Q1 2025 Trex Co Inc Earnings Call
Hello, and welcome to the check company last call about 2025 earnings conference call. All participants will be in a listen 99, because you need any assistance. Please signal a conference specialist by pressing the sake. So that they can after today's.
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Please note. This event is being recorded I would now like to turn the conference Casey country. Please go ahead.
Speaker Change: Thank you everyone for joining us today with us on the call are Bryan Fairbanks, President and Chief Executive Officer, and Brendan Love Check Senior Vice President and Chief Financial Officer, joining Brian and Brenda as Amy Fernandez Senior Vice President Chief Legal Officer, and Secretary as well as other members of checks.
Speaker Change: The company issued a press release today after market close containing financial results for the first quarter of 2025. 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 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 meaning of federal securities laws.
Amy Fernandez: 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.
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: 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 Brian Fairbanks.
Bryan Fairbanks: Thank you Amy, and thank you all for joining us to review our first quarter 2025 results and discuss our business outlook as we head into the heart of the decking season [inaudible]
Speaker Change: The Trex team delivered higher than expected sales in the first quarter, driven by continued strong demand for our premium products and our prominent positioning in both the home centers and the Pro Channel.
Speaker Change: Recall that the first quarters historically a period of inventory build for the channel. After a somewhat slow January and February , due to adverse weather conditions in many regions of the country, we saw a significant pickup in March demand.
Speaker Change: During the quarter, there are several key initiatives to know. First, new products launched within the last 36 months accounted for approximately 22% of our trailing 12-month sales. More than twice the level of last year's first quarter.
Speaker Change: Trex's proven track record as a market innovator is once again helping us win business and market share in both the pro and home center channels with new high performance products that resonate with consumers.
Speaker Change: Second, since the beginning of the year, we've converted an increasing number of dealers to the Trex brand, and the pace of Trex Probe recruitment and qualification is meaningfully ahead of the same period last year [inaudible]
Speaker Change: These account conversions are the result of our strategy to offer a comprehensive portfolio of decking and railing products that meet customer needs, enabling them to rely on a single trusted market leading brand. Thank you very much.
Speaker Change: This increase in conversions has also been supported by the distribution enhancements we implemented last year.
Speaker Change: Third, we officially launched our performance engineered for your life outdoors campaign on May 1st highlighting the performance advantages of Trex products across a wide range of applications .
Speaker Change: A key highlight of the campaign is Trex Marine Grade Decking, which is engineered to withstand Sun, Saltwater, Sand, and other harsh environmental elements.
Speaker Change: including some of the most demanding climates in the world, from the tropical Florida Everglades to the Arctic regions of Northern Canada and all the way to the beaches of Dubai. Bye.
Speaker Change: The new campaign also features our sun comfortable technology, which is a key differentiator for Trex in the marketplace.
Speaker Change: Originally developed for a Transcend lineage product line, Sun Comparable Technology is now available in three new select decking colors, two enhanced decking colors, and we continue to incorporate this technology into new product offerings.
Speaker Change: Lastly, we are pleased with the inventory level being held by our channel partners as of the end of the quarter. During the quarter, we began to realize the benefits of our new inventory strategy, which is designed to reduce the quarterly volatility associated with the timing of channel stocking and destocking.
Speaker Change: It also ensures our channel partners will have the inventory they need to meet consumer demand while at the same time enabling us to level production across the year, improving overall operating efficiency. Thank you very much.
Speaker Change: This strategy also gives Trex a greater flexibility to respond to market conditions, allowing us to draw down inventory to meet stronger than expected demand, or scale back production if demand softens, helping us maintain appropriate inventory.
Speaker Change: This approach ensures that we consistently have the right amount of product available to support our customer needs regardless of market fluctuations.
Speaker Change: Looking ahead to how the season is shaping up, the positive momentum and orders that we experienced in March has continued through April supporting our guidance for a mid to high single digit growth this year.
Speaker Change: With respect to tariffs, like all businesses, we are looking for additional clarity from the administration. Thank you very much.
Speaker Change: Less than 5% of our cost of sales is projected to be impacted by tariffs, with the majority of the impact related to purchases of aluminum and steel using a railing and fastening products
Speaker Change: We have mitigated and will further mitigate some of this impact through strategic actions such as building higher levels of pre-tariff inventory and negotiating with suppliers to either assume or share in the tariff burden.
Speaker Change: Additionally, we are adding new suppliers that are unaffected or less impacted by tariffs further reducing the impact on our cost of sales. Additional actions will be considered as we gain more clarity on the outcome of these new tariffs.
