Q3 2020 Trex Company Inc Earnings Call
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Good afternoon, and welcome to the Trex Company third quarter 2020, <unk> earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on the top.
Phone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would like now to turn the conference over to Victoria <unk> Investor Relations. Please go ahead.
Thank you Mike and thank you all for joining us today with US on the call are Bryan Ferry Bank, President and Chief Executive Officer, and then Michele.
President and Chief Financial Officer.
You any blinded data, it's bill Gupp senior Vice President.
All the counsel and secretary as well as other members trucks that's right.
The company issued a press release today after market close containing financial results for the third quarter 2020.
This release is available on the company's website.
This conference call is also being webcast and will be available on the Investor Relations page of the company's website for 30 days.
I'd now like to turn the call over to Bill Bill.
Thank you Victoria <unk> before we begin let me remind everyone that statements on this call regarding the company's expected future performance and condition constitute forward looking statements within the meaning of federal Securities Law. These statements are subject to certain risks and uncertainties that could cause actual result.
To differ materially from those expressed in the forward looking statements for a discussion of such risks and uncertainties. Please see our most recent form 10-K and form 10, Qs as well as our Nike 33, and other Nike 34 Act filings with the FCC.
Additionally, non-GAAP financial measures will be referenced in this call. A reconciliation of these measures to the comparable GAAP financial measure can be found in our earnings press release, a truck stop Tom.
The company expressly disclaims any obligation to update or revise publicly any forward looking statements whether as a result of new information future events or otherwise with that introduction I will turn the call over to Bryan Fairbanks.
Thank you Bill good evening, everyone. Thank you for joining our earnings call to review Trex Company third quarter results and discuss our business outlook for the fourth quarter of 2020 and into 2021.
This was another quarter of record revenue and earnings as we continue to navigate a very robust demand environment, while progressing with a major capacity expansion program to ensure trucks can lead to strong demand in the future.
I want to take a moment to highlight a few specific areas that are pivotal to track the success and cycle, who helped us achieve that success.
First we have the strongest channel partners in the industry and we recognize that they are key to truck sales growth.
They manage through the rapidly changing 2020 pandemic environment exceedingly well.
Also many thanks to our sales team.
Tirelessly traveled to local markets to support tracks customers contractors and retailers.
Lastly, I must note the extraordinary dedication of our manufacturing and supply chain teams have adjusted to the new safety protocols, while making packaging and shipping our product working to install new capacity and providing training to the many new employees joining our team to support our production expense.
Andrew.
So I think all members of the Trex team for their dedication and extra ordinary efforts in helping us achieve another successful quarter. Other work safely through the current pandemic to service our customers.
In the third quarter residential product sales growth accelerated to 20% as we utilize capacity gains from incremental lines in existing facilities to address broad based demand.
Robust demand for decking is not a new trend.
We're living has long represented one of the fastest growing categories within the repair remodel sector and RV you COVID-19, just providing a tailwind for an already strong category.
It has brought the usability comfort and enjoyment of the old to the forefront of consumers' minds.
To meet the current and expected future demand.
We continue to execute on our capacity expansion, which once completed will increase trex decking capacity by approximately 70%.
That's signaling in previous calls this quarter, we experienced increased labor costs as we recruit and train employees ahead of bringing the new production online.
Thanks to our highly efficient operating model, we were able to offset these expenses in the third quarter to report a 13% increase in net income adjusted for the warranty charge and an adjusted EBITDA margin of 29.4%.
To offset these additional costs longer term, we recently announced price increases on certain products set to take effect at the beginning of next year.
Dennis will share more details on this in a moment.
First commercial performed in line with our expectations in the third quarter, posting steady revenue result, and a steady margin profile.
With new leadership in place and the engineering capabilities, we have in house, we see multiple opportunities to expand this part of our business and continue to innovate and the commercial railing space.
We entered this period of accelerating demand for residential products with our broadest range of decking and railing products.
Zimmer demand for a game changing enhanced product line continues to exceed expectations.
This offering significantly expands our total addressable market by providing hole motors with an affordable high performance and eco friendly alternative to pressure treated wood decking.
Well enhancer is off to a great start remains ample runway ahead of us as we pursue this market share conversion for years to come.
With the success of enhanced product line and its appeal to the cost conscious consumer and the continued success of our premium select and transcend decking and railing line, we're seeing growth across our entire product portfolio.
