Trex Company, Inc.

Good day, and welcome to the TREX Company third quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. 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 Casey Coterie, Investor Relations Representative. Please go ahead.

Casey Coterie Thank you, everyone, for joining us today. With us on the call are Brian Fairbanks, President and Chief Executive Officer, and Brenda Lovchick, Senior Vice President and Chief Financial Officer. Joining Brian and Brenda is Amy Fernandez, Senior Vice President, Chief Legal Officer and Secretary, as well as other members of Trex Management. The company issued a press release today after market close containing financial results for the third quarter of 2024. This release is available on the company's website. This conference call is also being webcast and will be available on the industrial relations page of the company's website for 30 days. I will now turn the call over to Amy Fernandez. Amy?

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. 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-Q 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.

Thank you, Amy, and thank you all for joining us to review our third quarter results and discuss our business outlook. We are proud that our team delivered third quarter results that surpassed expectations thanks to the continued consumer demand for our premium price products. We estimate sell-through for our premium products increased at a high single-digit rate in the third quarter, and contractor lead times averaged six to eight weeks. in line with the norm for this point of the season. Additionally, sell-through of our lower price products remain stable with second quarter levels. On a year-to-date basis, sell-through across our entire portfolio was flat with the prior year, keeping in mind that our definition of sell-through includes only point-of-sale transactions at both home centers and within the pro channel. Concurrently, our distribution partners reduced their inventory in the third quarter by approximately $70 million, in line with our expectations and resulting in what we consider normalized inventory levels for this point in the season. As expected, we maintained our gross margin close to last year's adjusted level, thanks to the success of our continuous cost reduction programs, which partially offset the effect of lower utilization rates while EBITDA margin improved from diligently managed SG&A spending. This performance positions us to increase our EBITDA margin guidance for the full year of 2024 to 30.5%, the high end of our original guidance range. New product development remains a strategic priority and a key driver of future double-digit growth for TREX. Products launched within the last 36 months accounted for approximately 18% of our year-to-date net sales of $984 million, demonstrating how well aligned our products are with consumer preferences. This year, we further accelerated the pace of new product launches to capitalize on the significant railing opportunity as reviewed during our Investor Day last year, entered adjacencies that represented logical extensions of our product lines, and greater share of the wood conversion market. Last week, we issued a detailed release highlighting the latest additions to our product portfolio that will be available for the 2025 season. Among the introductions were new steel, aluminum, cable and glass railing systems, along with enhancements to the TREX Select composite railing system, designed to compete with vinyl railing and wood railing. These new railing products strengthen our portfolio and position Trex to significantly increase our penetration of the $3.3 billion railing market. We project a doubling of our share of the highly fragmented residential railing market from approximately 6% today to 12% share over the next five years. Another new development is the addition of four new decking colors, two for our premium Transcend lineage line and two for Trex enhanced decking line. All of these new colors integrate our proprietary heat mitigating technology to capitalize on the growing popularity of heat reduction. To learn more about our heat mitigating technology, please see our press release from earlier today and on our website. In the decking hardware category, we announced the continued rollout of the Trex Fastener Connection, which gives our channel partners a competitive edge by allowing them to deliver end-to-end solutions from one supplier. with these components backed by the same warranties as our decking. For example, when paired with Trex Transcend decking, fasteners are backed by a 50-year residential warranty. Our channel partners are working closely with us to maximize the benefits of these new Trex product introductions. Recently, we shared the news that Snavely Forest Products, a longtime and exclusive distributor of Trex, decided to sell Trex railing exclusively as well, displacing their previous suppliers and adding Colorado to their distribution coverage for Trex. Similar discussions are underway with a number of our exclusive decking distributors, and we expect to have additional announcements such as this in the coming months. As distributors adopt exclusivity for Trex railing, we expect the focus on a single brand will have a multiplier effect on both our decking and railing sales. This reinforces our confidence in our ability to gain substantial share of the residential railing market with our complete product portfolio and to harvest opportunities in adjacent markets to drive further incremental growth. The development of our Arkansas facility is a critical aspect of our future growth trajectory, and as promised, we want to share with you the latest update on the expected timing and associated startup costs. I will discuss the timing and then ask Brenda to review the costs. The substantial production efficiencies that we've achieved to date have yielded sufficient capacity at our existing manufacturing plants for us to accommodate the projected demand for TREX products in 2025 and 2026, enabling us to commence decking production at our Arkansas campus in the first half of 2027. Recycled plastic processing will begin in the first quarter of 2025. The output of this operation will be used at our Virginia and Nevada facilities and eliminate the need to purchase more expensive external pelletized recycled materials. We continue to adopt a modular approach to the development of the Arkansas campus, bringing on production lines in line with demand. Once completed, this will be our most efficient production site, as it will incorporate our latest proprietary equipment and technology. It is located near central raw materials and is in close proximity to key regions for wood conversion and is adjacent to major transportation hubs that will offer lower freight for centrally located customers. When Arkansas is fully operational, Trex will have total manufacturing capacity in excess of $2 billion, approximately double our current size. While we will still have elevated capital spending in 2025 with the completion of the decking building and installation of the decking lines, capital spending will significantly decline in 2026 and beyond. Looking ahead, we believe that the repair and remodel market will return to low single-digit growth in 2025, supported by lower interest rates and increased home turnover and home building activity. Trex has consistently outperformed the R&R Index by a significant margin, and we expect to do so again next year, with our results further strengthened by new products. More to come on that when we provide our guidance next year. Now I will turn the call over to our Senior Vice President and CFO, Brenda Lovechik, for a financial review. Brenda?

