Good day, and welcome to the Trex Company, Inc. Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Casey Kotary, Investor Relations Representative. Please go ahead.

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 second 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?

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.

Thank you, Amy and thank you all for participating in today's call to discuss our second quarter results and our business outlook. Our second quarter sales performance reflected strong demand from the high-end consumer, partially offset by softness in sales of entry-level products. This aligns with recent data on consumer buying trends. Sell-through of premium products grew at double-digit rates, demonstrating the enduring appeal and value of our Trex-branded outdoor living products with homeowners seeking beautiful, high-performance decking and railing for their outdoor spaces. In particular, the success of our recently launched Trex Transcend Lineage decking and Trex Signature lines along with our higher-end railing products appeals to higher income, economically resilient customers who seek the best in aesthetics and performance. In the second quarter, our financial results demonstrated the substantial operating leverage inherent in the Trex business model as well as the strength of our continuous improvement programs. During the quarter, we were able to generate 6% sales growth, resulting in a 13% net income improvement and 11% growth in EBITDA, resulting in a 180 basis point improvement in EBITDA margin. The improvement was driven by efficiencies within our existing production capacity and by leveraging our SG&A expenses. These results were achieved while we increased investments in branding and product development. Our cost-out initiatives are ongoing and will continue to contribute benefits for the remainder of this year and beyond. New product introductions are a strategic priority for Trex to drive future growth. To unlock their full potential, we design our new products to offer better options than what is currently available, and we differentiate them through customized engineering with long-lasting quality synonymous with the Trex brand. For example, we launched the Trex Select T-Rail in mid-2023 to narrow the price gap between high-performance composite railing and lower-priced PVC vinyl railing, thus appealing to a broader consumer audience. In its first year, the Select T-Rail product has been embraced by the market, as demonstrated by many dealer and contractor conversions. We see significant opportunity ahead of us and further market conversion success with the introduction of our all-in-one post kit for the Trex Select and enhanced railing that will further improve Trex's value proposition versus vinyl railing. Two weeks ago, we announced the introduction of Trex Signature X Series Cable Rail and X Series Frameless Glass Rail. These new premium offerings not only simplify specification and installation for cable railing but also provide the flexibility to accommodate frameless glass, giving consumers more style choices to achieve their desired outdoor aesthetic. These launches align with our strategy to build out a comprehensive railing product portfolio that appeals to a broad consumer base. Our ongoing objective is to significantly increase our penetration of the $3.3 billion railing market, and we are pleased with our success-to-date as these new railing products will strengthen our portfolio for years to come. We're also pleased with the market response to our recent launch of Trex-branded fasteners. The deck fastener category represents a market opportunity of approximately $250 million per year. We are seeing positive sell-through from our home center and pro channel partners as they leverage a total Trex solution for decking, railing, and fastening, and we expect to capture meaningful share gains for these products in the future. Looking ahead to the second half of 2024, there are two main factors impacting our outlook for the back half of the year. First, we see accelerated weakness in the entry-level product category; and secondly, we anticipate the current economic uncertainty will result in a reduction of pro channel inventories. With respect to our revised sales guidance, a meaningful portion of our projected sales decline is related to incremental channel inventory built in the first half of the year. We have better real-time visibility to our channel partners, allowing for quicker, more tactical inventory adjustments to evolving market conditions. To put numbers on this, approximately 60% of the decline relates to the channel inventory reduction, while the remainder is due to low-end product softness. Keep in mind that we did anticipate the $40 million in incremental channel inventory that we described in the first quarter would be worked down by the end of the year. We now believe that work down will be somewhat higher. Despite weakness in consumer spending and the repair and remodel market in general, Trex remains well-positioned for long-term success, with market-leading brand awareness, the highest availability of products in the market, and expanded market opportunities. Trex also has a category-leading presence at home centers. More recently, related to a home center line review, we will increase in-store stocking locations for our enhanced railing products and add two new decking colors. In spite of expectations for short-term weakness, our long-term outlook remains very positive. Trex is a primary beneficiary of several important secular growth drivers, including the large number of decks in the U.S. that are at or beyond replacement age and the record growth in U.S. homes that are candidates for remodel projects. The outdoor living category remains more resilient than the general repair and remodel category. And Trex decking and railing products provide homeowners with a broad range of options to add more living space while increasing the value of their homes. And of course, we continue to see the opportunity to convert more wood decks to Trex decking and railings. Our new Arkansas campus will enable Trex to efficiently meet our future demand. The project is moving forward, and we will provide further guidance on the amounts and projected timing of start-up costs when we release our third quarter results. At this point, I'd like to turn the call over to our Chief Financial Officer, Brenda Lovcik, for a financial review.

