Q4 2022 Trex Company Inc Earnings Call

February 27, 2023

Okay.

Good afternoon, and welcome to the trucks company fourth quarter and full year 2022 earnings conference call.

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<unk> you May Press Star then one on your telephone keypad.

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Note. This event is being recorded.

I would now like to turn the conference over to Victoria <unk> Investor Relations. Please go ahead.

Thank you everyone 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 trucks management.

The company issued a press release today after market close containing financial results for the fourth quarter and full year 'twenty 'twenty. Two this release is available on the company's website. This conference call is also being webcast and will be available on the Investor Relations page of the company's website for 30 days I would now.

Like to turn the call over to Amy Fernandez Amy.

Thank you Victoria, but 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 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 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 <unk> 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.

That introduction I will turn the call over to Bryan Fairbanks.

Amy and good evening, everyone. Our fourth quarter operating results came in ahead of our expectations and represented a strong sequential recovery.

We effectively navigated the challenges of approach channel inventory Recalibration I.

I am pleased to report that as anticipated.

Tori Recalibration was completed by year end.

With good participation in the early buy season, we entered the year and upcoming season with inventory levels that are aligned with market expectations.

Consumer demand for tricks decking and railing remained steady during the quarter demonstrating the broad based appeal of our product portfolio and attractiveness of the outdoor living category is an ongoing secular trend.

Supported by our industry, leading brand manufacturing efficiency and the strength of our long standing relationships with best in class Channel partners <unk> offers the most relevant products and strongest service levels to customers every day.

This has positioned <unk> as the primary beneficiary of positive long term trends towards outdoor living.

In addition, <unk> is the most widely available and purchase decking and railing brand in North America and around the world.

In recent months, we expanded our distribution network in Texas, Oklahoma and other southern states, enabling us to better service many of the fastest growing markets.

The world's largest manufacturer and market leader, what alternative composite decking and railing with the most expansive manufacturing and distribution network, our dealers and contractors can confidently gross sales.

Q4 was the first quarter to benefit from the actions we took in July to align our cost structure with the lower sales volumes due to channel inventory recalibration.

We reduced production levels right sized our employee base, while retaining our most experienced manufacturing talent and implemented cost efficiency programs.

These actions together with easing inflationary pressures enabled us to drive sequential increases in fourth quarter for both gross margin and EBITDA margin of 960 basis points and 710 basis points respectively.

Additionally, further opportunities for margin expansion are expected with our ongoing investment and focus on continuous improvement programs.

During the quarter, we balance these actions aimed at improving our near term profitability with longer term decision to support our growth trajectory, namely investing in the <unk> brand and continuing to commercialize new products that broadened our market opportunity.

In addition, we completed the sale of trucks commercial products. The divestiture reflects our decision to focus our resources on the most profitable opportunity for our company and its shareholders, namely accelerating conversion to composites from wood and further strengthening our industry leadership.

For more than 30 years, we've invented reinvented and define the composite decking category and innovation remains a key competitive advantage for trucks.

In the fourth quarter, we doubled the number of color options available nationally for our recently launched transcend lineage decking collection, which incorporates heat mitigating technology with a refined color palette and finish.

We also introduced a tiered warranty structure for trek stacking that underscores the value of our industry, leading good better best decking lineups.

More recently, we announced the launch the regional launch of our latest stacking innovation Trek signature decade.

This product offering elevates the premium composite decking category with the achievement of the most authentic wood aesthetics to date by raising the bar for beauty performance the sustainability.

Signature decking is backed by an industry, leading 50 year limited residential warranty and is complemented by the full range of trucks signature railing.

<unk> innovation also extends to our robust sourcing and recycling efforts.

Through the next treks recycling recycling program customers such as rent the runway L. L Bean and urban Outfitters have found the solution to transform their single use plastic waste into beautiful and sustainable treks decking.

While the economic backdrop remains uncertain, we continue to believe our tie to the repair and remodel sector makes us more resilient than other sectors. As many homeowners are priced out of moving they tend to invest in their existing homes and pursue renovation, especially those that add long term value like <unk>.

Despite our general optimism, we are moving forward cautiously to ensure that we emerge from this period as an even stronger company we.

We have several key advantages that position <unk> to outperform in both the near and long term.

The <unk> brand, which is synonymous with high performance and low maintenance continues to receive the most significant and prestigious recognition in the industry include.

Including recently being named America's most trusted composite decking brand by life story research, earning.

Earning the highest trust rating amongst nine decking brands include in the survey receiving the best reviews and satisfaction scores amongst survey respondents and being the only decking brand to earn the maximum five star ratings.

Second the 95% recycled and reclaim content of our decking boards, coupled with our sustainable manufacturing process makes us the ideal choice for todays increasingly eco conscious consumer and an appealing investment for ESG and growth investors.

Third we have the highest production efficiency and the composite industry.

Fourth we.

We have the industry's leading network of channel partner with products sold through more than 6700 retail outlets across six continents. Our brand appeal and strength has recently allowed tracks to gain additional stocking positions in the pro channel.

And to extend our market leading availability in the home Center channel.

And fifth.

Texas Company history of cash flow generation and balance sheet positions us too.

Positions us for today and into the future.

As we look to the long term, our new manufacturing facility in Arkansas will give us the capacity to take full advantage of demand growth.

We are continuing with the modular buildout of the facility in 2023 and.

Then Arkansas comes online tracks will have unmatched geographical coverage with east west and central sites to serve our decking and railing customers.