Thank you, Brian, and good evening, everyone. I am pleased to review our third quarter 2024 and year-to-date results. that unless otherwise noted, all comparisons I will discuss today are on a year-over-year basis compared to the third quarter and first nine months of fiscal 2023. In the third quarter, net sales were $234 million, a decrease of 23% compared to $304 million in 2023, driven primarily by the $70 million reduction in channel inventory during the quarter. Overall, sales were slightly ahead of our expectations, driven by solid consumer demand for our premium product lines, led by our TREX Transcend lineage and signature decking and railing, while consumer spending on our lower-priced products remained restrained. This behavior was consistent with what we saw during the second quarter. Growth margin was 39.9%, down 190 basis points from 41.8% after adjusting for the warranty benefit recognized in the prior year period. This decrease is primarily the result of lower utilization partially offset by the benefits of our continuous improvement initiatives which continue to deliver strong results. Selling, general, and administrative expenses were $39 million. or 16.6% of net sales in the third quarter, compared to 45 million, or 14.7% of net sales, primarily related to lower incentive compensation, which more than offset marketing spend as we continue to invest in new product innovation and branding as those investments have proven to deliver healthy returns. Net income, 41 million in the third quarter, or $0.37 per diluted share, a decrease of 38% from $65 million, or $0.60 per diluted share. We delivered EBITDA of $68 million, or 29.1% of net sales, down 32%, compared to $99 million, or 32.7% of net sales, excluding the warranty benefit The third quarter 2023 net income was 62 million, or 57 cents per diluted share. EBITDA was 96 million, and EBITDA margin was 31.5%. From a year-to-date perspective, net sales for the first nine months of 2024 totaled 984 million, a 9% increase compared to 899 million in the first nine months of 2023. This is primarily due to the shift of our early buy program from December to January. Net income was $217 million or $1.99 per diluted share compared to $183 million or $1.69 per diluted share in the first nine months of 2023. EBITDA was $331 million or 16% from $285 million in the prior year and EBITDA margin expanded by 200 basis points to 33.7% from 31.7% in 2023, driven primarily by stronger year-over-year gross margin improvement. Year-to-date operating cash flow was $152 million compared to $288 million in 2023. The decrease was primarily a result of increased railing and decking inventories, as we prepare to execute on our new railing strategy and prepare for the 2025 decking season. This was partially offset by an increase in accrued expenses associated with construction on our Arkansas manufacturing facility. In alignment with our capital allocation strategy, as of today, we have returned over $100 million to our shareholders this year through the repurchase of 1.6 million shares of our outstanding common stock. We also invested $152 million in capital expenditures year-to-date, primarily related to the build-out of the Arkansas facility. The total CapEx for this facility is expected to be approximately $550 million, of which we have already invested $340 million. The increase from our prior guidance for the project reflects management's decision to build redundancies to mitigate potential production constraints. within our existing manufacturing facilities, as well as inflationary pressures on installation and building material costs. Once this project is completed, our capital expenditures are expected to return to historical levels, resulting in a significant increase in our annual free cash flow generation. Now moving on to our Arkansas facility startup cost discussion. As Brian noted earlier, Recycled plastic processing will begin in early 2025, and by utilizing the output as raw material in the Winchester and Fernley facilities, it will help to offset the startup costs by reducing purchase pellets at those facilities. We expect the associated one-time startup costs to total approximately $5 million and the associated annualized appreciation of approximately $10 million to begin in the second quarter of 2025. These operations are expected to run at targeted utilization rates by the third quarter of 2025, with startup costs ending at this point. As Brian also mentioned, we have been able to shift the startup of our decking lines to the beginning of 2027 due to efficiencies gained at our existing facilities. At that time, we anticipate the one-time startup costs to be approximately $12 million beginning in the first half of 2027, with the associated annualized depreciation of approximately $20 million beginning at the same time. We expect these operations will be running at targeted utilization rates by the end of 2027. Once these startup expenses are behind us, not only will Arkansas be our most efficient plant, but it will also enable us to increase the flexibility and efficiencies of our legacy facilities. Now, turning to the guidance for the remainder of 2024, as noted in today's earnings release. Based on our results for the first nine months of 2024 and our current visibility through year end, we are pleased to reaffirm net sales guidance at the midpoint of our range of $1.14 billion, and we expect EBITDA margin to reach the high end of our guidance of 30.5%. Full year SG&A expense as a percentage of net sales is expected to be in line with last year as we continue to invest in branding and new product development. In addition, we anticipate our full year effective tax rate to be approximately 25 to 26%. Our net sales guidance implies Q4 sales of approximately 156 million at the midpoint. This guidance assumes the repair and remodel market continues to be challenged with low single-digit declines. It also assumes end-consumer sell-through will continue to be challenged with low single-digit declines, albeit off of a much smaller quarterly base. We also anticipate the market will reduce channel inventory by 20 to 30 million in addition to the 70 million in Q3 2021. ending the year at lower than normal inventory weeks on hand. With that, I will now turn the call back to Brian for his closing remarks.

