Q1 2021 Trex Company Inc Earnings Call
[music].
Yeah.
Good afternoon, and welcome to the Trustmark Company first quarter 2021 earnings Conference call.
All participants will be almost normally boat.
Could you give assistance please signal conference specialist by pressing the star key followed Buzzy Roe.
After todays presentation or on the opportunity to ask questions to.
Asking question on stars on one on your telephone keypad so low.
Your question. Please first of all going to.
Please note today's event is being reported.
Now, let's turn the conference average for you Michael Please go ahead.
Thank you all for joining us today.
Well that sounds like all our Bryan Fairbanks, President and Chief Executive Officer, and Dennis Kim Senior Vice President and Chief Financial Officer.
Joining Brian and Dennis it's built off senior Vice President General Counsel and Secretary as well as other members of management.
The company issued a press release today after market close containing financial results for the first quarter 'twenty 'twenty. One. This release is available on the company's website. The conference call is also being webcast and will be available on the Investor Relations page. The company's website for 30 day I would now like to turn the call over.
The buildup bell.
Thank you Victoria before we begin let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward looking statements within the meaning of federal Securities Law. These statements are subject to certain risks and uncertainties that could cause actual results 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 1933 and other 1934 act filings with the SEC. Additionally, non-GAAP financial measures will be referenced in this call.
A reconciliation of these measures with the compatible GAAP financial measure can be found on our earnings press release it trucks dotcom.
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 and good evening, everyone. Thank you for joining us on today's call to review Treks company as first quarter performance and business outlook.
Sustained broad based demand for <unk> residential products and accelerated market share gains from wood drove first quarter growth.
<unk> was driven by continued strong secular trends across the company as outdoor living products as well as increase in consumer preferences for environmentally sustainable products with proven high performance.
Instead ex and quality.
As a result treks residential sales grew 25% year over year in the first quarter.
This strong performance underscores the accelerated pace at which we are taking share from the traditional wood market, particularly as wood prices increase.
Our analysis indicates that a one percentage point market share gain from would translate to over $50 million of annual sales.
Consumer demand for outdoor living products remained strong traffic to treks dotcom indexed on our call in March and April reached the levels more typically seen in June and July are seasonally strongest months.
Our websites engage with the consumer at every step of the debt purchasing process.
The consumer Dream and design their debt estimate cost view on purchase samples and then finally, finding a contractor or partner where to buy our products.
Together, our sites are a powerful source of intelligence into consumer decision, making with respect to residential decking and railing, creating a unique and valuable resource for the company to inform design for future products and digital experiences.
In addition to consolidated sales growth of 23% in the first quarter, we reported strong EBITDA margin of 28, 9% in first quarter earnings per share of 42.
Earnings growth was impacted by startup costs from our capacity expansion program higher raw material inflation.
Transportation cost as well as the impact from the March fire in one of our buildings at our Virginia manufacturing campus.
This will review these impacts in his commentary.
These inflationary pressures led us to announce a mid single digit price increase on most products to minimize the short term impact on our distributors dealers and retailers contractors and consumers. This pricing action will take effect on August one 2021, providing 90 days of advance notice.
This quarter was strong for trucks not just in terms of our financial performance, but also with respect to tremendous progress with our capacity expansion program at the new manufacturing facility in Virginia.
We expect all lines and new facility to be fully operational by the end of May 30 days ahead of schedule on.
Also we are pleased with the performance of the installed lives and believe the additional capacity further reinforces our position as the industry leader and most efficient manufacturer of high performance Wood alternative decking and railing.
This capacity will provide us with an important competitive advantage in today's dynamic composite decking marketplace as demand for high performance low maintenance decking continues to gain momentum.
The additional capacity will also allow us to resume and pursue numerous growth initiatives such as new product development and further international sales in key markets for future sales growth is poised to outpace our domestic growth.
In addition, we will more vigorously pursue our continuous improvement projects that have historically contributed to improving margins.
