Q3 2022 Trex Company Inc Earnings Call
Good afternoon, and welcome to the trucks company third quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
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I would now like to turn the conference that very Victorian Aqua. Please go ahead.
Thank you all for joining us today with us on the call are Bryan Fairbanks, President and Chief Executive Officer, and Dennis Sheehan, Senior Vice President and Chief Financial Officer join.
Joining Brian and Dennis is Amy Fernandez, Vice President General Counsel as well as other members of management. The company issued a press release today after market close containing financial results for the third quarter was 2022.
This release is available on the Companys website. This conference call is also being webcast and 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.
We began 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.
The statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward looking statements.
For a discussion of such risks and uncertainties. Please see our most recent Form 10-K and form 10, Qs as well as our 1933 and other 1934 act filings with the FCC. Additionally, non-GAAP financial measures will be referenced on this call. A reconciliation of these measures to the comparable GAAP financial.
Or can be found in our earnings press release at trucks Dot Com. The company expressly disclaims any obligation to update or revise publicly any forward looking statements, whether as a result of new information future events or otherwise.
With that introduction I will turn the call over to Bryan Fairbanks.
Thank you Amy and good evening.
Thank you for joining us today to review our performance through the third quarter 'twenty, two and discuss our business outlook.
Third quarter results were in line with your expectations signal last quarter, while consumer sell through demand remained at healthy levels, our distribution and dealer partners used the quarter to service demand requirements, primarily through inventory drawdowns rather than reorders.
Our internal data and market intelligence gives us confidence that the inventory recalibration will be completed by the end of 'twenty two.
During this period of inventory Destocking, we took measures to align our cost structure with the current demand by decreasing production levels right sizing, our employee base and focusing on cost efficiency programs concur.
Concurrently we retained our most experienced manufacturing talent, enabling us to efficiently ramp up production as demand rebounds.
In addition, we refocused our efforts on production improvements that we were less able to pursue.
While operating at full capacity.
We believe these initiatives will allow us to navigate effectively through the current macroeconomic environment and lay the groundwork for enhanced profitability when growth resumes.
Despite rising interest rates, we continue to see healthy consumer demand as.
As the market leader in our category, we are confident in our ability to operate in this environment from a position of strength.
Are tied to the repair and remodel sector makes us more resilient than many other sectors.
Homeowners price started moving tend to invest in their existing homes with their existing lower rate mortgages and pursue renovations, especially those that add long term value like a trek stack.
Further the average age of housing stock in the U S is approximately 40 years old driving further remodeling spend.
The great majority of truck buyers are financially stable and are cash buyers will be less impacted by higher interest rates and inflation. All of these all of these items support continued repair and remodel spend for trek stacking.
With our solid financial position, we continue to invest in branding and product innovation to enhance <unk> ability to drive consumer demand for environmentally friendly outdoor living products recall, we launched our new trucks transcend lineage product late in Q2 and it has been.
Favorably received in the market for.
The new decking line features refined aesthetics and trend forward colors with heap mitigating technology and like all track stacking is made from 95% recycled and reclaimed content.
We plan on further product introductions in 2023.
Our integrated marketing campaign launched in early 2022 launches continue continues to highlight how trip trucks help homeowners transform their outdoor dream ideas into reality with continually refresh social digital and online content amplified by media.
Retail strategic partnerships and more.
Likewise, we continue to support long term growth by expanding our industry, leading distribution network in September and October we partner with two additional distribution locations in Texas, enabling us to service and expand the availability of tricks outdoor living products and one of the fastest growing.
Markets.
Our distributor network has a well earned reputation for providing outstanding service to their customers through the best distributor sales Representatives and management in the industry.
Distributors prefer to work with trucks, because we produce the highest quality products manufactured with superior engineering and offered at competitive price points, while leaving our category and sustainability and environmental standards.
With our selective and long standing channel relationships, we collectively offer the most relevant products and service levels to our customers every day.
During the third quarter, we continued to generate free cash flow invested in our operations repurchased shares of our outstanding common stock and continued our manufacturing expansion in Arkansas.
The modular development approach for this third manufacturing facility is calibrated to demand trends for <unk> decking products.
Arkansas remains a key aspect of our growth strategy due to its strategic advantages, including increased proximity to a central raw materials.
A strong pool of qualified and skilled labor.
Jason C to major transportation hubs and is situated near key growth markets for wood conversion.
