Q4 2021 Trex Company Inc Earnings Call
Okay.
[music]. Thank you guys I'll talk a few years.
Good afternoon, and welcome to the trucks company fourth quarter and full year 2021 earnings conference call.
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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 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.
That's on the call are Bryan Fairbanks, President and Chief Executive Officer and bonus for them.
Vice President and Chief Financial Officer, joining Brian and Dennis If Amy Fernandez, Vice President and General Counsel.
Other members of management.
<unk> issued a press release today after market close containing financial results for the fourth quarter and full year 2021 .
This release is available on the company's website.
This conference call is also being webcast and will be available on the Investor Relations page of the company's website for 30 days.
I would now like to turn the call over to Amy for Amanda Amy.
Thank you Victoria before we begin let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward looking statements within the meaning of federal Securities Law. These statements are subject to certain risks and uncertainties that could cause actual results to differ.
<unk> 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 the SEC. 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 at tracks Dotcom. 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 Brian .
And at Fairbanks.
Thank you Amy and good evening, everyone. Thank you for joining us today to review, our fourth quarter and full year 2021 performance along with our business outlook.
First I'd like to thank our extra ordinary employees, who continue to deliver great results through talent hard work and innovation.
Along with our channel partners distributors and professional contractors, who are the best in the business and are poised to execute growth in our composite decking and railing market.
We closed 2021 with all time record sales of $1.2 billion for the full year and a record finish to an exceptional year with fourth quarter sales, increasing 33% to $304 million and adjusted earnings per share growing 49% to 55 per share.
Our expanded manufacturing capacity enables us to effectively support strong organic growth, while also allowing our channel partners to infill inventory.
Strong revenue growth and replenish market inventories point to reduced product lead times and more normalized seasonality in 2022.
Consumer demand for our products remains robust.
Supported by significant repair and remodel activity.
Especially within the outdoor living category, which shows strong momentum as the fastest growing category of repair and remodel and supported by our continued conversion of wood took composite market share.
Rising interest rates and higher home values favor repair and remodel spending as homeowners continue to invest in their existing residences and pursue renovation that enhance our lifestyle and outdoor living spaces.
Flexible outdoor living spaces more essential than ever as consumers continue to reevaluate where and how they spend their time, so while COVID-19 related restrictions are easing.
In leisure travel and other activities are returning to pre pandemic levels, we expect demand to remain strong driven by favorable secular trends.
The launch of our traction haps products in January of 2019, with a significant catalyst that has accelerated our growth over the past few years.
This product was truly an industry game changer significantly expanding our addressable market by focusing on consumers, who would convert from wood to trucks at the right price.
As a result, we've continued to drive wood to composite market share conversions at 200 basis points plus per year.
The rate meaningfully greater than we've experienced in the past even with this accelerated pace, we estimate composites account for approximately 25% of the total decking market, but expect it will reach 45% to 50% in the future.
To support current demand and expected long term growth, we successfully executed the largest capacity expansion program in Texas history, which included construction of a new decking facility at our Virginia site and installation of additional production lines at our Nevada facility.
<unk>.
These expansion initiatives.
<unk> us to effectively meet customer demand in 2022 by increasing total capacity, 85% above 2019 volume levels.
Additionally in October of 'twenty one.
<unk> plans to develop a third U S based treks residential manufacturing facility at approximately 300 acres in little rock, Arkansas.
Expected to commence operation in 2024.
This $400 million capacity expansion program offers numerous strategic advantages, including increased proximity to a central raw materials.
A strong pool of qualified and skilled labor adjacency to major transportation hubs and is situated near key growth markets for wood conversion.
Similar to our previous capacity expansion programs. This development will be modular in nature and calibrated to demand trends.
When this plant opened trucks will have the strategic advantage of unmatched geographical coverage with east coast West Coast and Central region site that will service, our domestic pro channel and retail partners and also support our long term growth opportunities in the international and cladding markets.
Composites have lower market penetration outside of North America, and we believe our international growth can exceed our domestic market expansion pace on a long term basis.
We are pleased to meet with many of you at the recent international Builders' show held in Orlando, where we were impressed with the high attendance numbers and interest in learning more about all of the waves trucks can be part of their outdoor living plans.
We also had record attendance at our trucks Pro summit held in San Antonio with participants from around the world.
<unk> frozen or elite group of contractors dedicated to the installation of tricks decking and railing products for whom trucks provides valuable benefits such as increased consumer exposure customer leads.