For more than a decade transcend has set the bar for aesthetics performance and design within the industry and for homeowners to seek the best for their outdoor spaces.
Proving this point feedback.
Feedback from contractors continues to be positive it indicates a healthy backlog of projects with no signs of abating.
Since tried to the inception, we've developed and nurtured longstanding relationships with the top specialty material distributors pro channel dealers and D. I y. retailers, making tracks. The most widely available and purchase brand throughout North America and increasingly around the world.
These relationships are one of the fundamental the fundamental elements that position trucks for inclusion on the recently announced Fortune magazine 100 fastest growing companies.
As we have done in the past.
Next we'll continue to earn the business from the best distributors dealers and retailers by ensuring they grow alongside trucks as we invest in our brand and deliver market leading products that meet the needs of homeowners seeking to improve their outdoor living spaces.
The needs of our channel partners customers investors.
Also includes a focus on sustainability.
From inception, Trex has led the industry and the use of recycled raw materials and use was 95% recycled content in our decking product lives as well as recycled content and our aluminum railing systems.
In early October we were honored with a 2020 sustainability leadership award by the business Intelligence group.
Recognizing our ongoing commitment to sustainability.
Straight it through our proprietary manufacturing process commercial and community recycling programs and measurable positive environmental impacts.
Peter winning this latest thought or is the company is highly effective next tracks recycling program, which makes it easy for retailers distributors and consumers to responsibly recycle plastic waste.
Recently, our next tracks recycling program reached a monumental milestone of 1 billion pounds of recycled material collected through participating partners.
As we look forward to the fourth quarter and next year, our fourth quarter guidance points to year over year sales growth of 30% at the midpoint of guidance and for 2021, we expect strong double digit sales growth.
I will now pass the call to Dennis and sure to share more details on our financial performance.
Thank you, Brian and good afternoon consolidated net sales increased 19% to $232 million during the third quarter led by 20% growth in net sales of Trex residential products that reflected robust end market demand across our residential product lines trucks.
Trucks commercial products contributed 13 million to consolidated net sales in the quarter, an 11% increase from the year ago quarter.
During the third quarter, we recognized a one time $6.5 million charge to our warranty reserve for this legacy surface flaking issue that affected a portion of the products manufactured at our Nevada plant prior to 2007.
To put this amount in perspective, the average cash impact is less than 500000 per year through 2035.
Consolidated gross margin in the third quarter was 36.7% or 39.5% after adjusting for the warranty charge compared to 42.4% for the 2019 third quarter trucks.
Trucks residential products gross margin was 37.4% or 40.4% after adjusting for the warranty charge compared to 43.4% in the year ago quarter.
As we anticipated our gross margin was impacted by hiring and training costs in advance of our capacity ramp up in Virginia.
Continued cobot management costs and depreciation due to capital expansion expenditures, partially offset by favorable material costs due to managing our enhanced profile to the lower weight target.
Offset these additional costs, we recently announced a mid single digit price increases on multiple products across our decking and railing portfolio.
Trucks commercial performed in line with our expectations in the third quarter, posting steady revenue growth at 11% compared to the 2019 third quarter, reflecting the underlying growth in the commercial segment.
Gross margin at Trex commercial was 24.4% compared to 26.5% and last years third quarter.
We continue to leverage our operational infrastructure, increasing SGN a expense by only 2% to 28 million from $27.4 million in the third quarter of 2019, resulting in a 200 basis point reduction and that's DNA as a percentage of sales.
We expect to continue to gain significant operating leverage with SGN expenses growing at a slower rate than net sales.
In addition, our effective tax rate in the third quarter was relatively unchanged at 25.3% compared to 24.7% in the year ago quarter, an increase of 60 basis points.
Net income was 43 million for 37 cents per diluted share up 2% and 3% respectively from the 42 million or 36 cents per diluted share reported in the third quarter of 2019 adjusted for the stock split that took effect September 14th.
Adjusted for the warranty charge net income was 48 million or 41 cents per diluted share an increase of 13% and 14% respectively.
EBITDA was up 5% to 61 million, while EBITDA margin was 26.6% compared to 30.1%.
Exclusive of the warranty charge EBITDA and EBITDA margin were 68 million and 29.4% respectively.
We see EBITDA as a better indicator of our financial performance and we believe that over the long term, we will continue to improve our operating leverage and expand our EBITDA margin.
