Q3 2024 Trex Co Inc Earnings Call
Speaker Change: Good day and welcome to the Trek's Company, third quarter, 2024 earnings conference call.
Speaker Change: All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. Do ask a question, you may press star, then one on a touchstone phone. To withdraw your question, please press star then two. Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to Casey Kotary Investor Relations representative, please go ahead.
Casey Kotary: Thank you everyone for joining us today. With us on the call, our Bryan Fairbanks, President and Chief Executive Officer, and Brenda Lovcik, Senior Vice President and Chief Financial Officer.
Casey Kotary: Joining Bryan and Brenda is Amy Fernandez, Senior Vice President, Chief Legal Officer and Secretary, as well as other members of Trucks Management.
Casey Kotary: The company issued a press release today after Market Closed containing financial results for the third quarter of 2024. This release is available on the company's website.
Speaker Change: This conference calls also being webcast and will be available on the Industrial Relations page of the company's website for 30 days. I will now turn the call over to Amy Fernandez. Amy?
Amy Fernandez: Thank you, Casey. 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 meeting of federal security's laws.
Amy Fernandez: These statements are subject to certain risks and uncertainties that could cause actual results to different materially from those expressed in the forward-looking statements.
Amy Fernandez: For a discussion of such risks and uncertainties, please see our most recent Form 10-K and Form 10-Q, as well as our 1933 and other 1934 Act filings with the SEC.
Amy Fernandez: 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 trex.com.
Amy Fernandez: 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.
Bryan Fairbanks: Thank you, Amy, and thank you all for joining us to review our third quarter results and discuss our business outlook. We are proud that our team delivered third quarter results that surpassed expectations thanks to the continued consumer demand for our premium price products.
Bryan Fairbanks: We estimate sell-through for our premium products increased at a high single-digit rate in the third quarter and contractor lead times averaged six to eight weeks, in line with the norm for this point of the season.
Bryan Fairbanks: On a year-to-date basis, sell-through across our entire portfolio was flat with the prior year, keeping in mind that our definition of sell-through includes only point-of-sale transactions at both home centers and within the Pro Channel.
Bryan Fairbanks: Concurrently, our distribution partners reduced their inventory in the third quarter by approximately $70 million, in line with our expectations and resulting in what we consider normalized inventory levels for this point in the season.
Bryan Fairbanks: As expected, we maintained our gross margin close to last year's adjusted level, thanks to the success of our continuous cost reduction programs, which partially offset the effect of lower utilization rates while EBITDA margin improved from diligently managed SG&A spending.
Bryan Fairbanks: This performance positions us to increase our EBITDA margin guidance for the full year of 2024 to 30.5%, the high end of our original guidance range.
Bryan Fairbanks: New product development remains a strategic priority and a key driver of future double-digit growth for TREX.
Bryan Fairbanks: Products launched within the last 36 months accounted for approximately 18% of our year-to-date net sales of 984 million dollars, demonstrating how well aligned our products are with consumer preferences.
Bryan Fairbanks: This year, we further accelerated the pace of new product launches to capitalize on the significant railing opportunity as reviewed during our Investor Day last year.
Bryan Fairbanks: entered adjacencies that represented logical extensions of our product lines and grant greater share of the wood conversion market.
Bryan Fairbanks: Last week, we issued a detailed release highlighting the latest additions to our product portfolio that will be available for the 2025 season.
Bryan Fairbanks: Among the introductions were new steel, aluminum, cable and glass railing systems along with enhancements to the Trek Select composite railing system designed to compete with vinyl railing and wood railing.
Bryan Fairbanks: These new railing products strengthen our portfolio and position Trex to significantly increase our penetration of the 3.3 billion dollar railing market.
Bryan Fairbanks: We project the doubling of our share of the highly fragmented residential railing market from approximately 6% today to 12% share over the next five years.
Bryan Fairbanks: Another new development is the addition of four new decking colors, two for our Premium Transcend Lineage line and two for Trek's Enhanced Decking line.
Bryan Fairbanks: All of these new colors integrate our proprietary heat mitigating technology to capitalize on the growing popularity of heat reduction. To learn more about our heat mitigating technology, please see our press release from earlier today and on our website.
Bryan Fairbanks: In the decking hardware category, we announce the continued rollout of the TREX fastener connection.
Bryan Fairbanks: with these components backed by the same warranties as our decking. For example, when paired with TREX Transcend decking, fasteners are backed by a 50-year residential warranty.
Bryan Fairbanks: Our channel partners are working closely with us to maximize the benefits of these new Trex product introductions.
Bryan Fairbanks: Recently, we shared the news that Snavely Forest Products, a long-time and exclusive distributor of Trex, decided to sell Trex railing exclusively as well, displacing their previous suppliers and adding Colorado to their distribution coverage for Trex.
Bryan Fairbanks: Similar discussions are underway with a number of our exclusive decking distributors and we expect to have additional announcements such as this in the coming months.
