Q2 2023 Trex Company Inc Earnings Call
Good afternoon, everyone and welcome to the trucks company second quarter 2023 earnings Conference call.
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At this time I'd like to turn the floor over to Victoria NASA Ma'am. Please go ahead.
Thank you Jamie and thank you everyone for joining us today with us on the call are Bryan Fairbanks, President and Chief Executive Officer, Brad Mcdonald, Chief Accounting Officer, and Karen Strosnider Director of financial planning and analysis joined named Brian Brett and Kara, It's Amy Fernandez.
Vice President General counsel as well as other members of the checks management.
The company issued a press release today after market close containing financial results for the second quarter 'twenty twenty-three.
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 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.
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 Trek stock comp the.
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 good evening and thank you for joining us today to discuss our second quarter 'twenty.
Three financial and operating results. We're pleased to report that tracks delivered sales that were significantly above our guidance range, indicating resilient consumer demand for our products and the strength of the outdoor living category.
We experienced mid single digit growth in channel sell through despite the small sales decline compared to last year's record second quarter. When the channel was building robust inventories.
In contrast, despite our strong sales in the first half of the year. We believe the channel remains conservative holding inventory levels below the norm for this time of year.
While we remain cautious in our outlook. This performance has certainly improved our confidence in the consumer spending behavior and supports our experience that in challenging economic times consumers are more inclined to invest in areas that add value and enjoying it to their existing homes.
Antitrust the trek brand consistently add value to their outdoor living spaces.
Outdoor living remains the fastest growing category in the repair and remodel sector.
In support of our brand strategy, we continue to make significant investments in decking and railing products at every price point to make it easy for consumers to make the trek decision.
They're trading up from wood, decking, and railing or building the ultimate outdoor space with high end products like trek transcend lineage or signature decking.
Across the spectrum, the benefits of low maintenance trek composite decking and railing coupled with the easy installation of our products offers a compelling value proposition for the Trek brand.
Thanks to our leading distribution network extensive retail presence and top notch dealers and approached channel tracks is the most widely available and purchase decking brand in North America and worldwide repeatedly earning recognition as the brand of choice for consumers and contractors alike.
Our commitment to spending on branding programs and the expansion of our product portfolio are yielding strong returns as we accelerate the conversion from wood to composite decking and railing.
We're also supporting the launch of new products at both the entry and high end parts of the market.
Over the past several quarters, we've taken advantage of reduced production levels to implement a series of cost reduction and continuous improvement projects that we could not introduce while our plants are running at full capacity.
Specifically, our efforts have centered primarily on driving production optimization and efficiency lineup grades energy efficiency and raw material processing improvements.
Collectively these initiatives resulted in our second quarter gross margin of 43, 9% compared to residential gross margin of 41, 7% in the 'twenty two quarter.
This 220 basis point improvement in residential margin.
Less than full capacity is indicative of the substantial leverage inherent in the trek business model.
While we pursue cost reduction and continuous improvement programs to further strengthen our profitability.
We also continue to drive innovation through consistent investment in new product development.
In the second quarter, we introduce trek select T rail system, a competitively priced high performance low maintenance composite rail system that enables us and our channel partners to compete more aggressively at the entry level specifically against vinyl systems.
This innovative system expands our existing trek railing portfolio and is backed by a 25 year limited residential warranty and a 10 year commercial warranty.
Consistent with <unk> legacy of sustainability components are made for a minimum of 40% recycled materials.
We see railing as a growth opportunity that complements our decking portfolio and believe the tea real introduction will enable us to meaningfully increase our railing sales by expanding the addressable audience and competing price points not served before by our existing railing lineup.
Earlier this year, we launched our signature decking product at the top of our product spectrum, which provides all the benefits of trek stacking with unprecedented aesthetics that mirrors, the look and feel of true hardwood decking. We also added two incremental colors to trek transcend lineage decking introduced last year and quickly gaining phase.
We also redesigned our trek stack design tool and online deck planner, which provides contractors and consumers with comprehensive digital software predict planning.
In addition to offering three D rendering excusing realistic trek product imagery and collections the software assists users with budgeting drafting blueprints for permitting and creating a shopping list for all of the items needed to build a deck.
These features make this product ideal for DIY ers as well as those working with professional contractors.