Speaker Change: We recently held our Trex Pro contractor meetings, bringing together contractors from across North America. The mood was upbeat with indications of strong demand for our products and continued repair and repair model spending in our category. Most contractors are quoting backlogs of six to eight weeks. [inaudible]
Speaker Change: Our channel partners also responded positively to a program enhancements aimed at increasing brand alignment For example, if a contractor is installing decking, railing and fasteners all from Trex, they will qualify for additional marketing opportunities as well as enhanced warranty benefits
Speaker Change: For more than three decades, Trex has built and maintained the most respected network of pro contractors, distributors, dealers, and home centers by fostering strong partnerships that are reinforced by mutual benefit
Speaker Change: We will continue to expand our product offerings and work closely with our channel partners to innovate and strengthen relationships that bring Trex products to the customer [inaudible]
Thank you.
Speaker Change: Progress is continued on our new state-of-the-art manufacturing campus that we're building in Arkansas. In the first quarter, we realized a significant milestone with the production of our first recycled plastic pellets which are already helping to offset the cost of external pellet purchases at our Virginia and Nevada campuses. In the first quarter, we realized a significant milestone with the production of our first recycled plastic pellet purchases at our Virginia and Nevada campuses.
Speaker Change: As work continues through 2025 and into 2026 to complete the Decking Building and Installation with production plan to start in 2027, we will continue to strategically align our manufacturing footprint.
Speaker Change: As we said, when it was first and out, this new manufacturing hub positions treks to better respond to changing market conditions and quickly capture growth opportunities. While at the same time, serve customers across the country with improved regional manufacturing access and lower free costs.
Speaker Change: Recent data in case indicates that there's an increasing level of pent-up demand in the repair and remodel market.
Speaker Change: Per Square Foot of Home Space, set the end of 2021, and it reached its low point in 2024 at a project of the dollar per square foot. That's approximately 20% below the average spending level.
Speaker Change: However, it is projected to increase from that low point back to the long term average by 2027. We agree with the projection given that there are over 50 million decks in North America and over half are either at or beyond their normal life spans.
Speaker Change: In 2025, we expect that Trex will outperform the R&R market by a considerable margin driven by our new product introductions and market share gains and we're confident that the trend will continue long into the future [inaudible]
Speaker Change: Now I will turn the call over to Senior Vice President, CFO , Brenda Lovcik, for a financial review of the first quarter Brenda Thank you.
Brenda Lovcik: Thank you, Brian , and good evening, everyone. Before I lock through our financial results, I would like to provide an update on some of the strategic priorities we have implemented to drive growth and profitability in 2025 and beyond.
Speaker Change: Over the last 36 months, Trex has undergone a period of significant product innovation with new products accounting for approximately 22% of trailing 12-month sales.
Speaker Change: We remain focused on enhancing our product offerings and delivering an expanded portfolio through innovation.
Speaker Change: Notably, this launch includes the industry's first mid-price-decking board with our integrated, son-comfortable, keep mitigating technology.
Speaker Change: Additionally, we have improved our entry-level trex enhanced decking with revised file specifications that brought in consumer appeal.
Speaker Change: These advancements reflect our continued leadership and product innovation and our commitment to offering the highest quality solutions across all price points.
Speaker Change: Serving consumers across the full spectrum of the market remains a core element of Trex long-term growth strategy.
Speaker Change: We are seeing benefits from the new and expanded distributor partnerships announced last year with Boise International Wood Products
Naily Forest Products,
Speaker Change: specialty building products, and Weyerhaeuser. In particular, we saw strong sales in the Southwest where many of the distribution changes took place.
Speaker Change: These results highlight the positive impact of our expanded distributor relationship, which in turn helped to expand our dealer network provide better service to the home centers and enable long-term growth.
Speaker Change: We continue to see strong demand for our premium products across all channels in Q1s and continue to benefit from our significant market share in the Decking and Rayland category for both stocked products and special order products in the Home Center channel.
Speaker Change: We believe our positioning in the home center channel will enable us to capture significant consumer demand for valuable focus consumer who is converting from wood as the market segment begins to rebound.
Bryan Fairbanks: On the production side, as Bryan mentioned, our Arkansas campus began producing recycled plastic pellets that will serve as raw materials for our Virginia and Nevada facilities and eliminate the need to purchase higher cost inputs.
Bryan Fairbanks: Arkansas is set to become our most efficient decking production hub, enhancing overall operational performance by increasing efficiency across our broader manufacturing network and allowing us to respond with more agility to fluctuations in demand.
Bryan Fairbanks: We are excited to see this multi-year initiative come to life and begin contributing positively later this year.
Bryan Fairbanks: I would now like to review our first quarter 2025 results. Please note that unless otherwise stated, all comparisons discussed are on a year over year basis compared to the first quarter of 2024.
Bryan Fairbanks: In Q1, we incurred several expenses tied to strategic initiatives, including start-up costs associated with our Arkansas Plastic Processing Operation.
Bryan Fairbanks: Railing Conversion Support, as we partner with our distribution channel to bring Trex's expanded portfolio of railing products to the markets and investments in digital transformation aimed at enhancing the consumer experience.
Bryan Fairbanks: I will provide adjusted results reflecting these items while discussing financial performance. A reconciliation of these adjustments can be found in our press release on Trex.com.
