Q3 2023 Trex Company Inc Earnings Call

Good afternoon, and welcome to the truck company third quarter 2023 earnings Conference call.

All participants will be in listen only mode.

Did you need assistance. Please signal a conference specialist by pressing the star T forward base IBRA.

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

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

To withdraw your question Press Star then two.

Please note. This event is being recorded I would now like to turn the conference over to Vicki knock one. Please go ahead.

Thank you everyone for joining us today with us and nickel are Bryan Fairbanks, President and Chief Executive Officer. He is joined by Finance Executive Brad Mcdonald, Chief Accounting Officer, and Carol Strosnider director of financial planning and analysis as well as EMEA Fernanda.

Is vice President General Counsel together with other members of trucks management, including the recently named Senior Vice President and Chief Financial Officer, Brent Aloft Chick.

The company issued a press release today after market close containing financial results for the third quarter of 2023.

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 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.

All 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. Another 1934 act filings with the SEC. Additionally, non-GAAP financial measures will be referenced in this call.

<unk> measures to the comparable GAAP financial measure can be found in our earnings press release at tracks 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.

Good evening and thank you for joining us to discuss our third quarter 2023 results.

And all of our strong second quarter performance.

<unk> delivered another robust quarter with improvements across all key financial metrics consumer demand for <unk> products remained resilient with channel sell through growth in the mid single digits.

Sales growth in the quarter also benefited from a successful launch of new products, along with our brand and marketing investments.

These products resonate with consumers, who value the aesthetics and low maintenance advantages of trucks products over traditional what.

We continue to leverage our industry, leading manufacturing capabilities driving further cost reductions through increased production efficiencies, resulting in an adjusted gross margin of 41, 8%.

This strong performance on less than full capacity is a clear indication of the leverage inherent in the <unk> business model.

Adjusted EBITDA margin reached 31, 5% inclusive of our continued marketing and branding investments.

As we highlighted at our recent analyst day, we remain focused on continuing to grow our market share as we convert more of the traditional wood decking market to trucks.

Innovative new products remains central to our growth strategy and we continue to expand our portfolio to meet consumer needs and preferences across all price points.

In the third quarter, we experienced continued positive market response to our <unk> signature and trucks transcend lineage products. Two recently launched lines targeting the higher end consumer lineage with its proprietary eat mitigation technology.

On a more refined clean look has been well received in the marketplace and after successful testing in selected geographies. We play in a national rollout for signature decking, which is competing well at the high end of the market.

We spent many years developing these game changing products and are pleased with the reception, we're seeing from both our channel partners and consumers.

We also see significant growth potential in our broader residential segment, driven by railing fasteners cladding, and Samsung, which together with deck and brings our overall addressable market opportunity to approximately $14 billion.

We believe in opportunities in railing alone offer substantial growth potential.

Growth will be driven by expanded attachment rates, coupled with attractive solutions to match consumer preferences at each price point, while still delivering on trucks quality.

Well, we have manufactured and sold trucks railing products since our early years, we recently accelerated our efforts to further penetrate the market, notably we introduced our trek select key rail system in the second quarter. This composite rail system is priced competitively against low cost vital railing get.

Vital both in terms of aesthetics and performance T rail is off to a great start expanding our share in railing and building greater awareness of the <unk> brand in this important category.

T rail launch continues our strategy of providing railing product at every price point as we've successfully done in decades.

As we continue to drive innovation through new products and tap into a range of new growth opportunities. We are expanding our production capacity in a disciplined manner.

We will continue to develop our new facility in Arkansas, using a modular approach, enabling us to match new capacity with anticipated market demand, while allowing us to incorporate emerging technologies that will further optimize production efficiency.

As a part of our planned investment we intend to incorporate AI to further improve product quality and create the lowest cost manufacturing facility in the industry.

We continue to focus on long term growth and delivering value to shareholders in a sustainable manner.

<unk> leadership is important to us as it's been part of our company's DNA since its inception, and our sustainability goals align with profitability targets.

We remain committed to the reduction of waste water and energy consumption.

Powering and investing in our valuable employees and helping build a strong and healthy communities, where we operate through our recycling programs employee volunteer efforts and charitable donations.

Now I will turn the call over to Brad Mcdonald, Chief Accounting Officer for a review of our financial performance.

Thank you, Brian and good evening as in the previous quarter, given the divestiture of trucks commercial products at the end of 2022 and to provide a more meaningful comparison my comment mats will compare our third quarter 2023 financial performance to the third quarter of 2022 trucks residential resort.

<unk> <unk>.

Net sales of $304 million and exceeded our expectations and were significantly above last year's $178 million of residential net sales, which were impacted by channel inventory destocking.

Improved utilization rates from higher production volumes and the benefits from our investments in production efficiencies and cost out programs drove a significant improvement in gross margin to 43, 1%.

During the quarter, we recognized a benefit of $3 8 million due to a reduction in the warranty reserve related to the legacy surface flaking issue that affected a portion of the products manufactured at the Nevada plant prior to 2007.

Excluding the warranty benefit gross margin was 41, 8% compared to residential gross margin of 25, 4% in last year's third quarter.

Selling general and administrative expenses were $45 million or 14, 7% of net sales compared to $25 million or 13, 9% of trucks residential net sales in the 2022 quarter.

As discussed in the previous quarter, we're returning to more normalized SG&A spending levels with a focus on branding marketing and R&D.

Net income in the 2023 quarter was $65 million or <unk> 60 per diluted share compared to <unk> residential net income of $15 million or <unk> 14 per diluted share during the prior year quarter.

EBITDA was $99 million and EBITDA as a percentage of net sales or EBITDA margin was 32, 7% compared to trucks presidential EBITDA of $32 million and EBITDA margin of 17, 8% in the third quarter of 2022.

Excluding the warranty benefit.

Net income in the 2023 quarter was $62 million or <unk> 57 per diluted share and adjusted EBITDA was $96 million and EBITDA margin was 31, 5%.

Year to date 2023 net sales were.

Were $899 million compared to $879 million of residential net sales in the year ago period.

Net income was $183 million or $1 69 per diluted share compared to trucks residential net income of $177 million or $1 57 per diluted share in 2022.

Year to date 2023, EBITDA was $285 million, resulting in an EBITDA margin of 31, 7% compared to trucks residential EBITA of $268 million and EBITDA margin of 35%.

In 2022.

Excluding the warranty benefit year to date 2023 net income.

It was $181 million or $1 66 per diluted share adjusted EBITDA was $281 million and adjusted EBITDA margin was 31, 3%.

Year to date operating cash flow was $288 million compared to $244 million in the comparable period of 2022, as we converted significant working capital into cash through inventory reduction.

Capital expenditures amounted to $113 million year to date, primarily related to the build out of the Arkansas facility.

I will now turn to our updated guidance.

We are projecting fourth quarter revenues in the range of $185 million to $195 million.

Reflecting both seasonally lower demand and the shift of our pre buy to the first quarter of 2024.

As discussed in last quarter's conference call.

The resulting impact is that full year 2023 revenues.

Injected to be 1.09 billion, assuming the midpoint of the fourth quarter revenue guidance.

This is an increase from the 140 4 billion to $1.06 billion range provided during our last update.

We are also increasing our full year adjusted EBITDA margin guidance to be between 29, and 29, 5% compared to the previous range of 28% 29%.

Operator: Good afternoon and welcome to the Trex Company third quarter 2023 earnings conference call All participants will be in listen only mode So do you need assistance? Please signify conference specialist by pressing the start key followed by zero After today's presentation, there will be an opportunity to ask questions to ask a question who may press star then one on your telephone keypad? Do withdraw your questions?

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 guidance is projected at the higher end of the estimated 145 million to $155 million previously provided.

Depreciation and amortization will range from $47 million to $50 million.

