Q2 2021 Trex Company Inc Earnings Call
Good afternoon, and welcome to the trucks company second quarter 2021 earnings Conference call all participants will be in a listen only mode.
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I'd now like to turn the conference of 2 Victorian Aircoa. Please go ahead.
Thank you all for joining us today with us on the call on Bryan Fairbanks, President and Chief Executive Officer, and Dennis Schemm, Senior Vice President and Chief Financial Officer.
Good morning, Brian and Dennis Isabelle got senior Vice President General Counsel and Secretary.
The other members of management.
The company issued a press release today after market close containing financial results for the second quarter 'twenty 'twenty 1.
This release is available on the Companys website. This conference call is also being webcast and will be available on the Investor Relations page of the company website for 30 day.
I would now like to turn the call over to Bill got Bill.
Thank you Victoria before we begin let remember let me remind everyone that statements on this call regarding the company as 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.
Really from those expressed and 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 Rockford and this call a reconciliation of these measures to the.
Our book GAAP financial measures can be found in our earnings press release and trucks Dotcom and 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 and good evening everyone.
Thank you for joining us today to review Trust company of second quarter results and year to date performance along with our business outlook.
This was another very strong quarter with record revenues of $312 million led by 43% sales growth of <unk> residential.
Demand remains robust across all tracked residential outdoor living product lines in both the DIY and pro channels.
The success of our $200 million capacity expansion program.
Which became fully operational and 1 month ahead of schedule and has enabled us to take advantage of the appeal of <unk> branded products and increased conversion from the large wood market.
This expansion is the largest and the company's history and increases our production levels by 70 per cent compared to 2019 year end levels. However, labor constraints impacted to the extent to which we can utilize this capacity to meet the higher demand.
Our new Virginia plant is highly efficient and designed for maximum output with an emphasis on quality control and energy efficient operations.
With the capacity expansion plan largely behind US we are pivoting, our focus to cost reduction projects and continuous improvement opportunities to drive margin improvements.
These efforts will be focused on automation and energy efficiency and raw material processing.
1 such cost reduction project is poised to reduce the processing cost of our plastics by generating higher productivity and allowing for a wider use of low cost recycled material streams.
In addition, thanks to the tireless efforts of our engineering team and the continuous improvement mindset. We are pleased to announce the by the end of the year, we won't stall incremental decking capacity within the new Virginia facility that will further increase our production capability and improve our cost position.
As a result of this initiative tricks, we'll have even more opportunity to pursue further growth as we've been unable to fully realize.
Due to capacity constraints.
We will be positioned to take advantage of the product development work being done by our R&D team.
Spanned our international sales and penetrate the new home construction market.
While we continue to make significant strides with our additional capacity. We remain pleased with the continued success of our tiered product strategy.
Which supports consumer decision, making by providing a range of product of aesthetics features and price points.
Broad based appeal and distinct competitive advantages over what the.
And the winning mix of products makes it easy for the consumer to choose tracks and we see strong growth across all price points.
Like many other companies and industries during the second quarter, <unk> experienced labor challenges and inflationary pressures from higher raw materials and logistics costs.
As a result of the inflationary pressures treks took of mid single digit price increase on most products effective August 1st with the full impact to be seen later in the third quarter.
We deliberately chose the timing of our price increase to give the ample notice to our channel partners in order to minimize the impact during the peak decking season.
This action is example of the importance we place on our partnerships with distributors dealers and contractors and doing right by them.
Dennis will provide more detail around our financial results and inflationary impacts, but I want to highlight the despite inflationary headwinds EBITDA grew by 36% during the second quarter and produced the 29% increase and diluted earnings per share.
While we focus on profitable company growth expansion and continuous improvement we continue to do so and of sustainable manner.
Sustainability has always been on part of <unk> DNA since inception.
<unk> is and halt and it's always been 1 of North America's largest recyclers of plastic film.
In 2020, we upcycled and more than 900 million pounds of plastic film and reclaimed wood, most of which would otherwise be destined for landfills.
At our plants scrap boards of recycled back into the manufacturing process as well.
