last fiscal year. Azek says it had expenses of $43.4 million related to the higher organic sales volumes, $35.7 million due to higher acquisition sales volumes, and $5.3 million of startup costs for a polyethylene recycling facility.

Azek plans to increase the amount of recycled materials in its deck boards, which exceeded 200 million pounds last year, by more than 25 percent in fiscal 2020. Two of the company's decking lines, TimberTech PRO and Edge, are made from about 80 percent recycled material.

Azek says there is a significant opportunity for composite decking to take market share from wood as consumer awareness about sustainable materials increases and advances in material science and manufacturing improve the range of colors and textures available.

"We've seen an acceleration of the conversion from wood into our types of materials in recent years," Skelly said. "As consumers get more educated about the benefits of the products in terms of style, design, durability and low maintenance, it has really been an exciting time for the company."

Azek also is benefiting from the trend to extend the total livable space of a residence to the outdoors with a unique deck space for relaxing and entertaining.

"We've seen even more interest in this trend with the stay-at home orders as consumers sit in their homes and look out at their backyards and decks," Skelly said. "We've seen a real increase in our website visits and leads as more consumers engage with us about building the casual living space of their dreams."

To improve its balance sheet, Azek says it has reduced spending on strategic initiatives and taken steps to improve gross margins. The loss for the six months ended March 31 is $5.8 million, according to the IPO prospectus, while net sales for the period increased by 15.2 percent to $411.6 million.

The increase was primarily due to organic sales volume growth, which was driven in part by the expansion of the distribution network on the West Coast in the first quarter.

Recycling also is a core element around Azek's gross margin opportunity, Skelly said.

"Sustainability is incredibly important to our company," he said. "Last year we diverted almost 300 million pounds of plastic waste from going to landfills and instead we put that into our products. Using recycled materials as our raw material is more cost-effective than traditional processed resin. Replacing virgin material with recycled material is good for our profitability and great for the environment."

Azek is growing top-line sales and the market opportunity for building materials is expected to grow for new construction and remodeling, Donovan Jones, founder of IPO Edge, points out in his June 9 assessment of Azek at Seeking Alpha.

But Jones said those positives are countered by Azek management asking for what he described as a premium enterprise valuation at an EV/revenue multiple of 4.68x.

"In addition, all of the IPO's proceeds will be used to pay down debt, with nothing left over for the firm's growth initiatives," Jones said. "This is typical of private equity-owned IPO candidates and is a negative in my view. While the firm is growing moderately in a promising industry, I view the IPO as highly priced, so I'll watch it from the sidelines."

Azek operates seven manufacturing and recycling facilities in the U.S. Most Azek, Scranton and Vycom products are manufactured in Scranton, Pa., while TimberTech products are primarily manufactured in Scranton and Wilmongton, Ohio. All Versatex trim products are manufactured in Aliquippa, Pa., and all Ultralox rail products are made in Eagan, Minn. Azek's PE recycling plant also is in Wilmington.

In addition, in February, Azek announced it had purchased Return Polymers Inc., a major PVC recycler and compounder in Ashland, Ohio.

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