Q3 2021 Trex Company Inc Earnings Call

Good afternoon, and welcome to the trucks company third quarter 2021 earnings Conference call all participants will be in listen only mode.

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I would now like to turn the conference over to Victorian Aqua. Please go ahead.

Thank you all for joining us today with us on the call are Bryan Fairbanks, President and Chief Executive Officer, and Dennis Schemm, Senior Vice President and Chief Financial Officer, joining Bryan and Dennis is Bill got senior Vice President General Counsel and Secretary as well as other members of.

Rx management.

The company issued a press release today after market close containing financial results for the third quarter 'twenty 'twenty. One. This release is available on the Companys website. This conference call is also being webcast and will be available in the Investor Relations page of the company's website for 30 days I would now like to turn the call over to Bill.

Up Bill.

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 laws. 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 19 thirty-three. Another 1934 Act filings with you actually see 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 truckstop com the company expressly disclaims any obligation to update or revise publicly any forward looking statement, 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 <unk> company's third quarter results and year to date performance along with our business outlook. This was another great quarter for trucks robust demand fueled by the unmatched strength of the trucks brand along with our increased manufacturing capacity combined to drive 45% year over year.

Year sales growth to a record $336 million.

Dennis will provide more detail around our financial results, but I want to highlight that despite considerable inflationary headwinds <unk> reported strong EBITDA margin of over 32%.

And an increase in net earnings of 73% from the prior year period.

Record 64 cents per share.

Thank you to all of our trucks team members our distribution team our partner so both the pro and DIY channels as well as our contractor community for making this strong growth and performance possible.

<unk> continues to successfully execute on our long term strategy of gaining market share from wood within an expanding decking market.

Outdoor living remains one of the fastest growing categories within the repair and remodel sector and the strength of the trucks brand coupled with our expanded manufacturing capacity are key competitive advantages, helping us to effectively unlocked potential market share and drive long term growth.

We continue to benefit from increasing consumer interest in our environmentally friendly low maintenance product portfolio, the transforms and enhances the outdoor living experience.

With the strong momentum in the category and our success to date and converting share from the wood decking market. Our analysis suggests an acceleration in market share gains from wood.

It is estimated that gains from wood are now approximately two percentage points in market share per year up from one percentage point with composites accounting for approximately 24% to 25% of the overall decking market volume in North America.

Last week, we had the pleasure of hosting our channel partners at our annual distributor meeting in California, where it was great to be face to face for the first time since the start of the pandemic.

Our distributors are the best in the business and are poised to execute growth to convert wood and continue the success in growing composite decking and railing market.

Across the board there was universal agreement that we were early in the wood conversion opportunity and we will all need to invest for growth.

We continue to track our website activity as a proven indicator of consumer demand traffic to treks websites remains robust with high levels of dealer and contractor searches in the third quarter.

<unk> dot com and <unk> Dot com together continue to account for nearly 70% of the category of website traffic.

Selecting the company's unparalleled strengths in capturing consumer interest in outdoor living.

As consumer decisions are increasingly driven by digital content, we continue to strengthen and enhance our digital footprint to support long term sales growth.

We remain focused on ensuring the capacity to service our channel partners is aligned with both current demand and expected future growth.

Having recently completed a $200 million manufacturing capacity expansion at our Virginia, Nevada facilities.

Our engineering team is currently installing incremental decking lives within our new Virginia facility that will further expand our production capability.

Additionally, we recently announced plans to develop a third U S based manufacturing facilities at approximately 300 acres in little rock, Arkansas.

So this plant opens in 2024 trucks will have the strategic advantage of unmatched geographical coverage with site servicing the east coast West Coast and central regions that will provide our customers with better access to trucks residential products, when and where they need them.

The new site represents a strategic investment in our company's future and the success of our value channel partners.

Little rock emerge as the best fit for our future needs as it offers proximity to a central raw materials, a strong pool of qualified and skilled labor.

Proximity to key growth regions for wood conversion.

An adjacency for major transportation hubs that can optimize freight costs.

<unk> plans to invest approximately $400 million over five years funded primarily through ongoing cash generation.

What's the potential to become our largest manufacturing facility over time.

Arkansas manufacturing campus will eventually include buildings dedicated to decking and railing production.

Plastic film recycling and processing right.

Reclaimed wood storage warehousing and administrative offices.

Construction is slated to begin early next year with a modular development approach calibrated in alignment with demand trends.

We expect initial production output to begin in 2024 and over time the facility will employ approximately 500 people.

These expansion activities provide trucks with additional capacity to flex with demand by adding capacity as needed.

While providing bandwidth to pursue opportunities to expand domestically and internationally as we continue to drive wood conversion.

Capture incremental market share from the strength of <unk> products and the brand.

While focused on capacity expansion and strategic initiatives that support future growth opportunities, we remain committed to operating for the good of our employees communities and the planet.

<unk> with our heritage of advancing environmental and social responsibility.

We continually strive to minimize the environmental impact of treks operations, even as our company grows and we.

We've made one of the largest recyclers of polyethylene in the U S.

Diverting 850 million pounds of plastic and reclaimed wood from landfills annually.

We remain mindful of the need for trucks employees and partners to be respected and empowered to perform at their best and we continue to support the communities, where we work by giving back through community based organizations and programs I will now turn the call over to Dennis Schemm for details on our third quarter and year to date financial performance and our business out.

Dennis Thank you Bryan I'm pleased to report on <unk> strong third quarter results and year to date performance as well as our expectations for the rest of the year.

During the 2021 third quarter, we experienced impressive sales growth of 45% to a record 336 million in total net sales practice residential sales increased 46% to $319 million, primarily led by strong volume growth limited channel inventory and a small benefit from.

A recent price increase that aided September results.

<unk> commercial products contributed 17 million to net sales up 28% from the 2023rd quarter.

During the third quarter topline was constrained due to labor availability and we were able to manage through labor shortages service, our customers and deliver strong performance.

Consolidated gross margin for the third quarter was 38, 2%, reflecting the benefit of higher sales and manufacturing volumes offset by continued inflationary pressures on raw materials higher transportation costs and labor constraints as.

This compares to gross margin of 36, 7% in the year ago quarter, which included the impact of the $6 5 million trucks residential warranty reserve charge.

Excluding this charge third quarter 2020 consolidated gross margin was 39, 5%.

Inflation and higher transportation costs impacted gross margins by 750 basis points in the quarter.

We expect improvement in gross margin in the fourth quarter benefiting primarily from our recent price increase and increased production efficiencies.

Third quarter 2021, gross margins for trucks residential and trucks commercial or 38, 9% and 24% respectively.

SG&A expense was $30 million compared to $28 million in the same period last year.

G&A in the third quarter includes a gain on insurance proceeds of $3 7 million related to the fire at the Virginia facility that occurred in March of this year.

Excluding this gain SG&A was $34 million for the 2021 quarter.

As a percentage of net sales excluding the insurance recovery third quarter SG&A was 10, 1% of sales demonstrating the positive operating leverage inherent in our business model.

Strong sales growth and the disciplined SG&A spending resulted in significant operating leverage in the third quarter, even as we continue to experience inflationary pressures.

Bolstered by strong top line growth 2021 third quarter net income grew 73% to 74 million or <unk> 64 per diluted share from net income of 43 million or <unk> 37 per diluted share in the 2023rd quarter.

EBITDA increased 76% to $108 million and EBITDA margin expanded to 32, 2% compared to EBITDA.

$61 million and EBITDA margin of 26, 6% in the 2023rd quarter.

Excluding the warranty charge third quarter 2020, net income was $48 million or <unk> 41 per share and EBITDA and EBITDA margin were $68 million and 29, 4% respectively.

Now moving forward to our financial performance year to date consolidated net sales increased 37% to $893 million compared to the same period last year.

Higher net sales were primarily driven by a 39% growth in trucks residential sales to $851 million compared to the same period last year.

Growth in trucks residential sales was substantially all due to volume growth as our capacity expansion program was fully operational as of the end of may enabling us to capture additional growth.

The increase in net sales of trucks residential included a small impact from our price increase realized in September.

Trucks commercial contributed an additional $42 million to net sales.

Net income year to date increased to $184 million or $1 59 per diluted share compared to $132 million or $1 14 per diluted share during the same period in 2020.

EBITDA increased 44% to $271 million and EBITDA margin improved to 33% compared to EBITDA of $188 million and EBITDA margin of 28, 8% in the same period in 2020.

Excluding the warranty charge year to date 2020, net income was $137 million or $1 18 per diluted share and EBITDA and EBITDA margin were $194 million and 29, 8% respectively.