Turning now to our capacity expansion, we continued to make progress in the modular construction of our third facility in little rock, Arkansas.
With its favorable geographic location and proximity to a central raw materials, a major transportation hubs. This.
This facility will be our most efficient when it comes online.
We expect our production from this plant will enable us to efficiently meet the long term demand for trucks decking and railing products as well as support other long term growth initiatives. This facility will utilize the latest technology and innovation to minimize our carbon waste and water footprint, which will drive continued improvement in our.
Our sustainability metrics.
We recently published our fifth annual ESG report, highlighting our sustainability integration across the company and affirming our commitment to pursue responsible and sustainable growth.
We are pleased to announce that in 2022, we initiated a program to divert construction waste and end of life Trek stacking from landfills, providing full circle recycling for trek stacking.
While the trek stacking from our earliest days remains in use across the country in the world. We recognize the need to support future generations, who may want to replace their existing composite deck with new Trek stacking. This is just one way we are helping to contribute to a more sustainable future as.
As you know we're in the midst of a formal search for a new CFO in the meantime, I'm pleased to call are Brad Mcdonald, our Chief accounting officer to provide a review of the Q2 financials Bryan.
Thank you, Brian and good evening.
Relative to the previous quarter my prepared remarks will compare our second quarter 'twenty twenty-three financial performance to the second quarter 2022 trucks residential results given the divestiture of trucks commercial products at the end of 2022.
Net sales of $357 million in the quarter exceeded our expectations, but declined from $374 million of residential net sales in last years second quarter due to non recurrence of the channel inventory build that occurred during the first half of 2022.
Despite reduced capacity utilization on a year over year basis second quarter gross margin of 43, 9% increased 220 basis points compared to residential margin of $41 seven in the prior year period, driven by production optimization and cost savings programs when.
We lowered production starting in the second half of 2022.
Look the opportunity to prioritize cost savings programs that quickly produce results and yielded benefits in the first half of 2023.
We expect these efforts and improvements to continue.
Selling general and administrative expenses were $52 million or 14, 5% of net sales in the second quarter of 2023 compared to $37 million or 10% of trucks residential net sales in the second quarter of 2022.
The increase was primarily due to personnel related expenses disposal of certain equipment and expenses related to the exit of our prior corporate headquarters.
On a consolidated basis 2023 second quarter net income was $77 million or.
Or 71 cents per diluted share compared to 89 million or <unk> 79 per diluted share in the year ago quarter.
Second quarter, EBITDA was $117 million or 32, 8% of net sales.
From a year to date perspective.
Net sales for the first half of 2023 totaled $595 million compared to $701 million of residential net sales in the first six months of 2022.
Net income was $118 million.
Or a dollar nine per diluted share compared to a $160 million or $1 40 diluted share in the first half of 2022.
On a consolidated basis.
Year to date, EBITDA was $186 million with an EBITDA margin of 31, 2%.
Compared to EBITDA of $235 million with an EBITDA margin of 32, 3% in the comparable period last year.
Second quarter operating cash flow was $223 million as we converted significant working capital into cash from collection of accounts receivables and inventory reduction.
Capital expenditures in the quarter were $43 million, primarily related to the build out of the Arkansas facility.
Supported by our operating cash flow and continued confidence in our long term growth opportunity.
We repurchased 265000 shares of Trek stock in the second quarter were $16 million.
As of the end of the quarter $10 5 million shares remain available for repurchase under the program.
I will now cover updates to our market guidance.
Our first half results and greater visibility have put us in a position to provide full year revenue guidance.
Our confidence in consumer buying trends is improving.
We remain cautious.
For 2023, we expect revenues of 1.04 billion to 1.061 billion.
That reflect projected sell through as we anticipate year end channel inventories to be below 2022 levels.
Third quarter revenues are estimated to be in the range of 280 million to $290 million.
With fourth quarter results, reflecting both lower seasonal demand and channel inventory draw downs.
Also we are pleased to increase guidance for our full year EBITDA margin.
To a range of 28% to 29%.
A 200 basis point increase when comparing the new guidance midpoint to the previous guidance midpoint.
This guidance includes our expectation that SG&A will be at the higher end of the range of 15% to 16% of net sales.
Capital spending is estimated at 145 million to $155 million, an increase due to timing of cash flows related to the Arkansas build out.