The profile of <unk> dot com to showcase their work and extended warranty programs.
We launched a new marketing campaign for 2022 that highlights how trucks helps homeowners transform their outdoor dream ideas into reality, becoming the foundation for many of life's most memorable moments.
Sure we see it too campaigned launched January one.
But TV commercials on many popular channels.
Integrated content extends to social digital and online video amplified by radio print retail strategic partnerships and more for.
For 30 years, <unk> has invented reinvented and define the composite decking and outdoor living category and this new campaign boldly differentiates trucks with a distinctive and memorable message that creates a category of one.
As our business expands.
We remain focused on growing in a sustainable and socially responsible manner and taking market share from wood.
As our sales grow so does Texas positive impact on the environment.
Using recycled materials to manufacture the most aesthetically pleasing and long lasting decking and railing products in the market.
To support our capacity expansion efforts and sales growth, we continue to grow our employee base with a focus on diversity equity and inclusion and bringing new ideas and perspectives to our team.
In addition, the safety and wellbeing of our employees is of utmost importance and we consistently prioritize safe practices and emphasize employee well being.
Reflective of this we recently expanded ESG oversight at the executive level.
Leslie Atkins, Vice President of marketing at ESG development.
Long involved with steering the Trek brand. She has also been a steward of our ESG efforts since inception.
With that I'll turn the call over to Dennis to provide a more detailed view of our financial performance Dennis. Thank you, Brian and good evening, everyone. I'm pleased to report on trucks as strong fourth quarter results and full year performance and provide expectations for the first quarter and full year of 2022.
We are reporting fourth quarter topline growth of 33% to 304 million led by 35% growth in net sales of trucks residential to 288 million the.
The increase in sales reflects continued strong broad based demand across all product lines in both the retail and pro channels and a favorable impact from pricing actions and trucks residential trucks.
Trucks commercial net sales increased 6% year on year to $16 million.
Consolidated gross margin in the fourth quarter was 38, 9% compared to 45% in the year ago quarter.
Fourth quarter 2021 gross margin for trucks residential <unk> commercial were 39, 7% and 24% compared to 41, 3% and 28% in the fourth quarter of 2020.
The year over year decrease in 2021 fourth quarter gross margins was primarily due to increased raw material cost.
And higher transportation costs that more than offset increased efficiencies from higher capacity utilization and previous pricing actions.
In the 2021 fourth quarter, we recognized a $54 million goodwill impairment charge at trucks commercial that was primarily due to a reduction in project commitments, which adversely impacted project backlog and forecasted net sales and EBITDA.
The reduction in project commitments was influenced by a delay in new projects due to lingering uncertainty created in our commercial markets by the COVID-19 virus.
The delay in new projects, coupled with the Companys continued successful fulfillment of pre pandemic projects resulted in lower project backlog and reduce forecasted net sales and EBITDA.
The company expects revenues from trucks commercial to be constrained in 2022, but increased bookings are expected to lead to a resumption of revenue growth in 2023.
In addition, the company recognized a gain from insurance proceeds of $3 $2 million during the fourth quarter of 2021, primarily related to the fire at the trucks residential Virginia plant that occurred in March.
Excluding the goodwill impairment charge and the gain on insurance proceeds selling general and administrative expenses increased to 37 million compared to $34 million in the fourth quarter of 2020 as business travel and marketing related expenses began to return to more normalized levels.
However.
We continue to benefit from the operating leverage gained from our rapid sales increase with SG&A as a percentage of sales decreasing 290 basis points to 12, 1% in the FERC in the fourth quarter compared to the prior year quarter.
Net income for the 2021 fourth quarter was $25 million or 22 cents per diluted share excluding.
Excluding the noncash goodwill impairment charge and the gain on insurance proceeds adjusted net income was $64 million or 55 cents per diluted share.
Presenting increases of 47% and 49% respectively from net income of 43 million or <unk> 37 per diluted share in the 2024th quarter.
EBITDA, excluding the goodwill impairment charge and the gain on insurance proceeds was 92 million, a 44% increase compared to EBITDA of $64 million reported in the year ago quarter.
Fourth quarter 2021, adjusted EBITDA margin was 32% compared to 27, 9% in the fourth quarter of 2020.
Summarizing the full year performance consolidated net sales increased 36% to $1 $2 billion with trucks residential net sales growing 38% to 1.14 billion and tricks commercial contributing $58 million to net sales.
