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spk18: Good afternoon and welcome to the TREX Company fourth quarter and full year 2021 earnings conference call. All participants will be in 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. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Victoria Nakhla. Please go ahead.
spk14: Thank you all for joining us today. The guests on the call are Brian Fairbanks, President and Chief Executive Officer, and Dennis Shem, Senior Vice President and Chief Financial Officer. Joining Brian and Dennis is Amy Fernandez, Vice President and General Counsel. as well as other members of Tribes Management. The company issued a press release today after market close containing financial results for the fourth quarter and full year 2021. This release is available on the company's website. This conference call is also being webcast and will be available on the investor relations page of the company's website for 30 days. I would now like to turn the call over to Amy Fernandez. Amy?
spk00: Thank you, Victoria. Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward-looking statements within the meaning of federal securities law. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see our most recent Form 10-K and Form 10-Qs as well as our 1933 and other 1934 Act filings with the SEC. Additionally, non-GAAP financial measures will be referenced in this call. A reconciliation of these measures to the comparable GAAP financial measure can be found in our earnings press release at TREX.com. The company expressly disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information future events, or otherwise. With that introduction, I will turn the call over to Brian Fairbanks.
spk12: Thank you, Amy, and good evening, everyone. Thank you for joining us today to review our fourth quarter and full year 2021 performance along with our business outlook. First, I'd like to thank our extraordinary employees who continue to deliver great results through talent, hard work, and innovation. along with our channel partners, distributors, and professional contractors who are the best in the business and are poised to execute growth in the composite decking and railing market. We closed 2021 with all-time record sales of $1.2 billion for the full year and a record finish to an exceptional year with fourth quarter sales increasing 33% to $304 million this year. and adjusted earnings per share growing 49% to 55 cents per share. Our expanded manufacturing capacity enables us to effectively support strong organic growth while also allowing our channel partners to infill inventory. Strong revenue growth and replenished market inventories point to reduced product lead times and more normalized seasonality in 2022. Consumer demand for our products remains robust, supported by significant repair and remodel activity, especially within the outdoor living category, which shows strong momentum as the fastest growing category of repair and remodel, and supported by our continued conversion of wood to composite market share. Rising interest rates and higher home values favor repair and remodel spending as homeowners continue to invest in their existing residences and pursue renovation that enhance their lifestyles and outdoor living spaces. Flexible outdoor living space is more essential than ever as consumers continue to reevaluate where and how they spend their time. So while COVID-related restrictions are easing and leisure travel and other activities are returning to pre-pandemic levels, we expect demand to remain strong, driven by favorable secular trends. The launch of our Trex Enhance products in January of 2019 was a significant catalyst that has accelerated our growth over the past few years. This product was truly an industry game changer, significantly expanding our addressable market by focusing on consumers who would convert from wood to Trex at the right price. As a result, we've continued to drive wood to composite market share conversions at 200 basis points plus per year, a rate meaningfully greater than we've experienced in the past. Even with this accelerated pace, we estimate composites account for approximately 25% of the total decking market, but expect it will reach 45 to 50% in the future. To support current demand and expected long-term growth, we successfully executed the largest capacity expansion program in TREX's history, which included construction of a new decking facility at our Virginia site and installation of additional production lines at our Nevada facility. Collectively, these expansion initiatives position us to effectively meet customer demand in 2022 by increasing total capacity 85% above 2019 volume levels. Additionally, in October of 21, we announced plans to develop a third U.S.