Bryan Fairbanks: As distributors adopt exclusivity for Trek's railing, we expect the focus on a single brand will have a multiplier effect on both our decking and railing sales.
Bryan Fairbanks: This reinforces our confidence in our ability to gain substantial share of the residential railing market with our complete product portfolio, and to harvest opportunities in adjacent markets to drive further incremental growth.
Bryan Fairbanks: The development of our Arkansas facility is a critical aspect of our future growth trajectory, and as promised, we want to share with you the latest update on the expected timing and associated startup costs.
Bryan Fairbanks: I will discuss the timing and then ask Brenda to review the costs.
Bryan Fairbanks: The substantial production efficiencies that we've achieved to date have yielded sufficient capacity at our existing manufacturing plants for us to accommodate the projected demand for TREX products in 25 and 2026, enabling us to commence decking production at our Arkansas campus in the first half of 2027.
Bryan Fairbanks: Recycled plastic processing will begin in the first quarter of 2025.
Bryan Fairbanks: The output of this operation will be used at our Virginia and Nevada facilities and eliminate the need to purchase more expensive external pelletized recycled materials.
Bryan Fairbanks: We continue to adopt a modular approach to the development of the Arkansas campus, bringing on production lines in line with demand. Once completed, this will be our most efficient production site, as it will incorporate our latest proprietary equipment and technology.
Bryan Fairbanks: It is located near Central Raw Materials and is in close proximity to key regions for wood conversion and is adjacent to major transportation hubs that will offer lower freight for centrally located customers.
Bryan Fairbanks: While we will still have elevated capital spending in 2025 with the completion of the decking building and installation of the decking lines, capital spending will significantly decline in 2026 and beyond.
Bryan Fairbanks: Looking ahead, we believe that the repair and remodel market will return to low single-digit growth in 2025, supported by lower interest rates and increased home turnover and home building activity.
Bryan Fairbanks: TREX has consistently outperformed the R&R index by a significant margin, and we expect to do so again next year, with our results further strengthened by new products. More to come on that when we provide our guidance next year. Now I will turn the call over to our Senior Vice President and CFO, Brenda Lovcik, for a financial review.
Brenda Lovcik: Thank you, Bryan, and good evening, everyone. I am pleased to review our third quarter 2024 and year-to-date results.
Brenda Lovcik: Please note that unless otherwise noted, all comparisons I will discuss today are on a year-over-year basis compared to the third quarter and first nine months of fiscal 2023.
Brenda Lovcik: Overall, sales were slightly ahead of our expectations driven by solid consumer demand for our premium product lines led by our Trex Transcend lineage and signature decking and railing.
Brenda Lovcik: While consumer spending on our lower-priced products remained restrained, this behavior was consistent with what we saw during the second quarter.
Brenda Lovcik: Gross margin was 39.9%, down 190 basis points from 41.8% after adjusting for the warranty benefit recognized in the prior year period.
Brenda Lovcik: This decrease is primarily the result of lower utilization, partially offset by the benefits of our continuous improvement initiatives, which continue to deliver strong results.
Brenda Lovcik: Selling, general, and administrative expenses were $39 million.
Brenda Lovcik: or 16.6% of net sales in the third quarter.
Brenda Lovcik: compared to $45 million, or 14.7% of net sales, primarily related to lower incentive compensation, which more than offset marketing spend as we continue to invest in new product innovation and branding, as those investments have proven to deliver healthy returns.
Brenda Lovcik: Net income was $41 million in the third quarter, or $0.37 per diluted share, a decrease of 38% from $65 million, or $0.60 per diluted share.
Brenda Lovcik: We delivered EBITDA of $68 million, or 29.1% of net sales, down 32%, compared to $99 million, or 32.7% of net sales.
Brenda Lovcik: Excluding the warranty benefit, the third quarter 2023 net income was $62 million or $0.57 per diluted share, EBITDA was $96 million, and EBITDA margin was 31.5%.
Brenda Lovcik: From a year-to-date perspective, net sales for the first nine months of 2024 totaled $984 million, a 9% increase compared to $899 million in the first nine months of 2023.
Brenda Lovcik: This is primarily due to the shift of our early buy program from December to January.
Brenda Lovcik: Net income was $217 million or $1.99 per diluted share compared to $183 million or $1.69 per diluted share in the first nine months of 2023.
Brenda Lovcik: EBITDA was $331 million, or 16% from $285 million in the prior year, and EBITDA margin expanded by 200 basis points to 33.7% from 31.7% in 2023.
Brenda Lovcik: driven primarily by stronger year-over-year gross margin improvement.
Brenda Lovcik: The decrease was primarily a result of increased railing and decking inventories as we prepare to execute on our new railing strategy and prepare for the 2025 decking season.
Brenda Lovcik: This was partially offset by an increase in accrued expenses associated with construction on our Arkansas manufacturing facility.
