Thank you, everyone, for joining us today. With us on the call are Bryan Fairbanks, President and Chief Executive Officer. He is joined by finance executives, Brad McDonald, Chief Accounting Officer; and Kara Strosnider, Director of Financial Planning and Analysis as well as Amy Fernandez, Vice President, General Counsel, together with other members of Trex management, including the recently named Senior Vice President and Chief Financial Officer Brenda Lovcik. The company issued a press release today after market close containing financial results for the third quarter of 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 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 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.

Thank you, Amy. Good evening, and thank you for joining us to discuss our third quarter 2023 results. Building off our strong second quarter performance, Trex delivered another robust quarter with improvements across all key financial metrics. Consumer demand for Trex products remains resilient with channel sell-through growth in the mid-single digits. Sales growth in the quarter also benefited from the successful launch of new products, along with our brand and marketing investments. These products resonate with consumers who value the aesthetics and low maintenance advantages of Trex products over traditional wood. We continue to leverage our industry-leading manufacturing capabilities, driving further cost reductions through increased production efficiencies resulting in an adjusted gross margin of 41.8%. This strong performance on less than full capacity is a clear indication of the leverage inherent in the Trex business model. Adjusted EBITDA margin reached 31.5%, inclusive of our continued marketing and branding investments. As we highlighted at our recent Analyst Day, we remain focused on continuing to grow our market share as we convert more of the traditional wood decking market to Trex. Innovative new products remain central to our growth strategy, and we continue to expand our portfolio to meet consumer needs and preferences across all price points. In the third quarter, we experienced continued positive market response to our Trex Signature and Trex Transcend Lineage products, two recently launched lines targeting the higher-end consumer. Lineage with its proprietary heat mitigation technology and a more refined, clean look has been well received in the marketplace. And after successful testing in selected geographies, we plan a national rollout for Signature decking, which is competing well at the high end of the market. We spent many years developing these game-changing products and are pleased with the reception we're seeing from both our channel partners and consumers. We also see significant growth potential in our broader Residential segment driven by railing, fasteners, cladding and fencing, which together with decking brings our overall addressable market opportunity to approximately $14 billion. We believe the opportunities in railing alone offer substantial growth potential. The growth will be driven by expanded attachment rates coupled with attractive solutions to match consumer preferences at each price point while still delivering on Trex quality. While we have manufactured and sold Trex railing products since our early years, we recently accelerated our efforts to further penetrate the market. Notably, we introduced our Trex Select T-Rail system in the second quarter. This composite rail system is priced competitively against low-cost vinyl railing yet outperforms vinyl both in terms of aesthetics and performance. T-Rail is off to a great start, expanding our share in railing and building greater awareness of the Trex brand in this important category. The T-Rail launch continues our strategy of providing railing product at every price point as we have successfully done in decking. As we continue to drive innovation through new products and tap into a range of new growth opportunities, we are expanding our production capacity in a disciplined manner. We will continue to develop our new facility in Arkansas using a modular approach, enabling us to match new capacity with anticipated market demand while allowing us to incorporate emerging technologies that will further optimize production efficiency. As a part of our planned investment, we intend to incorporate AI to further improve product quality and create the lowest cost manufacturing facility in the industry. We continue to focus on long-term growth and delivering value to shareholders in a sustainable manner. ESG leadership is important to us as it's been part of our company's DNA since its inception and our sustainability goals align with profitability targets. We remain committed to the reduction of waste, water and energy consumption, empowering and investing in our valuable employees and helping build strong and healthy communities where we operate through our recycling programs, employee volunteer efforts and charitable donations. Now I will turn the call over to Brad McDonald, Chief Accounting Officer, for a review of our financial performance.

