Yahoo Finance Trex Company, Inc. (NYSE:TREX) Q1 2024 Earnings Call Transcript
Trex Company, Inc. (NYSE:TREX) Q1 2024 Earnings Call Transcript May 9, 2024
Trex Company, Inc. beats earnings expectations. Reported EPS is $0.819, expectations were $0.72. 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 evening, and welcome to the Trex Company, Inc. First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. 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 first quarter of 2024. This release is available on the company's website. This conference call is also being webcast and will be available at 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, and good evening. Thank you all for participating in today's call to review our first quarter performance and discuss our business outlook. This was an outstanding quarter for Trex, reflecting our leadership position in the growing outdoor living category. Within the quarter, we demonstrated excellent execution across our organization, along with strong channel demand for Trex branded decking and railing products. First quarter sales came in above the high end of our guidance range. The shift of our Early Buy season added approximately $75 million in incremental sales in the first quarter as our channel partners restocked ahead of the season after ending 2023 with historically low inventories.
Beyond a normalized seasonal inventory build, we saw strong growth and contribution from our recent premium decking product launches: Trex Transcend Lineage and Trex Signature. These additions to our portfolio have continued to gain traction, helping to drive double digit sell through of Trex premium products in the first quarter. Trex's channel partner inventories ending the quarter are at appropriate levels to service consumer demand during the busy decking season. Feedback from our contractor network indicates they have strong backlogs with projects trending towards larger deck sizes and premium products and average lead times ranging from six to eight weeks while many of our TrexPro Platinum's have lead times through late summer. These indicators were shared consistently when our leadership team gathered with over 300 of our largest TrexPro Platinum contractors during the month of April.
These data points, along with other internal data, support our view that business conditions, especially at the high end of the market, continue to be favorable and reflect a return to more normal seasonality. In the first quarter, we continued to see mid single digit increases in sell through of our total product portfolio, which has been designed to offer products at every price point and now includes a broader price range of railing options to complement our complete line of decking. There are numerous demand drivers that have and will continue to support Trex's growth. First, the average age of housing stock continues to increase, yielding record growth in homes between 20 and 40 years old over the next five years. These homes are prime candidates for remodeling projects.
In many cases, these homes will also have decks. We estimate that approximately half of the 50 million to 60 million decks in existence are either at or beyond the age for replacement. Next, with higher mortgage rates and the rising cost of housing, consumers remain in their homes longer and are prioritizing investments in their outdoor spaces that enable them to gain fuller enjoyment of their existing footprint. One of the most affordable ways to add square footage to your home is to add a deck. Trex is well positioned to take advantage of the trend of creating functional spaces beyond the walls of the home with outdoor living areas complete with couches, fireplaces, TVs and cooking areas. Lastly, we continue to see the opportunity to convert more wood decks to Trex composite decking and railing.
We estimate this conversion to be occurring at a long-term average of 150 to 200 basis points per year. With a comprehensive product portfolio, a robust branding and marketing program, the industry's strongest dealer and distribution network, and a leading share of home center shelf space and sales, Trex is well positioned to benefit from that wood conversion. Our financial outperformance in the first quarter was primarily related to exceptional gross margin expansion. The combination of high utilization with continued production efficiencies and fast return cost saving projects led to a 45% gross margin for the quarter. While we do not expect to replicate this margin level in subsequent quarters this year, it is a strong indicator of our ability to leverage our existing capacity in tandem with volume growth.
To support and ensure that channel inventories are appropriate to serve the decking and railing season, Trex has been running at high capacity utilization. This utilization will decrease as the year progresses. During the quarter, we implemented new cost saving projects as planned, while also developing new projects for our future cost saving pipeline. One notable project is the development of a new plastics recycling and processing technologies that will allow Trex to process contaminated materials more efficiently and allow for the use of a larger variety of recycled materials. Additionally, we continue to increase our investments in branding and other sales and marketing programs. These programs are designed to engage with homeowners seeking to update their outdoor living spaces with the broadest array of decking, railing and other outdoor living products at price points to serve a large range of household income levels.
As noted in prior calls and our Investor Day, new product development is a key priority and a future growth driver for Trex as we seek to expand our share of the addressable market. Following the launch of Select T-Rail last year, our high performance value priced system, we added two modern specialty premium railing options to our portfolio. The Trek Signature X-series railing, available in both cable and frameless glass infills. The positive response to these product announcements now translate into orders as these new high end railing products begin shipping this quarter. Additionally, we began taking orders for Trex branded decking fasteners in the first quarter for shipment in the second quarter. Trex has long sold our market leading Hideaway hidden fastening system and now we're broadly expanding into traditional decking and fascia fastening solutions with the launch of color matched screws and plugs, specially engineered bits, depth setters and clips, all which are designed to deliver a clean, cohesive aesthetic while making installation easier and more efficient for contractors and DIY installers alike.