Brenda Lovcik: In alignment with our capital allocation strategy, as of today, we have returned over $100 million to our shareholders this year through the repurchase of 1.6 million shares of our outstanding common stock.
Brenda Lovcik: We also invested $152 million in capital expenditures year-to-date, primarily related to the build-out of the Arkansas facility.
Brenda Lovcik: The total CapEx for this facility is expected to be approximately $550 million, of which we have already invested $340 million.
Brenda Lovcik: The increase from our prior guidance for the project reflects management's decision to build redundancies to mitigate potential production constraints within our existing manufacturing facilities as well as inflationary pressures on installation and building material costs.
Brenda Lovcik: Once this project is completed, our capital expenditures are expected to return to historical levels resulting in a significant increase in our annual free cash flow generation.
Brenda Lovcik: Now moving on to our Arkansas Facility Startup Cost Discussion.
Speaker Change: As Bryan noted earlier, recycled plastic processing will begin in early 2025.
Speaker Change: and by utilizing the output as raw material in the Winchester and Fernley facilities.
Speaker Change: It will help to offset the startup costs by reducing purchase pellets at those facilities.
Speaker Change: We expect the associated one-time startup costs to total approximately $5 million and the associated annualized depreciation of approximately $10 million to begin in the second quarter of 2025.
Speaker Change: These operations are expected to run at targeted utilization rates by the third quarter of 2025, with startup costs ending at this point.
Speaker Change: As Bryan also mentioned, we have been able to shift the startup of our decking lines to the beginning of 2027 due to efficiencies gained at our existing facilities.
Speaker Change: At that time, we anticipate the one-time startup cost to be approximately $12 million beginning in the first half of 2027, with the associated annualized depreciation of approximately $20 million beginning at the same time.
Speaker Change: We expect these operations will be running at targeted utilization rates by the end of 2027.
Speaker Change: Once these start-up expenses are behind us, not only will Arkansas be our most efficient plant, but it will also enable us to increase the flexibility and efficiencies of our legacy facilities.
Speaker Change: Now, turning to the guidance for the remainder of 2024, as noted in today's earnings release.
Speaker Change: Based on our results for the first nine months of 2024 and our current visibility through year-end.
Speaker Change: We are pleased to reaffirm Net Sales Guidance at the midpoint of our range of $1.14 billion, and we expect EBITDA margins to reach the high end of our guidance of 30.5%.
Speaker Change: Full year SG&A expense as a percentage of net sales is expected to be in line with last year as we continue to invest in branding and new product development.
Speaker Change: In addition, we anticipate our full-year effective tax rate to be approximately 25 to 26 percent.
Speaker Change: Our net sales guidance implies Q4 sales of approximately $156 million at the midpoint.
Speaker Change: This guidance assumes the repair and remodel market continues to be challenged with low single-digit declines. It also assumes end-consumer sell-through will continue to be challenged with low single-digit declines, albeit off of a much smaller quarterly base.
Speaker Change: We also anticipate the market will reduce channel inventory by $20 to $30 million in addition to the $70 million in Q3, ending the year at lower-than-normal inventory weeks on hand. With that, I will now turn the call back to Bryan for his closing remarks.
Bryan Fairbanks: Thank you, Brenda.
Bryan Fairbanks: We believe TREX is in a unique position to capture a greater share of the industry's long-term growth opportunities. We are the market leader with the greatest brand awareness and the largest and most trusted network of distributors, dealers, and home centers.
Bryan Fairbanks: Our expanded railing portfolio and adjacent products are earning Trek's exclusivity amongst our distributors and opening additional shelf space opportunities with home centers and pro-channel dealers.
Bryan Fairbanks: And our new product introductions have resonated well with contractors and consumers.
Bryan Fairbanks: All of this supports our confidence in the growth trajectory for TREX in the coming years. Operator, please open the call for questions.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. In the interest of time, we ask that you please limit yourself to one question and one follow-up.
Speaker Change: And our first question today comes from Ryan Merkel with William Blair. Please go ahead.
Ryan Merkel: Hey, thanks for taking the questions and congrats on the quarter.
Ryan Merkel: My first question is just on the fourth quarter assumptions, but I think you said down low single digits for sell-through. I'm curious if I heard that right and then what does that assume about the premium products and the lower end products?
Speaker Change: We did say low single digits from a sell-through perspective. Our premium products during the quarter sold through at a
Speaker Change: at a high single-digit, and then our entry-level products were in a mid-single-digit decline.
Speaker Change: We are expecting that to continue in Q4.
Speaker Change: Okay, good, that's what I thought. And then, Bryan, how do we think about the EBITDA margin guide for 25 exceeding 31%? Are you simply saying or signaling that X, the one-time cost, you can keep expanding margins due to cost takeout? Or is there anything else in there?
Bryan Fairbanks: Nope, that's correct. So excluding those one-time costs with the startup costs in Arkansas, as well as the railing transition costs, we'll continue to expand those margins.
Speaker Change: All right. Thank you.
