Good afternoon and welcome to the Trex Company Fourth Quarter and Full Year 2021 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Viktoriia Nakhla. Please go ahead.

Thank you all for joining us today. With us on the call are Bryan Fairbanks, President and Chief Executive Officer; and Dennis Schemm, Senior Vice President and Chief Financial Officer. Joining Bryan and Dennis is Amy Fernandez, Vice President and General Counsel 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 2021. 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 would now like to turn the call over to Amy Fernandez. Amy?

Thank you, Viktoriia. 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-Qs 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 is 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.

Thank you, Amy and good evening everyone. Thank you for joining us today to review our fourth quarter and full year 2021 performance along with our business outlook. First, I'd like to thank our extraordinary employees who continue to deliver great results through talent, hard work, and innovation, along with our channel partners, distributors, and professional contractors who are the best in the business and are poised to execute growth in the composite decking and railing market. We closed 2021 with all-time record sales of $1.2 billion for the full year and a record finish to an exceptional year with fourth quarter sales increasing 33% to $304 million and adjusted earnings per share growing 49% to $0.55 per share. Our expanded manufacturing capacity enables us to effectively support strong organic growth, while also allowing our channel partners to infill inventory. Strong revenue growth and replenished market inventories point to reduced product lead-times and more normalized seasonality in 2022. Consumer demand for our products remains robust, supported by significant repair and remodel activity, especially within the outdoor living category which shows strong momentum as the fastest-growing category of repair and remodel, and supported by our continued conversion of wood to composite market share. Rising interest rates and higher home values favor repair and remodel spending as homeowners continue to invest in their existing residences and pursue renovations that enhance their lifestyle and outdoor living spaces. Flexible outdoor living space is more essential than ever as consumers continue to reevaluate where and how they spend their time. So, while COVID-related restrictions are easing and leisure travel and other activities are returning to pre-pandemic levels, we expect demand to remain strong driven by favorable secular trends. The launch of our Trex Enhance products in January of 2019 was a significant catalyst that has accelerated our growth over the past few years. This product was truly an industry game-changer, significantly expanding our addressable market by focusing on consumers who would convert from wood to Trex at the right price. As a result, we've continued to drive wood to composite market share conversions at 200 basis points plus per year, a rate meaningfully greater than we've experienced in the past. Even with this accelerated pace, we estimate composites account for approximately 25% of the total decking market but expect it will reach 45% to 50% in the future. To support current demand and expected long-term growth, we successfully executed the largest capacity expansion program in Trex's history, which included construction of a new decking facility at our Virginia site and installation of additional production lines at our Nevada facility. Collectively, these expansion initiatives position us to effectively meet customer demand in 2022 by increasing total capacity 85% above 2019 volume levels. Additionally, in October of 2021, we announced plans to develop a third US-based Trex residential manufacturing facility on approximately 300 acres in Little Rock Arkansas. Expected to commence operation in 2024, this $400 million capacity expansion program offers numerous strategic advantages including increased proximity to essential raw materials, a strong pool of qualified and skilled labor, adjacency to major transportation hubs and is situated near key growth markets for wood conversion. Similar to our previous capacity expansion programs, this development will be modular in nature and calibrated to demand trends. When this plant opens, Trex will have a strategic advantage of unmatched geographical coverage with East Coast, West Coast and Central Region sites that will service our domestic pro channel and retail partners and also support our long-term growth opportunities in the international and cladding markets. Composites have lower market penetration outside of North America and we believe our international growth can exceed our domestic market expansion pace on a long-term basis. We were pleased to meet with many of you at the recent International Builders' Show held in Orlando, where we were impressed with the high attendance numbers and interest in learning more about all of the ways Trex can be part of their outdoor living plans. We also had record attendance at our TrexPro Summit held in San Antonio with participants from around the world. TrexPros are an elite group of contractors dedicated to the installation of Trex decking and railing products, for whom Trex provides valuable benefits such as increased consumer exposure, customer leads, a profile on trex.com to showcase their work and extended warranty programs. We launched a new marketing campaign for 2022 that highlights how Trex helps homeowners transform their outdoor dream ideas into reality, becoming the foundation for many of life's most memorable moments. Our 'We See It Too' campaign launched January first with TV commercials on many popular channels. Integrated content extends to social, digital and online video amplified by radio, print, retail, strategic partnerships and more. For 30 years, Trex has invented, reinvented and defined the composite decking and outdoor living category, and this new campaign boldly differentiates Trex with a distinctive and memorable message that creates a category of one. As our business expands, we remain focused on growing in a sustainable and socially responsible manner and taking market share from wood. As our sales grow, so does Trex's positive impact on the environment by using recycled materials to manufacture the most aesthetically pleasing and long-lasting decking and railing products in the market. To support our capacity expansion efforts and sales growth, we continue to grow our employee base with a focus on diversity, equity and inclusion and bringing new ideas and perspectives to our team. In addition, the safety and well-being of our employees is of utmost importance and we consistently prioritize safe practices and emphasize employee well-being. Reflective of this, we recently expanded ESG oversight at the executive level, naming Leslie Adkins, Vice President of Marketing and ESG Development. Long involved with steering the Trex brand, she has also been a steward of our ESG efforts since inception. With that, I'll turn the call over to Dennis to provide a more detailed view of our financial performance.