-based Trex residential manufacturing facility on approximately 300 acres in Little Rock, Arkansas. Expected to commence operation in 2024, this $400 million capacity expansion program offers numerous strategic advantages, including increased proximity to essential raw materials, a strong pool of qualified and skilled labor, adjacency to major transportation hubs, and is situated near key growth markets for wood conversion. Similar to our previous capacity expansion programs, this development will be modular in nature and calibrated to demand trends. When this plant opens, TREX will have the strategic advantage of unmatched geographical coverage with East Coast, West Coast, and Central Region sites that will serve as our domestic pro channel and retail partners and also support our long-term growth opportunities in the international and clouding markets. Composites have lower market penetration outside of North America, and we believe our international growth can exceed our domestic market expansion pace on a long-term basis. We are pleased to meet with many of you at the recent International Builder Show held in Orlando, where we were impressed with the high attendance numbers and interest in learning more about all of the ways TREX can be part of their outdoor living plans. We also had record attendance at our Trex Pro Summit held in San Antonio with participants from around the world. Trex Pro is an elite group of contractors dedicated to the installation of Trex decking and railing products for whom Trex provides valuable benefits such as increased consumer exposure, customer leads, a profile on trex.com to showcase their work, and extended warranty programs. We launched a new marketing campaign for 2022 that highlights how Trex helps homeowners transform their outdoor dream ideas into reality, becoming the foundation for many of life's most memorable moments. Our We See It Too campaign launched January 1st with TV commercials on many popular channels. Integrated content extends to social, digital, and online video, amplified by radio, print, retail, strategic partnerships, and more. For 30 years, TREX has invented, reinvented, and defined the composite decking and outdoor living category, and this new campaign boldly differentiates TREX with a distinctive and memorable message that creates a category of one. As our business expands, we remain focused on growing in a sustainable and socially responsible manner and taking market share from wood. As our sales grow, so does Trex's positive impact on the environment by using recycled materials to manufacture the most aesthetically pleasing and long-lasting decking and railing products in the market. To support our capacity expansion efforts and sales growth, we continue to grow our employee base with a focus on diversity, equity, and inclusion, and bringing new ideas and perspectives to our team. In addition, The safety and well-being of our employees is of utmost importance, and we consistently prioritize safe practices and emphasize employee well-being. Reflective of this, we recently expanded ESG oversight at the executive level, naming Leslie Atkins Vice President of Marketing and ESG Development. Long involved with steering the TREX brand, she has also been a steward of our ESG efforts since inception. With that, I'll turn the call over to Dennis to provide a more detailed view of our financial performance. Dennis?
spk07: Thank you, Brian, and good evening, everyone. I'm pleased to report on TREX's strong fourth quarter results and full year performance and provide expectations for the first quarter and full year of 2022. We are reporting fourth quarter top line growth of 33% to $304 million. led by 35% growth in net sales at Trex Residential to $288 million. The increase in sales reflects continued strong, broad-based demand across all product lines in both the retail and pro channels, and a favorable impact from pricing actions in Trex Residential. Trex Commercial net sales increased 6% year-on-year to $16 million. Consolidated gross margin in the fourth quarter was 38.9% compared to 40.5% in the year-ago quarter. Fourth quarter 2021 gross margin for TREX residential and TREX commercial were 39.7% and 24% compared to 41.3% and 28% in the fourth quarter of 2020. The year-over-year decrease in 2021 fourth quarter gross margins was primarily due to increased raw material cost and higher transportation costs that more than offset increased efficiencies from higher capacity utilization and previous pricing actions. In the 2021 fourth quarter, we recognized a $54 million goodwill impairment charge at TREX Commercial that was primarily due to a reduction in project commitments which adversely impacted project backlog, and forecasted net sales in EBITDA. The reduction in project commitments was influenced by a delay in new projects due to lingering uncertainty created in our commercial markets by the COVID-19 virus. The delay in new projects, coupled with the company's continued successful fulfillment of pre-pandemic projects, resulted in lower project backlog and reduced forecasted net sales in EBITDA. The company expects revenues from TREX Commercial to be constrained in 2022, but increased bookings are expected to lead to a resumption of revenue growth in 2023. In addition, the company recognized a gain from insurance proceeds of $3.2 million during the fourth quarter of 2021, primarily related to the fire at the TREX Residential Virginia plant that occurred in March. Excluding the goodwill impairment charge and the gain on insurance proceeds, Selling, general, and administrative expenses increased to $37 million compared to $34 million in the fourth quarter of 2020, as business travel and marketing-related expenses began to return to more normalized levels. However, we continue to benefit from the operating leverage gained from our rapid sales increase, with SG&A as a percentage of sales decreasing 290 basis points to 12.1% in the fourth quarter, compared to the prior year quarter. Net income for the 2021 fourth quarter was $25 million, or $0.22 per diluted share. Excluding the non-cash goodwill impairment charge and the gain on insurance proceeds, adjusted net income was $64 million, or $0.55 per diluted share, representing increases of 47% and 49%, respectively, from net income of $43 million, or $0.37 per diluted share, in the 2020 fourth quarter. EBITDA, excluding the goodwill impairment charge and the gain on insurance proceeds, was $92 million, a 44% increase compared to EBITDA of $64 million reported in the year-ago quarter. Fourth quarter 2021 adjusted EBITDA margin was 30.2%, compared to 27.9% in the fourth quarter of 2020. Summarizing the full year performance, consolidated net sales increased 36% to $1.2 billion, with TREX residential net sales growing 38% to $1.14 billion, and TREX commercial contributing $58 million to net sales. Full year 2021 net income was $209 million, or $1.80 per diluted share. Excluding the goodwill impairment charge and the gain on insurance proceeds of $8.7 million, adjusted net income was $243 million, or $2.10 per diluted share, representing increases of 35% and 36%, respectively. From adjusted net income of 180 million, or $1.55 per diluted share, in 2020, net up to $6.5 million surface flaking warranty charge. Net of these items that I just mentioned, full year 2021 adjusted EBITDA increased 38% to 357 million. Full year 2021 adjusted EBITDA margin was 29.8%. We generated record cash from operations of $258 million in 2021, an increase of 38% from 2020. The strength of our cash flow enabled us to self-finance the recent capacity expansion program while returning capital to shareholders through stock repurchases. Full-year capital expenditures were $159 million and were primarily related to our capacity expansion program. we repurchased approximately 809,000 shares of outstanding common stock in 2021 at an average price of $91 per share, totaling 74 million. As of December 31st, 2021, we have repurchased 3.6 million shares under our stock repurchase program and have 8 million shares remaining to be repurchased under the current program. Also, since the end of the fourth quarter, we have been active in purchasing shares under the same program. Looking ahead, we see a strong 2022 with double-digit top line growth inclusive of the one-time channel infill in 2021. We are also providing the following metrics for the first quarter and full year of 2022. First quarter consolidated net sales are expected to range from $320 million to $330 million representing year-on-year growth of 32% at the midpoint. For the full year 2022, we expect revenues to return to double-digit growth rates with a normalized seasonal cadence similar to pre-pandemic patterns we experienced in 2016 to 2018. In addition, we anticipate pricing realization will more than offset a more modest raw material and labor inflationary environment. SG&A is expected to be in the range of 12% to 13% of sales for the full year, which includes the higher investment in marketing and branding spend now that we have ramped up our new capacity and market inventories have improved. For the full year 2022, we anticipate incremental EBITDA margin to be between 30% to 35% when compared to the adjusted EBITDA figures discussed earlier. Our tax rate is anticipated at approximately 25%. Depreciation will range from $40 million to $45 million, and we expect full-year spending on CapEx to be in the range of $200 million to $220 million, inclusive of the Little Rock capacity expansion, the new corporate headquarters, and additional investments back into our core business. Now I will turn the call back to Brian.
spk12: Thank you, Dennis. Our strategic actions in 2021 and continued robust demand put us firmly on track to deliver strong double-digit growth in 2022, and we remain focused on converting consumers to the performance advantages of composites over wood. Supported by our industry-leading brand and recent capacity expansion program, we remain well positioned as the prime beneficiary of long-term trends towards outdoor living. Operator, we can now take questions.
spk18: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit your questions to one with a single follow-up. Our first question comes from Keith Hughes with Truist. Please go ahead.
spk19: Thank you. The question is about the incremental EBITDA margin guide for the year. Can you talk about how you think that will pace during the year? You did above that in the second half of 21. Can you talk about what the puts and takes are that are bringing it down year-over-year?
spk07: Hey, Keith. This is Dennis. Thanks for the question. It's a good question. I'm expecting to see EBITDA margins improve sequentially quarter to quarter as we move through the year, and we should see our highest EBITDA margins in that Q3, Q4 timeframe. Some of the puts and takes that we're looking at clearly are pricing coming into full utilization here in the first quarter. That's primarily the biggest impact. Secondarily, we're still dealing with inflation. And although we anticipate it moderating somewhat, we are seeing some headwinds right now with regards to higher transportation expenses. We're seeing some higher fuel costs on the natural gas side and oil. And we're also seeing some delayed lead times on our capital spending, which is resulting in some of our cost outs being pushed out a little further along. So that's some of the puts and takes that we're dealing with here in 2022.
spk19: If I could sneak one more in on the gross margin, will it also ramp up very similar to EBITDA? And do you think you'll be above water year over year above gross margins in the first half of 2022?