Our interest expense guidance is revised to $5 million to $6 million for the year.
Depreciation and amortization.
And our tax rate guidance remains unchanged at $45 to $47 million and 25% to 26% respectively.
With that I'll now turn the call back to Brian .
Brad our industry, leading brand expanded portfolio of products that appeal to a broad range of consumers and top distribution and sales channel network or a central competitive advantages for tracks that position us to capture the substantial long term growth opportunities ahead.
I appreciate the hard work and dedication of our employees and partners, who have contributed tremendously to our company's success operator, Please open the call to questions.
Ladies and gentlemen at this time, we'll begin the question and answer session.
To ask a question you May press Star and then one using a touchtone telephone.
Draw your questions you May press star two.
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Once again that is star and then one to join the question queue.
Our first question today comes from Keith Hughes from tourists. Please go ahead with your question.
Hi, Thank you just a question on the implied guide for the fourth quarter, that's a pretty big reduction I understand is seasonally weaker but that's a good bit weaker than we historically see in past years.
Given that sell through has remained positive do you anticipate the channel taken down that much inventory at the end of the year or is that what's driving it down so much.
Yes, Keith that's exactly what's driving it down as you will recall the end of the first quarter and into the first end of the fourth quarter and into the first quarter, our inventory built and the timing of that inventory build can change from year to year. So we're expecting with the conservatism in the channel with higher.
Interest rates that the channel will end their inventories below where they were in 2022 and that's the difference now that is just purely timing that difference will come back to us in the first quarter and first half of next year.
Okay are you hearing from your channel partners that this is the stance, we're taking or you just sort of making an assumption based on the trends.
We are hearing from our channel partners are they will continue to be conservative on inventory, especially at the pro dealer level, a little bit less so from a distribute distribution perspective, but we do expect that they'll take that inventory on a heavier basis into the first quarter, Okay and one final question.
<unk>.
Revenue in the quarter can you give us idea of how much of it was price mix how much volume metric one there's very little price involved during the first half of this year or is it maybe 1% of price on average through the first half okay. Thank you.
Thanks Keith.
Our next question comes from Tim Weiss from Baird. Please go ahead with your question.
Yeah, Hey, guys nice job nice job good afternoon. Thanks.
Maybe just to start on the sell through.
If you can maybe kind of parse out what is I guess embedded in that in the back half guidance around the sell through.
Yes for the back half, we do expect to have a continued strong third quarter historically third quarter is sequentially lower than second quarter, but as we look at the full year type numbers I am expecting roughly flattish on a sell through basis with prior year.
And as I just mentioned with the prior question.
That will exclude any normal inventory build that we would have during the December months.
Okay. Okay. So if you're kind of up a little bit from a sell through basis in the first half.
Maybe just assuming things are all potentially just a touch weaker in the back half on sell through it is the way to think about maybe a touch weaker if we look at the first quarter. We were down mid single second quarter. We were up mid single so roughly flat on a year to date basis.
Right now given what we see with the consumer I don't see much changing with that over the next 180 days.
Okay, Okay very good and then just.
On the mix side.
Let me sort of.
You know kind of mix changes within the portfolio, maybe trading down trading up.
Thank the consumers kind of reacting to just kind of overall inflation and just is that kind of led to any sort of kind of mixed implications with your portfolio.
We have not seen any significant mix implications as you are aware, we've launched both the signature and lineage dashboards at the top end of our spectrum to make sure that those customers who are looking for those high end products are driven by the design and capabilities of those products. So no no issues from a mixed perspective.
Okay, Okay, great well good luck on the second thanks, Tim Thanks, guys.
<unk>.
Our next question comes from John Lovallo from UBS. Please go ahead with your question Hey.
Hey, guys. Thank you for taking my questions as well.
If we think about the gross margin in the quarter versus your expect expectations. I mean can you kind of help us kind of bucket that.
Benefits from maybe volume leverage cost actions materials.
Things of that nature. Please.
Yes, so we've talked a little bit about deflation in the past as we are primarily focused on recycled raw materials. It doesn't move like market commodities do a virgin resin.
So there was just a small amount of deflation within the quarter itself, but by far the largest driver of it is the continuous improvement projects and teams that we have together and the building momentum of that flywheel as we started to pull down our production in the back half of last year, we were really able to focus more on.
