Q2 2022 Trex Company Inc Earnings Call
Good afternoon, and welcome to the checks company second quarter 2022 earnings Conference call all participants will be in a listen only mode.
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I'd now like to turn the conference over to Victoria Nicholas. Please go ahead.
Thank you Melanie and 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 Brian and Dennis is Amy Fernandez, Vice President General Counsel as well as other members.
Of tracks management.
The company issued a press release today after market close containing financial results for the second quarter 2022.
This release is available on the company's website. The conference call is also being webcast and will be available on the Investor Relations page of the company's website for 30 days I would now like to turn the call over to Amy Fernandez 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 materially from those expressed.
Breath 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.
Well, it's our 19th 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 truck stock comp 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.
That introduction I will turn the call over to Bryan Fairbanks.
Thank you Amy and good evening, everyone. Thank you for joining us today to review, our financial and operating performance in the second quarter 'twenty, two and discuss our business outlook.
All measures trucks performed exceedingly well in the second quarter solid execution by the entire trucks team coupled with continued demand for outdoor living products drove 24% top line growth even against a difficult comparison with last year's robust performance.
Our sales growth reflected an increase in <unk> residential net sales driven by pricing actions taken in 2021 and 2022.
Volume growth continues to reflect strong secular trends in the outdoor living category continued execution of our wood composite markets strategy share conversion.
And channel inventory built to support historically high growth rates.
The channel inventory build was due in part to expected consumer demand along the lines of what was seen in 2020 in 2021.
But also it was a consequence of improved product availability and more than two years of capacity constraints and product allocations.
EBITDA margin performance demonstrated our operational excellence as well as the positive leverage inherent in our business model.
Pricing actions, coupled with the launch of transcend lineage decking cost saving opportunities production efficiencies and spending controls resulted in margin expansion, even as we accelerated our brand investments step.
As a result, we generated an EBITDA margin of 33, 4% and a 49% increase in diluted earnings per share to 79 cents.
Towards the end of June we experienced a sudden reduction in our demand from our distribution partners spurred by.
Concerns over a potential easing in consumer demand.
Rising interest rates decline in consumer sentiment.
Expectations of a general slowing in the economy.
We expect our channel partners to meet demand, partially through inventory draw down rather than reordering product and maintaining current inventories.
We believe the current drawdown will likely impact the next two quarters and will be meaningful in nature.
In response to this changed environment. We immediately took measures to manage a production slowdown, including selective labor force reduction production optimization as well as other cost actions to ensure that <unk> remains the lowest cost producer in the industry.
During this period of lower utilization rates, we were able to refocus efforts on the high return production improvement programs of trucks has a long history of executing successfully.
Contributed to long term margin expansion.
These initiatives not only allow us to effectively.
Navigate effectively through an economic slowdown, but also lay the groundwork for enhanced profitability when growth resumes.
And by retaining our most experienced manufacturing talent, we will be able to ramp up production quickly as sales rebound.
In 2019, our product portfolio expanded with the introduction of trucks enhance naturals and basics at an industry, leading value price of decking products that expanded our addressable market with an eye towards wood conversion.
That strategy has paid off with an estimated 300 basis points of wood conversion occurring during the prior year.
During the second quarter, our focus was on expansion at the high end of the market with the launch of trucks transcend lineage stacking with the attributes of refined aesthetics trend forward colors keep mitigating technology and like all Trek stacking is made from 95% recycled and reclaim content.
This product introduction was welcomed by our channel partners and we plan to further expansion of our product portfolio with high impact product launches in the coming year.
At the same time trucks transcend and trek select decking have retained their broad appeal to homeowners looking for advanced performance materials with market leading aesthetics.
Our full suite of products from wood conversion to premium level for both decking and railing as well as our capacity capabilities have allowed our sales team to aggressively regain accounts that could not be served over the past few years and convert new accounts from competitors.
I'm proud of our industry, leading financial performance.
<unk> strength of the trucks brand and our engineering and R&D teams, whose depth of expertise will enable <unk> to further drive product innovations for years to come.
We enter this period of economic uncertainty in a position of strength supported by a strong balance sheet industry, leading brand recognition and unsurpassed distribution and retail channels.
We recognize that the dedication and collaboration of the <unk> organization and our extended family of retailers dealers contractors and distributors remains the driving force of our long term secular growth opportunity.
With our brand strength and market leading position.
Additional capacity and expanded product lines, we view the current market as an ideal opportunity to accelerate and expand our market share in the composite category.
Convert more wood decks to trek stacks and strengthen our distribution and retail partnerships.
We also remain committed to our ESG goals I encourage you to review our latest ESG report published at the end of June .
I'm proud to report that in 2021 trucks up cycle more than 1 billion pounds combined of recycled waste polyethylene film and reclaimed wood for use in our products.