Viktoriia Nakhla: Press star then two please note this event is being recorded I would now like to turn the conference over to Nikki Nakhla please go ahead Thank you everyone for joining us today with us on the call are Bryan Fairbanks president and chief executive officer. He is joined by finance executives, Brad McDonald, Chief Accounting Officer and Kara Strosniter director financial planning and analysis as well as Amy Fernandez vice president general counsel together with other members of Trex management including the recently named senior vice president and chief financial officer Brenda Lovcik The company issued press release today after market closed containing financial results for the third quarter 2023 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 social security 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 10k and form 10qs as well as our 1933 and other 1934 act filings with the SEC Additionally non-gap financial measures will be referenced in this call or reconciliation measures to the comparable gap financial measure can be found in our earnings press release at Trex.com The company expressly disclaims any obligation to update or revise publicly any forward looking statements Whether as a result of new information at future events or otherwise with that introduction I will turn the call over to Brian Fairbank Thank you Amy good evening and thank you for joining us to discuss our third quarter 2023 results building off our strong second quarter performance Trex delivered another robust quarter with improvements across all key financial metrics Consumer demand for Trex products remain resilient with channels fell through growth in the middle digits Sales growth in the quarter also benefited from the successful launch of new products along with our brand in marketing investments These products resonate with consumers who value the aesthetics and low maintenance advantages of Trex products over traditional ways We continue to leverage our industry-leading manufacturing capabilities, driving further cost reductions through increased production efficiencies, resulting in an adjusted gross margin of 41.8% This strong performance on less and full capacity is a clear indication of the leverage inherent in the Trex business model.

And our tax rate guidance remains at 25% 26%.

With that I'll now turn the call back to Brian.

Thank you Brad before I finish my remarks, I wanted to introduce the most recent addition to the tracks executive team Brendan <unk>, our new senior Vice President and Chief Financial Officer.

With over 25 years of experience Brenda brings deep financial experience gained the global manufacturing companies a strong track record in business operations and proven leadership skills Brenda.

Thank you, Brian and good evening, everyone. This is an exciting time for trucks and I'm delighted to join the team.

Continue to execute our growth strategy and build long term value protect stakeholders.

I look forward to speaking and meeting with you in person over the coming months.

Thank you Brenda <unk> continuing to successfully navigate this dynamic environment, leveraging our industry, leading competitive advantages that clearly distinguish <unk> from our competitors our laser focus on share gains from an expanding addressable market complemented by our continued investment in innovation.

<unk> product launches and consumer education will ensure we drive long term shareholder value.

Want to thank our <unk> team members for their hard work and channel partners for their many years of productive growth and look forward to many more years working together operator, please open the call to questions.

We will now begin the question and answer session.

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

If you are using a speakerphone please pick up your handset before pressing the key.

To withdraw your question. Please press Star then two.

Please limit yourself to one question and one follow up.

Do you have further questions you may reenter the question queue.

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

And our first question comes from John Lovallo of UBS. Please go ahead.

Good evening guys. Thanks for taking my questions.

First one is the fourth quarter revenue expectations improved from what was implied at about $155 million to $185 million last quarter to the 185 to 195 today and this would actually represent year over year growth versus the fourth quarter of 2022 that said the implied EBITDA in the fourth quarter, but still be down sort of 18 to 20.

Percent year over year. So can you just help us sort of bucket the year over year drivers are that are waiting on the fourth quarter EBITDA other than maybe the higher SG&A.

The biggest driver of that is going to be the SG&A related to branding spend we do have new products that will be coming into the marketplace next year. So we will be creating samples merchandizing crew.

Creating all of the literature that goes around that so we will have.

You do the modeling for SG&A youll see that that will come in quite a bit higher than what it has been historically as we prepare to launch those products.

Viktoriia Nakhla: As we highlighted in our recent analyst day, we remain focused on continuing to grow our market share as we convert more of the traditional wooddecking market to Trex. Innovative new products remain central to our growth strategy, and we continue to expand our portfolio to meet consumer needs and preferences across all price points. In the third quarter, we experience continued positive market response to our Trex signature and Trex transcend lineage products, two recently launched lines targeting the higher end consumer, lineage with its proprietary heat mitigation technology, and a more refined clean look has been well received in the marketplace.

Understood. Okay, and then maybe just from a high level, how did demand sort of trend through the quarter. How would you characterize September exits rate exit rate and how are things did things look in October.

We were pleased with the consumer reaction to our products throughout the third quarter.

Sorry, mid single digit type of sales growth and for the fourth quarter inclusive in our guidance and to your point are slightly better than what we provided for wood before we assumed a roughly flat now I would expect a low single digit type growth in the fourth quarter with consumer demand. So we're still positive.

On the tracks consumer the effectiveness of our marketing also the weather conditions that we're seeing across most of North America.

Viktoriia Nakhla: And after successful testing and selected geographies, we plan a national rollout for signature decking, which is competing well at the high end of the market. We've spent many years developing these game-changing products and are pleased with the reception we're seeing from both our channel partners and consumers. We also see significant growth potential in our broader residential segment driven by railing, fasteners, cladding, and fencing, which together with decking brings our overall addressable market opportunity to approximately $14 billion.

Great. Thanks, Brian.

Thank you.

Okay.

The next question comes from Susan Mcclary of Goldman Sachs. Please go ahead.

Thank you good afternoon, and thanks for taking the question.

Okay.

With Hello.

A bit about how you're thinking of the setup for 24, I mean, appreciating that it's still a bit early out there, but how do you think the the.

The industry as well as tracks will end the year in terms of channel inventories and maybe the potential to pull more volumes in next year, especially as you think about cell Ian perhaps outpacing sell out.

Viktoriia Nakhla: We believe in opportunities in railing alone offer substantial growth potential. The growth will be driven by expanded attachment rates coupled with attractive solutions to match consumer preferences at each price point while still delivering on Trex quality. While we have manufactured and sold Trex railing products since our early years, we recently accelerated our efforts to further penetrate the market. Notably, we introduced our Trex select T-rail system in the second quarter. This composite rail system is priced competitively against low cost vinyl railing, yet outperforms vinyl, both in terms of aesthetics and performance.

I think the best way to look at at this point, if I take myself back to this time last year.

We were looking at 2023 being down mid single digits and with the guidance. We've provided it wound up being up mid single digits.

Our full year full year basis, excluding any impacts from inventory changes at year end.

I'm feeling more positive about the tracks consumer today that I was feeling a year ago.

See how these consumers are reacting to the value of installing attracts tech.

Viktoriia Nakhla: T-rail is off to a great start, expanding our share and railing and building greater awareness of the Trex brand in this important category. The T-rail launch continues our strategy of providing railing products at every price point as we have successfully done in decking. As we continue to drive innovation through new products and tap into a range of new growth opportunities, we are expanding our production capacity in a disciplined manner. We will continue to develop our new facility in Arkansas using a modular approach, enabling us to match new capacity with anticipated market demand, while allowing us to incorporate emerging technologies that will further optimize production efficiency.

We hear more often than not these are consumers that might be normally looking to move up in their home, but because of high interest rates and high values of those homes that they're not making that move so theyre improving their existing spaces I expect that tailwind on the repair and remodel side to continue to be a benefit for <unk> as we move forward.

So I'm feeling marginally more positive today than I was at the end of last year.

Okay. That's helpful color and then maybe following up on John's question about you mentioned, you expect SG&A to be a bit higher in the fourth quarter.

In support of the new products that you'll be launching any thoughts on how we should think about margin cadence for 'twenty four.

Viktoriia Nakhla: As a part of our planned investment, we intend to incorporate AI to further improve product quality and create the lowest cost manufacturing facility in the industry. We continue to focus on long-term growth and delivering value to shareholders in a sustainable manner. ESG leadership is important to us as it's been part of our company's DNA since its inception and our sustainability goals align with profitability targets.

Any key items, you would highlight for next year.

We will provide a lot more detail 2024, as we get into the the end of the year call. It margin cadence I would expect that we will see a stronger early buy.

The channel recognizes that we need to ensure the appropriate amount of material is out there, but aside from that really nothing else to provide at this point.

Amy Fernandez: We remain committed to the reduction of waste, water and energy consumption, empowering and investing in our valuable employees, and helping build a strong and healthy communities where we operate through our recycling programs, employee volunteer efforts, and charitable donations.

Alright, thanks for the color and good luck with everything thank you.