Trucks company also remains fully committed to improving our environmental footprint and using recycled and reclaimed raw materials more than ever consumers are focused on eco friendly products and our best in class decking boards, utilizing 95% recycled and reclaim material offers a compelling.
If to wood decking and other competing products. Furthermore, trucks continues to create an enhanced recycling solutions for plastic waste.
Recently, we introduced the next treks packaging label initiative, which allows our packaging to be branded with an official certification at the plastic has been tested and verified as acceptable for recycling into high performance Trek stacking.
As part of this initiative trucks also will work with brand owners and companies to encourage promotion and participation at the retail level by positioning next trek spins and signage in stores to drive awareness and engagement in the plastic drop off program.
Furthering on our ESG heritage tracks will be issuing our third annual ESG report later in the second quarter, we've incorporated many new improvements to our reporting since our last issuance.
We are pleased about trucks with continued success in garnering industry honors the trucks brand earned numerous orders this quarter for.
The 14th consecutive year trucks top builder magazine's annual brand use study for brand familiarity.
Brand used most and brand used most in the past two years.
For the 11th consecutive year <unk> has been named the greenest decking in the industry by readers of Green builder magazine.
We are particularly proud of these awards because they evidenced the strength and leadership of the <unk> bran from those who use our products in their own business.
Now I will turn the call over to our CFO Dennis <unk> for the first quarter Financial review Dennis.
Thank you Brian I am pleased to review, our 2021 first quarter results and share our expectations for the second quarter and full year 2021.
Consolidated sales in the first quarter were $246 million, reflecting a 23% year over year increase driven by a strong 25% growth in trucks residential products.
Despite the temporary interruption due to the fire at one of our manufacturing buildings at our Virginia facility and tightness in the labor and freight markets.
This strong performance was driven by sustained broad based demand.
Cross all trucks channel partners as well as continued strong secular growth trends across our outdoor living products portfolio trucks.
<unk> commercial products contributed 13 million to consolidated sales in the first quarter of 2021.
<unk> margin was 39% compared to 44, 8%, reflecting inflationary pressures on raw materials and transportation costs the impact of startup cost increased depreciation related to our capital expansion program and reduced overhead absorption due to the fire at the Virginia facility is.
As Brian mentioned, we recently announced price increases on most products effective August 1st to offset the higher inflation that we are experiencing the timing of the increase will not benefit Q2 margin, but reflects our commitment to maintaining strong channel partner relationships, which is a key element of <unk> long term.
Success.
<unk> residential products gross margin was 42% compared to 45, 6% in the year ago quarter trucks commercial products gross margin was 17, 2% due to product mix and timing of certain projects and lower absorption, but we expect both revenue and margin and commercial products to recover.
In the second quarter.
SG&A expenses decreased 3 million to 31 million over the prior year quarter.
As a percentage of sales SG&A decreased 450 basis points to 12, 8% in the first quarter compared to 17, 3% in the prior year quarter, primarily due to timing of spend on branding and reduce travel and entertainment expenses because of the COVID-19 pandemic.
Our effective tax rate for the first quarter 2021 was 24, 7% and in line with expectations.
Net income net income was $49 million or 42 cents per diluted share up 14% and 17% respectively from the $42 million or 36 cents per diluted share in the prior year quarter.
EBITDA increased 20% to $71 million and EBITDA margin was 28, 9% compared to 29, 4% in the comparable quarter of 2020.
Capital expenditures were $58 million with the majority of supporting the cat the capacity expansion program in the first quarter, we continued to add lines to the new Virginia facility. When completed at the end of the month the capacity expansion program will provide 70% more capacity when compare.
2019 volume levels.
We repurchased over 500000 shares from treks outstanding common stock at an average price of $90 per share totaling $46 million under the share buyback program. During the 2021 first quarter.
We have repurchased a total of $3 3 million shares under the current program as of the end of the first quarter.
Our strong first quarter puts us firmly on track to have another year of strong double digit growth. Despite the estimated sales loss of 12 million to $13 million through the end of June year to date because of the fire at our Virginia facility.