In addition, <unk> reduced scope, one and two greenhouse gas emissions intensity by 33% compared to the previous year.
In 2021 trucks formalized oversight of ESG matters at the board level with the nominating and corporate governance Committee now, including ESG matters and its charter.
We also formalized ESG oversight at the executive level, leaving Lesley Adkins, our vice president of marketing and ESG development.
These step further our commitment to sustainability and advanced ESG initiatives as their strategic focus for our leadership.
In summary, even as we add more challenging economic environment, we are confident in our ability to navigate the future given our financial strength and our demonstrated ability to effectively align our cost structure as appropriate with market conditions.
<unk> market leadership brand strikes at low cost manufacturing processes positions us to well capitalize on the secular growth trends and outdoor living and the positive expectations for the repair and remodel segment now I'll pass the call to Dennis for a financial review Dennis. Thank you, Brian and good evening to everyone I'm pleased to report on.
<unk> second quarter results and year to date performance and provide our financial outlook and guidance for the second half of 2022.
Second quarter net sales increased 24% to $386 million driven by 25% growth in net sales at <unk> residential to $374 million.
The increase in <unk> residential net sales was primarily due to a 20% increase in average price per unit.
At mid single digit growth in volume as well as channel inventories still.
Trucks commercial contributed $12 million to sales during the quarter.
Consolidated gross margin of 47% expanded 270 basis points year over year, driven primarily by price realization that trucks residential increased capacity utilization and our continuing focus on cost reduction measures offset by continued inflationary pressures on raw.
Materials labor and transportation.
Gross margin for trucks residential <unk> commercial was 41, 7% and 12, 6%, respectively compared to $38 seven and 21, 6% respectively in the second quarter of 2021.
Even as we strategically increased our branding and marketing spend SG&A expenses of $40 million decreased 160 basis points to 10, 2% as a percentage of net sales compared to 11, 8% in the 2021 quarter as a result of a reduction in accrued incentives.
Improved operating leverage driven by our double digit revenue growth.
Net income for the 2022 second quarter was $89 million or <unk> 79 per diluted share representing increases of 45% and 49% respectively from net income of $61 million or <unk> 53 cents per diluted share in the year ago quarter.
EBITDA increased 41% to $129 million with EBITDA margins strengthening to 33, 4% compared to 29, 4% in the second quarter of 2021.
Our EBITDA margins demonstrate the leverage in our operating model, even as we continue to invest in future growth.
Consolidated net sales year to date increased 30% to 725 million compared to $557 million in the prior year period higher net sales were primarily driven by a 32% increase in trucks residential sales to $701 million compared to $532 million in the same period last.
Year.
Net income was $160 million or $1 40 per diluted share compared to 110 million or <unk> 95 per diluted share year to date in 2021.
EBITDA grew 44% to $235 million compared to $163 million and EBITDA margin expanded 310 basis points to 32, 3%.
Year to date, we generated cash from operations of $190 million.
We invested 60 million in Capex, primarily related to cost reduction initiatives and new Arkansas manufacturing facility.
Investments in our core business, our new corporate headquarters and safety environmental and general support.
Supported by our strong cash flow during the second quarter, we repurchased two 8 million shares of our outstanding common stock, which we believe will provide long term benefits to our shareholders.
As of the end of the quarter $4 3 million shares remain available for repurchase under the existing program.
We will continue to be a buyer of truck shares given our strong cash flow generation.
Our confidence in our long term growth prospects and our view that truck shares represent a compelling value.
Our balance sheet remains solid with ample liquidity supported by healthy annual operating cash flow to execute our strategy and move forward with planned capital investments.
We remain positive on our long term growth opportunities, while maintaining our cost discipline in the current environment.
As we work through this challenging economic period, we believe trucks will emerge stronger more efficient and more resilient.
Now turning to our financial outlook.
We are experiencing a sudden decline in demand as our distribution and pro channel partners plan to draw down their inventory levels to address both seasonality and expectations of a slowing economy.
Since Q3 of last year, we believe the channel has added approximately $200 million and additional inventory from the low levels that they carried in mid 2021.
As our channel reduces their on hand inventory in anticipation of an easing in consumer demand our added capacity enables us to more quickly supplier channel when sales rebound.
We believe the current inventory drawdown will be substantially completed by year end when the channel will again be operating at very low inventory levels.
To provide better visibility into the potential impact of this inventory drawdown on our future results. We have provided financial guidance for both the third and fourth quarters of this year we.
We anticipate third quarter consolidated net sales will be in the range of $185 million to $195 million.
Fourth quarter consolidated net sales will be 180 million to $190 million.
Total second half revenue is projected to range from 365 million to $385 million.
As a result of lower utilization, we are taking decisive actions to rightsize, our cost base, including labor and production optimization supply chain improvements and lean cost outs.