Year to date capital expenditures were $124 million with the majority of this investment supporting the capacity expansion program completed in May.

In addition year to date, we repurchased 576714 shares of treks outstanding common stock under our stock repurchase program at an average price of $90 68 per share.

We have $8 2 million shares remaining to be repurchased under the current program.

Also since the end of the third quarter, we have been active with share repurchases under the same program.

Looking ahead, we expect the following fourth quarter consolidated net sales to range from 295 million to $305 million representing year on year growth of 31% at the midpoint and reflecting strong consumer demand and further infill to low channel inventories.

In addition, we anticipate incremental EBITDA margin for the fourth quarter exclusively to be between 35 and 40%.

Our full year 2021 tax rate will be approximately 25%.

Depreciation will range from $30 million to $35 million.

Full year spending on Capex is expected to be in the range of $135 million to $155 million, which includes the installation of additional decking production lines to further.

Further boost our capacity in existing facilities.

Now I'll turn the call back to Bryan for his closing remarks.

Thank you Dennis based on our strong performance year to date and indications for continued healthy demand going forward. We are on track to deliver double digit revenue growth for the full year 2021 and into 'twenty two.

As we mentioned last quarter, we continue to focus on cost reduction projects and identify and continuous improvement opportunities to enhance our margins specifically our efforts are primarily centered on increased automation modernization enhanced energy efficiency and improvements to raw material processing.

At the same time, we intend to expand our marketing campaign, highlighting the advantages of tricks decking over wood as well as a focus on innovation and new product development that further strengthens our consumer brand and distribution advantages. These initiatives should help drive continued robust top line and profit growth and.

<unk> market share conversion operator, we can now take questions.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please.

Please limit your questions to one with a single follow up.

Our first question is from Stanley Elliott with Stifel. Please go ahead.

Hey, Bryan Deneve. Thank you guys for taking the call and congratulations.

I'm curious the conversations that you're having within the channel with some of the research you're doing.

Online and whatnot.

The improvement that you've seen the conversion on the wood opportunity, 2% has been pretty spectacular.

Would you guys hesitate to guess kind of where you think ultimately this market could end up getting in terms of the conversion opportunity.

Yeah. Thanks Stanley Thanks for being on this evening, we continue to hear really great feedback from the marketplace and peoples understanding of the opportunity with composites with the product lines that we have with enhanced at the entry level and of course, our higher end products. There is a product for every <unk>.

<unk> of consumer and unlike five seven years ago consumers know more about composites today. So when we look out over the long term that 45% to 50% of the overall marketplace, we definitely see capable of getting to those type of numbers and share.

Great guys. Thank you very much and best of luck.

Thanks.

The next question is from Ryan Merkel with William Blair. Please go ahead.

Hey, guys nice quarter good evening. Thanks.

So Bryan can you unpack the labor shortage comment that you made how impactful was that in the quarter and then are you making progress in <unk>.

Yeah, I think one of the things we forget about this internally.

As we work through adding all of this capacity, we needed to be able to staff up to support that additional 70% capacity and we did a pretty good job of that moving through the end of last year and into the beginning of this year. Some of those other labor shortages. We had were offset because we were bringing people on ahead of time.

For that new capacity.

We did start to catch up with us so as we got into the second quarter and all of that capacity was available and definitely into the third quarter things are improving at this point I wouldn't say, it's where I want it to be today, but it looks much better than it did 90 days ago.

And we have had to make changes to some of our compensation schemes.

<unk> higher on bonus day for $60 or excuse me stay for six months things like that we've had to put in place.

Got it Okay, and then on gross margin I missed it how.

How much did supply chain hurt the third quarter and then more importantly in the fourth quarter do you expect to make progress on gross margins since you're going to be capturing more price.

Yeah Stanley. So we came in at 38, 2%.

From a gross margin perspective, we're up 150 basis points. It was a really good quarter for us I.

I think the headline is we overcame 750 basis points of inflation in raw materials, and labor and transportation and so to me that's the real news there and I think that's pretty remarkable and we did that through a combination of better absorption.

We had a little bit better pricing in there as well and then our cost management and SG&A discipline. So we did a really nice job.

And then just sequentially you're going to make progress in four Q on gross margin, yes, we expect to see.

We expect to see some progress there basically because of we will have a full three months worth of our price increase in place.

Perfect.

We have a price increase coming in beginning of November as well too. So we will have two months of that price increase come through inflation. Unfortunately has not abated at this point, what do we talked last quarter.

We had expected things to soften somewhat during the third quarter. It didn't so we are still working to catch up and I'm confident that we will and we've taken more price increases this year then.

Last time was a major price increases all the way back in 2012.

Thanks for the color guys.

Thanks.

The next question is from Matthew Bouley with Barclays. Please go ahead.

Hey, good evening, everyone Ah congrats on the results in a pretty dynamic environment here.

Same topic.

On the gross margin side, Yeah, I think you said last quarter, maybe Dennis you were talking to early 'twenty two.

I think he kind of termed it getting back to the tracks gross margins that were used to just any kind of update on how to think about the cadence of <unk>.

Gross margin recovery beyond Q4 here. Thank you.

I do think sequentially, we will see a step up from Q3 to Q4 as we start rounding into the new year. You would also expect us to see gross margins north of 40%, it's going to be based on.

Continued look at pricing our pricing situation as well as the cost out opportunities that Bryan talked about so we will continue to focus on continuous improvement automation raw material formulations, those will be our big focus areas going forward that will help us.

Wonderful great. Thank you for that Dennis and then second one on the little rock capacity I guess number one just if there's any quantification I guess on how much capacity you may be adding when this is fully ramped and that's part one and part two is I'm just curious as you picked the little rock area for the scope.

<unk> I'm curious if you can get into any color around the conversion opportunity from composite or from wood to composite.

The surrounding regions there. Thank you.

Sure, we see the southern region as.

Excellent area, where we can convert more of the.

Pressure treated southern pine marketplace, two trucks composites, that's one of the things that energizes us about the location, we're in and being able to service some of those markets from a size perspective in essence, what we'll be building as buildings just like we just put here in Winchester engineering is done.

We understand what the performances, we've got all the drawings, we know how to build them along the way so as I mentioned in my comments. It will be modular we have the ability to add multiple buildings like this and this will give us the long term capability to grow.

We haven't put a specific number on it because it really carries us out over the next 10 years with the organization.

Got it well thank you Bryan Thanks, Dennis Good luck guys.

Thank you.

Your next question is from Trey Grooms with Stephens Inc. Please go ahead.

Hey, good afternoon, everyone and well done with another great quarter extra.

But I'm kind of you know.

Going to follow up on this little rock expansion.

You know.

You mentioned that this was to address long term demand trends.

And pursue new growth opportunities one I didn't know if there was any anything you could expand on as far as new growth opportunities you mentioned and secondly, you know going through kind of that conversion.

Outlook that that you were talking about to answer another question.

Seeing you know you could possibly go from 24, 25% of the market to 50% of the market.

And Bryan to your last comment about Tim.

You know give you some capacity to handle the next 10 years, possibly.

Is that to say that if we were to see.

This composite or excuse me with the composite transition continue for the long term is do you feel like what you have kind of planned out here in little rock is.

Sufficient to get you to that kind of.

Range for you know getting closer to that 40, or 50% type conversion range there'll be more behind it.

Well, even put those numbers together, yet, but we have a lot of property down in little rock and we can add a lot of lines down there to be able to to service that demand Theres also beyond the property that we acquired there is a significant amount of space to be able to expand within that same industrial yard.

As we look at the growth opportunities I think there are three of them that are meaningful and we've talked a lot about international we are back to growing international more quickly than what we've been growing in North America I expect that will continue next year.

We've talked in the past a little bit about new builder programs and while we don't have enough capacity right now to really take that on full hearted. We are starting to have those discussions and with the announcement of little rock coming onboard these take time to build out and come to the appropriate agree.

So we are starting with that effort. We've got a few people on the ground and we are engaging with the national Homebuilders and then the last one is cladding.

<unk> has been a popular product mostly on the west coast, but we're starting to see that look.

Come more east and it's been a product that we've had in the market. It's the same as our existing transcend deck board.

It's been in the market for some time, but we've not been able to fully market that due to the capacity constraints and we see a great opportunity to add incremental volume through that cladding opportunity and these are people that would be using.

Probably a different type of siding for a different design look on the outside of their business. So it is a subsegment of the overall siding industry. It.

And we will do some more work to try to better quantify what that opportunity is over time.

Awesome. Thanks for that and then and then as a follow up.

With these long term growth plans.

Describing you know and as you think about the raw material side of things.

You know clearly you guys had been in the in the recycled or scrap polyethylene game for a long time, but.

