Trex Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2025

Key Takeaways

  • Q1 net sales of $340 million declined 9% YoY but beat expectations on continued strong demand for premium products.
  • Gross margin contracted to 40.5% from 45.4%, driven by railing conversion costs, production leveling and enhanced decking changeover expenses despite ongoing continuous improvement efforts.
  • New products launched in the past 36 months now represent 22% of trailing 12-month sales—more than double last year’s level—and are helping drive market share gains in both pro and home center channels.
  • The Arkansas campus achieved a milestone by producing its first recycled plastic pellets, which will offset external pellet purchases and enhance overall manufacturing efficiency when fully online.
  • Management maintained its full-year 2025 guidance of 5–7% net sales growth and adjusted EBITDA margin above 31%, backed by strong order momentum and stabilized channel inventories.
AI Generated. May Contain Errors.
Earnings Conference Call
Trex Q1 2025
00:00 / 00:00

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Operator

note this event is being recorded.

Operator

I would now like to turn the conference over to Casey Cotary. Please go ahead.

Casey Kotary
Investor Relations Representative at AdvisIRy Partners

Thank you, everyone, for joining us today. With us on the call are Brian Fairbanks, President and Chief Executive Officer and Brenda Lovechick, 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 first quarter of twenty twenty five. This release is available on the company's website.

Casey Kotary
Investor Relations Representative at AdvisIRy Partners

This conference call is also being webcast and will be available on the Investor Relations page of the company's website for thirty days. I will now turn the call over to Amy Fernandez. Amy?

Amy Fernandez
Amy Fernandez
SVP, Chief Legal Officer, Secretary and Chief Sustainability Officer at Trex

Thank you, Casey. Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward looking statements within the meaning of federal securities laws.

Amy Fernandez
Amy Fernandez
SVP, Chief Legal Officer, Secretary and Chief Sustainability Officer at Trex

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 ks 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 release 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.

Amy Fernandez
Amy Fernandez
SVP, Chief Legal Officer, Secretary and Chief Sustainability Officer at Trex

With that introduction, I will turn the call over to Brian Fairbanks.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Thank you, Amy, and thank you all for joining us to review our first quarter twenty twenty five 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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

First, new products launched within the last thirty six months accounted for approximately 22% of our trailing twelve 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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Third, we officially launched our Performance Engineered for Your Life Outdoors campaign on May 1, 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 2,000,000 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 Sun Comfortable technology, which is a key differentiator for Trex in the marketplace. Originally developed for our Transcend Lineage product line, Sun Comfortable 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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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 quoting 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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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 benefit. We will continue to expand our product offerings and work closely with our channel partners to innovate and strengthen relationships that bring Trex products to the customer. Progress has continued on our new state of the art manufacturing campus that we're building in Arkansas.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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 is an increasing level of pent up demand in the repair and remodel market. Saunda Home Economics projects that R and R spending has been below the long term average of $1.26 per square foot of home space since the end of twenty twenty one, and it reached its low point in 2024 at a projected $1 per square foot.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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 50,000,000 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 and 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 Lemczyk, for a financial review of the first quarter. Brenda?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

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 thirty six months, Trex has undergone a period of significant product innovation, with new products accounting for approximately 22% of trailing twelve 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.

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

Notably, this launch includes the industry's first mid priced decking board with our integrated, sun comfortable, heat mitigating technology. Additionally, we have improved our entry level Trex 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 Trek's long term growth strategy. We are seeing benefits from the new and expanded distributor partnerships announced last year with Boise, International Wood Products, Nably Forest Products, Specialty Building Products, and Weyerhaeuser.

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

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.

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

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 multiyear initiative come to life and begin contributing positively later this year. I would now like to review our first quarter twenty twenty five results. Please note that unless otherwise stated, all comparisons discussed are on a year over year basis compared to the first quarter of twenty twenty four. In Q1, we incurred several expenses tied to strategic initiatives, including start up 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.