This is a great example of penetrating an adjacent market where we are directly related to our core products of decking and railing while further strengthening our leadership position and creating competitive advantages for our channel partners. During the quarter, we received many accolades from independent third parties. Trex was recognized as the overall supplier of choice from Builders FirstSource by winning the Morris Tolly National Supplier of the Year award. Other awards recognize our commitment to sustainability, innovation and corporate responsibility and naming Trex America's most trusted outdoor decking for the fourth consecutive year, which highlights the enduring connection between consumers and the Trex brand. All of us at Trex are honored and humbled to receive these awards and I want to thank all our Trex team members as well as our channel partners and our suppliers for their contributions to these important recognitions.
Now I'll turn the call over to our Senior Vice President and CFO, Brenda Lovcik, for a financial review. Brenda?
Brenda Lovcik: Thank you, Bryan, and good evening everyone. I am pleased to review our exceptionally strong first quarter 2024 results, which represent an excellent start to the year and support our expectations for above market growth in 2024. In the first quarter, net sales were $374 million, 57% above the $239 million of net sales reported in last year's first quarter. This growth was driven in part by the shift of our Early Buy program from Q4 2023 into the beginning of 2024, resulting in approximately $75 million of incremental sales in this year's first quarter. Sales volumes also benefited from the restocking of channel inventories in preparation for the beginning of the decking and railing season. Gross margin was 45.4%, a 580 basis point expansion from 39.6% in the first quarter of 2023 and above expectations.
Increased capacity utilization along with related production efficiencies and the continued benefit of cost-out programs with the key drivers of this exceptional margin performance, which more than offset higher labor costs. I continue to be impressed by the discipline and the success the company has around continuous improvement programs. It is part of our DNA and is embraced at all levels within the organization. As Bryan noted, while we do not expect to replicate this margin level in subsequent quarters this year, it is a good indicator of our ability to drive substantial operating leverage. Selling, general and administrative expenses were $51 million or 13.5% of net sales in the first quarter compared to $37 million or 15.7% of net sales a year ago, representing considerable leverage as a percent of sales due to the strong sales performance in this year's first quarter.
The year-over-year dollar increase is primarily due to accelerated branding and marketing spend, mainly related to new product launches and preparing for the busy season. We made the decision in 2023 to increase our branding spend back to historical levels. As we continue to invest at this level in 2024, we see evidence of it helping to drive the market to Trex products. Net income was $89 million in the first quarter or $0.82 per diluted share, more than double the $41 million, or $0.38 per diluted share reported last year. We delivered EBITDA of $133 million or 35.6% of net sales, compared to $69 million, or 28.8% of net sales in the year ago quarter, driven by increased sales volume and higher gross margins. Consistent with historical trends, first quarter cash flow from operations represented a use of cash primarily for working capital needs.
Cash used in operations was $174 million compared to cash used in operations of $115 million in 2023, primarily due to the shift in timing of the Early Buy program and subsequent increase in Q1 sales volume. We invested $38 million in capital expenditures, primarily related to the build out of the Arkansas manufacturing facility. As noted in today's earnings release, our first quarter results support our expectations for substantial above market growth in 2024. We are pleased to reaffirm our full year guidance for this year. We expect net sales to range from $1.215 billion to $1.235 billion, representing year-on-year growth of 12% at the midpoint. EBITDA margin is expected to range from 30% to 30.5%. Full year SG&A expenses are expected to drive 20 to 30 basis points of leverage and we are assuming an effective tax rate of approximately 25% to 26%.
With our Early Buy program completed in Q1, we expect Q2 sales in the range of $380 million to $390 million. With that, I'll now turn the call back to Bryan for his closing remarks.
Bryan Fairbanks: Thank you, Brenda. As I noted in our last conference call, I have a high level of confidence in the Trex consumer, in our brand, our products and product development capabilities, our channel partners and Trex's growth potential. Our first quarter results have only strengthened that confidence. Trex is well positioned to continue to benefit from the strength of the outdoor living category, and new product introductions are further distinguishing us from a competitive standpoint. Our channel partners are best in the industry. Trex products are available at over 6,700 locations, far more than any other brand in our industry, and consumer recognition of the attributes of Trex decking and railing products continues to build. We are looking ahead for a year of strong growth for Trex in 2024 and to capturing a greater share of the much larger addressable market in the coming years. Operator, we'll now open the call for questions.
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