These initiatives support our full year EBITDA margin expectations of 27% to 29%.
In Q3, we expect EBITDA margins in the range from 16% to 18% and in Q4, we expect EBITDA margins in the range of 22% to 25%.
EBIT margins improved sequentially from Q3 to Q4 as we received the full benefit from our cost reduction initiatives.
Are there more full year SG&A is expected to be in the range of 12% to 13% of net sales or.
Our tax rate is anticipated at approximately 25%.
Depreciation will range from $40 million to $45 million in.
And Additionally, we are revising our capex spend to be in the range of $170 million to $180 million, which primarily includes the initial phase of construction for a new facility in Arkansas, the new corporate headquarters and investments in our core business.
With that now I will turn the call back to Brian . Thank.
Thank you Dennis as the industry leader <unk> continues to capitalize on our key competitive advantages, namely unparalleled brand recognition strongest distribution network and lowest cost structure.
Since <unk> inception, we've developed and nurtured long standing relationships with top specialty material distributors CRO channel dealers and DIY retailers, making tracks. The most widely available and purchased brand throughout North America and around the world.
These relationships are one of the fundamental elephant or success.
The face of economic uncertainty I am confident of <unk> ability to navigate this business environment, while also investing to capture the long term opportunity in front of US operator, Please open the call to questions.
Thank you.
We'll now begin the question and answer session.
Can I ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone, please pick up the handset before pressing mckee.
Can withdraw your question. Please press Star then two.
Amanda please limit yourself to one question with one follow up.
Your first question comes from Jon <unk> with UBS. Please go ahead.
Hey, guys. Thank you for taking my questions Tonight, but the first one is could you just help walk us from the 32% adjusted EBITDA margins in the first half to the 16 to 18 that you're talking about in the third quarter I mean, how much of this is lost the loss of fixed cost absorption material cost AD spend I mean, it seems like it's implying about 40.
7%, Decrementals, which seems a little bit heavy.
Any help there would be helpful.
Yes. The main reason for the for the decrease is the lost absorption from the volume takedown, yes, that's being offset though by some very decisive actions that we've taken at our plant on the on the furloughs that we've done plus we're doing a lot of cost optimization work in our supply.
<unk> as well as a bunch of capex deployments to help with <unk>.
Improving our cost position the issues that came at us very very late in the quarter.
And the second at the very very end of the second quarter and so we've been realizing those activities now we won't be able to see the full benefits of those cost outs until Q4, and Thats why youre seeing that significant step up that we're calling from 16 to 18% to 22% to 25% from Q3 to Q4.
Sure.
Okay. That's helpful and then.
In terms of Capex, what projects are being delayed.
Should we sort of think about the bleed into next year.
From this year's kind of savings.
As we look at our Capex guidance at the time when we provided that there was more expectation of the economy continuing at a stronger rate that we would deliver the double digit top line. So some of the smaller capacity investments that we're making for example in and Ray.
Those will still occur, but the urgency isn't quite the same with them as it relates to little rock Little rock is still strategically important for US we are going to continue with that modular investment as we go forward some of the timing on some of those assets just because of supply.
Jane constraints I have pushed out some of those cash flows to next year.
Okay. Thank you guys.
Thanks.
Okay.
Thank you.
Our next question comes from Ryan Merkel with William Blair. Please go ahead.
Hey, guys. My first question is on the revenue outlook for the second half can you just help us understand the revenue assumptions that went into that guidance.
Yes, absolutely we fully recognize this is a quite a significant adjustment and.
The way the channel had been expecting the year to go and really right up until.
Mid June had been building along the lines of growth similar to the past couple of years.
They began to see that that was probably not going to be the case.
<unk> started communicating to us and we have regular meetings with all of our distributors as well as dealers.
That they were seeing a higher level of economic uncertainty and they were looking to take their inventories down.
So when we look at the variance between where we had expect it to be and where we're telling you today, it's about $300 million and Thats split approximately $200 million of that is inventory coming out of the channel remember, we built about $100 million in the second half of last.
Year, and then as we moved through the first half of this year and especially in the first quarter, we continued to build.
Just at distribution.
Also at the dealer level, our dealers had been short of inventory for two years. These are our largest most loyal approach handle dealers in the marketplace.
They built pretty heavy inventories theyre looking to rightsize their inventory as well, but there is that $200 million and then the other 100 million is related to general market softness.
Got it okay that explains the magnitude Bryan.
And then my follow up is there a risk that the retail channel needs to see a similar size destock, how do you think about that risk free.
Retail inventories are more closely managed by US we put product into their distribution centers on a consignment basis.
And then when it moves to the store it generates revenue. So there is a limited amount of material that can be pushed into the stores of course DIY decides how much that's going to be but we have we've got good visibility there with that and we don't see the same risk in that channel.
