Trex Company, Inc. (NYSE:TREX) Q4 2023 Earnings Call Transcript
Trex Company, Inc. (NYSE:TREX) Q4 2023 Earnings Call Transcript February 26, 2024
Trex Company, Inc. beats earnings expectations. Reported EPS is $0.2, expectations were $0.19. Trex Company, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the Trex Company Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Casey Kotary. Please go ahead.
Casey Kotary: Thank you, everyone, for joining us today. With us on the call are Bryan Fairbanks, President and Chief Executive Officer; and Brenda Lovcik, Senior Vice President and Chief Financial Officer. Joining Bryan 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 fourth quarter and full year 2023. 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?
Amy Fernandez: 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 Bryan Fairbanks.
Bryan Fairbanks: Thank you, Amy. Good evening and thank you for joining us to discuss our fourth quarter and full year 2023 results along with our outlook for 2024. The fourth quarter capped a year of solid performance, with revenues coming in slightly above our guidance range. I want to thank our channel partners and the dedicated team members at the Trex Company for making these achievements possible. Channel sell-through growth was in the mid-single digits, in line with the levels we experienced in the second and third quarters, and representative of the power of the Trex product portfolio. The resilience of the Trex brand was demonstrated throughout 2023, and our return to market-leading profitability represents a solid baseline from which to achieve our long term targets.
In Q4, we unveiled a robust selection of new product offerings that expanded our portfolio within existing categories and extended our range into complementary category adjacencies. These introductions contributed to both fourth quarter and year end results and will be key contributors to our long term strategic growth. The newest additions to our decking portfolio, Trex Transcend Lineage and Trex Signature appeal to the premium customer segment, seeking the realistic aesthetics of wood with the low maintenance and ecofriendly benefits of composites. Lineage decking, offering a refined finish in fresh colors coupled with proprietary heat mitigation technology, quickly gained traction in both the pro channel and within the special order category with our home center partners.
Trex's premium Signature decking replicates the look of the finest tropical wood and is sold at a premium price commensurate with its groundbreaking aesthetics and performance characteristics. Following successful regional introductions in 2023, Signature launches nationally in 2024. On the railing side of the business, we launched several additions to our portfolio to drive our objective of significantly increasing our railing attachment rate by offering railing choices at every price point, replicating the success of our tiered decking program. Trex Select T-Rail, our high performance, value priced railing system, competes favorably with popular vinyl railings and opens a new $300 million total addressable market to the company. The new Signature X-series cable rail and X-series frameless glass rail add two modern, streamlined specialty options to our premium railing line and will be available in the spring of this year.
Additionally, we launched our own Trex branded fastener collection, which includes a range of solutions for every composite deck fastening need from color match screws and plugs, specifically engineered bits, depth setters and clips, all designed to deliver a clean, cohesive aesthetic while making installation easier and more efficient for contractors and DIY installers alike. This new product offering will also be available in the spring of this year. These products and other future launches will provide our channel partners a competitive advantage by delivering end-to-end solutions from one supplier for a seamless deck building experience. In addition to investments in new product development, 2023 was a year of increased spending on branding and other sales and marketing programs, which helped drive outperformance against the larger repair and remodel segment.
Notably, our forward-looking demand metrics such as web traffic and sample sales posted strong year-on-year gains and throughout 2023, we worked closely with our industry leading channel partners to efficiently allocate marketing spend and optimize inventory levels with lead times to ensure that together we service growing consumer demand. Our intense focus on product development and ensuring success for every partner throughout the channel resulted in new account conversions to the Trex brand along with the continued expansion of our Trex Pro network. We're also proud of the improved profitability that Trex achieved in 2023. Our gross margin for the year expanded by 480 basis points, returning to more normalized levels even as utilization rates below those of the prior year.
This strong showing was driven primarily by production efficiencies and fast return cost saving projects. Notably, price and deflation were not major factors. Trex is honored by the many recognitions received in 2023, which include three high profile accolades for our ongoing commitment to sustainability. In addition to the Lowe's sustainability vendor partner of the year award, Trex is named one of the 100 best ESG companies for 2023 by Investor's Business Daily and earned a ranking by Newsweek as one of America's most responsible companies. As a company founded on sustainable principles, environmental stewardship and corporate responsibility are embedded in the DNA of Trex, and these [indiscernible] that our core values resonate with customers and the national media.
Now I'd like turn to our outlook for 2024. As shared in today's earnings release. We expect a strong year with double-digit revenue and EBITDA growth. Several factors underpin these assumptions. First, we have the benefit of the early buy program, by shifting from December to this year's first quarter. We expect $60 million to $80 million in incremental sales in the first half of 2024, primarily in the first quarter. Second, we anticipate mid-single digit underlying demand growth, despite our expectations of the larger repair and remodel market being flat to down low-single digits in 2024. Our consumers are staying in their homes longer and want to increase the enjoyment of their outdoor space while adding value to their home. Trex decking and railing does just that.
Our robust product portfolio with options for every budget, provides homeowners with the most relevant choices. And thanks to our industry leading distribution network, Trex products are available in more locations than anyone else. Third, in addition to approved utilization, we expect ongoing gross margin benefits from our continuous improvement cost out programs. We have a well-established group that is responsible for developing and implementing these programs and I'm pleased to say that the project pipeline for 2024 is filled and presently in implementation phase. Also, they are actively developing our actions for 2025 and beyond. Finally, channel stocking behaviors are normalizing. Year-end decking inventories were down approximately 15% from the prior year lows and that lower year-end inventory in part relates to our increased growth expectations for the first quarter of 2024.