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

I will provide adjusted results reflecting these items while discussing financial performance. A reconciliation of these adjustments can be found in our press release on trex.com. In the first quarter, net sales were $340,000,000 a decrease of 9% compared to $374,000,000 but better than expected due to the continued demand for our premium products. As a reminder, last year's net sales included a $40,000,000 benefit from a channel inventory build ahead of the decking and railing season that did not repeat this year. We ended the quarter with channel inventories in line with where we expected as we head into the busy season.

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

Gross profit was $138,000,000 and gross margin was 40.5% compared to gross profit of $170,000,000 and gross margin of 45.4%, down 32,000,000 or four ninety basis points. The decrease was 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 $4,000,000 was $142,000,000 Selling, general and administrative expenses were $56,000,000 or 16.5% of net sales, compared to $51,000,000 or 13.5% of net sales.

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

The increase was due to additional investments in branding and new product innovation, which continued to deliver strong results. Excluding expenses related to the start up of Arkansas facility and digital transformation activities, SG and A expenses were $55,000,000 or 16% of net sales. Net income was $60,000,000 or $0.56 per diluted share, a decrease of 32% from $89,000,000 or $0.82 per diluted share. Excluding the aforementioned expenses, adjusted net income was $64,000,000 or $0.60 per diluted share. Adjusted EBITDA was $101,000,000 down 24% compared to 133,000,000 As noted in today's earnings release, given our strong start to the year, we are maintaining our full year 2025 guidance.

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

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 occurred 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 and 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%, adjusted EBITDA margin to exceed 31%, SG and A expenses to be approximately 16% of net sales, interest expense less than $2,000,000 and depreciation in the range of 55,000,000 to $58,000,000 We are projecting an effective tax rate of approximately 25% to 26%. Capital expenditures are projected to be approximately $200,000,000 for the full year as we continue the development of the Arkansas campus. We expect Q2 sales in the range of $370,000,000 to $380,000,000 and Q2 margins to be in line with Q1. With that, I will now turn the call back to Brian for his closing remarks.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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 a market leader has not changed with the announcement of James Hardie's acquisition of AZEK.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

This confidence is based on our tremendous brand equity, our differentiated channel positioning that maximizes the visibility and availability of Trex branded product. 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.

Operator

Thank you. We will now begin the question and answer session. Session. 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.

Ryan Merkel
Co-Group Head–Industrials at William Blair & Company, L.L.C

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?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Yes. 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. '1 of the outcomes of that change is that it is a stronger deck board. 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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

We felt it was time in our 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.

Ryan Merkel
Co-Group Head–Industrials at William Blair & Company, L.L.C

Got it. Okay. And then margin question, you mentioned 2Q margins approximating 1Q. Were you talking about gross margins or EBITDA margins?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

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 enhancements will be running through in Q2.

Ryan Merkel
Co-Group Head–Industrials at William Blair & Company, L.L.C

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

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

Yes. So if you look at it, we highlight, right, three things that are impacting gross margin. One is the dealer or the railing conversion costs. Two is the level loading, so volumes production volumes. And then third was the enhanced changeover.

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

What I'd say is roughly a third, a third, and a third.

Ryan Merkel
Co-Group Head–Industrials at William Blair & Company, L.L.C

Got it. All right. Thanks so much. Pass it on.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Thanks, Ryan.

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

Thank you.

Operator

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

Rafe Jadrosich
Rafe Jadrosich
Managing Director & Senior Equity Analyst at Bank of America

Hi, good afternoon. Thanks for taking my question. I might have missed it, but Brian, did you say 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 and R assumption?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

Yes. Thank you, Rafe. Yes, 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 5% to 7%. 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.

Rafe Jadrosich
Rafe Jadrosich
Managing Director & Senior Equity Analyst at Bank of America

Okay. And then just following into 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 put temporary and what we should expect that to sort of reverse in the second half of the year?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

Exactly. Those are temporary and will be reversing in the second half, correct.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Yes. 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.

Operator

Thank you. The next question comes from Tim Wojs from Baird. Please go ahead.

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

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?

