Trex Company, Inc.

and welcome to the Trex Company Inc. first quarter 2025 earnings conference call. All participants will be in a listen-only mode. Should you need any 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 touchtone 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. Please go ahead.

Thank you, everyone, for joining us today. With us on the call are Brian Fairbanks, President and Chief Executive Officer, and Brenda Lovechik, 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 closed containing financial results for the first quarter of 2025. 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 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 first quarter 2025 results and discuss our business outlook as we head into the heart of the decking season. The Trex team delivered higher than expected sales in the first quarter, driven by continued strong demand for our premium products and our prominent positioning in both the home centers and the pro channel. Recall that the first quarter is historically a period of inventory build for the channel. After a somewhat slow January and February due to adverse weather conditions in many regions of the country, we saw a significant pickup in March demand. During the quarter, there are several key initiatives to note. First, new products launched within the last 36 months accounted for approximately 22% of our trailing 12-month sales, more than twice the level of last year's first quarter. Trex's proven track record as a market innovator is once again helping us win business and market share in both the pro and home center channels with new high-performance products that resonate with consumers. Second, since the beginning of the year, we've converted an increasing number of dealers to the Trex brand, and the pace of Trex Pro recruitment and qualification is meaningfully ahead of the same period last year. These account conversions are the result of our strategy to offer a comprehensive portfolio of decking and railing products that meet customer needs, enabling them to rely on a single, trusted market-leading brand. This increase in conversions has also been supported by the distribution enhancements we implemented last year. Third, we officially launched our Performance Engineered for Your Life Outdoors campaign on May 1st, highlighting the performance advantages of TREX products across a wide range of applications. A key highlight of the campaign is TREX marine grade decking, which is engineered to withstand sun, saltwater, sand, and other harsh environmental elements. This proven performance is why over 2 million square feet of TREX decking has been installed by installers on docks in both saltwater and freshwater areas, including some of the most demanding climates in the world, from the tropical Florida Everglades to the Arctic regions of northern Canada and all the way to the beaches of Dubai. The new campaign also features our SunComfortable technology, which is a key differentiator for Trex in the marketplace. Originally developed for a Transcend lineage product line, SunComfortable technology is now available in three new select decking colors, two enhanced decking colors, and we continue to incorporate this technology into new product offerings. Lastly, we are pleased with the inventory level being held by our channel partners as of the end of the quarter. During the quarter, we began to realize the benefits of our new inventory strategy, which is designed to reduce the quarterly volatility associated with the timing of channel stocking and destocking. It also ensures our channel partners will have the inventory they need to meet consumer demand, while at the same time enabling us to level production across the year, improving overall operating efficiency. This strategy also gives Trex greater flexibility to respond to market conditions, allowing us to draw down inventory to meet stronger than expected demand or scale back production if demand softens, helping us maintain appropriate inventory. This approach ensures that we consistently have the right amount of product available to support our customer needs, regardless of market fluctuations. Looking ahead to how the season is shaping up, The positive momentum in orders that we experienced in March has continued through April, supporting our guidance for a mid to high single-digit growth this year. With respect to tariffs, like all businesses, we are looking for additional clarity from the administration. Less than 5% of our cost of sales is projected to be impacted by tariffs, with the majority of the impact related to purchases of aluminum and steel using our railing and fastening products. We have mitigated and will further mitigate some of this impact through strategic actions such as building higher levels of pre-tariff inventory and negotiating with suppliers to either assume or share in the tariff burden. Additionally, we are adding new suppliers that are unaffected or less impacted by tariffs, further reducing the impact on our cost of sales. Additional actions will be considered as we gain more clarity on the outcome of these new tariffs. We recently held our TrexPro contractor meetings, bringing together contractors from across North America. The mood was upbeat with indications of strong demand for our products and continued repair and remodel spending in our category. Most contractors are quoted backlogs of six to eight weeks. As we've seen with both consumers and our channel partners, there was strong positive feedback on our new products. Our channel partners also responded positively to our program enhancements aimed at increasing brand alignment. For example, if a contractor is installing decking, railing, and fasteners all from Trex, they will qualify for additional marketing opportunities as well as enhanced warranty benefits. For more than three decades, Trex has built and maintained the most respected network of pro-contractors, distributors, dealers, and home centers by fostering strong partnerships that are reinforced by mutual benefits. We will continue to expand our product offerings and work closely with our channel partners to innovate and strengthen the relationships that bring TREX products to the customer. Progress has continued on our new state of the art manufacturing campus that we're building in Arkansas. In the first quarter, we realized a significant milestone with the production of our first recycled plastic pellets, which are already helping to offset the cost of external pellet purchases at our Virginia and Nevada campuses. As work continues through 2025 and into 2026 to complete the decking, building, and installation with production planned to start in 2027, we will continue to strategically align our manufacturing footprint. As we said when it was first announced, this new manufacturing hub positions TREX to better respond to changing market conditions and quickly capture growth opportunities. while at the same time serve customers across the country with improved regional manufacturing access and lower freight costs. Recent data indicates that there's an increasing level of pent-up demand in the repair and remodel market. Zonda Home Economics projects that R&R spending has been below the long-term average of $1.26 per square foot of home space since the end of 2021, and it reached its low point in 2024 at a projected $1 per square foot. That's approximately 20% below the average spending level. However, it is projected to increase from that low point back to the long-term average by 2027. We agree with the projection, given that there are over 50 million decks in North America, and over half are either at or beyond their normal lifespans. In 2025, we expect that Trex will outperform the R&R market by a considerable margin, driven by our new product introductions and market share gains, and we're confident that the trend will continue long into the future. Now I will turn the call over to Senior Vice President and CFO, Brenda Lubczyk, for a financial review of the first quarter. Brenda?