We entered 2024 with a high level of confidence in our brand, our product, our channel partners and Trex's growth potential. At this point, I'll turn the call over to our CFO, Brenda Lovcik for fourth quarter and full year financial review. Brenda?
Brenda Lovcik: Thank you, Bryan and good evening everyone. I am pleased to review fourth quarter results which represented a strong finish to the year. Given the divestiture of Trex commercial products at the end of 2022 and to provide more meaningful comparison, I will compare our fourth quarter and full year 2023 financial performance to the fourth quarter and full year 2022 Trex residential results unless otherwise stated. In the fourth quarter, net sales were $196 million, 8.4% above the $181 million of net sales reported in last year's fourth quarter. This growth was driven by increased volume and the absence of the residual channel inventory destocking we experienced in the fourth quarter of 2022. Gross margin was 36.1%, flat with last year's fourth quarter and above expectations.
Selling, general and administrative expenses were $42.5 million, or 21.7% of net sales in the fourth quarter compared to $32 million or 18% of net sales a year ago. As discussed in prior quarters, we have returned to more normalized SG&A spending levels as we continue to see positive returns from our branding, marketing and R&D initiatives. In addition to the normalization of our marketing, fourth quarter SG&A was elevated due to the spending related to new product launches for 2024. Net income was $22 million in the fourth quarter or $0.20 per diluted share compared to $24 million or $0.22 per diluted share in the fourth quarter of 2022. We delivered EBITDA of $41 million or 21% of net sales compared to $44 million or 24.1% of net sales in the year ago quarter.
Moving to a brief overview of our full year results, net sales totaled $1.095 billion in 2023 compared to $1.060 billion in 2022, which, despite moving the early buy program out of Q4, 2023 and into the first half of 2024, is an increase of $35 million or 3% growth over the prior year. Gross margin expanded by 360 basis points to 41.3% from 37.7% in 2022. This year's gross margin benefited from the absence of the inventory recalibration done by our channel partners in 2022. Additionally, our cost-out initiatives and improved plant performance were important contributors to the gross margin recovery and more than offset the higher depreciation and utility costs. Selling, general and administrative expenses were $176 million in 2023, or 16% of net sales compared to $132 million or 12.4% of net sales in 2022.
The year over year increase is driven by additional investments in branding, marketing and R&D which continue to provide good returns. Full year 2023 net income was $205 million or $1.89 per diluted share compared to $201 million or $1.80 per diluted share. We delivered full year EBITDA of $326 million up from $311 million and EBITDA margin expanded to 29.8%, a 40 basis point improvement from the 29.4% reported in 2022. During the 2023 fiscal year, we recognized a benefit of $3.8 million from a reduction in the Trex residential Warranty reserve related to the surface flaking issues that affected a portion of our products manufactured at the Nevada plant before 2007. Excluding the warranty benefit, 2023 adjusted gross margin was 41%. Adjusted net income was $203 million or $1.86 per diluted share.
Adjusted EBITDA was $323 million and the adjusted EBITDA margin was 29.5%. We generated a healthy consolidated operating cash flow of $389 million considerably higher than the $216 million in 2022. Capital expenditures were $166 million primarily related to the buildout of the Arkansas manufacturing facility. During 2023, we returned $15.6 million to shareholders through the repurchase of approximately 265,000 shares of Trex outstanding common stock. Trex remains committed to a disciplined capital allocation plan which includes the repurchase of up to 10.8 million shares, or approximately 10% of outstanding shares. As we turn to our outlook, we are expecting a strong year with double-digit revenue growth and further margin expansion for the Trex company.
We anticipate full year net sales to be in the range of $1.215 billion to $1.235 billion representing year on year growth of 12% at the midpoint. Given that year end channel inventories reached exceptionally low levels, coupled with the change in the timing of our early buy program, we estimate that approximately 60% of full year revenues will occur in the first half of the year. A few other details regarding our expectations for 2024. We expect first quarter 2024 sales to be in the range of $360 million to $370 million inclusive of the $60 million to $80 million from our early buy program. Full year EBITDA margin is expected to range from 30% to 30.5%, a 75 basis point expansion from the 2023 levels at the midpoint. Full year SG&A expenses are expected to drive 20 basis points to 30 basis points of leverage and we are assuming an effect active tax rate of approximately 25% to 26% addition, we expect interest expense to range from $4 million to $6 million, depreciation expense to range from $50 million to $53 million and 2024 full-year capital expenditures are assumed at approximately $220 million as we continue the development of the Arkansas facility.
With that, I'll now turn it back -- the call back to Bryan for his closing remarks.
Bryan Fairbanks: Thank you, Brenda. 2023 performance demonstrated the strength of the Trex brand and the relevance of our products in the outdoor living segment. These attributes will continue to drive Trex to outperform the underlying repair and remodel market in the coming years and achieve our objectives of 11% to 13% annual revenue growth and 500 basis points of EBITDA expansion through 2028. As Brenda noted, in 2024, we will continue to invest in those areas which have historically driven our success. We will also focus on the consumer's wants and needs to guide our roadmap for growth. The Trex team is forging ahead with our strategy to capture an increasing share of decking, railing and adjacent products, which together represents a $14 billion addressable market for Trex, while remaining mindful of the strengths that have gotten us where we are today, brand strength, aesthetics, durability, products at every price point, the excellence of our dealers, contractors, home improvement retailers, distributors, and the dedication and commitment of our Trex team members.
I look forward to even greater achievements in 2024. Casey, I'll turn it back to you.
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