The next question comes from Ryan Merkel of William Blair. Please go ahead.

Hey, everyone. Thanks for taking the questions. My first one Brian is just you mentioned the positive response to the new decking products.

Brad McDonald: Now, I will turn the call over to Brad McDonald, Chief Accounting Officer, for a review of our financial performance. Thank you, Brian, and good evening.

Did you measure that and then should we expect a bigger pop next year as you're rolling that out in a bigger way.

Brad McDonald: As in the previous quarter, given the debustiture of Trex commercial products at the end of 2022, and to provide a more meaningful comparison, my comment amounts will compare our third quarter of 2023 financial performance to the third quarter of 2022 Trex residential results. Net sales of 304 million exceeded our expectations, and were significantly above last year's 178 million of residential net sales, which were impacted by channel inventory destocking, improved utilization rates from higher production volumes, and the benefits from our investments in production efficiencies and cost-out programs drove a significant improvement in gross margin to 43.1%.

Oh, Yeah to answer your second question, yes, absolutely. It does take some time to get these products into market. We launched two colors of our lineage product line and I believe it was may of last year and then two additional colors in December of 2022, So we've seen that.

Build as we've gone through the course of the year and we expect to see that continue to build next year as more people get more familiar with the transferred lineage product line. The heat mitigating technology. The updated colors. So we're calling it based off of what we're actually seeing in the market from a signature perspective.

We expect that it'll be more of a niche product is designed to really hold on to that super premium buyer. That's looking for the aesthetics and the feel of the real tropical hardwood. So we are seeing that turn through the channel in the test markets that we've launched it into and we will have a national rollout of that in the new year.

Brad McDonald: During the quarter, we recognized the benefit of 3.8 million due to a reduction in the warranty reserve related to the legacy surface-flaking issue that affected a portion of the products manufactured at the Nevada plant prior to 2007. Excluding the warranty benefit, gross margin was 41.8% compared to residential gross margin of 25.4% in last year's third quarter. Selling general and administrative expenses were 45 million, or 14.7% of net sales compared to 25 million, or 13.9% of Trex residential net sales in the 2022 quarter.

Perfect.

And then for my follow up I'm, just getting asked about the risk of consumer financing again can you just refresh us on your thinking there and.

How what percent of the consumer you think uses financing for your products.

Consumer financing for that project is not extensively used.

Data that we have in talking with our contractors, it's less than 10% of the marketplace. It is not something that we hear back from our contractors and our contractors are not shy about asking us for selling tools to help them in the marketplace.

Brad McDonald: As discussed in the previous quarter, we're returning to more normalized S-GNA spending levels with a focus on branding, marketing, and R&D. Net income in the 2023 quarter was 65 million, or 60 cents per diluted share compared to Trex residential net income of 15 million, or 14 cents per diluted share during the prior year quarter. EBITO was 99 million, and EBITO added a percentage of net sales, or EBITO margin, was 32.7% compared to Trex residential EBITO of 32 million, and EBITO margin of 17.8% in a third quarter of 2022. Excluding the warranty benefit, net income in the 2023 quarter was 62 million, or 57 cents per diluted share, and adjusted EBITO was 96 million, and EBITO margin was 31.5%.

It doesn't even show up in the top 10 of things that they're looking for for selling tools along the way.

Great. Thank you.

Thanks.

The next question comes from Joe <unk> of Deutsche Bank. Please go ahead.

Hey, Joe Hey, good afternoon, everybody. Thanks for taking the questions.

I'm always looking at your finished good inventory, but I think this third quarter number is particularly important as we think about.

What actions people might take in the channel around pre buy and it's $43 million I think on finished goods that is far lower than last year and it's more in line with 2021 I'm just wondering.

How you are planning I guess production in the fourth quarter to service, even the guidance that you've put out.

Brad McDonald: Year-to-date 2023 net sales. Charles, were 899 million compared to 879 million of residential net sales in the year-go period. Net income was 183 million or $1.69 per diluted share compared to Trex residential net income of $177 million or $1.57 per diluted share in 2022. Year-to-date 2023 EBITDA was 285 million resulting in an EBITDA margin of 31.7 percent compared to Trex residential EBITDA of 268 million and EBITDA margin of 30.5 percent in 2022.

And then what you might do if.

The pre buy is actually a little bit stronger than you're assuming I just want to also make sure that the number that you assume is pushed to <unk> hasnt changed either.

Yeah remember last year, we pulled back our sales guidance significantly because of the need to reduce inventory in the channel. So we were building inventory and putting it onto our balance sheet.

From that perspective, whereas this year it was a regular third quarter inventory and to your point looks more like a normal end of the third quarter. We finished with usually the lowest inventory.

For the year.

As we go into the end of the year, we will be building inventory as we normally do during the fourth quarter and we'll use that in addition to our production to be able to service. The early buy them through the second quarter of next year.

Brad McDonald: Excluding the warranty benefit, year-to-date 2023 net income was 181 million or $1.66 per diluted share adjusted EBITDA was 281 million and adjusted EBITDA margin was 31.3 percent. Year-to-date operating cash flow was 288 million compared to 244 million in the comparable period of 2022 as we converted significant working capital into cash through inventory reduction.

And so thinking about the fourth quarter implied gross margin, that's reflective probably of the production rate of three Q and so as you build inventory in <unk>, we might see a pretty decent step up into <unk> gross margin is that a fair way to think about it.

Yes production will be roughly in line with what we made maybe even marginally a little bit higher than what we've made in the third quarter.

Brad McDonald: Capital expenditures amounted to 113 million year-to-date primarily related to the build-out of the Arkansas facility.

Brad McDonald: I will now turn to our updated guidance. We are projecting fourth quarter revenues in the range of 185 million to $195 million, reflecting both seasonally lower demand and the shift of our pre-buy to the first quarter of 2024 as discussed in last quarter's conference call. The resulting impact is that 4-year 2023 revenues are projected to be 1.09 billion, assuming the midpoint of the fourth quarter revenue guidance.

Alright, Thanks, a lot good luck.

Thanks.

The next question comes from Jeffrey Stevenson of Loop capital. Please go ahead.

Hi, Thanks for taking my questions today and congrats on the strong results.

Thanks, Jeff.

Brian can you talk about the current sentiment at your dealer and distributor partners I'm just wondering if they become incrementally more optimistic there another strong sell through demand quarter does there remains some conservatism given concerns about the impact of higher interest rates and slowing existing home sales.

Brad McDonald: This is an increase from the 1.04 billion to 1.06 billion range provided during our last update. We are also increasing our full-year adjusted EBITDA margin guidance to be between 29 and 29.5 percent compared to the previous range of 28 to 29 percent. This guidance includes our expectation that SGNA will be at the higher end of the range of 15 to 16 percent of net sales. Capital spending guidance is projected at the higher end of the estimated 145 million to 155 million previously provided. Depreciation and amortization will range from 47 million to 50 million and our tax rate guidance remains at 25 percent to 26 percent.

Yes, what we're hearing from the channel is that.

While there is there is concern from consumers those that have strong consumer brands are holding up.

Better than other parts of the marketplace, which are more commodity base. So overall much like my comments earlier in the call they're feeling more positive about the Trax business going into next year than they did going into 2023 and they want to ensure they have the right inventory on the ground to be able.

To support those consumers as we continue to see a tailwind from a homeowners that are staying in their existing homes that they are upgrading those wood decks, we've talked in the past about there being $50 million to $60 million would decks and about half of those are either past or at the point of needing replacement.

Bryan Fairbanks: With that, I will now turn the call back to Brian. Thank you, Brad.

Brenda Lovcik: Before I finish my remarks, I wanted to introduce the most recent addition to the track's executive team. Brenda Lovechik, our new Senior Vice President and Chief Financial Officer. With over 25 years of experience, Brenda brings deep financial experience gained a global manufacturing company, a strong track record in business operations and proven leadership skills. Brenda? Thank you, Brian, and good evening, everyone. This is an exciting time for tracks, and I am delighted to join the team as we continue to execute our gross strategy and build long-term values for track stakeholders. I look forward to speaking and meeting with you in person over the coming months.