Thank you, Bryan and good evening everyone. I am pleased to review our second quarter 2024 and year-to-date results. In the second quarter, net sales were $376 million, an increase of 6% compared to the $357 million reported in the second quarter of 2023. As Bryan noted, while we continue to see double-digit sell-through in our premium products, sales of our entry-level products were a little below our expectations, but consistent with recent data on consumer buying trends. Gross margin was 44.7%, an 80 basis point expansion from 43.9% in the second quarter of 2023. We were pleased to have once again delivered strong margin performance. The improvement is primarily the result of our continued focus on identifying and delivering on our continuous improvement programs as well as benefits from greater absorption of our fixed costs due to higher production levels. Selling, general, and administrative expenses were $51 million or 13.6% of net sales in the second quarter, flat in absolute dollars, but a 90 basis point improvement as a percentage of net sales. This performance reflected lower personnel-related expenses, which offset higher branding and new product development costs as we continue to invest in high-return areas that will drive the future growth of the business. Net income was $87 million in the second quarter or $0.80 per diluted share, an increase of 13% from $77 million or $0.71 per diluted share reported last year. We delivered EBITDA of $130 million or 34.6% of net sales, up 11% compared to the $117 million or 32.8% of net sales in the year-ago quarter. From a year-to-date perspective, net sales for the first half of 2024 totaled $750 million, a 26% increase compared to the $595 million in the first six months of 2023. This is largely the result of higher sales volumes from a compressed early buy as we shifted approximately $75 million from December 2023 into Q1 of 2024. Sales volumes also benefited in Q1 from the restocking of channel inventories in preparation for the beginning of the decking and railing season. We estimate sell-through at high single-digits and low single-digits for Q1 and Q2, respectively. Please note that our definition of sell-through only considers point-of-sale transactions at both home centers and within the pro channel. Net income was $176 million or $1.62 per diluted share compared to $118 million or $1.09 per diluted share in the first half of 2023. The 26% year-to-date sales growth highlighted earlier converted to the first half EBITDA growth of 42% and EBITDA margin expansion of 390 basis points to 35.1% from 31.2% a year ago. Year-to-date, operating cash flow was $20 million compared to $108 million in 2023. The decrease was primarily due to an increase in accounts receivable and higher inventory levels. The increase in accounts receivable resulted from the 26% increase in net sales, while the increase in inventories is the result of increased production, primarily related to the new product introductions in both decking and railing as we prepared for the product launches that Bryan noted earlier. We invested $73 million in capital expenditures, primarily related to the modular build-out of the Arkansas manufacturing facility. The build-out of the new facility is on track, and we are currently scheduled to start up production of our plastics operation in the first half of 2025. During the Q3 earnings call, I will provide more detail around the startup costs and margin impact related to this new facility. I will now discuss updates to our guidance. Based upon our first half results, together with our current visibility into the second half of the year, we have reduced our full year sales guidance by approximately $85 million at the midpoint. As Bryan noted, approximately 60% of that adjustment relates to anticipated channel inventory reductions, while the balance is attributable to softness in the market, primarily related to entry-level products. At year-end, we expect inventory levels at distributors and dealers to be at the appropriate levels to service the market. We now expect 2024 net sales to range from $1.13 billion to $1.15 billion, but we are maintaining our full year EBITDA margin guidance at 30% to 30.5%, which demonstrates how effectively our teams are executing on our cost-out programs. Full year SG&A expense as a percentage of net sales is expected to be in line with last year as we continue to invest in branding and new product development. In addition, we anticipate our full year effective tax rate to be approximately 25% to 26%. We expect Q3 sales in the range of $220 million to $230 million. Consistent with prior years, we expect slight gross margin deterioration from this year's Q2 levels. We also expect the Q3 FY 2024 gross margin percentage to be slightly below third quarter 2023 levels as we continue to take down production to align with demand. SG&A in absolute dollars is expected to be approximately flat with Q3 2023. With that, I'll now turn the call back to Bryan for his closing remarks.