Thank you, Bryan, and good evening. As in the previous quarter, given the divestiture of Trex commercial products at the end of 2022. To provide a more meaningful comparison, my comments will compare our third quarter 2023 financial performance to the third quarter of 2022 Trex Residential results. Net sales of $304 million exceeded our expectations and were significantly above last year's $178 million of Residential net sales, which were impacted by channel inventory destocking. Improved utilization rates from higher production volumes and the benefits from our investments in production efficiencies and cost-out programs drove a significant improvement in gross margin to 43.1%. During the quarter, we recognized a benefit of $3.8 million due to a reduction in the warranty reserve related to the legacy surface flaking issue that affected a portion of the products manufactured at the Nevada plant prior to 2007. Excluding the warranty benefit, gross margin was 41.8%, compared to Residential gross margin of 25.4% in last year's third quarter. Selling, general and administrative expenses were $45 million or 14.7% of net sales compared to $25 million or 13.9% of Trex Residential net sales in the 2022 quarter. As discussed in the previous quarter, we're returning to more normalized SG&A spending levels with a focus on branding, marketing and R&D. Net income in the 2023 quarter was $65 million or $0.60 per diluted share compared to Trex Residential net income of $15 million or $0.14 per diluted share during the prior year quarter. EBITDA was $99 million, and EBITDA as a percentage of net sales or EBITDA margin was 32.7% compared to Trex Residential EBITDA of $32 million and EBITDA margin of 17.8% in the third quarter of 2022. Excluding the warranty benefit, net income in the 2023 quarter was $62 million or $0.57 per diluted share, and adjusted EBITDA was $96 million, and EBITDA margin was 31.5%. Year-to-date 2023 net sales were $899 million compared to $879 million of Residential net sales in the year ago period. Net income was $183 million or $1.69 per diluted share compared to Trex Residential net income of $177 million or $1.57 per diluted share in 2022. Year-to-date 2023 EBITDA was $285 million, resulting in an EBITDA margin of 31.7% compared to Trex Residential EBITDA of $268 million and EBITDA margin of 30.5% in 2022. Excluding the warranty benefit, year-to-date 2023 net income was $181 million or $1.66 per diluted share, adjusted EBITDA was $281 million, and adjusted EBITDA margin was 31.3%. Year-to-date operating cash flow was $288 million compared to $244 million in the comparable period of 2022 as we converted significant working capital into cash through inventory reduction. Capital expenditures amounted to $113 million year-to-date, primarily related to the build-out of the Arkansas facility. I will now turn to our updated guidance. We are projecting fourth quarter revenues in the range of $185 million to $195 million, reflecting both seasonally lower demand and the shift of our pre-buy to the first quarter of 2024 as discussed in last quarter's conference call. The resulting impact is that full year 2023 revenues are projected to be $1.09 billion, assuming the midpoint of the fourth quarter revenue guidance. This is an increase from the $1.04 billion to $1.06 billion range provided during our last update. We are also increasing our full year adjusted EBITDA margin guidance to be between 29% and 29.5% compared to the previous range of 28% to 29%. This guidance includes our expectation that SG&A will be at the higher end of the range of 15% to 16% of net sales. Capital spending guidance is projected at the higher end of the estimated $145 million to $155 million previously provided. Depreciation and amortization will range from $47 million to $50 million, and our tax rate guidance remains at 25% to 26%. With that, I'll now turn the call back to Bryan.

Thank you, Brad. Before I finish my remarks, I wanted to introduce the most recent addition to the Trex executive team, Brenda Lovcik, our new Senior Vice President and Chief Financial Officer. With over 25 years of experience, Brenda brings deep financial experience gained at global manufacturing companies, a strong track record in business operations and proven leadership skills. Brenda?

Thank you, Bryan, and good evening, everyone. This is an exciting time for Trex. And I am delighted to join the team as we continue to execute our growth strategy and build long-term value for Trex stakeholders. I look forward to speaking and meeting with you in person over the coming months.

Thank you, Brenda. Trex is continuing to successfully navigate this dynamic environment, leveraging our industry-leading competitive advantages that clearly distinguish Trex from our competitors. Our laser focus on share gains from an expanding addressable market, complemented by our continued investment in innovation, product launches and consumer education will ensure we drive long-term shareholder value. I want to thank our Trex team members for their hard work, and channel partners for the many years of productive growth, and look forward to many more years working together. Operator, please open the call to questions.

And our first question comes from John Lovallo of UBS. Please go ahead.

Good evening, guys. Thanks for taking my questions. The first one is the fourth quarter revenue expectations improved from what was implied at about $155 million to $185 million last quarter to the $185 million to $195 million today. And this would actually represent year-over-year growth versus the fourth quarter of 2022. That said, the implied EBITDA in the fourth quarter would still be down sort of 18% to 20% year-over-year. So can you just help us sort of bucket the year-over-year drivers that are weighing on the fourth quarter EBITDA other than maybe the higher SG&A?