spk07: We're going to continue to put a lot of focus and attention on our gross margins. That's always been the way it tracks, and this year it's not going to be any different. I would expect the gross margins to follow a similar cadence to the EBITDA margins as well. So, again, pricing coming more into play here by the end of the first quarter, inflation moderating somewhat, and then we talked about some of those headwinds that we're dealing with. Okay, thank you.
spk18: The next question is from Ryan Merkle with William Blair. Please go ahead.
spk16: Hey, guys. A couple questions for me. Morning or afternoon. So first off, can you just unpack sales outlook for 22 a little bit? How much will price contribute? And then just talk about what is more normalized seasonality just to roll on the same page.
spk07: Yeah, so when I think about more normalized seasonality, I'm really looking probably at the first quarter to be around like 26% of our sales. Then you move into the second quarter where about, you know, second and third quarters, about 50% of the sales in fourth quarter would be the remainder. That's what I'd look to as far as more normalized seasonality. When I think about growth here in 2022, I guess I would look at it as follows here. So pricing will play a role. We're probably in the low teens for pricing. And we've got repair and remodel that we talked about extensively in Brian's remarks that we feel is going to be strong. And in the past, we've doubled up on that repair and remodel metric. And so You take those two, that gets you to the upper end of the growth range there. And then you have to back out the one-time inventory infill that we had in the back half of 2021. So that's kind of how I see the puts and takes for growth and how we get to the strong double-digit growth that we suggested.
spk16: Got it. That's helpful. Okay, then for my follow-up, I can Low teens price capture in 2022 is a little higher than I was thinking. You know, how is that going to flow through the year? Is it going to start higher and then sort of kind of bleed down as you lap price increases from last year?
spk12: Yeah, I think that's the right way to expect it will be coming through. We took more of the pricing last year later in the year. So we'll have that full recapture as we move through the year. And we'll see what inflation does as we move through 2022. Got it.
spk18: All right, thanks.
spk12: Thanks, Ryan.
spk18: The next question is from Stanley Elliott with Stiefel. Please go ahead.
spk05: Hey, everybody. Thank you guys for the question, and congratulations on a nice year. I'm curious, kind of high level, I would love to hear from the Trex Pro Day, talking with the contractors, what are they telling you about their backlogs, about their order book? Obviously, the guidance seems very positive on the year, but just curious if you could dig down into that a little bit more.
spk12: Sure. Yeah, our Trex Pro Day was our contractors feel very positive about how the year is shaping up for them. Now, these are some of our largest, most skilled contractors. You'd expect them to have longer backlogs. When we go down the ranks and talk to other contractors that may not be quite as large, we hear great optimism from them as well. Backlogs anywhere from three months out to six months. We've not seen a material shift in the marketplace and the interest for outdoor living.
spk05: Great. And then you've also been working on improving the recycled content on the front end. I was wondering kind of how much progress you were able to make on that, and any updates would be great.
spk12: So Trex Company has always prided ourselves on using approximately 95% recycled content in our products. Where we don't use it as great of a degree, for example, some of our aluminum and some of our railing products, we do strive to increase the recyclability content within that product. But from a decking perspective, which is the largest share of revenues for the company, we've continued to drive recycled materials. material use and we continue to look for new opportunities to take more waste out of the waste stream and allow us to use it in decking.
spk18: Thanks guys, appreciate it and best of luck.
spk12: Thanks.
spk13: The next question is from John Lovallo with UBS. Please go ahead. Hey guys, thank you for taking my questions as well. First one, the step up in capex to 200 to 220 versus I think 160 in 2021. I was under the impression that CapEx would actually be down this year. Can you maybe just talk about some of the puts and takes that may have changed that?