Thanks Brenda. In the second quarter, we published our 2023 sustainability report named Seeing More Value and Sustainability. The report charts our progress across a broad spectrum of company activities and expands on several key points, including Trex's commitment to circularity, our safety record, training and educational opportunities, manufacturing efficiency, and community engagement. We're proud of the actions we've taken to continually operate Trex in a sustainable manner, and we're pleased we can share these details in our 2023 report. Our year-to-date business operating and financial results reflect excellent teamwork across the Trex organization and with our channel partners. Trex is the most widely available and recognized brand in the industry. We remain focused on making it easy for consumers to dream, design, plan, buy, and build their outdoor space with Trex products available at more than 6,700 retail locations worldwide. Operator, I'd now like to open the call to questions.

We will now begin the question-and-answer session. Our first question comes from Susan Maklari with Goldman Sachs. Please go ahead.

Thank you. Good afternoon and thanks for taking the questions. Can we start with some additional color on how you're thinking about the sell-through in the second half given the channel destocking that sounds like it's now going to be coming through?

Yes. So, if we think about the course of the year, what we've been seeing, first quarter, as we look back on and developed all of the data we had, we found that overall sales were high single-digits. We originally talked in earnings about a big and mid-single-digits. But remember, I've also talked in the past that first quarter sell-through isn't all that high. It's generally Q2 and Q3 that are really what makes the year. We look at the second quarter, it declined to a low single-digit in totality. So, it did accelerate from a downside perspective, especially as we moved into the month of June and then we saw that same behavior during the month of July. We felt it prudent to project Q3 a low single-digit decline during the third quarter and then a high single-digit decline during the fourth quarter. Again, the fourth quarter volume isn't going to be that extreme moving through the marketplace; a much larger effect will be felt during the third quarter. And that's where you see the largest impact from the reduction in our guidance for the rest of the year.

Okay. That's helpful.

And just one more quick point. Much of that will be managed by reducing inventory in the channel. While we anticipate a low single-digit decline, the sales figures from Trex don't necessarily represent what's actually being sold. This will be managed with the existing inventory in the channel.

Okay. All right. Thank you for that. And then you've been pushing some of these new products despite the tougher operating environment. As you look out and you think about some of the dynamics that are coming through, what is your willingness to continue to ramp these investments? And anything else that's coming through on the horizon in the near term that we should be aware of in terms of new introductions?

I think there's no better time to go after either new markets for us or other areas where tertiary players are engaged in decking and railing and try to take more of that share. So, that won't change our strategy one bit.

Okay. Thank you for the color. Good luck with everything.

Thanks.

Our next question comes from Keith Hughes with Truist. Please go ahead.

Thank you. I guess your commentary on the third quarter, I think you said gross margin was going to be, I guess, down modestly over year-over-year, I just want to make sure I heard that right? It seems like there'll be a lot more pressure given the revenue projection. Is there other things going on that are helping out the numbers?

You heard us correctly. So, there will just be a slight deterioration from last year. You're right, there are additional pressures. But as we highlighted, the work that we've been doing on our continuous improvement programs, we'll continue to see the benefit of that offsetting some of the other weaknesses. We also have a significant temp staff that, again, we're able to do more flexing especially in the first half. So, yes, we're expecting just slightly below a year ago.