Additionally, our ongoing efforts to improve energy and resource and efficiency in our plants.
<unk> reduced the company's energy use related to cooling by approximately 40% in 2020, and the addition of closed loop chilled water systems and significantly reduced water usage.
For a more detailed description of our ongoing ESG efforts I encourage you to review our third annual 2020 ESG report on our website, which includes our first disclosure of scope, 1 and 2 annual carbon emissions and establishes our baseline for future efforts to reduce carbon emission.
And.
The report was issued at the end of June 'twenty, 1 and recaps of year of building a better tomorrow together for our customers employees communities and investors and the environment.
Dennis Schemm will now share details on our second quarter financial performance Dennis. Thank you, Brian I'm pleased to highlight the drivers of our strong second quarter results and year to date performance as well as our expectations for the third quarter and full year 2021.
<unk> sales were $312 million and the second quarter compared to 221 million and the same quarter last year.
The 41% increase was driven by substantial volume growth across all trucks residential product lines and.
<unk> residential sales of 299 million outpaced sales of 209 million year over year by 43%, resulting from sustained broad based demand and market share gains from wood.
<unk> commercial products contributed 13 million to consolidated sales and the second quarter of 2021.
Consolidated gross margin for the second quarter was 38% after absorbing and approximately 400 basis point impact related to startup cost and inflationary pressures on key raw materials and transportation versus 41, 9% and the prior year quarter.
Margin was also impacted by increased depreciation expense of $5 million related to the capacity expansion program and trucks residential and labor constraints.
Labour constraints resulted in lower sales and margins by under utilizing expanded capacity.
Cost savings initiatives and increased production and the impact of the January price increase partially offset the unfavorable impacts.
Gross margins for trucks residential and trucks commercial were 38, 7% and 21, 6%, respectively compared to 42, 5 per cent and 37%, respectively and the year ago quarter.
SG&A expenses were $36 million and increase of 24% compared to 29 million and the prior year quarter. The.
Primary drivers of the increase were personnel related expenses higher branding spending and the resumption of travel and entertainment expenses as COVID-19 related impacts east.
As a percentage of net sales however, SG&A decreased by 170 basis points to 11, 5% and the second quarter compared to 13, 2% and the prior year quarter, reflecting disciplined cost management and leverage and our operating model as we rapidly grow our sales.
Despite the inflationary and startup costs, we incurred during the quarter, we delivered 30% growth and net income to 61 million or 53 per diluted share up from the $47 million or <unk> 41 per diluted share and last year's second quarter.
The steady focus on our strategic initiatives and our increased production capacity resulted in a 36% growth and EBITDA to 92 million and and EBITDA margin of 29, 4%.
The continued strength of the repair and remodel sector trucks brand leadership and increased capacity drove our impressive year to date performance.
Consolidated net sales year to date increased 32% to 557 million compared to $421 million and the prior year period.
Higher net sales were primarily driven by a 34% increase and <unk> residential sales to $532 million compared to $396 million and the same period last year.
Net income was $110 million or <unk> 95 per share compared to $90 million or <unk> 77 per diluted share year to date in 2020.
EBITDA grew 29% of $163 million compared to $126 million and EBITDA margin remained relatively stable at 29, 2% compared to 30% for the same period and 2020.
Year to date capital expenditures were $95 million with the majority of supporting the capacity expansion program completed in May.
In addition year to date, we repurchased $49 million of trucks outstanding common stock and an average price of $91 per share under the share buyback program and.
<unk> has and approve buyback program for up to 8.3 million shares.
Looking ahead, we expect third quarter consolidated net sales to range from $320 million to $330 million representing year on year of growth of 40% at the midpoint and reflecting continued strong consumer demand from our channel partners.
We expect continued inflationary pressures in the coming quarter as the tailwind from the August <unk> 2021 price increase will not take effect until sometime in September as we are fulfilling orders of approximately 30 days later than expected because of labor constraints.
As we navigate these challenges we anticipate incremental EBITDA margin will be at the low end up the range of 35% to 40% for the full year.