We expect second quarter consolidated net sales to range from 295 million to 390 to 305 million representing year on year growth of 36% at the midpoint.
This is in line with our previous expectation of sales growth in the second quarter as our additional capacity is fully operational and in the third quarter as we backfill channel inventory before returning to more normalized seasonal patterns in the fourth quarter.
We are also reaffirming the guidance for full year 2021 incremental EBITDA margin of between 35 per cent and 40% as the positive impact of the August price increase and cost savings projects drive additional gross margin leverage in the second half of 2021 amid more normalized SG&A.
Spending.
Our tax rate is anticipated at approximately 25%.
Depreciation will range from 35 million to $40 million, increasing throughout the year and we expect full year kept full year spending on capex to be in the range of $130 million to $150 million.
Now I will turn the call back to Brian for his closing remarks. Thank you Dennis our first quarter performance has laid the foundation for continued strong double digit growth in 2021 against the backdrop of strong consumer demand and completion of our capacity expansion program.
<unk> of our capacity additions overall strength of the market and the wood conversion opportunity as demonstrated by the midpoint sales guidance of 36% growth in the second quarter I want to take effect the entire treks team for their hard work as well as our dealers retailers distributors and contractors who has.
<unk> support has been essential to our growth operator, I'd now like to open the call for questions.
Thank you we will now begin the question and answer session.
Ask the question I suppose on one on you touched on as well.
So usually the speaker phone we ask you. Please pickup your handset will touch on the fees.
Well the draw on your question. Please press Star then two we do ask you. Please limit yourself to a single to one question and a single follow up.
Today's first question comes from Ryan Merkel with William Blair. Please go ahead.
Hey, Thanks for taking the question free.
First off can you talk about lumber prices and if you've seen stronger conversion as a result, and if so has it growth and boost at the low end or is it broad based.
Sure Ryan could do I talk to you. This evening, we have seen higher lumber prices DIY or reasonable quality pressure treated is selling for about $1 60, and as Youre aware our entry level is about $1 75.
At the enhance basics products.
What we're seeing is a broad based demand across all of our products. So I would expect for that consumer who is primarily intending would it.
It's easier for them to make that conversion at this point given how close that price is but we're not seeing a shift towards that opening price point, we continue to see the growth across all of our product line people see that they are able to afford the enhance basics product line recognize the aesthetics.
Of the enhance naturals will give them more of the look that they want and those that are looking for the more premium products in aesthetics are still tending towards these select and transcend products.
That's great to hear Brian. Thanks, and then from my follow up on SG&A should we be assuming that brand spend comes back gradually through the year, such that you're exiting four Q, maybe $8 million to $10 million higher than <unk>.
We definitely said that we would be reinvesting in the brand more heavily this year and we will continue on that path.
We said that this would be a more normalized year and after the first quarter, we were certainly lower than then.
And then last year as expected and we would gradually see that start to increase throughout the remainder of the year.
Alright fair enough thanks, great quarter. Thanks, Ryan.
And our next question comes from Jim Rogers.
Sir Please go ahead.
Hey, everybody good morning, or good afternoon, sorry. Thanks.
So I guess my first question is just just on input costs could you maybe talk about what you're seeing now in terms of inflation and.
How that might be trending relative to your initial expectations earlier this year.
We are seeing broad based inflation across the organization going into the year, we had expected inflation to pick up.
It's fair to say that it is coming higher than coming in higher than what those expectations were it was important that we recognize how the channel operates and many decks are sold 90 120 days in advance. So we wanted to give enough time for the channel to work through that allow.
Contractors to finish their jobs, and then pass along the price increase so with that inflation coming in.
And the pricing, we're taking we're able to hold our incremental EBITDA margin guidance.
Okay. Okay. That's good and then could you just remind us how you've recycled inputs move relative to relative to the to the version two diverging counterparts.