When this plant comes online trucks will have unmatched geographical coverage with east coast West Coast and Central region sites that serve our customers.
The film facility will also support our long term growth opportunities in the international and cladding markets now I will turn the call over to Dennis to provide a more detailed view of our financial performance.
Yes.
Thank you, Brian and good afternoon to everyone I will discuss <unk> third quarter results and year to date performance reaffirm our financial outlook for the fourth quarter and provide annual guidance for 2022.
Third quarter 2022, net sales were 188 million in line with our guidance last quarter, reflecting an inventory recalibration by our distributors and dealers as they met demand partially through inventory draw downs, rather than reordering product.
Residential net sales were $178 million compared to $319 million in the same quarter last year.
As previously communicated between the third quarter of 2021, and the second quarter of this year. The channel built approximately $200 million of inventory due to the expectations for volume growth in 2022.
As noted in our prior call sell through was roughly flat year on year through the second quarter and the back half of this year. We anticipate this inventory will be consumed as the channel reestablish as new inventory targets reflective of the current macroeconomic concerns and expect our channel will enter the next calendar.
Per year with lower inventories than in 2021.
Inventories have declined in line with our expectations.
Consolidated gross margin was 24, 5% in the third quarter 2022, compared to 38, 2% in the year ago quarter.
The decrease is primarily due to lower production levels of trucks residential, resulting from our distribution and dealer inventory recalibration.
Selling general and administrative expenses were $27 million or 14, 2% of net sales compared to 34 million or 10, 1% of net sales in the 2021 quarter.
SG&A in the third quarter 2022 included a $1 2 million severance charge for employee reductions.
The decrease in SG&A, primarily related to a decrease in company incentive costs, partially offset by an increase in marketing and branding spend and the severance charge.
Net income for the third quarter, 2022 was $14 million or <unk> 13 per diluted share compared to $74 million or 64 cents per diluted share in the third quarter 2021.
Excluding the severance charge in the third quarter of 2022, net income was 15 million or 14 cents per share.
Third quarter 2022, EBITDA was $31 million and EBITDA margin was 16, 4% consistent with our expectations, excluding the severance charge EBITDA margin was 17%.
During the third quarter 2022, we repurchased one 7 million shares of our outstanding common stock totaling $100 million and have $2 6 million shares remaining as of the ended the quarter that may be repurchased under the program.
Now briefly summarizing year to date results consolidated net sales were $914 million up from $893 million reported in the year ago period.
<unk> residential net sales increased 3% to $879 million with trucks commercial contributing $35 million.
SG&A was 106 million year to date, 2022, or 11, 6% of net sales compared to $103 million or 11, 5% of net sales for the prior year period.
In contrast for 2023, we expect SG&A will increase as a percentage of net sales due to increased branding spend to support sales volumes.
We also expect to return to a more normalized management incentive expense.
Net income for the nine month period was $174 million or $1 55 per diluted share compared to $184 million or $1 59 per diluted share.
EBITDA year to date was $265 million, resulting in an EBITDA margin of 29% compared to EBITDA of $271 million and EBITDA margin of 33% during the same period in the prior year.
From a cash flow perspective, we generated cash from operations of $244 million year to date.
We invested $108 million in Capex, primarily related to cost reduction initiatives and other investments back into the core the new Arkansas manufacturing facility and our new corporate headquarters.
As we turn to the outlook, we reaffirm our Q4 2022 guidance for net sales of 180 million to $190 million and EBITDA margin of 22% to 25%.
The significant sequential increase in EBITDA margin reflects our decisive actions to rightsize, our cost base, including employee and production optimization and supply chain improvements.
We believe the channel inventory drawdown will be substantially completed by year end and that the channel inventory will then be in line to start the 2023 season.
Now turning to our 2020 to annual guidance, we are seeing the following EBITDA margin of 27% to 29%.
SG&A in the range of 12% to 13% of net sales an effective tax rate of approximately 25%.
Depreciation in the range of 40 million to $45 million.
Capital expenditure guidance remains in the range of $170 million to $180 million as we continue to build out our Arkansas facility at a measured pace as development is modular and calibrated to demand trends for <unk> residential outdoor living products.
With that I'll now turn the call back to Brian . Thank you Dennis for more than 30 years <unk> has invented reinvented and define the composite decking and outdoor living category.
<unk> entered this period of uncertainty and its strongest competitive and economic position.