Okay. Now that's very helpful and my second question is that players on opportunities that have become more aggressive whats your share repurchase program. After the recent market driven pullback here.

We operated our program through <unk>, one to filings those parameters are preset when the when the program is filed we do.

Do have a continuing program for the shares.

I expect that.

<unk> important part of our capital allocation our top priority is our organic growth and then second would be share buyback.

Great. Thanks, Brian Thank you.

The next question comes from Keith Hughes of Suntrust. Please go ahead.

Bryan Fairbanks: Thank you, Brenda. Trex is continuing to successfully navigate this dynamic environment, leveraging our industry leading competitive advantages that clearly distinguish Trex from our competitors. Our laser focus on share gains from an expanding addressable market, complemented by our continued investment in innovation, product launches, and consumer education will ensure we drive long-term shareholder value. I want to thank our Trex team members for their hard work and channel partners for the many years of productive growth and look forward to many more years working together.

Thank you you've given us kind of a view for capital spending for 'twenty. Three if you look into 'twenty four would be the same order of magnitude.

We'll provide additional color on that but I do expect 2024 to be quite a significant year of capital spending as we really get into the heavy part of the build out and the purchasing of the equipment for the decking building as well as potentially adding a.

So onto that site as well too and most of that capital will be expanded within the course of the year.

Operator: 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 you are using a speaker phone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question few.

And on the quarter was the revenue growth was that all units or was there some price mix in that number.

There was no price.

Okay. Thank you very much.

You.

Yeah.

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

Hi, Good afternoon. This is Noah Costco on for Trey Thanks for taking my questions.

First do you anticipate the need to take any pricing in 2024.

Operator: At this time, we will pause momentarily to assemble the roster.

We haven't made decisions on pricing.

If we were to take pricing, we would talk with the channel prior to talking with the investment community on that.

John Lovallo: On our first question comes from John Lovalo of UBS. Please go ahead. Good evening, guys. Thanks for taking my questions. The first one is the fourth quarter revenue expectations improved from what was implied at about $155,000,000 to $185,000,000 last quarter to $185,000 to $195,000 today. This would represent your growth versus the fourth quarter of 2022. That said, the implied EBITDA on the fourth quarter would still be down sort of 18 to 20% year-over-year.

We have not seen.

Any significant upward move in our overall cost other than a few things here and there on some certain specific smaller product lines that we might consider along the way, but I wouldn't expect it to be material.

Got it that makes sense and then for my follow up is <unk>.

$60 million to $80 million still the right way to think about potential inventory build in <unk> 24.

John Lovallo: Can you just help us sort of bucket the year-over-year drivers that are weighing on the fourth quarter EBITDA other than maybe the high-res Q&A? The biggest driver of that is going to be the STNA related to branding spend. We do have new products that will be coming into the marketplace next year. We will be creating samples, merchandising, creating all of the literature that goes around that. We will have, when you do the modeling for STNA, you will see that that will come in quite a bit higher than what it has been historically as we prepare to launch those products.

I wouldn't necessarily call it inventory build I would expect the inventory build to be larger than that the $60 million to $80 million specifically refers to those sales that would have otherwise occurred in December as part of our early buy wed.

John Lovallo: Understood. Okay.

We last year, we did it over a four months time period from December through March. This year, we will do it over a three month time period January through March.

Got it that makes sense, thanks for taking my questions.

Thanks.

The next question comes from Alex Rygiel B Riley FBR. Please go ahead.

Bryan Fairbanks: And then maybe just from a high level, how did demand sort of trend through the quarter? How would you characterize September, Exit's rate and how are things looking October? We were pleased with the consumer reaction to our products throughout the third quarter. I saw a mid-single digit type sales growth and for the fourth quarter, inclusive in our guidance and to your point, slightly better than what we provided for, before we assumed a roughly flat now, I would expect a low single digit type growth in the fourth quarter with consumer demand. So we're still positive on the Trex consumer, the effectiveness of our marketing, also the weather conditions that we're seeing across most of North America. Thanks, Brian.

Thanks, Brian and very nice quarter here could you provide a bit more color on the increase in sales guidance relative to sell through versus channel inventory rebounding.

Bryan Fairbanks: Thank you.

You're talking specific for the fourth quarter.

Yes.

So for the fourth quarter. Originally we had expected that we would be looking at a flattish fourth quarter now I am expecting to see a low single digit type growth and then there'll be just a little bit of inventory build within the channel itself. When looking at the end of the third quarter was well below where where things were.

Last year, and so I would expect just a small rebound within the quarter and then the meaningful inventory build will occur during the fourth quarter of next year.

That's helpful. And then I believe up rail attachment rates are in that 15% to 20% range is there any way you could be a little bit more specific in that maybe talk about how thats changed in 2023, and maybe talk about how that could change in 2024.

Susan Maklari: The next question comes from Susan Maklari of Goldman Sachs, please go ahead. Thank you, good afternoon and thanks for taking the question. Sorry, maybe to start with, hello. Can you talk a bit about how you're thinking of this at up for 24? I mean, appreciating that it's still a bit early out there, but how do you think the industry as well as Trex will end the year in terms of channel inventories and maybe the potential to pull more volumes in next year, especially as you think about sell in perhaps outpacing sell out?

It's a significant variance in attachment rate depending upon the regions that we operate within and the attractiveness of our existing railing profiles to those regions out there and it can be anywhere from 15% going all the way up to over 50% depending upon the area.

Susan Maklari: I think the best way to look at this point, if I take myself back to this time last year, we were looking at 2023 being down mid single digits. And with the guidance we've provided, it wound up being up mid single digits, on a full year, full year basis, excluding it. So, I think that's a good way to get any impacts from inventory changes at year end. I am feeling more positive about the Trex consumer today that I was feeling a year ago.

One of the things that we're going to work on how can we better have a metric to reference that back to the marketplace, but there's such a wide variance on it today.

Trying to pick a single metric on overall attachment rate doesn't work all that well for us, but what we do see is where we have those lower attachment rates that means that there are areas of the marketplace that we're not hitting the sweet spot for what Theyre looking for and they are all opportunities for us to be able to expand that.

Susan Maklari: I see how these consumers are reacting to the value of installing a Trex deck. We hear more often than not these are consumers that might be normally looking to move up in their home, but because of high interest rates and high values of those homes, they're not making that move, so they're improving their existing spaces. So, I expect that tail end on the repair and remodel side to continue to be a benefit for Trex as we move forward.

Catchment right to get it up to 50% to 60% across the board.

Thank you.

The next question comes from Joe.

Of Jefferies. Please go ahead.

Hey, guys congrats on a strong quarter and Brendan looking forward to working with you going forward.

So Brian I guess sellout was obviously quite impressive in a pretty tough backdrop in R&R.

Susan Maklari: So, I'm feeling marginally more positive today than I was at the end of last year. Okay, that's helpful color. And then maybe following up on John's question a bit, you mentioned to expect SGNA to be a bit higher in the fourth quarter in support of the new products that you'll be launching. Any thoughts on how we should think about margin cadence for 24, any key items you'd highlight for next year? We'll provide a lot more detail on 2024 as we get into the end of the year call and margin cadence.

New building products companies have talked about maybe flat to down low single digit R&R for 2024 still assuming that's the right backdrop do you expect to grow in that environment and they know how to.

Your Investor Day, you guided like low double digit organic growth is that something that's achievable.

Current environment.

I think I think next year growth is absolutely in the cards for trucks I'll go back to my comments around the brands continue to bring consumers in we also operate in a segment that when consumers do tend to pullback or.

Susan Maklari: I would expect that we will see a stronger early buy as the channel recognizes that we need to ensure the appropriate amount of material is out there. But aside from that, really nothing else to provide at this point. Okay, all right. Thanks for the color. Good luck with everything.

Our consumers tend to be a little bit higher income and.

So don't pull back quite as hard so we feel good about where we stand in the market.

Okay. That's helpful and then the attachment rate on railing, you've talked about at length at your Investor Day, and you called it out in your outlook as well today.

Susan Maklari: Thank you.

How do you do you have any wins that you want to call out that could be substantial and how are you approaching.