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

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 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?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Yes. 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 falloff in the third quarter, not a huge falloff, but still a falloff, and then a significant falloff in the fourth quarter as the channel begins to learn what's going to be in the following year. Of course, declines in that fourth quarter as well and they get their inventories ready for the next early buy season that's coming through.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

It's about, I guess, normal of a year as I can say going back to almost pre-twenty nineteen 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.

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

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 kind of picking up seasonally versus any sort of kind of underlying kind of demand improvement or just kind of consumer activity?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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 good 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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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 1. It's not just since May 1. We've been seeing this for a number of months now.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

So that helps drive the confidence of what we have in the marketplace.

Timothy Wojs
Senior Research Analyst at Robert W. Baird & Co

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

Operator

Thank you. Your next question comes from Keith Hughes from Chelope. Please go ahead.

Keith Hughes
Keith Hughes
Managing Director at Truist Securities

Thank you. A question on SG and A. The guidance you gave 16% for the year. Would we see kind of ratably year over year? It looks like you're talking about a little bit of an increase year over year.

Keith Hughes
Keith Hughes
Managing Director at Truist Securities

Would it be ratably? Or is there one quarter where it could be particularly higher spending?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

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.

Keith Hughes
Keith Hughes
Managing Director at Truist Securities

Okay, so it should decelerate from the $55,000,000 that you reported in the first quarter. Is that kind of what you're saying?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

That's correct.

Keith Hughes
Keith Hughes
Managing Director at Truist Securities

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 say the fourth quarter, are you anticipating flattish production year over year as we head into 2026?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

As we head into right now, I'm anticipating flattish 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.

Keith Hughes
Keith Hughes
Managing Director at Truist Securities

And I guess one final point with, you 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, 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.

Operator

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

Susan Maklari
Susan Maklari
Senior Equity Research Analyst at Goldman Sachs

Thank you. Good afternoon, everyone. Brian, in your remarks, noted good afternoon. You noted the benefits that you're starting to see from some of the the the new or the extended 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?

Susan Maklari
Susan Maklari
Senior Equity Research Analyst at Goldman Sachs

And how we should think about perhaps some tailwinds as you continue to leverage those new relationships and expand those geographies with them?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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 of 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.

Susan Maklari
Susan Maklari
Senior Equity Research Analyst at Goldman Sachs

Okay. That sounds good. And then 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?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Yes. 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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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 turnaround in the third quarter of this year. And then of course, next year, we'll see considerably lower capital spending.

Susan Maklari
Susan Maklari
Senior Equity Research Analyst at Goldman Sachs

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

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Thanks.

Operator

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

Collin Verron
Collin Verron
Director at Deutsche Bank

Great. Thank you for taking my questions. I guess I just wanted to start on the 2Q guide here calling for flattish sales. It sounds like things are 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?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

Again, just as a reminder, last year we had a really high first half. So, 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.

Collin Verron
Collin Verron
Director at Deutsche Bank

Understood. I appreciate the color there. And then I guess just pivoting over to the recycling start up, 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?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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.

Collin Verron
Collin Verron
Director at Deutsche Bank

All right. Thank you for taking my questions.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Thanks.

Operator

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

Michael Rehaut
Michael Rehaut
Executive Director at JP Morgan

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 perhaps how that's impacting some of the financial metrics either I'd 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?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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.

Michael Rehaut
Michael Rehaut
Executive Director at JP Morgan

Okay. Thank you for that. I guess secondly, maybe just from a broader market perspective, highlighted the continued strength of the premium products and now the lower end kind of stabilizing. I'd love to get a sense from a kind of a bigger picture market standpoint, perhaps what's driving that 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?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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.

Michael Rehaut
Michael Rehaut
Executive Director at JP Morgan

Great. Thanks so much.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Thanks.

Operator

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

Ketan Mamtora
Ketan Mamtora
Director - Building Products Equity Research at BMO Capital Markets

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 you have launched kind of a full suite of products, Kind of early signs on how that is going and maybe if you want to highlight a couple of successes or some challenges that you've seen there?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Yes. With both our aluminum railing system as well as steel railing system, we do have meaningful conversions 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 product than what a vinyl railing is going to provide along the way.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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 rather than a lot more that they focused on in the past.