Thank you, Brenda. We believe Trex is in a unique position to capture a greater share of the industry's long-term growth opportunities. We are the market leader with the greatest brand awareness and the largest and most trusted network of distributors, dealers, and home centers. Our expanded railing portfolio and adjacent products are earning TREX exclusivity amongst our distributors and opening additional shelf space opportunities with home centers and pro channel dealers. And our new product introductions have resonated well with contractors and consumers. All of this supports our confidence in the growth trajectory for TREX in the coming years. Operator, please open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. In the interest of time, we ask that you please limit yourself to one question and one follow-up. And our first question today comes from Ryan Merkle with William Blair. Please go ahead.

Hey, thanks for taking the questions and congrats on the quarter. My first question is just on the fourth quarter assumptions. I think you said down low single digits for sell-through. I'm curious if I heard that right. And then what does that assume about the premium products and the lower-end products?

Right. We did say low single digits from a sell-through perspective. Our premium products during the quarter sold through at a – at a high single-digit, and then our entry-level products were in a mid-single-digit decline. Got it. Sorry, yes, and we are expecting that to continue in Q4. Okay, good.

That's what I thought. And then, Brian, how do we think about the EBITDA margin guide for 25 exceeding 31% Are you simply saying or signaling that X, the one-time cost, you can keep expanding margins due to cost takeout? Or is there anything else in there?

Nope, that's correct. So excluding those one-time costs with the startup costs in Arkansas, as well as the railing transition costs, we'll continue to expand those margins.

All right. Thank you.

Thanks, Ryan. Thanks, Ryan.

And our next question today comes from Rafe Jadrosich with Bank of America. Please go ahead.

Hey, good afternoon. Thanks for taking my question. I just wanted to ask on the inventory side, if I look at your inventory days on hand, they're a lot higher than where they've been historically, especially as we go back to maybe pre-COVID. Can you just talk about why you're carrying more inventory now? Is there a structural change, or is this related to the railing launch next year and just getting ready for the decking season next year?

Yeah, we've talked about this. We've talked about this a number of times over the past six months. It is twofold. First, it is driven by the new product launches that are coming up. A couple products are already in the market, but most of them will be coming into the market beginning of next year. The second part of it is that for a long time, we've ramped our capacity up during the busiest parts of the season and pulled it back later on in the year. Given the size of the organization that we are today, we believe it makes more sense to carry a little bit heavier inventory and then reduce the amount of increases and decreases that we put the operations through. It reduces the amount of hiring that we have to bring people in. When we bring a line on, we can keep that line running. We can keep the efficiencies at a high level. So there is a piece of it that will be structural in nature, and we will run with generally higher levels of inventory when we get to the year end as compared to what you've seen in the prior years.