And then outlook for strong growth and this would the composite conversion and in other.

Products that you can kind of like what you are talking with the cladding.

At what point does the raw material availability become an issue or is there plenty out there to to provide the kind of growth we could see over the next several years once the expansion is rolled out and the growth that's ahead.

Yes, with the growth that we've had this year year to date, 37% growing much more quickly than what the market for recycled is right now there's some challenge in the short term normally this business has been growing in the teens up to 20% and we've been able to add to our sourcing capability in <unk>.

So those amounts every year along the way this year the growth has been so much higher we've really had to look at every location possible. Our inventories are a little bit lower we've added people onto our sourcing team.

We see the ability to be able to continue growing that and service the marketplace.

Alright, Thanks, guys I appreciate the taking the questions.

The next question is from Tim Weiss with Baird. Please go ahead.

Hey, guys good afternoon.

Good evening.

Maybe just to start on the growth commentary for 'twenty two I'm, just trying to think about the pieces.

Any sense for what pricing contribution and maybe channel inventory kind of normalization might be for 'twenty. Two as you look at next year.

So pricing is there's still discussions going on as to where it will be a pricing. So I don't want to jump into that but it will be meaningful on a year over year basis, Dennis may be able to jump in on how much pricing comes through what we've already taken.

Basically what we're trying to do with our pricing philosophy is to offset the inflationary aspects and so from a year to date perspective, we've probably seen about five 6% and inflation on our raw materials as a percent of sales from a price perspective were pretty much right there.

<unk> that almost from a dollar per dollar perspective, and then from there. What we continue to do is look for the cost outs to help us with our margins and so forth.

Okay. Okay, and then as you think about kind of the margin composition going forward. How would you think about kind of gross profit margin leverage from here and SG&A leverage over the next couple of years.

I think the key focus here will continue to be on EBITDA.

Margin and even with the pressures we've seen at the gross margin level, we've been able to continue to improve that EBITDA. So we will look to leverage both at the gross margin level as well as at the SG&A level and remember our entry level product line. It doesn't carry the same level of branding we will be increasing our burn.

<unk> spend next year back to more of a normalized probably the 5% to 6% type range of sales.

But when you sell an enhanced basic deck board. It doesn't carry that same level of spending along the way. So we still see that opportunity to be able to leverage now next year, there will be some of those costs coming back in again, you'll get back to a full year of normalized travel from the sales team as well as the rest of the overall trucks organization get back to Julie.

Shows like the builder show.

Our regular meetings, those sort of things and marketing along the way.

Okay. Okay, great. Good luck on our singer.

Thank you.

The next question is from Jeff Stevenson with loop capital. Please go ahead.

Hi, Thanks for taking my questions today, and congrats on the strong quarter. Thanks.

Thanks, Jeff.

So my first question is just on how much of the volume growth at the midpoint of your fourth quarter sales guidance as inventory channel fill with new windows.

Industry capacity up and running and you can just update us where channel inventory levels are currently and when we might expect them to return closer to normalized levels.

Yeah. It's a good follow up Tim asked about that as well too. So we do see inventory build inclusive of the fourth quarter number along the way coming out of the third quarter inventories were built at the retail level, both at DIY as well as in the approach and so you can get the product, especially.

At the larger dealers that were in.

Out in the marketplace as well as virtually any DIY store. If we now look at the fourth quarter, we see that I don't think inventory will get all the way back to a completely healthy level, but we are starting to see that inventory build now usually you see fourth quarter come down quite a bit sequentially from the third quarter. This is still in <unk>.

STREAMWAY strong fourth quarter for us the growth.

He was quite strong in there so there will be inventory build along the way I can't really give you a number of that right now because it depends upon that underlying market strength, but as we get into the end of the year call, we'll definitely update the market on where we stand inventory wise and how much of that is a one time inventory build versus.

Is underlying market growth.

Okay, Great no that's very helpful.

Just wanted to ask about kind of high level of Capex priorities in 2022, obviously youre doing a number of cost out projects now and in the past you've talked about a long runway of those and when you're beginning your little rock.

<unk> facility in early 2022, so how should we think about the progression of cost out projects next year in Capex in general.

It's a great question. So we'll certainly have more detail for you.

Q1 of 2022, when we are when we go through the earnings cycle, there with you. However.

This year, we plan on spending roughly between $1 35, and $1 55 and 2021.

<unk> 2022 will clearly be less than this year has 22021 was mainly the finalization of the $200 million in capacity expansion. So I look at 2022 is being a transition year between this capacity expansion and then little rock because as we move into <unk>.

'twenty three you'll start to see investment in little rock pick up more significantly.

So whats left in 2022, then it was really Debottlenecking automation.

Other type of cost out projects to make us more effective more efficient.

Okay. That's helpful. Thanks again.

The next question is from Keith Hughes with Truest. Please go ahead.

Thank you.

The fourth quarter.

EBITDA margin between 35% to 40%.

The low thirties.

Obviously, a lot of challenges.

What do you think that kind of average contribution margins over a longer period of time it looks like at this point.

Yeah, I think we're clearly over time going to demonstrate leverage on the EBITDA line.

SG&A today is slow we will continue to see more and more leverage there, even though as Bryan mentioned that we will see some brand spend pick up.

In 2022, but as basics becomes a bigger part of the portfolio over time. It does not require that same level of advertising and branding spend. In addition, we're not going to be adding people at the same rate, which we're growing as well so I clearly see that EBITDA margin improving expanding over time.

Okay.

Okay. One other one other question.

As you look.

So those are just sort of talk about where inventory was.

Do you see the beginning of.

'twenty two is a period, where you're still catching up on.

The Tories.

And the channel or do you think you'd be able to finish that by the end of the year.

I think we'll still be putting some inventory in the channel in the first quarter of next year. The question is going to be how much one of the things that I mentioned to our distributor partners last week is that given the size of this market today.

Important that we have inventory at all levels of the channel and make sure that our yard as what we'd need their yards as well as as the dealer yards. So that we're always able to have the product necessary to serve customers as we continue to convert that sure.

Okay. Thank you.

The next question is from Michael Rehaut with J P. Morgan. Please go ahead.

Thanks, Good afternoon, everyone. Thanks for taking my questions.

Firstly I just wanted to circle back to the gross margins for a moment and just wanted to make sure I'm hearing you correctly in thinking about things in the right context.

You said that you're expecting some improvement.

<unk> in the in the fourth quarter.

With that for next year, you would expect to be above 40%.

So yeah.

I I would presume that means that you're not kind of getting above 40% yet in the in the fourth quarter itself and then when we talk about 2022.

Any reason why you can't get back to like.

41, we won in 2000, 1941, and a half and 2020.

The reason you can't get back fully to that type of a of a level.

Given all of the different margin.

Margin improvement initiatives that you've been talking about.

Well right now we are looking.

Looking to step up from Q3 to Q4 and again, we will have that full impact of the pricing increase for the three months. The additional on that Bryan talked about as well that's going to help us take a step up.

In addition to that we're going to continue to make progress now on our cost out initiatives as we move forward into 2022.

We should start to see better absorption as.

As well as we have the full capacity two to play out as well for us. So I would expect us to be north of 40% and we will have more clarification moving forward I think the.

A more important line to be looking at to though is on that EBITDA margin line right and we're going to continue to see expansion there.

In my opinion, there is no reason why we couldnt be up at that 35% to 40% Incrementals.

Incrementals over the longer term it just makes sense that.

That we could see that sort of expansion on incrementals.

Okay.

I appreciate that.

I guess secondly on the SG&A you talked about expanding some marketing campaigns, maybe T E starting to normalize.

Obviously it depends on your still your rate of top line growth, but you know.

Presuming something that you know at least 15%, 20% year over year growth, which seems like it was all.

All of the capacity expansion and price increases.

Be on track to do would you expect further leverage in.

In 'twenty two.

On SG&A in spite of some of those higher dollar cost, but on a percent of sales.

Expect maybe some further.

Improvement in terms of the SG&A ratio.

Yeah, we're we're going to have a lot more information for you on SG&A in the coming year I think what we're trying to get a.

Get across today is that we still expect to be very disciplined in our spend on SG&A. We do expect to have a leverage model. So you know Bryan has been talking about yes, we're going to be spending more on branding going forward.

But we're still going to see a lot of leverage because basics will will become a greater part of the overall portfolio not requiring the same level of branding spend we're not going to be adding people at the same rate as which were growing too. So.

While it may tick up in absolute dollars.

I'm not so sure that where we.

We're going to continue to be running this at a pretty low and mean level here for the foreseeable future. It will allow us to continue to expand margins.