Ryan Merkel: The next question comes from Ryan Merkel of William Blair.

Trying to capture share in this business differently than years past is it a product.

Ryan Merkel: Please go ahead. Hey, everyone. Thanks for taking the questions. My first one, Brian, is just you mentioned the positive response to the new Decking products. How did you measure that? And then should we expect a bigger pop next year as you're rolling that out in a bigger way? Yeah, answer your second question. Yes, absolutely. It does take some time to get these products in the market. We launched two colors of our lineage product line in, I believe it was May of last year and then two additional colors in December of 2022.

Product rollout and now when we think about wins here does it have any material impact on your margins incremental margins mix and all that good stuff.

I think it's fair to say you've listened to us talk over the past four years or so we've talked about decades.

So you've heard a little bit of a shift to start is if we're moving away from decking, but we want the market to understand theres, a real opportunity for trucks and rail and there will be more research sources, both from an R&D perspective, as well as focus from our sales team of how we go about ensuring that we're getting our fair share in the market.

Ryan Merkel: So we've seen that build as we've gone through the course of the year. And we expect to see that continue to build next year as more people get more familiar with the transcend lineage product line, the heat mitigating technology, the updated colors. So what we're calling it based off of what we're actually seeing in the market from a signature perspective. We expect that to be more of a niche product. It's designed to really hold on to that super premium buyer that's looking for the aesthetics and the feel of that real tropical hardwood. We are seeing that turn through the channel in the test markets that we've launched it into and we will have a national rollout of that in the new year.

Ryan Merkel: Perfect.

A great example is the launch of the tea rail system, there's a lot of people that install the low cost vinyl railing systems in the marketplace. We've put we've put a product out there. We've had a couple of nice wins, where we've been able to take competitive product off the shelves.

Brought tracks and they bundled in with the rest of the program and we continue to see great opportunity to do that with T rail, but also other railing profiles that we're not playing in today.

Any impact on margins and Incrementals.

We focus on continually improving our margins on an ongoing basis.

And some of our some of our products have higher some have a little bit lower along the way, but we're looking for overall continuous improvement I wouldn't expect to see a significant change just because of additional focus on railing.

Ryan Merkel: And then for my follow up, I'm just getting asked about the risk of consumer financing again. Can you just refresh us on your thinking there and, you know, what percent of the consumer you think uses financing for your products? Consumer financing for debt projects is not extensively used. Data that we have in talking with our contractors is less than 10% of the marketplace. It's not something that we hear back from our contractors.

Okay. Thank you.

<unk>.

The next question comes from Stanley Elliott of Stifel. Please go ahead.

Thank you everybody. Thank you all for the for the question, Brian You mentioned the cost environment, you're not really moving one way or the other is is that more a function of just what youre seeing in the macro I know you guys and I guess.

Ryan Merkel: And our contractors are not shy. They're not shy about asking us for selling tools to help them in the marketplace. It doesn't even show up in the top 10 of things that they're looking for for selling tools along your way.

Joe Ellsmeyer: Great. Thank you. Thanks.

You spent a lot of energy on on and moving downstream on the recycling I'm, just curious kind of what sort of the breakdown would be from the process improvement versus just overall commodity prices.

Joe Ellsmeyer: The next question comes from Joe Ellsmeyer of Deutsche Bank. Please go ahead. Hey, Joe. Hey, good afternoon, everybody. Thanks for taking the questions. You know, I'm always looking at your finished good inventory, but I think this third quarter number is particularly important as we think about, you know, what actions people might take in the channel around pre-buy. And it's 43 million, I think, on finished goods. That is far lower than last year.

One of our strategies is to have ongoing continuous improvement programs that kind of offsets a let's call a normal amount of inflation over the course of the year and generate improvement from our overall EBITDA margin perspective, So, let's say, we get back to a normal environment, we're back down to a 2%.

Type inflation rate I would expect that we can continually offset that with continuous improvement.

Really the only thing that we've seen I would say over the last quarter of course fuel prices diesel has gone up and that electric prices out in the western footprint continue to grow up go up but again.

Joe Ellsmeyer: And it's more in line with 2021. I'm just wondering, you know, how you're planning, I guess, production in the fourth quarter to service. That's even the guidance that you've put out. And then what you might do if, you know, the pre-buy is actually a little bit stronger than you're assuming. I just want to also make sure that the number that you assume is pushed to one queue hasn't changed either. Remember last year we pulled back our sales guidance significantly because of the need to reduce inventory in the channel.

Those are not that significant compared to the type of inflation that we saw the prior two years, where we really had to take pricing to cover it.

And then in terms of kind of some of the new product launches you've got slated for for next year you mentioned you referenced.

Joe Ellsmeyer: So we were building inventory and putting it on our balance sheet from that perspective. Whereas this year it was a regular third quarter inventory and to your point looks more like a normal end of the third quarter where we finish with usually the lowest inventory for the year. As we go into the end of the year, we will be building inventory as we normally do during the fourth quarter. And we'll use that in addition to our production to be able to service the early buy and then through the second quarter of next year.

Should we expect us to be more kind of ended decking category more than some of the adjacent categories that you guys had touched on.

At the recent analyst day.

Stay tuned on that there could be some good news forthcoming later on but very good alright. Thanks, So much best of luck. Thanks Stanley.

The next question comes from Tim <unk> of Baird.

Please go ahead.

Hey, guys. Good good afternoon Michele.

Maybe just on sell through.

Mid single digit that you talked about was there any kind of variance between.

Joe Ellsmeyer: And so thinking about the fourth quarter implied gross margin, that's reflective probably of the production rate of three queue. And so as you build inventory in four queue, we might see a pretty decent step up into one queue gross margin. Is that a fair way to think about it? Yeah, production will be roughly in line with what we made maybe even marginal a little bit higher than what we made in the third quarter. All right, thanks a lot. Good luck. Thanks.

The different.

Types of channels that you service.

I would say the the approach at all and what I'd say.

<unk> pro at anybody selling to a contractor so our approach and also that the contractors, but our DIY Big box is also sell to those pro customers that tended to be somewhat stronger than the pure DIY customer during the third quarter.

Okay. Okay. Good.

And then and then just on the on the winter buy.

Bryan Fairbanks: The next question comes from Jeffrey Stevenson of Loop Capital. We've go ahead. Hi, thanks for taking my questions today and congrats on the strong results. So Brian, keep talking about the current sentiment at your dealer and distributor partners. I'm just wondering if they've become incrementally more optimistic of their another strong shelter to main quarter. Does there remain some conservatism given concerns about the impact of higher interest rates and slowing existing home sales?

I guess one is is there any change to that kind of $50 million shift that you talked about last quarter from Q4 to Q1 and did you make any structural changes to the winter buy program at all or is it just really just one last month and what you've had before.

That's the probably the biggest differences it's one last month otherwise the program is relatively similar we do make some adjustments based off of feedback that we get from our channel partners each year and things that we specifically want to focus on but otherwise, it's not too far off what we've done in the past.

Bryan Fairbanks: Yeah, what we're hearing from the channel is that while there's concern from consumers, those that have strong consumer brands are holding up better than other parts of the marketplace which are more commodity-based. So overall, much like my comments earlier in the call, they're feeling more positive about the Trex business going into next year than they did going into 2023. And they want to ensure they have the right inventory on the ground to be able to support those consumers as we continue to see a tailwind from homeowners that are staying in their existing homes that they're upgrading those wood decks. We've talked in the past about their being 50 to 60 million wood decks, and about half of those are either passed or at the point of meeting replacement.

Okay, Okay, great well good luck on the rest of the year.

The next question comes from Reis Jab Rosa of Bank of America. Please go ahead.

Hi, good afternoon, Thanks for taking my question.

Brian on the <unk> marketing investments, which you will be able to just quantify it a little bit for us should we be thinking about SG&A dollars, maybe flattish quarter over quarter and is any of that a pull forward of investments.

I don't expect it will be flattish you can back into it with the SG&A guidance, where we've talked about 15% to 16%, but being at the higher end of that part of the guidance and back into a number for the fourth quarter.