That's really helpful, and that makes a lot of sense. And then just on the over 31% EBITDA margin target for next year, is there an embedded revenue assumption, or is that based on the R&R market getting back to low single digit? Can you just talk about the different levers that you have to pull to give you confidence to talk about a 31% for next year already?

Yeah, as we're looking at it right now, we have a base assumption of it going back into the mid-single digits, which will drive our growth. We're not providing guidance on that number right now. But as we mentioned in the call, we have consistently outperformed that number. And we do think that there are a number of underlying economic metrics that will support getting repair and remodel back to growth again.

Great, thank you.

And our next question today comes from Keith Hughes with Truist. Please go ahead.

Thank you. The commentary on channel inventory reduction, 20 to 30 million in the fourth quarter, is that all in DigBox or are you seeing it in other channels?

That's primarily going to be in our distribution channel. Okay. Okay. Yeah, with the home center channel that's managed through consignment when we ship into their distribution centers, still our inventory, and then from there when it ships to the stores when we book revenue. So there's high visibility to that. We know exactly where that's going to be. With the pro-channel distributors, while we still have good visibility of that, it's not managed on a consignment basis, and that's where we'll see the decrease. Okay.

And second question with the – The recycled plastic startup in Arkansas, I think you said earlier, is going to be replacing, I assume you mean virgin pellets, at the two other facilities. Number one, is that right? And number two, even with transportation costs, is that still a cheaper landed cost for those plants?

We don't use virgin pellets in our operations, but we do buy some outside pelletized recycled materials. and this material will replace that, and yes, there will be a cost benefit to that. Okay, thank you. Thanks.

And our next question today comes from Ruben Garner with the Benchmark Company. Please go ahead.

Thank you. Good evening. A question on the railing. You referenced a one-time $5 million cost. Any way to gather what exactly that cost is tied to and what the revenue benefit might be from those particular costs?

Yeah, that will be, as we launch into the marketplace, a certain level of transition cost. As we bring more merchandising into the market, we need to make sure that all of our dealers as well as home centers are properly merchandised. All the literature is up to date. And this is a we've got many more launches over the upcoming four or five months than we've had in the history of the company. So there is some cost to get that into the market and get it done correctly.

Okay. And then my second question is a clarification on the inventory drawdown at distribution. You referenced kind of the entry level product and customer being a little more hit the last couple of quarters. Am I, Connecting the wrong dots here, is the product that's being drawn down at distribution the same product, or are those two different sort of pressures that you're facing, an inventory drawdown at distribution and then a slower consumer at the retail big box channel?

Distributors have already adjusted their inventories, understanding that entry-level market is going to be a little bit weaker. But as we did our surveys with distribution and understanding where they wanted to come in, for year end, understanding the new products that we're going to have for next year. The channel inventory is a little bit lighter than what we had expected coming out of the second quarter, but nothing that we're concerned about.

Great. Thanks, guys. Good luck into the year end.

Thanks.

And our next question today comes from Susan McCleary with Goldman Sachs. Please go ahead.

Thank you. Good afternoon, everyone. My first question is on the inventories. You mentioned the 20 to 30 million drawdown in the fourth quarter. What does that suggest as you go into the pre-buy early next year, and what are you hearing in terms of the level of demand that you could see as we start to get into the spring, given what the contractors are telling you?

Well, so there's quite a bit of time before we get to pre-buy at this point, but people are feeling positive about next year, that repair and remodel is numbers do come back into positive territory. Recall last year, we went ahead and we moved our December pre-buy into the new year, but then we also shipped an additional roughly $40 million on top of that, so the channel would be ready to support the season. Given our own inventory position at this point, I wouldn't expect that additional infill would occur During the first quarter next year, we're highly confident in our ability to be able to serve the marketplace. Our sales team has good visibility to where the pro channel is sitting on inventory at any given time. And we feel as though this is a little bit better way to run the market rather than trying to push it in with incentives earlier in the year.

Okay, that's helpful, Collar. And then maybe thinking a bit about the gross margin, you mentioned that you did see the benefit of some cost reductions in there that offset the lower utilization this quarter. Any thoughts on further cost benefits that you could be realizing into year-end and then any projects that you want to highlight thinking about 2025?