Full year 2021, net income was $209 million or $1 80 per diluted share.
Excluding the goodwill impairment charge and the gain on insurance proceeds of $8 7 million adjusted net income was $243 million or $2 10 per diluted share representing increases of 35% and 36% respectively.
From adjusted net income of $180 million or $1 55 per diluted share in 2020, net up to $6 $5 million surface flaking warranty charge.
Net of these items that I just mentioned full year 2021, adjusted EBITDA increased 38% to $357 million.
Full year 2021, adjusted EBITDA margin was 29, 8%.
We generated record cash from operations of $258 million in 2021, an increase of 38% from 2020.
The strength of our cash flow enabled us to self finance the recent capacity expansion program, while returning capital to shareholders through stock repurchases.
Full year capital expenditures were $159 million and were primarily related to our capacity expansion program.
We repurchased approximately 809000 shares of outstanding common stock in 2021 at an average price of $91 per share totaling $74 million.
As of December 31, 2021, we have repurchased three 6 million shares under our stock repurchase program and have 8 million shares remaining to be repurchased under the current program.
Also since the end of the fourth quarter, we have been active in purchasing shares under the same program.
Yes.
Looking ahead, we see a strong 2022 with double digit topline growth inclusive of the onetime channel infill in 2021.
We are also providing the following metrics for the first quarter and full year of 2022.
First quarter consolidated net sales are expected to range from $320 million to $330 million representing year on year growth of 32% at the midpoint.
For the full year 2022, we expect revenues to return to double digit growth rates with a normalized seasonal cadence similar to pre pandemic path patterns, we experienced in 2016 to 2018.
In addition, we anticipate pricing realization will more than offset a more modest raw material and labor inflationary environment.
SG&A is expected to be in the range of 12% to 13% of sales for the full year, which includes the higher investment in marketing and branding spend now that we have ramped up our new capacity in market inventories have improved.
For the full year 2022, we anticipate incremental EBITDA margin to be between 30% to 35% when compared to the adjusted EBITDA figures discussed earlier.
Our tax rate is anticipated at approximately 25% depreciation will range from 40 million to $45 million.
And we expect full year spending on capex to be in the range of $200 million to $220 million inclusive of the little rock capacity expansion, the new corporate headquarters and additional investments back into our core business.
Now I will turn the call back to Brian .
Thank you Dennis are strategic.
<unk> and 2021 and continued robust demand put us firmly on track to deliver strong double digit growth in 2022, and we remain focused on converting consumers to the performance advantages of composites over wood.
Supported by our industry, leading brand and recent capacity expansion program, we remain well positioned as the prime beneficiary of long term trends towards outdoor living 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 were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Please limit your questions to one with a single follow up.
Our first question comes from Keith Hughes with Truest. Please go ahead.
Thank you.
Question is about the.
<unk> EBITDA margin guide for the year can you talk about how you think that will pace during the year.
And you get above that in the second half of 'twenty. One if you could talk about what the puts or takes Clinton sites are that are bringing that down year over year.
Hey, Keith this is Dennis thanks for the questions. Good questions. So I'm expecting to see EBITA margins improved sequentially quarter to quarter.
As we move through through the year and we should see you know our highest EBITDA margins in that Q3 Q4 timeframe.
Some of the puts and takes that we're looking at clearly our pricing coming into <unk>.
For full utilization here in the first quarter.
That's primarily the biggest impact secondarily, we're still dealing with inflation and although we anticipate it moderating somewhat we are seeing some headwinds right now with regards to higher transportation expenses were seeing some higher fuel costs on the natural.
Gas side in oil and we're also seeing some delayed lead times on our capital spending which is resulting in some of our cost outs being pushed out a little further along so that's that's some of the puts and takes that we're dealing with here in 2022.
If I could sneak one more in.
On the gross margin will it also ramp up very similar to EBITDA and do you think youll be above water on a year over year about gross margins in the first half of 'twenty two.
And we're going to continue to put a lot of focus and attention on our gross margins. That's always been the way attracts and this year, it's not going to be any different I would expect the gross margins to follow a similar cadence to the EBITDA margins as well, so again pricing coming more into play here.
By the end of the first quarter inflation moderating somewhat and then we talked about some of those headwinds that we're dealing with.
Okay. Thank you.
Your next question is from Ryan Merkel with William Blair. Please go ahead.