As a leader in a growing market. We are confident <unk> is well positioned to effectively navigate economic challenges our strategy remains focused on converting consumers to the performance advantages of composites over wood.
While continuing to operate in a sustainable and socially responsible manner.
We are poised to take advantage of long term growth opportunities supported by our people channel partners industry, leading brand market, leading products low cost manufacturing and relentless focus on efficiency.
Operator, please open the call to questions.
Thank you.
We'll now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble I roster.
Today's first question comes from Ryan Merkel with William Blair. Please go ahead.
Hey, guys. Thanks for taking the questions.
Good afternoon, So Brian can you comment on sell through in the quarter and what you expect for the fourth quarter and really what I'm driving at is are you seeing consumer demand slowing here.
We were pleased with the demand that we saw in the third quarter of this.
This year it did reduce the inventories to the extent that we had expected.
And that demand will continue and we're seeing it continue into the fourth quarter now recall in the fourth quarter sequentially. Normally you will see demand fall off. So we are seeing that fall off related to the seasonal part of our business, but it is still in line with the expectations that we had when we provided guidance.
At the end of the second quarter.
Okay. So what is the read that sell through is flattish slightly up so.
Sell through was flattish.
Okay.
And then gross margin is a big question for everyone in 'twenty three I'm not looking for guidance per se, but any puts and takes you could call out for us to help with modeling.
Yeah, So I think.
Q4 is going to be your best proxy as for a starting point for us at the margins that we see there will be a nice guide and then from there we would layer on performance improvement as Bryan talked about were continuing to work on investing back into the core with Capex investments.
We have continuous improvement investments as well being made and then finally there is some moderating of inflation that we would expect to see as well.
Got it so.
Roughly 32% gross margin for Q, you think you can lift from there based on some of the cost out initiatives.
From Q4, you know roughly speaking right when you back into it we're projecting around 33% right. So above that yes, you would have a couple of basis points higher I'm not going to give the guidance right now because we will give guidance in Q4, but you would expect to see proven that.
Over that 33%.
Perfect. Thank you.
The next question comes from Joe, Although Smile with Deutsche Bank. Please go ahead.
Hey, good evening guys. Thanks for taking the questions good evening.
Yeah, maybe if you could just split out.
I guess, you don't even need to split out the volume, but just looking at what pricing may have been year over year in the third quarter did you see any impact as you are destocking in the channel.
We saw about 8% price year.
Year over year in the quarter and the third quarter and so year to date were around 16% price.
And you know prices holding price continues to to hold up very very well.
Okay, Great and then just on production levels, obviously has slowed those in <unk> and we saw the unabsorbed cost in the margin I know, you're giving guidance on the gross margin for the fourth quarter does that imply that production.
It is closer to normal levels going into next year, just given where you see the channel inventory yet or are you still going to be running below where you might have otherwise been so the strategy that we've taken on with production as we do not want to whipsaw, our operations with large decreases in that large increase.
We do expect our net sales will be well above where we are at the back half of this year as we move into the first couple of quarters of next year. So we are producing at a level, where we are building inventory you'll see that's on our balance sheet that will continue in the fourth quarter. If you go back to the historical years with trucks, you would see track.
<unk> begin to build inventory in the third quarter fourth quarter and first quarter, you would see those inventories peak and then declined through the busy season. So we're getting back to that historical balance of working capital usage at the end of the year and the first quarter, so to Dennis comment where the fourth quarter.
Continued improvement in gross margin, we will continue to run at those levels as we move into at least the start of next year, probably through the first quarter, but we have the ability to ramp up or if we saw the economy going the other way, we could pull back on that as well.
Alright, Thanks, a lot.
The next question comes from Stanley Elliott with Stifel. Please go ahead.
Hey, Brian Dennis Thank you guys for taking the question.
There's a huge discrepancy right now and some of the street estimates for 23 from a from a top line perspective, and I don't want guidance necessarily but when you think about kind of the $1 1 billion ish. There we're going to do this year and then we can make around assumptions, whether it's down five or up five whatever.
The thought process would be to add deck, you had roughly the 200 million of Destocking. This year to get whatever the numbers would be that's a fair way to think about it.
By the way, we're thinking about it I'm going to go back to the comments that I made in my prior question about what we're producing to the level. We're producing two right now support about $1 billion for next year as I mentioned also with that and this was very important that is not guidance for next year, we have the ability to ramp up our production to be able to.