Bryan Fairbanks: Okay, now that's very helpful. My second question is if there's an opportunity to become more aggressive with your sharey purchase program after the recent market driven pullback here. We operate our programs to 10B51 filings. Those parameters are preset when the program is filed. We do have a continuing program for the shares and I expect that it's continued important part of our capital allocation. Our top priority is our organic growth and then second would be shared by back. Great. Thanks, Brian. Thank you.

Okay, and then I mean, there's been a big step up on SG&A. This year and it seems like it's been effective in driving the demand and sell through.

Do we think about the level of spend that's appropriate going forward and that said as we go into the into next year do you think the 2023 run rate is the right level.

I think we'll continue to leverage SG&A.

We've talked about that before as one of the.

One of the driving opportunities for our EBITDA improvement overtime.

See that we're going to be looking at 40 50 basis type leverage at $40 40.

Excuse me 40 to 50 basis point annual improvement, but that 20 to 30 type level absolutely.

Keith Hughes: The next question comes from Keith Hughes of Fund Trust. Please go ahead. Thank you. You've given us kind of view for capital spending for 23. If we look into 24, what would be the same order of magnitude? We'll provide additional color on that, but I do expect 2024 to be quite a significant year of capital spending as we really get into the heavy part of the build out and the purchasing of the equipment for the decking building as well as potentially adding a warehouse onto that site as well too.

Got it Okay and then just.

One more quick one.

Would you be able to talk about the the sellout trends now that railing is becoming a bigger part of your business and you're you're focusing more there.

How did the decking sell out trend versus versus railing did one outperform the other or both of them in that mid single digit range.

With whom we're in that range.

Great. Thank you very helpful.

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

Keith Hughes: And most of that capital be expended within the course of the year. And on the quarter was the revenue growth, was that all units or was there some price mix in the number? There was no price. Okay. Thank you very much.

Hi, good afternoon, thanks for taking my questions.

Keith Hughes: Thank you.

Uh huh.

Hey.

So first I just wanted to make sure I heard you correctly from before in terms of.

For Q into <unk>. It looks like you know from like 2015 to 2019, the seasonal move of about $40 million to $50 million of higher sales in <unk> versus <unk>.

Trey Grooms: The next question comes from Trey grooms of Steven. Please go ahead. All right. Good afternoon. This is Noah Murkowski on portray. Thanks for taking my questions. First, do you anticipate the need to take any pricing in 2024? We haven't made decisions on pricing. If we were to take pricing, we would talk with the channel prior to talking with the investment community on that. We have not seen any significant upward move in our overall costs.

Are you, saying that you know.

We should expect it to be a little greater than that due to that month ship, maybe by another 15 or 20 million is that the right way to think about it I just wanted to make sure I was understanding you correctly.

I think the more important part is we're a bigger company today.

<unk> from those years that you're looking at so yes, the number would be higher but the model really hasnt changed where it's extremely important that that inventory gets pre staged into the marketplace before the season really turns on during the peak seasonal months.

Trey Grooms: There have been a few things here and there on some certain specific smaller product lines that we might consider along the way, but I wouldn't expect it to be material. Bill, got it, that makes sense. And then for my follow-up, is 60 to 80 million still the right way to think about potential inventory build in 1Q, 24? I wouldn't necessarily call it inventory build. I would expect the inventory build to be larger than that.

Okay got it got it no. Thank you and I guess secondly.

Talking about the attachment rates for.

For railway and the opportunity there.

And obviously you also have some additional capacity that you've turned on over the last couple of years.

Is there any way to think about.

Trey Grooms: The 60 to 80 million specifically refers to those failed that would have otherwise occurred in December of part of our early buy. We last year we did it over a four-month time period from December through March. This year we'll do it over a three-month time period January through March. Got it. That makes sense. Thanks for taking my questions.

You know whatever market.

<unk> would be in 2024.

Do you think those additional opportunities either from ramping up.

Trey Grooms: Thanks.

Sales efforts on the railing side or just pursuing additional opportunities.

Your your additional capacity the builder channel or other channels.

Way to think about.

Alex Rygiel: The next question comes from Alex Rigel-O, the Riley FBR. Please go ahead. Thanks Brian and very nice quarter here. Could you provide a bit more color on the increase in sales guidance relative to sell true versus channel inventory rebounding? Do you talk specific for the fourth quarter? Yes. So for the fourth quarter originally we had expected that we would be looking at a flatish fourth quarter. Now I'm expecting to see a low single digit type growth.

What the growth opportunity might be above the market.

Next year.

We'll talk more about next year as we get into the end of the year call, but I think when you look at over the longer term are inclusive of E.

Okay.

Our investor day of a 12% top line.

And growing our EBITDA margin by 500 basis points through 2028, that's inclusive of that railing and decking growth.

Alex Rygiel: And then there'll be just a little bit of inventory build within the channel itself. When looking at the end of the third quarter was well below where where things were last year. And so I would expect just a small rebound within the quarter. And then the meaningful inventory build will occur during the fourth quarter of next year. And then I believe rail attachment rates are in that 15 to 20% range. Is there any way you could be a little bit more specific in that maybe talk about how that's changed in 2023 and maybe talk about how that could change in 2024?

Okay. Thank you.

Yes.

The next question comes from Kurt Yinger of D. A Davidson. Please go ahead.

Great Thanks, and good afternoon, Brian.

Just wanted to start off on sell through when you talk about the mid single digit growth is that based on sales out of two step or more reflective of kind of point of sale at the deep dealers and retailers themselves and then as we kind of think about full year guide of $1 9 billion in sales.

Alex Rygiel: It's a significant variance and attachment rate depending upon the regions that we operate within and the attractiveness of our existing railing profiles to those regions out there. And it can be anywhere from 50% going all the way up to over 50% depending upon the area. That's one of the things that we're going to work on and how can we better have a metric to reference that back to the marketplace. But there's such a wide variance on it today that trying to pick a single metric on overall attachment rate doesn't work all that well for us. But what we do see is where we have those lower attachment rates. That means that there are areas of the marketplace that we're not hitting the sweet spot for what they're looking for.

As we think about some of the sales being pushed into Q1 of next year is kind of a realistic kind of full year sell through number 10, and not 1.15 billion in sales is that a reasonable starting point as we start thinking about 2024.

We will talk more about 24 on the next call.

Related to the sell through specifically.

It was really kind of consistent I guess I would say between the two.

For level, so not necessarily if the truck side.

That takes out any movements that you would have in inventory.

Okay got it.

Alex Rygiel: And they're all opportunity for us to be able to expand that attachment rate to get it up to 50 to 60% across the board. Thank you.

This last quarter, one of the kind of more notable shifts that we heard on the contractor side was just kind of a thinning of project backlogs and in some cases those being below normal at this stage is that a theme you've heard it all out of your contractor network and how does that maybe impact your view around.

Phil Naismith: The next question comes from Phil. Nice of Jeffries. Please go ahead.

Bryan Fairbanks: Hey guys. Congrats on a strong quarter and Brenda looking forward to working with you going forward. So Brian, I guess sellout was obviously quite impressive in a pretty tough backdrop in R&R. A few building products companies I've talked about maybe flat to download single digit R&R for 2024. So assuming that's the right backdrop, do you expect to grow in that environment? I know that's your investor that you got in like low double to organic growth.

Underlying demand trends going forward.

We're hearing is there's some fitting for some of the smaller projects that are out there, but the bigger projects. There continues to be a good backlog and quite robust demand for those larger products projects.

Okay. Thanks for the color.

Yes.

Bryan Fairbanks: Is that something that's, you know, a chival in the current environment? I think next year growth is absolutely in the cards for trucks. I'll go back to my comments around the brands continue to bring consumers in. We also operate in a segment that when consumers do tend to pull back, they are consumers tend to be a little bit higher income and don't pull back quite as hard. So we feel good about where we stand in the market.

The next question comes from Reuben Garner of the Benchmark company. Please go ahead.

Thank you good evening everybody.

Brian did I hear you.

You mentioned increasing.

Our capacity in the near term.

If so.

How are you going about doing that did you quantify how much and is there any kind of near term investment or.