Hey, guys couple of quick around me.
Good morning, or afternoon. So first off can you just unpack sales outlook for 'twenty, two a little bit how much will price contribute and then just talk about what is more normalized seasonality just wrong on the same page.
Yeah, so when I think about more normalized seasonality.
I am really looking probably at the first quarter to be around like 26% of our sales then you move into the second quarter were about.
Oh, 52nd and third quarters about 50% of the sales in fourth quarter would be the remainder.
That's what I would look to as far as more normalized seasonality.
When I think about growth here in 2022.
I guess I would look at it as follows year, so pricing will play a role we're probably in the low teens for pricing.
And we've got repair and remodel that we talked about extensively in Brian's remarks that we feel is going to be strong and in the past we've doubled up on that repair and remodel metric.
The metric and so you take those two.
That gets you to that.
The upper end of the the growth range. There and then you have to back out the one time inventory infill that we had in the back half of 2021.
So that's kind of how I see the puts and takes for growth and how we get to the strong double digit growth that we suggested.
Got it that's helpful. Okay, and then for my follow up.
Teens price capture in 'twenty, two is a little higher than I was thinking.
How is that going to slow through the year is it going to start higher and then sort of just kind of bleed down as you lap price increases from last year.
Yes, I think thats the right way to expect it will be coming through we took more of the pricing last year later in the year. So we'll have that full recapture as as we move through the year and we will see what inflation does as we move through 'twenty two.
Got it alright, thanks, that's it right.
The next question is from Stanley Elliott with Stifel. Please go ahead.
Thank you everybody. Thank you guys for the question and congratulations on a nice year.
Curious kind of high level would love to hear from the trucks per day.
Talking with the contractors what are they telling you about their backlogs about the order book, obviously the guidance seems.
Very positive on the year, but just curious if you could dig down into that a little bit more sure tricks Proto it was.
Our contractors feel very positive about how the year shapes shaping up for them. So these are some of our largest most skilled contractors you'd expect them to have longer backlogs. When we go down the ranks and talk to other contractors that may not be quite as large we hear great optimism from them.
As well backlogs anywhere from three months out to six months. So they have not seen a material shift in the marketplace and the interest for outdoor living.
Great and then you also have been working on improving the recycled content on the front end was wondering kind of how much progress you were able to make on that and you know any update would be great.
So the company has always prided ourselves on using 90, approximately 95% recycled content in our products, where we don't use it.
Great of a degree for example, some of our aluminum and some of our railing products. We do strive to increase the recyclability content within that product, but from a decking perspective, which is the largest share of revenues for the company.
We've continued to drive recycled material use and we continue to look for new opportunities to take more waste out of the waste stream and allow us to use it in decades.
Thanks, guys I appreciate it and best of luck. Thanks.
The next question is from John Lovallo with UBS. Please go ahead.
Hey, guys. Thank you for taking my questions as well.
First one the step up in Capex to 200 to $2 20 versus I think 160 in 2021.
Under the impression that Capex would actually be down this year could you maybe just talk about some of the puts and takes that may have changed that.
Hey, Jon now that that's a fair question and I know, we talked about that earlier that we expected to have a a downsizing if you will in the capex spend but that was before the little rock announcement right and so little rock is really the primary driver of that number coming coming going higher so essentially you've got.
Little rock in there. We also have our new corporate headquarters being built as well so that's going to be some additional capex spend and then the remainder is investments back into the core.
Got you, Okay and then in terms of my follow up can you, maybe just elaborate a little bit on the reduction in commercial project commitments I guess I'm curious on what type of projects.
Were kind of delayed or canceled I should say and then are they going to wood.
Our other competitors in the composites space, taking the business.
So from a commercial perspective different segment from residential primarily talking about our railing and certain staging products.
During 2021, our net sales were still quite strong however, as the company continued to successfully work down that existing backlog. We also experienced a reduction in new project commitments because of lingering uncertainty around COVID-19 . So for all of the tailwind that the residential.
Side of the business received.
The commercial side, mostly had headwinds. So COVID-19 paid has played a significant impact on that part of the business.
Core markets that we serve sports Entertainment commercial office, where all hit hard and investments were sidelined until there was more certainty on what life post Covid would look like.
Remember at one point it didn't look like many people are going back to the office and of course, we're now seeing people go back and we're seeing people go back to sporting events and other outdoor opportunities so given that reduce backlog and reduction in new project commitments to replace and build the backlog.