Summarizing our year to date results consolidated net sales were 653 million, representing a 12% increase from 581 million in 2019 trucks.
Trex residential net sales increased 13% to 614 million.
Year to date net income was 132 million or one dollar and 14 cents per diluted share up 21% and 23%, respectively from 109 million or 93 cents per diluted share when adjusted for the stock split.
EBITDA was up 23% to 188 million, while EBITDA margin expanded 260 basis points to 28.8%.
Adjusting for the warranty charge net income was 137 million or one dollar an 18 cents per diluted share up, 26% and 27%, respectively, and EBITDA and EBITDA margin increased 28% to 194 million.
And 360 basis points to 29.8% respectively.
Related to the balance sheet and cash flow as mentioned on previous calls we are carrying higher than usual level of accounts receivable, which are related to sales support and incentive programs provided to our channel partners.
Receivables will return to a more normalized level by year end.
We have had no issues, nor foresee any issues with the collectability of our accounts receivables.
Capital expenditures for the to tell for the 2029 month period increased to 100 million compared to 37 million for the 2019 nine month period, primarily related to our ongoing capacity expansion.
The new production lines in our Nevada facility are fully operational and the production lines at our new Virginia facility will start coming online in the first quarter of 2021 and continue to ramp up through the second quarter.
We continue to fund all capital needs from cash flow and had no additional borrowings under our revolver at quarter end, providing trucks with an untapped 300 million of available borrowing capacity.
Given our confidence in underlying demand and the growth in outdoor living the Trex board of directors reinstated our share buyback program in.
In 2017, the board of directors authorized up to 11.6 million share repurchases 2.8 million shares have been repurchased today totaling 103 million at an average cost of $36.65 per share.
I will now provide additional insight regarding our guidance.
We expect consolidated net sales for the fourth quarter to be in the range of 210 million to 220 million we.
We expect full year incremental gross margin to be at the lower end of the 45% to 50% range, excluding the warranty reserve, but inclusive of additional kobin related expenses higher inflation and logistics costs associated with startup as we approach our Virginia facility coming online we are.
Expect startup cost to persist into 2021, as we continue to ramp the facility.
Full year consolidated that's DNA as a percentage of sales is projected to improve by approximately 150 basis points over the prior year.
Our tax rate is anticipated at approximately 25%.
We expect full year spending on capex spend to be in a range of 150 to 170 million.
For the full year working capital will normalize to historical levels.
Now I'll turn the call back to Brian.
Thank you Dennis year to date results put tracks on track for another record year with 16% growth, including fourth quarter guidance at the mid point even.
Even more importantly.
We do not see the growth slowing and we expect to follow up with strong double digit sales growth and 2021.
This positive outlook reflects a combination of the strength of the outdoor living category or brand leadership.
And our product lineup that allows us to compete effectively from the entry level to premium level decking and railing products. We continue to be excited about the significant conversion opportunity from wood to Trex products, operator, I'd now like to open the call to questions.
We will now begin the question and answer session to ask a question you May Press Star then one on the telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys if.
If at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Keith Hughes with Trust Securities. Please go ahead.
Thank you the guidance you've given for gross.
Gross contribution margin year employee.
Implies a step up from what you just reported.
Got to the fourth quarter kind of a mid thirtys roughly in the fourth quarter you.
You should go into next year is that roughly the kind of numbers.
See as you add this new capacity in or you think it would dip down for period as you've adjusted.
As Dennis mentioned in his commentary, we will have startup costs that will be hitting us, especially in the first half of the year and then I expect in the later half of the year well see some of that cost improvement opportunities starting to come out I says, we've got more engineering capability on that in some key.
Heartened to really focus on the opportunity we have both at the gross margin line.
But also at the operating income and from an EBITDA perspective, we've talked in the past with the launch of enhance that it wouldn't carry the same brand load as the rest of the Trex product lives and we've estimated that generally between 5% to 6% of sales so that leverage divest today over the long term.
It's a very important value contributor to the company.
And Bob Bradley do you mean advertising.
Or like that correct correct, yes, yes.
Yes.
The other question I had the with the price increase coming are you anticipating some of these sales.
We're going to see in the fourth quarter some of that kind of pre buy before the price increase or is that just that strong.
Wonderful thanks channels.
Desirability, you're probably yes demand.
Demand continues to be strong in the channel. So we are selling at elevated levels through October November eventually weather will kick in and have to slow some of that demand down we have more of a normalized early buy program set up and that will start in December and run through March and into early April of next year.