Okay. And second question. Usually when we see these inventory takedowns, they tend to come more in the winter months. Was it just the severity at which sell-through fell off in June and July that's necessitating this move in the third quarter, Bryan?

Well, we'd normally see inventory sell-downs in the second half of the year. That's normally the way it works. We move inventory into the channel during the first quarter, continues to build usually into May, and then we start to see a decline in the channel through the end of the year. So, it isn't all that different from what we've seen in the past. Unfortunately, what's happening is the end market demand isn't strong as we originally thought it was going to be and our channel built for a long way. So, there's a little bit of excess inventory that's coming out to reconcile where channel inventory is against the demand.

Thank you.

Thanks.

Next question comes from Ryan Merkel with William Blair. Please go ahead.

Hey thanks for the questions. I wanted to start with the retail slowdown. Can you just walk us through how the quarter progressed there? It sounds like June, there might have been a more sudden slowdown? And then a second part to that question, are you assuming the second half for retail is worse than what you saw in the second quarter?

Yes, what we see is June and July are really key months for retail. You start getting everybody out of school, you've got more vacations, you have more promotions occurring within retail, and those do tend to be your highest volume months of the year. We did see the performance as we moved through the month of June. We did see a decline as the month went on. And in the month of July as well, we saw a weak performance. So, those two data points where a material amount of revenue comes through those channels, we felt as though there was enough data there that we needed to change the full year numbers.

Yes. Okay, that makes sense. And then I wanted to move to the pro. You mentioned some encouraging signs and I'm just curious, are you assuming the pro is also slower in the second half? Or is that outlook not changed too much?

Yes, we are observing some positive trends in the professional segment as well. Our sample sales are increasing, and the results from our dealer and contractor searches show improvement. Contractors are currently experiencing a backlog of about six to eight weeks. However, they are indicating that they need to put in more effort to finalize sales at this time. We have identified some positive indicators in higher-level parts of the business and acknowledged that entry-level products are also contributing to sales in the professional channel. While there is some impact, it is certainly more significant in retail.

All right. Thank you.

Thanks.

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

Hi, good afternoon. Thank you for taking my questions. I wanted to follow up on the destocking to understand its magnitude. In your original guidance, you mentioned $40 million, and now with the guidance cut to about $85 million at the midpoint, with 60% of that coming from destocking, are you suggesting that the full year destocking is around $90 million? Is that approximately correct? Additionally, I thought the channel inventory was normal or perhaps even below normal coming into this year. Where does inventory currently stand, and where do you anticipate it to be by the end of the year compared to normal or pre-COVID levels?

Yes. The key point that seems to be overlooked is that the channel increased inventory levels in anticipation of mid-single-digit growth for the year. However, as we assess the full year now, we expect sell-through to be approximately flat. We haven't finalized our projections for next year yet, but we anticipate a year-end inventory decrease, likely between $20 million and $30 million on a year-over-year basis.

Okay, that's helpful. And then just how much of your business would you sort of define that low-end entry level segment? And then R&R trends have been soft for a while, like that isn't a new trend that it's recently slowed, what would you attribute to kind of the more recent slowdown on the DIY side of the business? Is there anything specific you can point to?

We haven't broken out product line revenue from a retail perspective, roughly 35% to 40% of our overall revenue comes through the home centers. That's a combination of on-the-shelf sales as well as special order. Now, mixed within there are going to be premium products, special order leans heavily towards those premium products. Your second question? Sorry, I missed that.

There has been a slowdown in the low-end entry level.

Yes, that's right. So, the slowdown from an entry-level perspective. I kind of break our customers into three different levels. It's more the lower-income that's not heavily engaged with Trex and buying composite decking. And then you have the next two-thirds, you've got that middle-range customer and that higher-end customer. And up until the June timeframe, that middle range in the upper customers were doing pretty well. As we got into June and July, we started to see those mid-level customers struggle and start to see that pull back as well, too.

Thank you. Appreciate it.

Thanks.