We knew that the outlook for 2022 was diminished.
Per our policies, we conducted an annual impairment test for goodwill we assessed the project commitments the reduction in our backlog because of Covid and our forecasted net sales and determined there was a negative impact on our financial condition.
And as such we decided to take the $54 million write down based on that analysis I think on the positive side here. We are starting to see that order book rebuilding encouraged encouraged by the activity in the first couple months of the year, but it will take some time and we'll we're still encouraged with.
The opportunity on the commercial side of the business.
Okay. Thank you.
The next question is from Jeff Stevenson with loop capital. Please go ahead.
Hi, Thanks for taking my questions and congrats on a strong year.
Yep.
Sure.
Are there any negative impact from micron in January and did you have any labor and logistics are material headwinds from that that will impact the first quarter.
Yeah, I like everybody else, we did see elevated absences in January for a moment. The crowd. We saw him in December as well it was probably a little bit heavier.
The impact of that is inclusive of the guidance that we've provided in the first quarter transportation, where some I guess update in down days, but.
It wasn't.
We didnt struggled too much through January one of the things. We did Ron was more over time in January to be able to offset those those absences we had.
Okay, Great and then.
Can we just get an update on channel inventories right now and how much of your kind of first quarter sales guidance is related to inventory channel fill.
So recall normally the first quarter is going to be building of inventory to support the busiest part of the season and that's exactly what we are seeing coming into the end of the year.
If you remember back to the third quarter I talked about our dealer level inventories improving significantly and then through the end of the year our distributor level inventory has improved significantly as well now we're back into a normal inventory build to support Q2 and Q3 in the marketplace.
Got it thank you.
The next question is from Trey Grooms with Stephens. Please go ahead.
Hey, good afternoon.
That's right.
So first one Dennis I, just want to make sure I got this right.
The kind of the.
Quarterly cadence you outlined earlier.
You mentioned I think in.
I'm, probably missing something here, but I think you said Q1 is going to be 26%.
All year.
Just kind of back end backing into that midpoint of the guidance range if you.
Gross that up it just imply something like 5%.
Growth for the full year, so what am I missing there on that math.
The best way to take to look when we talk about what historical looks like it is going back from 2016 to 2018 timeframe and looking at those quarterly averages increases and decreases and the reason that time is an important it takes the entire takes a pandemic out of it but it also.
It takes the launch of enhance out of it as well.
No, yes, I get I get all that I'm, just trying to reconcile the arithmetic behind.
$3 25.
Kind of midpoint of the guidance for revenue for the first quarter. If that's 26% then that implies something like 5% growth for the full year.
The 26% is not part of our guidance okay.
Okay, just making sure because I heard that and I knew I was thrown off there's somewhere with the math on that.
Okay fair enough thanks for clearing that up.
And then.
Second question is EBITDA margins.
Dennis mentioned, you said that it should ramp in kind of Q3, Q4 timeframe and I think the long term guidance for 35, 45% incremental margin EBITDA margins.
Is that still the right way to think about long term incrementals and at what point do you think we kind of return to that sort of flow through.
Yeah, Trey so no. The guide for 2022 is 30% to 35% incremental EBITDA margins just to be clear.
And as we go forward. The reason, we pulled that back a little bit this year from where we normally are at we're bringing our marketing our traveling payment or show expenses back to a normalized level from where we were in prior years I expect as we move forward, you'll see that move back to the more normalized level.
35% to 40 incremental yeah, that's what I was getting at I was clear I was clear on this year I just know long term, 35% to 40, that's still that's still a good target.
Thank you.
The next question is from <unk> with BMO capital markets. Please go ahead.
Thank you for taking my question.
This is a bit about.
What you are seeing on the demand.
Excellent.
Jim.
On the cladding side, there's a couple of opportunities that you guys have talked about and is there any way to kind of.
Bye.
Medium term opportunity could be there.
Yes International we do continue to see that coming back we did have to deemphasize that for a couple of years, but through the fourth quarter of this year, we were able to rebuild inventories to get the season started right. In these marketplaces. So I'm excited about the growth opportunity I've said in the past.
That we see the international market as being able to outgrow our north American markets I still hold to that we'll be in much better shape inventory wise this year as.
As it relates to the cladding marketplace. We've now been able to show the customers that are interested in using our decking as cladding or that the product is available.