spk07: Hey, John, that's a fair question. And I know we talked about that earlier, that we expected to have a downsizing, if you will, in the CapEx spend. But that was before the Little Rock announcement, right? And so Little Rock is really the primary driver of that number going higher. So essentially, you've got Little Rock in there. We also have our new corporate headquarters in
spk13: being built as well so that's going to be some additional capex spend and then the remainder is investments back into the core gotcha okay and then in terms of my follow-up can you maybe just elaborate a little bit on the reduction in commercial project commitments i guess i'm curious on you know what type of projects uh were kind of delayed or canceled i should say and then are they going to wood or do are other competitors in the composite space taking the business
spk12: So from a commercial perspective, different segment from residential, primarily talking about railing and certain staging products. During 2021, our net sales were still quite strong. However, as the company continued to successfully work down that existing backlog, we also experienced a reduction in new project commitments because of lingering uncertainty around around COVID. So for all of the tailwinds that the residential side of the business received, the commercial side mostly had headwinds. So COVID played a significant impact on that part of the business. The core markets that we serve, sports, entertainment, commercial office, were all hit hard and investments were sidelined until there was more certainty on what life post-COVID would look like. Remember, at one point, it didn't look like many people were going back to the office, and, of course, we're now seeing people go back, and we're seeing people go back to sporting events and other outdoor opportunities. So given that reduced backlog and reduction in new project commitments to replace and build the backlog, we knew that the outlook for 2022 was diminished. Per our policies, we conducted an annual impairment test for goodwill. We assessed the project commitments, the reduction in our backlog because of COVID, and our forecasted net sales and determined there was a negative impact on our financial condition. And as such, we decided to take the $54 million write-down based off that analysis. I think on the positive side here, we are starting to see that order book rebuilding encouraged by the activity in the first couple months of the year. But it will take some time, and we're still encouraged with the opportunity on the commercial side of the business.
spk18: Okay, thank you. The next question is from Jeff Stevenson with Loop Capital. Please go ahead.
spk20: Hey, thanks for taking my questions today, and congrats on a strong year. Thanks, Jeff. Sure, and was there any negative impact from Omicron in January, and did you have any labor logistics or material headwinds from it that will impact the first quarter?
spk12: Yeah, like everybody else, we did see elevated absences in January from Omicron. We saw some in December as well. It was probably a little bit heavier. The impact of that is inclusive of the guidance that we provided in the first quarter. Transportation, there were some, I guess, up days and down days, but we didn't struggle too much through January. One of the things we did run was more overtime in January to be able to offset those absences we had.
spk20: Okay, great. And then can we just get an update on channel inventories right now and how much of your kind of first quarter sales guidance related to inventory channel fill?
spk12: So recall, normally the first quarter is going to be building of inventory to support the busiest part of the season. And that's exactly what we are seeing. Coming into the end of the year, if you remember back to the third quarter, I talked about our dealer-level inventories improving significantly. And then through the end of the year, our distributor-level inventories improved significantly as well. Now we're back into a normal inventory build to support Q2 and Q3 in the marketplace. Got it.
spk20: Thank you.
spk18: The next question is from Trey Grooms with Stevens. Please go ahead.
spk02: Hey, good afternoon. Hi, Trey.
spk07: Hey, Trey.
spk02: Hey, so first one, Dennis, I just want to make sure I got this right. On the kind of the quarterly cadence you outlined earlier, You mentioned, and I'm probably missing something here, but I think you said Q1 is going to be 26% of full year. And just kind of backing into that, the midpoint of the guidance range, if you gross that up, it just implies something like 5% growth for the full year. So what am I missing there on that math?
spk12: I think the best way to take a look, when we talk about what historical looks like, It is going back from 2016 to 2018 timeframe and looking at those quarterly averages, increases and decreases. And the reason that time is important, it takes the pandemic out of it, but it also takes the launch of Enhance out of it as well.
spk02: No, yeah, I get all that. I'm just trying to reconcile the arithmetic behind the $325,000 you know, is the kind of midpoint of the guidance for revenue for the first quarter. If that's 26%, then that implies something like 5% growth for the full year.
spk12: Yeah, the 26% is not part of our guidance.
spk02: Okay. Okay, just making sure, because I heard that, and I knew I was thrown off there somewhere with the math on that. Okay, fair enough. Thanks for clearing that up. Yep. And then second question is EBITDA margins – You know, Dennis mentioned, you know, you said that it should ramp in kind of the Q3, Q4 timeframe. And I think the long-term guide is for 35% to 45% incremental margins, EBITDA margins. Is that still the right way to think about long-term incrementals? And at what point do you think we kind of return to that sort of flow through?
spk07: Yeah, Trey. So, no, the guide for 2022 is 30% to 35% incremental EBITDA margins, just to be clear.