The main factor driving this will be the selling, general and administrative expenses related to branding efforts. We will be introducing new products to the market next year, which means we will need to produce samples, merchandising materials, and all relevant literature. Therefore, when you analyze the SG&A, you will notice that it will be significantly higher than historical levels as we get ready to launch these products.

Understood. Okay. From a high level, how did demand trend through the quarter? How would you describe the September exit rate? And what did things look like in October?

We were pleased with the consumer reaction to our products throughout the third quarter. I saw a mid-single-digit type sales growth. And for the fourth quarter, inclusive in our guidance. And to your point, slightly better than what we provided before. We assumed a roughly flat now, I would expect a low single-digit type growth in the fourth quarter with consumer demand. So we're still positive on the Trex consumer, the effectiveness of our marketing, also the weather conditions that we're seeing across most of North America.

The next question comes from Susan Maklari of Goldman Sachs. Please go ahead.

Thank you. Good afternoon, and thanks for taking the question. Bryan, maybe to start with – hello, can you talk a bit about how you're thinking of the setup for '24? I mean appreciating that it's still a bit early out there. But how do you think the industry as well as Trex will end the year in terms of channel inventories and maybe the potential to pull more volumes in next year, especially as you think about sell-in perhaps outpacing sell-out?

I think the best way to look at it at this point, if I take myself back to this time last year, we were looking at 2023 being down mid-single digits. And with the guidance we've provided, it will end up being up mid-single digits on a full year basis, excluding any impacts from inventory changes at year-end. I am feeling more positive about the Trex consumer today than I was feeling a year ago. I see how these consumers are reacting to the value of installing a Trex deck. We hear more often than not, these are consumers that might be normally looking to move up in their home, but because of high interest rates and high values of those homes, they're not making that move, so they're improving their existing spaces. I expect that tailwind on the repair and remodel side to continue to be a benefit for Trex as we move forward, so I'm feeling marginally more positive today than I was at the end of last year.

Okay. That's helpful color. And then maybe following up on John's question a bit. You mentioned you expect SG&A to be a bit higher in the fourth quarter in support of the new products that you'll be launching. Any thoughts on how we should think about margin cadence for '24? Any key items you'd highlight for next year?

We'll provide a lot more detail on 2024 as we get into the end-of-the-year call and margin cadence. I would expect that we will see a stronger early buy as the channel recognizes that we need to ensure the appropriate amount of material is out there. But aside from that, really nothing else to provide at this point.

The next question comes from Ryan Merkel of William Blair. Please go ahead.

Hey, everyone. Thanks for taking the questions. My first one, Bryan, is just you mentioned the positive response to the new decking products. How did you measure that? And then should we expect a bigger pop next year as you're rolling that out in a bigger way?

Yes, to address your second question, it definitely takes time to introduce these products to the market. We launched two colors of our Lineage product line in May of last year and then added two more colors in December 2022. We've observed a steady growth throughout the year and anticipate this momentum will continue next year as more consumers become familiar with the Transcend Lineage product line, including its heat mitigating technology and updated colors. We're basing our expectations on current market observations. From the perspective of our Signature line, we expect it to cater to a more niche market targeting premium buyers who appreciate the look and feel of real tropical hardwood. We are seeing positive responses in the test markets where we have introduced it, and we plan to have a national rollout next year.

Perfect. For my follow-up, I would like to ask about the risk of consumer financing again. Could you please share your thoughts on this and what percentage of consumers you believe uses financing for your products?

Consumer financing for deck projects is not extensively used. Data that we have in talking with our contractors indicates it's less than 10% of the marketplace. It's not something that we hear back from our contractors. And our contractors are not shy about asking us for selling tools to help them in the marketplace. It doesn't even show up in the top 10 of things that they're looking for, for selling tools along the way.

The next question comes from Joe Ahlersmeyer of Deutsche Bank. Please go ahead.

