Good day, and welcome to the Trex Company Third Quarter 2025 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Casey Kotary. Please go ahead.

Thank you, everyone, for joining us today. With us on the call are Bryan Fairbanks, President and Chief Executive Officer; and Prith Gandhi, Senior Vice President and Chief Financial Officer. Joining Bryan and Prith 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 third quarter of 2025. 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 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 review our third quarter results and discuss our business outlook. We anticipated 2025 would include some recovery in R&R spend based on historical trends. While there were indications of recovery in the second quarter into July, consumer demand eased during the rest of the third quarter, resulting in third quarter revenues coming in 5% below the midpoint of our guidance range. But there were a number of positive takeaways worth noting. First, our positioning in the pro and home center channels continues to serve us well and remains a long-term advantage for Trex. Second, new products accounted for 25% of our trailing 12-month sales. This compares favorably with last year's third quarter, when new products accounted for 18% of our 2024 9-month sales, demonstrating how well aligned our new product launches are with consumer preferences. Third, our railing strategy, now in its second full year, continues to yield positive results. In Q3, our sales were robust and in line with our expectations. And lastly, our profitability was strong, with gross profit benefiting from higher sales volumes and efficiencies gained from our continuous improvement projects and adjusted EBITDA increasing by 33%, inclusive of a 15% increase in SG&A spending. These results were achieved under mixed market conditions. As we look ahead, we believe these positive achievements in a challenging market will benefit Trex when the buying season begins in January 2026 in tandem with our Early Buy Program. Trex continues to benefit from the strength of our channel positioning, being the leading company in our industry that serves the pro channel and is both on the shelf and available by special order at the leading home centers. We continue to put priority on ensuring that Trex is present wherever the consumer is shopping for decking and railing products. Also, our new products, products we launched over the last 36 months, have shown impressive growth. While it generally takes about three years for new products to gain full traction, we are pleased with the early success of our most recent launches. This includes products we added to our Trex Select decking line. We launched three new colors featuring elevated aesthetics and performance, including the industry's first mid-price deck board that includes SunComfortable, our proprietary heat mitigating technology. In addition, Trex Select decking is submersible and rated for wild urban interface, making it ideal for marine applications in areas susceptible to wildfires. We now have the most differentiated mid-priced product on the market. And we continue to see strong demand across our railing portfolio, which we filled out in 2024 with the addition of our innovative cable and glass railing systems and then added our new enhanced steel system and select aluminum systems in early 2025. Year-to-date, our railing sales are tracking to the double-digit year-on-year growth that was expected, and we are well positioned to continue on this path in 2026. We continue to elevate branding, marketing and R&D spend in the third quarter to support future growth. Our new Performance-Engineered for Your Life Outdoors campaign launched earlier this year, and it highlights our leadership in delivering outdoor solutions that combine lasting beauty with real-world durability. These investments in branding and a refreshed marketing campaign have produced significant increases in early indicators of purchase intent. Trex's product sample program and website traffic are both up 50% year-on-year, and our improved cost calculator is driving higher completion rates and generating double-digit increases in lead generation for our contractors. Another highlight of the third quarter is the continued progress that we're making on our new state-of-the-art plastic processing and decking facility in Arkansas. Production rates and yields in our plastic processing operations continue to surpass our initial expectations. These results support our expectation that once it's fully built, Arkansas will be our most efficient production hub, enabling us to capitalize on growth opportunities for years to come. Our production level loading strategy, which is now completing its first full annual cycle, has allowed us to increase our operating efficiency and enabled us to work even more closely with our pro channel partners, positioning us to respond quickly when repair and remodel spend recovers. As we noted in our earnings release today, we are anticipating a muted fourth quarter and have adjusted our production levels accordingly. Our fourth quarter sales guidance considers similar market sell-through as seen in the third quarter. Additionally, the fourth quarter is the seasonally lightest period of shipments for decking, railing, and accessories, and we expect that our channel partners will manage their year-end inventory to lower levels than in the prior year. Looking ahead, Trex is moving forward with strategies designed to capture an increasing share of the conversion from wood to composite decking. In addition to including our popular SunComfortable heat mitigating technology and new decking colors to be introduced in 2026, we have new product launches planned for next year that will include features designed to expand our market penetration. We support this increased level of activity and continue to strengthen the advanced consumer awareness of the benefits of Trex decking and railing. We expect that in future periods, our SG&A spending will return to pre-COVID levels of approximately 18% of net sales. Also, we expect the mix impact associated with another year of double-digit growth in railing and additional depreciation related to the expansion of our Arkansas facility to reduce 2026 gross margin by approximately 250 basis points. Two-thirds of the 250 basis point impact is related to depreciation, with the remainder related to mix. In summary, while this year's sales are coming in below our initial expectations of mid-single-digit growth, 2025 to date has been a year of significant accomplishment for Trex despite market headwinds. I'm confident that our strategy for long-term growth positions us to realize significant gains as R&R spending recovers. Demonstrating this confidence, our Board of Directors has authorized a $50 million share repurchase program. I'm pleased to ask our new Senior Vice President and CFO to handle the third quarter financial review. Prith Gandhi only came on board a month ago, but he's already making a positive difference at Trex. Prith?