Where we start building some inventory back into the channel again.
Okay. Thank you. Thank you.
Our next question comes from Stanley Elliott with Stifel. Please go ahead.
Hey, guys. Thank you all for taking the question.
Hey, I'm of course, the share repurchase to us have above planned to have a plan in place.
How should we think about when that could get kind of more involved.
Moving into next year.
The the plan will be in place, we'll file a tenbfive one and you know as historically, we've been very very opportunistic on on buying back our stock and I think you can see that from the success of our our buyback over the over the past years.
Perfect and then lastly, guys it feels like that you're talking to people in the channel that demand is pretty good. It does it feel like to you all.
That the rate limiting step right now is really the contractors ability to put down the product.
I think it's less the contractors are clearly busy and they all have attractive backlogs going into the winter months and I expect that will carry him right through as they they move into next year the deal why business and not necessarily just through that channel, but through all of our channels.
Has been extremely strong and that's where the timing of the launch of enhance what was pretty good from that perspective to make sure that we have products.
That would appeal specifically to that D. I Y consumer so where you're seeing some shortages of contractors, you're tending to see the d. I y. side of the business picking up that additional demand.
Great guys. Thank you very much.
Our next question comes from Ryan Merkel with William Blair. Please go ahead.
Hey, guys congratulations on the quarter. Thanks, good evening.
So I guess first off a follow up Keith question. Your fourth quarter revenue guidance was much better than I was thinking can you just give us a sense for the contribution from sell through versus sell in.
There's still a lot of sell through going on in the marketplace or some of the channel checks that I read somewhere various analysts show that there are some back order is out there in the marketplace those will be Phil and then there will be at the start of some inventory build in the marketplace mostly into December.
Okay.
And then secondly, you may not want to answer that directly but what would gross margins have been this quarter, excluding the onetime startup costs I'm just trying to gauge earnings power once we lap these costs.
We've not provided an estimate of what those startup costs are we may do that as we get through the the end of the year. We recognize that we will continue to have those costs moving into next year, and we're not really going to be in a position to be breaking that out each quarter.
Okay fair enough. Thanks.
Thanks Ryan.
Our next question comes from Phil Ng with Jefferies. Please go ahead.
Hey, guys appreciate.
Appreciate the color for 2021, and strong double digit growth sound right Brian.
Brian is there a way to kind of put a finer bond that is as you know high teens does have a two and ill spend a little more color on that double digit growth for 2021.
So we're sitting here at the end of the third quarter and 2020, a there is a lot of things that will happen with the economy I expect over the next 60 days and as we get out to the end of the year.
We will provide additional color on that revenue for 2021, just try to give an idea of the strengths that we expect to continue to see in the market and the strategy of converting would continues to be very relevant in this environment.
Got it and is from a fourth quarter standpoint, certainly as you go into early 2021 are you like fully caught up from a supply standpoint, I know supply was a big governor for growth for big parts of the year.
Are you pretty flush in that side of things at this point. It's mixed there are certain areas I'm sure you'll talk to at the end of December and they'll be saying that there's there's more needed and there's other areas that will feel pretty good about their inventory position.
Okay got it and just one last one for me with the price increases that you guys have out there for 2021 and all the good work you're doing on the cost out.
Is that enough to kind of you know have your EBITDA margins kind of flat on a year over year basis in the first half I know, there's a lot of startup costs to start the year, but on EBITDA standpoint, like how should we think about the margin profile I think when you look at EBITDA margins on a full year basis, we'll be looking to expand those EBITDA margins were not really going to.
To get into a splitting it out by half along the way, but there clearly will be more pressure on the first half than we'll see in the second half okay.
Okay, alright, thanks, a lot really appreciate the color.
Our next question comes from Tim watches with Baird. Please go ahead.
Hey, Hey, guys, good afternoon, and nice job Jim Thanks.
Maybe just first on the pricing commentary is there any way to just maybe give us a little bit of context in terms of how much of your product portfolio is taking that mid single digit price increase and maybe what the historical realization of pricing it's been.
Historic realization on pricing has been 100%, it's not like some industries, where price increases are put through and then they're revoked a month later along the way. So we have absolute confidence that the pricing that has been put into the market will stay in the marketplace. All that being said that pricing communication is working.
Its way through the marketplace right now.