And to drive additional long term growth through expansion of our international sales and addressing the adjacent cladding market.

While we are committed to the build out of the Arkansas facility, we expect to build out will extend beyond the originally planned 2024 timing with gradual manufacturing ramp starting with processing of recycled materials and then moving to decking manufacturing currently estimated to start in early 2026.

We've entered 2023 with a position of strength supported by our brand and market leadership and a strong balance sheet at the same time, we remain mindful of the macroeconomic environment and as such we're taking a conservative approach to full year planning.

We expect to decrease our balance sheet inventory to more normalized levels throughout 2023, which will improve cash flow.

As we've noted in prior calls we've elected to run our facilities with the assumption of a $1 billion revenue run rate for the year. However, if demand differs from expectations. We have the ability to quickly flex our production level. Accordingly, I will now turn the call over to Dennis to provide a more detailed view of our financial performance and our outlook.

Thank you, Brian and good afternoon, everyone.

<unk> net sales were $192 million in the fourth quarter, which exceeded expectations <unk> residential <unk> commercial net sales were $181 million and $11 million respectively.

As previously discussed fourth quarter residential sales were impacted by the inventory recalibration in the pro channel spurred by concerns over a potential easing in consumer demand due to rising interest rates declining consumer sentiment and expectations of a general slowing in the economy. However, as Brian mentioned we are.

Pleased to report that the pro channel inventory correction was completed by year end 2022 as anticipated.

In response to the inventory Recalibration, we immediately took aggressive actions to better align our cost structure with current demand by reducing production right sizing our employee base and focusing on the cost reduction programs. As a result, we posted a significant sequential recovery and consolidated gross margin and <unk>.

<unk> residential gross margin, which increased to 34, 1% and 36, 1% respectively in the fourth quarter and the year ago period consolidated gross margin was 38, 9% and trucks residential gross margin was 39, 7%.

Selling general and administrative expenses were $35 4 million or 18, 5% of net sales in the fourth quarter compared to $36 7 million or 12, 1% of net sales in the fourth quarter of 2021.

Excluding $4 3 million of other expenses related to the sale of trucks commercial and non executive retention compensation.

SG&A was $31 2 million or 16, 2% of net sales.

During the fourth quarter, we completed the sale of our wholly owned subsidiary and reportable segment <unk> commercial.

The divestiture reflects our decision to focus on the driving the most profitable growth strategy for the company and its shareholders through the execution of our outdoor living strategy.

Sale resulted in a $15 4 million loss in the fourth quarter.

Beginning in 2023, the company will operate in one reportable segment trucks residential.

We posted the relevant quarterly data and our earnings release and on our website and our investor presentation for ease of comparison.

2022 fourth quarter net income was $10 million or <unk> <unk> per diluted share compared to $25 million or 22 per diluted share in the year ago quarter.

Excluding the loss on the sale and other expenses related to the divestiture of trucks commercial and nonexecutive retention compensation adjusted net income was $25 million or 23 per diluted share.

We are pleased to have delivered adjusted EBITDA of $46 million or 24, 1% of net sales in line with our expectations.

We used our strong balance sheet and cash flow to repurchase one 1 million shares of our outstanding stock in Q4, returning $50 million to shareholders.

We also upsized, our revolver by $150 million, bringing our total debt capacity to $550 million to provide us with the additional financial flexibility.

Summarizing our full year results consolidated net sales were $1 1 billion compared to $1 2 billion in 2021.

Trust trucks residential net sales were $1 1 billion with trucks commercial contributing $47 million.

Consolidated and residential gross margins were 36, 5% and 37, 7%, respectively compared to 38, 5% from 39, 3% respectively in 2021.

Selling general and administrate administrative expenses were $142 million or 12, 8% of net sales compared to $140 million.

11, 7% of net sales in 2021.

Excluding $5 $5 million related to the loss on the sale and other expenses related to the divestiture of trucks commercial.

Nonexecutive retention compensation and third quarter severance charges SG&A expenses in 2022 or $136 million or 12, 3% of net sales.

Full year 2022, net income was $185 million or $1 65 per diluted share.

<unk> $209 million or $1 80 per diluted share in 2021.

Excluding the loss on sale and other related expenses to nonexecutive retention compensation and severance charges. Adjusted net income in 2022 was $201 million or $1.80 per diluted share.

Adjusted EBITDA was $313 million, resulting resulting in an adjusted EBITDA margin of 28, 3% in line with guidance compared to adjusted EBITDA of $357 million and adjusted EBITDA margins of 29, 8% in 2021.

We generated a very healthy operating cash flow of $216 million in 2022.

We invested $176 million in Capex, mostly related to the new Arkansas manufacturing facility.

We also invested in our high return investment cost reduction initiatives that will enable us to improve our profitability in 2023 and beyond.

2022 was also a record year for share buybacks as we returned approximately $395 million to.

Orders through the repurchase of $6 5 million shares of our outstanding common stock with one 5 million shares remaining under this existing program.

As Brian mentioned, we are committed to Arkansas as our third production locations, but we expect the investment to occur over a longer time period.

Total investment is still planned at approximately $400 million most of which was initially planned to occur through late 2020 for that.

That investment will now carrying on through 2025 and into 2026.

We expect to use more working capital throughout the first half of the year as we level load our production to $1 billion of sales and deploy normal early buy programming to ensure our products are properly seated in the channel.

Our strong share repurchases in 2022, we expect to be utilizing our revolver throughout the year and incurring interest expense in the range of 8 million to $9 million.