We expect to return to more normalized EBITDA margins and the first quarter of 2022 as we are of past the startup phase of our capacity expansion and as our price increase and strong cost reduction and continuous improvement initiatives take effect.
Our tax rate is anticipated to be approximately 25% depreciation will range from $35 million to $40 million increasing throughout the remainder of the year.
Full year spending on Capex is expected to be in the range of $130 million to $150 million, which includes the installation of additional decking production lines to further boost our capacity.
Now I will turn the call back to Brian for his closing remarks.
Thank you Dennis our year to date performance places us firmly on track to achieve our stated expectation for strong double digit growth in 2020, 1 and the success of our capital expansion program, along with the additional capacity investments positioned tracks for ongoing growth and enhance the value creation for our stakeholders.
<unk>.
Most importantly, I want to recognize the hard work and dedication of the entire <unk> team as well as the continued support of our dealers and retailers distributors and contractors, who continue to be great partners and key to our growth and <unk> extra ordinary success is due in large part to all of you opera.
Later, we can now take questions.
Thank you and we will now begin the question and answer session to ask a question and you May press. The Star then 1 on your Touchtone phone.
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The first question today will come from Jeff Stevens and with loop capital. Please go ahead.
Alright, Thanks for taking my question my.
My personal on as raw material inflation pizza and the second quarter or do you expect the and the incremental inflation on the back half of the year.
And then following up on that you believe the August mid single digit increase will be enough to offset these higher inflation pressures or do you think youll need incremental pricing and the SEC.
And half.
Well, we've not seen any of the raw materials start to come down and the market as of yet we continue to receive new notifications of increases in price. So I expect the third quarter 2 the of higher impact than the second quarter, but of course, we've got the price and coming in.
As we look forward, it's too early to predict what inflation is going to do out in 2020.2.
But in order of priority, we will continue to focus on continuous improvement cost reduction and of course, we will look at pricing as appropriate to make sure that we're offsetting any new costs that flow through the tracks related to inflation.
Okay. That's helpful. And then just some of new Virginia capacity of this and can you kind of any more color on how incremental versus the capital investment and potential.
The potential impact on margin like the the prior expansion any more color there would be helpful. Sure. If you compare it to what we provided last time it was a 70% increase and capacity.
The approximately 15% additional capacity, we haven't been as specific on the actual investment but it is included within the guidance for the capital spending we provided for 2020.1.
Got it thanks for your health and all of the book.
Great. Thank you.
And our next question will come from Keith Hughes with true. Please go ahead, David and Katy thoughts. Thank you.
Hey, how are you all.
Couple of questions..1 you had lifted off of the drivers of the 400 basis points down on gross margin can you kind of put the magnitude on those what was the biggest second biggest set of things of that nature.
Yeah. So you know if I were 2 of rank order the right. So I would first start with inflation and clearly that is where most of the margin pressure is coming from.
And then has your walk it down and startup costs were were clearly pretty significant in the quarter as well as you know we had April and May I'm with startup cost as we completed the expansion program in late May.
From there I would look at our depreciation expense as well.
As that had a significant impact to and then we.
We also add labor shortages impact us as well.
Because of the tight labor market, we weren't able to run all of our lines as much as we would've liked and as a result, we of absorption impact from that.
And we wanted to go back into the inflation for a little bit more detail right I would look at it as raw material inflation and then from a transportation perspective, we were hit with higher logistics cost so.
Those would be the 2 drivers within inflation that were the biggest impact.
Okay.
And as you look at the inflation moving into the third kind of calling at the peak and the third.
Is that.
That's still a function of transportation costs still moving up and I'm, referring to the translation within raw materials going into your facility and that's what's changing or is it the actual base material itself.
No what we're actually seeing more is the base material starting to rise on some of the key raw materials and so.
So the transportation market still remains high.
And it's really on the base level of the materials.
Okay. Thank you.
Thanks, Keith and.
Our next question will come from Ryan Merkel with William Blair. Please go ahead.
Hey, guys. Thanks for taking the question Hey, Ryan.
So I guess first off you mentioned labor constraints hurt production what solutions are you working on and have you seen any improvement.
