Trex Company, Inc. (NYSE:TREX) Q4 2024 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

Despite positive full-year growth metrics and optimistic guidance for 2024, the Q4 results showed a decline in key financial figures such as gross margin and net income, causing concern. The Q&A revealed management's reluctance to provide specific growth details, which could be seen as a red flag. However, the reaffirmed guidance and strategic plans for expansion and stock repurchases balance out these concerns, suggesting a neutral sentiment for stock movement.

Key Financial Performance

Net Sales (Q4 2024) $168 million, a decrease of 14% from $196 million in Q4 2023, primarily due to a decrease in channel inventory by approximately $45 million.

Gross Margin (Q4 2024) 32.7%, down 340 basis points from 36.1% in Q4 2023, primarily due to lower utilization, partially offset by continuous improvement initiatives.

Net Income (Q4 2024) $10 million or $0.09 per diluted share, a decrease of 58% from $22 million or $0.20 per diluted share in Q4 2023.

EBITDA (Q4 2024) $29 million or 17% of net sales, down from $41 million or 21% of net sales in Q4 2023.

Net Sales (Full-Year 2024) $1.2 billion, a 5% increase compared to $1.1 billion in 2023, primarily due to the shift of the Early Buy program and strong demand for premium products.

Net Income (Full-Year 2024) $226 million or $2.09 per diluted share, a 10% increase from $205 million or $1.89 per diluted share in 2023.

EBITDA (Full-Year 2024) $360 million, up 10% from $326 million in 2023, with EBITDA margin expanding by 150 basis points to 31.3% from 29.8%, primarily due to cost-out programs and improved utilization.

Operating Cash Flow (Full-Year 2024) $144 million, a decrease from $389 million in 2023, primarily due to increased inventories.

Capital Expenditures (Full-Year 2024) $232 million, primarily for the build-out of the Little Rock, Arkansas facility.

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Operating Highlights

New Product Development: Products launched within the last 36 months accounted for approximately 20% of full-year revenues. New products introduced in 2024 and slated for 2025 will support future sales growth.

Transcend Lineage: The premium decking line continued to drive strong consumer demand, featuring heat mitigating technology branded as SunComfortable.

Next Generation Trex Select Decking: Introduced with three new colors and SunComfortable technology, available in Q2 2025.

Railing Growth Strategy: Accelerated new product introductions in railing systems, aiming to double market share in the $3.3 billion railing market from 6% to 12% over five years.

Distribution Partnerships: Strengthened relationships with distributors like Snavely Forest Products and Boise Cascade, expanding Trex's market share in key U.S. geographies.

Canadian Market Expansion: Expanded distribution network in Canada with Alexandria Moulding to reach more retailers and contractors.

Home Depot Shelf Space: Gained additional shelf space at Home Depot, enhancing market availability.

Production Efficiencies: Continuous cost-out programs yielded positive operating leverage and production efficiencies.

Arkansas Campus: New recycled plastic processing operation scheduled to go online in Q1 2025, expected to be the most efficient production site.

Channel Inventory Strategy: Revised strategy to reduce quarterly volatility and minimize production fluctuations.

Branding Investments: Continued investments in branding and marketing to strengthen consumer recognition and appeal.

Market Positioning: Positioned for growth in 2025 with expectations for strong sell-through of premium products and double-digit growth in railing sales.

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Risk or Challenges

Regulatory Issues: The company mentions potential risks associated with regulatory compliance, particularly in relation to environmental standards and product safety, which could impact operations and costs.

Supply Chain Challenges: There are concerns regarding supply chain disruptions, particularly in sourcing recycled materials, which are critical for production efficiency and cost management.

Economic Factors: The company anticipates a flat repair and remodel market in 2025 compared to 2024, which could affect sales growth and overall market performance.

Competitive Pressures: Trex faces competitive pressures from other decking brands, which could impact market share and pricing strategies, especially in the premium product segment.

Capital Expenditure Risks: The ongoing capital expenditures for the Arkansas facility, estimated at $550 million, pose financial risks if the expected efficiencies and production targets are not met.

Inventory Management: The revised channel inventory strategy aims to minimize production fluctuations, but any misalignment could lead to revenue volatility and impact gross margins.

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Guidance & Outlook

New Product Development: Trex continues to prioritize new product development and market launches, with products launched in the last 36 months accounting for approximately 20% of full-year revenues. A record number of new products are slated for 2025.

Railing Market Share: Trex aims to double its market share of the $3.3 billion railing market from 6% to 12% over the next five years.