Bryan Fairbanks: In the first quarter, net sales were $340 million, a decrease of 9% compared to $374 million, but better than expected do the continued demand for our premium products.
Bryan Fairbanks: As a reminder, last year's net sales included a $40 million benefit from a channel inventory built ahead of the Jacking and Railing season that did not repeat this year.
Bryan Fairbanks: and we ended the quarter with channel inventories in line with where we expected as we head into the busy season.
Bryan Fairbanks: Gross Profit was 138 million and Gross Margin was 40.5 percent compared to Gross Profit of 170 million and Gross Margin of 45.4 percent down 32 million or 490 basis points
The decrease, primarily due to three factors, railing conversion costs,
Bryan Fairbanks: Lower year-over-year production as we level-load our facilities and as noted earlier we improved our injury level enhanced decking boards to optimize performance and refine the aesthetic appeal.
Bryan Fairbanks: This refinement requires changes to our production process which impacted Q1 margins and we expect will impact Q2 margins [inaudible]
Trex's unrelenting focus on continuous improvements partially offset these impacts.
Bryan Fairbanks: Adjusted gross profit, which excludes railing conversion costs of approximately $4,142,000,000
Bryan Fairbanks: The increase was due to additional investments in branding and new product innovation which continued to deliver strong results.
Bryan Fairbanks: Excluding expenses related to the startup of Arkansas facility and digital transformation activities, S-G-N-A expenses were 55 million or 16% of net sales [inaudible]
Bryan Fairbanks: Net income was 60 million or 56 cents per diluted share, a decrease of 32 percent from 89 million or 82 cents per diluted share
Bryan Fairbanks: excluding the aforementioned expenses adjusted net income with 64 million or 60 cents per diluted share.
Bryan Fairbanks: Adjusted EBITDA was 101 million, down 24% compared to 133 million [inaudible]
Bryan Fairbanks: As noted in today's earnings release, given our strong start to the year, we are maintaining our full year 2025 guidance We expect to see strong year over year comparisons in the second half of the year driven by normalized production levels, the ongoing benefits of our continuous improvement initiatives
Bryan Fairbanks: The absence of channel inventory reductions that occur in the second half of last year.
Bryan Fairbanks: We continue to anticipate a flat repair and remodel market relative to 2024 and we expect to considerably outperform the R&R market in 2025, supported by continued strong demand for our premium ducking products.
Bryan Fairbanks: Increasing demand for our entry level decking products and double digit growth in our railing products [inaudible]
Bryan Fairbanks: To reiterate our 2025 guidance, we expect next sales growth to be between 5-7%
Bryan Fairbanks: Adjusted EBITDA margin to exceed 31%, S-DNA expenses to be approximately 16% of net sales, interest expense less than 2 million, and depreciation in the range of 55 to 58 million.
Bryan Fairbanks: We are projecting an effective tax rate of approximately 25 to 26 percent.
Bryan Fairbanks: Capital expenditures are projected to be approximately 200 million for the full year as we continue the development of the Arkansas campus.
Bryan Fairbanks: We expect Q2 sales in the range of 370 to 380 million and Q2 margins to be in line with Q1.
Bryan Fairbanks: With that, I will now turn the call back to Brian for his closing remarks. Thank you, Brenda. To sum up, the first quarter represented a good start to 2025, and the pace of incoming orders is in line with our expectations. Thank you.
Bryan Fairbanks: While we're closely monitoring consumer behavior and other macroeconomic forces, we're confident in the strength of our market position We're going to talk about that in the future.
Bryan Fairbanks: To anticipate a question that I expect is on your minds, the confidence we have in our position as a market leader has not changed with the announcement of James Hardy's acquisition of ASEC. [inaudible]
Bryan Fairbanks: This confidence is based on our tremendous brand equity, our differentiated channel positioning that maximizes the visibility and availability of Trex branded products.
Bryan Fairbanks: are expanded product portfolio and the network of distributors, dealers, home centers, and pro contractors that we partner with every day to bring the highest quality, performance-driven products to the marketplace. This is the extent of what we will say on this topic.
Bryan Fairbanks: Now I will welcome your questions on Trex, our performance, and our outlook [inaudible]
Operator, please open for questions.
Speaker Change: Thank you. We will now begin the question and answer session to ask a question you may press star then one on your touch during phone. If you're using a speaker phone, please pick up the handset before pressing the keys. To withdraw your question, please press star then two. In the interest of time, we do ask that participants limit themselves to asking one question and one photo-up question.
Speaker Change: Your first question comes from Ryan Merkel from William Blass, please go ahead.
Ryan Merkel: Hey, good afternoon. Thanks for taking the question. I wanted to start with the change made to the enhance the refinement I guess for the word of use. Talk about why you did that and then are you expecting stronger sales after you make that change? Thank you very much.