Speaker Change: Thanks, everyone.
Speaker Change: And our next question today comes from Rafe Jadrosich with Bank of America. Please go ahead.
Rafe Jadrosich: Hey, good afternoon. Thanks for taking my question.
Rafe Jadrosich: I just wanted to ask on the inventory side, if I look at your inventory days on hand, they're a lot higher than where they've been historically, especially if we go back to...
Speaker Change: Can you talk about why you're carrying more inventory now? Is there a structural change or is this related to the railing launch next year and just getting ready for the decking season next year?
Speaker Change: Yeah, we've talked about this.
Speaker Change: For a long time we've ramped our capacity up during the busiest parts of the season and pulled it back later on in the year.
Speaker Change: given the size of the organization that we are today.
Speaker Change: We believe it makes more sense to carry a little bit heavier inventory and then reduce
Speaker Change: what you've seen in the prior years.
Speaker Change: that's really helpful and that makes it makes a lot of sense.
Speaker Change: And then just on the 31, over 31% EBITDA margin target for next year, is there an embedded revenue assumption or is that based on the R&R market getting back to low single digit? Can you just talk about the different levers that you have to pull to give you confidence to talk to about a 31% for next year already?
Speaker Change: are a number of underlying economic metrics that will support getting repair and remodel back to growth again.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And our next question today comes from Keith Hughes with Truist. Lee, go ahead. Thank you. The commentary on channel inventory reduction 20 to 30 million in the fourth quarter, is that all in big box or are you seeing it in other channels?
Speaker Change: That's primarily going to be in our distribution channel.
Speaker Change: work at.
Speaker Change: distribution centers still our inventory and then from there when it shifts to the store is when we book revenue so there's high visibility to that we know exactly where that's going to be
Speaker Change: With the pro-channel distributors, while we still have good visibility of that, it's not managed on a consignment basis, and that's where we'll see the decrease.
Speaker Change: Okay. And second question with the, um...
Speaker Change: The Recycle Plastics startup in Arkansas, I think you said earlier, is going to be replacing, I assume you mean Virgin Pellets, at the two other facilities.
Speaker Change: Number one, is that right? And number two, even with transportation costs, is that still a cheaper-landed...
Speaker Change: All right. Well, thank you. Thank you. Okay.
Speaker Change: We don't use virgin pellets in our operations, but we do buy some outside pelletized recycled materials. And this material will replace that, and yes, there will be a cost benefit to that.
Speaker Change: Okay, thank you. Thanks.
Speaker Change: And our next question today comes from Reuben Garner with The Benchmark Company. Please go ahead.
Reuben Garner: Thank you. Good evening.
Reuben Garner: A question on the railing. You referenced a one-time $5 million cost. Any way to gather what exactly that cost is tied to and what the revenue benefit might be from those particular costs?
Speaker Change: More merchandising into the market. We need to make sure that all of our dealers as well as home centers are Properly merchandised all the literature is up to date and this is a We've got many more launches over the upcoming four or five months than we've had in the history of the company So there is some cost to get that into the market and get it done correctly
Speaker Change: Am I connecting the wrong dots here? Is the product that's being drawn down at distribution the same product, or are those two different sort of pressures that you're facing, an inventory drawdown at distribution and then a slower consumer at the retail big box channel?
Speaker Change: Distributors have already adjusted their inventories understanding that entry level market is going to be a little bit weaker but as we did our surveys with distribution and understanding where they wanted to come in for year-end understanding the new products that we're going to have for next year
Speaker Change: The channel inventory is a little bit lighter than what we had expected coming out of the second quarter, but nothing that we're concerned about.
Speaker Change: For more information, visit www.fema.gov
Speaker Change: Great, thanks guys. Good luck into the year. Thanks.
Speaker Change: And our next question today comes from Susan McClary with Goldman Sachs. Please go ahead.
Susan Mcclary: Thank you. Good afternoon, everyone.
Susan Mcclary: My first question is on the inventories. You mentioned the 20 to 30 million drawdown in the fourth quarter. What does that suggest as you go into the pre-buy early next year? And what are you hearing in terms of the level of demand that you could see as we start to get into the spring given what the contractors are telling you?
Speaker Change: Well, so there's we've got quite a bit of time before we get to pre-buy at this point But people are feeling positive about next year that repair and remodel Numbers do come back into a positive territory Recall last year we went ahead and we moved our December pre-buy into the new year But then we also shipped an additional roughly 40 million dollars on top of that So the channel would be ready to support the season
Speaker Change: Given our own inventory position at this point, I wouldn't expect that additional infill would occur during the first quarter next year. We're highly confident in our ability to be able to serve the marketplace.
Speaker Change: Our sales team has good visibility to where the pro channel is sitting on inventory at any given time. And we feel as though this is a little bit better way to run the market rather than trying to push it in with incentives earlier in the year.