Our engineering and expertise on that cost reduction side, we've stabilized the business at this point at running the volume. We're at at this point, we're able to drive meaningful improvements through the system.
Got it Okay, and then on SG&A to to hit the high end of the 15% to 16% it would apply to imply something like 17% on average in the second half looks a little bit elevated on a dollar basis. I guess the question is I mean is this really driven by continued brand spend moving into the back half of the year.
Yes, you will see a significant increase compared to last year, where we pulled back significantly on the brand spend in Q3 and Q4 and we're seeing the brand spend is working it's bringing that consumer through to the channel to biotech products.
Alright. Thank you guys. Thank you.
Yeah.
And once again, if you would like to ask a question. Please press star and then one on your Touchtone telephone. We also ask that in the interest of time, please limit yourselves to one question and a single follow up.
Our next question comes from Ralph <unk>.
<unk> from Bank of America. Please go ahead with your question.
Yes.
Great. Thanks for taking my question.
Brian just following up on the kind of fourth quarter comment can you just.
Help us kind of understand it is that incremental destocking the rest of the year.
Or is that just kind of what's already happened year to date in the channel in other words like do you expect sell in to lag sell through in.
In the fourth quarter of the year.
So last year, we did have some restocking at the end of the year, we were successful in getting to the channel inventory targets and we started our early buy program.
In December and ran through the end of March this.
This year as we look at where interest rates are the desire for the channel to hold inventories.
Inventories later in the cycle as possible, we will not have a program to the same degree that we did in the prior year. So I wouldn't really call. It incremental destocking, it's really just a timing of when that inventories moving into the channel.
Okay very helpful. And then just following up on the earlier comments on SG&A.
Youre, taking up the percent on Ohio higher sales number how do we just think about that kind of longer term and going and into next year.
There is still leverage available to us within SG&A as we grow as an organization and so thats something as part of the value proposition with <unk> as we grow that top line, we can leverage the the SG&A line, but.
But we are seeing the branding working and pulling people through and in this economic environment I don't know what we're going to see first half of next year. We will continue to look at the things that are working to drive people to our channel partners to buy trucks products.
Great. Thank you.
Yes.
Our next question comes from Alex <unk> from B Riley FBR. Please go ahead with your question.
Thank you and nice quarter gentlemen.
Could you quantify the onetime items in the second quarter within the SG&A line.
They were minimal so there were some moving out from our old headquarters as well as some asset write offs in total it was about one 5 million.
$1 5 million between the two.
Okay.
Excellent and then is it possible to estimate the annual savings associated with your other cost reduction efforts of process improvement initiatives.
We have not put an exact number on that I think it's fair to say that.
As a management team, we're highly focused on gross margin and EBITDA margin were looking for continuous improvement in everything that we do.
The flywheel really has kicked in during the second quarter and will continue to see that some of that will be offset by lower volumes as we move through the rest of the year is seasonally lower revenue along the way, but it is something that we will continue to focus on a sizeable part of that increase came from those improvement actions.
Thank you very much.
Thanks.
Our next question comes from Ryan Merkel from William Blair. Please go ahead with your question.
Hey, good afternoon, and congrats on the quarter.
Thanks, Ryan I wanted to I wanted to also follow up on the fourth quarter can you just quantify the drawdown on inventory and then is that is that something that you'll see in the first quarter. You mentioned it was just delayed.
Yeah, I estimate that number to between between 60 and $80 million.
And yes, I would expect to see that move into the first quarter now it's possible depending upon the desires of the channel that some of that may be in the fourth quarter. So right now the expectation is that inventory build portion moves out to the first quarter.
Got it Okay. That's helpful. And then I had a question on second half gross margin it looks like guidance implies that at <unk>.
Down to just unpack, what's getting in the second half I realized revenues are up a little bit last but is there anything else going on.
No there's really nothing else it would be going on that would drive that the revenue drives down we still do have the fixed cost within the operation the maintenance activities that we take indirect labor those sort of things that don't all go into inventory. So we do see a step down and I'll remind everybody on the call.
The best way to look at tracks is on an annualized basis for gross margin there will be variances from quarter to quarter, depending upon our sales volume as well as how much were running through our facilities and we don't really focus on it as much on a pure quarterly basis, but what are we driving on a full year basis for our shareholders.