Thank you, Bryan, and good evening everyone. I'm pleased to report on Trex's strong fourth quarter results and full year performance and provide expectations for the first quarter and full year of 2022. We are reporting fourth quarter top line growth of 33% to $304 million led by 35% growth in net sales at Trex Residential to $288 million. The increase in sales reflects continued strong broad-based demand across all product lines in both the retail and pro channels and a favorable impact from pricing actions in Trex Residential. Trex commercial net sales increased 6% year-on-year to $16 million. Consolidated gross margin in the fourth quarter was 38.9% compared to 40.5% in the year-ago quarter. Fourth quarter 2021 gross margin for Trex Residential and Trex Commercial were 39.7% and 24%, compared to 41.3% and 28% in the fourth quarter of 2020. The year-over-year decrease in 2021 fourth quarter gross margins was primarily due to increased raw material costs and higher transportation costs that more than offset increased efficiencies from higher capacity utilization and previous pricing actions. In the 2021 fourth quarter, we recognized a $54 million goodwill impairment charge at Trex Commercial that was primarily due to a reduction in project commitments, which adversely impacted project backlog and forecasted net sales and EBITDA. The reduction in project commitments was influenced by a delay in new projects due to lingering uncertainty created in our commercial markets by the COVID-19 virus. The delay in new projects coupled with the company's continued successful fulfillment for pre-pandemic projects resulted in lower project backlog and reduced forecasted net sales and EBITDA. The company expects revenues from Trex Commercial to be constrained in 2022 but increased bookings are expected to lead to a resumption of revenue growth in 2023. In addition, the company recognized a gain from insurance proceeds of $3.2 million during the fourth quarter of 2021, primarily related to the fire at the Trex Residential Virginia plant that occurred in March. Excluding the goodwill impairment charge and the gain on insurance proceeds, selling, general and administrative expenses increased to $37 million, compared to $34 million in the fourth quarter of 2020 as business travel and marketing-related expenses began to return to more normalized levels. However, we continue to benefit from the operating leverage gained from our rapid sales increase with SG&A as a percentage of sales, decreasing 290 basis points to 12.1% in the fourth quarter compared to the prior year quarter. Net income for the 2021 fourth quarter was $25 million or $0.22 per diluted share. Excluding the non-cash goodwill impairment charge and the gain on insurance proceeds, adjusted net income was $64 million or $0.55 per diluted share, representing increases of 47% and 49%, respectively from net income of $43 million or $0.37 per diluted share in the 2020 fourth quarter. EBITDA excluding the goodwill impairment charge and the gain on insurance proceeds was $92 million, a 44% increase compared to EBITDA of $64 million reported in the year-ago quarter. Fourth quarter 2021 adjusted EBITDA margin was 30.2% compared to 27.9% in the fourth quarter of 2020. Summarizing the full year performance, consolidated net sales increased 36% to $1.2 billion with Trex Residential net sales growing 38% to $1.14 billion and Trex Commercial contributing $58 million to net sales. Full year 2021 net income was $209 million or $1.80 per diluted share. Excluding the goodwill impairment charge and the gain on insurance proceeds of $8.7 million, adjusted net income was $243 million or $2.10 per diluted share, representing increases of 35% and 36%, respectively from adjusted net income of $180 million or $1.55 per diluted share in 2020 net of the $6.5 million surface flaking warranty charge. Net of these items that I just mentioned, full year 2021, adjusted EBITDA increased 38% to $357 million. Full year 2021 adjusted EBITDA margin was 29.8%. We generated record cash from operations of $258 million in 2021, an increase of 38% from 2020. The strength of our cash flow enabled us to self-finance the recent capacity expansion program, while returning capital to shareholders through stock repurchases. Full year capital expenditures were $159 million and were primarily related to our capacity expansion program. We repurchased approximately 809,000 shares of outstanding common stock in 2021 at an average price of $91 per share totaling $74 million. As of December 31st, 2021, we have repurchased 3.6 million shares under our stock repurchase program and have eight million shares remaining to be repurchased under the current program. Also, since the end of the fourth quarter, we have been active in purchasing shares under the same program. Looking ahead, we see a strong 2022 with double-digit top line growth inclusive of the one-time channel infill in 2021. We are also providing the following metrics for the first quarter and full year of 2022. First quarter consolidated net sales are expected to range from $320 million to $330 million, representing year-on-year growth of 32% at the midpoint. For the full year 2022, we expect revenues to return to double-digit growth rates with a normalized seasonal cadence similar to pre-pandemic patterns we experienced in 2016 to 2018. In addition, we anticipate pricing realization will more than offset a more modest raw material and labor inflationary environment. SG&A is expected to be in the range of 12% to 13% of sales for the full year which includes the higher investment in marketing and branding spend now that we have ramped up our new capacity and market inventories have improved. For the full year 2022, we anticipate incremental EBITDA margin to be between 30% to 35% when compared to the adjusted EBITDA figures discussed earlier. Our tax rate is anticipated at approximately 25%. Depreciation will range from $40 million to $45 million. And we expect full year spending on CapEx to be in the range of $200 million to $220 million, inclusive of the Little Rock capacity expansion, the new corporate headquarters and additional investments back into our core business.