I'd, rather will allow our sales team to have the time to make sure everybody understands all the particulars of it.
Before we get into details on it it is on certain product line just not the entire product line up that we have and we base that on the strategy of how can we continue to convert more of the wood marketplace. And then we also saw areas, where there was opportunity at the premium end of the market.
To be able to recognize additional revenue the key driver for taking the price increase we do expect to see some inflationary pressures moving into next year.
Rob materials more so because of logistics cost and then the sheer volume that we're going to be needing next year as everybody is aware the majority of our material. It's not something that is manufactured out about a specific plan, we are buying our products, both wood and recycled plastic from.
All over the country and we will have to expand our sourcing footprint.
Okay. Okay. That's helpful. Thanks, and then maybe just.
Conceptual question, what is the right kind of long term growth rate fresh DNA.
Yeah, I guess with enhanced coming in in a in a later marketing mode.
You're doing 10% growth of 12% growth I guess, what percentage of that you need to reinvest in that you know going forward.
I'd like I'd like to be able to give you a rule of thumb to use the reality is this year. Our sq today is definitely below where it would normally be because of lower medical expense much lower travel and entertainment and then also pulling back on branding during the second quarter of the year.
Expect that we'll see all of those come back into play next year, some level of leverage along the way, but probably not as extensive as you move out beyond that timeframe are you start to see more leverage occurring again, but it will really depend upon where do we see the largest growth opportunities in our markets.
The team is extremely effective in understanding when they put a dollar to work what's the return going to be for the company and that's the way we make decisions on how we are going to be investing with us today.
Okay. Okay. Thanks for the questions and good luck on the rest of the year great. Thanks.
Our next question comes from Matthew Bouley with Barclays. Please go ahead.
Good afternoon I'm thinking.
Thank you for taking the questions I have a two parter on the price increase I guess number one if you can comment is that a similar increase between retail and distribution customers and and number two.
I guess at a higher level to what degree do you think.
Pushing price, perhaps impacts the penetration of composite decking versus would that does it at all.
Play into that consumer decision when theyre comparing versus what thank you.
I'll take the first question there so all of our channel partners will receive the same price increase across those multiple products and I'll shoot a question second question over to Brian Yeah. Our strategy of converting increased amounts of would the composites is fully intact. We will still have a product that is roughly two times.
On the price of oil and that a move up product our enhanced naturals with a higher level of of statics retailing for about $2.50 per linear foot.
Okay got it that's helpful. Second one do you I guess, how do you have any sense of what I guess wood decking has done you know through all this strong demand in the summer and early fall I guess you know the real question is do you think that composite decking share gain has actually accelerated this.
Here.
Yes, you know, what's historically been maybe that one to 200 basis points of increase penetration in any given year. It really just has the underlying decking market, but not strong as well or have you actually accelerated that share gain like well, it's fair to say that the underlying decoupled decking market has been strong this year lumber.
Sales were empty in many many cases, but what we do see is a continued recognition by consumers that there are affordable high quality composite products available to them and they are more often than not making that choice to go with trex composite products we've seen.
Organic search results coming two tracks Dot com that we're just absolutely are off the charts and that's because of the educational opportunities that we've been taking over the past couple of years and we'll continue to do that as we go forward and continue to build that demand. There's a lot of business out there that still goes to war.
So we don't see any shortage of opportunities for us to go after to continue our growth trajectory.
Thank you Brian Thanks, Dennis.
Thank you.
Our next question comes from Alex Rygiel with B. Riley FBR. Please go ahead.
Thank you, Brian and Paul.
Just first sort of asking that last question in the same way.
What do you think the organic growth rate in the composite market wasn't either third quarter or for the entire year.
Organic growth rate.
If we look at just the.
Underlying growth of composites.
It's going to be in the mid single digits.
And then once you start adding the wood conversion opportunity.
On top of that you start to see that difference in growth for a long time before we were really targeting Ah going after the wood marketplace.
Composite tended to flow right in line with remodeling spend increases I think we're seeing a little bit of a divergence at this point, but.
But I would still calculate same way you go after remodeling plus the wood conversion opportunity overtime I expect we will have significant international growth on top of that as well.
And Dennis coming back to your prepared.
Prepared remarks.
What is the remaining balance on your authorization right now share repurchase authorization.
One second on that.
[noise] well I mean, so so bottom line is the the board authorized 11.6 million shares, we repurchased 2.8 million to to date on that.