Got it thank you pass it on thanks.
Thanks.
Our next question comes from Stanley Elliott from Stifel. Please go ahead with your question.
Hey, everybody. Thank you for the question.
Picking up on the margin side can you talk maybe how should we think about the margin split between three.
<unk> and <unk> with the moving parts in the revenue and then also kind of voluntary destock it sounds like.
Yes, So I think if you look at it there'll be a fairly sizeable difference because of the difference in revenue between those when you look at the third quarter Youre, probably looking at a step down between three to let's call. It 300 to 350 basis points and then the difference would fall out in the fourth quarter.
Great guys. Thanks, so much.
Thanks.
Our next question comes from Joe <unk> from Deutsche Bank. Please go ahead with your question.
Hey, Brian Good evening doing well Hey, Joe.
If I look at your balance sheet at the end of 2022, when you have the destock and Youre running the plants at about $1 billion run rate. You were building finished good inventory you carry that into the first quarter and then it looks like with the upside to the second quarter sales.
Sold out of inventory kind of 40 to 45 million sequential change lower and finished good inventory just curious with the with the assumptions you're making in the back half and I hear you on maybe $60 million to $80 million is pushed from <unk> to one <unk>.
What are you planning to do with respect to finished good inventories is that something you're willing to do again this year take that on and.
Carry that.
The conference has them in the channels.
Yeah, we're absolutely willing to build into the inventory to support the channel knowing the conservatism is out there I think we've got a really good view of the consumer and we will have of course, a better view of the new year as we get closer to the end of the year I don't see us building to the same level that we were last year, but ended the year does tend to be the high.
Inventory level historically.
As we build into early buy.
And so thinking about how that manifests in margin in the first and second quarter.
Along with some of the deflation in the improvements you've made to the production processes. We would assume we should assume I suppose that the favorability and profitability would get hung up on the balance sheet that's fine.
Second half margin guidance correct.
We haven't provided any guidance on that I guess it would depend upon how much of that inventory gets used and in what quarter.
Alright understood. Good luck, thanks a lot.
Yes.
Our next question comes from Michael Rehaut from JP Morgan. Please go ahead with your question.
Hi, good afternoon, thanks for taking my questions.
First of all just wanted to revisit the upside on the second quarter sales are which is obviously well above guidance. If you could kind of parse out.
The drivers of that upside and also comment on a sell through versus sell in.
You know how much of the strength was due to better than expected sell through.
I would say all of the strength was due to better better expected sell through as we moved into the quarter and as the quarter moved its way through that sell through increased and as we look at the month of July it's continuing at an elevated level.
Fairly normal in a seasonal business for those peak summer months to be the strongest sell through periods for us but.
But I would say the strength of the consumer their desire to continue investing in outdoor spaces and remodeling projects is holding up a little bit better than what we had expected and we sure hope that continues.
Okay I appreciate that Brian So I guess does that mean that embedded in your back half guidance, you're still expecting sell through to be to be positive or I know you said flat I guess for the third quarter is that any does that reflect any type of deceleration.
We're expecting on a full year basis to be roughly flat.
Okay, Great and then just secondly on the gross margins you know you had some nice upside there as well and you cited a lot of the continuous improvement projects that that you know are yielding benefits yielding some fruit.
I think earlier you had talked about.
If you think about the gross margins that you achieved.
From like 2016 to 2019 or up 42%.
You had said that you expect given the lower level of capacity utilization that you have today.
On a normal basis, you might be below that.
That still how you feel given some of the upside perhaps that you've seen in the second quarter in terms of.
The continuous improvement initiatives has that changed at all.
You know relative to your prior comments.
I think theres a lot of opportunity for us as we continue to go after cost within the organization.
That manifests itself over the long term for gross margin over any specific quarter Theres a lot of other business decisions that are made as well in business opportunities. So overall I would expect that you will continue to see us driving for improved gross margins here, but we also know there's changes to businesses each year.
And what's happening with the economy, and what our customers need from trucks.
Thanks, great. Thanks.
Our next question comes from Jeffrey Stevenson from Loop capital. Please go ahead with your question.
Hi, Thanks for taking my questions today, and congrats on the strong quarter.