Yeah.

Can I sneak one more in if I if possible just on price increases.

I think you mentioned that you were able to implement 5% to 6% of sales. This year I thought it was something a little bit higher than that I just wanted to make sure I heard that right.

What I'm trying to get at is you know.

You've raised prices.

At least two or three times now if you're including November I'm, just trying to get a sense of magnitude of each of those increases in you know kind of where we are again cumulatively if I did hear you right.

You did hear correctly and so.

Those price increases were on most of our products. So they were not on all of those so those were mid single digit price increases on most products and so what I'm, giving you now is more of a cumulative number across the portfolio.

You heard correctly at 5%.

Great. Thank you.

The next question is from Phil <unk> with Jefferies. Please go ahead, Hey, Guy.

Congrats on a really strong quarter, just given all the headwinds.

Headwinds you're seeing right now.

No.

It'd be helpful to kind of give us a sense how full year lines are running currently Bryan wanted to get a better handle on your bandwidth to kind of support that strong double digit growth and will you be constrained until new capacity effectively effectively come down in 2024 at the Arkansas.

But I see continued opportunities as we look at the first quarter, we were bringing lives up second quarter, we were continuing to bring lines up so we can run those with that.

That full.

More capacity next year, depending upon what the market needs from us along the way.

We haven't gotten into exactly where our utilization is at this point, we are working to increase it as we try to fill that channel channel inventory at this point, but we did lose some revenue in the quarter. We said the same thing last quarter.

We're not exactly where we want to be for the fourth quarter, we do have improvement opportunities off of our legacy lives, replacing some of the equipment, which will allow us to have further growth. These are all proven return projects that we know how to do to get more out of our existing capacity.

That's helpful and then I'm, sorry to kind of be.

Beat a dead horse.

From an inflation standpoint, which should you should we expect to be fully caught up with the November price increase as you exit the year and then if there was any disconnect on just getting incrementals back to you.

More normalized level in the fourth quarter or was it all price cost or was there something else we gotta.

For appreciate it.

We've been running behind all year long and we've continued to take price increases to be able to to catch up with that I'd love to tell you that I'm going to be there right at the end of the year. We still got 45 days left of the of the quarter here and pricing is on a lot of things is continuing to go up not at the same level that we.

We saw.

In late second quarter into the third quarter, along the way, but it sure is our intent to get caught up at the same time getting caught up within 30 days probably isn't the most important thing either having a confidence that we can take price in the marketplace. We can drive the margins that we expect that our investors expect is important.

And we've been able to show that we can do that but just going out to the market and saying I'm, taking X percent tomorrow, because my numbers aren't there it doesn't help the market either so we've given enough time for our channel to get ready for those prices to put them through and part of that is the relationship that we have in our channel and that's put us a little bit behind where.

We would prefer to be.

Okay Super Thank you.

The next question is from Keaton mentor with BMO capital. Please go ahead.

Thank you and congrats on another strong quarter.

Maybe start off.

On the demand side.

I'm just curious if you're seeing more strength on the on the entry level product or is the demand growth a more broad based across your different product categories.

We're seeing that demand growth across all of our portfolio and pretty much in line with where we expected that to be so we're really pleased at having this product lineup with different pricing points. It really is appealing to our large customer base.

Yeah.

Got it that's helpful and then just switching to the.

The Arkansas facility and I'm not trying to put too fine a line on that I recognize that that is kind of a long term plan yet but is that of me to think about how much you you envision to add in 'twenty four 'twenty five in terms of capacity and in terms of your first sort of buildup.

So I think analytically I'll give you the keys to the analytical equation here.

70% capacity increase cost us about $200 million.

We're saying about $400 million over a five year timeframe I think we owe.

Only difference there is that we need to build out the infrastructure at that plant will be a lot of utility there'll be a lot of paving there'll be a lot of dirt moving that we didn't have to do for that that existing capacity along the way.

Got it that's a helpful I've done it over and good luck.

The next question is from Reuben Garner with the benchmark company. Please go ahead.

Thanks, Good evening, and congrats guys on the quarter and the Arkansas announcements.

Great.

Most of my questions have been answered, but I do have one kind of longer term one I wanted to sneak in the when you guys had the capacity announcements.

For.

A lot of effort and time spent by the team to do those projects in your existing facilities and I think some of the focus with you guys being so tight.

It was taken away from some of your continuous improvement initiatives would you envision this being different.

And a couple of years as you're kind of getting to that stage, where youre able to do both because it's a third facility or or is your team gonna have to kind of be.

Use your existing team here and we have to use a b.

He used enough for the capacity additions that it may it may take away from those in the near term as you're as you're building out that that facility.

We can do both key thing there is getting the engineering team to to full staffing and we've got a.

Playing there to what we need to do to get it we're back where we want it to be support the new capacity of course, the 200 million capacity was coming off the plate at this point the last couple of lines are going in Winchester.

But we do need to beef up that group and we can do both.

Great. Thanks, guys and congrats again thanks.

The next question is from Kurt Yinger with D. A Davidson. It also if you would like to ask a question. Please press Star then one Mr. Yano. Please go ahead.

Great Thanks, and good afternoon, Brian and Dennis.

Can you.

I just wanted to start off on the dynamics between composites and wood recently I mean, there's just been a lot of commentary from the lumber guys around Sky high pricing in the middle of the year, taking its toll on demand and prices have moderated it seems like the interest from the DIY consumer has come back pretty strong I'm, just curious whether you've seen any.

That I.

I guess play out in terms of your own demand trends and as you kind of step back and think about.

The two points of conversion versus one point.

Annually in the past what are kind of the big factors that I guess might make you optimistic that this new higher rate of conversion is sustainable.

The first important point is the <unk>.

Futures market that we all referred to as lumber builder builder quality lumber.

Customers are going out buying pressure treated lumber, which the chemicals that go into it the labor that goes into it is all expect more expensive now. So there is some price increase thats permanent in that type of lumber, but those prices have come back down again.

Much more important part of the.

Story and the strategy is that we're able to educate those buyers that there are affordable composite products and it's not just about selling and enhanced basics board, it's showing them for an extra couple of hundred dollars you could move to a composite product and then being able to move them up the spec.

From of the <unk> product line to give them the aesthetic and the performance of that Theyre looking for so the company started down this path of converting against wood back in about 2017, we started advertising directly against wood.

We launched enhanced in 2019, and we started to see that conversion start to pick up.

We've got of course through the pandemic elevated demand people staying at home, but over the long term the strategy that we put back put together back in the 17 18 timeframe is unchanged and those consumers are learning more about composites today.

Are enticed to purchase them.

Got it Okay. That's helpful. And then just my second on recycled film pricing I think last quarter, you talked about that being up maybe mid teens.

Year over year could you update us on how that's been trending the last few months and relative to maybe lagging divergent market by a couple of quarters are you expecting any incremental cost pressures there as we get into 2022.

Yes, I do expect to continue to see some cost pressure around that we did see that.

Expand let's call it into the high teens in the third quarter. So those prices are still going up and like I said, they tend to lag by about nine months and we're still in that nine month lag period. So we will continue to see that move a little bit more.

Okay I appreciate the color Bryan good luck in Q4 here guys.

Thank you.

The next question is from Alex Rygiel with B Riley. Please go ahead.

Thank you very nice quarter gentlemen, a couple of quick questions here first.

Can you try to quantify the capacity that you're adding in the fourth quarter.

Well, we've talked about there being an opportunity to improve by about 15%. So that would bring us from that 70% over 2019% to 85% over 2019 levels by the end of the year.

Okay. That's helpful and then as it relates to the Arkansas facility.

Could this become your low cost manufacturing facility.

So.

Approximately when.

We see the opportunity with Arkansas, the proximity to some of our raw materials.

More optimized than our other locations.

We will have some opportunity with the scale.

The of the operations.

It will eclipse at some point, our Winchester facility and so we will have some scale opportunities there it'll be the newest technology that we have for running our products, which does give us a better cost along the way. So I think that's a that's a fair way to look at it.

Offset with labor.

We will have a higher labor cost across all of our facilities, but we also are looking at automation opportunities and I don't see this automation opportunity at taking away anybody's job with the growth that we have there will be plenty of opportunities for our existing trucks employees, but as we build new capacity out we may not need as much.

Many people to run those lines.

Very helpful. Thank you great. Thanks, Alex.

This concludes our question and answer session I would like to turn the conference back over to Bryan Fairbanks for any closing remarks.

Thanks, everybody for your questions in attendance at 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.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

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Yes.

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Okay.

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Good afternoon, and welcome to the trucks company third quarter 2021 earnings Conference call.