Thank you, Brian, and good evening, everyone. Before I walk through our financial results, I would like to provide an update on some of the strategic priorities we have implemented to drive growth and profitability in 2025 and beyond. Over the last 36 months, Trax has undergone a period of significant product innovation, with new products accounting for approximately 22% of trailing 12-month sales. We remain focused on enhancing our product offerings and delivering an expanded portfolio through innovation. In February, we announced an expansion of our mid-tier Trek Select decking line, introducing three new colors that feature elevated aesthetics and performance that define Treks. Notably, this launch includes the industry's first mid-price decking board with our integrated sun-comfortable heat-mitigating technology. Additionally, we have improved our entry-level Treks enhanced decking with refined profile specifications that broaden consumer appeal. These advancements reflect our continued leadership in product innovation and our commitment to offering the highest quality solutions across all price points. Serving consumers across the full spectrum of the market remains a core element of TREC's long-term growth strategy. We are seeing benefits from the new and expanded distributor partnerships announced last year with Boise, International Wood Products, Navley Forest Products, specialty building products, and Weyerhaeuser. In particular, we saw strong sales in the southwest where many of the distribution changes took place. These results highlight the positive impacts of our expanded distributor relationship, which in turn helped to expand our dealer network, provide better service to the home centers, and enable long-term growth. We continue to see strong demand for our premium products across all channels in Q1 and continue to benefit from our significant market share in the decking and railing category for both stocked products and special order products in the home center channel. We believe our positioning in the home center channel will enable us to capture significant consumer demand for value focused consumer who is converting from wood as the market segment begins to rebound. On the production side, as Brian mentioned, our Arkansas campus began producing recycled plastic pellets that will serve as raw materials for our Virginia and Nevada facilities and eliminate the need to purchase higher cost inputs. Arkansas is set to become our most efficient decking production hub, enhancing overall operational performance by increasing efficiency across our broader manufacturing network and allowing us to respond with more agility to fluctuations in demand. We are excited to see this multi-year initiative come to life and begin contributing positively later this year. I would now like to review our first quarter 2025 results. Please note that unless otherwise stated, all comparisons discussed are on a year-over-year basis compared to the first quarter of 2024. In Q1, we incurred several expenses tied to strategic initiatives including startup costs associated with our Arkansas plastic processing operation, railing conversion support as we partner with our distribution channel to bring Trex's expanded portfolio of railing products to the market, and investments in digital transformation aimed at enhancing the consumer experience. I will provide adjusted results reflecting these items while discussing financial performance. A reconciliation of these adjustments can be found in our press release Ontrex.com. In the first quarter, net sales were $340 million, a decrease of 9% compared to $374 million, but better than expected due to continued demand for our premium products. As a reminder, last year's net sales included a $40 million benefit from a channel inventory build ahead of the decking and railing season that did not repeat this year. and we ended the quarter with channel inventories in line with where we expected as we head into the busy season. Gross profit was $138 million and gross margin was 40.5% compared to gross profit of $170 million and gross margin of 45.4%, down $32 million or 490 basis points. The decrease primarily due to three factors, railing conversion costs, lower year-over-year production as we level load our facilities, and as noted earlier, we improved our entry-level enhanced decking boards to optimize performance and refine the aesthetic appeal. This refinement required changes to our production process, which impacted Q1 margins and we expect will impact Q2 margins. Trex's unrelenting focus on continuous improvements partially offset these impacts. Adjusted gross profit which excludes railing conversion costs of approximately $4 million, was $142 million. Selling, general, and administrative expenses were $56 million, or 16.5% of net sales, compared to $51 million, or 13.5% of net sales. The increase was due to additional investments in branding and new product innovation, which continued to deliver strong results. Excluding expenses related to the startup of Arkansas facility and digital transformation activities, SG&A expenses were 55 million or 16% of net sales. Net income was 60 million or 56 cents per diluted share, a decrease of 32% from 89 million or 82 cents per diluted share. Excluding the aforementioned expenses, adjusted net income was 64 million or $0.60 per diluted share. Adjusted EBITDA was $101 million, down 24% compared to $133 million. As noted in today's earnings release, given our strong start to the year, we are maintaining our full year 2025 guidance. We expect to see strong year-over-year comparisons in the second half of the year, driven by normalized production levels, the ongoing benefits of our continuous improvement initiatives, the absence of channel inventory reductions that occur in the second half of last year. We continue to anticipate a flat repair and remodel market relative to 2024, and we expect to considerably outperform the R&R market in 2025, supported by continued strong demand for our premium decking products, increasing demand for our entry-level decking products, and double-digit growth in our railing products. To reiterate our 2025 guidance, we expect net sales growth to be between 5 to 7 percent, adjusted EBITDA margin to exceed 31 percent, SG&A expenses to be approximately 16 percent of net sales, interest expense less than 2 million, and depreciation in the range of 55 to 58 million. We are projecting an effective tax rate of approximately 25 to 26 percent, Capital expenditures are projected to be approximately $200 million for the full year as we continue the development of the Arkansas campus. We expect Q2 sales in the range of $370 to $380 million and Q2 margins to be in line with Q1. With that, I will now turn the call back to Brian for his closing remarks.