Thank you, Dennis. Our strategic actions in 2021 and continued robust demand put us firmly on track to deliver strong double-digit growth in 2022. And we remain focused on converting consumers to the performance advantages of composites over wood. Supported by our industry-leading brand and recent capacity expansion program, we remain well positioned as the prime beneficiary of long-term trends towards outdoor living. Operator, we can now take questions.

We will now begin the question-and-answer session. Our first question comes from Keith Hughes with Truist. Please go ahead.

Thank you. Question is about the incremental EBITDA margin guide for the year. Can you talk about how you think that will pace during the year? And you did above that in the second half of 2021. If you could talk about what the puts or takes are that are bringing it down year-over-year.

Hey Keith, this is Dennis. Thanks for the question. It's a good question. So, I'm expecting to see EBITDA margins improve sequentially quarter-to-quarter, as we move through the year. And we should see our highest EBITDA margins in that Q3, Q4 time frame. Some of the puts and takes that we're looking at clearly are pricing coming into full utilization here in the first quarter. That's primarily the biggest impact. Secondarily, we're still dealing with inflation. And although we anticipate it moderating somewhat, we are seeing some headwinds right now with regards to higher transportation expenses, we're seeing some higher fuel costs on the natural gas side and oil. And we're also seeing some delayed lead times on our capital spending, which is resulting in some of our cost-outs being pushed out a little further along. So that's some of the puts and takes that we're dealing with here in 2022.

If I could sneak one more in, on the gross margin. Will it also ramp up very similar to EBITDA? And do you think you'll be above water year-over-year above gross margins in the first half of 2022?