Ketan Mamtora
Ketan Mamtora
Director - Building Products Equity Research at BMO Capital Markets

Understood. That's helpful. And then just on the $40,000,000 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?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

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

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Q4 is a rebuild again.

Ketan Mamtora
Ketan Mamtora
Director - Building Products Equity Research at BMO Capital Markets

Got it. So, is it fair to say two thirds, one third between Q2, Q3?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

Yes, that's a good number.

Ketan Mamtora
Ketan Mamtora
Director - Building Products Equity Research at BMO Capital Markets

Perfect. Thank you very much.

Operator

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

John Lovallo
John Lovallo
Senior US Homebuilding & Building Products Equity Research Analyst at UBS Group

Hi, guys. Thanks for taking my questions. The first one is just on tariffs. I mean, 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?

John Lovallo
John Lovallo
Senior US Homebuilding & Building Products Equity Research Analyst at UBS Group

And then also how does the possibility of pricing fit into your mitigation efforts?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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, way that they've jumped on it, 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.

John Lovallo
John Lovallo
Senior US Homebuilding & Building Products Equity Research Analyst at UBS Group

Understood. And then 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, that was more reliant upon consumer sentiment, which seems to have, if anything, deteriorated a bit as the quarter went on. So any thoughts on that?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Yes. 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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

And it does tend to start more so with the high end of the marketplace. And even as I mentioned before, our entry level customer is still a higher end customer when we look at the overall economy.

John Lovallo
John Lovallo
Senior US Homebuilding & Building Products Equity Research Analyst at UBS Group

Makes sense. Thank you.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Thanks.

Operator

Thank you. Your next question comes from Phil Ng from Jefferies. Please go ahead.

Philip Ng
Philip Ng
Managing Director at Jefferies Financial Group

Hey guys. Congrats on a strong start to the year. I guess for me, the question is really on back half, you're calling for a ramp in top line, but also implicitly your guidance implies incremental EBITDA margins, call it, in the mid-60s, which would be pretty impressive and noticeably above your 3540% longer term target. Can you expand on some of the levers that you expect to use to kind of drive margins higher? Any that you could kind of quantify from a continuous improvement standpoint that might be a good guide for margin in the back half?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

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.

Philip Ng
Philip Ng
Managing Director at Jefferies Financial Group

Okay. That's helpful. And then a question for Ryan. This isn't so much about the exact James Hardie combination, but it's more broader. Certainly from a distribution channel partner dynamic, we're seeing some signs of further consolidation.

Philip Ng
Philip Ng
Managing Director at Jefferies Financial Group

Call it the next three to five years strategically, is there any big philosophy changes perhaps maybe your approach on M and A? Or how are you going to approach your go to market strategy going forward?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

I wouldn't say there's necessarily any change to our M and 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.

Philip Ng
Philip Ng
Managing Director at Jefferies Financial Group

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?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

We're in a good spot, yes.

Philip Ng
Philip Ng
Managing Director at Jefferies Financial Group

Okay. Thank you.

Operator

Thank you. Your next question comes from Trey Grooms from Stephens. Please go ahead.

Trey Grooms
Managing Director at Stephens Inc

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 $4,000,000 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 up about a third, a third, a third. So that saying that each one of these things were $4,000,000 or are they all kind of lumped into that 4,000,000 that you described as only railing conversion in the press release, just so I'm clear?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

The earlier is $4.44. Think of it like that.

Trey Grooms
Managing Director at Stephens Inc

Got it. Perfect. Okay. In the, and also for clarity, the adjusted gross profit, that only excludes that $4,000,000 for the railing conversion only, so it doesn't take into account the others?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

That is correct.