spk12: And as we go forward, the reason we pulled that back a little bit this year from where we normally are is we're bringing our marketing, our travel attainment, our show expenses back to a normalized level from where we were in prior years. I expect as we move forward, you'll see that move back to the more normalized level of the 35 to 40 incremental.
spk02: Yep, that's what I was getting at. I was clear on this year. I just know long-term, 35 to 40, that's still a good target. Thank you.
spk18: The next question is from Ketan Montoro with BMO Capital Markets. Please go ahead.
spk01: Thank you for taking my question. Can you talk a little bit about what you are seeing on the international side and On the cladding side, there's a couple of opportunities that, you know, you guys have talked about. And is there any way to kind of size what the medium-term opportunity could be there?
spk12: Yeah, international, we do continue to see that coming back. We did have to de-emphasize that for a couple of years. But through the fourth quarter of this year, we were able to rebuild inventories to get the season started right in these marketplaces. So I'm excited about the growth opportunity. I've said in the past that we see the international markets being able to outgrow our North American markets. I still hold to that. We'll be in much better shape inventory-wise this year. As it relates to the cladding marketplace, we've now been able to show the customers that are interested in using our decking as cladding that the product is available on normalized lead times so that they can start quoting that. We really hadn't been quoting all that much business over the past couple of years, so we're back out selling again actively into that marketplace.
spk01: Understood. And just as my follow-up, what is embedded within your guidance for sort of inflation for FY22? Thank you very much.
spk12: Our inflation expectations are... are baked within the guidance that we've provided. As Dennis mentioned earlier, we have seen some inflation into the new year, but we do expect that to moderate as we go out through the rest of this year.
spk01: Thank you. Thanks.
spk18: The next question is from Ruben Garner with the Benchmark Co. Please go ahead.
spk09: Thanks, Scott. Congrats on the strong close of the year. Most of my questions have been answered, but I do want to follow up on one. I wanted to see if there's any way you could kind of quantify opportunities maybe that you guys had to walk away from over the last couple of years, whether it's internationally or in the U.S., just because of your capacity situation, you know, specifically talking about maybe some smaller players in the market that, maybe we're able to benefit because TREX, you know, the industry leader was sold out so often. Is there any numbers or way to quantify what might have been missed over the last two, three years as you guys were trying to catch up?
spk12: Well, you're right. There are things that we have had to walk away from as we've managed through the capacity constraints over the past couple of years. I would say last year was a a position where we started more normalized in the marketplace. And with inventories being built back to more normalized levels, we truly get back to a regular cadence for the year. We've not tried to put a number to what those sales are.
spk09: And just a quick follow-up, Brian, do you think that you've already started to kind of – I guess how much of the strength you saw in 2021 was maybe you guys recapturing some of that business that was gone versus, you know, there was a lot of infill, obviously, at the end of last year in your own channels. Like, are you just now at the point where maybe you can go after some of that business that maybe you could have had before because you've been still trying to fill the channel?
spk12: I did a lot of plant tours with our sales team during the fourth quarter. showing both our existing customers who have been loyal to us throughout, as well as other customers who may be carrying competing brands, the capacity we have and our ability to service them.
spk09: Perfect. Thanks, and good luck this year, guys.
spk12: Thanks.
spk18: The next question is from Tim Wolges with Baird. Please go ahead.
spk10: Yeah. Hey, guys. Thanks for taking the question. I had one kind of modeling question and then a bigger picture one. But on the modeling question, is there a way to quantify what the channel infill kind of load-in comp is? I don't know if you want to put a sales dollar number on it or some sort of kind of like lead time or kind of weeks of inventory or just any more color you can kind of give us just so we can kind of make sure we're on the same page with some of the comps.
spk07: Yeah, Tim, it's a good question. So, you know, our estimates, right, are – pointing to about $100 million in infill that happened in the back half of 2021. Okay.
spk10: Okay. That's helpful. And then I guess on a bigger picture question, just as you think about, Brian, getting to that kind of 45% to 50% penetration of composite relative to the market, is there any kind of change in the cost of getting to that incremental penetration? Like for an incremental 5% of market penetration, has that cost to attain that penetration changed at all, either positively or negatively?
spk12: Well, there's an incremental change in the short term here because we need to get back to a normalized cadence for marketing. We've pulled back on that past few years. We will get back into normalized cadence for that. We see that as important to be able to continue driving that wood conversion opportunity. getting our name in front of people who are in the market for decking, whether it be wood or for competitive products, and showing them why they should make the TREX decision.