I think last earnings call, Brian you mentioned that dealer and distributor partners, we're conservative about sell through demand expectations. This year given that reduced early buy I'm wondering if the channel has become incrementally more optimistic after the strong second quarter demand or whether it's relatively stable from a kind of where things were at that.
Clint.
Yeah, I think it's fair to say the channel has become more optimistic than where we were I believe in the last earnings call I mentioned that I would have been happy to see an additional $30 million to $40 million of inventory in the channel heading into the season, obviously that wasn't there you see that that came off of our balance sheet to be able to support.
Fort the marketplace, but yeah, our channel partners are definitely feeling the consumer being stronger and the marketing actions that we continue to.
Pursue quite heavily is working and bringing those customers in the door.
Great.
And then just wondered if you could talk more about the demand trends you've seen in the retail channel.
There was some concerns over potential slowdown after at home centers play that a deceleration on large ticket R&R last quarter I'm wondering if you saw any sequential change in channel demand.
Through the pandemic the home centers grew more quickly.
Because they were available to be able to sell.
Maintaining those gains that we're seeing in the home home centers and continuing to do very well from a special order perspective, so both what's selling on the shelf as well as what they're ordering on a special order basis.
Alright, good levels.
Great. Thanks, Brad.
Thanks.
Yeah.
And our next question comes from Philip <unk> from Jefferies. Please go ahead with your question.
Hey, guys congrats on a very strong quarter.
Ryan I guess, a destock the channel and the channel that Youre, calling out is that all happened in the fourth quarter, just because it sounds like sellout strengthen through July and an implicit in your sales guidance and EBITDA guidance for the full year does that assume youre curtailing your inventory to a certain degree in the fourth quarter like ahead of where sell out.
It's tracking a track for the year.
No we will be putting the inventory on our balance sheet.
It just won't be turning into revenue. So it will be building it recognizing that it's moving into the new year, we will need that inventory.
Okay. That's helpful.
And then from a capex standpoint, it sounds like Capex is going to come in closer to the higher end some of that timing any color on how to think about next year is there a pull forward dynamic of sorts.
Now there'll be about a $10 million difference, we haven't provided a number but I think in the past. We've said that we thought next year would be similar to what we saw this year from a total capex perspective.
Okay. So that's still a good way to think about it then yes.
Hello, Thank you.
Yeah.
Our next question comes from Adam Baumgarten from Zelman. Please go ahead with your question.
Yeah I was just wondering.
Theres plenty of industry capacity now for the first time in years also playing a role and how distributors order may be closer to when they need the product and stocking up like they did in the past.
I'm sure there's some of that thinking in the marketplace, but I would say, it's probably the bigger issue was the confidence in that end consumer of what they were going to do that nobody wanted to get ahead from an inventory position.
Okay got it and then just thinking about raw materials as you get into the back half do you expect more meaningful deflation that you saw in the first half at this point.
Oh, no we I think H D. P will probably level out where it is so we've seen a little bit of benefit there. We just don't use that much Virgin H D. P. We don't use much in the way of Virgin PVC.
While it's nice we're not seeing the costs go up on them like we did for a couple of years.
It's not something that drives a large benefit to us because of our reliance on using recycled polyethylene.
Okay got it thanks best of luck.
Thanks.
Our next question comes from Steven Ramsey from Thompson Research Group. Please go ahead with your question.
Good evening on the brand spend that's being affected what is driving that effectiveness and brand spend in the current times more effective than in the past.
Well, we had moved away from a heavy brand spend through the entire pandemic in the first half of last year, we did get back into roughly a full load of brand spending and then pulled it back significantly as we were restructuring or our business to achieve our financial goals and the.
Market volume that's out there.
We look at each one of the programs that we're offering from a branding perspective to understand its effectiveness in the market. How does that result in website views and it's not just about people going to the overall trek stock comp how are they interacting with us are they buying samples are they looking for a contractor are they looking for a retailer.
Or to buy that and we've been able to correlate those numbers pretty closely over the years to understand the effectiveness of that marketing spend versus bringing people through the channel and resulting in an end market sale.
Yeah.
Okay helpful. And then thinking about you having a more robust view channel partners on the market. The actual results, beating your view thinking about channel partners, what is keeping them from buying more do you see a catalyst on the horizon that Navy.
<unk>.