Meet higher levels, we also have the ability to pull back if necessary.
But right now that's what we're producing too so we're making sure that we keep the flexibility so that whatever the market throws at us, we will be able to effectively and efficiently be there for our customers.
Perfect and then.
I guess you have a 2.6 or 7 million shares left on the authorization you use the credit line.
How are you all thinking about leverage are we kind of over the next six months near term horizon, given the you know where the stock is today.
So that's a great question I mean, all along we've always run a very very conservative balance sheet I would expect that to continue into the future.
No changes there will continue to be prioritizing capital for investments back into the core.
And share repurchases, but we're going to continue to be extremely opportunistic on the share repurchases as well.
To answer your specific question on leverage I would not see us venture higher than two five times.
Great guys, thanks, very much and best of luck.
Okay.
The next question comes from John Lovallo with UBS. Please go ahead.
Hey, guys. Good afternoon. This is actually Spencer Kaufman on for John Thank you for the question.
Maybe on the first one and I know, Brian you sort of touched on this in your prepared remarks, but you guys pretty much did exactly what you said you would do on last quarter's call.
The one thing I did.
Stand out was the SG&A on a dollar basis at a little under $26 million.
Are there any concerns about lifting costs out too quickly here and how are you positioned if demand does pick back up.
Yeah. So I think we're positioned extremely well if demand does pick up so the primary drop that youre seeing in SG&A in this quarter was the employee incentives. This would include commissions as well as our annual incentive programs that was the primary drop we are continuing to.
<unk> very very strongly and branding marketing and R&D. There is no change there and and to invest in our sales force to win.
Okay that makes sense.
And when you guys printed your second quarter results you know just given the rapidly changing environment and a destock you sort of outline how youre thinking about the next two quarters.
And then you reaffirm your guide for <unk>.
But I think that would be really helpful. Sorry to hear how you guys are thinking about <unk> and the pre buy here. Yeah. If you look back historically inside of a pre COVID-19 world one key sales can jump up rather meaningfully.
Greater than 50% quarter over quarter. So yeah, maybe just directionally here, how are you guys thinking about that.
Yes, we look at next year, we've been able to.
Our balance.
Where our production is to be able to serve serve the marketplace. What normally happened in the first quarter is you have your distributors and dealers build inventory to be able to service. The busy part of the season, we fully expect that to happen next year what.
What I think will happen to a lesser degree is closer to the consumer I expect the dealers may build less inventory as they are closer to that consumer and they will have more questions, which means they will need to buy more through distribution to be able to serve it. So it's really just a change in which part of the.
Channel that will be shipping more more product to at the end of the day. So the underlying dynamics of the first quarter won't change all that much we have to build inventory, but where it gets built may shift a little bit.
Okay that makes sense thanks, guys.
The next question comes from Tim <unk> with Baird. Please go ahead.
Yeah, Hey, guys good afternoon.
Maybe just on that point Brian .
Just on your conversations with your distributors, what would what would get them more excited about maybe building more inventory and maybe what would would you get.
Get them can maybe take more of a wait and see approach as the season develops especially with.
The lead times in the industry coming down over the last few quarters, our distributors are committed to making sure. They have the right inventory to be able to service the marketplace. While lead times are much shorter right now we have already talked to our distribution channels and let them know that lead times will not be saying.
At that level it will be it will push out probably two or three weeks.
Appropriate three to four weeks of appropriate level to run lead time, so that appropriate inventories are in the channel.
Okay, Okay that makes sense.
And then I guess, just just on little rock I mean, as you think about 'twenty three I mean are there any sort of <unk>.
Startup costs or overhead or DNA or just things like that that we should just kind of consider you know.
From a margin perspective.
We'll be continuing to invest capital dollars. There so there's not going to be any depreciation moving through there's not going to be any startup expenses coming through it's a little too early.
Okay. Okay. Good.
Thanks, guys I appreciate it.
The next question comes from Jeff Stevenson, Jeff Stevenson with loop capital. Please go ahead.
Hi, Thanks for taking my questions today.
Hey, good doing good is there been any change in the retail inventory levels, we've heard of some destocking and other building product categories. I'm wondering if you've seen any as well or whether it be retail channel inventory levels continue to be more in line with manufacturers are you referring to DIY specifically are all REIT.
Bill.