Our next question comes from John Lovallo with UBS. Please go ahead.

Hi guys. Thanks for taking my questions as well. The first one is, Bryan, given the uncertain macro and some softness here at the entry level, what are you seeing on the pricing front? Is there any pressure either at the low end, particularly, but even in the middle end of your product portfolio?

Well, let's start with the low end. From a low-end perspective, we sell at about $2 a linear foot. That's about 2x the price of lumber. You can buy low-quality pressure-treated lumber. It's going to be in that $0.80 to $0.90 a linear foot range. Medium-quality pressure-treated lumber is about $1.10 on a linear foot. So, we're still right in the range where market research tells us that consumer is willing to spend an extra couple of hundred dollars so that they can move up and have a composite deck. We really haven't seen much occurring from a pricing perspective. I'll just jump in from a deflationary perspective, we really haven't seen deflationary factors coming through our business. And from an inflation perspective, we haven't seen that. So, from an overall cost of purchasing perspective, we haven't seen significant changes. We haven't made any decision on pricing for next year at this time, but I'd expect overall there to be a relatively muted environment.

Okay, understood. And then given some of the recent pullback in the stock, along with many stocks, but potentially a little bit more pressure here tomorrow, how are you guys thinking about the opportunity for share repurchases?

We have a program available to us that can purchase up to 10% of the float of the company. As you've seen in the past, when there have been opportunistic times to be in the market, we've been able to be very active in the marketplace.

Our next question comes from Alex Rygiel with B. Riley FBR. Please go ahead.

Thank you. Hey Bryan, with regards to the line review and increased in-store stocking, what quarter is going to be mostly impacted by this? And how should we think about the order of magnitude of it?

Yes. We'll see that changeover starting during the third quarter of this year. The two new colors will replace two other colors in probably half of the stores. And then from a railing perspective, that's going to be in the third quarter as well.

That's helpful. I know it's a bit early to consider 2025, but I would like to hear your thoughts on EBITDA margins in that year, especially with regards to how new products will be integrated and the shift in product mix.

A little bit earlier to be talking about 2025 EBITDA margins. We need to understand volume, what our production capacity is going to be. But I think we can go back to our overall philosophy on how we operate the business, and we have a continued focus on improvement programs across the organization. We've got a great pipeline that we're implementing in 2024. We'll see the benefits of that in 2025. Of course, there's another pipeline for 2025 projects that we'll see benefits along the way. This is an organization that is focused on gross margin and EBITDA improvement along the way, and we'll continue to do that regardless of the market volumes.

Very helpful. Thank you.

Thanks.

Our next question comes from Michael Rehaut with JPMorgan. Please go ahead.

Thank you. Good afternoon everyone. I appreciate you taking my questions. First, I would like to understand more about the premium product sell-through being in double digits, especially considering the challenges at the lower end. Can you also discuss how the mid-market is performing this quarter? Additionally, it seems you anticipate a slight worsening of sell-through in the fourth quarter, although starting from a lower base. As you evaluate these various market segments, what are your expectations for the fourth quarter sales guidance?

It's somewhat linear. Your lowest end products are going to be the weakest, the midrange are going to be less weak, and then we're continuing to see strength in the higher end, and that higher end being Transcend and Transcend Lineage. Same thing from a railing lineup perspective.

Okay. I would like your thoughts on the sector's positive outlook, which is supported by the ongoing strength in outdoor living trends and the shift from wood to composite materials. This year, it seems like sell-through will be fairly stable overall, if I understood you correctly. Are you concerned about the pace at which the market is transitioning from wood to composite? You still expect this transition to outpace the broader repair and remodel market, but I was wondering if the conversion rate, which has been increasing by around 100 to 200 basis points annually over the past few years, might be affected this year by some of the challenges in certain parts of the market that you've identified.

Too early to call where the year is going to come out from that perspective. But from an overall perspective, as we made it through the first half, we haven't seen it turn back towards wood at all, and we do still see market conversion when we look across the entire portfolio against wood. So, a little bit early to make a call on the full year, but I don't have any great concerns that the underlying consumer behavior of wanting high-quality materials, low-maintenance and affordable to purchase and install will stay with us.