Thank you, Brenda. To sum up, the first quarter represented a good start to 2025. and the pace of incoming orders is in line with our expectations. While we're closely monitoring consumer behavior and other macroeconomic forces, we're confident in the strength of our market position. To anticipate a question that I expect is on your minds, the confidence we have in our position as the market leader has not changed with the announcement of James Hardy's acquisition of Azek. This confidence is based on our tremendous brand equity, our differentiated channel positioning that maximizes the visibility and availability of TREX branded products, our expanded product portfolio, and the network of distributors, dealers, home centers, and pro contractors that we partner with every day to bring the highest quality performance-driven products to the marketplace. This is the extent of what we will say on this topic. Now I will welcome your questions on TREX, our performance, and our outlook.

Operator, please open for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star then two. In the interest of time, we do ask that participants limit themselves to asking one question and one follow-up question. Your first question comes from Ryan Merkel from William Blair. Please go ahead.

Hey, good afternoon. Thanks for taking the question. I wanted to start with the change you made to the enhance, the refinement, I guess was the word you used. Talk about why you did that, and then are you expecting stronger sales after you make that change?

Yeah, we had received some customer feedback over the past couple of years, and we elected to go ahead and make that manufacturing change during the first quarter. One of the outcomes of that change is that it is a stronger sales So when you're laying it across whatever span that you have, it's going to be a little bit less flex within that. Some other changes just to lightly improve the general aesthetics of the overall board. We felt it was time in a normal continuous improvement type methods that we have here at Trex to make that adjustment. And there were some changeover costs for that during the first quarter.

Got it. Okay. And then, you know, margin question. You mentioned two Q margins approximating one Q. Were you talking about gross margins or EBITDA margins?

Largely gross margins. So we'll continue to level load the facilities, which will have a little bit of an impact year over year because we were running really hot Q2 in 2024. And then still some of the costs from the changeover with enhancement we'll be running through in Q2. Okay.

Okay, that's kind of what I thought. Any way you can quantify the refinement to enhance what the impact was, the gross margins in 1Q and 2Q, just to help us with modeling?