Ryan Merkel: Yeah, we had received some customer feedback over the past couple of years [inaudible]
Ryan Merkel: Methods that we have here at Trex to make that adjustment and there were some change over costs for that during the first quarter [inaudible]
Speaker Change: Got it, okay. And then, you know, margin question, you mentioned two Q margins, approximating one Q. What are you talking about gross margins or EBITDA margins?
Speaker Change: largely gross margins, so we'll continue to level load the facilities which will have a little bit of an impact year over year because we were running really hot Q2 in 2024, and then still some of the costs from the change over with enhancement will be running through in Q2. Yeah.
Speaker Change: Okay, that's kind of what I thought. Anyway, you can quantify the refinement to enhance what the impact was, the gross margins of one Q and two Q, just to help us with modeling.
Speaker Change: If you look at it, we highlight three things that are impacting Gross Margin. One, it's the dealer or the railing converging cost.
Speaker Change: Two is the level loading, so volumes, production volumes, and then third was the enhanced changeover. What I'd say is roughly a third, a third, and a third.
Speaker Change: Got it. Alright, thanks so much, Pettinari. Thank you
Speaker Change: Thank you. Your next question comes from Rafe Jadrosich from Bank of America. Raise go ahead.
How are you good afternoon, thanks for taking my question [inaudible]
Speaker Change: I might have missed it, Brian , did you see what the cell through was in the first quarter? And then can you just talk about what you're assuming for the remainder of the year against that kind of flat R&R assumption? Thank you.
Speaker Change: Thank you, Rafe. In the first quarter we saw again continue strong demand for our premium products and we did start to see the entry level.
Speaker Change: Turnaround. And so we are on track for our four-year guidance, which is that five to seven percent. And then that does reflect what we believe the cells through will be for the four-year, so that mid to high single-digit cell through. [inaudible]
Speaker Change: Okay, and then just following him to the prior question on the two cute guidance.
Speaker Change: for Gross margins. Are the components of the year over year decline similar to what's impacting the first quarter for the second quarter as well? And then therefore put temporary and we should expect that to reverse in the second half of the year.
Speaker Change: Exactly, those are temporary, and we'll be reversing in the second half, correct? Yeah, we're continuing to see improved performance on the new profile, the enhanced changes that we've made. We'll continue to make great progress on that, and we'll have that a great shape by the time we get to the end of the second quarter. We'll continue to see improved performance on the new profile, and we'll continue to see improved performance on the new profile.
Thank you [inaudible]
Tim Wudge: The next question comes from Tim Woods, from Bob, please go ahead.
Tim Wudge: Hey everybody, good afternoon. Thanks for all the colors. I guess one question on kind of the just given some of the changes in inventory practices and things. How would you kind of expect? Next.
Tim Wudge: Q3, look, like is there less of a seasonal drop-off than you would normally see, Q2 to Q3, and then you kind of normally see, you know, Q4 week or just how should we kind of think of that just giving kind of the moving pieces between how you're kind of changing the inventory load into the channel.
Tim Wudge: Yes, so a normal seasonality is going to be a strong first quarter as you build inventory the channel. You still have to do that regardless of what inventory level that we have so the channel is ready for the season.
Tim Wudge: Second quarter will increase from that number, and then you'll see a fall-off in the third quarter, not a huge fall-off, but still a fall-off, and then a significant fall-off in the fourth quarter, as the channel begins to learn what's going to be in the following year. Of course, demand declines in that fourth quarter as well, and they get their inventory is ready for the next early buy season that's coming through. It's about, I guess, as normal of a year as I can say, going back to almost pre-2019 at this point, and clearly-
Tim Wudge: since the pandemic. It's been challenging to find a normal year as it relates to percentages of revenue quarter by quarter, but as what we see this year, I think we'll get back to that more normalcy.
Tim Wudge: Start of Spring and things kind of just typically see it kind of picking up seasonally versus any sort of kind of underlying kind of demand improvement or just kind of kind of consumer activity.
But we also keep a good close eye on marketing metrics
Tim Wudge: And as soon as that weather started to break in the month of March, we saw those numbers tick off quite quickly. They've continued to go that way. So we're very pleased with what we're seeing from a marketing metric perspective. The engagement that people are having with Trex. [inaudible]
Tim Wudge: I mentioned the new program, the new campaign that we launched in May 1st, it's not just since May 1st we've been seeing this for a number of months now so that helps drive the confidence of what we have in the marketplace .
Okay. Awesome. Thanks for the color. We'll see you soon.
Speaker Change: Thank you. Your next question comes from Keith Hughes from Chills. Please go ahead
Keith Hughes: Thank you. Question of SGNA, the guys gave 16% for the year. Would we see kind of ratably year of the year, like you're talking about a little bit of an increase year of the year, would it be ratably or is there one quarter where it could be particularly higher?
Keith Hughes: So typically, we front-load the expenses from a marketing and innovation perspective as we're getting prepared. One, we launch all of the new products that we've been talking about and then secondly, as we get prepared for the decking season. So you will see it more front-loaded during the year.