spk10: Okay. Okay, so 22 is really more of just, I guess, kind of a catch-up now that you've got capacity and you've got the channel and a better inventory position.
spk12: Yeah.
spk10: Okay, great. Well, good luck on 22, guys. Thanks for your time. Thanks. Thank you.
spk18: The next question is from Steven Ramsey with Thompson Research Group. Please go ahead.
spk17: Hi, good evening. Starting off with drivers of sales growth for the year, how much of that is pure core wood conversion and how much of that is international growth kicking in, new construction, cladding, some of those other adjacent areas of opportunities?
spk12: Yeah, I'd love to say that there's enough data out there in the marketplace that I could break each of those down. and be able to give you accurate numbers. I think the right way to look at it is we've always looked at our business using kind of the repair and remodel growth numbers as a baseline for the business. On top of that, wood conversion opportunity, growth in international markets, as well as cladding along the way, and that gets us to the double-digit sales increase for the year.
spk17: okay excellent and then is there uh embedded uh with the channel infill that you've done uh mix that that points to uh continued increase on the enhanced line i know it's coming from a lower base but is there any read-through on penetration of that lower price product through 21 we continued to see a strong growth across all of our product lines in line with our expectations Thank you.
spk18: The next question is from Phil Eng with Jefferies. Please go ahead.
spk03: Hey, guys. You know, you guys have been constrained from a capacity standpoint the last few years. So I'm just curious, looking in 2022, how much bandwidth do you have from a capacity standpoint? So if you could quantify that, maybe capacitalization would be helpful. And when we think about Little Rock, as you kind of ramp that up, you know, Brian appreciating its modular nature. Is there a good way to think about how much capacity that would free up at least in the first phase of that ramp?
spk12: So I think the best way to size the capacity is what I said in my comments about the 85% over where we were from a 2019 perspective. And as we look out towards Little Rock coming on, which would be 2024 timeframe, Little Rock has the opportunity to be the largest facility across our system. So there's a significant amount of growth opportunity there.
spk03: Okay. Of that 85% in color, how much of that's already consumed, Brian?
spk12: We've not provided utilization.
spk03: Okay. And then a quick one for Dennis. The 12% to 13% S&A is percentage of sales. for guidance for this year. Is that a good way to think about it in 2023? Is this more of a catch-up year? I just want to get a better sense. Is there an opportunity for some S&A leverage going forward?
spk07: Right. We've always talked about there being an opportunity longer term for SG&A leverage, especially as enhanced becomes a bigger part of the portfolio. So I think Brian said it well earlier on that 2022 really becomes a catch-up year, and then from there we should start to see that leverage really start to accelerate more.
spk18: Okay. All right. Appreciate it. The next question is from Alexander Leach with Berenberg Capital Markets. Please go ahead.
spk15: Hi, guys. Thanks for taking my question. Sorry if I miss this as my line drops off, but do you have an internal rate of inflation that you can provide for us? And, you know, how has your internal rate of inflation been trending through Q1 versus Q4? You've mentioned some persistent headwinds, but, you know, CPI has been accelerating, and it sounds as though, you know, inflation in your business isn't accelerating anywhere near the same level.
spk12: Yeah, so we've built our forecasts and plans with a rate of inflation that – our research tells us that the business is going to see. Now, inflation, as everybody on the call knows, is very difficult to predict as to which commodities it's going to hit and which ones it may alleviate over the course of the year. But that inflation is inherent in the incremental EBITDA guidance that we've provided, but we're not going to provide a specific percentage that we've assumed.
spk15: Sure. And then just as a follow-up, is there still scope or room in the business to increase prices if inflation persists through the year?
spk12: Sure. There's going to be opportunities. If we see inflation roll through the economy at a degree where we see that pricing won't need to be taken, it's something that we'll do as needed.
spk15: Okay, great. Thanks, guys.
spk18: The next question is from Michael Rahat with JPMorgan. Please go ahead.
spk11: Great. Thanks for taking my question. First, I just wanted to circle back to, you know, the top line outlook. And it's very helpful to give the hundred million of infills and back after 21. You know, I also got to that similar math from an earlier question about if you just do that 26% on the first quarter, it implies like a 4% actually full-year growth. So I'm just trying to get a sense. You obviously are saying double-digit for the year. You know, with that $100 million headwind, though, in the back half of 21, you You know, are we talking about maybe flat sales in the back half of the year, or how should we think about, you know, comping that comp in 3Q and 4Q of this year?