Got it thanks, Thanks Ray.
Thank you.
Question comes from Keith Hughes with Suntrust. Please go ahead.
I guess question on self sell out for distribution or even for the dealer market do you have a feel on that and what are they seeing in sell out versus the first half of the year versus prior year in the second coming up the first half of the year, it's been relatively flat.
With the prior year.
Just given the prior year number.
Your number for the sell through in the first half no I don't have that fell through in the first half of last year was similar to our growth numbers as they were taking the inventory we were shipping them that was moving through the channel. So a very different dynamic between the two years.
And so what kind of what kind of sell out have they been saying in the last month or two.
Versus normal run rate, what kind of percentage decline.
<unk> bin if you've went through June .
They were seeing flat through June , but remember as I mentioned in my prior comment they built assuming they would see 15% 20% type growth. This year. So if I assume the rest of the year is flat that the consumer remains still buying at that elevated level like they did last year they need to.
<unk> that inventory back down to a more normalized level to be able to support that your revised market size.
And one final question on this it seems like based on the guidance together the units.
We're assuming there's going to be some further reduction in terms of consumer demand is that am I reading that correctly.
How are you just kind of building in some conservatism given it's pretty uncertain out there right now.
The best knowledge of what we have from the marketplace of the inventory that we see in the channel.
It's fair to say there is some concern about the consumer as well it's been flat year to date as I mentioned from a sell through perspective.
And with all of the various news thats out there not to expect that there wouldn't be any flow through to our business would probably be a little too aggressive right now.
Okay. Thank you.
Keith.
Thank you. Your next question comes from Tim <unk> with Bob. Please go ahead.
Hey, guys good.
Good afternoon.
Maybe just on on pricing.
At the distributor level or the consumer level.
You mentioned that you've regained some underserved accounts and just kind of curious what's kind of entailed in those conversations and I guess have you seen any pushback from distributors dealers or the consumer or is it about pricing.
So as we look to regain some of the accounts that we've not been able to service over the past couple of years, our sales team has been very active.
And working with those accounts to be able to show them that we have the capacity. We've got the right product lineup to be able to serve them over the long term and any concerns that they've had from the past that.
That occurring in the future we will have the capacity to be able to serve that we took pricing at the beginning of the year and then took a very small pricing or just two of our product lines of aluminum and our select decking line and beginning of April we haven't had any pricing since then.
Timeframe.
And I think the market is adjusting to the pricing at this point, we've got products that go anywhere from $2 to $2 25 per linear foot all the way up to $6 $6 50, a linear foot, depending upon which channel you're purchasing the products through.
So I think it's fair to say there is still adjusting to the new price reality is because of how quickly the market has moved similar to other remodeling products.
Okay. Okay, and then just on the on the cost the cost actions and savings.
I guess, what's the annualized number it is something in the in like a.
$30 million to $40 million range I guess.
As things would would potentially come back in 2023, I mean, how do you kind of make sure that you don't lose a lot of that production staff that that can be difficult to hire when when the volumes come back I'll have Dennis pickup the number side of it here we are.
Are trying to maintain the highest technical skills within our organization. So some of that skilled labor will come with a little bit higher cost recognizing that this is a correction correction every period.
It happened so quickly as we moved into the end of June that the team has been reacting very very quickly putting plans together to reduce the cost. Unfortunately, you can't turn the ship over the course of 30 days it will take us a little bit of time to be able to get there, but that assumes I think Tim youre in the ballpark I mean.
I started looking at these run rates now and seeing how the Q3 meters to Q4, we could be in that range of somewhere around $40 million to $45 million in annual savings kind of pushing through here.
Okay.
Any of those savings are going to come from the Cogs side War and I'd be looking heavily at the SG&A lines as well.
Okay, and I guess as volumes would potentially return I mean will those where those costs also come back or are those kind of permanently kind of out of the cost structure.
Some costs will come back.
As you as we start to improve on utilization and we bring up more lines, then we're going to be adding people back into the scenario. So there'll be some that will come back with growth and I believe some we're just going to be much more efficient.
Okay, Okay makes sense I.
Appreciate the information guys. Thanks. Thanks.
Thank you. Your next question comes from Trey Grooms with Stephens incorporated. Please go ahead.
Hey, good afternoon.
Hey, Hey, Brian so the.
Just a little bit of clarity on the inventory rebalance again, you mentioned 200 million I think was the.
The portion of the guide.
Reduction here that was due to the rebalancing of inventory.
But just for clarity was that all of this year.
How much if any of the inventory that was out there.
Or is that rebuild balancing it needs to take place could could spill over into <unk>.
Yes, we're expecting that this inventory rebalancing given the magnitude of what we're talking about.
Otherwise and we've already had meetings with our distributors.