And we talked about that a little bit in some of our prior calls the biggest move that we're seeing with the recycled inputs right now is the higher volume that we're purchasing so we're having to go further and of course transportation, we're seeing significant increases and that's the biggest driver of the increased cost in polyethylene right now.
No.
Okay, Okay, great I'll hop back in queue next Jeremy.
<unk>.
And our next question today comes from Scott <unk> with BMO capital. Please go ahead.
Oh, Thank you I'm just curious.
You know what are you guys seeing in thumbs up on channel inventories for this time of the year. Given you know demand has been so strong.
Channel inventories continue to be lower than where we would like normally coming out of the first quarter, we would have peak inventories.
Not seeing that right now because of the demand that's in the marketplace and Thats why Dennis mentioned that we expected we'd be back to building capacity and building inventory in the channel during the third quarter as all of our capacity is on line by that time frame.
Got it and then can you just remind us what is left by the off on repurchase authorization.
Oh, there is a significant amount slept for us it's a relatively $8 2 million shares are left.
Project value handful I jump back in the queue. Thank you.
And our next question comes from Keith Hughes Insurance. Please go ahead.
Thanks, you talked about in the release and on the prepared statements about some of the cost pressures in the quarter around the fire.
Ramp up of capacity can you give us an idea of how much did that.
How much of those two items for our numbers on a quarter.
Yeah, Keith that's a great question and you know despite all of these issues dealing with inflation startup expense the fire.
We're still very proud that our incrementals for the full year will remain unchanged at between 35, and 40%, but I you know when you when you take a look at the gross margin degradation in the quarter. You know about 200 basis points of that was inflation and I'd say you know another 200 was relative to the start up.
Benches.
Yes.
Does that 200 basis points include the higher DNA or is that more just on Dol.
All our cost aspect on it it does it include some of the higher D&A as well.
It is all of that DNA to come in and cost of goods excuse me on a cost of sales of some of it.
Up in SG&A.
There's a little bit on SG&A, but the major the major Capex is of course on the Cogs line.
Okay and then a final question on the on the excuse me on the price release sitting on the price increase.
Is that across the entire trucks product portfolio that those increases are coming.
It's across most of our products.
Okay. Thank you.
Thanks Keith.
And our next question today comes from Stanley Elliott with Stifel. Please go ahead.
Hey, guys. Thank you all for taking the question in terms of the guidance very impressive. It feels like this is really true demand instead of any sort of restock ahead of the price increase but I would love to get some color around that especially in the context of the high web traffic that you're seeing.
Well, you're you're spot on with your comments. It is demand driven I would prefer to be saying that there's some inventory build that will occur in the second quarter, but as of now we expect that it's all going to be demand and we'll get into some of that inventory building in the third quarter and then back to more of a normal seasonal type.
Man pattern in the fourth quarter.
Great and with the expansion coming on line faster than what you. All had targeted you mentioned a handful of kind of wish list growth project. How quickly can you start moving on those once you get completed with the expansion in May.
We've got a number of projects that are in the queue. At this point some are down the path of our where we already have investments.
Theres other parts of it where they're still in the pipeline.
I think youll start to see some more of those come on once we're done with that capacity piece of it we could go back a number of years ago, we talked about increasing the output on our existing manufacturing line. That's still an opportunity ahead of us, but we need to be able to get the downtime to be able to replace some of those assets.
Thanks, guys I appreciate it and best of luck index.
And our next question today comes from Matthew Bouley with Barclays. Please go ahead.
Good evening, everyone from.
So up to that last question you know on on the capacity being fully operational by the end of May just just number one what does that suggest around I don't know the utilization. However, you want to define that because it does sound like you think you'll have additional room to go after these growth initiatives, but then my broader question is really.
You know given the strength of demand at what point does it make sense or are you actually need to think about you know the next actually the next waves of capacity. Thank you Brian.
Yeah. Thanks, whether they are sophisticated supply chain group and they're looking out five seven and 10 years for what our sales growth expectations are.