Speaker Change: Okay, that's helpful, Culler. And then maybe thinking a bit about the gross margin, you mentioned that you did see the benefit of some cost reductions in there that offset the lower utilization this quarter. Any thoughts on further cost benefits that you could be realizing into year-end, and then any projects that you want to highlight, thinking about 2025?
Speaker Change: One of the things I talked about was given the efficiency projects that we have underway
Speaker Change: That is driving some of that benefit that we're seeing. So we've got projects like that that will be ongoing in the organization.
Speaker Change: And I wouldn't pin it on any one thing that we're going after. It's a good number of projects, and it continues to deliver benefits that, in some cases, offset other costs that are coming into the business.
Speaker Change: completely immune from any inflationary impacts, but generally we've been able to offset those inflationary impacts as well as deliver other benefit to our income statement.
Speaker Change: Okay, thank you and good luck with everything.
Speaker Change: Thank you.
Speaker Change: And our next question today comes from John Lovallo with UBS. Please go ahead
John Lovallo: Hey guys, I think you've taken my questions as well. The first one is, you mentioned pushing out production of decking to 2027 in Arkansas through some of the efficiencies that you've generated at existing plants. Just curious if you could put a number on how much incremental capacity you were able to generate at these existing production facilities.
John Lovallo: And you know just really just making sure that there's nothing you're seeing on the demand side that that's stopping the production at at Arkansas
Speaker Change: Highly confident that we can meet the market needs with the existing capacity And then just bring on a little bit a little rock just a little bit later
Speaker Change: Okay, that makes sense. It looks like you guys repurchased about $45 million of stock already this quarter. How should we think about your appetite through the remainder of the quarter and as we move forward as some of the Little Rock stuff comes online?
Speaker Change: We have an open program for roughly 10%, now that's minus the $100 million we just bought, not exactly sure the percentage impact of that.
Speaker Change: But that program still is available to the company, and we coordinate with our board of directors and make decisions as to how we implement those 10B51 plans as we go forward. Okay. Thank you, guys.
Speaker Change: Thanks.
Speaker Change: And our next question today comes from Michael Rehart with J.P. Morgan. Please go ahead.
Speaker Change: Thank you for watching!
Michael Rehart: Thanks, good afternoon everyone. Thanks for taking my questions.
Michael Rehart: First, I was just hoping to get clarification on a couple of the comments around 2025. And apologies if I missed it.
Speaker Change: The 31% or 31% or greater, if that number includes the Arkansas, some of the early Arkansas
Speaker Change: startup costs in the railing transition that's inclusive of that and also the mid single digit growth that that was a reference to the R&R market or your own sales growth
Speaker Change: The $31 million is adjusted for those one-time costs, so if we exclude those one-time costs of the $5 million of the transition cost for railing and the $5 million of the one-time
Speaker Change: Startup costs for the for the repro lines
Speaker Change: We expect 31-plus percent on the EBITDA line. And the single digit is for the R&R market. That's what we're expecting for R&R based on what we're seeing and hearing in the market right now for 2025.
Speaker Change: you know positive outdoor living trends as well as the the conversion from wood to composite kind of giving a double you know positive tailwinds relative to the underlying R&R market.
Speaker Change: What, in your view, has made the lower end kind of maybe grow, more recently at least, in line with the underlying R&R market, as opposed to not benefiting from some of those trends that maybe you're still seeing in the premium side?
Speaker Change: Thank you.
Speaker Change: The differentiation is primarily going to be
Speaker Change: inflation that consumer is asking the question which repair and remodel projects
Speaker Change: do I want to do with my home.
Speaker Change: So that's definitely a key driver of it. I think it's really important to note also
Speaker Change: that composites are not losing share to wood. Wood is declining at a higher rate than what we've seen our entry level decline. So, we still see that there is underlying support that conversion is happening in the market. Again, we survey our partners in the marketplace so that we understand what's happening out there, but there is a general weakness at that entry level at this point.
Speaker Change: Fortunately, the premium customers are still quite strong.
Speaker Change: Okay, so that's very helpful. I mean, basically what it sounds like you're saying, Bryan, is that maybe perhaps the...
Speaker Change: Overall, the decking market could even theoretically be worse than the broader R&R, just given that it's a bigger purchase and a lot more discretionary, is that kind of what you're implying? I did not say that.
Speaker Change: okay I'm just curious it sounded like directionally there but all right appreciate it thank you
Speaker Change: And our next question today comes from Tim Wise with Barrett. Please go ahead.
Tim Wise: Hey everybody, good afternoon. Maybe just on raw materials, some of the
Tim Wise: recycled indices that we look at, Bryan, have seen some inflation in some of the recycled polyethylene grades.
Tim Wise: Is that something, and I can't really explain it, so I mean, is that something that you're seeing in the marketplace or you're seeing in COGS or any driver to what that might be?
Speaker Change: Well, I'll start with I've never really seen a good
Speaker Change: It's usually going to be on pelletized purchases.