All participants will be in listen only mode.

You need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.

To withdraw your question. Please press Star then two please.

Please note this event is being recorded.

I would now like to turn the conference over to Victorian Aqua. Please go ahead.

Thank you all for joining us today with us on the call are Bryan Fairbanks, President and Chief Executive Officer, and Dennis Schemm, Senior Vice President and Chief Financial Officer, joining Bryan and Dennis is Bill got senior Vice President General Counsel and Secretary as well as other members of <unk>.

<unk> management.

The company issued a press release today after market close containing financial results for the third quarter 'twenty 'twenty. One. 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's website for 30 days I would now like to turn the call over to Bill.

Bill.

Thank you Victoria before we begin let me.

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 laws. 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 19th 33 and other 1934 Act filings with the SEC. Additionally, non-GAAP financial measures will be referenced in this call. A reconciliation of these measures to the <unk>.

Bearable GAAP financial measure can be found in our earnings press release at Truckstop Com. 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.

<unk>.

Thank you Bill and good evening everyone.

Thank you for joining us today to review <unk> company's third quarter results and year to date performance along with our business outlook. This was another great quarter for trucks robust demand fueled by the unmatched strength of the <unk> brand along with our increased manufacturing capacity combined to drive 45% year over year.

Year sales growth to a record $336 million.

Dennis will provide more detail around our financial results, but I want to highlight that despite considerable inflationary headwinds <unk> reported strong EBITDA margin of over 32%.

And an increase in net earnings of 73% from the prior year period.

A record 64 per share.

Thank you to all of our <unk> team members our distribution team our partner so both the pro and DIY channels as well as our contractor community for making this strong growth and performance possible.

<unk> continues to successfully execute on our long term strategy of gaining market share from wood within an expanding decking market.

Outdoor living remains one of the fastest growing categories within the repair and remodel sector and the strength of the <unk> brand coupled with our expanded manufacturing capacity are key competitive advantages, helping us to effectively unlocked potential market share and drive long term growth.

We continue to benefit from increasing consumer interest in our environmentally friendly low maintenance product portfolio that transforms and enhances the outdoor living experience.

With the strong momentum in the category and our success to date and converting share from the wood decking market. Our analysis suggests an acceleration in market share gains from wood.

It is estimated that gains from wood are now approximately two percentage points in market share per year up from one percentage point with composites accounting for approximately 24% to 25% of the overall decking market volume in North America.

Last week, we had the pleasure of hosting our channel partners at our annual distributor meeting in California, where it was great to be face to face for the first time since the start of the pandemic.

Our distributors are the best in the business and are poised to execute growth to convert wood and continue the success in growing composite decking and railing market.

Across the board there was universal agreement that we are early in the wood conversion opportunity and we will all need to invest for growth.

We continue to track our website activity as a proven indicator of consumer demand traffic to treks web sites remains robust with high levels of dealer and contractor searches in the third quarter.

<unk> dot com and <unk> Dot com together continue to account for nearly 70% of the category website traffic, reflecting the company's unparalleled strengths in capturing consumer interest in outdoor living.

As consumer decisions are increasingly driven by digital content, we continue to strengthen and enhance our digital footprint to support long term sales growth.

We remain focused on ensuring the capacity to service our channel partners is aligned with both current demand and expected future growth.

Having recently completed a $200 million manufacturing capacity expansion at our Virginia, Nevada facilities.

Our engineering team is currently installing incremental decking lines within our new Virginia facility that will further expand our production capability.

Additionally, we recently announced plans to develop a third U S based manufacturing facilities at approximately 300 acres in little rock, Arkansas.

This plant opens in 2024 trucks will have the strategic advantage of unmatched geographical coverage with site servicing the east coast West Coast and central regions that will provide our customers with better access to tracks residential products.

And where they need them.

The new site represents a strategic investment in our company's future and the success of our value channel partners Little.

The little rock emerge as the best fit for our future needs as it offers proximity to a central raw materials, a strong pool of qualified and skilled labor.

Proximity to key growth region for wood conversion.

And adjacency for major transportation hubs that can optimize freight costs.

<unk> plans to invest approximately $400 million over five years funded primarily through ongoing cash generation.

With the potential to become our largest manufacturing facility overtime. The Arkansas manufacturing campus will eventually include buildings dedicated to decking and railing production.

Plastic film recycling and processing right.

Reclaimed wood storage warehousing and administrative offices.

Construction is slated to begin early next year with a modular development approach calibrated in alignment with demand trends.

We expect initial production output to begin in 2024 and over time the facility will employ approximately 500 people.

These expansion activities provide trucks with additional capacity to flex with demand by adding capacity as needed.

While providing bandwidth to pursue opportunities to expand domestically and internationally as we continue to drive wood conversion and capture incremental market share from the strength of <unk> products and the brand.

While focused on capacity expansion and strategic initiatives that support future growth opportunities, we remain committed to operating for the good of our employees communities and the planet consistent with our heritage of advancing environmental and social responsibility.

We continually strive to minimize the environmental impact of treks operations, even as our company grows and we remain one of the largest recyclers of polyethylene in the U S.

<unk> 850 million pounds of plastic and reclaimed wood from landfills annually.

We remain mindful of the need for trucks employees and partners to be respected and empowered to perform at their best and we continue to support the communities, where we work by giving back through community based organizations and programs I will now turn the call over to Dennis Schemm for details on our third quarter and year to date financial performance and our business out.

Dennis Thank you Bryan I'm pleased to report on <unk> strong third quarter results and year to date performance as well as our expectations for the rest of the year.

During the 2021 third quarter, we experienced impressive sales growth of 45% to a record $336 million in total net sales ex residential sales increased 46% to $319 million, primarily led by strong volume growth limited channel inventory and a small benefit from.

A recent price increase that aided September results trucks.

<unk> commercial products contributed $17 million to net sales up 28% from the 2023rd quarter.

During the third quarter top line was constrained due to labor availability and we were able to manage through labor shortages service, our customers and deliver strong performance.

Consolidated gross margin for the third quarter was 38, 2%, reflecting the benefit of higher sales and manufacturing volumes.

Set by continued inflationary pressures on raw materials higher transportation costs and labor constraints.

This compares to gross margin of 36, 7% in the year ago quarter, which included the impact of the $6 5 million trucks residential warranty reserve charge.

Excluding this charge third quarter 2020 consolidated gross margin was 39, 5%.

Inflation and higher transportation costs impacted gross margins by 750 basis points in the quarter.

We expect improvement in gross margin in the fourth quarter benefiting primarily from our recent price increase and increased production efficiencies.

Third quarter 2021, gross margins for trucks residential and trucks commercial or 38, 9% and 24% respectively.

SG&A expense was $30 million compared to $28 million in the same period last year.

SG&A in the third quarter includes a gain on insurance proceeds of $3 7 million related to the fire at the Virginia facility that occurred in March of this year.

Excluding this gain SG&A was $34 million for the 2021 quarter.

As a percentage of net sales excluding the insurance recovery third quarter SG&A was 10, 1% of sales demonstrating the positive operating leverage inherent in our business model.

Strong sales growth and that disciplined SG&A spending resulted in significant operating leverage in the third quarter, even as we continue to experience inflationary pressures.

Bolstered by strong topline growth in 2021 third quarter net income grew 73% to 74 million or <unk> 64 per diluted share from net income of $43 million or <unk> 37 per diluted share in the 2023rd quarter.

EBITDA increased 76% to $108 million and EBITDA margin expanded to 32, 2% compared to EBITDA.

Of 61 million, an EBITDA margin of 26, 6% in the 2023rd quarter.

Excluding the warranty charge third quarter 2020, net income was $48 million or <unk> 41 per share and EBITDA, and EBITDA margin or $68 million and 29, 4% respectively.

Now moving forward to our financial performance year to date consolidated net sales increased 37% to $893 million compared to the same period last year.

Higher net sales were primarily driven by a 39% growth in trucks residential sales to $851 million compared to the same period last year.

The growth in <unk> residential sales was substantially all due to volume growth as our capacity expansion program was fully operational as of the end of may enabling us to capture additional growth.

The increase in net sales of trucks residential included a small impact from our price increase realized in September.

<unk> commercial contributed an additional $42 million to net sales.

Net income year to date increased to $184 million or $1 59 per diluted share compared to $132 million or $1 14 per diluted share during the same period in 2020.

EBITDA increased 44% to $271 million and EBITDA margin improved to 33% compared to EBITDA of $188 million and EBITDA margin of 28, 8% in the same period in 2020.

Excluding the warranty charge year to date 2020, net income was $137 million or $1 18 per diluted share and EBITDA and EBITDA margin were $194 million and 29, 8% respectively.