As we turn to our outlook, we anticipate first quarter 2023, net sales to be in the range of $230 million to $240 million.

And we are seeing the following for 2023 annual guidance.

Full year 2023, EBITDA margin to be in the 26% to 27% range.

Selling general and administrative expenses in the range of 15% to 16% of net sales.

An effective tax rate of approximately 25% to 26%.

Interest expense in the range of 8 million to $9 million.

Depreciation in the range of $45 million to $47 million.

Capital expenditures in the range of $130 million to $140 million, which primarily relates to the modular build out of our Arkansas facility calibrated to demand trends.

With that I'll now turn the call back to Brian . Thank you Dennis to sum up our fourth quarter performance has set the stage for 2023 to be a year of continuous improvement and returned to normalized marketing of both the <unk> brand and new products trucks will continue to provide the consumer with a broad based product.

<unk> and deliver meaningful value to our channel partners, we remain confident in our ability to outperform thanks to our brand strength and market, leading position distribution and retail partnerships expanded product lines and most importantly, the dedication and collaboration of the people who make up the trek storage utilization.

Are a key competitive advantage that cannot be replicated operator, please open the call to questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw from the question can you. Please press Star then two.

The interest of time, please limit yourself to only one question and one follow up.

At this time, we will pause momentarily to assemble our roster.

Today's first question comes from John Lovallo with UBS. Please go ahead.

Good afternoon, guys. Thanks for taking my questions. The first one is I just want to make sure I have the math right here. So there was $200 million of channel inventory built starting in the third quarter of 'twenty. One I think 100 million was in the third quarter and fourth quarter combined so the other 100 million was in 2022 and I believe last quarter you said.

That two thirds of that was in the first quarter, so call it $65 million to $70 million. It looks like the revenue guide year over year for the first quarter is down call it $90 million to $100 million year over year. So is that sort of 20% to $30 million Delta your assumption for the decline in sell through.

It's not as much of a decline in sell through as it is the channel being more conservative in the amount of inventory that.

They are willing to hold at this point. So there is still caution within the channel itself our balance sheet. We have additional inventory, we talked about building that inventory going into the end of the year as we were producing at a $1 billion level, but we weren't selling at that level for the last six months of the year. So we are prepared to service the marketplace.

But by far the largest driver of it is a more conservative channel right now not leading quite as heavily into normal early buy as they have in the past.

Got it Okay and then.

At the midpoint of the EBITDA margin guide you called $265 million it appears that.

You mean $1 billion in sales it appears that the decremental margin would be somewhere around 80% or are we thinking about that right and what would drive such a sharp.

Sharp.

Decremental margin.

Well I think.

The way, we're looking at it because decremental as always get a little bit messy here when youre dealing with that but we're looking at 26%, 27% EBITDA margins for the full year.

So the main decreases year over year are going to be essentially with the step up in SG&A.

As we talked about last year in Q3 rates that we talked about the need that we needed to step that up to support more branding.

Support our number one position with the brand we wanted to also support R&D as well with new product deliveries as well as.

Alternative formulations, and then thirdly, continuing to invest in our sales force as we want to grow in the highest wood conversion opportunity areas, but that would be the major ones.

Thank you thanks John .

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

Hey, guys. Thanks for taking the questions.

So first off.

Ian or Dennis can you unpack the $1 billion revenue guide a bit more just looking for details on sell through in units remodel outlook and any seasonality details that we should think about.

Yes, I think I mentioned in my opening comments, there's a little bit about seasonality that I expect to see a steeper curve to this season than what we've seen in the past we're building our plan, assuming a $1 billion of production plan.

Kind of assuming from a channel perspective that what sells in cells out during the course of the year, we are not expecting any significant inventory build and as I mentioned earlier, we will be ready to support that inventory need as the as the summer gets here, but we also have a planning assumption, where the consumer is a little bit weak.

<unk> down at mid single digit type range on a full year basis.

It's really more of the second half of the year Theres still more concerned as there is just general uncertainty in the economy still.

And if we do see that there is improvement we do have the ability to quickly flex up that production and deliver.

Deliver whatever capacity is necessary.

Got it Okay. That's helpful. And then I know you said demand is steady can you just talk about sort of sell through and for Q, what you're seeing here in <unk> and just.

Contract with confidence heading into the selling season.

Yes, we continue to see good demand in the fourth quarter October and November were flat with prior year, we did see a bit of a falloff in December and mid single digit type falloff, but moving into the new year, that's improved where it's roughly flat again with prior year in talking with our contractor backlog.

<unk> have normalized so rather them than them being up between eight and 12 weeks motive some are going to be between four and six weeks at this point. So our contractors are still feeling pretty good about the season.

Good to hear thanks, Thanks, Brian .

The next question is from Joe <unk>.

With Deutsche Bank. Please go ahead.

Yeah. Thanks for the question good afternoon, guys Hey, Joe.

So I wanted to be really clear on what is guidance and what is not here because Dennis in your prepared remarks, I think you jumped right to the EBITDA margin. When you were talking about 2023 guidance.

John did a good job of laying out the <unk> I won't go into detail on the full year, but other than to say that it implies that $1 billion down something in the mid teens I think Brian I heard you say mid single digits as yourself through assumption so.

Yes. The bottom line of my question is can we just be really clear on is the $1 billion, a production rate assumption, which which we'd have to add your assumptions around selling through of your inventory.

<unk> is the $1 billion not a.

Got it.