We're going to continue to put a lot of focus and attention on our gross margins. That's always been the way it tracks and this year is not going to be any different. I would expect the gross margins to follow a similar cadence to the EBITDA margins as well. So, again, pricing coming more into play here by the end of the first quarter, inflation moderating somewhat. And then, we talked about some of those headwinds that we're dealing with.

The next question is from Ryan Merkel with William Blair. Please, go ahead.

Hey, guys.

Hi, Ryan.

A couple of questions for me. Good morning or afternoon. So, first off, can you just unpack sales outlook for 2022 a little bit? How much will price contribute? And then, just talk about what is more normalized seasonality, just so we're all on the same page?

When considering a more typical seasonality pattern, I expect the first quarter to represent about 26% of our sales. The second and third quarters should account for around 50% of sales, while the fourth quarter will cover the remaining portion. Regarding growth in 2022, pricing will have an impact, likely in the low teens range. We also anticipate strong performance in repair and remodel, which we've discussed extensively. Historically, we've seen significant contributions from that area. Combining these factors will place us at the upper end of our growth expectations. However, we need to adjust for the one-time inventory infill we experienced in the latter half of 2021. This encapsulates my view on our growth potential and why we aim for robust double-digit growth.

Got it. That's helpful. Okay. And then, for my follow-up, low teens price capture in 2022 is a little higher than I was thinking. How is that going to flow through the year? Is it going to start higher and then sort of kind of bleed down as you lap price increases from last year?

Yes, I think that's the right way to expect it will be coming through. We took more of the pricing last year later in the year. So we'll have that full recapture as we move through the year. And we'll see what inflation does as we move through 2022. Thanks, Ryan.

The next question is from Stanley Elliott with Stifel. Please, go ahead.

Hey, everybody. Thank you guys for the question and congratulations on a nice year. Curious, kind of high level, I'd love to hear you from the TrexPro day, talking with the contractors, what are they telling you about their backlogs, about their order book? Obviously, the guidance seems very positive on the year. But just curious, if you could dig down into that a little bit more.

Certainly. Our contractors are feeling very positive about the year ahead. These are some of our largest and most skilled contractors, and they typically have longer backlogs. When we speak with smaller contractors, they also express great optimism. Their backlogs range from three to six months, indicating that they haven't experienced a significant change in the marketplace or in demand for outdoor living.

Great. And then you've also been working on improving the recycled content on the front end. I was wondering kind of how much progress you were able to make on that and any updates would be great.

So Trex Company has always prided ourselves on using approximately 95% recycled content in our products. Where we don't use it to a great degree, for example some of our aluminum and some of our railing products, we do strive to increase the recyclability content within that product. But from a decking perspective, which is the largest share of revenues for the company, we've continued to drive recycled material use and we continue to look for new opportunities to take more waste out of the waste stream and allow us to use it in decking.

Thanks, guys. Appreciate it and best of luck.

Thanks.

The next question is from John Lovallo with UBS. Please go ahead.

Hey guys. Thank you for taking my questions as well. First one, the step-up in CapEx to $200 million to $220 million versus I think $160 million in 2021. I was under the impression that CapEx would actually be down this year. Can you maybe just talk about some of the puts and takes that may have changed that?

That's a valid question, John. We previously mentioned that we anticipated a reduction in CapEx spending. However, that was before the announcement regarding Little Rock. Little Rock is now the main factor contributing to the increase in that number. Additionally, we are constructing our new corporate headquarters, which will involve further CapEx expenditure. The rest will be directed towards investments in our core operations.

Got you. Okay. And then in terms of my follow-up, can you maybe just elaborate a little bit on the reduction in commercial project commitments? I guess, I'm curious on what type of projects were kind of delayed or canceled I should say. And then, are they going to wood, or are there competitors in the composite space taking the business?