Yeah, so if you look at it, we highlight, right, three things that are impacting gross margin. One, it's the dealer or the railing conversion cost. Two is the level loading, so volumes, production volumes. And then third is was the enhanced changeover, what I'd say it's roughly a third, a third, and a third. Got it.

All right. Thanks so much. Pass it on.

Thanks, Ryan.

Thank you. Thank you. Your next question comes from Rafe Jitrasich from Bank of America. Please go ahead.

Hi. Good afternoon. Thanks for taking my question. I might have missed it, but Brian, did you see what the sell-through was in the first quarter? And then can you just talk about what you're assuming for the remainder of the year against that kind of flat R&R assumption?

Yeah, thank you, Ray. Yeah, in the first quarter, we saw, again, continued strong demand for our premium products, and we did start to see the entry-level turnaround. And so we are on track for our full-year guidance, which is that five to seven-year And then that does reflect what we believe the sell-through will be for the full year. So that mid to high single digit sell-through.

Okay. And then just following up to the prior question on the 2Q guidance for gross margins, are the components of the year-over-year decline similar to what's impacting the first quarter for the second quarter as well? and then therefore temporary, and we should expect that to sort of reverse in the second half of the year?

Exactly. Those are temporary, and we'll be reversing in the second half.

Correct. Yeah, we're continuing to see improved performance on the new profile, the enhanced changes that we've made. We'll continue to make great progress on that, and we'll have that in great shape by the time we get to the end of the second quarter.

Thank you. The next question comes from Tim Wedge from Bog.

Please go ahead.

Hey, everybody. Good afternoon. Thanks for all the color. I guess one question on kind of the, just given some of the changes in inventory practices and things, how would you kind of expect the seasonality in the back half of the year to kind of track relative to what you've done historically? Does Q3 look like, is there less of a seasonal drop-off than you would normally see Q2 to Q3? And then you kind of normally see, you know, Q4 week or just, how should we kind of think of that just given kind of the moving pieces between how you're kind of changing the inventory load into the channel?

Yeah, so normal seasonality is going to be a strong first quarter as you build inventory in the channel. You still have to do that regardless of what inventory level that we have so the channel is ready for the season. Second quarter will increase from that number, and then you'll see a fall-off in the third quarter, not a huge fall-off, but still a fall-off, and then a significant fall-off in the fourth quarter as the channel begins to learn what's going to be in the following year. Of course, demand declines in that fourth quarter as well, and they get their inventories ready for the next early buy season that's coming through. It's about, I guess, as normal of a year, as I can say, going back to almost pre-2019 at this point, and clearly since the pandemic, it's been challenging to find a normal year as it relates to percentages of revenue quarter by quarter. But as what we see this year, I think we'll get back to that more normalcy. Okay.

Okay. And then you talked about a strong March and a strong April. How do you kind of internally delineate between like what is just the start of spring and things kind of just typically season, you know, kind of picking up seasonally versus, you know, any sort of kind of underlying kind of demand improvement or, you know, just kind of consumer activity?

January and February, they were weak, without a doubt. We've seen that in other earnings reports as we were going through those two months. We heard from our channel partners what was happening in the marketplace. But we also keep a close eye on marketing metrics. And as soon as that weather started to break in the month of March, we saw those numbers tick up quite quickly. They've continued to go that way. So we're very pleased with what we're seeing from a marketing metric perspective, the engagement that people are having with Trex. I mentioned the new program, the new campaign that we launched on May 1st. It's not just since May 1st. We've been seeing this for a number of months now. So that helps drive the confidence of what we have in the marketplace.

Okay. Awesome. Thanks for the color. We'll see you soon.

Thank you. Your next question comes from Keith Hughes from QRIS.

Please go ahead.

Thank you. A question on SG&A. The guy just gave 16% for the year. Would we see kind of radibly year over year? Looks like you're talking about a little bit of an increase year over year. Would it be radibly or is there one quarter where it could be particularly higher in spending?

So typically we front load the expenses from a marketing and innovation perspective as we're getting prepared. One, we launch all of the new products that we've been talking about. And then secondly, as we get prepared for the decking season. So you will see it more front loaded during the year.

Okay. So it should decelerate from the $55 million that you reported in the first quarter. Is that kind of what you're saying?

That's correct.