DIY specifically the DIY there never really was an issue with inventory for the tracks company, we manage that inventory on a BMI basis, we ship into their distribution centers and then from there we record revenue when it moves out of the distribution center and because we manage that inventory, we're getting them what they need when.
They need it so we didn't see any inventory issues, there and don't expect to see any inventory issues there.
Okay, Great and have you seen any change in mix from a trade down as sell crude demand.
This is kind of progressed through the third quarter or do you expect kind of overall mix to remain relatively in line as we move through the back half of the year.
Haven't seen any material shift in mix, we continue to see those customers that want the highest performance investor statics going with our transcend product line, but over time and this has happened over the past couple of years, we have seen shift mix shift towards the enhanced product line that was part of the strategy of launching that product.
<unk> should be going up against wood. So we have to bring those customers in as we convert from wood and they will come in at that enhanced product line. So I over the longer term, we will see some of that shift, but we will make sure that we continue to have the premium products that drive that higher end customer to trucks.
Okay, great. Thank you.
The next question comes from Trey Grooms with Stephens. Please go ahead.
Hey, good afternoon, Hey, Trey.
So first question.
Brian mentioned the Recalibration.
The channel inventory will be completed by the end of 'twenty, two which is great.
But as we think about it just I guess from a comp standpoint in <unk> can you remind us how much above normal inventory may have taken place in <unk> 'twenty two.
Just as we kind of think about looking into next year and the year over year comp.
So we talked about in the prior year like December 31, 2021, we had that historic involve $100 million and during the first half of 2022, we built another $100 million of inventory. So a total of 200 million.
It was pretty much in the channel by the end of the second quarter of 2022.
Okay and of that 100 million I am guessing that given that a lot of sell through happens in <unk>.
That maybe the bulk of it happened and when does that clear up two thirds, one third probably from that okay.
Perfect. That's super helpful. Thank you and then.
With with the the right sizing that has taken place you've mentioned, 40% to $45 million of savings.
First off where are you in that process it sounds like youre going to be largely through it soon.
But where are you in the process and then secondly.
Maybe looking out a little bit further how are you thinking about the incremental margin opportunity as we see sales improve I think you used to look for a targeted of the most recent one was kind of 35% to 40% Incrementals long term are those still good targets I think when you look at the long term of this organization we are.
<unk> focused organization when it comes to both our gross margin as well as incremental EBITDA margins as we move forward our.
Long term you can expect to see us working to improve that margin. We know where we were at the end of the second quarter of this year and will have targets to get back back there again.
Okay, and the 40 to 45 in savings you are.
Where are you on that in that process.
I think the best way to look at this trait is take that Q4 guide that we've just talked about here, where we're roughly speaking going to be at that 33% gross margin and then we're going to continue to build upon that through continuous improvement.
Be investing back into the business with Capex projects as well we've got the best employees now working on these lines. These are long term.
Loss, well seasoned employees with the right technical skills, we're running these lines better than we ever have and.
So all of those are going to combine along with some moderation in inflation to help us improve the margin set if it sounds like we're trying to be a little bit conservative right. Now we are and Thats our characteristic as a management team as we get through the rest of this quarter and early into next year, we will have much better visibility to what raw.
<unk> look like what the economy looks like and we'll give everybody a much clearer update at this point at that point.
Yep understood makes sense. Thanks, guys appreciate it.
The next question comes from Reuben Garner with the benchmark company. Please go ahead.
Thanks, Good evening everybody.
Not to harp on the inventory in the channel, but but.
I think Dennis you mentioned that it was lower than the 2021 levels is there any way you can kind of put that in.
Just some perspective on how that might have looked kind of pre <unk>.
The pre 2020 levels, if I recall, the 2020, one period was whereas historically low but I just want to make sure I have that accurate yes.
Parison isn't particularly relevant because the market has shifted.
Sell through as we said is roughly flat versus last year as an organization. We are very satisfied where we see that inventory getting to by the end of the year when you're in a growing organization you'd expect that inventory to increase so in total the number is going to be higher at least.
And then probably where we were in 2020, but as Dennis mentioned, we should be around that 21 level as we get through the end of this year.
And then the.
Congrats on picking up a couple of more channel partners in the quarter.
Any.
I guess thoughts there on any potential larger.
Opportunities, whether it's here in the U S or internationally I know you guys were running pretty tight on product for a few years is something where you could make a big splash at some point or is it more likely that youll, maybe pick up you know.