From a commercial perspective, which differs from residential primarily concerning railing and certain staging products, we saw strong net sales in 2021. However, as we successfully reduced our existing backlog, we also faced a decline in new project commitments due to ongoing uncertainty surrounding COVID. While the residential sector experienced positive trends, the commercial side faced challenges. The core markets we cater to, such as sports entertainment and commercial office, were significantly affected, leading to postponed investments until there was more clarity about life after COVID. At one time, there was doubt about when people would return to the office, but we are now witnessing a resurgence in attendance at offices and sporting events, along with other outdoor activities. Given the diminished backlog and lowered new project commitments, we anticipated a challenging outlook for 2022. In line with our policies, we conducted an annual impairment test for goodwill. We evaluated the project commitments, the backlog reduction from COVID, and our projected net sales, which revealed a negative impact on our financial situation. Consequently, we decided to record a $54 million write-down based on that analysis. On a more positive note, we are beginning to see our order book rebuild, buoyed by activity in the initial months of the year. However, it's going to take time, and we remain optimistic about the opportunities within the commercial sector.

Okay. Thank you.

The next question is from Jeff Stevenson with Loop Capital. Please go ahead.

Thanks for taking my questions. Congrats on a strong year.

Thanks Jeff.

Sure. And was there any negative impact from Omicron in January? And did you have any labor logistics or material headwinds from that that will impact the first quarter?

Yes, similar to others, we experienced higher absences in January due to Omicron, with some instances in December as well, which were likely more pronounced. The effects of this were included in the guidance we provided for the first quarter. In transportation, we experienced some good days and some challenging days, but we managed to navigate through January without significant struggles. To address the absences we faced, we increased overtime in January.

Okay. Great. And then can we just get an update on channel inventories right now? And how much of your kind of first quarter sales guidance is related to inventory channel build?

So recall, normally, the first quarter is going to be building of inventory to support the busiest part of the season. And that's exactly what we are seeing. Coming into the end of the year, if you remember back to the third quarter, I talked about our dealer level inventories improving significantly. And then through the end of the year, our distributor level inventory has improved significantly as well. Now we're back into a normal inventory build to support Q2 and Q3 in the marketplace.

Got it. Thank you.

The next question is from Trey Grooms with Stephens. Please go ahead.

Hey, good afternoon.

Hey, Trey.

Hey. So first one, Dennis, I just want to make sure I got this right. On the kind of the quarterly cadence you outlined earlier, you mentioned, I think – and I'm probably missing something here, but I think you said Q1 is going to be 26% of full year and just kind of backing into that the midpoint of the guidance range, if you gross that up it just implies something like 5%. So growth for the full year so what am I missing there on that math?

I think the best way to take – to look when we talk about what historical looks like, it is going back from 2016 to 2018 timeframe and looking at those quarterly averages increases and decreases. And the reason that time is important it takes the entire takes the pandemic out of it, but it also takes the launch of Enhance out of it as well.

No, yeah I get all that. I'm just trying to reconcile the arithmetic behind the $325 million is the kind of midpoint of the guidance for revenue for the first quarter. If that's 26% then that implies something like 5% growth for the full year?

The 26% is not part of our guidance.

Okay. Okay. Just making sure because I heard that and I knew I was thrown off there somewhere with the math on that. Okay. Fair enough. Thanks for clearing that up. And then second question is EBITDA margins, Dennis mentioned you said that it should ramp in kind of the Q3, Q4 timeframe. And I think the long-term guide is for 35% to 45% incremental margin – EBITDA margins. Is that still the right way to think about long-term incrementals? And at what point do you think we'd kind of return to that sort of flow-through?

Yeah Trey. So no the guide for 2022 is 30% to 35% incremental EBITDA margins, just to be clear.

And as we go forward, the reason we pulled that back a little bit, this year from where we normally are is we're bringing our marketing, our travel and our show expenses back to a normalized level from where we were in prior years. I expect as we move forward you'll see that move back to the more normalized level of the $35 million to $40 million incremental.

Yeah. That's what I was getting at. I was clear on this year. I just know long term 35% to 40% that's still a good target. Thank you.

The next question is from Ketan Mamtora with BMO Capital Markets. Please go ahead.

Thank you for taking my question. Can you talk a little bit about what you're seeing on the international side and on the cladding side? There's a couple of opportunities that you guys have talked about. And is there any way to kind of size what the medium-term opportunity could be there?