spk12: Yeah, I would go back to my clarification comments and use the 16 through 18 seasonality as a guideline for the revenue calendarization process.
spk11: Brad, if you use that, that's 26 percent, and that gets you to the 4 percent for the full year. That's the challenge. But maybe we can talk about that offline.
spk12: Well, again, we've provided guidance of a double-digit revenue improvement during the course of the year.
spk11: Right. Okay. Well, maybe switching gears then, to the margin guidance on the 30 to 35% EBITDA. You know, I think the math kind of works out that, you know, you're looking for full year, you know, results in full year margin improvement on an operating margin EBITDA basis. You know, just trying to get a sense, you know, when would you expect the year over year return positive during the year? I mean, a lot of companies have obviously been kind of saying, you know, not the first quarter, obviously, maybe getting close to parity on the second and positive in the back half. Is that how we should think about it for you as well?
spk07: I think we're going to see higher inflection, you know, in the back half of the year. I think I spoke earlier just about we would see that steady cadence of pickup here. First quarter, you know, second quarter will be stronger than the first quarter. Third quarter will be stronger than the second quarter. But that year-over-year improvement really comes more in that Q3, Q4 timeframe.
spk11: Right. Okay. Maybe just one last quick one, if I could. You were also kind enough to kind of give expectations for pricing for the year on low-teens. Any way we should think about volume contribution in 22 versus 21?
spk07: Well, we talked a little bit about just, you know, strong double digits was the guide that we gave, right? And so I gave you the pricing and the low teens. We talked about our growth being able to, you know, double up on the repair and remodel index and then backing out the infill from the prior year. Kind of gives you a good feel for how we're looking at growth.
spk11: So when you say strong double digits, I mean, that could be a wide range. Any way to narrow that down a little?
spk07: Yeah, our guidance is strong double digits, and I think I've just given you the pieces to it there.
spk11: Okay. Thanks very much. Okay.
spk18: The next question is from Matthew Bowley with Barclays. Please go ahead.
spk04: Good evening. Thank you for taking the questions. Can I just follow up with one more on that revenue outlook? I think Dennis, you just mentioned backing out the one-time channel infill, which you said is $100 million. Are you talking about the strong double-digit growth is off of kind of last year's growth burden for the $100 million, or how are we kind of layering that on? Thank you.
spk12: It's year over year. We thought it was important to understand there was that inventory infill that we wouldn't normally see because inventories were depleted to a much larger level than they had been historically.
spk04: Okay. Understood. And then just high level back to the international opportunity because you keep highlighting this is a big opportunity over the years. Just curious if you can get any more specific on that and just where are the markets where you see that opportunity and how do you kind of, you know, go to market from a channel perspective there? Thank you.
spk12: Yeah, we tend to focus on the markets that generally have higher levels of GDP, increased family incomes, and an interest in outdoor living. So you're looking at the primarily Europe up in the Scandinavia out into the Australia markets. But we also service many smaller markets down into Central South America and the Caribbean as well. But when we talk about the larger markets and the higher GDP, that's going to be the primary focus where we will sell through similar channels to what we do here in North America.
spk04: Okay.
spk18: Thank you, Brian. Good luck.
spk12: Thanks.
spk18: The next question is from Kurt Yinger with DA Davidson. Please go ahead.
spk08: Great. Thanks, and good afternoon, everyone. Wanted to go back to the high-level kind of decking conversion here in 22. It sounds like you're looking for, you know, two points or better again. I guess, first, what part of that dynamic over the last few years do you think has gotten sustainably stronger? And second...
spk12: down about 10% on a year-over-year basis.
spk08: Okay. All right. That's helpful. I appreciate all the pillar and good luck here, guys.
spk18: The next question is from Alex Rigel with B Reilly. Please go ahead.
spk06: Thank you. Nice quarter gentlemen. Can you address the variables that may have the biggest impact on your incremental margin either coming in at the high end or the low end?
spk07: Yeah, when I think about that, right, I mean, clearly pricing plays a role in this, followed secondarily by cost outs and continuing to drive those efficiencies that we've talked about.
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