Speaker Change: So it should be celebrate from the $55 million that you reported in the first quarter, is that kind of what you're saying? That's correct
Speaker Change: Yeah, and I guess a question on, um, give us the shape of the year, as you kind of laid that out, are you anticipating in the, say, the fourth quarter, are you anticipating? Slatish production year over year, as we head into 26.
Speaker Change: As we head into, right now, I'm anticipating lattice production with where we were in the first quarter, which was similar to where we were in the fourth quarter of last year. So we've not projected what our production is for next year. As of yet, we will go into the end of the year with higher inventories not necessarily higher than where we were last year, but the inventory strategy will remain for us.
Speaker Change: I guess one final point with, you know, we've got, you get us a shape of the year if we head into a normal year next year to find that RV you want to, normally positive. Well, well you have done enough work and we will start to see less variation quarter to the quarter in the growth rate on revenues. [inaudible]
Yes
Okay, thank you very much [inaudible]
Speaker Change: Thank you. The next question comes from Susan Maklari from Goldman Sachs, please go ahead.
Thank you, good afternoon everyone.
Bryan, in your remarks you noted...
Speaker Change: Good afternoon. You noted the benefits that you're starting to see from some of the expanded relationships with distributors like Boise and some of the others. As you think about the momentum you're seeing in rail and some of the new products, can you talk about how perhaps some of those relationships are helping that come together and how we should think about perhaps some tailwind as you continue to leverage those new relationships and expand those geographies with them?
Speaker Change: I think it's broader than just the new relationships that we have. It is across.
are now fully focused on Trex decking and railing.
Speaker Change: and you can't underestimate how important it is to have those sales teams out there just focused on one brand rather than multiple brands. We are seeing that benefit, we are seeing those conversions occur from a dealer perspective and then also having discussions from a home center perspective. Thank you.
Speaker Change: Okay, that sounds good. And then, you know, thinking about capital allocation as you're starting to get through the Arkansas rebuild and things are perhaps coming together a bit from an operational perspective, can you talk about your priorities for capital allocation, any thoughts on shareholder returns or other uses of cash? Thank you very much.
Speaker Change: Our priorities haven't changed from where we've been in the past. We continue to look for opportunities in the market from an acquisition.
Speaker Change: perspective, there's not been a lot that we've done around that but it still is a priority for us from a capital perspective.
Speaker Change: Of course, our organic growth that we have, we've invested significant amounts in that, so that will decline considerably as we move out to 2026.
Speaker Change: Time frame, and then finally our share buy back program. So none of those priorities have changed, but what we will see is significantly...
Speaker Change: More free cash flow coming back to the balance sheet here.
Speaker Change: Councillor Seable was quite high coming out of the first quarter, not a surprise when you have an early buy program. That will start turning around in the second quarter and then further turn around in the third quarter of this year and then of course next year we'll see considerably lower capital spending. Thank you very much.
Yeah, okay, thank you. Good luck with everything. Thanks
Speaker Change: Thank you. Your next question comes from Colin Van, from Deutsche Bank. We go ahead.
Colin Barron: Thank you for taking my questions. I guess I just want to start on the two-two guide here calling for flatter sales. It sounds like things were tracking pretty well, pretty nicely in March and April . So I guess I was just wondering what the offsets are there that would drive flatter sales or some of the more positive trends you saw at the end of the first quarter. Thank you very much.
Colin Barron: Again, just as a reminder, in the last year we had a really high first half, we had about 65% of our total year sales and that first half of the year, which...
Colin Barron: Historically, we've been more at like that 56 to 57%, so the comparable is really tough and that's what's going on.
Colin Barron: causing that. We're feeling very excited and bullish about the back half of the year, barring any other macro-economic pressures that we see, but as Brian noted, the statistics that we're seeing with our marketing metrics, the conversations that we're having with our distributors and their backlogs, we're feeling positive and optimistic about the back half of the year.
Speaker Change: Understood, I appreciate the color there. And then I guess just pivoting over to the recycling start-up, great to hear that that's going well. We did starting to contribute positively later this year, just any thoughts on what sort of the cost benefits will look like as we exit the year and look out into 2026?
Speaker Change: Rather than specifying those cost benefits, I think it's more important to look at the overall continuous improvement program that we have. Within the first quarter we did deliver some margin benefit from those continuous improvement programs. Of course we have continuing benefit from last year and new projects that are coming in at all times. So really we look at it as an overall program and helps us to be able to ensure that we continue to drive the margins that we have.
Speaker Change: and Bebe as efficient as possible but we're not going to get into breaking out the specifics of the projects.
All right, thank you for taking my questions. Thanks
Speaker Change: Thank you. Your next question comes from Michael Rehaut from JD Morgan. Please go ahead.
Thanks. Good afternoon. Thanks for taking my questions.
Speaker Change: I wanted to start with the interesting stat that you gave out around the product vitality being more than double a year ago.
Speaker Change: and we'd love to get a sense for, you know, perhaps how that's impacting...