You know a regional or local player here and there and that's kind of how you're.
Kind of regain some share opportunity.
We already have we've got about 50% market share within the industry. So there's 50% of it that we don't have out there theres a lot of opportunity for the <unk> company.
We'll buy it we'll do it by hitting a lot of.
A lot of singles and maybe a double here and there there may be an opportunity for more along the way, but we do see opportunities in the marketplace.
Perfect. Thanks, guys. Good luck on through the rest of the year.
Thanks.
The next question comes from Alex fragile with B Riley FBR. Please go ahead.
Thank you could you talk a little bit about the cadence of price in 2023, and maybe to address it talk about when the price increase was in 2022.
Yeah. The last price increase that we had of any significance was January 2022, we had a small one in the first quarter, but it was very very small and we're really not expecting any need for further price increase in 2023.
That is helpful and then any comment on website traffic.
Is it telling you anything interesting at this point or is it somewhat useless at the moment.
No that is useless, we are seeing it down on a year over year basis, and given the general strength of the consumer over the past couple of years, that's not a huge surprise to us.
We are seeing some increasing strength in our decks dot com.
It shows us that DIY market is remaining quite quite strong out there. It's fair to say it is much more difficult to read that data today than it was over the past couple of years, but it still does provide value valuable information about where the consumers are coming detracts from.
Helpful. Thank you.
The next question comes from Kurt Yinger with D. A Davidson. Please go ahead.
Great. Thanks, and good afternoon, everyone.
You've talked a little bit about I guess sentiment in the distributor channel, but hoping you could talk a little bit about feedback youre getting from your contractor base and what youre hearing in terms of confidence or visibility into next year around.
Around backlog.
Overall, our contractors have been very positive other backlogs have come down from from the peaks, but a lot of our contractors are still carrying backlogs and of course. This time as season. They would expect to have a shorter backlog. So probably what's more important is their confidence as they look out towards next.
Year.
And a lot of our <unk> pro contractors are still feeling very positive they've got quotes that they are putting out for for installation next year and feel good about where we stand in the repair and remodel sector.
Got it Okay. That's helpful and then.
Lastly, I mean, just given some of the challenges for the industry with channel inventories and.
Maybe a slower growth environment have you seen anything new in terms of.
The competitive landscape or any actions on that front.
It's a.
It's an industry, where you've got three to four dominant players that are out there.
Would you say that we've seen anything that we haven't seen before in this industry. We've got good competitors out there.
And everybody is looking to take share away from each other but I think more importantly, the industry understands the largest opportunity is against wood and that's where most of the dollars and most of the focus is being applied.
Got it okay, well I appreciate the color and good luck here in Q4.
Thanks.
The next question comes from Keith Hughes with Truest. Please go ahead.
Thank you.
Trucks inventory year over year, it's up pretty substantially I know, there's a lot of them twice in there can you talk about where your unit inventory compares to last year.
Dennis has got balance sheet numbers here just from a strategy perspective, we would expect that to be up significantly over last year last year. We were still really shipping out every stick that we were manufacturing. So we've had low inventories for really the past two and a half years and I think I've mentioned in the past.
Couple of calls to expect to see that inventory get back up to normalized levels through the third quarter first quarter. It third quarter fourth and then first quarter of next year.
Okay.
On raw materials.
Earlier, but are you are you starting to see some of those calls rollover here as we head towards the end of the year.
Because it was such a quick shift and how much production or supply chains still had orders out well into the third quarter of course, we're pulling down production.
Raw materials are being used in the back half of the year. So much of what's coming in is still coming in at that higher price probably the biggest thing that we've seen a material reduction in cost is going to be on aluminum. We haven't started receiving any aluminum at that lower cost as of yet.
The majority of.
The recycled materials, there's been a slight price decrease but we haven't seen any significant shift on that at this point, but it is fair to say that inflation has moderated, but we're not seeing a big rush to deflation right now.
Okay. Thank you.
The next question comes from Phil <unk> with Jefferies. Please go ahead.
Hey, guys.
I guess, Brian Whats your channel partners early read on demand heading into 2023, and then share gains from would have really accelerated the last few years and a moderate recession do you see that taking a step back and how do you think your business generally holds up relative R&R in that backdrop. Our channel partners are extremely pleased that their inventories are going to.