Yeah. And I guess a question on give us the shape of the year. As you've kind of laid that out, are you anticipating in the fourth quarter, are you anticipating slattish production year over year as we head into 26?

As we head into right now, I'm anticipating slattish production with where we were in the first quarter, which was similar to where we were in the fourth quarter. of last year, so we've not projected what our production is for next year as of yet. We will go into the end of the year with higher inventories, not necessarily higher than where we were last year, but the inventory strategy will remain for us.

I guess one final point with, you know, we've got, you gave us the shape of the year. If we head into a normal year next year to find out if you want to, normally positive, we'll Will you have done enough work that we will start to see less variation quarter to quarter in the growth rate on revenues?

Yes. Okay. Thank you very much.

Thank you. The next question comes from Susan McLary from Goldman Sachs. Please go ahead.

Thank you. Good afternoon, everyone. Brian, in your remarks, you noted, good afternoon. Good afternoon. You noted the benefits that you're starting to see from some of the expanded relationships with distributors like Boise and some of the others. As you think about the momentum you're seeing in rail and some of the new products, can you talk about how perhaps some of those relationships are helping that come together and how we should think about perhaps some tailwinds as you continue to leverage those new relationships and expand those geographies with them?

I think it's broader than just the new relationships that we have. It is across all of our channels in distribution where our distributors are now fully focused on Trex decking and railing. And you can't underestimate how important it is to have those sales teams out there just focused on one brand rather than multiple brands. We are seeing that benefit. We are seeing those conversions occur from a dealer perspective and then also having discussions from a home center perspective.

Okay, that sounds good. And then, you know, thinking about capital allocation as you're starting to get through the Arkansas rebuild and things are perhaps coming together a bit from an operational perspective, can you talk about your priorities for capital allocation? Any thoughts on shareholder returns or other uses of cash?

Yeah, our priorities haven't changed from where we've been in the past. We continue to look for opportunities in the market from an acquisition perspective. There's not been a lot that we've done around that, but it still is a priority for us from a capital perspective. Of course, our organic growth that we have, we've invested significant amounts in that. So that will decline considerably as we move out to 2026 timeframe. And then finally, our share buyback program. So none of those priorities have changed, but what we will see is significantly more free cash flow coming back to the balance sheet here. Accounts receivable was quite high coming out of the first quarter. Not a surprise when you have an early buy program. That will start turning around in the second quarter and then further turn around in the third quarter of this year. And then, of course, next year we'll see considerably lower capital spending.

Yeah. Okay. Thank you. Good luck with everything.

Thanks.

Thank you. Your next question comes from Colin Barron from Deutsche Bank. Please go ahead.

Great. Thank you for taking my question. I guess I just want to start on the 2Q guide here calling for flattish sales. It sounds like things were tracking pretty well, pretty nicely in March and April. So I guess I was just wondering what the offsets are there that would drive flattish sales versus some of the more positive trends we saw at the end of the first quarter.

Again, just as a reminder, last year we had a really high first half. We had about 65% of our total year sales in that first half of the year, which historically we've been more at like that 56% to 57%. So the comparable is really tough, and that's what's causing that. We're feeling very excited and bullish about the back half of the year, barring any other macroeconomic pressures that we see. But as Brian noted, The statistics that we're seeing with our marketing metrics, the conversations that we're having with our distributors and their backlogs, we're feeling positive and optimistic about the back half of the year here.

Understood. I appreciate the color there. And then I guess just pivoting over to the recycling startup. Great to hear that it's going well. With it starting to contribute positively later this year, just any thoughts on what sort of the cost benefits will look like as we exit the year and look out into 2026?

Rather than specifying those cost benefits, I think it's more important to look at the overall continuous improvement program that we have. Within the first quarter, we did deliver some margin benefit from those continuous improvement programs. Of course, we have continuing benefit from last year and new projects that are coming in at all times. So really, we look at it as an overall program and helps us to be able to ensure that we continue to drive the margins that we have and be as efficient as possible. But we're not going to get into breaking out the specifics of the projects.

All right. Thank you for taking my questions. Thanks.

Thank you. Your next question comes from Michael from JPMorgan. Please go ahead.

Thanks. Good afternoon. Thanks for taking my questions. Wanted to start with the interesting stat that you gave out around the product vitality being more than double a year ago. And would love to get a sense for, you know, perhaps how that's impacting some of the financial metrics either assume new products generally come in at a better gross margin than what they replace or also from a sales contribution standpoint more so in terms of in the marketplace if you feel that it's helping with share gains and perhaps how to think about how this statistic might progress over the next couple of years and if that might have even a further impact on some of the numbers?