Yeah. International we do continue to see that coming back. We did have to deemphasize that for a couple of years. But through the fourth quarter of this year, we were able to rebuild inventories to get the season started right in these marketplaces. So I'm excited about the growth opportunity. I've said in the past that we see the international markets being able to outgrow our North America markets. I still hold to that. We'll be in much better shape inventory-wise this year. As it relates to the cladding marketplace we've now been able to show the customers that are interested in using our decking and cladding that the product is available on normalized lead times so that they can start quoting that. We really hadn't been quoting all that much business over the past couple of years. So we're back out selling again actively into that marketplace.

Understood. And just as my follow-up, what is embedded within your guidance for sort of inflation for FY 2022? Thank you very much.

Our inflation expectations are included in the guidance we've provided. As Dennis mentioned earlier, we've encountered some inflation at the beginning of the year, but we anticipate that it will decrease as we progress through the remainder of this year.

Got it. I’ll turn it over. Thank you.

Thanks.

The next question is from Reuben Garner with The Benchmark Co. Please go ahead.

Thanks, guys. Congrats on the strong close of the year.

Thanks.

Most of my questions have been answered, but I want to follow up on one. I'm interested to know if you could quantify any opportunities you may have had to pass on over the last couple of years, either internationally or in the US, due to your capacity situation. Specifically, I'm referring to smaller players in the market that may have gained an advantage because Trex, as the industry leader, was often sold out. Are there any numbers or ways to quantify what might have been missed over the past two to three years as you worked to catch up?

Well, you're right. There are things that we have had to walk away from as we've managed through the capacity constraints over the past couple of years. I would say last year was a position where we started to more normalize in the marketplace. And with inventories being built back to more normalized levels, we truly get back to a regular cadence for the year. We've not tried to put a number to what those sales are.

And just a quick follow-up, Bryan. Do you think you've started to recapture some of the business that was lost in 2021, or was the strength you saw more related to the increased activity at the end of last year in your own channels? Are you now in a position to pursue some of that business you could have had before while still working on filling the channel?

I did a lot of plant tours with our sales team during the fourth quarter, showing both our existing customers who have been loyal to us throughout as well as other customers who may be carrying competing brands, the capacity we have and our ability to service them.

Perfect. Thanks, and good luck this year guys.

Thanks.

The next question is from Tim Wojs with Baird. Please go ahead.

Thank you for taking my question. I have a modeling question and a broader one. Regarding the modeling question, can you provide any insights into quantifying the channel infill load-in comparison? It would be helpful to have a sales dollar figure, lead time, or weeks of inventory, or any additional information to ensure we are aligned on the comparisons.

Yeah, Tim, it's a good question. So our estimates right are pointing to about $100 million in infill that happened in the back half of 2021.

Okay. Okay. That's helpful. And then I guess on a bigger picture question, just as you think about Bryan getting to that kind of 45% to 50% penetration of composite relative to the market, is there any kind of change in the cost of getting to that incremental penetration? Like for an incremental 5% of market penetration, is that cost to retain that penetration changed at all either positively or negatively?

Well, there's an incremental change in the short term here because we need to get back to a normalized cadence for marketing. We've pulled back on that past few years. We will get back into a normalized cadence for that. And we see that as important to be able to continue driving that wood conversion opportunity getting our name in front of people who are in the market for decking, whether it be wood or competitive products and showing them why they should make the Trex decision.

Okay. Okay. So 2022 is really more of just I guess kind of a catch-up now that you've got capacity and you've got the channel and that inventory position?

Yeah.

Okay. Great. Well good luck on 2022 guys. Thanks for the time.

Thanks.

Thank you.

The next question is from Steven Ramsey with Thompson Research Group. Please go ahead.

Hi, good evening. Starting off with drivers of sales growth for the year, how much of that is pure core wood conversion and how much of that is international growth kicking in new construction, cladding some of those other adjacent areas of opportunities?

Yes, I'd love to say that there's enough data out there in the marketplace that I could break each of those down and be able to give you accurate numbers. I think the right way to look at it is we've always looked at our business using kind of the remodeling – repair and remodel growth numbers as a baseline for the business. On top of that, wood conversion opportunity, growth in international markets, as well as cladding along the way that gets us to the double-digit sales increase for the year.