And is that 11.6 pre the split or post the split.
This is a a post split number.
Thank you okay.
Our next question comes from Kurt Kinger from D.A. Davidson. Please go ahead.
Yeah, Thanks, and good evening everyone.
Starting off could you just give a little bit more color, Brian on where you stand with the new Winchester facility just in terms of overall construction I guess equipment being in place.
And hiring ahead of next year.
Sure as you will recall, we announced this facility in July of last year. So we're about 16 months in to the building at this point and I don't want from a I'm just an open piece of land to having all four walls.
A lot of equipment going into the building at this point, we continue to be on track with an expected start up.
In January of 2020, and then we will ramp those lines.
As we move through the first two quarters of the year.
Got it Okay. That's helpful. And then for my second one could you just update us on where you stand with the enhanced scallop.
And I realize it's not a huge needle mover for you guys, but talk a little bit about what you're seeing in Virgin polyethylene pricing.
Freight and then any other inflationary pressures kind of on the horizon.
Sure, we've largely removed the wage from our enhanced product line. There's a couple of lines that were still working on getting the the final equipment in but the vast majority of product going out today has the lower lower weight it.
The second point was about gross margin pressures and so forth and so you know what as we're looking out here.
Into fourth quarter, I mean, we're going to continue to see labor pressures as we continue to bring on people in advance of the start up Weve got inflation as Bryan talked about on raw materials says were stretching out further to secure our our footprint for supply for these new lines and I think it's another important.
One point to make is about co bid we are incurring more costs as we continue to keep our workforce safe yeah, what and that's basically what's taken us more to that lower end of the range of the 45% to 50%.
We've done quite a bit of hiring a in advance of startup, especially at our Virginia facility.
For many of the skilled trades indirect heads as well as training people, who will be working directly on the lives. So thats coming along as planned at this point not to say, it's without challenge. It is a very tight labor market, probably a year ago had we talk I will talk to you about risk with general labor and.
That's something that we continue to see today.
Great Okay, well I appreciate all the details Brian Denis and good luck here in the fourth quarter. Thanks Kurt.
Our next question comes from Rubin Garner with the benchmark company. Please go ahead.
Thank you good evening guys.
So I.
I hate to harp on the price thing, but just a follow up question does.
I guess.
Well, how do you how does trex pricing normally compared to your peers and and have you seen I know there was one out there at least that increased prices have you seen others do the same is there any risk that this puts you you know at a in a larger premium than you are to others or you competitively right now and that puts you more in line.
Well traction reviews, our pricing on an annual basis I understand where we are in the marketplace against the strategies that we've built overtime I can't really comment on what else everybody what everybody else is doing in the marketplace, but we feel as though that it sets up very well for our product lines.
Okay Fair enough and then on the.
Brian You mentioned the international.
That's our opportunity <unk>, how has your capacity constraint kind of impacted your gross opportunity there and does the how much of the incremental capacity that you're adding I guess, how much does that open you up to be able to maybe grow that.
Mr. In other markets and the short term, it's definitely limited our growth opportunities in international markets. We've got some great partners in overseas market place they'd love to have more and more products and as we move out into next year and we have that capacity will be able to really put some rocket fuel back.
Give to that business again.
And drive growth there.
Great. Thank you congrats on the quarter and good luck for the rest of the year ago. Thanks.
Our next question comes from Alex merger with Baron Burke. Please go ahead.
Hey, guys. Good evening and thanks for taking my questions heading into 2021 can you discuss your marketing strategy, especially since some of the competitors are getting more aggressive on brand visibility.
Sure as we look out to 2021, we built a strategy from a marketing perspective that targets consumers, who are specifically in the market for decking products and that could be a composite or would.
That's through our trucks dot com will likely use page search as we we do in the past as well as other advertising revenues that will hit that marketplace. But also we will rely heavily on Dec star Oh, that's a wholly truckload website, which appeals to buyers who are primarily looking at would start.
And then we will use that website to try to bring more people into trucks and understanding that composites are affordable and in many cases be able to move them up to anesthetic a better a static on their deck. So I expect that you'll continue to see more of what we have done in the past very successfully.
As well as new things that our marketing team is working on now.
Okay got it and then historically you've seen limited new construction exposure. However, given the strength in that market right now and the difficult labor environment for remodeling contractor rethink any changes and new homebuilders propensity to build that.