Year to date capital expenditures were $124 million with the majority of this investment supporting the capacity expansion program completed in May.

In addition year to date, we repurchased 576714 shares of <unk> outstanding common stock under our stock repurchase program at an average price of $90 68 per share.

We have $8 2 million shares remaining to be repurchased under the current program.

Also since the end of the third quarter, we have been active with share repurchases under the same program.

Looking ahead, we expect the following fourth quarter consolidated net sales to range from 295 million to $305 million representing year on year growth of 31% at the midpoint and reflecting strong consumer demand and further infill to low channel inventories.

In addition, we anticipate incremental EBITDA margin for the fourth quarter exclusively to be between 35 and 40%.

Our full year 2021 tax rate will be approximately 25%.

Depreciation will range from 30 million to $35 million.

Full year spending on Capex is expected to be in the range of 135 million to $155 million, which includes the installation of additional decking production lines to further.

Further boost our capacity in existing facilities.

Now I'll turn the call back to Bryan for his closing remarks.

Thank you Dennis based on our strong performance year to date and indications for continued healthy demand going forward. We are on track to deliver double digit revenue growth for the full year 2021 and into 'twenty two.

As we mentioned last quarter, we continue to focus on cost reduction projects and identify and continuous improvement opportunities to enhance our margins specifically our efforts are primarily centered on increased automation modernization enhanced energy efficiency and improvements to raw material processing.

At the same time, we intend to expand our marketing campaigns, highlighting the advantages of tricks decking over wood as well as a focus on innovation and new product development that further strengthens our consumer brand and distribution advantages. These initiatives should help drive continued robust top line and profit growth and.

Rated market share conversion operator, we can now take questions.

We will now begin the question and answer session.

Ask a question you May press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please.

Please limit your questions to one with a single follow up our first question is from Stanley Elliott with Stifel. Please go ahead.

Hey, Bryan dentist. Thank you guys for taking the call and congratulations.

I'm curious the conversations that you're having within the channel that some of the research you're doing.

Online and whatnot.

The improvement that you've seen the conversion on the wood opportunity, 2% has been pretty spectacular.

Would you guys hesitate to guess kind of where you think ultimately this market could end up getting in terms of the conversion opportunity.

Yes, Thanks Stanley Thanks for being on this evening, we continue to hear really great feedback from the marketplace and peoples understanding of the opportunity with composites with the product lines that we have with enhanced at the entry level and of course, our higher end products. There is a product for every segue.

<unk> of consumer and unlike five seven years ago consumers know more about composites today. So when we look out over the long term that 45% to 50% of the overall marketplace, we definitely see capable of getting to those type of numbers and share.

Great guys. Thank you very much and best of luck.

Thanks.

The next question is from Ryan Merkel with William Blair. Please go ahead.

Hey, guys nice quarter good evening. Thanks.

So Bryan can you impact the labor shortage comment that you made how impactful was that in the quarter and then are you making progress in <unk>.

Yes, I think one of the things we forget about this internally.

As we work through adding all of this capacity, we needed to be able to staff up to support that additional 70% capacity and we did a pretty good job of that moving through the end of last year and into the beginning of this year. Some of those other labor shortages. We had were offset because we were bringing people on ahead of time.

For that new capacity.

Did it start to catch up with us so as we got into the second quarter and all of that capacity was available and definitely into the third quarter things are improving at this point I wouldn't say, it's where I wanted to be today, but it looks much better than it did 90 days ago.

And we have had to make changes to some of our compensation schemes incentives are higher on bonus stay for $60 excuse me stay for six months things like that we've had to put in place.

Got it Okay, and then on gross margin I missed it how.

How much did supply chain hurt in the third quarter and then more importantly in the fourth quarter do you expect to make progress on gross margins since you're going to be capturing more price.

Yes Stanley. So we came in at 38, 2%.

From a gross margin perspective, we're up 150 basis points. It was a really good quarter for us I.

I think the headline is we overcame 750 basis points of inflation in raw materials, and labor and transportation and so to me that's the real news there and I think that's pretty remarkable and we did that through a combination of better absorption.

Yeah, we had a little bit better pricing in there as well and then our cost management and SG&A discipline. So we did a really nice job.

And then just sequentially you're going to make progress in four key on gross margin, yes, we expect to see.

We expect to see some progress there basically because of we will have a full three months worth of our price increase in place.

Perfect.

We have a price increase coming in beginning of November as well too. So we'll have two months of that price increase come through inflation. Unfortunately has not embedded at this point when we talked last quarter.

We had expected things to soften somewhat during the third quarter. It didn't so we are still working to catch up and I'm confident that we will and we've taken more price increases this year then.

Last time was a major price increases all the way back in 2012.

Thanks for the color guys.

Thanks.

The next question is from Matthew Bouley with Barclays. Please go ahead.

Hey, good evening, everyone Ah congrats on the results in a pretty dynamic environment here same topic.

On the gross margin side, Yeah, I think you said last quarter, maybe Dennis you were talking to early 'twenty two.

I think he kind of termed it getting back to the tracks gross margins that were used to just any kind of update on how to think about the cadence of.

Gross margin recovery beyond Q4 here. Thank you yeah, I do think sequentially, we will see a step up from Q3 to Q4 as we start rounding into the new year. You would also expect us to see gross margins north of 40% is going to be based on continued look.

At pricing, our pricing situation as well as the cost out opportunities that Bryan talked about so we will continue to focus on continuous improvement automation raw material formulations, those will be our big focus areas going forward that will help us.

Wonderful great. Thank you for that Denison second one on the little rock capacity I guess number one just if there's any quantification I guess on how much capacity you may be adding when this is fully ramped and that's part one and part two is I'm just curious as you picked the little rock area for this.

Paucity I'm curious if you can get into any color around the conversion opportunity from a composite or from wood to composite.

The surrounding regions there. Thank you.

Sure, we see the southern region as.

Excellent area, where we can convert more of the.

Pressure treated southern pine marketplace, two tracks composites, that's one of the things that energizes us about the location, we're in and being able to service some of those markets from a size perspective in essence, what we'll be building as buildings.

Buildings, just like we just put here in Winchester of engineering is done we understand what the performances.

Got all the drawings, we know how to build them along the way so as I mentioned in my comments. It will be modular we have the ability to add multiple buildings like this and this will give us the long term capability to grow.

So we haven't put a specific number on it because it really carries us out over the next 10 years with the organization.

Got it well thank you Bryan and thanks, Dennis Good luck guys. Thank you.

The next question is from Trey Grooms with Stephens Inc. Please go ahead.

Hey, good afternoon, everyone and well done with another great quarter. Thanks Tarek.

But I'm kind of.

We're going to follow up on this little rock expansion.

You mentioned that this was to address long term demand trends and pursue new growth opportunities. One I didn't know if there was any anything you could expand on as far as new growth opportunities you mentioned and secondly, you know going through kind of that conversion.

You know kind of outlook that you were talking about to answer another question, where youre seeing it could possibly go from 24, 25% of the market to 50% of the market and Bryan to your last comment about.

Tim you know that this could give you some capacity to handle the next 10 years, possibly is that to say that if we were to see.

This composite or excuse me with a composite transition continue for the long term is do you feel like what you have kind of planned out here in little rock is.

Sufficient to get you to that kind of.

Range for getting closer to that 40, or 50% type conversion range of ablate that there'll be more behind it.

No I haven't put those numbers together, yet, but we have a lot of property down in little rock and we can add a lot of lines down there to be able to to service that demand Theres also beyond the property that we acquired there is a significant amount of space to be able to expand within that same industrial yard.

As we look at the growth opportunities.

There are three of them that are meaningful and we've talked a lot about international we are back to growing international more quickly than what we've been growing in North America I expect that will continue next year.

We've talked in the past a little bit about new builder programs and while we don't have enough capacity right now to really take that on full hearted. We are starting to have those discussions and with the announcement of little rock coming onboard these take time to build out and come to the appropriate agree.

So we are starting with that effort. We've got a few people on the ground and we are engaging with the national Homebuilders and then the last one is cladding.

<unk> has been a popular product mostly on the west coast, but we're starting to see that look.

Come more east and it has been a product that we've had in the market.

Same as our existing transcend deck board.

It's been in the market for some time, but we've not been able to fully market that due to the capacity constraints and we see a great opportunity to add incremental volume through that cladding opportunity and these are people that would be using.

Probably a different type of siding for a different design look on the outside of their business. So it is a subsegment of the overall siding industry.

And we will do some more work to try to better quantify what that opportunity is over time.

Awesome. Thanks for that and then and then as a follow up.