<unk> right sized as they get through this year. So they enter next year, starting with the right levels of inventory to be able to support the growth that they are expecting to have or to support.
The overall market as I mentioned before they feel good about that end consumer that they saw.
<unk>.
At this point that there is resiliency in composite decking and remodeling spend.
And it's important part of their business to make sure that.
For them to be successful that they have the right inventory to be able to support their customers.
How do you see your business holding up in a moderate recession versus R&R.
Well I'd say, we're in a moderate recession already in the back half of this year and I'm not sure that those economic conditions change all that much into next year and we will give you additional guidance on where we see the marketplace as we get to <unk>.
Ended the year earnings.
Got you and then you were talking about potential singles and doubles.
<unk> will partner with I know in the past.
Actually some opportunity on the retail channel.
Gains I'm sure, they're idling capacity was constrained any line reviews.
Otherwise, we should be aware of.
Yeah.
The opportunity you know home depot did have a line review this year and any announcements related to that line review would be handled by the customer before anybody else were to announce anything.
But there's nothing that you have.
Yes.
Nothing to add at this point.
Okay, alright, great. Thanks.
The next question comes from Phil Bouley with Barclays. Please go ahead.
Hey, guys, Matt Bouley Barclays.
I'm on the topic of pricing and promotions I think last quarter. You said, we could expect a return to normal promotional activity occurring this year and I think you mentioned earlier that there is not likely to be a new price announcements and so you know if promotions are returning to normal and you don't have incremental positive.
Price.
Curious if you could kind of size what that promotional activity might look like if it's happening in and sort of what that impact to the top line might be in 2023.
The biggest thing that will be noticeable next year is around our accounts receivable. We will go back to more of a normalized dating program, where this year. It's been a very very low dsos will get back to more of a normalized type program that will result in much higher accounts receivable.
As we move through the first half of the year and then a higher levels of cash flow being generated in the back half of the year, whereas this year you saw that cash flow come in on a year over year basis in the first and second quarter, which had been very different from the past otherwise from a promotions perspective, we kind of manage it.
Overall part of funds of what is the what are the things that are going to drive the marketplace that are most meaningful for both our distributors our dealers as well as anything that comes through the retail channel.
Got it okay. That's helpful. Thanks for that Brian and then segue.
On the competitive environment, you guys added some Texas distribution, we know a competitor had announced some distribution expansion in recent weeks I think I think Brian you mentioned earlier that your competition is trying to take share from one another.
So how do you think about these distribution wins in this environment from a competitive landscape perspective is is pricing a component that you know that could drive these type of business wins as we think out over the next year.
Well have to make sure that our distributors are all competitive with each other and much more important fact of the Texas distribution gains.
That's a marketplace that is really quite sizable and we felt that by adding the distributors. There we had the appropriate scale to be able to go after that market opportunity and when we go back to hitting those singles and doubles are great. Examples of the things that we're going after.
Great well, thanks, Brian and good luck.
The next question comes from Adam Baumgarten with Zelman. Please go ahead.
Hey, Thanks, So my question Happy Halloween.
I guess, just maybe on the it's been probably four or five years from what I understand but are you seeing a return to kind of the historical winter discounting maybe as you're trying to move some of the inventory.
Even as we've gone through the past couple of years, there have been early buy programs.
I expect there will be some form of a program to ensure that the channel holds the inventory that they need to hold early in the season I've talked earlier, a little bit about the seasonal nature of this business. It is important that that product get out and get close to the consumer as we exit the first quarter of the year.
Year, so there will be programs as we've seen in the prior year's to Incent that behavior.
Okay got it and then I think you talked about sell out being flattish can you give us a sense for point of sale in the retail channel.
Point of sale has actually been the.
Retail side has been quite strong we've been very pleased with what we've been seeing.
Coming through the retailers during the third quarter.
Okay, great. Thanks.
Yeah.
The next question comes from race Jed <unk> of Bank of America. Please go ahead.
Hi, there. Thanks for taking my question I just wanted to follow up on your comments on the SG&A outlook for next year, how do we just think about the sensitivity of SG&A to sales growth next year and then what are some of the moving pieces on variable versus fixed in that SG&A being up as a percent of sales.
Yeah, No. That's a great question and I think it's important one to address so yeah. We talked about we had a one timer here this year with the employee incentives and commissions being lower this year. So that clearly will have to come back into 2023.
In addition, we're going to ramp up branding spend in some R&D spend as well.
