Trex Company, Inc. (NYSE:TREX) Q4 2022 Earnings Call Transcript

Dennis Schemm: Yes. I think if I would just go and compare 2021 €“ or sorry, 2022 to 2023, right. Largest decrement to the EBITDA margin side will be the step-up in the SG&A that we did, right. So, we talked about that last year where we are stepping up in branding and R&D and the like. So, that was definitely part of it. I think another part that’s important to think through, too, right, is we are not utilizing all of our capacity today. And so maybe in round numbers here for every $100 million in net sales that we would be producing for I would be expecting to see about 100 basis points to 150 basis points of gross margin improvement as well. So, these are some opportunities for us to really inflect EBITDA margins higher going forward.

Kurt Yinger: Got it. And I guess that 100 basis points to 150 basis points of gross margin, is that just all volume leverage or?

Dennis Schemm: Pretty much that would be mainly volume leverage.

Kurt Yinger: Got it. Okay. And then in the release, you talked about focusing on driving accelerated wood conversion. Just curious how that element kind of factors in to your 2023 outlook or kind of the framework you are using for market demand? And what factors you think are working for or against you in the current market?

Bryan Fairbanks: Yes. So, in today’s marketplace, wood has receded back to normalized pricing. Our basics product sells for 2x the price of wood. All of the market research we did about converting that wood customer to the Trex composite customer started with that 2x price level and then being able to up-market that consumer to the Naturals product line, which has been highly successful over the past few years. And with Decks.com, we will continue to pursue that strategy.

Kurt Yinger: Got it. Alright. Thanks a lot Bryan and good luck here in 2023 guy.

Operator: The next question is from Matthew Bouley with Barclays. Please go ahead.

Matthew Bouley: Hey. Good evening everyone. Thanks for taking the questions. Just one on the divestiture of commercial, so what does that do from the perspective of management’s focus? And how should we think about Trex kind of looking at any targeted M&A within residential decking or other residential adjacencies?

Bryan Fairbanks: Well, as I have mentioned in my comments, it does allow the organization to specifically focus on the residential segment, which by far has the largest shareholder returns and opportunity moving forward. So, it’s one less distraction that’s out there for the organization.

Matthew Bouley: Got it. That’s helpful. Thank you for that. And then just second one, back on the topic of sell-through. If we take 2022, you had the $200 million of destocking at the end of the year and the $100 million of channel and fill at the beginning of the year. So, you sort of had that net $100 million of destock. So, is it fair to say that your 2022 kind of sell-through was actually $100 million higher, right? And then so when you talk about the $1 billion in 2023, you are actually thinking of more like a 10% decline in sell-through. Am I overcomplicating it? Is there an assumption of price in there? Just any additional color on that.

Dennis Schemm: In 2022 versus 2021, if you are just looking at that net sales line then yes, it would appear that we are about 10% higher from a net sales out. But if you look at it on more of a volume basis linear feet basis, I would tell you, sell-through equal to sell-out. And so our main philosophy into 2023 is in how we are building our plan is really sell-in is equal to sell-out. There is not going to be €“ we are not factoring in any sort of inventory build in the channel.

Matthew Bouley: Understood. So, $1 billion is effectively your view of sellout in €˜23. Okay. Thanks Dennis. Thanks Bryan.