From there, making determinations as to what we need to do with capacity. So it's something that we talk about regularly here as we talked about utilization right now utilization is at 100%. We're running all of the assets, we have and getting every single linear foot of decking and railing out to the marketplace.
Yes.
Okay understood.
Second one.
On a on along the same line, but it but as you scale. This quickly you know, you're obviously going to need to source more and more material. It sounds like you've got some interesting efforts here with the next track that you mentioned just as you scale up this quickly does the ability to actually source recycled plastics becomes a constraint at all thank you.
We've been working to scale for some time now recognizing that the growth is out there and the size of the conversion opportunity. So while there are some challenges related to a lot of it related to free right. Now there is plentiful supplies of the market and as more companies look at their own ESG.
<unk> principles and as more homeowners want to do what's right for the environment that supply of plastic increases.
Wonderful well. Thank you for the details Brian and good luck, thanks, Matt I appreciate it.
And our next question comes from Jeff students from Loop capital. Please go ahead.
Hi, Thanks for taking my questions.
On my first one is how should we think about the cadence of incremental EBITDA margin as the year progresses should it still be back half weighted here from a 35 or 40% range.
It would be sooner now that the capacity of the program is complete earlier from our original expectation.
It's a great question, Jeff and our Q2 margins will be a little dampened because of the inflation that we're seeing in our price increase does not go into effect until August 1st. So you will definitely see this you know the EBITDA margin expansion be more of a back half Q3 and will definitely be.
Higher than Q2, and that's because all of our lines will be up and running fully and we expect to be running full out and then Q4 will should even be higher so that's how the ramp should occur.
Okay, great and just as far as demand goes I, just wondered about the exit rate.
From March heading into April and whether how much pent up demand was a result of the fire at the Virginia plant and also winter stair arm, a euro and how that could impact on second quarter.
I wouldn't say that that drove the pent up demand. So they were orders that we could have filled during the quarter, we were unable to do that on.
As I mentioned earlier the inventories in the channel are low at this point, we'd like to have more out there and as the capacity comes on.
Worked fill those orders.
Got it thank you.
Thanks, Jeff and our next question today comes from Michael Rehaut with JP Morgan. Please go ahead.
Yeah.
Thanks, Good afternoon, everyone. Congrats on the results.
Yeah.
First question I had was on the how to think about our revenue in the back half.
Obviously in the second quarter, you gave your guidance and in part that's based on the continued ramping capacity.
Demand obviously doesn't remain.
It is not a problem and it's it's it's continues to be a backdrop, where you can just sell as much as you can make so you know from that standpoint.
As you look at further you know lines coming up and being fully operational by the end of May how should we think about the run rate in <unk> and <unk> again, just lets say for arguments sake that seasonality isn't as much as on a factor as it is it as was the case last year.
Yeah, we feel really good about growth for the entire year after clipping off the 23% growth rate here in Q1, moving to a 36% growth rate at the midpoint for Q2. It gives us a lot of momentum I expect Q3 to even be bigger than Q2 as.
As all of our lines will be fully operational and Q2 only sees a part of that right. So Q3 should be bigger than Q2, and then things will start to return to more normalized seasonal levels for Q4.
Right no that's great. Thank you for that very.
Very helpful. On on the second question, you know just kind of going back to the gross margin cadence.
And also to a degree I mean, you talked about SG&A, obviously, improving I believe on a dollar basis sequentially throughout the year I'm wondering if we should still be expecting leverage on a full year basis. It would seem to be the case, but also on the gross margin side you know.
You talked about obviously flipping positive into the back half as the price increases kick in it should to Q should we be seeing a similar type of year over year decline or as some of those startup costs are moderating and you have the better top line you know we should be thinking about something.
Less so kind of a two parter there sorry for that.
From buttons.
No no no problem at all so relative to SG&A you know so.
Just to be really clear, we're going to be increasing SG&A throughout the year. So Q2 will actually be a headwind year over year right because last year. There were significant pullback because of COVID-19. So Q2, Q3 and Q4, we were pulled back pretty significantly.