Speaker Change: Some of the financial metrics either, you know, get assumed your new products generally come in at a better gross margin than what they replace.
Speaker Change: or also from a failed contribution standpoint, more so in terms of in the marketplace if you feel that it's helping with share games.
Speaker Change: and perhaps how to think about how the statistic might progress over the next couple of years, and if that might happen even a further impact on some of the numbers. Thank you very much.
Speaker Change: The reason we've decided to start discussing that is we've been talking for a while about the investments that we're making in new product development.
Speaker Change: And you've seen a lot of launches come to the marketplace in the marketplace.
over the past couple of years. [inaudible]
Speaker Change: So what we wanted to give our investors an idea of the success of these new launches [inaudible]
Speaker Change: So you have the lineage products in the marketplace now, new colors coming in, new enhanced colors coming in as well, all of the new railing products that we have
Speaker Change: and it was a way for us to be able to indicate the success that we're seeing with those new product development opportunities.
Speaker Change: We have more that will be coming out later on this year into next year. It's a continuing part of our strategy to make sure that we've got a fresh product portfolio and we're meeting the needs of all of the decking and railing buyers in the marketplace. Thanks.
Okay.
Speaker Change: Thank you for that. I get secondly, you know, maybe just from a broader market perspective, you know you highlighted the continued strength of the premium products.
Speaker Change: and now the lower end kind of stabilizing. You know, love to get a sense from a kind of a bigger picture market standpoint. You know, perhaps what's driving that?
you know
Speaker Change: particularly relative to maybe some of the challenges in the last few quarters around the entry level and how you see the different segments of the market progressing over the next few quarters.
Speaker Change: Well, we've seen two-quarters in a row now. When we talked to you last in February , we talked about seeing sequential improvements with our entry-level products.
Speaker Change: We continue to see that in the first quarter of this year [inaudible]
Speaker Change: So while our entry level buyer tends to be a higher income, average family income, than many other products would consider [inaudible]
Speaker Change: Entry level. And I think the fact that repair and remodel has been suppressed for a number of years now, there is that pent up demand that's out there. There are a lot of wood decks.
Speaker Change: that are at or beyond their level for repair. And it is still an efficient way to be able to add square footage, usable, enjoyable space onto your home, and we're seeing more people take advantage of that.
Great, thanks so much. Thanks.
Speaker Change: Thank you. The next question comes from Ketan Mamtora, from BMO Capital. Please go ahead.
Ketan Mamtora: Good afternoon, thanks for taking my question. Maybe Brian to start with on the really side, can
Ketan Mamtora: Obviously, you know, you're a launched and a full suite of products, kind of, you know, early science on how that is going and maybe, you know, to highlight a couple of successes or some challenges that you've seen there.
Ketan Mamtora: Yeah, with both our aluminum railing system, as well as steel railing system, we do have meaningful conversions.
Ketan Mamtora: In different areas of the country, steel railing system is not generally sold everywhere, it tends to be in the more arid type climates whereas the new select aluminum railing system really will have entire country and up into Canada type of popularity on it. We're seeing improving numbers with our T rail system designed specifically to go after the vinyl railing systems give the consumer a much higher quality. [inaudible]
Ketan Mamtora: Product is then what a vital railing is going to provide along the way, and we've seen significant conversions occur during the first quarter where inventory is being built.
Ketan Mamtora: They are moving on from other competitors at this point so that they can drive both Trex Decking and Trex railing at the same time, simplify their inventory strategy, simplify their marketing strategy and allow their sales team to focus on a more limited number of brands rather than a lot more than they focused on in the past.
Speaker Change: That's helpful, and then just on the 40 million that you've talked about in the past around that inventory layering in. Can you talk about sort of as you move through Q2 and Q3, how that sort of flows through and what kind of embedded. Did you get it?
Speaker Change: Yeah, so we will see that materialized in Q3, most of it in Q3, but a portion of that is estimated as of time in, I'm sorry, most of it in Q2 and then the rest of that materializing in Q3.
and I call you forward to rebuild again. Thank you.
Speaker Change: Carter-Certz, is it fair to say two-thirds, one-third between Q-2, Q-3? Yes, that's a good number.
Perfect, thank you very much. Yep.
Speaker Change: Thank you. The next question comes from John Lovallo from UBS. Please go ahead.
John Lovello: Hi guys, thanks for taking my questions. The first one is just on tariffs. Amy talked about less than 5% of cogs.
John Lovello: impacted by tariffs and spoke of some mitigation efforts including building inventory, negotiating with suppliers. I guess the question is, you know, is there any thought of resourcing out of China and then also how does the possibility of pricing fit into your mitigation efforts.
John Lovello: of a percentage is coming out of China. We've got more that are coming out of some other countries that are also...