Yeah sure. So theres been there've been quite of few things that we've implemented at our manufacturing environment to improve our ability to run all of our lines, we have changed the wage structure.
And for a number of the positions that we have it hasnt been across the board.
But there have been certain areas, where we have increased wages second thing as it relates to overtime. We have put some additional incentive programs in place to encourage more people to work the overtime that we need with the additional lines and then the last is a much broader.
The focus on recruiting so getting more people through the doors that we can help run our lives on examples of that we've moved heavily into this year is what we call our level up program.
And for most of <unk> history, we've hired people at the entry level and then we've trained them through all of our manufacturing processes as they move up through manufacturing.
We recognize there are highly skilled capable people available and our local economies and.
And we've gone ahead and started recruiting directly for those individuals of course paying about a higher wage rate than just coming into trucks as a.
Newer and unfamiliar employee along the way we continue to look for new ideas out there, we hope of that with the.
Change in government benefits as we move through September the number of people that are coming back into the market increased further from what we've already seen and of course, we operate in states, where we continue to pay the higher level of unemployment benefits for the full statutory period of time.
Got it alright, and thats going to be important given the new capacity and then secondly, just how should we think about gross margins and the second half at this point I know youre going to be at the lower end of the incremental margin side. It sounds like and what's the improvement just a little bit slower than expected and then fourth quarter and presumably would be.
The kind of the best quarter that Sir.
I think that's a real fair way to look at it you know the way the way I'm thinking about this as you know.
The gross margin pressures in my mind are more transitory in nature.
So if you think about the east and I'll take each 1 that I talked about earlier and inflation, we took our price increase with the 90 day advance notice and then on top of that because of labor constraints. We're fulfilling July orders essentially in the September timeframe.
Right. So this is making it harder for us to get our price increase out there.
So that's 1 and.
And more obviously, our price increase will take effect more more significantly in the September timeframe that will address the inflation the startup costs are behind us at this point.
So we won't be seeing that recur in Q3.
Labor shortages eventually are going to get right and you know Brian talked a lot about some of the initiatives that we're working here internally, which are seeing positive impact.
But over the longer term and thats going to to right itself as well and then finally depreciation will lap that in Q3 of next year. So all of these issues are transitory in nature and then as you think about the back half we're going to start pivoting to these cost reduction and continue.
And this improvement projects that will help to elevate our gross margins going forward and we're predicting to see.
Trucks standard margins right. The gross margins that you're all used to back in Q1 of 2022.
Alright very helpful. Thanks.
Thanks Ryan.
And our next question will come from Michael Rehaut with J P. Morgan. Please go ahead.
Hello, and perhaps your line is viewed and Michael yes, sorry about that.
Good afternoon, everyone.
First question just wanted to make sure I understood it right or how to think about and you kind of gave some.
And the puts and takes on the.
The gross margins and.
In terms of maybe expecting a little bit of improvement from the second quarter, where you have the 38%.
And might it kind of takeaway that youll see a little bit more enrollment.
Inflate the material inflation and Youll see less.
Startup cost you know I don't know if they would offset each other within the reason youre seeing.
And some improvement off of the 38.
Is that if you have some cost alleviating some costs, increasing but then on top of that you have the price increases coming through and September is that.
The right way to think about it I.
And I think you pretty much hit everything there with the price increase will come through in September and that'll be a month later than we had originally intended.
We will continue to see some of the raw material costs climb throughout the third quarter I hope the third quarter ends up being the the peak period and things level out from from that perspective, the startup costs are behind us in the third quarter. So that's the 1 of the.
The favorability that we see on a quarter over quarter basis.
Okay. That's great. Thank you and then just a follow up I guess shifting to the top line.
And he came and a little bit above I believe guidance for this quarter.
You kind of hit our number of at least.
The high end of your range and our number for the third quarter.
As we think about the fourth quarter, obviously, you haven't given guidance yet but.
How should we think about.
Obviously, you have a lot more capacity now fully up and running and at the same time I think you've talked about maybe eventually taking some of it offline at points, let's do the improvement maybe some downtime.
Obviously, there's still a very strong demand backdrop and.
You can operate at a higher sales rate.