Bryan Fairbanks: Okay, that's helpful. And then the attachment rate on railing, you've talked about at length of your investor, then you called it out and your outlook as well today. Do you have any wins that you want to call out? That could be substantial. And how are you approaching, you know, trying to capture share in this business differently than years past? Is it a product rollout? And now when we think about wins here, does it have any material impact on your margins, incremental margins, mixing all that good stuff?

Impact on margin from doing that.

Now remember, we pulled back our capacity quite significantly.

Last July. So this is just bringing back on some of that capacity and I would expect the fourth quarter just to be marginally higher than where we were in the third quarter.

Okay, Great and then.

Hum.

The railings initiatives.

Is there any potential or opportunity that there might be kind of a.

Bryan Fairbanks: I think it's fair to say when you've listened to us talk over the past four years or so, we've talked about decking. So you've heard a little bit of a shift. It's not as if we're moving away from decking, but we want the market to understand there's a real opportunity for treks in railing. There will be more research sources, both from an R&D perspective, as well as focus from our sales team of how we go about ensuring that we're getting our fair share in the market.

The inventory build situation next year, where some of your customers are kind of ramps the amount of product that they.

Terry or keep on hand, as you guys build that out or is that kind of.

That's not baked I assume into that kind of 60 to 80 million number that you talked about the I assume that would be separate is that a sizeable opportunity or something probably not as material.

Bryan Fairbanks: And a great example is the launch of a T-rail system. There's a lot of people that install the low-cost vinyl railing systems in the marketplace. We've put a product out there. We've had a couple nice wins where we've been able to take competitor product off of the shelves, and they brought treks in. They bundled it in with the rest of the program. And we continue to see great opportunity to do that with T-rail, but also other railing profiles that we're not playing in today.

I think what you're asking is there a one time infill related to it clearly is right up with new products. There are going to be one time in fills. These infill wells are not nearly to the same degree as for example, when we launched enhanced back in 2019, and we had I think it was five or six different colors.

Bunch of different lengths, we had the basics we have the enhanced products. It was a material infill.

The railing piece it will be part of our normal early buy and there'll be some level of infill, but it's not going to drive the growth on its own.

Bryan Fairbanks: Any impact on margins and incrementals? We focus on continually improving our margins on an ongoing basis. Some of our products have higher, so I'm having a little bit lower along the way, but we're looking for overall continuous improvement. I wouldn't expect to see a significant change just because of additional focus on railing.

Stanley Elliott: Okay, thank you.

Perfect. Thanks, Congrats on the strong results.

Thanks.

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

Good evening, just a quick question to clarify first did pro.

Stanley Elliott: The next question comes from Stanley Elliott of C-Full. Please go ahead. Hey everybody, thank you all for the question. Brian, you mentioned the cost environment. You're not really moving one way together. Is that more a function of just what you're seeing in the macro? I know you've spent a lot of energy on moving downstream on the recycling. I'm just curious what sort of breakdown would be from the process improvement versus just overall commodity prices?

Outpaced DIY, you said that DIY, a drag or was pro just meaningfully better but both positive.

Well, what I'm trying to make sure that we clarify is both home depot and Lowe's both sell to the pro contractor. So if I bifurcate by pro and.

And my folks that are buying they may be buying from any part of the channel and they're doing it themselves that part of it was weaker anybody that's selling to the pro channel continued to be a somewhat stronger and drove more of the growth.

Stanley Elliott: One of our strategies is to have ongoing continuous improvement programs that can offset a, let's call a normal amount of inflation over the course of the year and generate improvement from our overall EBITDA margin perspective. So let's say we get back to a normal environment. We're back down to a 2% type inflation rate. I would expect that we can continually offset that with continuous improvement. Really the only thing that we've seen, I would say over the last quarter, of course fuel prices, diesel, has gone up and an electric price is out in the Western footprint, continue to grow up.

Okay.

Helpful and then getting into the nuance of higher SG&A spending at the high end still on a percentage of sale.

But a higher dollar.

Now as well is there a way to think like for like spending on higher SG&A spend on decking versus how much of that is related to driving demand in the ancillary products like really.

Stanley Elliott: But again, those are not that significant compared to the type of inflation that we saw the prior two years where we really had to take pricing to cover it. And then in terms of kind of some of the new product launches you've got slated for next year you mentioned a reference. Should we expect those to be more kind of in the decking category, more in some of the adjacent categories that you guys had touched on at the recent analyst day? Stay tuned on that. There will be some news forthcoming later on. Very good. All right. Thanks so much. Best of luck. Thanks, Stanley.

Tim Wojs: The next question comes from Tim Wojs. A third.

We've not tried to split that out we're continue to <unk>.

Focus on our branding effort to make sure we're doing everything we can to bring those customers in the door to buy a <unk> product, especially while the weather continues to hold up here at the end of the season.

That's helpful. Thank you.

<unk>.

The next question comes from Matthew Bouley of Barclays. Please go ahead.

Hey, good evening guys. Thanks for taking the question.

So on the fourth quarter margin guide I think even with with SG&A getting to the high end of your full year guide I mean, it still implies that step down in gross margin in the fourth quarter. I think you said earlier that the timing of some of your production economics is going to play into it but my question is was was the production in <unk>.

Q3, I guess enough to take your gross margins are down to that degree in Q4 was there anything else hitting the gross margin in the fourth quarter or are you just sort of building in conservatism there. Thank you.

Tim Wojs: Please go ahead. Hey guys. Good afternoon, missha. Maybe just on cell through the mid-single digit that you talked about. Was there any kind of variance between, you know, the differences? What are the differences between, you know, types of channels that you service? I would say the, the pro channel. And when I say pro, anybody selling to a contractor. So our pro channel sells the contractors but our DIY big boxes also sell to those pro customers.

It's primarily related to the production economics. So the revenue is significantly lower than it is in Q3, not all of the costs that go through manufacturing ended up getting put into inventory you saw that impact last year in the fourth quarter and so that's just a continued part of the impact from.

The way the cost flow through the balance sheet and inventory.

Tim Wojs: That tended to be somewhat stronger than the pure DIY customer during the third quarter. Okay. Good. And then, and then just on the, on the winner by, I guess one is, is there any change to that kind of $50 million shift that you talked about last quarter from Q40, Q1? And did you make any structural changes to the winner by program at all? Or is it just really just a, you know, one last month and what you've had before?

Perfect got it okay and second one.

On the last comment that that sort of true retail DIY was a tad weaker.

You know how do you read into that historically have you seen that DIY lead pro or perhaps not is it just different types of consumers. My question is really you know what do you make of that right.

I think it would be.

Tim Wojs: That's the, probably the biggest difference is it's one last month. Otherwise, the program is relatively similar. We do make some adjustments based off of feedback that we get from our channel partners each year and things that we specifically want to focus on. But otherwise, it's not too far off what we've done in the past. Okay. Good. We've done luck on the rest of the year. Thanks.

At the lower cost decking side of things.

Probably more of an impact in the short term, but everything that I'm seeing.

Is that the consumer that is looking to do the larger projects and using a higher end material is absolutely there we talked about the tailwind.

Higher interest rates, preventing people to move up and we're hearing that as a continued storyline coming back from our contractors as well as our dealer body.

Raistjad Rizic: Next up. The next question comes from Raistjad Rizic of Bank of America.

Raistjad Rizic: Please go ahead. Hi. Good afternoon. Thanks for taking my question. Brian, on the four Q marketing investments, would you be able to, to just quantify it a little bit for us? Like, should we be thinking about S&A dollars, maybe flatish quarter quarter? And is any of that pull forward of investments? I don't expect it will be flatish. You can back into it with the S&A guidance where we talked about 15 to 16% but being at the higher end of that part of the guidance and back into a number for the fourth quarter.

Thanks, Brian and good luck.

Thank you.

This concludes our question and answer session I would like to turn the conference back over to Bryan Fairbanks for any closing remarks.

Thanks for everybody's participation today and your support of the <unk> company and our growth objectives. We look forward to speaking with many of you in the coming weeks.

Good evening.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

[music].