The reason we've decided to start discussing that is we've been talking for a while about the investments that we're making in new product development. And you've seen a lot of launches come to the marketplace over the past couple of years. So what we wanted to give our investors an idea of the success of these new launches. So you have the lineage products in the marketplace now. You have new colors coming in. new enhanced colors coming in as well, all of the new railing products that we have. And it was a way for us to be able to indicate the success that we're seeing with those new product development opportunities. We have more that will be coming out later on this year into next year. It's a continuing part of our strategy to make sure that we've got a fresh product portfolio and we're meeting the needs of all of the decking and railing buyers in the marketplace.

Okay. Thank you for that.

I guess secondly, you know, maybe just from a broader market perspective, you know, you highlighted the continued strength of the premium products and now the lower end kind of stabilizing. You know, I'd love to get a sense from a kind of a bigger picture market standpoint, you know, perhaps what's driving that, you know, particularly relative to maybe some of the challenges in the last few quarters around the entry level and how you see the different segments of the market progressing over the next few quarters?

Well, we've seen two quarters in a row now. When we talked to you last in February, we talked about seeing sequential improvements with our entry-level products, and we continue to see that in the first quarter of this year. So while our entry-level buyer tends to be a higher income, average family income, than many other products would consider entry-level. And I think the fact that repair and remodel has been suppressed for a number of years now, there is that pent-up demand that's out there. There are a lot of wood decks that are at or beyond their level for repair and And it is still an efficient way to be able to add square footage, usable, enjoyable space onto your home. And we're seeing more people take advantage of that.

Great. Thanks so much. Thanks.

Thank you. The next question comes from Ketan Mentora from BMO Capital. Please go ahead.

Good afternoon. Thanks for taking my question. Maybe, Brian, to start with, on the railing side, can you talk to sort of, you know, what you guys are seeing out there? Obviously, you know, you launched kind of a full suite of products. Kind of, you know, early signs on how that is going and maybe, you know, if you want to highlight a couple of successes or some challenges that you've seen there.

Yeah. With both our aluminum railing system as well as steel railing system, we do have meaningful conversions there. In different areas of the country steel railing system is not generally sold everywhere it tends to be in the more arid type climates whereas the new select aluminum railing system really will have entire country and up into Canada type Popularity on it. We're seeing improving numbers with our T rail system designed specifically to go after the vinyl railing systems gives the consumer a much higher quality of product than what a vinyl railing is going to provide along the way. And we've seen significant conversions occur during the first quarter where inventory is being built. They are moving on from other competitors at this point so that they can drive both Trex decking and Trex railing at the same time, simplify their inventory strategy, simplify their marketing strategy, and allow their sales team to focus on a more limited number of brands that rather than a lot more that they focused on in the past.

Understood. That's helpful. And then just on the $40 million that you've talked about in the past around that inventory layering in, can you talk about sort of as you move through Q2 and Q3, how that sort of flows through and what's kind of embedded?

Yeah, so we will see that materialize in Q3, most of it in Q3, but But a portion of that is estimated this time in, I'm sorry, most of it in Q2, and then the rest of that materializing in Q3.

And then Q4 is a rebuild. Got it.

So is it fair to say two-thirds, one-third between Q2, Q3? Yes, that's a good number. Perfect. Thank you very much. Yep.

Thank you. Your next question comes from John Lavello from UBS. Please go ahead.

Hi, guys. Thanks for taking my questions. The first one is just on tariffs. I mean, you talked about less than 5% of COGS impacted by tariffs, and you spoke of some mitigation efforts, including building inventory, negotiating with suppliers. I guess the question is, is there any thought of resourcing out of China? And then also, how does the possibility of pricing fit into your mitigation efforts?

Our exposure to China is very, very limited. Just a fraction of a percentage is coming out of China. We've got more that are coming out of some other countries that are also tariff impacted. And so that's where we're looking at potentially moving things around. to achieve more efficient levels of tariffs or even potentially back here to the States. But of course, there's a lot of people that are looking for those type of opportunities at this point. And rather than make any rash moves at this point, we would prefer to wait a little bit, see what the eventual outcomes are going to be. But I'm extremely proud of our supply chain team, the way that they've jumped on it and made sure that the leadership team has had the information that we need to make decisions. and the negotiations that they've been able to already go into and offset some of those costs.