You have inflation incurring and health care costs Merit increases insurance premiums.
So when you tie it all together.
We're probably looking somewhere in that neighborhood of like 15, 5% of sales if you would say like on a.
A billion dollar business, so 15, five to 16, 5% of sales.
That's really helpful. And then just following up on the <unk>.
Earlier comment on that you are producing.
Two 1 billion for next year understanding that that's not guidance.
But that $1 billion that you are producing too what would that imply for the sell out trend for 2023 that would that be sellout, staying consistent or better or worse relative to 2022.
The $1 billion.
From a sellout perspective would be slightly below would be definitely below but we have the ability as I mentioned to be able to add that production back and what we don't want to do is get too far ahead of ourselves in this economy right now we will have the inventory to be able to support the marketplace.
Denis mentioned, we have a highly skilled operators in our plants and we can add some labor whether it be full time or whether it would be temporary employees to be able to increase that to meet what the market demand is and not get ahead of ourselves from an inventory perspective.
Okay. So that makes it through plan and your capacity for sell out to be a little bit lower than where it is today. That's very helpful. Thanks planning.
Planning conservatively right now with the ability to drive higher.
Very clear thank you.
Okay.
The next question comes from Dan Oppenheim with Credit Suisse. Please go ahead.
Thanks, very much for that I guess wondering as you're thinking about the you're talking about pricing in terms of not needing much in the way of pricing in 2023.
Wondering sort of how you think about that in terms of expectations for on the cost side and what do you think that leads to the margins in terms of.
If you can tell me the pricing there.
What we've said is that when we've seen inflation moderate at this point I'd love to see an economy, where we start to see some true deflation out there, but I'm not necessarily seeing signs of it. If we were to see an economy, where deflation is to the same extent of what we saw inflation you could see some pricing changes out.
There, but right now I think quite a bit of the inflation. That's out there is going to be sticky, but we will see the percentages of inflation decreased quite significantly we've already seen it in our business and I expect it to moderate even further as we move into next year.
Great. Thanks, and I guess the follow up in terms of production you've talked about that number in terms of the $1 billion and then thinking about just the capacity coming on line, but you talked about it being modular.
How are you thinking.
Are you, saying you are just being very slow in bringing that on you know if we end up in that too.
Billion or thereabouts level, how how do you think about sort of when you would then be a bring that on and what do you expect in terms of actions from others. It would all be about the timing and the pace of the investment as to when we're bringing that capacity on.
We have the ability to pull forward, we have the ability to have pushed back as well I will give additional details on that at the end of the year.
Great. Thank you.
The next question comes from Michael Rehaut of J P. Morgan. Please go ahead.
Thanks I.
I appreciate you taking my questions.
I just wanted to.
Verify that.
And I apologize if this is something that you kind of hit on earlier, but you know what.
When we think of the sales in the in this past quarter as well as for Q that you're still thinking that the inventory destock for each period.
It represents roughly a $100 million of a hit to sales is that still.
How youre thinking about that impact in <unk> and <unk>.
I think that we saw a greater destock in Q3 than we'll see in Q4, we've probably got around $140 million to $160 million out in Q3, So we're well along the way and that's why it gives us a lot of confidence to say that that recalibration will be done by the end of the year.
Okay. So, but then still you're talking about an expectation for roughly 200 million for the for the full period, but the full back half that's correct.
Okay, So if I'm too.
Play with those numbers and you know assuming that you had maybe.
I think it's been discussed earlier.
$50 million.
Build in last year's fourth quarter.
That would point to potentially the market being or your core growth.
You kind of add back 50 to your outlook for this year and take out 50 from your base from last year would point to the core growth.
Being down maybe 5% to 10%.
I want to know if that's something that kind of fits with the way you're seeing it and.
If that is also kind of how we should be thinking of perhaps how the market is trending in the fourth quarter.
Well the way we were looking at this and you know we talked about this pretty extensively in Q2 that back half.
For 2021, right. So we probably had something like $630 million in sales, we built $100 million worth of inventory, though right.
So we are estimating our sell out at the end of 2021, roughly speaking around $540 million.
You fast forward to 2022, and the back half we have $375 million in sales roughly speaking.
$200 million of destock.
So when you put that together there I mean, you're roughly again flat on a sell out basis year on year.
Yes, there is some price there is some mix but.
That's how we're looking at it.
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 on today's 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.
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