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U.S. housing market: The ‘higher-end consumer is still very active,’ Trex CEO says

Trex CEO Bryan Fairbanks joins Yahoo Finance Live to discuss U.S. pending home sales data, interest rates, the state of the housing sector, and the outlook for homebuyers.

Video Transcript

- Pending home sales coming in better than expected this morning as consumers continue to face high interest rates. But how is this impacting housing material brands? Well, Trex CEO Bryan Fairbanks joins us now. Bryan, great to have you here in studio with us this morning.

BRYAN FAIRBANKS: Yeah, great to be here. Thanks.

- Absolutely. So a lot of people who over the course of the pandemic and even a little bit thereafter looking at the DIY home projects or even constructors that you work with looking at what products and materials that they need to take on. Your company really prioritizes more sustainability around these build-outs as well. So what kind of success have you seen over these past couple of years, especially leading into this year, too?

BRYAN FAIRBANKS: Yeah, one of the things that's really unique about Trex is we've had a sustainable culture since the day we started business. Our founders recognized that we could use recycled material into our products. We started that over 30 years ago. Move forward to today, we have class-leading products. We're the market leader in composite decking and railing. And we still use over 95% recycled and reclaimed material in our deck boards.

- And what kind of trends are you guys seeing right now, right? I mean, we just talked about pending home sales. We have definitely seen the housing market come off. But how closely do your sales coincide with or correlate with what we see in the housing market?

BRYAN FAIRBANKS: We're 90% to 95% repair and remodel. So we don't correlate particularly tightly with the new home build side of things. And the outdoor living part of the market has continued to outpace the rest of remodeling. That's where our primary focus is. And it is a very low-cost way to be able to add square footage to your home.

- That's really interesting that you say that because we've definitely have seen home decor, the inside of the house in large part take a hit, right? Furnishing companies, home decor, we have heard about weakening trends from some of those. But it sounds like you say people are still spending on the outside.

BRYAN FAIRBANKS: They absolutely are, especially that higher-end consumer. And there also is a trend towards moving that indoors. Out you see more outdoor kitchens today. You see more living room type furnitures, TVs being put in outdoor environments, all things that continue to benefit Trex.

- Now, when you think about your time at the company, I mean, you've managed through past financial downturns or economic downturns, rather. And now, even as we're talking about what is perhaps the most telegraphed, as some of the economists that come on our show have described, the impending recession, how do you even see that start to show up in Trex data to make the business decisions, make the management decisions that you need to as well in order to navigate through that?

BRYAN FAIRBANKS: Yeah, the impending recession we keep hearing is six months out. And even in our last earnings call, we talked about the back half of the year being the more concerning part of it. Today, as I mentioned, we do see that higher-end consumer is still very active. Our contractors still have reasonably long backlogs, still seeing good consumer demand out there.

The question will be, how does that consumer hold up as we get to the back half of this year? And we're preparing ourselves, making sure that our inventories aren't too high. We're making sure that our channel doesn't have inventories too high. But if we see that consumer hang in like they have during the first part of the year, we'll have the ability to bring production on and serve whatever needs are there.

- Yeah, because I wonder how much interest rates, higher interest rates affect you all as well. Obviously, it's not as big a purchase as a house that you have to finance. But surely some percentage of the projects that people are doing with your materials are financed projects. So is that causing any kind of headwind?

BRYAN FAIRBANKS: It's not as much that there's that many people that finance their deck. There are some that do that, roughly 10%, 15% type range. But the bigger impact is going to be the lack of people moving up into that next larger home and rather than moving up, improving on the existing places that they live, back to that point where a deck is a relatively low-cost way to add space onto an existing home.

- I want to go back to sustainability for a second because I'm curious, even though you guys have been in that game for a long time, how the sales pitch has changed over time. In other words, when someone buys a Trex deck and you survey them, is sustainability one of the biggest reasons? Is it durability? And how has that changed over time?

BRYAN FAIRBANKS: If we go back 10 or 15 years, we were sustainable because we felt it was the right way to run the company. We had the best cost basis to be able to purchase those materials to put into it. Going back over the past five years, sustainability is much more important to that buyer. Today that's something that they're looking at. Price, aesthetics, durability, and sustainability is in that top five.

And especially as that next generation comes through, as they're making product decisions, they're looking for those green credentials. And they're not looking for the company just to say they have green credentials. They want the proof that these are green products. And that's something that Trex can deliver.

- You guys use plastic bags as one of the raw materials, right? There's a lot fewer plastic bags now, right? We know you've got to bring your bags to the grocery store now. Do you have any trouble getting that raw material?

BRYAN FAIRBANKS: We talk a lot about plastic bags because the consumer understands plastic bags. And they see, this is the type of plastic that's going into it. 5% to 10% of the material we source is those plastic bags. A lot more of it is coming out of distribution centers, where it's the pallet wrapping, where it is manufactured products that are being protected with plastic going into industrial environments. That's the lion's share of the material that we're buying.

- And this is sort of a geeky question, but how has that process changed over time? Are you guys producing the same way that you did 10 years ago, 20 years ago? Or has the manufacturing process changed? How do you make a bag into a board?

BRYAN FAIRBANKS: Yeah, what's interesting about using recycled material, every bale of material is different. And we have experts that understand, how do I manage a bale of plastic that has maybe 15% contaminant in it versus something that has 5% contaminant? And, depending upon the types of contaminants, how do we manage that?

We have adjusted how we manufacture with those products as the plastic has changed over time. And a lot of technology has gone into both the processing so that we can make plastic that's more consistent to go into our line, but also the way we run that material into the manufacturing lines itself.

- All right. Bryan, thanks so much for being here. This is an interesting conversation about decking. I appreciate it. Bryan Fairbanks is the CEO of Trex. Thank you.