Understood. And then, you know, the comment on the entry-level sort of stabilizing as you move through the quarter, I'm curious what you think is driving that. I would have thought that, you know, that was more reliant upon consumer sentiment, which seems to have, you know, if anything, deteriorated a bit as the quarter went on. So any thoughts on that?

Yeah, tough to say specifically what's in that consumer's mind right now. I do think it is coming back to the fact that repair and remodel has been down for a number of years now. It's very rare that you see below average spending for as many years as we have now. It does end up catching back up, and it does tend to start more so at the high end of the marketplace. And even as I mentioned before, our entry-level customer is still a higher-end customer when we look at the overall economy.

Makes sense. Thank you. Thanks.

Thank you.

Your next question comes from filming from Jeffrey. Please go ahead.

Hey, guys. Congrats on a strong start to the year. I guess for me, the question is really on back half. You're calling for a ramp in top line, but also implicitly your guidance implies that incremental EBITDA margins, call it, in the mid-60s, which would be pretty impressive and noticeably above your 35% to 40% longer-term target. Can you expand on some of the levers that you expect to use to kind of drive margins higher? Anything you could kind of quantify from a continuous improvement standpoint that might be a good guy for margins in the back half?

As Brian noted, we won't get into the specifics of any one continuous improvement program, but to your point, you will start to see some significant improvements in our margin starting really in Q3, and that is a result of many of these continuous improvement programs coming into fruition. But it's also, again, we will have the impact of some of the enhanced changeover costs that were impacting Q1 and Q2, those will go away. And then just better volumes than we had in Q3 compared to Q3 a year ago. And then Q4 will still look better than a year ago as well.

Okay. That's helpful. And then a question for Ryan. This isn't so much about the Azac-James Hardy combination, but it's more broader, certainly from a distribution channel partner dynamic, we're seeing some signs of further consolidation. Call it the next three to five years strategically. Is there any big philosophy changes, perhaps maybe your approach on M&A, or how are you going to approach your go-to-market strategy going forward?

I wouldn't say there's necessarily any change to our M&A strategy, but I think we all recognize that from a distribution perspective, there are national distributors that are out there. And Those that have the full country capability is where they're looking to get along the way. So that's something that we've been cognizant of for quite some time now. And, of course, we keep our ear to the ground very closely, and we're extremely happy with the group of distributors that we work with today.

Are there still any gaps right now, or you're in a really good spot in terms of how you want to be on that front?

We're in a good spot, yeah. Okay. Thank you.

Thank you. The next question comes from Trey Grooms from Stevens. Please go ahead.

Hey, good afternoon. Thanks for taking the question. This is maybe just more for clarity, just to make sure I understand it right or heard it right. So you mentioned in the press release $4 million of impact to gross profit from the railing conversion costs, but You mentioned three things that impacted the quarter, the rail conversion, lower production, and the enhanced production changes there on the enhanced products, that they were about a third, a third, a third. So is that saying that each one of these things were $4 million, or are they all kind of lumped into that $4 million that you described as only railing conversion in the press release, just so I'm clear?

The earlier is 4, 4, 4. Think of it like that.

Got it. Perfect. Okay. But in the – and also for clarity, the – sorry, the adjusted gross profit, that only excludes that $4 million for the railing conversion only, so it doesn't take into account the others?

That is correct.

Okay. Got it. And then on the – So I guess all of those three things will be kind of behind you as you move into the second half. And then there was a $1.5 million charge or impact related to the Arkansas startup. Is that something that's going to recur, or was this more isolated to the rollout of the plastics that you rolled out late in the quarter? Yeah.

I know, great question. So, yeah, the impact that we saw for the Arkansas facility was in SG&A this quarter as we pulled in and trained the new group of employees that started running the production at the very end of the quarter. In Q2, 3, and 4, you will see some production inefficiencies from that startup that will impact COGS.

Recall, if we go back to the end of the year call, we talked about $15 to $20 million of one-time cost within the year. Roughly 15 of that was related to Little Rock as well as railing transition costs, and then the remainder is related to digital transformation costs. That gives you an idea of what the total numbers are for the year again. Okay, great.