Speaker Change: I would tell you, with what we're outpurchasing in the market, we continue to see very, very moderate levels of inflation with it, and it's not been a concern that we've had this year. Okay. Okay. That's helpful. And then, I guess, just, just, I want to, I think you said two different numbers, kind of, through the call. I just want to make sure I get it right. So, are you guys assuming that the R&R market next year is up mid-single digits or low-single digits?
Speaker Change: Low single digits. Okay, okay, thanks very much.
Speaker Change: And our next question comes from Phil Ng with Jefferies. Please go ahead.
Phil Ng: Hey guys, just a clarification to Susan's question earlier, Bryan are you saying there's no winter buy in 2025 or just you're not going to see the outsize $40 million inventory?
Bryan Fairbanks: Yeah, there'll still be a pre-buy and given the seasonality of this industry, that's the reason
Speaker Change: seasonal companies do the early buy programs. And so that that inventory is staged when the season really kicks off in the April timeframe. And yeah, there will absolutely be a program that will be focused on January through March timeframe.
Speaker Change: So just not as big as last year because the last year you had this big, I mean this year had a big bump.
Speaker Change: You know tracks running structurally with more inventory How should we think about the production get?
Speaker Change: production levels and how you're going to run in 2025. I know a few years ago when you had too much inventory, you kind of managed inventory in a certain way, but it sounds like you may look at it a little differently. I just want to be thoughtful about that because your inventories are high. So, you know, is there any risk that you draw down production next year, which would be a headwind on margins?
Speaker Change: Yeah, we're definitely looking at inventories differently than we did back in 2022. We really dropped production way off in 2022, then we had to bring quite a bit of that production back.
Speaker Change: in early, I guess it was mid-23 and then ran pretty heavily. So it's been a bit of an up and down.
Speaker Change: from a production perspective. We want to get away from that. It doesn't make sense from a cost perspective. It doesn't make sense from an employment perspective. So that's where you'll see.
Speaker Change: I'm not too concerned from a utilization perspective. We can run more efficiently if we can run on a more stable basis.
Speaker Change: At least on the plastic recycling piece, is that roughly like a $5 million impact and $15 million on earnings?
Speaker Change: And I guess expanding that question, for 2025, are you effectively stripping out the $5 million load-in and the startup costs from EBITDA and EPS? Because in the past, I think you generally kept it, so I just wanted to understand, are you stripping it out going forward?
Speaker Change: Yeah, so again, $5 million will be the pure startup cost, and then you'll have the depreciation, right, of $10 million.
Speaker Change: We're just a little rock piece of it, but the $10 million in depreciation doesn't start until Q2.
Speaker Change: So you will only have three quarters of that depreciation, so think of it from that perspective. Yeah, so we'll give you adjusted numbers, we'll explain what those adjustments are. Yeah. But the adjusted numbers will or will not include the start-up cost? I know you, from a, perhaps... They will not.
Speaker Change: We will adjust out those startup costs, yep. What about the DNA?
Speaker Change: We will appreciate it. It's not going to be in your EBITDA. Right. On earnings perspective.
Speaker Change: Are you streaming that on, too, or are you...?
Speaker Change: We haven't decided how we'll report that next year as of yet. If it's more helpful to the market, we'll show it that way.
Speaker Change: Okay, all right. Thank you
Speaker Change: And our next question today comes from Jeffrey Stevenson with Loop Capital. Please go ahead.
Jeffrey Stevenson: Hey, thanks for taking my questions today.
Jeffrey Stevenson: I just had a clarification. I believe previously you talked about in the fourth quarter a high single-digit type sell-through decline, and just, you know, wondered was there any variance between, you know, your current down-low single-digit expectations or any change in, you know, how inventories, you know, exit the year compared to previous expectations?
Speaker Change: Yeah, it's a great question. We did have an assumption that there would be a high single-digit decline as we moved into the the fourth quarter and that there would be continued deterioration.
Speaker Change: in the third quarter came in as we expected. I mentioned in the last call July was pretty rough, but then we actually saw numbers improve a little bit in August and September. Now we expect that it will continue to see those kind of numbers through the end of the year. So instead of having a high single-digit decline, it ends up being a low single-digit decline.
Speaker Change: and a full year being flat. Where's that difference being serviced from? It is being serviced from the inventory in the channel where that channel inventory will be somewhat lower than what we had originally expected.
Speaker Change: And will that be similar to last year, which is, you know, what's 15% below historical levels, or is it going to be lower than that?
Speaker Change: It'll be lower than last year.
Speaker Change: Got it got it
Speaker Change #100: And my second question is just, you know, Bryan, on the importance of the Snavely, you know, exclusive railing announcement and, you know, the expectation of more with distribution partners. Is this being really driven by the new railing products that Trex has introduced over the last, you know, year or so? And then at a higher level, you know, how much of, you know, railing sales at a distributor such as Snavely were Trex versus other brands in the past?
Bryan Fairbanks: Yeah, it's a great question. This is a strategy we've been pursuing for about two years now.