We expect inventory to get back to I would I would say is going to be very low levels will be lower than where we were going.
Going into the inventory build from last year as our distributors want to be conservative when we do have the capacity to be able to serve them going forward as the market comes back to growth again.
Right got it understood and then.
With that.
You were expecting.
An improvement as you mentioned from Q3 to Q4 as far as the.
The margins go.
So that debt.
Q4 timeframe when it sounds like you'll be realizing a lot of the cost out by then and that sort of thing so.
In the environment that we see a lower volume in <unk> of next year is that kind of the rough.
Rough range of decremental, we should be kind of baking in as we think about that if that actually comes to fruition and <unk>.
No I actually feel like as you look at Q4.
It should be a baseline for us and I would think that we're just going to continue to get better.
If that volume would be flattish right. So it that volumes flattish.
I would think that we're going to see some improvement on that Cogs line still as we just get more accustomed to running this way right.
Talking about sequentially there right Dennis.
That's correct.
Is that we have is as it came so quickly we still have a supply chain built to deliver at that higher level, when I say supply chain.
The sourcing that we have in the marketplace. Some of this are things that we can push out but there's many other things that were already committed to we will have to take that so we'll have some.
Storage inefficiency in some pattern shouldn't say penalties, but additional cost over the next couple of months here as we begin to right size, our inventory from a raw material perspective with the production requirements.
Got it okay. Thanks for all the color guys I appreciate it.
Okay.
Thank you. Your next question comes from Jeff Stevenson with Loop capital. Please go ahead.
Hi, Thanks for taking my questions today.
So you talked about the opportunities the demand slowdown will give you. The one back counts that you Werent able to service last year, but you also mentioned share gain opportunities. So I was just wondering if you could kind of farther elaborate on some of the opportunities for future share gains moving forward along with the areas you've talked about you'd like to grow into.
Two such as international and cladding, where you didn't have the.
Capacity to aggressively grow in these markets does that kind of speed up the timeline in those areas as well.
So trucks has 50% plus market share we've got the right products, we are the <unk>.
Main manufacturer Thats going after wood conversion with our trucks enhance basics of two X the price of wood, we've got a compelling message for our channel.
Thats.
You will receive the majority of customers walking in the door.
If you're carrying attracts products. So that gives us opportunity in accounts that may not be 100% with trucks today or may not be carrying trucks at all.
So it's a strong message that our sales team is working through it.
Showing the channels of how our product lineup, how it works together and how we can sell up from basic to Naturals and then for the more premium customers transcend up to transcend lineage.
Okay got it.
And then my follow up is just on the commercial bidding environment.
Any changes that you've seen there and what are your expectations into the back half of the year and into 'twenty three.
Yes, commercial bidding activity is I'd say consistent with where it was in the first half of this year up significantly over where we were last year. The Abi is still showing over 50.
Always positive for for the commercial business.
I've talked about in prior calls this is a transition year as we rebuild that backlog and get back to a growth pattern going into 2023 2024.
Great. Thanks, Brian Thanks.
Thank you. Your next question comes from Phil <unk> with Jefferies. Please go ahead.
From an inventory standpoint, Brian if I heard you correctly, you expect the channel to have that all flushed out by the end of the year, but what about year end do you expect your inventory and your balance sheet to be flushed out and when we kind of look out to 2023 assume that's all kind of sorted out in your comments right now kind of assume more flat growth I know a lot of uncertainty.
Help us think through how you kind of think growth may kind of.
Transpire next year.
Had low finished goods inventories over the past couple of years. So I would still expect to see growth in our finished goods. So that we can support the marketplace. We recognize with this level of adjustment in a quarter, we have to be careful not to overreact.
And bring production down so far that we can't meet what even a flat year would look like next year. So our inventories will grow and then we'll have to work to rightsize, our raw material inventories as well I don't expect us to be all the way there with raw materials by the end of the year, but I expect as we get out through the end of the first quarter.
We will see that start to normalize the demand at that point.
Gotcha, and then between you and your largest competitor in decking.
Both of you guys are flushing, a lot of inventory out of the channel.
In that backdrop and potentially declining environment, we'd look out the next year. How do you think pricing will hold off for your business and you mentioned that Youre looking kendra regain some market share.
How should we think about promotions and discounting this backdrop.
This isn't an industry that has effectively gone to pricing to capture market share our products carry a certain value for the consumer.
And our channels understand and know how to sell on that value. So I'd be surprised if.
We were to see that be used as a.
As a leverage point.
We'll have early buy promotions as we go into the season I think those will normalize more to what we saw prior to.
Let's say 2020 prior to the pandemic, where you didn't have to insert quite as much because the demand was so strong through the course of the season, we need to ensure that the channel builds back to normal inventories going into the end of the first quarter. So that they can support the strength of the normal seasonality of the marketplace.