Got it. Thanks, Brian. Thanks, Brenda. Thanks.

Thank you. The next question comes from Matthew Foley from Barclays. Please go ahead.

Good evening, everyone. Thanks for taking the questions. Just back on the tariffs again, you know, less than 5% cost of sales impacting that. You know, I know you have negligible China, so, you know, probably limits the total dollar impact, but just You know, you did hold the fiscal year EBITDA margin, guys. I just wanted to, I guess, double check on what that dollar impact may end up being. And, you know, was the expectation that you're kind of mitigating that cost entirely or is it just then end up being kind of too small to move the needle?

Thank you. We have not mitigated that cost entirely. The team's done a great job in working through mitigation actions. There are continued opportunities that we have. We're going to leave it with the guidance less than 5%. And the reason why I think it's important to look at it that way, there's a finished goods impact to this, but then there's an indirect purchasing impact to this, which is going to have a little bit longer of a tail. So the spare parts that we need to buy, the gloves, safety glasses, all of those things that are sourced out of China, and they will continue to move into different countries to try to avoid the 145% tariffs that are there. So that's why I'm not going to provide a number on that right now and hold to the less than 5%. But we are committed to mitigating it, working with our suppliers, and then looking at whatever other actions need to be taken. Okay, got it.

Thank you for that, Brian. And then, yeah, secondly, just on the entry level versus the more premium, just at any Any more color on kind of, you know, how those performed? I know you mentioned several times that entry levels stabilized, but just kind of, you know, how they performed relative to the total. And, you know, as you think about kind of the full year, is the expectation that the entry levels specifically would turn positive, you know, along with the total? Or does that still end up kind of flattish or down, kind of, you know, just double-clicking there on that entry level side? Thank you.

As we saw at the end of last year going into the new year, we were seeing improvement at that entry level, but we continued to see very strong sales with the premium products that are out there. So that's continuing in the marketplace, and we continue to see sequential improvement with those entry-level products.

Okay. Thanks, guys. Good luck. Thanks.

Thank you.

The next question comes from Anthony from City Group. Please go ahead.

Good afternoon. Just following up on Arkansas on the CapEx side, is there any finer point you can put on the quarterly cadence of capital spending there and when that spending is essentially done, you know, whether that's 1Q26 or a bit earlier or a bit later? Just trying to understand when that free cash flow step up could occur.

So again, as a reminder, yeah, the CAPEX spend, total CAPEX spend is estimated at $550 million. This year's total CAPEX spend is about $200 million. The majority of that will be the Arkansas facility. So you should expect that we will have the vast majority of that $550 spent by the end of this year. So 2026, you will start and should expect to see strong cash flow from improvements going 2026 and beyond.

Got it. Got it. And then you mentioned the investments in digital transformation. I think you announced the new SVP of marketing last month with digital experience and you brought on a CIO late last year. Can you just talk about the digital transformation efforts, kind of what inning you're in and what kind of benefits you're looking to drive?

Yeah, sure. So the company is making remarkable progress in advancing its digital transformation, and I'd say it's in three key areas of focus. One, optimizing our end-to-end business processes through increased automation and deeper ERP utilization. Second, we are making progress to harness the power of data by evolving our enterprise data platform to provide real-time, accurate insights That'll be valuable not only to Trex's internal employees and making more timely, informed decisions, but also it's data that we can use with our consumers and our customers. And then thirdly, we are fostering a culture of innovation by identifying and removing friction in every step in the customer journey. So this is, again, really aimed at enhancing overall customer experience.

Okay, that's very helpful. I'll turn it over. Thanks.

Thank you. And next question comes from Adam Baumgarten from Shellman and Associates. Please go ahead.

Hey, guys, just one for me. Just on the balance of the year, are you assuming, given the guidance and kind of what you saw in the first quarter, that sell-through remains at that mid-to-high single-digit rate over the balance of the year?

Well, that's the full-year guidance that we've provided in the 5% to 7%, so less worried about exactly how it works by quarter. The real volume quarters are Q2 and Q3, so that's really when it counts that you see that sell-through occur.

Okay, thanks. Thank you.

Thank you.

There are no further questions at this time. I'll now hand back to Brian Fairbanks for closing remarks.

Thank you for participating in our call this evening and we look forward to meeting with many of you in the coming weeks. Good evening.

And that does conclude our conference for today. Thank you for participating. You may now disconnect.