John Lovello: and so that's where we're looking at potentially moving things around to achieve more efficient levels of tariffs, or even potentially back here to the States. But, of course, there's a lot of people that are looking for those type of opportunities at this point. And rather than make any rash moves at this point, we would prefer to wait a little bit to see what the eventual outcomes are going to be. But I'm extremely proud of our supply chain team, the way that they've jumped on it. Make sure that the le-----
John Lovello: The leadership team has had the information that we need to make decisions and the negotiations that they've been able to already go into and offset some of those costs [inaudible]
Speaker Change: Understood. And then, you know, the comment on the entry level sort of stabilizing as you move through the quarter. I'm curious what you think is driving that. I would have thought that, you know, that was more relying upon consumer sentiment, what seems to have, you know, if anything deteriorated a bit as the quarter went on. So any thoughts on that? [inaudible]
Speaker Change: Yeah, it's tough to say specifically what's in that consumer's mind right now. I do think it is coming back to the fact that
Speaker Change: Blue average spending for as many years as we have now, it does end up catching back up, and it does tend to start more so with the high end of the marketplace, and even as I mentioned before, our entry level customer is still a higher end customer when we look at the overall economy. Thank you very much.
Makes sense. Thank you. Thanks.
Speaker Change: Thank you. The next question comes from filming from Jeffries. Please go ahead.
Jeffrey: Hey guys, congrats on a strong start to the year. I guess for me, the question is really on back half, you're calling for a ramp in top line, but also implicitly your guidance implies incremental EBITDA margins call it in the mid-60s, which would be pretty impressive and noticeably above your 35% to 40% longer term target.
Jeffrey: Can you expand on some of the lovers that you expect to use to kind of drive margin tire? Any that you could kind of quantify from a continuous improvement standpoint that might be, you know, a good guy from margin to back-f [inaudible]
Bryan Fairbanks: As as Bryan noted, we won't get into the specifics of any one continuous improvement program but to your point you will start to see some significant
improvements in our margin. [inaudible]
Bryan Fairbanks: Starting really in Q3 and that is a result of many of these continuous improvement programs coming into fruition, but it's also, again, we will have the
Bryan Fairbanks: The impact of some of the enhanced changeover costs that we're impacting Q1 and Q2, those will go away and then just
Bryan Fairbanks: Better volumes than we had in Q3 compared to Q3 a year ago. And then Q4 will still look better than a year ago as well.
Okay, that's helpful.
Speaker Change: and then a question of Ryan. This isn't so much about the ASAC Jantarty combination, but it's more broader. You know what I'm saying?
Speaker Change: Certainly from a distribution channel partner dynamic, we're seeing some signs of further consolidation.
Speaker Change: called the next three to five years strategically, you know, is there any big philosophy changes perhaps maybe your approach on M&A or how you're going to approach your go-to-market strategy going forward?
Speaker Change: I wouldn't say there's necessarily any change to our M&A strategy, but I think we all recognize that from a distribution perspective . . .
Speaker Change: There are national distributors that are out there, and those that have the full country capability.
Speaker Change: is where they're looking to get along the way so that's something that we've been cognizant of for quite some time now and of course we keep our ear to the gap ground very closely and we're extremely happy with the group of distributors that we work with today. Thank you very much.
Speaker Change: Are there still any gaps right now or are you you're in a really good spot in terms of how you want to be on that front? We're in a good spot. Yeah. Okay. Thank you.
Trey Grooms: Thank you. Your next question comes from Trey Grooms, from students. Please go ahead.
Good afternoon, thanks for taking the question. [inaudible]
Trey Grooms: This is maybe just more for clarity, just to make sure I understand it right or hurt it right. So,
Trey Grooms: You mentioned three things that impacted the quarter, the rail conversion, lower production and the enhanced production changes there on the enhanced product that they were about a third to third to third . . . . . . . . .
Trey Grooms: So is that saying that each one of these things were $4 million or are they all kind of lumped into that $4 million that you've described as only railing conversion in the press release? Just so I'm clear.
Trey Grooms: Earlier is 444. Think of it like that. Got it. Perfect. Okay, but in the in the in also for clarity the
Trey Grooms: Sorry, the pro or the adjusted gross profit, that only excludes that 4 million for the railing conversion only so it doesn't take into account the others.
That is correct.
Trey Grooms: So I guess all of those three things will be behind you as you move into the second. Thank you very much.
Trey Grooms: Half, and then there was a 1.5 million charge or impact related to the Arkansas startup. Is that something that's going to recur? Or was this more isolated to the rollout of the plastics that you rolled out late in the quarter? [inaudible]
Trey Grooms: And a great question. So, yeah, the impact that we saw for the Arkansas Facilities was an S-G-N-A this quarter as we pulled in the...
Trey Grooms: and trained the new group of employees that started running the production at the very end of the quarter. In Q2, 2, 3, and 4, you will see some production inefficiencies from that startup that will impact COGS.
Trey Grooms: Recall, if we go back to the end of the year, we talked about $15 to $20 million of one-time cost within the year. Roughly 15 of that was related to Little Rock as well as railing transition costs.
Trey Grooms: and then the remainder is related to digital transformation costs. That gives you an idea of what the total numbers are for the year again.