Okay. Excellent. And then is there embedded with the channel infill that you've done mix that points to continued increase on the enhanced line? I know it's coming from a lower base but is there any read-through on penetration of that lower-priced product?

Through 2021, we continued to see strong growth across all of our product lines and in line with our expectations.

Excellent. Thank you.

The next question is from Phil Ng with Jefferies. Please go ahead.

Hey, guys. You guys have been constrained from a capacity standpoint in the last few years. So I'm just curious looking in 2022, how much bandwidth you have from a capacity standpoint? So if you could quantify that maybe capacity would be helpful. And when we think about Little Rock, as you kind of ramp that up, Bryan appreciating it's modular in nature is there a good way to think about how much capacity that would free up at least in the first phase of that ramp?

So I think the best way to size the capacity is what I said in my comments about the 85% over where we were from a 2019 perspective. And as we look out towards Little Rock coming on which would be 2024 timeframe, Little Rock has the opportunity to be the largest facility across our system. So there's a significant amount of growth opportunity there.

Okay. Of that 85% any color on how much of that is already consumed Bryan?

We've not provided utilization.

Okay. And then a quick one for Dennis. The 12% to 13% SG&A as a percentage of sales for guidance for this year, is that a good way to think about it in 2023, or is this more of a catch-up here? I just want to get a better sense. Is there an opportunity for some SG&A leverage going forward?

Right. We've always talked about there being an opportunity longer term for SG&A leverage, especially as Enhance becomes a bigger part of the portfolio. So I think Bryan said it well earlier on that 2022 really becomes a catch-up year. And then from there we should start to see that leverage really start to accelerate more.

Okay. All right. Appreciate it.

The next question is from Alexander Leach with Berenberg Capital Markets. Please go ahead.

Hi, guys. Thanks for taking my question. Sorry, if I missed this as my line drops off, but do you have an internal rate of inflation that you can provide for us? And how is your internal rate inflation been trending through Q1 versus Q4? You've mentioned some persistent headwinds but CPI has been accelerating and it sounds as though inflation in your business isn't accelerating in anywhere near the same level.

Yes. So we've built our forecast and plans with a rate of inflation that our research tells us the business is going to see. Now inflation as everybody on the call knows is very difficult to predict as to which commodities it's going to hit and which ones it may alleviate over the course of the year. But that inflation is inherent in the incremental EBITDA guidance that we've provided but we're not going to provide a specific percentage that we've assumed.

Sure. And then just as a follow-up is there still scope for room in the business to increase prices, if the inflation persists through the year?

Sure. There's going to be opportunity. If we see inflation roll through the economy at a degree where we see that pricing won't need to be taken it's something that we'll do as needed.

Okay. Great. Thanks, guys.

The next question is from Michael Rehaut with JPMorgan. Please go ahead.

Great. Thanks for taking my question. First, I just wanted to circle back to the top-line outlook. And very helpful to give the $100 million of infill from the back half of 2021. I also got to that similar math from an earlier question about if you just do that 26% on the first quarter it implies like a 4% actually full year growth. So I'm just trying to get a sense you obviously, are saying double-digits for the year. With that $100 million headwind though in the back half of 2021 are we talking about maybe flat sales in the back half of the year, or how should we think about comping that comp in 3Q and 4Q of this year?

Yes, I would go back to my clarification comments and use the 2016 through 2018 seasonality as a guideline for the revenue calendarization.

Bryan, if you use that 26% and that gets you to the 4% for the full year that's the challenge. But maybe we can talk about that offline.

We've provided guidance of a double-digit revenue improvement during the course of the year.

Right. Okay. Well maybe switching gears then to the margin guidance on the 30% to 35% EBITDA. I think the math kind of works out that you're looking for full year results and full year margin improvement on an operating margin EBITDA basis. Just trying to get a sense when would you expect the year-over-year return positive during the year? I mean a lot of companies have obviously been kind of saying not the first quarter obviously maybe getting close to parity on the second and positive in the back half. Is that how should how we should think about it for you as well?