With these long term growth plans.

Describing you know and as you think about the raw material side of things.

Clearly you guys had been in the in the recycled or scrap polyethylene game for a long time, but.

And outlook for strong growth and this would the composite conversion and in other.

Products that you kind of like what you are talking with the cladding.

At what point does raw material availability become an issue or is there plenty out there to provide for the kind of growth we could see over the next several years once the expansion is rolled out and the growth that's ahead.

Yes, with the growth that we've had this year year to date, 37% growing much more quickly than what the market for recycled is right. Now there is some challenge in the short term normally this business has been growing in the teens up to 20% and we've been able to add to our sourcing capability in X.

So those amounts every year along the way this year the growth has been so much higher we've really had to look at every location possible. Our inventories are a little bit lower we've added people onto our sourcing team.

We see the ability to be able to continue growing that and service the marketplace.

Alright, Thanks, guys I appreciate the taking the questions. Thanks.

Your next question is from Tim Weiss with Baird. Please go ahead.

Hey, guys good afternoon.

Good evening.

Maybe just to start on the growth commentary for 'twenty, two just trying to think about the pieces.

Any sense for what pricing contribution and maybe channel inventories to kind of normalization might be for 'twenty. Two as you look at next year.

So pricing is there's still discussions going on as to where we'll be on pricing. So I don't want to jump into that but it will be meaningful on a year over year basis, Dennis may be able to jump in on how much pricing comes through what we've.

Already taken.

Basically what we're trying to do with our pricing philosophy is to offset the inflationary aspects and so from a year to date perspective, we've probably seen about five 6% and inflation on our raw materials as a percent of sales from a price perspective were pretty much right there.

Covering that almost from a dollar per dollar perspective, and then from there. What we continue to do is look for the cost outs to help us with our margins and so forth.

Okay. Okay, and then as you think about kind of the margin composition going forward, how would you think about kind of gross.

Margin leverage from here and SG&A leverage over the next couple of years.

The key focus here will continue to be on EBITDA margin and even with the pressures we've seen at the gross margin level, we've been able to continue to improve that EBITDA. So we will look to leverage both at the gross margin level as well as at the SG&A level and remember our entry level product line doesn't care.

At the same level of branding.

We will be increasing our branding spend next year back to more of a normalized is probably in the 5% to 6% type range of sales.

But when you sell an enhanced basic deck board. It doesn't carry that same level of spending along the way. So we still see that opportunity to be able to leverage now next year, there will be some of those costs coming back in again, you'll get back to a full year of normalized travel from the sales team as well as the rest of the overall trucks organization get back to doing.

Shows like the builder show.

Our regular meetings, those sort of things and marketing along the way.

Okay. Okay, great. Good luck in our scenario.

Thank you.

The next question is from Jeff Stevenson with loop capital. Please go ahead.

Hi, Thanks for taking my questions today, and congrats on the strong quarter. Thanks.

Thanks, Jeff.

So my question is just on how much of the volume growth at the midpoint of your fourth quarter sales guidance as inventory channel fill with new industry capacity up and running and you can just update us where channel inventory levels are currently and when we might expect them to return closer to normalized levels.

Yes, it's a good follow up with Tim Tim asked about that as well too. So we do see inventory build inclusive of the fourth quarter number along the way coming out of the third quarter inventories were built at the retail level, both at DIY as well as in the approach and so you can get the product, especially.

Actually at the larger dealers that were in.

Out in the marketplace as well as virtually any DIY store. If we now look at the fourth quarter, we see that I don't think inventory will get all the way back to a completely healthy level, but we are starting to see that inventory build now usually you see fourth quarter come down quite a bit sequentially from the third quarter. This is still in <unk>.

Stream with strong fourth quarter for us the growth.

It was quite strong in there so there will be inventory build along the way I can't really give you a number of that right now because it depends upon that underlying market strength, but as we get into the end of the year call, we'll definitely update the market on where we stand inventory wise and how much of that is a one time inventory build versus.

Is underlying market growth.

Okay great.

Very helpful.

Just wanted to ask about kind of high level of Capex priorities in 2022, obviously youre doing a number of cost out projects now and in the past you've talked about a long runway of those and when you're beginning your little rock.

<unk> facility in early 2022, so how should we think about the progression of our cost out projects next year in Capex in general.

It's a great question. So we'll certainly have more detail for you come Q1 of 2022, when we are when we go through the earnings cycle. There with you. However.

This year, we plan on spending roughly between $1 35, and $1 55 and 2021.

<unk> 2022 will clearly be less than this year has 22021 was mainly the finalization of the $200 million in capacity expansion. So I'd look at 2022 is being a transition year between this capacity expansion and then little rock because as we move into <unk>.

'twenty three you'll start to see investment in little rock pick up more significantly.

So whats left in 2022, then is really debottlenecking automation and other.

Other type of cost out projects to make us more effective more efficient.

Okay. That's helpful. Thanks again.

The next question is from Keith Hughes the Truest. Please go ahead.

Thank you.

During the fourth quarter.

EBITDA contribution margin.

35 and 40%.

The low thirties of the year.

A lot of challenges.

What do you think that kind of.

The average contribution margin over a longer period of time it looks like at this point.

Yes, I think we're clearly over time going to demonstrate leverage on the EBITDA line.

SG&A today is slow we will continue to see more and more leverage there even though as Bryan mentioned, yes, we will see some brand spend pick up.

In 2022, but as basics becomes a bigger part of the portfolio over time. It does not require that same level of advertising and branding spend. In addition, we're not going to be adding people at the same rate, which we're growing as well so I clearly see that EBITDA margin, improving and expanding over time.

Yes.

Okay. One other one other question.

As you look.

And so those are just sort of talk about where inventory was.

Do you see the.

'twenty two is a period, where you're still catching up on.

Getting inventory.

The channel or do you think you'd be able to finish that by the end of the year.

I think we'll still be putting some inventory in the channel in the first quarter of next year. The question is going to be how much one of the things that I mentioned to our distributor partners last week is that given the size of this market today.

<unk> that we have inventory at all levels of the channel and make sure that our yard has what we'd need their yards as well as as the dealer yards. So that we're always able to have the product necessary to serve customers as we continue to convert that share.

Okay. Thank you.

The next question is from Michael Rehaut with J P. Morgan. Please go ahead.

Thanks, Good afternoon, everyone. Thanks for taking my questions.

Firstly I just wanted to circle back to the gross margins for a moment and just wanted to make sure I'm hearing you correctly in thinking about things in the right context.

Hum.

You said that you're expecting some improvement sequentially in the fourth quarter.

But that for next year, you would expect to be above 40%.

You know.

I would presume that means that you're not kind of getting above 40% yet in the in the fourth quarter itself and then when we talk about 2022.

Any reason why you can't get back to you.

So you had 41 one.

In 2000, 1941, and a half and 2020 any reason you can't get back fully to that type of a level given.

Given all the different.

Margin improvement initiatives that you've been talking about.

Well right now we are.

We're looking to step up from Q3 to Q4 and again, we will have that full impact of the pricing increase for the three months. The additional one that Bryan talked about as well that's going to help us take a step up.

In addition to that we're going to continue to make progress now on our cost out initiatives as we move forward into 2022.

So we should start to see better absorption as.

As well as we have the full capacity to to <unk>.

Play out as well for us so I would expect us to be north of 40% and we will have more clarification moving forward I think.

The more important line to be looking at to though is on that EBITDA margin line right and we're going to continue to see expansion there.

In my opinion, there is no reason why we couldnt be up at that 35% to 40%.

Incrementals over the longer term it just makes sense that.

That we could see that sort of expansion on incrementals.

Okay.

I appreciate that.

I guess secondly on the SG&A you talked about expanding some marketing campaigns, maybe T E starting to normalize.

Obviously it depends on your still your rate of top line growth, but you know.

Presuming something that you know at least 15%, 20% year over year growth, which seems like it was.

All of the capacity expansion and price increases.

Be on track to do would you expect further leverage in.

In 'twenty two.

On SG&A in spite of some of those higher dollar cost, but on a percentage of sales are expect maybe some further.

Improvement in terms of the SG&A ratio.

Yeah, we're going to have a lot more information for you on SG&A in the coming year I think what we're trying to get a.

Get across today is that we still expect to be very disciplined in our spend on SG&A. We do expect to have a leverage model. So Bryan has been talking about yes, we're going to be spending more on branding going forward.

But we're still going to see a lot of leverage because basics will will become a greater part of the overall portfolio not requiring the same level of branding spend we're not going to be adding people at the same rate as which were growing too. So.

While it may tick up in absolute dollars.

I'm not so sure that where.