One of the things I talked about was given the efficiency projects that we have underway, we are deferring the startup of our decking operation in Little Rock that is driving some of that benefit that we're seeing. So we've got projects like that that will be ongoing in the organization. We have an extremely sophisticated continuous improvement group where they really challenge everything within the organization. We've got dedicated engineers to going after these costs. And I wouldn't pin it on any one thing that we're going after. It's a good number of projects, and it continues to grow. deliver benefits that, in some cases, offset other costs that are coming into the business. I'm completely immune from any inflationary impacts, but generally we've been able to offset those inflationary impacts as well as deliver other benefit to our income statement.

Okay, thank you and good luck with everything.

Thank you. And our next question today comes from John Lovallo with UBS. Please go ahead.

Hey guys, thank you for taking my questions as well. The first one is you mentioned pushing out production of decking to 2027 in Arkansas and through some of the efficiencies that you've generated at existing plants. Just curious if you could put a number on how much incremental capacity you were able to generate at these existing production facilities. And you know, just really just making sure that there's nothing you're seeing on the demand side that that's stopping the production at Arkansas.

No, we're not going to put a number on those incremental efficiencies. I think probably what's more important is from when we launched Little Rock timing, the market has been somewhat weaker in 2023 and 2024. So that's definitely impacting that. But also as we look at it, our own internal improvements allow us to be highly confident that we can meet the market needs and with the existing capacity, and then just bring on Little Rock just a little bit later.

Okay, that makes sense. And then it looks like you guys repurchased about $45 million of stock already this quarter. How should we think about your appetite through the remainder of the quarter and as we move forward as some of the Little Rock stuff comes online?

Yeah, so year-to-date we've repurchased $100 million worth of shares, roughly an average price of $63 a share. We have an open program for roughly 10%. Now, that's minus the $100 million we just bought. I'm not exactly sure the percentage impact of that. But that program still is available to the company, and we coordinate with our board of directors and make decisions as to how we implement those 10B51 plans as we go forward. Okay. Thank you, guys. Thanks.

And our next question today comes from Michael Rehart. with JP Morgan. Please go ahead.

Thanks. Good afternoon, everyone. Thanks for taking my questions. First, I was just hoping to get clarification on a couple of the comments around 2025, and apologies if I missed it, but the 31% or 31% or greater, if that number includes the... Arkansas, some of the early Arkansas startup costs and the railing transition, if that's inclusive of that, and also the mid-single-digit growth, if that was a reference to the R&R market or your own sales growth.

The 31 is adjusted for those one-time costs. So if we exclude those one-time costs of the $5 million of the transition cost for railing and the $5 million of the one-time startup cost for the repro lines. We expect 31-plus percent on the EBITDA line. And the single digit is for the R&R market. That's what we're expecting for R&R based on what we're seeing and hearing in the market right now for 2025.

Okay, great. Thank you for that, Brenda. And maybe just more of a conceptual question around the differentiation of sell-through that you've seen in premium versus the lower end of the market. Theoretically, we've always kind of thought of the strong growth in composite decking as benefiting from both you know, positive outdoor living trends, as well as the conversion from wood to composites, kind of giving a double, you know, positive tailwinds relative to the underlying R&R market. What, in your view, has made the lower end kind of maybe grow more recently, at least in line with the underlying R&R market? as opposed to not benefiting from some of those trends that maybe you're still seeing in the premium side?

The differentiation is primarily going to be off of the demographic of the more entry-level customers. So you're going to have a lower income demographic and in an environment where there's much higher inflation, that consumer is asking the question, which repair and remodel projects do I want to do with my home? So that's definitely a key driver of it. I think it's really important to note also that composites are not losing share to wood. Wood is declining at a higher rate than what we've seen our entry level decline. So we still see that there is underlying support that conversion is happening in the market. Again, we survey our partners in the marketplace so that we understand what's happening out there. But there is a general weakness at that entry level at this point. And Fortunately, the premium customers are still quite strong.

Okay, so that's very helpful. I mean, basically what it sounds like you're saying, Brian, is that maybe perhaps the overall decking market could even theoretically be worse than the broader R&R, just given that it's a bigger purchase and a lot more discretionary. Is that kind of what you're implying? I did not say that. Okay. I was just curious. It sounded like directionally there, but all right. Appreciate it. Thank you.

And our next question today comes from Tim Wise with Barrett. Please go ahead.