Trey Grooms
Managing Director at Stephens Inc

Okay, got it. And then, 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 1,500,000.0 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?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

Great question. So, yeah, the impact that we saw for the Arkansas facility was in SG and 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, Q3 and Q4, you will see some production inefficiencies from that startup that will impact COGS.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Recall, if we go back to the end of the year call, we talked about 15,000,000 to $20,000,000 of one time cost within the year. Roughly 15,000,000 of that was related to Little Rock as well as railing transition costs. And then the remainder is related to digital transformation That gives you an idea of what the total numbers are for the year again.

Trey Grooms
Managing Director at Stephens Inc

Okay, great. Got it. Thanks, Brian. Thanks, Brenda.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Thanks.

Operator

Thank you. Your next question comes from Matthew Bouley from Barclays. Please go ahead.

Matthew Bouley
Matthew Bouley
Senior Equity Research Analyst at Barclays

Good evening, everyone. Thanks for taking the questions. Just back on the tariffs again, less than 5% cost of sales impacting that. I know you have negligible China, so probably limits the total dollar impact, but just you did hold the fiscal year EBITDA margin guide. So I just wanted to, I guess, double check on what that dollar impact may end up being and 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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

We have not mitigated that cost entirely. The team has 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 five percent. 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.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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 and working with our suppliers and then looking at whatever other actions need to be taken.

Matthew Bouley
Matthew Bouley
Senior Equity Research Analyst at Barclays

Okay. Got it. Thanks for that, Brian. And then secondly, just on the entry level versus the more premium. Just any more color on kind of how those performed?

Matthew Bouley
Matthew Bouley
Senior Equity Research Analyst at Barclays

I know you mentioned several times that entry level stabilized, but just kind of how they performed relative to the total. And as you think about kind of the full year, is the expectation that the entry level specifically would turn positive along with the total? Or does that still end up kind of flattish or down kind of just double clicking there on that entry level side? Thank you.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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.

Matthew Bouley
Matthew Bouley
Senior Equity Research Analyst at Barclays

Okay. Thanks guys. Good luck.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Thanks.

Operator

Thank you. Your next question comes from Anthony Pettinari from Citigroup. Please go ahead.

Anthony Pettinari
Anthony Pettinari
Analyst at Citigroup

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, whether that's 1Q twenty twenty six or a bit earlier or a bit later? Just trying to understand when that free cash flow step up could occur.

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

So again, as a reminder, yes, the CapEx spend total CapEx spend is estimated at $550,000,000 This year's total CapEx spend is about $200,000,000 The majority of that will be the Arkansas facility. So you should expect that we will have the vast majority of that $550,000,000 spent by the end of this year. So 2026, you will start and should expect to see strong cash flow improvements 2026 and beyond.

Anthony Pettinari
Anthony Pettinari
Analyst at Citigroup

Got it.

Anthony Pettinari
Anthony Pettinari
Analyst at Citigroup

Got it. And then you mentioned the investments in digital transformation. I think you announced a new SVP of Marketing last month with digital experience, and you brought on a CIO 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?

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

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 in making more timely, informed decisions, but also its 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.

Brenda Lovcik
Brenda Lovcik
Senior VP & CFO at Trex

So this is, again, really aimed at enhancing overall customer experience.

Anthony Pettinari
Anthony Pettinari
Analyst at Citigroup

Okay. That's very helpful. I'll turn it over.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Thanks.

Operator

Thank you. The next question comes from Adam Baumgarten from Zelman and Associates. Please go ahead.

Adam Baumgarten
Managing Director at Zelman & Associates

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?

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

That's the full year guidance that we provided, 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.

Adam Baumgarten
Managing Director at Zelman & Associates

Okay. Thanks.

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

Thank you.

Operator

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

Bryan Fairbanks
Bryan Fairbanks
President & CEO at Trex

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.

Operator

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

Executives
    • Amy Fernandez
      Amy Fernandez
      SVP, Chief Legal Officer, Secretary and Chief Sustainability Officer
    • Bryan Fairbanks
      Bryan Fairbanks
      President & CEO
    • Brenda Lovcik
      Brenda Lovcik
      Senior VP & CFO
Analysts
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