What is the $1 billion historically, we've provided one quarter out of revenue guide and that's what we've done this quarter, but also at the beginning of the year, we've provided a variety of different metrics, but in this case, providing full year guidance on EBITDA SG&A tax.

So no the $1 billion is not a full year guide we have not moved to that but I think given the changes in the marketplace.

Giving everybody here and understanding of the type of level that we're producing too because if I were sitting in your chair and we said we were producing to let's say a $1 4 billion type rate that might be a little bit concerned that the customer is not strong enough to support that kind of rate. So we believe that it's important that we produce.

At a prudent rate, while we have the ability to turn on production as we see the marketplace change.

Very clear.

Okay and then.

Your residential EBITDA margin in 2018 was around 31%.

Could you maybe help reconcile a bridge that number to your 26% to 27% guidance.

What sort of what constitutes that $4 to 500 basis points difference DNA doesn't really factor in their mix of always assumed as margin neutral you are talking about having invested in productivity and having a highly trained workforce. So is there a way to think about what's driving that gap into 2023 versus 2018.

I think the biggest factor there Joe is really coming down to utilization of capacity.

And that would basically drive this difference that you're referencing at this point in time.

We are operating at a level below our total capacity at this time.

Got it very clear thank you guys.

Thanks, Joe.

The next question is from Tim <unk> with.

Baird. Please go ahead.

Yeah, Hey, guys good afternoon.

Maybe just first question just can you talk a little bit about some of the shelf space wins that you talked about in your prepared remarks, and I guess.

Maybe just expand a little bit on the value proposition of the levers that you are kind of leading with because I think there are some questions out there from investors, if theres any sort of kind of pricing pressure.

That comes along with that I don't think there is but I'm just kind of curious what your what your leverage.

No we have not seen pricing pressure in the marketplace, our contractors have been comfortable in selling through the.

The product lines, we provided at the at the current price levels. So that's not something that we see that there is a high risk of as it relates to the.

The opportunities to win I think we talked a little bit in the past about with tracks with leading market share and when you have some uncertainty in the marketplace.

Much bigger selling proposition is go with the leading brand the brand is important when the consumer isn't quite as strong and we've seen a number of our channel partners move exclusively to trucks or increase their commitment with tracks as we move through this period. So.

That continues to be an opportunity as we move forward.

Okay. Okay. Good and then I guess just from a margin cadence perspective, I mean anything that kind of call out from a.

Seasonality perspective, as we kind of think through the year than maybe you had in Q4 is kind of a benchmark.

Yes.

Great question. Thanks for that so our jumping off point, if you will as Brian mentioned, we got the full benefit of all of our restructuring and right sizing our workforce in Q4. So we ended up at <unk> residential at 36%.

We're looking to see that lift that gross margin lift.

By about 150 to 200 basis points.

For the full year, so I would expect to see those cost savings initiatives start to ramp up now when you get into the Q2 Q3 were offset partially here by a slightly weaker mix as we're more DIY oriented at that time.

But I would just look at it pretty much level across the year with about a 38% gross margin.

37, 5% to 38% gross margin.

Okay. Okay. Thanks, guys.

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

Hey, good afternoon, thanks for taking the question.

So.

So the channel inventory normalization it sounds like that's behind you.

First off if you could maybe give us a little color on kind of how.

Youre seeing the inventory levels.

Within the channel here as we're kind of getting into peak season, sorry, if I missed it I dropped off for just a second but.

Do you feel like it's kind of at or even below kind of normal levels within the channel or just kind of what your thoughts around that.

We attacked the excess inventory in the channel aggressively starting in July and it was effective in getting it down to where we wanted to be by the end of the year you heard us talk about the year will be a little bit steeper curve as we move into Q2 and Q3.

Like to see a little bit more inventory in the channel as we've seen historically.

It'll be a little bit happier with that but we recognize where the channel it's coming from.

We have the capacity here, we have the inventory to be able to see.

Support to the reduced risk.

To carry right now.

Got it got it Okay and then.

As you kind of think about that.

Cost side of things.

Any any kind of deflation or maybe any kind of.

Good guys on the cost side that you could point to maybe.

And as we kind of look at this year.

<unk> is probably the right word for it at this point rather than deflation I hope to see that as we move through the year, we actually have some commodities that we do see some significant deflation, but we're not really seeing that nor are we seeing evidence of that if you would've asked me a month ago I would've said aluminum probably it was a.

Great opportunity and for those of you that follow aluminum.

Recently shifted quite significantly.

It's kind of back to where it was in the back half of last year at those higher prices. So it's something that we'll keep you up to date on but we're not seeing a significant deflationary marketplace. We don't buy a lot of PVC.

The marketplace, which has deflated quite significantly right and I guess, it's fair to say then that.

The EBITDA margin guide of 26%, 27%, if we were to see some.

Significant deflation there for you guys that that would create some potential upside for those margins correct alright. Thank you guys take care. Thanks.

The next question comes from Keith Hughes with <unk> Securities. Please go ahead.

In response to an earlier question I think you said you were expecting sell through to be down mid single digits for the year I just wanted to confirm that and if you could talk about what you were thinking at this point in terms of first half versus second half, we're not necessarily expecting it to be done we are building our production plan with that in mind and as we.

See this consumer is stronger as we move into Q2, and Q3 and more product is needed in the channel will be able to to service that but that $1 billion is based off of a mid single digit type decline.

Okay.