Great. Thanks so much.

Thanks.

Our next question comes from Tim Wjos with Baird. Please go ahead.

Hey, everybody, good afternoon. Maybe just on the sequencing kind of this year and on a go-forward basis, do you kind of expect the channel on a go-forward basis to kind of act like they're acting this year in the sense that a lot more inventory gets brought in, in the first half of the year and then they kind of destock to a greater extent in the back half of the year, just given the lead times? I'm just kind of curious if you think there's kind of a structural kind of change in the way that the channel thinks about inventory?

Well, the first thing I'd like to call out is I think the channel has done a great job this year in servicing the overall marketplace. And we collectively, Trex and our channel partners struggled over the past couple of years, making sure that we had all of our SKUs in stock so that we could get timely delivery. A lot of it, we could do it. But there were certain things that we missed along the way. I think our channel has done a great job in bringing the right amount of inventory and to support the marketplace to grow at mid-single-digits. Now, we see that the market is not going to grow at that level; there is going to be an adjustment. I think as we look at potentially next year, first quarter, I'm not sure it's quite as heavy probably as what we saw this year along the way, for example, that $40 million excess that we talked about, that may not occur next year along the way. We'll probably have that on our ground, so we'll be able to support whatever the market does at that point. So, I wouldn't say there's anything structurally different in the marketplace. Distribution and manufacturers and seasonal businesses have always loaded in during the first quarter of the year and starting May, June timeframe, start bringing that inventory down. And when there's a shift in the economy in the midst of that, that does result in an inventory change. Fortunately, we're able to see those inventories pretty clearly, and we can make an adjustment on it before we continue producing too much or moving more into the channel, which exacerbates the issue.

Okay, that's helpful. Regarding marketing and branding in a slower demand environment, do you see that as a means of downside protection or leverage? Or is this a situation where, since things are a bit slower, we plan to increase our marketing efforts, particularly in search and SEO, to boost sales?

Yes. Thank you, Tim, this is Brenda. We continue to see nice returns on those investments that we're making on the branding side. So, even in a time where we're seeing a little bit of softness, we'll continue to look for ways to invest. So, we'll be, again, in particular how we do that, but you will see us continue to invest and continue to invest in the brand.

Okay. Thanks for your time guys.

Thanks.

Our next question comes from Phil Ng with Jefferies. Please go ahead.

Hey guys. I guess on 2025, I know it's really early, Bryan, if we assume a more normalized channel load in next year, is the headwind like $40 million or $70 million? I just want to make sure when we think about reversing?

Yes, I'm not going to get into what first quarter is going to be. I was just giving you an example potentially of the way to think about how inventory may not be quite as heavy next year along the way. But we'll make sure it's available, whether it's at distribution or whether it's on our ground to be able to support the busy part of the season.

Okay, that's helpful. And then you talked about wins at the home centers via line reviews. And if I heard you correctly, Bryan, you're seeing that come through this year. So, is there a loaded impact in 3Q and your sales guidance account for that? Any way to kind of size up this opportunity in terms of the win and what price point or type of mix of customer are you gaining share from?

There will be two products, we'll be moving in. It will be a basic product and enhanced natural product. There will also be a couple of existing colors that will be moving out of the store. So, those will be discounted and sold through. From a railing perspective, we'll see that over the course of the third quarter. Really, the opportunity from a sell-through perspective there is going to be into next year. We'll get a stock. Those stores will begin to market that, and we'll see that opportunity next year. Neither one of them, I would say, are particularly material to revenue within the quarter. But for the longer-term opportunity that continued making sure that we have a market-leading presence in both of the home centers, it's very important that we make these changes and we're gaining more shelf space.

Okay. But the loaded impact will be more next year, right? Or are you starting to see it now?