Hi, Joe. Hey, good afternoon, everybody. Thanks for taking the questions. I'm always looking at your finished good inventory, but I think this third quarter number is particularly important as we think about what actions people might take in the channel around pre-buy. And it's $43 million, I think, on finished goods. That is far lower than last year, and it's more in line with 2021. I'm just wondering how you're planning, I guess, production in the fourth quarter to service even the guidance that you've put out, and then what you might do if the prebuy is actually a little bit stronger than you're assuming. I just want to also to make sure that the number that you assume is pushed to 1Q hasn't changed either.

Yes, remember, last year, we pulled back our sales guidance significantly because of the need to reduce inventory in the channel. So we were building inventory and putting it on our balance sheet from that perspective. Whereas this year, it was a regular third quarter inventory, and to your point, looks more like a normal end of the third quarter where we finish with the lowest inventory for the year. As we go into the end of the year, we will be building inventory as we normally do during the fourth quarter, and we'll use that in addition to our production to be able to service the early buy and then through the second quarter of next year.

And so thinking about the fourth quarter implied gross margin, that's reflective probably of the production rate of 3Q. And so as you build inventory in 4Q, we might see a pretty decent step-up in the 1Q gross margin. Is that a fair way to think about it?

Yes. Production will be roughly in line with what we made, maybe even marginally a little bit higher than what we made in the third quarter.

The next question comes from Jeffrey Stevenson of Loop Capital. Please go ahead.

Hi. Thank you for the opportunity to ask questions today, and congratulations on the strong results. Can you discuss the current sentiment among your dealer and distributor partners? I'm curious if they are becoming more optimistic about another strong quarter of sell-through demand, or if there is still some caution due to concerns about higher interest rates and a slowdown in existing home sales.

Yes. What we're hearing from the channel is that while there's concern from consumers, those that have strong consumer brands are holding up better than other parts of the marketplace, which are more commodity based. So overall, much like my comments earlier in the call, they're feeling more positive about the Trex business going into next year than they did going into 2023. And they want to ensure they have the right inventory on the ground to be able to support those consumers as we continue to see a tailwind from homeowners that are staying in their existing homes, that they're upgrading those wood decks. We've talked in the past about there being 50 million to 60 million wood decks, and about half of those are either passed or at the point of needing replacement.

Okay. No, that's very helpful. And my second question is if there's an opportunity to become more aggressive with your share repurchase program after the recent market-driven pullback here?

We manage our program according to our 10b5-1 filings, with parameters set at the time of filing. We have an ongoing program for the shares, which I believe remains a crucial aspect of our capital allocation. Our primary focus is on organic growth, followed by share buybacks.

Next question comes from Keith Hughes of SunTrust. Please go ahead.

Thank you. You've given us kind of a view for capital spending for '23. If we look into '24, will it be the same order of magnitude?

We'll provide additional color on that, but I do expect 2024 to be quite a significant year of capital spending as we really get into the heavy part of the build-out and the purchasing of the equipment for the decking building as well as potentially adding a warehouse onto that site as well, too, and most of that capital will be expanded within the course of the year.

And on the quarter was the revenue growth, was that all units? Or was there some price mix in the number?

There was no price.

The next question comes from Trey Grooms of Stephens. Please go ahead.

Hi. Good afternoon. This is Noah Murkowsko on for Trey. Thanks for taking my questions. First, do you anticipate the need to take any pricing in 2024?

We haven't made any decisions about pricing. If we were to adjust pricing, we would consult with the channel before discussing it with the investment community. So far, we haven't observed any significant increase in our overall costs. There have been minor fluctuations in some specific smaller product lines that we might consider, but I wouldn't expect any material changes.

Got it. That makes sense. And then for my follow-up, is $60 million to $80 million still the right way to think about potential inventory build in 1Q '24?

I wouldn't necessarily refer to it as an inventory build. I would anticipate the inventory build to be larger than that. The $60 million to $80 million specifically pertains to sales that would have typically taken place in December as part of our early buy. Last year, we conducted this over a four-month period from December to March. This year, we'll be executing it over a three-month period from January to March.

The next question comes from Alex Rygiel of B. Riley FBR. Please go ahead.

Thanks, Bryan, and very nice quarter here. Could you provide a bit more color on the increase in sales guidance relative to sell-through versus channel inventory rebounding?