Normalized lead times, so that they can start quoting that we really hadn't been quoting all of that much business over the past couple of years. So we're back up selling again actively into that marketplace.
Understood and then just as my follow up.
What is embedded within your guidance.
Relation for FY 'twenty two thank you very much.
Our inflation expectations are are baked within the guidance that we've provided as Dennis mentioned earlier, we have seen some inflation into the new year, but we do expect that to moderate as we go out through the rest of this year.
Perfect.
Thank you.
The next question is from Reuben Garner with the benchmark co. Please go ahead.
Thanks, Scott Congrats on the strong close to the year.
Sure.
Most of my questions have been.
Answered, but I do want to follow up on one.
I wanted to see if there's any way you could kind of quantify opportunities maybe that you guys had to walk away from.
Last couple of years, whether it's internationally or in the U S. Just because of your capacity situation.
Typically talking about maybe some smaller players in the market that.
Maybe we're able to benefit because tracks.
The industry leader.
Sold out so often Brian numbers or.
Way to quantify what might've been over the last two three years as you guys were trying to catch up.
But you're right. There are things that we have had to walk away from as we've managed through the capacity constraints over the past couple of years I would say last year was a <unk>.
Position, where we started to more normalize in the marketplace and with inventories being built back to more normalized levels, we truly get back to a.
Regular cadence for the year.
We've not tried to put a number to what those sales are.
And just to.
Quick follow up Brian do you think that you've already started to kind of.
I guess, how much of the strength you saw in 2021 with maybe you got recapturing some of that business that that was gone versus.
There was a lot of infill obviously at the end of last year in your own channels. Like are you just now at the point, where maybe you can go after some of that business that maybe you could have had.
Before because <unk> been still trying to fill the channel.
Well I did a lot of plant tours with our sales team during the fourth quarter.
Showing both our existing customers, who have been loyal to us throughout as well as other customers who may be carrying competing brands.
Capacity, we have in our ability to service them.
Perfect. Thanks, then.
Good luck this year guys.
<unk>.
The next question is from Tim <unk> with Baird. Please go ahead.
Yeah, Hey, guys. Thanks for taking the question.
I had one kind of.
Modeling question, and then a bigger picture ones, but on the modeling question. Just is there a way to quantify what the channel infill kind of loading copies.
No if you want to put.
What a sales dollar number on it or some sort of kind of like lead time or kind of weeks of inventory or just any more color you can kind of give us just so we can kind of make sure. We're on the same page with what kind of comps.
Yeah, Tim it's a good question. So our estimates right are pointing to about $100 million in infill that happened in the in the back half of 2021.
Okay. Okay. That's helpful and then I guess on on a bigger picture question.
As you think about Brian getting to that kind of 45% to 50%.
Penetration of composite relative to the market.
Is there any kind of change in the cost of getting to that incremental penetration like for an incremental 5% market penetration is that cost to attain.
That penetration changed at all either positively or negatively.
Well, there's an incremental change in the short term here, because we need to get back to a normalized cadence for marketing we've pulled back on the past few years, we will get back into a normalized cadence for that.
And we see that as important to be able to continue driving that wood conversion opportunity getting our name in front of people who are in the market for decking, whether it be water or for competitive products and showing them why they should make the trucks decision.
Okay. Okay. So 22 is really more of just us I.
I guess kind of a catch up now that <unk> got capacity in.
<unk> got the channel in a better inventory position.
Okay, great well good luck on 'twenty two guys. Thanks for the time thank.
Thank you.
Question is from Steven Ramsey with Thompson Research Group. Please go ahead.
Hi, good evening, starting off with drivers of sales growth for the year.
Much of that is pure core wood conversion and how much of that is.
International growth kicking in new construction clouding some of those other Jason here.
Areas of opportunity.
Yeah, I'd love to say that there is enough data out there in the marketplace that I could break each of those down.
And be able to give you give you accurate numbers I think the right way to look at it as we've always looked at our business.
Using kind of the remodeling repair and remodel growth numbers as a baseline for the businesses on top of that wood conversion opportunity growth in international markets.
As well as a cladding, along the way and that gets us to the double digit sales increase for the year.
Yeah.
Okay excellent and then is there.
That it would go.
The channel infill that you've done.
That points to continued increase on the enhanced right I know, what's coming from a lower base, but is there any read through on penetration of that lower priced products.