<unk> lead because of reduced travel and entertainment, we pulled back on the branding as well because demand was so strong in Q2, we're definitely going to be you know.
Throttling up the SG&A spend and Q3 and Q4, so we will be returning to more normalized levels of SG&A.
As we move through the year, we fully expected Q1 to be light because it was COVID-19 impacted.
Relative.
So long story too right. So over the longer term here, we clearly expect SG&A to be a leverage story, we will get leverage this year as well.
Relative to gross margin, we talked about Q2 being.
Being a little muted despite the lines coming on we still have startup expenses and.
And we have higher inflation and so our price increase does not have not taken to come into effect until August one. So Q2 will be exposed, but as we move into Q3, we'll have the price increase behind us and in Q4 as well.
Also with Q3 Youre going to have you know we were expecting to be running full out so capacity utilization will be very very strong as well. So Q3 and Q4, you'll see ratable increases in our gross margin performance.
Just I appreciate that just to clarify on the Q2 versus Q1 on the gross margin I appreciate that the raw material inflation impact will still be sales, perhaps similarly, given the price increases don't kick in yet what about the startup costs that 200 bip.
Drag from higher startup costs, and depreciation would that moderate given the higher sales and the continued ramp into Q and should therefore that fee.
The <unk> gross margins be.
Better than <unk>.
Well I'm not going to comment on specific guidance on the margins, but startup expenses should start to come down where we are going to be at full capacity for our new building by the end of May. So we should we should start to see those start up expenses a decrease and we are we definitely.
We saw the full component of the start up expenses in Q1 of this year.
Thank you.
Thanks.
And our next question today comes from so long with Jefferies. Please go ahead.
You guys congrats on the net another strong quarter.
Great.
Hey, Brian Great to see the day, new capacity come on ahead of schedule. So if demand is there and you run full out just curious how much bandwidth do you have from a supply standpoint on a year over year basis for <unk> in the back half you know appreciating some of that 70% incremental cash did come on last year already.
Well, we haven't provided specific numbers I think when you look at the sales growth that where we're showing it's an indication of that capacity coming on so we will have the full.
Full quarter for the lines that have already come up and that of course will have a two fold to let's say to two full months of the additional lines that will will come up through the quarter and by the third quarter as Dennis mentioned.
That increase is from a revenue perspective, because we now have all of that capacity available to us.
Okay.
Our view is that.
Given that the demand backdrop, you'll be kind of caught off from an inventory standpoint for the channel by.
Three Q4, he will kind of return back to more normal.
We expect we'll be building inventory in the third quarter, where the market goes at that point, it's tough to say, whether we're fully back there, but its our expectation at this point with the capacity that we have will be able to get a large wave of large way part part of the way there.
Okay, and then with some of the new capacity Youre, bringing on you know you talked about providing opportunity free to pursue to international markets in new products, what about new construction I'm just trying to gauge there just because housing is actually really strong right. Now. So is that you know are less attractive opportunity versus international from a margin standpoint, thanks a lot.
It's a good point that is something that we have a team that's focused on we already have relationships with some of the largest national builders that are out there.
And working with them to let them know when that product will consistently be available. So that they can offer that is upgrades in their homes.
Okay, Alright sounds good that's exciting.
And our next question today comes from Alex Murray Mircea <unk> with Baird. Please go ahead.
Good afternoon, guys. Thanks for taking my questions just looking to get more information around these price increases in August for timing as this is the start or end of the month and then in terms of the accounting of it how does the price increase work with sales that can't be booked until their ship from D. D. C is the retail.
The price increase will take effect on August 1st.
And from an accounting perspective out of our plants. It is F O b manufacturing plant and for our retail customers. It's one of the product ships from their distribution center to the store.
Okay got it and then if we get pass the price increase in the event the input cost to begin normalizing in the back half of the year, how much of the cost savings would you capture in FY 'twenty one versus 'twenty two.