You talk specific for the fourth quarter?

Yes.

So for the fourth quarter, originally, we had expected that we would be looking at a flattish fourth quarter. Now I'm expecting to see a low single-digit type growth, and then there will be just a little bit of inventory build within the channel itself. When looking at the end of the third quarter, it was well below where things were last year. And so I would expect just a small rebound within the quarter. And then the meaningful inventory build will occur during the fourth quarter of next year.

That's helpful. And then I believe rail attachment rates are in that 15% to 20% range. Is there any way you could be a little bit more specific in that? Maybe talk about how that's changed in 2023. And maybe talk about how that could change in 2024.

It's a significant variance, the attachment rate depending upon the regions that we operate within and the attractiveness of our existing railing profiles to those regions out there. And it can be anywhere from 15% going all the way up to over 50%, depending upon the area. That's one of the things that we're going to work on and how can we better have a metric to reference that back to the marketplace, but there's such a wide variance on it today that trying to pick a single metric on overall attachment rate doesn't work all that well for us. But what we do see is where we have those lower attachment rates, that means that there are areas of the marketplace that we're not hitting the sweet spot for what they're looking for and they're all opportunity for us to be able to expand that attachment rate to get it up to 50% to 60% across the board.

The next question comes from Phil Ng of Jefferies. Please go ahead.

Hey, guys. Congrats on a strong quarter, and, Brenda, looking forward to working with you going forward. So Bryan, I guess sellout was obviously quite impressive in a pretty tough backdrop in R&R. A few building products companies have talked about maybe flat to down low single-digit R&R for 2024. So assuming that's the right backdrop, do you expect to grow in that environment? And I know at your Investor Day, you guided like low double-digit organic growth. Is that something that's achievable in this current environment?

I think next year growth is absolutely in the cards for Trex. I'll go back to my comments around the brands continuing to bring consumers in. We also operate in a segment that when consumers do tend to pull back, our consumers tend to be a little bit higher income, and so they'll pull back quite as hard. So we feel good about where we stand in the market.

That's helpful. Regarding the attachment rate on railing, you've discussed it in detail during your Investor Day and mentioned it in your outlook today. Are there any significant wins you would like to highlight? How are you approaching market share capture in this business differently from previous years? Is it related to a product rollout? Also, when we consider these wins, will they have any significant effect on your margins and incremental margin mix?

I think it's fair to say, when you've listened to us talk over the past 4 years or so, we've talked about decking. And so you've heard a little bit of a shift, it's not as if we're moving away from decking. But we want the market to understand, there's a real opportunity for Trex in railing. There will be more resources both from an R&D perspective as well as focus from our sales team of how we go about ensuring that we're getting our fair share in the market. And a great example is the launch of the T-Rail system. There's a lot of people that install the low-cost vinyl railing systems in the marketplace. We put a product out there. We've had a couple of nice wins where we've been able to take competitor product off of the shelves, and they brought Trex in. They bundled it in with the rest of the program, and we continue to see great opportunity to do that with T-Rail, but also other railing profiles that we're not playing in today.

Any impact on margins and incrementals?

We focus on continually improving our margins on an ongoing basis. And some of our products have higher, some have a little bit lower along the way, but we're looking for overall continuous improvement. I wouldn't expect to see a significant change just because of additional focus on railing.

The next question comes from Stanley Elliott of Stifel. Please go ahead.

Thank you for the question, Bryan. You mentioned the cost environment and noted that there isn’t much movement in either direction. Is that primarily due to what you're observing in the macro environment? I understand that you have invested considerable effort into enhancing your recycling processes. I'm interested in the breakdown between improvements made and the influence of overall commodity prices.

One of our strategies is to implement ongoing continuous improvement programs that can offset a typical level of inflation throughout the year and enhance our overall EBITDA margin. Assuming we return to a standard environment with approximately 2% inflation, I anticipate that we can consistently counterbalance that through continuous improvement. The only notable changes we've observed in the last quarter are the rising fuel prices, particularly for diesel, and increasing electric rates in the Western region. However, these increases are not as significant compared to the inflation we experienced in the previous two years, which forced us to raise prices to manage the impact.