Would you expect in the second half of the year I mean based on your production planning to get back on the positive side revenue in production year over year, Yes, I think in the third quarter, you would see a significant clearly we've got two really tough comps in the first half and in the back half of the year much easier comps and then the fourth quarter really the question will be.

How do we see the consumer moving out into 2024, and how much risk is our channel willing to hold going into the end of the year. What does our early buy program look like in December or does it start in January . So those questions are are still to be answered.

And one final one could you talk about what pricing contributed in the fourth and what Youre planning in the first two revenue.

Yes, so pricing was about 10, 7%.

And in the first quarter, it's going to be our biggest opportunity is probably around $4 million there for the first half.

Essentially like $5 million to $6 million, maybe Max we've pretty much lapped all of our pricing January of last year was the last significant pricing. We took we took a very small about.

In April so as we.

Get through pretty much the first quarter all of that pricing has been lapped.

Okay. Thank you.

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

Hi, Thanks for taking my questions. Today I was just wondering if you could talk more about your conversations with dealers and distributors about sell through demand expectations as we move into the spring selling season has there been any sequential change you would call out compared with say 90 days ago or have expectations remain relatively steady with.

Where they were.

I would say expectations have remained relatively steady they continued to see good demand through the fourth quarter. Clearly there were some questions about that from a channel perspective or would they be able to continue selling at a level to draw down inventory, but then also be able to bring in the start of an early buy in the month of December and as you can.

Move out to the first quarter again, we continue to see that consumers are going to both our approach at all as well as DIY customers, placing orders for <unk> products.

No that's great to hear and then I just wanted to touch on the progress you've made expanding your distribution network. So the Texas, Texas announcements were encouraging but just how long a runway do you believe you have an <unk>.

Pending your distribution partnerships moving forward.

Generally speaking for <unk> is going to be less about adding new distributors. These were a couple of marketplaces, where we see the growth is quite significant and we felt that we needed to add some additional representation.

So the largest growth will come from additional retail outlets as well as improving our share within the existing outlet that we fell from but these were important enough.

Marketplace that we do see outsized growth in the future that we wanted to call them out specifically.

Great. Thank you.

Thanks.

The next question is from Phil Inc, with Jefferies.

Jeffrey Please go ahead hey.

Hey, guys congrats on the impressive quarter.

For you Dennis I guess, the 26% to 27% EBITDA margin target.

I appreciate youre not guiding to $1 billion of sales, but that implies mid single digit volume declines give or take what if it was like weaker like down 10% do you have enough levers to kind of still sustain that margin threshold and that demand background.

I think you saw in the past, how we're able to move and get our cost structure right. So I think that there are things that we would do.

Two to improve the margin structure and keep it robust.

Okay, and I forgot to ask Dennis any way to help us think how much of the cost out is driving some of that.

And the sustainability of the strength of margins for 2023.

Well I mean, that's the baseline right for us moving forward and now what you have is what the cost saving measures of continuous improvement cost outs that we worked really hard on from a labor perspective.

Energy diversification et cetera, they're all coming into play now thats that additional 100 <unk>.

$50 to 200.

Basis points of gross margin improvement that we're calling out okay.

Okay. That's helpful.

And then on your Capex guidance, the 130 to $1 40 for 2023, it's more muted than I would've thought appreciating maybe youre, adding some little rock capacity further out down the road is that $1 31 for the sustainable and if I heard you guys correctly.

You are not actually physically adding decking capacity until 2026 is that when it hits the market I expect that we'll start to see production out in that timeframe I think it's really important for everybody to understand our existing facilities. We don't have room for additional buildings or additional capacity. So it's important that.

We have the third site, we have a building thats ready for decking capacity to be able to go in and based off what we're looking at this point, we think that timing is.

As early 2026, when that would start running.

Okay. That's helpful. Thanks.

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

Thank you good evening everybody.

Robin.

So kind of a follow up.

Phil's question on the EBITDA margin guide I guess, Conversely, if the market is better than you anticipated or are you kind of managing the business to this 'twenty six 'twenty seven level, meaning youll have more investments to make to bring capacity on faster.

SG&A investments or would you see some leverage and expansion on that margin if the markets better than you expected the year progresses.

Yes, I think that's a great question. So yes, I would expect that we would see some margin expansion. If we saw demand stronger than we're going to see better utilization and that will be better cost absorption for us. So I think that's where you'll you'll see that benefit in.

We're pretty committed to keeping the SG&A rate in that range of the 15% to 16%.

Got it and then.

The contractor any update on what Youre hearing about contracted backlog in.

Even pricing of jobs I know that was kind of a deterrent from activity over the last couple of years that the extended lead times to get things done and pricing for the labor.

Other components of the job and it's gotten expensive are you hearing that those are reversing or starting to settle in a little bit.

Tractor backlogs have normalized at this point between four and eight weeks.

They had longer backlogs and some of them. They were out 10 16 type type weeks.

They can price jobs wherever they wanted to assess your job they didn't really want to do with a more normalized backlog the <unk>.

Rising is coming back in line in the marketplace.

They're looking to continue to drive that backlog.

I will make sure that they've got competitive pricing.

Great Congrats on a strong close to the year guys and good luck. Thanks, Robyn Thanks Reuben.

The next question please.

Right.

Finally, please go ahead.

Thank you good morning, gentlemen, a couple of quick questions here.

The mid single digit decline in volume assumption can you disaggregate that between the market decline expectation.

And maybe some market share gain assumptions that you have applied there based upon.

Pro.

Retail market.

You commented on yes, I think the biggest question is the strength of the consumer in the back half so we've not disaggregated that number.