In Q2 and Q3.
Okay Super Thanks, a lot.
Thank you. Your next question comes from Adam Baumgarten with Zelman.
Please go ahead.
Hey, good evening, everyone. Just curious on your lead times I mean, how much have you seen those improved versus maybe the worst levels and how do those compare to history.
We had a allocation program in place for about <unk> about two years.
We would receive orders 30 days before and go ahead and ship them out but the amount of orders was limited we have come off that allocation program at our more standard lead time now is 30 days, but we are shipping well under that right now.
Okay got it and then just could you give us a sense for the carryover pricing that we could see next year, assuming pricing stays at the current levels.
Yes, I would I would definitely.
Expect to see about an 8% increase overall I think in pricing, we took that well we took that price increase though on select in our.
And our signature railing, but.
Pricing should be relatively flat other than that other than that increase so that'll just be so it's relatively flat, but a very small increase that we took in April .
Okay, great. Thank you.
Thank you.
Your next question comes from Michael Rehaut with Jpmorgan. Please go ahead.
Thanks, Good afternoon, everyone.
I just wanted to.
Just wanted to make sure.
Properly understanding.
<unk>.
The impact of the inventory rebalance.
<unk>.
How that kind of relate to if you kind of back out some of the numbers relates to end market demand.
If you take $100 million out of.
Back half of 'twenty one sales.
I guess the sales about $540 million.
And if you add $200 million too.
Your guidance for the back half of this year.
Putting up with a little bit of growth, maybe 5% to 10% end market growth maybe.
Going out the door at the dealers in.
At the end consumer.
Just wanted to make sure. This is the right way to think about it and also if I heard you correctly about sell through in the first half of the year comments around that as well.
Yes, I'm looking at a little differently when im looking at the full year of growth.
Seeing us down.
8% roughly speaking and so.
No.
And im thinking that about 18% of that is going to be volume and then it's going to be offset by about 10% price. So so from a full year perspective, I got it down.
What im doing is actually adjusting for the inventory.
In in the back half of 'twenty one.
The reduction in inventory in the back half of this year, yes. So.
We'll see from a channel perspective.
That I didn't follow exactly the numbers, but they are going to look very different assuming that the consumer remains buying at the kind of levels that they have for the first half of the year.
Their growth will be significantly better their sell through growth will be significantly better than what Texas, whereas last year, our growth was higher especially in the second half of the year that our channel because they were building inventory we were selling it now the reverse is happening.
Right Okay.
Maybe we'll follow up offline then.
I understand what you're saying I guess.
Secondly, just wanted to also understand.
If you're thinking about the first half of this past year.
Yeah.
Any if you feel that the any continued.
Channel.
Rebuild.
Similar to the $100 million.
Okay.
Half of 'twenty one.
But I had mentioned in the first half that the inventory continued to build the channel was expecting to grow at similar rates to what we've seen in the past couple of years, so that required a higher level of inventory.
As they move through June .
See the marketplace turning that way.
That's why some of the significant changes in order patterns are really starting to understand what the second half would look like from their perspective.
Okay.
One last one if I could just on the.
Fourth quarter EBITDA margins that you quoted.
I believe you said that.
Yeah, you can clarify.
To the extent that.
At <unk>.
<unk> sales.
Our.
Quarterly run rate in <unk> continues into the first quarter.
Should we be expecting a similar type of EBITDA margin or any improvement just based on ongoing.
Productivity or cost actions.
So are you assuming that the sales in Q4 is what we would be seeing in Q1 of 'twenty three was that your question.
Correct Yep.
So I would if that were the case and again, we're so early for any type of projection like that then I would be expecting to see more EBITDA margin improvement.
At that level, because again, we're going to continue to see these cost initiatives roll through the P&L and so we're getting more in Q4 than Q3, and then I think it would start to.
Reach its full potential there in Q1 again.
That demand stays at the same level as Q Q4.
Okay.
Thank you Thanks, Brian next question.
Come from Dan Oppenheim with Credit Suisse. Please go ahead.
Thanks, very much I was just wondering given the comment in terms of taking some share and serving customers, but also talks about the capacity additions and sort of modular with little rock. How are you thinking about the time he was that fully coming on and I guess, how are you thinking about that in terms of the goal of taking share versus.
Maintaining some irrational pricing and such.
Well, we can show our channel that we have the capacity to be able to support growth we've talked about seeing.
Seeing little rock come on in 2024, and we still we're still going to continue with the build out of the plant, let's say the only change at this point is the urgency isn't quite what it was before we will have the capacity within our existing two sites to be able to.
To drive whatever growth that the channel will.
Provide and our team will be able to drive, but we do see little rock as a very important for our long term strategy of being able to service the market appropriately.