But should we be expecting some type of pullback.
Cline at least sequentially.
<unk> versus <unk>, just more of them.
The room maintenance or retooling standpoint.
I would expect a similar production number in the fourth quarter and its really all dependent upon how much of the channel inventories and our own can get filled during the third quarter. We do see some evidence of that at least in certain channels inventory is being filled at this point and then.
Theres other channels, where we have quite a few backlogs that still need to be addressed so as we move through the quarter. We will have better visibility on the I would expect that we'll continue running the capacity and build the inventory necessary to give our customers of the confidence that we have everything that they need and.
And then we'd be in a position to start taking lines down for a little bit longer period, if we get out into next year and we've got the inventories throughout the channel. We can do the maintenance that we've wanted to do as well as improve some of the assets for improved cost positions.
Great. Thank you. Thank you.
And our next question will come from Matthew Bouley with Barclays. Please go ahead.
Hey, good afternoon, thanks for taking the questions.
So on the Q3 revenue guide.
Obviously, the prior commentary I think was for Q3 revenue growth to be.
I think stronger than that of Q2 and correct me if I'm wrong.
The Q2 came in stronger than the prior guide and you've been very clear that the these labor shortages here of probably another piece, but obviously what I'm getting at is it kind of begs the question of if theres anything and the demand picture.
That is perhaps any less robust than what you were thinking 3 months ago of anything and DIY or retail.
It helps.
And obviously you can clarify some of that commentary. Thank you, yes, I think it's a great question and our guidance is more based off of the labor constraints that we see in the marketplace.
The base Mark of the consumer demand through all of our channels continues to be very strong. We got no concerns about changes that are there and.
And I fully expect that I think with the volume we have we are moving through the peak part of the decking season that we will start to see some inventories built but we're not seeing a falloff in and consumer demand from a growth perspective.
Okay Wonderful day, thank you for that color.
The second 1 is.
And you continue to highlight the builder market.
And that's the first time, you've said something along those lines I'm just curious.
As you are now again looking at additional capacity coming online and where do you see those opportunities and the geographically.
Production builders nationally versus custom builders, how do you kind of.
Dip your toe into that market. Thank you.
With the custom builders, we already have a pretty decent relationships because they tend to be the higher end homes that are already looking for composite decking. So I'd say this will be mostly focused on the production builders and.
And showing the builders the case all of them to earn a higher level of profitability and of course less callbacks on of that most of <unk>. When they're built are going to have the warranty call back within that first 12 months, so that and small amount of additional costs that they're willing to put in and can then.
And charge the customer for having a track that will offset that longer term risk for them.
And we see it of a great opportunity with the new capacity that we have and.
And somewhat of a market that hasn't been tapped to the potential available.
Great well, thank you for that kind of Brian and good luck.
Thanks, Matt.
And our next question will come from Keith in <unk> with BMO capital. Please go ahead.
Good afternoon, and thanks for taking my question.
And maybe coming back to the discussion around.
Inventories can you give us some sense of.
Value thing, John and inventories out of at this point I know you've been trying to rebuild that you think as you exit youll see.
You would have gotten to the point that you feel more comfortable with where they are.
I think we will feel more comfortable the question is to what degree of comfort that we'll feel at that point inventories are not where we would like them to be in the channel or on our ground. At this point. So we have some work to do to get everything back to a normalized environment.
Understood.
And the other thing you also talked about in your release.
Sort of expanding on the international side, maybe talk a little bit of more of a kind of where you see the most opportunity.
And how you see that kind of playing out over the next 4 years.
And we've seen significant growth and the international markets. This year as we've had the additional capacity available to serve so everything with that strategy continues as we have expected when we look out over the next 4 to 5 years and.
And we can supply everything that's needed and it's mostly going to be the larger markets with a higher GDP and and interest and outdoor living we.
We have distribution relationships already built and most of these economies.
And we're still really just very much in the the first inning of opportunity in those marketplaces. So we're pretty excited about it as another opportunity for growth.
Thank you.
Thanks, Tom.
And our next question will come from Tim <unk> with Baird. Please go ahead.