Through 'twenty, one we continued to see strong growth across all of our product lines and in line with our expectations.
Excellent. Thanks.
Your next question is from Phil <unk> with Jefferies. Please go ahead.
Hey, guys.
You guys have been constrained from a capacity standpoint in the last few years. So I'm just curious looking into 2022, how much bandwidth you have from a capacity standpoint, if you could quantify that and maybe pass utilization would be helpful. And then when we think about little rock and you kind of ramp that up.
Brian appreciate its modular in nature is there a good way to think about how much capacity that would free up at least in the first phase of that ramp.
So I think the best way to size. The capacity is what I said in my comments about the 85% over where we were from a 2019 perspective.
As we look out towards little rock coming on which would be 'twenty 'twenty four time frame little rock has the opportunity to be the largest facility.
Our system, so there's a significant amount of growth opportunity there.
Of that 85% any color on how much is that's already consumed Brian .
We've not provided utilization, okay, and then a quick one for Dennis the 12% to 13%.
SG&A as a percentage of sales for our guidance for this year is that a good way to think about it in 2023 or is this more of a catch up here I just wanted to get a better sense is there an opportunity for some SG&A leverage going forward.
We've always talked about there being an opportunity longer term for SG&A leverage, especially as enhanced becomes a bigger part of the portfolio. So I think Brian said it well earlier on the 2022 really becomes a catch up year and then from there we should start to see that leverage really start to accelerate.
Great more okay.
Alright I appreciate it.
The next question is from Alexander <unk> with <unk> capital markets. Please go ahead.
Hi, guys. Thanks for taking my question I'm, sorry, if I missed this as my my line dropped off but do you have an internal rate of inflation that you provide for us.
How is your internal rate inflation been trending through Q1.
Q4, you mentioned some persistent headwinds but.
CPI has been accelerating and it sounds as though.
Inflation in your business isn't accelerating anywhere near the same level.
And so we build our forecast and plans with <unk>.
Rate of inflation that are our research tells us that the business is going to see.
No inflation as everybody on the call knows is very difficult to predict as to which commodities, it's going to hit and which ones.
Alleviate over the course of the year, but that inflation is inherent in the incremental EBITDA guidance that we've provided but we're not going to provide a specific percentage that we've assumed.
And then just as a follow up.
Is this still scope pool.
Room in the business to increase prices in the system.
So inflation persist through.
Yes.
Sure there's going to be opportunities.
We see inflation roll through the economy.
Degree, where we see that pricing won't need to be taken.
The thing that we'll do as needed.
Okay, great. Thanks, guys.
The next question is from Michael Rehaut with JP Morgan. Please go ahead.
Great.
Thanks for taking my question.
First I just wanted to circle back to the top line.
Outlook and.
Very helpful to get the $100 million of infill and back half of 'twenty one.
I also got to that similar math from an earlier question about it.
Do that 26% on the first quarter implies like a 4% actually full.
Full year growth.
I'm just trying to get a sense you obviously are seeing double digit for the year.
What's that $100 million.
A headwind, though in the back half of 'twenty one.
Or are we talking about maybe flat sales in the back half of the year or how should we think about.
You know comping that comp.
Requeue and <unk> of this year.
I would go back to my clarification comments and use the 16 through 18 seasonality as as a guideline for <unk>.
Revenue calendar <unk>.
Brian if you use that.
96% and that that gets you to the 4% for the full year that's the challenge.
But maybe we can talk about that at all.
We've provided guidance.
Double digit revenue.
<unk> during the course of the year.
Right Okay.
Well.
Switching gears then.
Two.
The margin guidance on the 30% to 35% EBITDA.
Yes.
Think the math kind of works out that you are looking for full year.
And full year margin improvement.
On an operating margin and EBITDA basis.
Yes, I'm, just trying to get a sense.
When would you expect.
Year over year turn positive during the year I mean, a lot of companies have obviously been kind of thing.
Not in the first quarter, obviously may be getting close to parity on the second and positive in the back half is that how should we how we should think about it for you as well.
I think we're going to see higher inflection in the back half of the year I think I spoke earlier, just about where you would see that steady cadence of pickup here first quarter second quarter will be stronger than the first quarter third quarter will be stronger than the second quarter, but that year over year improvement really comes more in that Q3 Q4.
Time frame.
Right Okay.
Maybe just one last quick one if I could.
You were you were also kind enough to kind of give your expectations for pricing for the year on low teens.