At least for this call.

We know what's coming through with some of the market share gains that we've had out there, but again, we are being conservative as we look to the back half of this year from a production perspective and that our expectations with the consumer.

Yes.

And then secondly are you anticipating any product mix shift with your production plan.

No we have not seen a shift downward with any changes in the economy and Dennis did mention that we will see a little bit of a mix shift only because during the summer time.

We have a much higher DIY demand, which is heavier on basics doesn't carry the same margin as our as our other profiles along the way.

So we do end up offsetting that with other continuous improvement along the way, but thats probably the biggest impact is that we see a steeper curve in the year.

A year, which drives a little bit more of those basic sales through the summer months normal.

Thank you.

Yes.

The next question is from Kurt Yinger with D. A Davidson. Please go ahead.

Great. Thanks, and good afternoon, everyone.

Sure.

I just wanted to start out with a high level question on margins and Dennis.

Earlier, you said I think the big difference between the 26% to 27% EBITDA margin this year and what we've seen historically is.

Call it lower utilization, but I guess looking forward what are the big areas of opportunity that you see on the margin side.

Regardless of improvements and I guess the volume environment.

I think.

I would just go and compare 2021, sorry, 2022% to 2023 rate largest detriment to the EBITDA margin side will be the step up in the SG&A that we did right. So we talked about that last year, where we're stepping up in branding and R&D and the like so that one.

That was definitely part of it.

I think another part that's important to think through two right is we are not utilizing all of our capacity today and so maybe and in round numbers here for every $100 million in net sales that we would be producing for.

I would be expecting to see about 100 to 150 basis points of gross margin improvement as well so and these are some opportunities for us to really inflect.

EBITDA margins higher going forward.

Got it and I guess that 100 to 150 basis points of gross margin is that just all volume leverage or.

Pretty much that would be mainly volume leverage.

Got it okay.

And then.

In the release, you talked about focusing on driving accelerated wood conversion just curious how that element kind of factors in to your 2023 outlook or kind of the framework you're using for market demand and what factors you think are working for or against you.

In the current market.

Yes, so today's marketplace would has receded back to normalized pricing our basics product sales for two times the price of wood all of the market research that we did about converting that would customer to attract composite customer started with that two X price level, and then being able to market that.

Consumer to the Naturals product line, which has been highly successful over the past few years and with Dex Dot Com, we will continue to pursue that strategy.

Got it alright, thanks for that Brian and good luck here in 2023 guys.

Sure.

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

Hey, good evening, everyone. Thanks for taking the questions.

One on the divestiture of commercial so what does that do from the perspective of management's focus and how should we think about <unk> kind of looking at any targeted M&A within residential decking or other residential adjacencies.

As I mentioned in my comments it does allow the organization to specifically focus on the residential segment.

<unk> has the largest shareholder returns and opportunity moving forward. So it's one less distraction that's out there for the organization.

Got it that's helpful. Thank you for that and then just a second one.

Back on the on the topic of <unk>.

Of sell through if we take 2022.

You had the $200 million of Destocking at the end of the year.

And the $100 million of channel fill at the beginning of the year. So you sort of add that net.

$100 million of.

Destock. So is it fair to say that your your 2020 to kind of sell through was actually a $100 million higher right and then so when you talk about the billion dollars in 2023, Youre actually thinking of more like a.

A 10% decline in and sell through my over complicating. It is there an assumption of price in there.

Any additional color on that.

In 2022 versus 2021, and if Youre just looking at that net sales line then yes. It would appear that we're.

We're about 10% higher from a net sales out, but if you look at it on a more of a volume basis linear feet basis, I would tell you is sell through equal to sell out.

And so our main philosophy into 2023 is and how we're building. Our plan is really sell in is equal to sell out.

There is not going to be we are not factoring in any sort of inventory build in the channel.

Understood.

1 billion is effectively your view of sell out in 'twenty three.

Thanks, Dennis Thanks, Brian .

Thank you.

The next question comes from Steven Ramsey with Thompson Research Group. Please go ahead.

Hi, Good evening I wanted to jump on the question there so yes.

Q4 has even Q4 'twenty three has even.

Normalized level of inventory build in the channel that would be upside to thinking about the $1 billion of production is that a fair way to think of it.

Yes, depending upon the strength of the consumer.

If a consumer behaves.

As we have expected with the production plan that we built then yes, there would be upside based on that.

Okay helpful. And then wanted to make sure I understood on the gained.

<unk> in Texas and surrounding states.

You said that was more retail oriented than the wholesale channel, maybe just help us understand it.

If that's the case and how you see that building in the guidance this year or if that's more benefits 2024.

All of our distributors to support both the pro channel as well as retail customers. So.

It's really an overall channel opportunity to improve our representation in those markets.

Sure that we can get product to customers, where and when they need it.

Helpful. Thank you.

The next question comes from Adam Baumgarten with Zelman. Please go ahead.

Hey, good evening everyone.

Just given the kind of more gradual build out a little rock can you maybe talk to the overall dollar amount of capacity you have just because.

With the return to growth in the coming years and the push out till 2026, just curious if you have enough.

ASC to grow and maybe your kind of historical rates as we as we get into the outer years here.

Yes, we're not going to get into the capacity of the dollar value of total capacity that we have we are confident that we have the capacity, we need to be able to grow through that timeframe.

We see it come on quicker, we would use inventory as the buffer to build ahead on that.

Okay got it and then.