Arkansas Campus Investment: Trex is on track with investments in the new Arkansas campus, which will be the most efficient production site and is expected to generate substantial free cash flow starting in 2026.

Branding and Marketing: Significant investments in branding and marketing programs are aimed at enhancing consumer recognition and driving sales.

2025 Net Sales Guidance: Expected net sales for 2025 are projected to be between $1.21 billion to $1.23 billion, representing a year-over-year growth of 5% to 7%.

Adjusted EBITDA Margin: Expected to exceed 31% in 2025, consistent with 2024's record year, excluding one-time startup and restructuring costs.

Capital Expenditures: Projected capital expenditures for 2025 are approximately $200 million, primarily for the Arkansas facility.

First Quarter 2025 Revenue Guidance: Guiding first quarter 2025 revenues to be between $325 million to $330 million, with approximately $40 million shifting out of the first quarter into the remainder of the year.

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Shareholder Return Plan

Share Repurchase: Trex returned over $100 million to shareholders in 2024 through the repurchase of 1.6 million shares of outstanding common stock.

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Key Q&A

Q:Can you just talk about some of the changes that have happened? Do you anticipate any more going forward and maybe like how it positions you going forward?

A:I expect that you will see a much calmer environment in 2025. A lot of those distribution changes were related to the decking and railing alignment strategy as well as ensuring that we had the right number of distributors and appropriate coverage across the country.

Q:Can you just talk about what that commitment means? Just trying to get an understanding on how much visibility that gives you onto the growth going forward?

A:There’s three stages of that commitment. The first stage is making sure that you can get that product to the marketplace effectively and that relies upon the distributors. The second piece is making sure that we can get that into the pro-channel dealer as well as retail centers. Finally, it’s going to be that end consumer.

Q:How much of the revenue growth guidance would come from decking, and how much from railing?

A:We’re not going to split out necessarily the exact difference. I did say we expected double-digit growth on the railing side of the business.

Q:Are you projecting your production to whatever percentage of that’s railing, are you assuming to produce at that level of railing during the year?

A:Yes, we do expect that we will be able expanding our railing manufacturing.

Q:The inventory level you ended the year at, is that about what we should see you end at at the end of ‘25?

A:Yes. We feel pretty good about that inventory level.

Q:Can you talk about what gives you the confidence in demand, especially given the macro environment?

A:We saw a high single-digit overall increase in the fourth quarter, which was an acceleration from the third quarter.

Q:Can you talk about some of the puts and takes that you are expecting this year, especially as it relates to the gross margin?

A:The gross margin will appear to be flat off of a very high-growth margin that we ended 2024 of.

Q:Can you just talk about why 2Q sales are expected to be flat year-over-year?

A:The $40 million will shift into the rest of the year. The majority of it’s going to be into Q2 and Q3.

Q:Is the EBITDA margin cadence more second-half loaded or level loaded?

A:It is more back-half loaded.

Q:Is the 5% to 7% growth relative to the R&R market purely sell-through, or are there pricing impacts?

A:We took just a little bit of pricing going into the year. Less than 1% of that will flow through.

Q:Can you talk about the margin profile between railing and decking?

A:There is going to be a pretty wide range of margin on the railing programs that we have.

Q:What are the historical attachment rates for railing?

A:It varies by the region. On an overall basis, probably around 20%.

Q:Can you give more color around the potential impact of tariffs?

A:Trex has a very low amount that’s sourced from the overseas market.

Q:Can you quantify the growth you’re expecting for more premium products versus entry-level?

A:We’re not going to bifurcate the growth levels of the different parts of our businesses.

Q:Can you talk about the pushback you hear from contractors regarding increasing the attach rate?

A:Trex, if you had these products, we would be putting your products on these decks.

Q:Can you talk about the railing transition costs?

A:The primary piece of that is going to be first is the merchandising cost.

Q:Can you talk about which regions you see as most attractive from a demand or pricing position?

A:The designs that we’ve launched are areas that we were not participating in that primarily appeal.

Q:How should we think about your appetite for repurchases as we move through 2025?

A:We continue to have a program available to us roughly 10% of the float of the company.

Q:How much of the railing growth expected for 2025 is wallet share gains versus new partners?

A:We do expect to see double-digit type growth for those railing product lines.

Q:What will the maintenance CapEx level be as you get past this year?

A:It will be roughly 5% to 6% of revenue.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the exact revenue split between decking and railing, the exact growth levels of different parts of the business, and the specific impact of the $40 million shift on 2Q sales.

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