Can you repeat that question again, sorry, you came across a little broken up yeah, no worries as we get past this price increase in the event that input costs start normalizing in the second half how much of the savings from those cost declines would you capture in FY 'twenty one versus 'twenty two.
Oh Jeez I think we would have to.
We have to be making some real assumptions there at this point regarding what of those cost changes would be flowing through so I don't think that's one we can provide you a good answer for it this time.
Okay. No worries I was just trying to gauge the timing of when you're purchasing the raw materials versus when they would actually get booked.
Yeah, the raw material in many cases.
30 to 60 day supply depending upon what it is some are longer some are shorter, but there's a zone.
I think there is an easy way to get to even a rough number for you for this purpose.
Okay got it thank you guys.
And the next question today comes from Reuben Garner with the benchmark company. Please go ahead.
Thank you and congrats on the quarter guys.
Sure.
So maybe just a follow up from an earlier question Dennis you sounded it sounds like you're suggesting in the third quarter growth rate could be even stronger than the second quarter. I know that you guys are planning on to built building. Some inventory can you talk about like how much you know I guess to get back to <unk>.
Normal levels like how much.
Business would you get just from you know restocking.
To normal levels in the in the third quarter, assuming that the way. We if we think the market underlying market is growing 20 per cent per you guys. We can add in whatever a restock or is there a good way to look at that.
We see the overall growth is inclusive in the.
Double digit top line number we're talking about I know it doesn't give you exactly what youre looking for we do expect the third quarter to grow be on where the second quarter as with the availability of their capacity.
<unk> market demand as well as back filling inventory.
Okay, and then a follow up on the polyethylene.
Conversation.
As you know a handful of years ago. I know you guys were were in the <unk>.
Pellet business with with Virgin prices I think they were north of a dollar a pound back when you were doing that I don't know exactly where they stand today, but I got to imagine that they're pretty close I mean is there any thought for you guys into to doing some business there to take advantage of your your your capabilities and you know turning the.
The cheaper inputs into you know a quality product that the Oems can use as a growth opportunity for us in the outdoor living marketplace is much more attractive than commodity pellets.
Okay. So it would use the same capacity at its not a separate manufacturing process that we use the same capacity that you do for decking, that's correct unless we built additional capacity to service that market specifically.
But right now our strategy is focused on serving the growing outdoor living marketplace.
Got it very helpful. Thank you guys and congrats again.
And our next question today comes from Kurt Yinger with.
Davidson. Please go ahead.
Great. Thank you.
I'm just curious when you talk to contractors as part of your pro program.
What are you hearing in terms of labor and that perhaps being a constraint in any way to to projects and demand is as.
If the market is quite hot right now.
The labor is a challenge for everybody in the channel whether it be the retailer trying to get enough people to make sure they're registered on the lumber aisle on.
Our staff or the pro channel, making sure that they have the right SKU.
<unk> people to be able to sell the premium products that they carry.
For our contractors are no different many of the employees that these contractors have had been with them for some time now and they have been fully employed through the entire pandemic period, so they're not having to be bringing people back off of unemployment into these jobs again I'm sure.
Like virtually everybody else in the economy, it would be happy to have more people coming off of those roles.
At a quicker pace, along the way, but right now they have the staffing that they need to be able to meet their own backlogs.
Okay. It makes sense and then my second one on you know obviously the conversion story right now is very strong and I think it's a you know a real critical part of the long term narrative I'm just curious as you look out over the next 235 years. What do you think is most important in terms.
Ms of your role in continuing that accelerated rate of conversion.
There's $40 million to $50 million would decks just in North America alone.
On an average age eight to 10 years on those decks. So I would expect between.
The next five to seven years on average those decks will need to be replaced composites trucks composites, specifically are much more well known in the market than any other products that are out there and we will gain more than our fair share of those sales as they come along so even though we have a.
<unk> tightened the marketplace between wouldn't composites right now if it goes right back to where it was tomorrow, we're highly confident in our strategy to continue that conversion.
Alright, I appreciate the color, Brian and good luck here in Q2 guidance.
Yes.