I expect to see a significant increase in the latter half of the year. As I mentioned earlier, we should experience a steady progression. The second quarter will perform better than the first, and the third quarter will outperform the second. However, the noticeable year-over-year improvement is primarily anticipated in the third and fourth quarters.

Right. Okay. Maybe just one last quick one if I could. You were also kind enough to kind of give expectations for pricing for the year on low teens. Any way we should think about volume contribution in 2022 versus 2021?

Well we talked a little bit about just strong double-digits was the guide that we gave right? And so I gave you the pricing in the low teens. We talked about our growth being able to double-up on the repair and remodel index and then backing out the infill from the prior year. Kind of gives you a good feel for how we're looking at growth.

So when you say strong double digits I mean that could be a wide range. Any way to narrow that down a little?

Yes. Our guidance is strong double digits. And I think I've just given you the pieces to it there.

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

Good evening. Can I just follow-up with one more on that revenue outlook? I think Dennis you just mentioned backing out the one-time channel infill which you said is $100 million. Are you talking about the strong double-digit growth is off of kind of last year's growth burden for the $100 million, or how are we kind of layering that on? Thank you.

It's year-over-year. We thought it was important to understand there was that inventory infill that we would normally see because inventories were depleted to a much larger level than they had been historically.

Okay. Understood. Could you elaborate on the international opportunity you have been emphasizing over the years? I would like to know which markets you see that potential in and how you approach them from a channel perspective. Thank you.

Yes. We primarily focus on markets with higher GDP levels, increased family incomes, and interest in outdoor living, such as Europe, particularly in Scandinavia, and Australia. However, we also cater to smaller markets in Central and South America and the Caribbean. When discussing larger markets with higher GDP, those will be our main focus, and we will utilize similar sales channels as we do in North America.

Okay. Thank you, Bryan. Good luck.

Thanks.

The next question is from Kurt Yinger with D.A. Davidson. Please go ahead.

I'll address your question about marketing first. We haven't been as aggressive in our marketing efforts over the past couple of years. I believe one key factor that will help us moving forward is the increased education of consumers. During the pandemic, people spent more time at home and sought products that would enhance their comfort and make home maintenance easier. As a result, more consumers have Trex composite decks today. There is also more word of mouth and media coverage about composite materials compared to wood. This trend will continue to aid in our conversion efforts. Got it. Okay. That's helpful. And then, I guess, just a follow-up on the commercial side. Given where your backlog are, is there any way to kind of size the magnitude of the decline there that you're expecting in 2022?

Yes, I'd expect 2022 to be down about 10% on a year-over-year basis.

Okay. All right. That’s helpful. Appreciate all the color and good luck to you guys.

The next question is from Alex Rygiel with B. Riley. Please go ahead.

Thank you. Nice quarter gentlemen. Can you address the variables that may have the biggest impact on your incremental margin either coming in at the high end or the low end?

Yes. When I think about that, right, I mean clearly, pricing plays a role in this followed secondarily by cost-outs and continuing to drive those efficiencies that we've talked about. I think on the negative side, clearly, inflation watching some of those headwinds that we've talked about that's a key concern for us. On the transportation side, natural gas, those are a couple of the big ones that we'll be continuing to watch. But also I think in there too, Bryan talked a little bit about the marketing spend that we had as well or that we're driving here in 2021. So that's another variable impacting those incremental margins.

And then as it relates to that range of 30% to 35%, is that what you would call sort of a 2022 target, or is that sort of more of a longer-term target range for incremental margin?

Right. So I would look at that 30% to 35% as a 2022 guide. And we talked about over time, that we should see those incremental margins improve to that 35% to 40%. Why? So we're going to get more SG&A leverage over time because Enhance will become a bigger part of the overall portfolio requiring a lot less branding spend. In addition, we're going to continue to drive costs throughout our plant manufacturing network and that's going to continue to help us with the margin improvement.

Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Bryan Fairbanks for any closing remarks.

Thanks everybody, for your questions and attendance in today's conference call. We look forward to speaking with many of you during the quarter, at conferences and other events. Have a great evening. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.