Hey, guys. Good afternoon, good evening and how are you.
I'm good thank you.
Maybe just.
Thinking about 2022 at this point any.
Leading indicators, whether it's the sampling of our website traffic on <unk> dot com traffic that you can kind of cite that gives you confidence and visibility.
The visibility around demand heading into next year.
Yes, I wouldn't say that way of necessarily anything.
Within our own systems that indicate 2022 demand, but as we look at where the marketplace is consumer confidence continues to be at a high level.
There is still of lot of capital out in the marketplace, even though we've seen many of our consumers start moving to spending more money on travel really hasnt impacted the.
The spending on repair and remodel so we expect a very robust repair and remodel moving into next year.
Okay. Okay, and then when you think about price just just mathematically given the realizations when you actually have more price from the 21 increases next year than this year.
Yeah, I would expect that we would.
Given that.
We will have a delayed impact of our August <unk> price increase more hitting that September time frame. So so yes. It is.
And how I would see it.
Okay, great well good luck on the back half of the year guys. Thanks for everything. Thank you. Thanks, Tim.
And our next question will come from Stanley Elliott with Stifel. Please go ahead.
Hey, Brian Dennis Thank you guys for taking the question.
And as it relates to pricing and the back half and you've got the August price increase. So is this impacting your thoughts around early order programs in terms of what you want to do there to get product out in the marketplace and at higher price points.
Well, we always look at our year end program and relation to the inventories that are and the market. The capacity we have available to serve and the dynamics that are occurring as part of general marketplace and with the consumer that's something on our sales team spend a lot of time working on.
On generally during the third quarter and.
The efforts still to be completed here. So I think the answer is yes, because it's always part of the impact on how we look at pricing and it might how it might flow into those programs is something that will be considered.
And when we think about kind of margins returning <unk> 2022 to kind of some of the more normal margins and more incremental.
That really just the pricing kind of catching up and I'm curious how long it's going to take for some of these.
The cost reduction program continuous improvement programs to roll through.
Is that going to be more of a benefit into the latter part of the year.
Well I see by then we start moving through the noise of the capacity expansion that we've been experiencing over the last year.
So we won't have the startup cost moving into the beginning of next year, we will see some of these cost improvement programs and we're going after come into play and then of course of there'll be the pricing that Dennis talked about.
Great guys. Thank you very much and best of luck.
And our next question will come from Trey Grooms with Stephens Inc. Please go ahead.
Hey, Brian and Dennis Hope, you're all doing well and great. Thanks, Craig.
And so.
Just touching on the.
Cost improvement initiatives, you talked about and just a minute ago and.
You kind of lined out on laid out excuse me.
The focus on automation and energy efficiency raw material processing is.
Is there any way to maybe help us understand what's the impact here could be I know. This is this is something you guys are continuously going after.
So will this be.
Step function and any any comments you could give us on the timing there.
And the size of the <unk> company is very different from where we were 5 years ago I see this as a continuous improvement where we will get back of having a pipeline of projects that will drive cost savings to the organization and they will come in over the course of the year.
Okay.
Of the course of of.
22, primarily we will start to see them coming in and the back half of this year now that we're through capacity.
And then additional into next year and more of that cost saving benefits and will have a full year of anything that comes in and this year.
Perfect perfect. Thank you for that and then.
On the labor constraints and we've touched on it several times on the call, but and.
And I know you guys are seeing some of it you mentioned that but as you look across it.
Is it.
Is this more than just on your side of this also of some labor constraints and the channel or at the installer and level or just across the board.
As far as Labor goes and are you hearing if it is outside of just you guys. I assume it is probably are you hearing any improvement out there outside of just tracks on late but.
Further out into the channel.
So the labor constraints have impacted our suppliers of raw material, we have been able to work through that having appropriate level of safety stocks on the ground.
Same labor impacts of impacted our contractors, where they could put additional crews on the absolutely would to try to reduce their time to the marketplace, but it's very difficult to find those individuals and then train them to appropriately build the deck.
As I get up and talk.
With the folks in our selling channel.
The same issues there, it's just very difficult to bring new people in and in many cases, they've got long time employees that.