Okay, great, got it. Thanks, Brian . Thanks, Brenda. Thanks.
Speaker Change: Thank you. The next question comes from Matthew Bouley, from Barclays. Please go ahead.
Matthew Bowley: Good evening, everyone. Thanks for taking the questions. Just back on the tariffs again, less than 5% cost of sales, impacting that.
Matthew Bowley: You know, I know you have negligible China, so, you know, probably limits the...
was a total dollar impact, but just...
Matthew Bowley: You know, you did hold the fiscal year EBITDA margin guys, I just wanted to, I guess, double check on what that dollar impact impact.
May end up being an...
Matthew Bowley: You know, was the expectation that you're kind of mitigating that cost entirely, or is it just then end up being kind of too small to move the needle? Thank you. We have not mitigated that cost entirely. The team's done a great job in working through mitigation actions. There are continued opportunities that we have. We're going to leave it with the guidance less than 5%. And the reason why I think it's important to look at it that way. Thank you very much. Thank you very much.
There's a finished good impact to this.
Matthew Bowley: But then there's an indirect purchasing impact to this, which is going to have a little bit longer of a tail. So the spare parts that we need to buy, the gloves, safety glasses, all of those things.
Matthew Bowley: that are sourced out of China, and they will continue to move into different countries to try to avoid the 145% tariffs.
Matthew Bowley: that are there. So that's why I'm not going to provide a number on that right now and hold to the less than 5%, but we are committed to mitigating and working with our suppliers and looking at whatever other actions need to be taken. Thank you very much.
Speaker Change: Okay, got it, thanks for that, Brian . And then, yeah, secondly, just not on the entry level versus the more premium, just any more color on kind of, you know, how those performed. I know you mentioned several times that entry level stabilized, but just kind of, you know, how they performed relative to the total. And, you know, as you think about kind of the full year is the expectation that the entry level specifically would turn positive. [inaudible]
Speaker Change: You know, along with the total, or does that still end up kind of flatish or down kind of, you know, just double, double clicking there on that entry level side? Thank you [inaudible]
Yeah.
Speaker Change: As we saw at the end of last year going into the new year, we were seeing improvement.
Thanks, guys. Good luck. Thanks.
Speaker Change: Thank you. Your next question comes from Anthony Pettinari from City Group, please go ahead.
Good afternoon.
Anthony Petronari: Just falling up on Arkansas on the CapEx side, is there any finer point you can put on the quarterly cadence of capital spending there and when that spending is essentially done, you know, whether that's 1-2-26 or a bit earlier or a bit later, just trying to understand when that free cash flow step up could occur?
Anthony Petronari: Again, as a reminder, the total cap expend is estimated at $550 million. This year's total cap expend is about $200 million. The majority of that will be the Arkansas facility. You should expect that we will have...
Anthony Petronari: The vast majority of that 550 spent by the end of this year, so 2026, you will start and should expect to see strong cash flow improvements.
going 2026 and beyond.
Speaker Change: Got it. Got it. And then you mentioned the investments in digital transformation. I think you announced a new SVP of marketing last month with digital experience and you brought on a CIO last year. Can you just talk about the digital transformation efforts, kind of what in and you're in and what kind of benefit you're looking to drive? Thanks.
Speaker Change: Yes, sure. So the company is making remarkable progress in advancing its digital transformation and I'd say it's in three key areas of focus.
Speaker Change: One, optimizing our end-to-end business processes through increased automation and deeper ERP utilization.
Speaker Change: Second, we are making progress to hardest the power of data by evolving our enterprise data platform to provide real time, accurate insights.
Speaker Change: That will be valuable not only to you, Trex's internal employees and making more timely informed decisions, but also it's data that we can use with our consumers and our customers [inaudible]
Speaker Change: and then thirdly we are fostering a culture of innovation by identifying and removing friction in every step in the customer journey. So this is again really aimed at enhancing overall customer experience. Thank you.
Okay, that's very helpful. I'll turn it over
Thanks.
Speaker Change: Thank you. The next question comes from Adam Baumgarten, from gentlemen and associates. Please go ahead.
Speaker Change: Hey guys, it's just one for me. Just on the bounce of the year, are you assuming it's given the guidance and kind of what you saw in the first quarter that shelter remains at that mid to high single digit rate over the bounce of the year?
Speaker Change: So that's the full-year guidance that we've provided in the five to seven percent. So let's worry about exactly how it works by quarter. The real volume quarters are Q2 and Q3, so that's really when it counts that you see that sell through a curve.
Thank you.
Okay, thanks.
Thank you [inaudible]
Speaker Change: Thank you. There are no further questions at this time. I'll man him back to Bryan Fairbanks for closing remarks.
Bryan Fairbanks: Thank you for participating in our call this evening and we look forward to meeting with many of you in the coming weeks. Good evening.
Speaker Change: That does conclude our conference for today. Thank you for participating. You may now just connect.
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