Hey, everybody. Good afternoon. Maybe just on raw materials, some of the – recycled indices that we look at, Brian, have seen some inflation in some of the recycled polyethylene grades. Is that something, and I can't really explain it, so I mean, is that something that you're seeing in the marketplace or you're seeing in COGS or any driver to what that might be?

Well, I'll start with I've never really seen a good index that covers the type of polyethylene that we use, the film coming from the marketplace. It's usually going to be on pelletized purchases. I would tell you with what we're out purchasing in the market, we continue to see very, very moderate levels of inflation with it, and it's not been a concern that we've had this year.

Okay. Okay. That's helpful. And then I guess just – I think you said two different numbers kind of through the call. I just want to make sure I get it right. So are you guys assuming that the R&R market next year is up mid-single digits or low single digits? Low single digits.

Low single digits.

Okay, okay, thanks very much.

And our next question comes from Phil Ng with Jefferies. Please go ahead.

Hey, guys. Just a clarification to Susan's question earlier. Brian, are you saying there's no winter buy in 2025, or just you're not going to see the outside $40 million inventory?

Yeah, there will still be a pre-buy. And given the seasonality of this industry, That's the reason seasonal companies do the early buy programs is so that that inventory is staged when the season really kicks off in the April timeframe. And, yeah, there will absolutely be a program that will be focused on January through March timeframe.

Okay. So just not as big as last year because last year you had this big – I mean, this year had a big bump. And I guess with, you know, Trex running structurally with more inventory and How should we think about the production levels and how you're going to run in 2025? I know a few years ago when you had too much inventory, you kind of managed inventory in a certain way, but it sounds like you may look at it a little differently. I just want to be thoughtful about that because your inventories are high. So, you know, is there any risk that you draw down production next year, which would be a headwind on margins?

Yeah, we're definitely looking at inventories differently than we did back in 2022. We really dropped production way off in 2022. Then we had to bring quite a bit of that production back in early, I guess it was mid-23, and then ran pretty heavily. So it's been a bit of an up and down from a production perspective. We want to get away from that. It doesn't make sense from a cost perspective. It doesn't make sense from an employment perspective. So that's where you'll see the additional inventory that we'll have. And I'm not too concerned from a utilization perspective. We can run more efficiently if we can run on a more stable basis.

Okay, that's helpful. And then the way I should interpret some of the comments you made on Little Rock, at least on the plastic recycling piece, is that roughly like a $5 million impact and $15 million on earnings? And I guess expanding that question, For 2025, are you effectively stripping out the $5 million load-in and the startup costs from EPS? Because in the past, I think you generally kept it. So I just wanted to understand, are you stripping it out going forward?

Yeah, so again, $5 million will be the pure startup costs, and then you'll have the depreciation, right, of $10 million for just a little rock piece of it. But the $10 million in depreciation doesn't start until Q2, right? So you will only have three quarters of that depreciation. So think of it from that perspective.

Yeah, so we'll give you adjusted numbers. We'll explain what those adjustments are.

Yeah. But the adjusted numbers will or will not include the startup costs? I know from perhaps a little bit. They will not.

Will not include the startup costs. We will adjust out those startup costs, yeah.

What about the DNA? Okay.

It's not going to be in your EBITDA.

Right.

On earnings perspective.

We haven't decided how we'll report that next year as of yet. If it's more helpful to the market, we'll show it that way.

Okay. All right. Thank you.

And our next question today comes from Jeffrey Stevenson with Loop Capital. Please go ahead.

Hey, thanks for taking my questions today. I just had a clarification. I believe previously you talked about in the fourth quarter a high single digit type sell through decline and just wondered was there any variance between your current down low single digit expectations or any change in how inventories exit the year compared to previous expectations?

Yeah, that's a great question. We did have an assumption that there would be a high single digit decline as we moved into the fourth quarter and that there would be continued deterioration. We didn't really see a continued deterioration in the third quarter. It came in as we expected. I mentioned in the last call, July was pretty rough, but then we actually saw numbers improve a little bit in August and September. Now we expect that it will continue to see those kind of numbers through the end of the year. So instead of having a high CIGIT High single-digit decline ends up being a low single-digit decline and a full year being flat. Where's that difference being serviced from? It is being serviced from the inventory in the channel, where that channel inventory will be somewhat lower than what we had originally expected.