Stocking to greater levels heading into 2024.
I think if we all see that the consumer is going to hold up to the same level that it did this year and get back to a growth type of environment. Our channel partners are absolutely going to want to build more inventories into the year and we'll make sure that we have appropriate safety stocks here as well to be able to support the channel.
Okay.
Great. Thank you.
Thanks.
Our next question comes from Kurt Yinger from D. A Davidson. Please go ahead with your question.
Great. Thank you.
Brian I guess I'm just curious your thoughts on kind of wood composite conversion this year and as you look forward and you think about the accelerated rate of conversion.
And call it two years post pandemic.
How confident are you or how are you thinking about the ability to kind of achieve those elevated conversion rates going forward versus.
Maybe following back to something more normalized that we saw in the 'twenty tens period.
So there was a lot of noise throughout the pandemic and composites.
Well outgrew and al converted against wood during that timeframe I think the best way to look at it and I don't have complete data for this year, but the anecdotal data I would say is as we look at over the past three years, we've still been converting at about 200 basis per year basis points per year, it's been choppy.
One year being really high the next year being flat, maybe down a little bit thus.
Thus far this year.
We're continuing to see positive indicators from the market that that conversion is continuing.
Got it thanks, and then just one follow up on capital spending could you remind us where you're at in terms of.
The total Arkansas spend at this stage and then I guess, if you were to try to estimate like a run rate or normalized capital spending number excluding that what would that look like.
Our maintenance Capex is going to be roughly 5% of revenue.
The the little rock number.
Thank is about $150 million, maybe $170 million.
Got it okay. Thanks, So we've got a ways to go with that.
Okay.
Our next question comes from Matthew Bouley from Barclays. Please go ahead with your question.
Hey, good evening, everyone. Thanks for taking the questions.
In terms.
In terms of the the channel inventory.
<unk> sort of mentioned that the channel is kind of looking for better visibility or comfort in the consumer to kind of returned to more normal ordering patterns is that a comment that as we think about 2024 from what you can tell today that maybe we could see a more return to more normal seasonality next year or should we think that what we saw this past year.
It might still be the kind of new normal for the near term.
I think the return to normalcy is what we're all looking for so our operations have absolutely stabilized.
The channel got used to running with very very low inventories high turns.
Margins in this year some of that's normalizing back out again into holding normalized inventories going into the season itself, but that doesn't completely turnaround in one year. So I think we will see further normalization next year I hope it's completed in 2024, but it may extend out into 2012.
Five.
Got it Okay. That's helpful. Thank you and then.
Previously you guys had spoken to sort of 100 to 150 basis points of better gross margins on a $100 million of higher sales you know obviously your visibility to margins has progressed here in production for the balance of the year is that still a good rule of thumb for us to think about.
Yes.
Alright, Thanks, guys. Good luck. Thanks.
And our next question comes from Reuben Garner from the Benchmark Company. Please go ahead with your question.
Thank you and good evening, everyone and congrats on the strong results.
So I guess first a clarification.
So you were previously building for $1 billion sort of production level your outlook now something better than that for for revenue have you had.
People or lines or anything or will you have to in the second half and is that kind of baked in for <unk>.
The gross margin outlook, there's some investment in ramping back up or are you able to kind of managed by working using some of your existing inventory.
As we get later into the quarter, we did start to add back it's not something that we can do overnight.
And we will we will add that on as we go through the rest of this year, but it does take time to add those people lines Jim.
Okay and then.
The next question is.
Working capital one.
It's been a source of Oh excuse.
Excuse me on use of cash in the first half of the year I know there were some things going on in the first quarter.
With new potentially having to build inventory how do we think about how working capital will play out in the second half of the year.
Well youll see that accounts receivable in the first quarter accounts receivable balance was all collected in the second quarter, you'll see the second quarter balance all collected within the third quarter and then the majority of that receivable balance will turn to cash by the end of the year and certain amount of that will be offset by higher inventories.
Perfect. Thanks, guys I appreciate it good luck going forward.
Thanks.
Yeah.
And ladies and gentlemen, with that we'll be concluding today's question and answer session I would like to turn the floor 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 through the rest of the quarter.
Good evening.
And with that ladies and gentlemen will be concluding today's conference call and presentation. We thank you for joining you may now disconnect your lines.