Near term if demand doesn't end up being stronger than anticipated how quickly can you ramp up production with that just use your existing workforce from June to hire additional people to service that additional demand.

Combination of both we would we would bring people in.

I'd mentioned in my comments, we do have a highly talented workforce today, because we've kept our most experienced and long tenured employee. So employees. So we do have the ability to bring in.

Less less scale less knowledgeable individuals on day, one and be able to train them on how to run our lines. So they become highly skilled and are with us for a long period of time, but with a much higher percentage of highly skilled individuals who know all the ins and outs of running our lives it's much easier to bring on in that line today.

Then it was during the peak of the pandemic.

Got it thanks, a lot best of luck.

Thanks.

The next question comes from Rafe <unk> with Bank of America. Please go ahead.

Hi, good afternoon, Thanks for taking my question.

Dennis I just wanted to follow up on an earlier comment about the gross margin cadence through the year.

We're expecting.

Consistent other than some of the mix shift pressure in <unk> and <unk>.

Does that mean that but in terms of the production levels you are assuming that it stays relatively consistent through the year I would think if approaches for sort of ramping the gross margin will go up with it.

Yes, so we build our plan basically assuming a level load our production to support a $1 billion in sales so.

To answer your question, it's a level load across the quarters.

Okay. That's helpful and then.

Just on the.

Are you assuming anything on the international side can you give an outlook for 2023 is there any step up there now that you have some excess capacity.

Yes, we do have the capacity international who is challenged it's fair to say.

Those markets are and a little bit different situation compared to North America. Their energy prices continue to be very very high some of the other inflationary factors have been more elevated than what we've seen here in the states. So we are expecting.

Much weaker consumer in those marketplaces are customers did infill their inventories at the end of the year. They are in good shape whatever the market throws at them along the way, but I do expect this will be a difficult year with some of our international marketplaces.

Thank you that's helpful.

The next question comes from Michael Rehaut with Jpmorgan. Please go ahead.

Great. Thanks for taking my questions.

Hey, how are you.

So first just wanted to get make sure I'm understanding it right in terms of the first quarter sales you mentioned that.

Yes.

The destocking.

Largely completed are completed by year end.

At the same time Youre looking at it.

On an adjusted basis, if you take out the build from last year.

Sales down about 8% to 12%.

And but.

The sell out sell through.

I hear it right that you are expecting it to be roughly flat year over year. So the delta would be.

The difference in channel inventory.

Well, we're thinking sell in.

In equal to sell out right and so I think Brian talked a little bit about Q1 sales being a little lighter than we would like them to be at this point in time, because the channel understand we understand the channels position they understand as well that we have inventory and we have capacity. However, we.

<unk> two <unk>.

Keyed up here in the second quarter and be more of a shift.

Much higher shift in demand in Q2.

So that's how we're looking at that first half first half would be larger than the second half as far as sales go I wouldn't call. It a 50 50 across across the haps.

Yes, I think it's important to recognize even though the channel is not stocking to the same degree that it has in the past it will be building inventory in the first quarter, it's a must to be able to service the marketplace. During the peak part of the season is some of that inventory is built so that when we talk about producing.

We're seeing the sell through that's on the course of the full year, but through the first quarter, we definitely expect inventory to be built in the channel. It's just much more conservative than what it has been in the past.

Okay. Okay.

Perhaps you can follow up with that.

Secondly, also I just wanted to make sure I understood.

You're talking about an expectation for.

Gross margins to be roughly similar throughout the year at around 37, 538%.

Would that apply the same then to SG&A and if you could just remind us how.

How to think about SG&A for the year I think the last time last call you talked about 15% to 16%.

Just curious if that still applies.

Yes, so for the full year guide, we're looking at 15% to 16%.

For SG&A and as you discussed before from a gross margin perspective, yes, we're looking at 38% pretty much.

<unk> or flattish across across the quarters I think it's just important to over the longer term here.

We do expect to see gross margins.

Increment up I would see us getting over 40% over the longer term.

As far as incremental EBITDA margins over the longer term as well I do expect us to return to that 35% to 40% incremental EBITDA margins over the longer haul and our branding is more heavily weighted to the beginning part of the year, we start that midway through the first quarter and then continue on that heavily through second quarter.

Even into the third quarter, and then trails off significantly at the end of the year.

Thanks.

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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Good afternoon, and welcome to the trucks company fourth quarter and full year 2022 earnings conference call all participants will be in listen only mode.

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

After todays presentation, there will be an opportunity to ask questions.

Ask a question you May press Star then one on your telephone keypad.

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

Please note this event is being recorded.

I would now like to turn the conference over to Victoria <unk> Investor Relations. Please go ahead.

Thank you everyone 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.

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 fourth quarter and full year 2022.

This release is available on the Companys website. This conference call is also being webcast and will be available on the Investor Relations page of the company's website for 30 days I would now like to turn the call over to Amy Fernandez Jamie.

Thank you Victoria.

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 in the forward looking statements.

For a discussion of such risks and uncertainties. Please see our most treatment Form 10-K, and form 10, Qs as well as our $19 33, and other $19 34 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 <unk> Dot Com. The company expressly disclaims any obligation to update or revise publicly any forward looking statements whether as a.

A result of new information future events or otherwise.

That introduction I will turn the call over to Bryan Fairbanks.

Amy and good evening, everyone. Our fourth quarter operating results came in ahead of our expectations and represented a strong sequential recovery as we effectively navigated the challenges of the pro channel inventory Recalibration I.