And will that be similar to last year, which was 15% below historical levels, or is it going to be lower than that? It'll be lower than last year. Got it, got it. My second question is just, Brian, on the importance of the Snavely exclusive railing announcement and the expectation of more with distribution partners. Is this being really driven by the new railing products that Trex has introduced over the last year or so? And then at a higher level, how much of railing sales that a distributor such as Snavely has were Trex versus other brands in the past?

Yeah, it's a great question. This is a strategy we've been pursuing for about two years now. You're starting to see the benefits of this strategy come through with the announcement from Snavely. And the way the strategy has worked is understanding what types of railings were our distributors selling, what were the volumes they're selling, and what products did we need to have so that we could have those distributors just focused on the Trex brand. And now you're starting to see some of that come through. And as I mentioned, I expect that you'll see further announcements as we move forward with that. All of the products I announced earlier, those are the type of products that our distributors are looking for. And, yeah, there's a material amount of sales that our distributors have had with competitive products over the past years. Great. Thanks, Brian.

Thank you. And our next question today comes from Kurt Yinger with DA Davidson. Please go ahead.

Great. Thank you. I just wanted to follow up on the last question. Intuitively, it makes sense. More distribution coverage better. I'm just curious how we should think about that playing out at the retail level, right? I mean, the contractor, homeowner still picking the brand. How does more distribution... kind of help ultimately pull that sale through in your mind?

Yeah, the first thing that will happen is you've got more feet on the street that are pitching your product. You've got availability at more locations. But in this industry, it generally takes three years to really gain share with these new products. First year, you have the infill. Second year, now you've got more turning through the channel. And then by the third year is really where you start seeing that significant growth. We're excited that this potentially we could see more benefit earlier from that, but we also understand the channel that we work within. Our own sales team is highly engaged with conversion of these accounts as well as our distribution channel. We believe we'll have success both at the home center and within the pro channel.

Got it. Okay. Appreciate that. And then You know, I thought it was interesting that you talked about adding the heat mitigating technology to some of the enhanced decking lines. Could you maybe just talk about kind of the cost implications surrounding that and how you think about kind of the opportunity across more of the portfolio, recognizing that, you know, it does seem like a higher end feature and maybe there's kind of some cannibalization factor in the back of your head. Just curious how you think about that.

The advantage of having an ongoing continuous improvement program can allow you to add more value to your product. One of the questions I used to get a number of years ago was, are we going to take prices back down now that we've taken all this price over those couple of years? And the answer is no. I've not seen any pressure on price within the industry itself. But there's always going to be a drive to ensure that you're providing the best value to those consumers. especially with those entry-level products. And while they're not as strong right now, that market will come back, and we are in the right place to be able to capture that wood conversion marketplace as repair and remodel increases.

Just to sneak one more in, is it fair to think about kind of the innovation on the decking side being more kind of around features going forward or more kind of expanding the price points? How would you think about that?

We've got products that go anywhere from $2 a linear foot up to $9 to $10 a linear foot. So we've got a wide selection of decking, various levels of aesthetics, various levels of performance, all with strong, strong warranties. Will there be new deck boards coming to the market? There absolutely will be. There will be new features and benefits, and then there will also be new railing products that come to the marketplace. So I wouldn't say we're not at the end game with either one of these product groupings.

Okay. Appreciate the color, Brian. Thank you.

Thanks. Our next question today comes from Trevor Allenson with Wolf Research. Please go ahead.

Good evening. Thank you for taking my questions. First question on railing. You talked about doubling your market share within five years. Is the 6% market share you called out referring to the entire $3.3 billion railing market you referred to or just the parts of the market that you're operating in and then Is your expectation over the next five years that the railing market grows in line with the decking market?

That's going to be the entire railing market. $3.3 billion includes wood and any other alternative players, and so it's based off of those numbers. And we do expect the railing market to grow roughly in line with repair and remodel. It doesn't see quite the same growth that some of the projections are on the decking side of it. You've got roughly 30% of decks don't get a railing at all because they're less than 36 inches in height, but there is a significant opportunity for Trex to be able to go after. We are the number two residential railing provider by market share at 6% of the marketplace. So that gives you a bit of an idea of just how fragmented this industry is.

Yeah, it makes sense. Sounds like a great opportunity. And then Brian, I wanted to follow up on a question or on a comment you made just a few minutes ago about not seeing the incremental 40 million load in next year. Is that comment due specifically to where your inventory is positioned currently as you've built those levels up, or is that more of a permanent change in how you're going to approach channel inventory levels moving forward to mitigate some of this boom and bust cycle that we've seen over the last couple of years? Thanks.