Sell-through impact will be more next year. We're loading in at the end of the season. If you recall, normally, when there's a change on the shelves that occurs moving into the season. It occurs generally coming out of the first quarter. In this case, our customer has elected to do it during the third quarter at the end of the season where inventory is already starting to sell down, and it reduced the cost of that transition.

Okay, helpful. Thank you.

Our next question comes from Reuben Garner with The Benchmark Company. Please go ahead. You may be muted.

Let's come back to Ruben.

All right. We will move on to the next questioner, Trey Grooms with Stephens, Inc. Please go ahead.

Hey good afternoon. So, Bryan, your inventory levels, you touched on them a bit here, but they're elevated. You mentioned new product rollout, playing a role. If you could maybe parse out how much of the higher inventory is associated with these new products? And maybe where do you see your inventory as we move through the balance of the year. I guess what is kind of ballpark your target inventory level by year-end? If you could help us with that, given the fact you've got new products. And then it also sounds like you might be willing to keep a little bit more inventory on your ground than maybe you had in the past. If you could just help us with that would be great.

Yes, I've led into that in a couple of the prior discussions that, in general, we will be willing to hold more inventory on our balance sheet, and our channel partners have all said that they're willing to carry more inventory as well to make sure that we can properly service the marketplace. So, we do have new products coming in. We've talked about some of those. There will be additional new products later on this year that we've not talked about as of yet. We don't have specific guidance on inventory, but we can look at providing some additional detail on that in the third quarter call.

Okay. Could you provide any insight into the current inventory levels in relation to the sales figures you're discussing? How much of the sales number is inflated due to the introduction of new products?

Hey Trey, this is Brenda. Most of it is connected to new products. For instance, we are heavily involved with aluminum railing. We have done a significant amount of pre-buying on aluminum to prepare it for kitting as part of our overall strategy. So, the majority relates to new products utilizing aluminum, which reflects our preparation for launching enhanced products among others. However, we do anticipate that our inventory levels will be higher by the end of the year. One of the things I appreciate about this company is the strong relationship we have with our distribution partners. I am in regular discussions with CEOs and CFOs to ensure we can meet market demand. They are a bit cautious given current demand trends. Nevertheless, we remain confident in the long-term demand expected in 2025, so we will have that inventory ready.

Okay, that's helpful. Thanks a lot. I'll pass it on.

Thanks Trey.

Our next question comes from Kurt Yinger with D.A. Davidson. Please go ahead.

Great. Thanks and good afternoon everyone. Just one question. You talked about some of the kind of positive indicators that you were still seeing in the business and recognizing we'll have to see what happens at the end of the year. I guess what indicators are you seeing that, I guess, would point to that deceleration and sell-through continuing kind of into the fourth quarter?

There are some other web metrics that we track as well that we started to see in the mid-June timeframe, and the performance we've seen as we moved into late June into July have correlated with that. I'm not going to get into those specific items. But we have seen some other weakness, which then has demonstrated with the market itself that it's prudent to take our numbers down for the full year.

Okay. Thank you very much.

Thanks.

Our next question comes from Steven Ramsey with Thompson Research Group. Please go ahead.

Hi, good evening. I wanted to see if there's any nuance to the channel destocking. You mentioned economic uncertainty. Are they reducing all products equally, or are they maintaining higher stock levels for the premium products compared to the lower-end ones?

I think they're keeping the right levels of product based off of what is selling through in the market. They're going to look at things as A, B, and C SKUs. They're going to make sure that they are well stocked on their A SKUs and bringing down their stocks on the B and C SKUs along the way. I would say it will be more probably even in the marketplace if they see more weakness at the entry level, then there may be fewer weeks of supply of some of that entry-level. And that will all get adjusted as we move through the back half of the year.

Okay, helpful. And then on railing and fasteners, I realize it's coming off a low base. Can you talk to the growth and the ramp of those products versus what you had expected? And is that growth curve reflecting some of the June-July slowness?