Any way, we should think about volume contribution in 'twenty two versus 21.
Well, we talked a little bit about just strong double digits was the guide that we gave right and so I gave you the pricing in the low teens, we talked about our growth being able to double up on the repair and remodel index and then backing out the infill from the prior.
Year kind of gives you a good feel for how we're looking at growth.
So when you say strong double digits, I mean that could be a wide range.
Any way to clear <unk>.
Narrow that down a little.
Yeah, our guidance as you know strong double digits and I think I've just given you the pieces to it there so.
Okay. Thanks.
Thanks very much.
Okay.
The next question is from Matthew Bouley with Barclays. Please go ahead.
Hi, Good evening. Thank you for taking the questions can I just follow up with one more on that revenue outlook I think Denis you just mentioned backing out the one time channel in film, which he says $100 million are you talking about the strong double digit growth is off of.
Kind of last year's growth burden for the 100 million or higher.
Are we kind of layering that on thank you.
Year over year.
So the thought was we thought it was important to understand there what that inventory infill that we would normally see because inventories were depleted to a much larger level than they had been historically.
Okay understood.
And then just high level on the back to the international opportunity because you keep.
Highlighting this this is a big.
Opportunity over the years just curious if you can get any more specific on that and just where are the markets, where you see that opportunity and how do you kind of go to market from a channel perspective, there we tend to focus on the markets generally have higher levels of GDP incur.
Increased family incomes and an interest in outdoor living.
So youre looking at the primarily Europe up in the Scandinavia out into the Australia market, but we also service many of the smaller markets down into.
Central South America, and the Caribbean as well, but when we talk about the larger markets and a higher GDP, that's going to be the primary focus where we will sell through similar channels to what we do here in North America.
Okay. Thank you, Brian and good luck. Thanks.
The next question is from Kurt Yinger with D. A Davidson. Please go ahead.
Great. Thanks, and good afternoon, everyone.
Just wanted to go back to the high level kind of.
Checking conversion here in 'twenty two it sounds like you're looking for two points or better again, I guess first what part of that dynamic over the last few years do you think has gotten sustainably stronger and second as you think about the levers that you have at your disposal.
Drive conversion are there any areas, where you think you can still push a lot harder than you have been.
Well, let me I'll answer your first one are your second one first year I think our own marketing perspective, because we haven't pushed as hard over the past couple of years, one of the things that will sustain as we move forward is a higher level of education of the consumer through the pandemic. They were spending time at home they were looking for products that would.
Make it more comfortable and easy to maintain their home more people have trucks composite decks today, there's more word of mouth, there's more media.
Composite today and the simplicity against wood that is something that will continue to assist with the conversion.
Got it Okay. That's helpful and then.
I guess just to follow up on the commercial side, given where your backlog or is there any way to kind of size the magnitude of the decline there that youre expecting in 'twenty two.
Yes, I would expect 22 to be about down about 10% on.
On a year over year basis.
Okay, Alright, that's helpful. I appreciate all the color and good luck to you guys.
The next question is from Alex Rygiel with B Riley. Please go ahead.
Thank you nice quarter gentlemen.
Can you address the variables that may have the biggest impact on your incremental margin either coming in at the high end or the low end.
Yeah, when I when I think about that right I mean, clearly pricing plays a role in this followed secondarily by cost out and continuing to drive those efficiencies that we've talked about.
Think on the on the negative side clearly inflation watching some of those headwinds that we've talked about.
That's a key concern for us on the transportation side.
Natural gas.
Those are a couple of the big ones that will be continuing to watch.
Also I think you know in there too Brian talked a little bit about the marketing spend that we had as well or that we're driving here in 2021. So that's another variable impacting the those incremental margins.
And then as it relates to that range of 30% to 35% is that what you.
I would call sort of a 2022.
Or is that sort of more of a longer term target range for incremental margin.
Right. So so I would look at that 30 to 35 as a 2022 guide and we've talked about over time that we should see those incremental margins improve.
To that 35% to 40% why so we're gonna get more SG&A leverage over time.
Because enhance will become a bigger part of the overall portfolio requiring a lot less branding spend in addition, we're going to continue to drive cost outs.
Throughout our plant manufacturing network, and that's going to continue to help us with the with the margin improvement.
Thank you very much.
This.
A 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 in today's conference call. We look forward to speaking with many of you during the quarter at conferences and other events have a great evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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