I am pleased to report that as anticipated the inventory Recalibration was completed by year end.

With good participation in the early buy season, we entered the year and upcoming season with inventory levels that are aligned with market expectations.

Consumer demand for <unk> decking, and railing remained steady during the quarter demonstrating the broad based appeal of our product portfolio and attractiveness of the outdoor living category is an ongoing secular trend.

Supported by our industry, leading brand manufacturing efficiency and the strength of our long standing relationships with best in class Channel partners Treks offers the most relevant products and strongest service levels to customers every day.

This has positioned <unk> as the primary beneficiary of positive long term trends towards outdoor living.

In addition, <unk> is the most widely available and purchase decking and railing brand in North America and around the world.

In recent months, we expanded our distribution network in Texas, Oklahoma and other southern states, enabling us to better service many of the fastest growing markets.

The world's largest manufacturer and market leader of wood alternative composite decking and railing with the most expansive manufacturing and distribution network, our dealers and contractors can confidently grow sales.

Q4 was the first quarter to benefit from the actions we took in July to align our cost structure with the lower sales volumes due to channel inventory recalibration.

We reduced production levels rightsize, our employee base, while retaining our most experienced manufacturing talent and implemented cost efficiency programs.

Additionally, further opportunities for margin expansion are expected with our ongoing investment and focus on continuous improvement programs.

In addition, we completed the sale of <unk> commercial products. The divestiture reflects our decision to focus our resources on the most profitable opportunity for our company and its shareholders, namely accelerating conversion to composites from wood and further strengthening our industry leadership.

For more than 30 years, we've invented reinvented and defined a composite decking category and innovation remains a key competitive advantage for trucks.

We also introduced a tiered warranty structure for trek stacking that underscores the value of our industry, leading good better best decking lineups.

More recently, we announced the launch the regional launch of our latest stacking innovation Trek signature decking.

This product offering elevates the premium composite decking category with the achievement of the most authentic wood aesthetics to date by raising the bar for beauty performance the sustainability.

Signature decking is backed by an industry, leading 50 year limited residential warranty and is complemented by the full range of trek signature railing.

<unk> innovation also extends to our robust sourcing and recycling efforts.

Despite.

Our general optimism, we are moving forward cautiously to ensure that we emerge from this period as an even stronger company we.

We have several key advantages that position <unk> to outperform in both the near and long term.

First the <unk> brand, which is synonymous with high performance and low maintenance continues to receive the most significantly in prestigious recognition in the industry include.

Including recently being named America's most trusted composite decking brand by life story research, earning.

Earning the highest trust rating amongst nine decking brands included in the survey receiving the best reviews and satisfaction scores amongst survey respondents and being the only decking brand to earn the maximum five star ratings.

Second the 95% recycled and reclaim content of our decking board coupled with our sustainable manufacturing process makes us the ideal choice for todays increasingly eco conscious consumer and an appealing investment for ESG and growth investors.

Third we have the highest production efficiency and the composite industry.

Fourth we.

We have the industry, leading network of channel partner with products sold through more than 6700 retail outlets across six continents. Our brand appeal and strength has recently allowed tracks to gain additional stocking positions in the pro channel.

And to extend our market leading availability in the home Center channel.

And fifth.

Texas Company history.

Cash flow generation and balance sheet positions us to positions us for today and into the future.

As we look to the long term, our new manufacturing facility in Arkansas will give us the capacity to take full advantage of the demand growth.

We are continuing with the modular buildout of the facility in 2023 and.

Then Arkansas comes online trucks will have unmatched geographical coverage with east west and central sites to serve our decking and railing customers.

And to drive additional long term growth through expansion of our international sales and addressing the adjacent cladding market.

We expect to decrease our balance sheet inventory to more normalized levels throughout 2023, which will improve cash flow.

As we've noted in prior calls we've elected to run our facilities with the assumption of a $1 billion revenue run rate for the year. However, if demand differs from expectations. We have the ability to quickly flex our production levels. Accordingly, I will now turn the call over to Dennis to provide a more detailed view of our financial performance and our outlook.

Thank you, Brian and good afternoon, everyone.

<unk> net sales were $192 million in the fourth quarter, which exceeded expectations <unk> residential <unk> commercial net sales were $181 million and $11 million respectively. As previously discussed fourth quarter residential sales were impacted by the inventory recalibration in the pro channel spurred by <unk>.

Concerns over a potential easing in consumer demand due to rising interest rates declining consumer sentiment and expectations of a general slowing in the economy. However, as Brian mentioned, we are pleased to report that the pro channel inventory correction was completed by year end 2022 as anticipated.

As a result, we posted a significant sequential recovery and consolidated gross margin and <unk> residential gross margin, which increased to 34, 1% and 36, 1% respectively in the fourth quarter.

In the year ago period consolidated gross margin was 38, 9% and <unk> residential gross margin was 39, 7%.

Selling general and administrative expenses were $35 4 million or 18, 5% of net sales in the fourth quarter compared to $36 7 million or 12, 1% of net sales in the fourth quarter of 2021.

Excluding $4 3 million of other expenses related to the sale of trucks commercial and non executive retention compensation SG&A was $31 2 million or 16, 2% of net sales.

During the fourth quarter, we completed the sale of our wholly owned subsidiary and reportable segment trucks commercial the dive.

Best picture reflects our decision to focus on the driving the most profitable growth strategy for the company and its shareholders through the execution of our outdoor living strategy.

The sale resulted in a $15 4 million loss in the fourth quarter.