I think the whole builders right now are focused on building a home plain and simple, it's a great opportunity for us over the longer term as the homebuilders get out of their own backlog to all go away and get those homes built but we definitely see an opportunity to improve the penetration of trex decks.
New home builds over the longer term.
Great I'll hop off thank you.
Our next question comes from Trey Grooms with Stephens. Please go ahead.
Hi, good afternoon, Thanks for taking my question.
Hey, Brian so.
I guess first off and you may have touched on this but.
I'm really trying to get just a bit.
Her understanding of some of the costs related to the new capacity the startup costs and how to how we can kind of.
You know the dissect what would be maybe one time related true like ramping up costs and how much would be or how to think about you know maybe.
Continuing costs that are more depreciation related and that type of thing once the once the capacity increase is fully implemented.
Yeah, you know what I think about it right now like the start up costs are real you know so we got to be testing. These lines, we're gonna be shaking them out we're going to be working to perfect them to get them to ramp up to full capacity.
So that's going to be one aspect to think about going forward secondarily weren't to see higher costs as we're bringing on people training them developing them. We're all bringing these people on before those lines already so that's unabsorbed.
You know that's absorbed labor, so that's hitting us as well right until those lines are all up and running by the end of the second quarter. So I think those would be the primary one timers that you would see depreciation.
Depreciation of course is going to continue on and Weve got cobot expenses right now that you know we've got to keep a watchful eye on because we have seen an uptick in overtime and personnel costs just to be being very precautionary quarantining folks et cetera. So that's another one timer that.
We're dealing with but unfortunately I do expect that will continue out probably at least through the first quarter. Hopefully, we'll we'll see some solutions to that in the second quarter, but that may continue beyond the first quarter, Okay got it.
Alright, and then.
On International I know there was a comment earlier, so I don't think I've heard you sound. So excited about international in a while.
And I know theres been some headwinds recently there you know in the in the different areas that you guys have been.
You know sending product in the past but.
Where is that right now as a percent of total I don't know if you can give that to me, but right now as a percent of total and then where do you see that going over the long term.
The only headwind in that business is related to the capacity constraints that we have as an organization. So that's why I'm excited about it we've got our customers. They are primed ready to grow in those marketplaces and as we bring that capacity up we will expand what were shipping.
It's less than 10% of the business today.
I expect overtime, it will grow to be larger than that but as you can see we've been growing.
The North American side of the business pretty quickly over the years and I'm not sure exactly what when it will get to that over 10%, but yeah. You're right. We are excited about it and we've got a good strategies in place to hit those marketplaces.
All right that's it from me thanks for taking the questions and good luck. Thank you. Thanks Trey.
Our next question comes from Seldon Clarke with Deutsche Bank. Please go ahead.
[laughter]. Thanks for that question, just one more on pricing.
It's been fairly selective in the past I don't like the price increases and I think.
Generally they've been implementing in years, where inflation was it expected to be a little bit higher than normal so.
Some of the inflation you talked about in terms of freight costs in raw materials is a little bit more unexpected, but you. This doesn't seem like something that you seem to be anticipating earlier here. So just curious if your longer term approach to pricing has changed at all you know based on either industry dynamics.
On the acceleration and awareness that you've seen over the last couple of months.
Well continue to look at our pricing lineup on an annual basis and make a determination of where we are and the value of our products as it relates to the end consumer and make pricing decisions based off that as well as understanding what inflationary impacts so there's really a.
Multiple number of inputs is not just inflation that goes into pricing decisions, but that has been a primary driver with some of the last increases that we've taken.
Okay. So no real change to the previous strategy no.
No.
Okay, and then I understand you're bringing on another 70% of capacity. What's your current expansion, but could you just give us a sense of where you think a total capacity in 2021 compares to 2020 I know you don't like to give a ton of radiant.
You know there, but you're expecting another year of double digit growth. So just curious how you're thinking about it trending from sort of a capacity utilization perspective, as well I'm just any sense that would be helpful.
Well, Yeah, we did talk about like the Nevada lines that came up that was a much smaller percentage of the overall capacity expansion plan right. So I think getting past comments, we said probably about 30% of that is going to be in Nevada, and the bulk of that will or the remainder of that would be in Virginia.
Okay. That's helpful. I appreciate it.
Thanks So.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Thanks, everybody for joining us on the call. This evening, we look forward to speaking with many of you in the coming weeks at various conferences. Thank you and good evening.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
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