Yeah, the latter of what you said. It'll be more of a permanent change and try to reduce the chances for that boom and bust cycle. Exactly.

Got it. Understood. Thanks for all the color. Appreciate it.

Thanks. Our next question today comes from Adam Baumgarten with Zellman. Please go ahead.

Hey, thanks for taking my question. Just on your 2025 outlook, you said R&R up low single digits. I would assume, based on your history, you would grow higher than that. So just thinking about the 31%, or above EBITDA margins, does that not include any assumption for volume leverage benefiting margins?

Well, we haven't provided what that growth number is for next year, so let's not get too far ahead of ourselves. We will definitely provide more details on that.

Okay, got it. And then just on the whole dynamic of premium versus entry level, sell-through, kind of bifurcating here, have you ever seen it this disconnected in the past?

Well, I think what's changed is there are more products that are going after that wood conversion marketplace. So in 2019, we launched our enhanced product line, and it was specifically designed to go after that buyer who is installing wood and not just moving them to a product that's roughly two times the cost of wood, but show that consumer that for an extra couple hundred dollars, they can afford to upgrade to our enhanced Naturals product line, which sells for $275, $3 a linear foot. That strategy has worked extremely well. And the key part is educating these consumers that, yeah, for an extra $500, $700, you can have a composite deck, not just a wood deck that's going to deteriorate within 12 to 15 years. So the marketplace has changed. over the past five years or so. So I think that's why you're seeing a bit of a difference in how the consumer is reacting when we enter into times of economic uncertainty. Got it. Thanks. Best of luck. Thanks.

And our next question today comes from Stephen Ramsey with Thompson Research Group. Please go ahead.

Good evening. To focus on the railing topic a bit more, could you put the sell-through of railing demand in some context with the decking divergence? I know it's a higher ramp off a low base, but if there's a way to help us gauge that.

Yeah, we've not tried to do that as yet. Something that we'll consider as we move forward with it. There's a lot of moving parts with railing right now with some of these new products coming to marketplace. And what I don't want to do is confuse selling of products with actual sell through of products right now.

Okay, that's helpful. And thinking longer term on railing, is there a way to think about where the spectrum of products goes there on a premium versus entry level way of thinking about the railing portfolio?

I see opportunities at every level, even though we already have a strong lineup. And once these products are launched, we'll have a very complete lineup, much like the decking side of things. There will always be new opportunities for us to be able to go after.

Okay, thank you. Thank you. And our next question today comes from Matthew Boley with Barclays. Please go ahead.

Hey, good afternoon, everyone. Thanks for taking the questions. On the gross margin into the fourth quarter, I think you were implying something in the mid-20s, and correct me if I'm wrong. And I know you're going to be keeping inventories higher, but kind of given where sell-through is exiting this year and where your inventory is, how should we think about your kind of early-year production plans? And specifically what I'm asking is what is the potential for that gross margin to kind of rebound beyond the fourth quarter? Thank you.

Yeah, we tend to have our weakest gross margin in the fourth quarter anyway, so that really shouldn't be too much of a surprise for those that have lower sales as well as lower production with that. While we won't cease our production like we've done over the past couple of years, there still will be some level of increase and decrease as we move into the seasonal part of the year. Okay, thanks for that, Brian. And then

Secondly, just not to harp on it, but just back on that 31% EBITDA margin, and presumably there is a production estimate in there. I guess if you bear with me, you're saying the 40 million channel fill is not going to repeat. Obviously, sell-through is kind of still exiting the year down. And I guess you sounded like you're assuming revenues could be up mid-singles for the entire year. I guess the question is, is the assumption that you would see kind of accelerating revenue growth as you go through 2025, or should it be kind of more radically spread out between the first half and second half?

I think repair and remodel right now is showing accelerating as we move through the external metrics for repair and remodel. And when we talk about that $40 million, it's not as if it doesn't sell in. What we're saying is that it doesn't sell in in the first quarter. There's no reason to put that inventory out there in the first quarter. We expect the market will be there. It will sell in during Q2 and Q3. Okay. Thanks, everyone. Good luck. Thanks, Matt. Thank you.

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

Thank you for your participation and questions today. We look forward to speaking with many of you in the coming weeks and at upcoming conferences. Good evening.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.