Really no of the business very well there hasnt been turnover from that perspective, but bringing new individuals and to manage the growth has been a challenge.
Yeah, Alright, and understandable I'll leave it there thanks, guys and good luck.
And our next question will come from Phil <unk> with Jefferies. Please go ahead.
Hey, guys I guess the question for Dennis you mentioned and well first of all of you guys saw a really good SG&A leverage and the core and the quarter. So curious from an EBITDA margin standpoint, when do you expect EBITDA margins to inflect positively.
Tied to that <unk> timeframe as well and Dennis.
Yes, it will start to pick up here more in the the latter half of the year for sure and then it'll follow suit of course with the gross margin improvement. So you'll continue to see this leverage story play out.
And of very significant way I think we of that near term and longer term and play right. So near term, we're going to see more of a normal spending pattern for SG&A right. So medical is coming back we have travel and entertainment and coming back we're reinvesting and the brand all of which we.
Back in 2020.
And then longer term as we move into 2021, you're going to see that leverage story really start to play out because we don't have to advertise and brand as much for enhanced and has enhanced becomes a greater part of our product mix than net leverage really starts to take off.
Got it Okay. That's helpful. And then a question for you Brian some of the comments you were talking about in terms of expanding into the new construction side and international with the capacity of freeing up any wins that you could call out on the the production builders that you don't have to give me the company, but any noticeable wins and then to kind of and really drive growth here.
Or are you, making any real investments, whether it's on the sales force side or anything else and we should be mindful of.
Well from an investment perspective, yes, we're making investments and a number of different areas within the organization, including sales and specifically on the new builder side as it relates to specific wins that are out there probably a bit too early to get into that discussion because we need to make sure that our.
Panels are filled with product. So discussions are being had at this point, that's really of the early stage of it and as we begin to fill that channel and get back to more normalized operating parameters I think we'll be and a good shape to be able to talk about some of those contract wins.
Is it going to the noticeable enough that we will see it and you know on the volume side and you've noticed all of fashion call. It like the back half of next year or is it going to be really more of of 2023 of them.
Difficult to say right now I'm not sure that that initiative on its own I'll be in a position to call out here is what the specific growth from it will understand as it comes into the on.
Of our sales.
Opportunities along the way, but well worth the wait as we look at what next year's growth opportunities are and where we stand on inventories coming into the end of the year that'll really be of key determinant.
Great. Thank you.
And the next question will come from Reuben Garner with the benchmark.
Please go ahead.
Thanks, Good evening, Brian and Dennis.
Hey, Reuben.
Most of my questions have been answered and I just have a follow up on the SG&A.
Brian Dennis you mentioned expense.
The normalized in Q2, I think historically, it's been kind of on the high watermark for.
SG&A dollars.
And I still kind of ramping some of the.
Marketing costs and travel and other things that were taken out temporarily last year and.
And that 30.
$6 million roughly the Q2 might not be the high watermark for the year as a result.
So what we saw last year, we had about what $29 million and SG&A. We we ramped at 236 million here in Q2, so $7 million of pickup.
And I think it's a pretty high watermark for us yet I still think we're going to see a little more spend here.
In Q3.
And just because there will be more travel there as we're predicting a little bit more medical and some branding as well so.
I would I would expect things to be normalize, though right around this level I don't think it's going to be much higher.
And that gives you look out at next year the.
Percentages by quarter will probably normalize if you go back to pre pandemic timeframe, we get back to having the builder show, we get back to normal advertise timing, we get back to having distributor meetings normal travel and entertainment from our sales team. So I expect next year to look like and much more.
Normalized environment, whereas this year, we still have the impacts from the pandemic some things of which we're spending on other things, we're not spending as much on but that will build as we go through the year and and normalized for next year.
Perfect. Thank you guys and congrats on the results.
Thank you.
And once again, if you'd like to ask a question. Please press Star then 1 of our next question will come from Alex <unk> with B Riley FBR. Please go ahead.
Thank you Brian can you comment on the significant volatility in lumber prices broadly and how that sort of help demand.