Great. Thank you.
Thank you.
Next question comes from Reuben Garner with benchmark. Please go ahead.
Thank you and good evening everyone.
Maybe if you could help me with the so you mentioned, Brian that I think at the low end is two X.
Treated lumber if we do see the continued pressure on industry demand I'm, assuming it's going to continue to put downward pressure on untreated lumber and maybe take it back to at or below levels, we saw pre COVID-19.
In that scenario, you know I recognize pricing isn't a strategy for the overall company to gain volume, but would you.
Maybe look at the lower end entry level board differently and try to keep that two X ratio.
But pricing today for treated lumber is going to be about 90, 90 cents to one dollar a linear foot pre COVID-19. It was consistently 80 to 90 sites.
Projections are that are treated lumber will be in probably that dollar to dollar 10.
The range of course, the cost of chemicals that go into it the transportation the labor all of those things are a higher cost and it does take time for that to flow through the channel appropriately.
<unk> always said that the enhance basics is the conversion board and it needs to be approximately two X. The price of what so it would were to drop to 75 for a period of time, we're not going to jump in and react just as when it went up to $1 60, a linear foot, we didn't react and make it too.
Extra price at that time so.
I don't expect to see a significant downward pressure on that price from where it is today.
From what we're hearing from many of our customers that they do expect it to tick back up again as that industry is right sizing its capacity as well.
Okay, perfect and then.
My follow up can you tell us what your mix of businesses in pro versus.
Retail or direct to consumer however, you.
Talk about just trying to gauge the.
The dollar amounts that you're that you're talking about the inventory adjustments were still heavily geared towards the pro channel.
<unk> business is 30% to 35%, but within that number that includes a special order that comes out of distribution. So that'll be another part of what drive that inventory down.
Okay, great. Thanks, guys. Thanks.
Thank you. Your next question comes from Rafe <unk> with Bank of America. Please.
Please go ahead.
Hi, good afternoon, thanks for taking my questions.
Alright.
I just wanted to clarify the earlier comments on sell out in the first half was that a volume comment or revenue.
That was on a volume basis.
And then.
We have seen significant growth because of pricing along the way, but it was on a volume basis to the volume was flattish in the first thing. Thank you.
You commented.
Do you expect the destocking to largely be completed by year end.
What is your expectation or what's the assumption for sell out trends in the second half of the year that gets you to that.
Balanced inventory by year end and then if I look at your historical seasonality and pre pandemic <unk> was always kind of below <unk> and your guidance has it basically flat quarter over quarter does that mean, you would expect kind of peak destocking in the third quarter and that to improve into the fourth quarter.
Yes, so given the aggressiveness of this destocking in the channel, we do have more even quarters.
We look at it there is some concern that our channel will.
Over the stock along the way that they've got more concerned about the economy than what we see at this point.
We've made that known to our channel at this point, so that's where we see a fall.
Fourth quarter, while seasonal seasonality has at the lowest volume quarter from a sell through perspective that it will be more heavily done during the third quarter and then to a lesser extent in the fourth.
And then assuming similar sell out trends in the second half yes, okay.
Okay.
Very helpful. Thank you consistent with seasonality.
Thank you. Your next question comes from Kurt <unk> with D. A Davidson. Please go ahead.
Great. Thanks, and good afternoon, everyone Hi, Kurt.
Brian you've been with traction in the industry for a long time and Im curious if there are any historical parallels.
But you see when you think about kind of this current channel inventory dynamic and then as you think about the broader implications.
You might be monitoring, whether it's share shifts or our pricing how do you kind of ensure that you're best positioned.
Potentially benefit from any shifts that occur there.
Yes, so we all look back to the 2007 2008 timeframe as the last example of a significant pullback treks company was a very different organization. It was in the midst of a turnaround.
The industry was losing share to wood at the time.
<unk>.
Selling a first generation composites, which didn't have the same properties that we have a fade Spain.
Scratch resistance that we have today. So as we look forward. We've got a high performance product lineup, we have products that will serve every level of the marketplace.
We have the strongest distribution best.
<unk> customers that are out there. So we feel very good how we stack up and we've got a sales team that knows how to go out and sell with the capacity that we have today.
Got it okay. Thanks.
Just my last one in terms of transcend lineage.
Any early observations in terms of sell through and I guess cannibalization there versus drawing in kind of an incremental buyer at that higher price point.
Too early to say if the market research that we did with lineage showed us that the market was looking for trend forward colors. The heat mitigation mitigating technology was important and we always said that we wouldn't bring new products to the market until the channel was fully stocked so right now it has been loaded into the.
Channel. It's there it's available for consumers and it's the building products industry, new products tend to take a little bit of time to get situated and for the end customer to be able to see that that products. There, but we are seeing our trucks grow starting to post pictures of lineage installations and it is starting to get out to the marketplace, but.