And then in terms of kind of some of the new product launches you've got slated for next year, you mentioned a reference, should we expect those to be more kind of in the decking category, more in some of the adjacent categories that you guys had touched on at the recent Analyst Day?

Stay tuned on that. There will be some news forthcoming later on the quarter.

The next question comes from Tim Wojs of Baird. Please go ahead.

Hey, guys. Good afternoon, Michelle. Maybe just on sell-through, the mid-single digit that you talked about, was there any kind of variance between the different types of channels that you service?

I would say the pro channel. And when I say pro, anybody selling to a contractor. So our pro channel sells to contractors, but our DIY big boxes also sell to those pro customers. That tended to be somewhat stronger than the pure DIY customer during the third quarter.

Okay. Good. Regarding the winter buy, is there any update on the $50 million shift you mentioned last quarter from Q4 to Q1? Did you implement any structural changes to the winter buy program, or is it simply a reduction of one month compared to previous years?

The main difference is that it's one less month. Other than that, the program is quite similar. We do make some adjustments based on the feedback we receive from our channel partners each year and the specific areas we want to focus on. But overall, it's not significantly different from what we've done previously.

The next question comes from Rafe Jadrosich of Bank of America. Please go ahead.

Hi. Good afternoon. Thanks for taking my question. Bryan, on the 4Q marketing investments, would you be able to just quantify it a little bit for us? Like should we be thinking about SG&A dollars maybe flattish quarter-over-quarter? And is any of that a pull forward of investments?

I don't expect it will be flattish. You can back into it with the SG&A guidance where we talked about 15% to 16%, but being at the higher end of that part of the guidance and back into a number for the fourth quarter.

Okay. And then, I mean, there's been a big step-up on SG&A this year, it seems like it's been effective in driving the demand and sell-through. How do we think about the level of spend that's appropriate going forward? And as we go into next year, do you think that the 2023 run rate is the right level?

I believe we will keep utilizing SG&A as one of the key opportunities for improving our EBITDA over time. I don't anticipate we'll achieve a 40 to 50 basis point annual improvement, but a 20 to 30 basis point level is definitely feasible.

Got it. Okay. And then just one more quick question. Can you discuss the sellout trends now that railing is becoming a bigger part of your business and you're focusing more on it? How did the decking sellout trend compare to railing? Did one outperform the other, or were both in that mid-single-digit range?

Both of them were in that range.

The next question comes from Michael Rehaut of JPMorgan. Please go ahead.

Hi. Yeah, good afternoon. Thanks for taking my questions. So first, I just want to make sure I heard you correctly from before in terms of 4Q into 1Q. It looks like from like 2015 to 2019, there was a seasonal move of about $40 million to $50 million of higher sales in 1Q versus 4Q. Are you saying that we should expect it to be a little greater than that due to that month shift maybe by another $15 million or $20 million? Is that the right way to think about it? Just want to make sure I was understanding you correctly.

I think the more important part is we're a bigger company today from those years that you're looking at. So yes, the number would be higher. But the model really hasn't changed where it's extremely important that, that inventory gets pre-staged in the marketplace before the season really turns on during the peak seasonal months.

Okay, I understand. Regarding the attachment rates for railing and the potential there, you've also increased your capacity over the past couple of years. Can you provide any insight into the market baseline for 2024? How do you see the growth opportunities, whether through enhancing your sales efforts in railing or exploring additional avenues with your increased capacity to expand your distribution channels? What do you anticipate the growth opportunity might be beyond the market for the coming year?

We'll talk more about next year as we get into the end of the year call. But I think when you look at over the longer term, inclusive of our Investor Day of a 12% top line and growing our EBITDA margin by 500 basis points through 2028, that's inclusive of that railing and decking growth.

The next question comes from Kurt Yinger of D.A. Davidson. Please go ahead.

Great. Thanks and good afternoon, Brian just wanted to start off on sell-through. When you talk about the mid-single-digit growth, is that based on sales out of two-step or more reflective of kind of point of sale at the dealers and retailers themselves? And then as we kind of think about the full year guide of $1.09 billion in sales, we think about some of the sales being pushed into Q1 of next year, is kind of a realistic kind of full year sell-through number kind of in that $1.15 billion in sales? Is that a reasonable starting point as we start thinking about 2024?