And our next question today comes from Alex right.
B Riley FBR. Please go ahead.
Hey, guys. Thank you very nice quarter Bryan.
Thanks, Alex.
Brian you've been in the business for a long time can you talk a little bit about the correlation between new home construction cycles, and then the sort of lagging.
Demand drivers to building, a DAC and composite decking.
I think you just said Ive got gray hair didn't you.
Yeah, I've been around for a while.
With the demand patterns on new homebuilding.
Because we are 95% repair and remodel theres not a significant correlation between trucks and that homebuilding cycle that you see out there I think as we move forward and there is the.
Uh huh.
Expansion in new homebuilding over the next couple of years and as we build those relationships further build on them and have product available to it will probably be a little bit more of a correlation but I'd be so it's never going to become a dominant part of our business.
Maybe let me clarify the question.
Clearly a lot of homes are built without a deck.
What kind of sort of lagging benefit have you seen after a big housing cycle when does the cycle from building those debt then develop yeah I got you now.
Usually going to be 24, 12 to 24 months after that home has built where the homeowners have spent most of their upgrade money on their countertops or floors or fixtures they get into the house and then they realize they want the deck. So it's generally one to two years. After the house has been closed.
Thank you.
And ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one.
Your next question comes from Trey Grooms with Stephens. Please go ahead.
Hey, good afternoon, and congrats great quarter extra Inc.
So I guess this one is just kind of around the the incrementals are kind of revisiting that some of the commentary there.
35% to 40% incremental EBITDA margin it it sounds like.
You will ramp through the year and if I understood right.
<unk> would be your highest incremental quarter incremental margin quarter.
The year, if I understood that right and so I guess the question is you know with the puts and takes you know around.
The price cost catch up that you're seeing excuse me in the <unk>, but also if you're returning back to normal kind of capacity.
Capacity utilization or maybe more normal seasonal patterns in the <unk>.
With those puts and takes at hand here and looking at exiting the year at the highest incremental EBITDA margin.
How are we thinking about longer term incrementals.
Going forward exiting this year is that a good run rate is there more to come above and beyond that or how should we be thinking about it longer term Brian.
Well I think you know over the longer term, we're going to continue to find ways in which to improve our cost position that is one of the things trucks is known for historically and so we.
Where our focus right now is on the capacity expansion, but as Brian talked about earlier, we're going to quickly pivot and we're going to start looking at cost out projects as well and we'll be focused on those for the back half of the year and then into the future and so as we can continue to grow we have all of our lines behind us.
SG&A becomes a greater leverage story as well.
As as we're not having to invest dollar for dollar if you will from a branding perspective and enhanced because enhance it does not require the same level of branding spend.
So clearly it can be higher than the on the range that we've given you.
Yeah I got that thank you for that and then you know that SG&A ramp I guess as a follow on that SG&A ramp that you're talking about back to something more normal.
Is that.
Can you give us any any better way of kind of thinking about kind of where you see maybe exiting the year.
This year Dennis is it is it a kind of a linear ramp up to <unk>.
And then ex U.
No.
Or is it is it more lumpy is there more step functions there.
No. It's it's it's not a lumpy at all in fact I would consider this to be a little more linear now. So Q1 was was definitely going to be the lightest because it was COVID-19 impacted when do you start stepping into Q2 and Q3 Q4, we're going to continue on with our branding spend.
And you're going to see more and more travel start to kick in so I think that you'll see Q3 be a little higher than Q2, and I think you'll see Q4 be a little higher than Q3 from a travel and entertainment perspective, because we'll be out on the road more will be attending conferences more.
And meeting with customers.
Okay. That's helpful. Thanks, a lot I'll pass it on ex China.
Ladies and gentlemen. This concludes the question and answer session I'd like to turn the conference back over to Bryan Fairbanks for closing remarks.
Thank you for everybody's participation on today's call. We look forward to keeping you updated on our progress at upcoming conferences and meetings good evening.
Thank you Sir This concludes today's conference call and thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.