We're going to continue to be running this at a pretty low and mean level here for the foreseeable future. It will allow us to continue to expand margins.

Yeah.

Can I sneak one more in if I if possible just on price increases.

I think you mentioned that you were able to implement 5% to 6% of sales. This year I thought it was something a little bit higher than that I just wanted to make sure I heard that right.

What I'm trying to get at is you.

You've raised prices I think you know.

At least two or three times now if you're including November just trying to get a sense of magnitude of each of those increases in you know kind of where we are again cumulatively. If I did hear you right now.

You did hear correctly and so.

Those price increases were on most of our products. So they were not on all of those so those were mid single digit price increases on most products and so what I'm, giving you now is more of a cumulative number across the portfolio. So thats you heard correctly at 5%.

Great. Thank you.

The next question is from Phil <unk> with Jefferies. Please go ahead hey.

Hey, guys. Congrats on a really strong quarter, just given all the.

Headwinds you're seeing right now.

Ill be help with kind of give us a sense how full your lines are running currently Bryan wanted to get a better handle on your bandwidth to kind of support that strong double digit growth and will you be constrained until new capacity effectively secondly comes on in 2020 for the Arkansas.

But I see continued opportunities as we look at the first quarter, we were bringing lines up second quarter, we were continuing to bring lines up.

So we can run those with that.

That full.

More capacity next year, depending upon what the market needs from us along the way.

We haven't gotten into exactly where our utilization is at this point, we are working to increase it as we are.

Try to fill that channel channel inventory at this point, but we did lose some revenue in the quarter. We said the same thing last quarter.

We're not exactly where we want to be for the fourth quarter, we do have improvement opportunities off of our legacy lives, replacing some of the equipment, which will allow us to have further growth and these are all proven return projects that we know how to do to get more out of our existing capacity.

Okay. That's helpful and then I'm, sorry to kind of.

Beat a dead horse.

From an inflation standpoint, which should you should we expect to be fully caught up with the November price increase as you exit the year and then if there was any disconnect on just getting incrementals back to you.

More normalized level in the fourth quarter was it all price cost or was there something else we gotta.

For depreciation.

You've been running behind all year long and we've continued to take price increases to be able to to catch up with that I'd love to tell you that I am going to be there right at the end of the year. We still got 45 days left of the of the quarter here and pricing is on a lot of things is continuing to go up not at the same level that we.

We saw it.

In late second quarter into the third quarter, along the way, but it sure is our intent to get caught up at the same time getting caught up within 30 days probably isn't the most important thing either having a confidence that we can take price in the marketplace. We can drive the margins that we expect that our investors expect is important.

And we've been able to show that we can do that but just going down to the market and saying I'm, taking X percent tomorrow, because my numbers aren't there it doesn't help the market either so we've given enough time for our channel to get ready for those prices to put them through and part of that is the relationship that we have in our channel and that's put us a little bit behind where.

We would prefer to be.

Okay Super Thank you.

The next question is from Keaton mentor with BMO capital. Please go ahead.

Thank you and congrats on another strong quarter.

Maybe start off on the demand side.

I'm just curious if you're seeing more strength on the on the entry level product or is that demand growth a more broad based across your different product categories.

We're seeing that demand growth across all of our portfolio and pretty much in line with where we expected that to be so we're really pleased at having this product lineup with different pricing points that really is appealing to our large customer base.

Yeah.

Got it that's helpful and then just switching to the.

The Arkansas facility and not trying to put too fine a line on that I recognize that that is kind of a long term plan, yet but is that a way to think about how much you you envision to add in 'twenty four 'twenty five.

In terms of capacity and in terms of your first sort of buildup.

So I think analytically I'll give you the keys to the analytical equation here.

70% capacity increase cost us about $200 million.

We're saying about $400 million over a five year timeframe I think the only difference there is that we need to build out the infrastructure at that plant will be a lot of utility there'll be a lot of paving there'll be a lot of dirt moving that we didn't have to do for that that existing capacity along the way.

Got it that's a helpful I've done it over and good luck.

The next question is from Reuben Garner with the benchmark company. Please go ahead.

Thanks, Good evening, congrats guys on the quarter and the Arkansas announcement.

Right.

Most of my questions have been answered, but I do have one kind of longer term one I wanted to sneak in the when you guys had the capacity announcements before.

A lot of effort and time spent by the team to do those projects in your existing facilities and I think some of the focus with you guys being so tight.

What's taken away from some of your continuous improvement initiatives would you envision this being different.

You know in a couple of years as you're kind of getting to that stage, where youre able to do both because it's a third facility or or is your team gonna have to kind of be.

Use your existing team gonna be have to used.

He used enough to sort of the capacity additions that it may it may take away from those in the near term as you're as you're building out that facility.

We can do both key thing there is getting the engineering team to to full staffing and we've got a.

Plan, there to what we need to do to get it we're back where we want it to be support the new capacity of course, the $200 million capacity is coming off the plate at this point. The last couple of lines are going in Winchester.

But we do need to beef up that group and we can do both.

Great. Thanks, guys and congrats again thanks.

The next question is from Kurt Yinger with D. A Davidson. It also if you would like to ask a question. Please press Star then one Mr. Yano. Please go ahead.

Great Thanks, and good afternoon, Brian and Dennis.

Can you.

I just wanted to start off on the dynamics between composites and wood recently, I mean, theres just been a lot of commentary from the lumber guys around Sky high pricing in the middle of the year, taking its toll on demand and as prices have moderated it seems like the interest from the DIY consumer has come back pretty strong I'm, just curious whether you've seen any.

Of that I.

I guess play out in terms of your own demand trends and as you kind of step back and think about.

The two points of conversion versus one point.

Annually in the past what are kind of the big factors that.

Might make you optimistic that this new higher rate of conversion is sustainable.

The first important point is the.

<unk> futures market that we all referred to as lumber builder builder quality lumber.

Customers are going out buying pressure treated lumber, which the chemicals that go into the labor that goes into it is all expect more expensive now. So there is some price increase that's permanent in that type of lumber, but those prices have come back down again.

Much more important part.

The <unk>.

Story and the strategy is that we're able to educate those buyers that there are affordable composite products and it's not just about selling and enhance basics board, it's showing them for an extra couple of hundred dollars you could move to a composite product and then being able to move them up the spec.

From of the <unk> product line to give them the aesthetic and the performance of that Theyre looking for so the company started down this path of converting against wood back in about 2017, we started advertising directly against wood.

We launched enhanced in 2019, and we started to see that conversion start to pick up and we've got of course through the pandemic elevated.

People staying at home, but over the long term the strategy that we put back put together back in the 17 18 timeframe is unchanged and those consumers are learning more about composites today.

And are enticed to purchase them.

Got it Okay. That's helpful. And then just my second on recycled film pricing I think last quarter, you talked about that being up maybe mid teens a year over year could you update us on how that's been trending the last few months and relative to maybe lagging the Virgin market by a couple of course.

<unk> are you expecting any incremental cost pressures there as we get into 2022.

Yes, I do expect to continue to see some cost pressure around that we did see that.

Expand let's call it into the high teens in the third quarter. So those prices are still going up and like I said, they tend to lag by about nine months and we're still in that nine month lag period. So we'll continue to see that move a little bit more.

Okay I appreciate the color Bryan good luck in Q4 here guys.

Thank you.

Next question is from Alex Rygiel with B Riley. Please go ahead.

Thank you very nice quarter gentlemen, a couple of quick questions here first.

Okay.

Try to quantify the capacity that youre, adding in the fourth quarter.

Well, we've talked about there being an opportunity to improve by about 15%. So that would bring us from that 70% over 2019% to 85% over 2019 levels by the end of the year.

That's helpful.

And as it relates to the Oregon facility.

Could this become your low cost manufacturing facility and if so.

<unk>.

We see the opportunity with Arkansas, the proximity to some of our raw materials.

More optimized than our other locations.

We will have some opportunity with the scale.

Of the of the operations.

Will eclipse at some point, our Winchester facility and so we will have some scale opportunities there it'll be the newest technology that we have for running our products, which does give us a better cost along the way so I think thats it.

Thats, a fair way to look at it.

Offset with labor.

We will have a higher labor cost across all of our facilities, but we also are looking at automation opportunities and I don't see this automation opportunity at taking away anybody's job with the growth that we have there will be plenty of opportunities for our existing trucks employees, but as we build new capacity out we may not need as many.

Many people to run those lines.

Very helpful. Thank you great. Thanks, Alex.

This concludes our question and answer session I would like to turn the conference back over to Bryan Fairbanks for any closing remarks.

Thanks, everybody for your questions and attendance at todays 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.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.