Speaker Change #101: You're starting to see the benefits of this strategy come through with the announcement from Snavely.
Speaker Change #101: And the way the strategy has worked is understanding what types of railings were our distributors selling, what were the volumes they're selling, and what products did we need to have so that we could have those distributors just focused on the Trex brand.
Speaker Change #101: And now you're starting to see some of that come through, and as I mentioned, I expect that you'll see further announcements as we move forward with that. All of the products I announced earlier, those are the type of products that our distributors are looking for. And yeah, there's a material amount of sales that our distributors have had with competitive products over the past years.
Speaker Change #102: Great. Thanks, Brad.
Speaker Change #103: Thank you.
Speaker Change #104: And our next question today comes from Kurt Jenger with DA Davidson. Please go ahead.
Kurt Jenger: Great, thank you. I just wanted to follow up on the last question, you know, intuitively it makes sense.
Speaker Change #106: more distribution coverage better.
Kurt Jenger: I'm just curious, like, how we should think about that playing out at the retail level, right? I mean, the contractor, homeowner, still picking the brand, you know, how does more distribution kind of help ultimately pull that sale through in your mind?
Speaker Change #107: Yeah, the first thing that will happen is you've got more feet on the street that are pitching your product. You've got availability at more locations. But in this industry, it generally takes three years to really gain share with these new products. First year, you have the infill. Second year, now you've got more turning through the channel. And then by the third year is really where you start seeing that significant growth. We're excited that this potentially we could see more benefit earlier from that, but we also understand the channel that we work within. Our own sales team is highly engaged with conversion of these accounts as well as our distribution channel. We believe we'll have success both at the home center and within the pro channel.
Speaker Change #108: Okay, appreciate that. And then, you know, I thought it was interesting that you talked about adding the heat mitigating technology to some of the enhanced decking lines.
Speaker Change #109: How do you think about kind of the opportunity across more of the portfolio, recognizing that, you know, it does seem like a higher end feature and maybe there's kind of some cannibalization factor in the back of your head? Just curious how you think about that.
Speaker Change #110: The advantage of having an ongoing, continuous improvement program
Speaker Change #111: One of the questions I used to get a number of years ago was are we going to take prices back down now that we've Taken all this price over those couple of years and the answer is no I've not seen any Pressure on price within the industry itself But there's always going to be a drive ensure that you're providing the best value to those consumers especially with those entry-level products
Speaker Change #111: And while they're not as strong right now, that market will come back and we are in the right place to be able to capture that wood conversion marketplace as repair and remodel increases.
Speaker Change #112: Just to sneak one more in, is it fair to think about kind of the innovation on the decking side being more kind of around features going forward or more kind of expanding the price points? How would you think about that?
Speaker Change #112: We've got products that go anywhere from two dollars a linear foot up to nine to ten dollars a linear foot So we've got a wide selection
Speaker Change #113: very much.
Speaker Change #114: Okay, appreciate the call, Bryan. Thank you. Thanks.
Speaker Change #115: Our next question today comes from Trevor Allinson with Wolf Research. Please go ahead.
Trevor Allinson: Good evening, thank you for taking my questions. First question on railing, you talked about doubling your market share within five years. Is the 6% market share you called out referring to the entire 3.3 billion railing market you referred to or just the parts of the market that you're operating in and then it's your expectation over the next five years that the railing market grows in line with the decking market?
Speaker Change #117: So that's going to be the entire railing market, $3.3 billion includes wood and any other alternative players. And so it's based off of those.
Speaker Change #118: Those numbers and we do expect the railing mark to go roughly in line with repair and remodel It doesn't see quite the same
Speaker Change #118: growth that some of the projections are on the decking side of it.
Speaker Change #118: You've got roughly 30% of decks don't get a railing at all because they're less than 36 inches in height, but there is a significant opportunity for treks to be able to go after.
Speaker Change #118: We are the number two residential railing provider by market share at 6% of the marketplace. So that gives you a bit of an idea of just how fragmented this industry is.
Speaker Change #119: Yeah, makes sense. Sounds like a great opportunity.
Speaker Change #120: Bryan, I wanted to follow up on a comment you made just a few minutes ago about not seeing the incremental $40 million load-in next year.
Speaker Change #121: Is that comment due specifically to where your inventory is positioned currently as you've built those levels up, or is that more of a permanent change in how you're going to approach channel inventory levels moving forward to mitigate some of the boom and bust cycles that we've seen over the last couple of years?
Speaker Change #122: Yeah, the latter of what you said, it'll be more of a permanent change and try to reduce the chances for that boom and bust cycle, exactly.
Speaker Change #123: Got it. Understood. Thanks for all the color. I appreciate it. Thanks.
Speaker Change #124: Our next question today comes from Adam Baumgarten with Zelman. Please go ahead.