We're about I guess now a month and a half in from the first product shipping out the door. So it's really just hitting the channel.
Makes sense alright, I appreciate all the color. Thanks.
Thank you. Your next question comes from Steven Ramsey with Thomas Research Group. Please go ahead.
Good evening maybe.
Maybe to.
Sure more on your second half views are you more optimistic on the second half consumer demand than your dealers are just given website or any other indicators that you look at and if this is the case what is the magnitude maybe of that difference.
I wouldn't say I'm more optimistic I think we share some level of the concern that they should be reducing some of their inventories knowing that we're not going to see the kind of volume growth that we've seen over the past couple of years.
But we also have to be sure given the size of the share that <unk> company has today and the expectations is that our customers have at least from a DIY perspective to be able to walk in the door and get a truckload of product very quickly and then from approach at all within a couple of days I've thought a week.
Be able to get our product that the entire channel is supporting that.
Okay helpful. And then on the dealer reduction that started in late second quarter has the pace of that been pretty consistent to date and has this reduction been similar in all geographies in a similar magnitude.
We've continued to see those inventories reduce as as we've expected.
Okay. Thank you.
Thank you. Your next question comes from Kate Montella with BMO capital. Please go ahead.
Thank you and good afternoon.
Brian I'm just curious.
Market environment.
<unk> creates an opportunity for a bigger push into the international market.
Well, yes.
Is the answer is the only challenge with that is while everybody is debating whether the U S is in a recession with the energy prices that are over in Europe today.
Consumer has truly pullback at this point.
So I do expect that that market is going to be pretty weak in the back half of the year, where we've seen really nice growth over the first half of the year I expect that to change significantly.
The back half of this year.
Only exception would be Australia, the Australian economy still continues to be a relative relatively strong at this point.
Got it that's helpful and then.
So I'm curious from a capital allocation standpoint.
And then you talked about continuing with the share repurchases.
Can you talk about you know.
How you think about keeping some additional balance sheet flexibility if the markets remain be kept for a prolonged period of time versus.
Kind of taking advantage of what we describe as kind of compelling.
No opportunity in terms of share repurchases.
Well I think we're in a fantastic position right now we have you know as at the end of the second quarter, we have absolutely zero debt on the books.
Us tremendous flexibility.
You do share repurchases as well as just continue with some of the things are really important attraction. Its long term strategy and that is investing in the brand investing in R&D. For example is chips to two other very important cogs in the strategic wheel.
And then just would you be willing to take that leverage.
Higher than the shock.
If they are.
So it will be an opportunity.
We have talked about that as a as an executive team and so at this point in time at the when you were teetering potentially on a recession I don't think that that would be something that we would be looking to right now but over the longer term I mean, we've talked about being willing to do.
Five times, but not much more than that.
Got it that's helpful I've done a door.
Yeah.
Thank you. Your next question comes from Matthew Bouley with Barclays. Please go ahead.
Good evening, everyone. Thanks for taking the question. So the comment you made about the trade potentially over Destocking.
Versus the other comment you made that distribution, maybe it doesn't need to carry as much inventory today because capacity.
And kind of service levels are so much better how do you kind of balance those two do you suspect as we get into next year. The trade just maybe wont need to restock to the degree it normally would into the spring and that kind of sell in may match sell through for the foreseeable future. How do you kind of balance what you think the trade will do there it's fair to say.
It's a challenge so we've gone through two years of pandemic with very low stock.
We come out of the end of last year people build their stocks back again, everybody expects to grow at similar rates in 2022 that wasn't happening at everybody pulls back again so.
So the best of the best way I can tell you how we're managing it is with communication.
We have regular meetings with our distributors, our DIY customers contractors to understand what's happening in the marketplace is a perfect no, but we've got a pretty good visibility to what's happening out there and if we see what we believe the inventories going too low to be a.
Well to service our customers.
That's clearly something that we'll address from a customer relationship perspective.
Got it thanks for that and then secondly, just a follow up on the pricing side, just given the inventory.
Rebalancing is happening into the fall and winter here how does the typical early by play out in this scenario would you still see volume discounts or things like that or just as the winter by not really happened in this stop here. Thank you.
Storage really the menu for early buy and when I say that menu. This could be one or all of the above it's going to be dating some discounts it could be pricing.
There's a whole variety of different things related to the loyalty of that customer the volume that they purchase.
These are the types of things, we look at pulling that entire menu together based off of the market conditions and we revise it from year to year based off of what will be most impactful for the marketplace.
Alright, Thanks, Brian .
<unk>.
Yes.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Bryan Fairbanks for any closing remarks.
Thank you for your questions and your attendance in today's call. We look forward to speaking with many of you during the quarter at conferences and other events have a great evening. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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