Raistjad Rizic: And then, I mean, there's been a big step up on S&A this year and it seems like it's been effective in driving the demand and tell through. How do we think about the level of spend that's appropriate going forward and as we go into next year? Do you think the 2023 run rate is the right level? I think we'll continue to leverage S&A. We've talked about that before as one of the driving opportunities for our EBITDA improvement over time. I don't see that we're going to be looking at 40-50 basis type leverage on an 40-50 basis point annual improvements but at that 20-30 type level, absolutely. Okay, and then just one more quick one.

Michael Rehaut: Would you be able to talk about the sell-out trends that now that railing is becoming a bigger part of your business and you're focusing more there? How did the decking sell-out trend versus railing? Do you think it won now or perform the other or both of them in that mid-single digit range? Who more in that range? Great, thank you, very helpful.

Michael Rehaut: The next question comes from Michael Rehaut of J.P. Morgan, please go ahead. Good afternoon, thanks for taking my questions. Hey, I just wanted to make sure I heard you correctly from before in terms of, you know, 4Q into 1Q. It looks like, you know, from like 2015 to 2019, it was a seasonal move of about 40 to 50 million of higher sales in 1Q versus 4Q. Are you saying that, you know, we should expect it to be a little greater than that due to that month shift, maybe by another 15 or 20 million. If that's the right way to think about it, just want to make sure I was understanding you correctly.

Michael Rehaut: I think the more important part is we're a bigger company today from those years that you're looking at. So, yes, the number would be higher, but the model really hasn't changed where it's extremely important that that inventory gets pre-staged in the marketplace before the season really turns on during the peak seasonal months. Okay, got it. Got it.

Bryan Fairbanks: No, thank you. And I guess, just secondly, you're talking about the attachment rates for railing and the opportunity there. And obviously, you also have some, you know, additional capacity that you've turned on over the last couple of years. Is there any way to think about, you know, whatever the market baseline would be in 2024. What you think those additional opportunities, either from ramping up your sales efforts on the railing side, or just pursuing additional opportunities for your, you know, your additional capacity, the builder channel or other channels.

Bryan Fairbanks: Any way to think about, you know, what the growth opportunity might be above the market next year. We'll talk more about next year as we get into the end of the year call, but I think when you look at over the longer term, inclusive of the investor day of a 12% top line and growing our EBITDA margin by 500 basis points through 2028. That's inclusive of that railing and decking growth.

Kurt Yinger: Okay, thank you.

Kurt Yinger: Next question comes from Kurt, younger of the Davidson, please go ahead. Great. Thanks and good afternoon, Brian. I just wanted to start off on cell through when you talk about the mid single digit growth, is that based on sales at a two step or more reflective of kind of point of sale at the deep dealers and retailers themselves. And then as we kind of think about the four year drive of 1.0 9 billion in sales, we think about some of the sales being pushed into q1 of next year is kind of a realistic kind of four year cell through number 10 in that 1.15 billion in sales is that a reasonable starting point as we start thinking about 2024.

Kurt Yinger: We'll talk more about 24 on the next call related to the cell through specifically. It was really kind of consistent, I guess I would say, between the other level. So not necessarily at the Trex side. That takes out any movements that you would have in inventory. Okay, got it. And then, you know, this last quarter, one of the kind of more notable shifts that we heard on the contractor's side was just kind of a thinning of project backlogs.

Kurt Yinger: And in some cases, those being below normal at this stage. Is that a theme you've heard of all out of your contractor network? And how does that maybe impact your view around underlying demand trends going forward? What's interesting is there's some filling for some of the smaller projects that are out there, but the bigger projects, there continues to be a good backlog and quite robust demand for those larger projects. Okay, thanks for the color.

Kurt Yinger: Thanks.

Reuben Garner: The next question comes from Ruben Garner out of the benchmark company. Please go ahead. Thank you, good evening, everybody. Ruben, did I hear you mentioned increasing capacity in the near term? If so, how are you going about doing that? Did you quantify how much? And is there any kind of near terms investment or impact on margins from doing that?

Reuben Garner: Now, remember, we pulled back our capacity quite significantly last July. So this is just bringing back on some of that capacity, and I would expect the fourth quarter just to be marginally higher than where we were in the third quarter.

Reuben Garner: Okay, great. And then the railings initiative, is there any potential or opportunity that there might be kind of a inventory bill situation next year where some of your customers kind of ramp the amount of product that they carry or keep on hand as you guys build that out? Is that kind of, that's not big size, I assume, into that kind of 60 to 80 million number that you talked about with that, I assume that would be separate.

Reuben Garner: Is that a sizeable opportunity or something, probably not as material? I think what you're asking is there are one time in fill related to it. Yes, clearly as we did that with two products, there are going to be one time in fills. These in fills are not nearly to the same degree as, for example, when we launched enhanced back in 2019. And we had, I think it was five or six different colors, a bunch of different lengths.

Reuben Garner: We had the basics. We had the enhanced product. It was a material in fill. So the railing piece will be part of our normal early buy. And there will be some level of infill, but it's not going to drive the growth on its own.

Reuben Garner: Perfect.

Reuben Garner: Thanks, congrats on the stone results.

Steven Ramsey: The next question comes from Steven Ramsey of Thomson Research Group. Please go ahead. Good evening, just a quick question to clarify first. Did pro outpace DIY? You said that was DIY a drag or was pro just meaningfully better but both positive? Well, what I'm trying to make sure that we clarify is both Home Depot and Loads, both sell to the pro contractor. So if I bifurcate my pro and my folks that are buying, they may be buying from any part of the channel and they're doing it themselves, that part of it was weaker. Anybody that's selling to the pro channel continued to be somewhat stronger and drove more of the growth.

Steven Ramsey: Okay, helpful. And then getting into the nuance of higher SG&A spending at the high end still on a percentage of sales, but a higher dollar amount as well. Is there a way to think like for like spending on higher SG&A spend on decking versus how much of that is related to driving demand in the ancillary products like railing? We've not tried to split that out. We're continued to focus on our branding effort to make sure we're doing everything that we can to bring those customers in the door to buy a track product, especially while the weather continues to hold up here at the end of the season. That's helpful. Thank you.

Matthew Bouley: Thanks.

Matthew Bouley: The next question comes from Matthew Booley of Forklays. Please go ahead. Hey, good evening, guys. Thanks for taking the question. So on the fourth quarter margin guide, I think even with with SG&A getting to the high end of your, oh, your guide. I mean, it still implies that step down in gross margin in the fourth quarter. I think you said earlier that the timing of some of your production economics is going to play into it.

Matthew Bouley: But you know, my question is was with the production in Q3. I guess enough to take your gross margins down to that degree in Q4. Is there anything else hitting the gross margin in the fourth quarter or are you just sort of building in conservatism there?

Matthew Bouley: Thank you. It's primarily related to the production economics. So the revenue, you significantly lower than it is in Q3, not all of the costs that go through manufacturing end up getting put into inventory. You saw that impact last year in in the fourth quarter. And so that's just continued part of the impact from the way to cost flow through the balance sheet and inventory. Perfect. Got it. Okay.

Matthew Bouley: And second one, you know, on the last comment that that sort of true retail DIY was a tad weaker. You know, how do you read into that historically? Have you seen that DIY, you know, lead pro or perhaps not? Is it just different types of consumers? My question is really, you know, what do you make of that? I think at the at the lower cost decking side of things, it has probably more of an impact in the short term.

Matthew Bouley: But everything that I'm seeing is that the consumer that's looking to do the larger projects and using the higher end material is absolutely there. We talked about the tailwinds from higher interest rates preventing people to move up. And we're hearing that as a continued storyline coming back from our contractors as well as our dealer body. Thanks, Brian. Good luck.

Matthew Bouley: Great, thank you.

Operator: This concludes our question and answer session.

Bryan Fairbanks: I would like to turn the conference back over to Brian Fairbanks for any closing remarks. Thanks very much for participation today in your support of the Trex Company and our growth objectives. We look forward to speaking with many of you in the coming weeks.

Bryan Fairbanks: Good evening.

Operator: The conference is now concluded.

Thank you for attending today's presentation and you may now disconnect.