We'll discuss 2024 in more detail during the next call. Regarding the sell-through, it has been relatively consistent with the quarter's performance, not just specific to Trex. This removes any changes that might occur in inventory.

Okay. Got it. And then this last quarter, one of the kind of more notable shifts that we heard on the contractor side was just kind of a thinning of project backlogs and in some cases, those being below normal at this stage. Is that a theme you've heard of all out of your contractor network? And how does that maybe impact your view around underlying demand trends going forward?

What we're hearing is there's some thinning for some of the smaller projects that are out there. But the bigger projects, there continues to be a good backlog and quite robust demand for those larger product projects.

The next question comes from Reuben Garner of The Benchmark Company. Please go ahead.

Thank you. Good evening, everybody. Bryan, did I hear you mention increasing capacity in the near term? If so, how are you approaching that? Have you quantified how much? Is there any near-term investment or impact on margins from this?

No. Remember, we pulled back our capacity quite significantly last July. So this is just bringing back on some of that capacity. And I would expect the fourth quarter just to be marginally higher than where we were in the third quarter.

Is there a possibility for an inventory buildup next year where some of your customers might increase the amount of product they keep on hand as you expand? I assume this scenario is not included in the $50 million to $80 million estimate you mentioned. Would that represent a significant opportunity, or is it likely to be something less impactful?

I think what you're asking is there a one-time infill related to it. Clearly, as we end up with new products, there are going to be one-time infills. These infills are not nearly to the same degree as, for example, when we launched Enhance back in 2019, and we had, I think it was, five or six different colors and a bunch of different links. We had the basics, we had the enhanced product. It was a material infill. So the railing piece will be part of our normal early buy. And there will be some level of infill, but it's not going to drive the growth on its own.

Congrats on the strong results.

Thanks.

The next question comes from Steven Ramsey of Thompson Research Group. Please go ahead.

Good evening. I have a quick question for clarification. Did the professional segment outperform DIY? You mentioned whether DIY was a drag or if the professional segment simply performed significantly better, but both were positive.

What I want to clarify is that both Home Depot and Lowe's sell to professional contractors. If I separate my professional customers from those who are doing it themselves, that segment was weaker. However, anyone selling to the professional channel has continued to perform somewhat stronger and contributed more to the growth.

Okay. Helpful. And then getting into the nuance of higher SG&A spending at the high end still on a percentage of sales, but a higher dollar amount as well. Is there a way to think like-for-like spending on higher SG&A spend on decking versus how much of that is related to driving demand in the ancillary products like railing?

We've not tried to split that out. We are continued to focus on our branding effort to make sure we're doing everything that we can to bring those customers in the door to buy a Trex product, especially while the weather continues to hold up here at the end of the season.

The next question comes from Matthew Bouley of Barclays. Please go ahead.

Hey, good evening, guys. Thanks for taking the question. So on the fourth quarter margin guide, I think even with SG&A getting to the high end of your full year guide, I mean, it still implies that step down in gross margin in the fourth quarter. I think you said earlier that the timing of some of your production economics is going to play into it. But my question is, was the production in Q3, I guess, enough to take your gross margins down to that degree in Q4? Is there anything else hitting the gross margin in the fourth quarter? Or are you just sort of building in conservatism there?

It's primarily related to the production economics. So the revenue is significantly lower than it is in Q3. Not all of the costs that go through manufacturing end up getting put into inventory. You saw that impact last year in the fourth quarter. And so that's just a continued part of the impact from the way the costs flow through the balance sheet and inventory.

Perfect. Got it. Okay. And second one, on the last comment that, that sort of true retail DIY was a tad weaker, how do you read into that? Historically, have you seen that DIY lead pro or perhaps not? Is it just different types of consumers? My question is really what do you make of that, Bryan?

I think at the lower cost decking side of things, it has probably more of an impact in the short term. But everything that I'm seeing is that the consumer that's looking to do the larger projects and using the higher-end material is absolutely there. We talked about the tailwinds from higher interest rates preventing people to move up, and we're hearing that as a continued story line coming back from our contractors as well as our dealer body.

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

Thanks for everybody's participation today and your support of the Trex Company and our growth objectives. We look forward to speaking with many of you in the coming weeks. Good evening.

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