Well, we're seeing great growth. The Select T-Rail system we launched a year ago, and we're seeing numerous dealer conversions moving away from vinyl PVC and contractors as well who were installing vinyl PVC, making the move over to our Trex Select system. The Cable Rail System just launched. You saw there was a press release earlier this week on all-in-one-post; that's part of the Select system. Those are just hitting the market right now. So, too early to talk about that. But we are pleased with what we're seeing from a Select system. And then we have a number of other products that will be coming behind it as we move out into next year.

All righty. Thank you.

Our next question comes from Anthony Pettinari with Citigroup. Please go ahead.

Good evening Ms. Lovcik. This is Gregory on for Anthony. Just a few points of clarification, I guess, for me. So, you mentioned the middle-income Trex consumer who seem to be doing pretty well from let's call it January to May, kind of slowed down in June and maybe a little more in July. So, I'm wondering if there's a finer point you can put on the nature of the slowdown that you've seen there. Would you say it was kind of an abrupt slowdown in pro inbound leads? Would you say it was homeowners who had previously voiced interest in the category, but maybe decided not to pursue for whatever reason or maybe you have insight into other homeowners are deferring projects and not canceling all together? So, any finer point there would be appreciated.

Yes, I don't believe it has been a sudden slowdown. However, we have noticed a shift from lower income consumers to those in the middle income bracket, where individuals are becoming more selective with their spending. The high-end market continues to show demand, particularly for building decks and other premium products. At the start of the year, we primarily saw interest from entry-level buyers. Therefore, the most significant change is that we are observing a slight decrease in spending moving up to higher market segments.

Thank you for that clarification. If this is accurate, it doesn't indicate a sudden slowdown, but demand does appear to be decreasing a bit. Given that, would you anticipate your project backlogs to gradually decline over the remainder of the year from the current six to eight weeks?

Well, I would expect them to trickle down just due to seasonality. You tend to have your longest backlogs in Q2, Q3. Out into Q4, you've got certain areas where the weather is good to be building all year long. But once you start getting into the October through December time period, there are going to be areas where there isn't quite as much building going on. And so usually, your lead-times will decline anyway from that timeframe. But in general, excluding that, I think there will be some weakness, and we've included that within our numbers. So, there will probably be some decline within that.

Thank you.

Our next question comes from Matthew Bouley with Barclays. Please go ahead.

Good evening. Thank you for your questions. Regarding the economic uncertainty that is affecting inventory reductions in the professional channel, I recall that in 2022 there were similar discussions about anticipating market softness in your destocking assumptions. During that time, there was a more pronounced destock in the third quarter but less in the fourth quarter. So, my question is about the extent to which your near-term ordering patterns inform this guidance versus how much you are adopting a more cautious approach regarding where you believe the channel may be at the end of the year. What is your visibility into channel inventories considering the phasing we observed in 2022? Thank you.

Thank you, Matthew. And yes, we learned a lot during that 2022 cycle. And so as we were highlighting, have great relationships with the channel. And consistent with 2022, we would see as the majority of the destocking happening in Q3. I think one thing I want to highlight that's quite different than 2022 is that we've got better visibility at the dealer level. And in 2022, the dealers had a lot of excess inventory as well as the distributors. Right now, at the dealer level, those inventories, again, enough to service the market but are lower. We're not worried about inflated inventory at the dealer level.

Thank you for that, Brenda. On a more immediate note, in terms of your guidance of low single-digit sell-through in the third quarter, especially considering the comments from June and July, I’d like to know if you are currently observing sell-through in the low single-digit range during the first few weeks of the quarter, or if the trends are slightly better or worse than that. Any further insights would be appreciated. Thank you.

Yes, that's exactly what we saw. And that's why seeing the July numbers to understand how does that track from what we saw in the month of June. Again, they're both very large volume months, both from a home center perspective as well as from a pro channel perspective, and that is what we are seeing through the month of July.

All right. Thanks Bryan. Good luck guys.

Thanks.

Thank you.

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

Thank you for everybody's participation and questions today. We look forward to speaking with many of you in the coming weeks and at various conferences during the third quarter. Thank you.

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