Adam Baumgarten: Hey, thanks for taking my question. Just on your 2025 outlook, you said R&R up below single digits. I would assume, based on your history, you would grow higher than that. So just thinking about the 31% or above EBITDA margin, does that not include any assumption for volume leverage benefiting margins?
Speaker Change #126: We haven't provided what that growth number is for next year so let's not get too far ahead of ourselves. We will definitely provide more details on that.
Speaker Change #127: Okay, got it. And then just...
Speaker Change #128: Just on the whole dynamic of premium versus entry level, sell-through, you know, kind of bifurcating here, have you ever seen it this disconnected in the past?
Speaker Change #129: Well, I think what's changed is there are more products.
Speaker Change #129: that are going after that wood conversion marketplace. So in 2019, we launched our enhanced product line.
Speaker Change #129: And it was specifically designed to go after that buyer who was installing wood. And not just moving them to a product that's roughly two times the cost of wood.
Speaker Change #129: for an extra couple hundred dollars they can afford to upgrade to or enhance.
Speaker Change #129: Natural's product line which sells for $2.75, $3.00 a linear foot. That strategy has worked extremely well and the key part is educating
Speaker Change #129: these consumers that, yeah, for an extra $500, $700, you can have a composite deck, not just a wood deck that's going to deteriorate within 12 to 15 years.
Speaker Change #129: So the marketplace has changed over the past five years or so. So I think that's why you're seeing a bit of a difference in how the consumer is reacting when we enter into times of economic uncertainty.
Speaker Change #130: Got it. Thanks. Best of luck.
Speaker Change #130: Thanks.
Speaker Change #131: And our next question today comes from Stephen Ramsey with Thompson Research Group. Please go ahead.
Stephen Ramsey: Good evening. To focus on the railing topic a bit more, could you put the sell-through of railing demand in some context with the decking divergence? I know it's a higher ramp off a low base, but if there's a way to help us gauge that.
Speaker Change #133: Yeah, we've not we've not tried to do that as yet something we'll consider as we move forward with it There's a lot of moving parts
Speaker Change #133: With railing right now with some of these new products coming to marketplace and what I don't want to do is confuse Selling of products with actual sell-through of products right now
Speaker Change #134: Okay, that's helpful. And thinking longer term on railing, is there a way to think about where the spectrum of products goes there on a premium versus entry level way of thinking about the railing portfolio?
Speaker Change #135: I see opportunities at every level, even though we already have a strong lineup. And once these products are launched, we'll have a very complete lineup. Much like the decking side of things, there will always be new opportunities for us to be able to go after.
Speaker Change #136: Okay, thank you.
Speaker Change #137: Thank you.
Speaker Change #138: And our next question today comes from Matthew Boley with Barclays. Please go ahead.
Matthew Boley: Hey, good afternoon, everyone. Thanks for taking the questions.
Matthew Boley: On the gross margin into the fourth quarter, I think you were implying something in the mid-twenties, and correct me if I'm wrong, and I know you're going to be keeping inventories higher.
Matthew Boley: But kind of given where sell-through is exiting this year and where your inventory is, you know, how should we think about your kind of early year production plans? And specifically what I'm asking is what is the potential for that gross margin to kind of rebound beyond the fourth quarter? Thank you.
Speaker Change #140: Yeah, we tend to have our weakest gross margin in the fourth quarter anyway, so that really shouldn't be too much of a surprise for those that have lower sales as well as lower production with that. While we won't...
Speaker Change #141: CSAR production like we've done over the past couple of years, there still will be some level of increase and decrease as we move into the seasonal part of the year.
Speaker Change #142: Okay, thank you for that, Bryan. And then secondly...
Speaker Change #143: not to harp on it, but just back on that 31% EBITDA margin and, you know, presumably there is a production estimate.
Speaker Change #144: In there, I guess if you bear with me, you're saying you're, you know, the 40 million channel fill is not going to repeat, obviously sell-through is kind of still exiting the year down, and I guess you sounded like you were assuming revenues.
Speaker Change #144: could be up mid-singles for the entire year. And so I guess the question is, is the assumption that you would see kind of accelerating revenue growth as you go through 2025, or should it be kind of more radically spread out between the first half and second half?
Speaker Change #145: I think repair and remodel right now is showing accelerating as we move through the external metrics for repair and remodel. And when we talk about that $40 million, it's not as if it doesn't sell in. What we're saying is that it doesn't sell in in the first quarter. There's no reason to put that inventory out there in the first quarter. We expect the market will be there. It will sell in during Q2 and Q3.
Speaker Change #146: Thank you. Thank you. Thank you.
Speaker Change #147: Okay, thanks everyone. Good luck. Thanks, Matt. Thank you.
Speaker Change #148: This concludes our question and answer session. I would like to turn the conference back over to Bryan Fairbanks for any closing remarks.
Bryan Fairbanks: Thank you for your participation and questions today. We look forward to speaking with many of you in the coming weeks and at upcoming conferences. Good evening.
Bryan Fairbanks: The End
Speaker Change #149: Thank you for watching!