And how it might change demand as lumber prices pull back here and then can you also comment on the.
The higher and wood product sort of marketplace that you compete with and what.
Pricing looks like and availability of it looks like there.
Out of that product is.
Sourced internationally.
And so for the standard lumber business of course, the future of shot up earlier this year all of those while the futures of come back down again, the actual prices in the marketplace have not returned back to those savings of at the same levels of let's call. It about 80.85.
Linear foot 4 for lumber.
Definitely has been a health and this marketplace as people come in and understand that I can spend of $1.60 on buying a piece of lumber I can spend of $1.60, a foot and by trucks or maybe $2.50 and move up to the enhanced product. So it's been a bit of a tailwind for us as we look out over the longer.
Term on.
And expect lumber from of retail perspective to drop back down to that 85 again.
So there will be a tightened spread between our pricing and where lumber is and will continue to pursue the same marketing strategy and we have for the past few years on converting those lumber buyers at roughly of <unk> price.
Premium to move up to trucks as it relates to the higher and part of the marketplace and.
And not as familiar with the pricing out there.
And the visiting a few dealers earlier this month.
And at a couple of the species are very difficult to get because they are coming internationally and some cases they are coming from in danger of the range for us So it's more and more difficult to be able to get those types of materials and those consumers often now are looking to do the right thing environmentally.
And moving over to our trucks transit and type products.
Is it pretty easy sale for the dealer or the contractor to make our product tends to be easier to work with than some of the hardwoods the exotic hardwoods as well.
Very helpful. Thank you.
Okay.
And our next question will come from Kurt younger with D. A Davidson. Please go ahead and great.
Great Thanks, and good afternoon, Brian and Dennis.
Afternoon Patrick.
Yes, I guess.
Ignoring the labor constraints and the channel inventory for a minute. It does seem like you're in a pretty good place relative to the rest of the industry in terms of having incremental capacity to respond to demand I'm. Just curious if that plays into your messaging or sales strategy with your channel partners and whether you think that's something.
And it can be of transitory or more lasting advantage in terms of market share.
So we expect that the.
And the capacity that we put on and will continue to add through the end of this year.
Give us the advantage and I expect over time, we will need additional capacity last we talked I think we said this gives us a couple of years of capacity. If the market continues growing at this level of it'll probably be a little bit shorter of time, but these are regular discussions that the management team has with each other as well as our board of directors and will launch.
Sure that we stay ahead of the market.
Got it okay that makes sense and then just going back to the inflation topic I guess on recycled film specifically in the past I think that was pretty correlated with Virgin resin prices for the last couple of years. It's the coupled are we back of the point where those 2.
And we're moving and the same direction again and and any color you can provide in terms of expectations for pricing there.
Yeah.
So the answer is yes, and no there is more of correlation there and there has been over the past few years past few years the.
The 2 markets were completely separate as we've seen the verge and marketplace go over a dollar a pound.
<unk> seen some correlation creep back into the market we've seen some of the recycled materials price increase has been in the mid.
Mid teens type level on a year over year basis, So and we talked about increasing costs and the third quarter I think that's something that we'll continue to see.
Historically generally the recycled market tends to move 6 to 9 months after the Virgin marketplace and that's basically what we're seeing at this point.
Got it and.
Just 1 more quickly.
Is that something where as you consume more recycled material and perhaps have to move out further.
And you would expect pricing generally.
The increase or do you think you can offset that by expanding some of these lower quality of materials that otherwise wouldn't have a home.
And I think we'll be able to expand the usage of material and some of these lower priced opportunities that are not being taken advantage of today and the marketplace, but we talked I guess it was the end of last year coming into this year that we were going to be going further or that material and we.
With that comes additional logistics costs. So we will continue to see that as we move through this year and into next.
Got it okay, well I appreciate all of the color and good luck and thanks Kurt.
And this will conclude our question and answer session I would like to turn the conference back over to Bryan Fairbanks for any closing remarks.
Well, thanks, everybody for your questions and to the independence of today's conference call. We look forward to speaking with many of you during the quarter at conferences and other events. Thank you and have a great evening by the.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
Okay.
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