Thank you, Bryan, and good evening, everyone. I'm pleased to deliver my first financial review as Chief Financial Officer of Trex. I know many of you already and look forward to reconnecting and getting to know the Trex investors and other analysts who cover Trex. With that, I'll now review our third quarter 2025 and year-to-date results. Unless otherwise stated, all comparisons are on a year-over-year basis compared to the third quarter and first nine months of fiscal 2024. In the third quarter, net sales were $285 million, an increase of 22% compared to $234 million in 2024, driven by growth across the product range, which was led by strength in railing as well as the lack of channel inventory destocking that we experienced in Q3 of last year. Gross profit was $115 million, a 23.9% increase from $93 million. And gross margin was 40.5%, a 60 basis point expansion from 39.9% in the prior year. This increase is primarily the result of lower labor costs and production efficiencies from our continuous improvement programs. Our level loading program, which Trex has previously discussed, delivered a positive impact in Q3. Our strategic investments in the third quarter included onetime start-up costs related to the Arkansas facility of $1.4 million and onetime railing conversion costs of $0.3 million. Excluding these items, adjusted gross profit was $117 million. Selling, general, and administrative expenses were $45 million or 15.8% of net sales compared to $39 million or 16.6% of net sales in the prior year. This increase is primarily related to higher spending on branding and IT as we continue to advance on our marketing strategy and new product innovation, two elements essential to our success as the category leader in composite decking and railing. In the third quarter, onetime expenses related to digital transformation activities and the start-up of the Arkansas facility were approximately $2.4 million. Excluding these onetime expenses, SG&A expenses were $43 million or 15% of net sales. Net income was $52 million in the third quarter or $0.48 per diluted share, an increase of 27.7% from $41 million or $0.37 per diluted share. Excluding the previously mentioned onetime charges incurred in the third quarter, adjusted net income was $55 million or $0.51 per diluted share. Adjusted EBITDA was $90 million, up 33% compared to $68 million in the prior year, driven by sales growth across our product lines, expanded gross profit margin, and stable year-on-year SG&A expense. From the year-to-date perspective, net sales for the first nine months of 2025 totaled $1 billion, a 3% increase compared to $984 million in the first nine months of 2024. Net income was $188 million or $1.75 per diluted share, a 13% decrease compared to $217 million or $1.99 per diluted share. Excluding onetime charges incurred year-to-date, adjusted net income was $198 million or $1.84 per diluted share, and adjusted EBITDA was $314 million. Year-to-date, operating cash flow was $293 million compared to $152 million in 2024. The increase was primarily due to the timing of working capital changes related to our level loading and channel inventory strategy. We anticipate ending the year with inventory levels at approximately the same level as the end of year 2024. Given our continued strong cash flow generation, we will look to repurchase up to $50 million in Trex shares through the end of 2025, depending on equity market conditions. We have invested $188 million in capital expenditures year-to-date, primarily related to the building out of the Arkansas facility. Now turning to our guidance for the remainder of 2025. As noted in today's earnings release, we now expect several factors to impact fourth quarter sales, bringing them well below our original expectations. As Bryan mentioned, we expect consumer demand to remain muted in the fourth quarter, which is also the seasonally slowest time of the year. In addition, we expect our pro channel partners to lower their inventories through the end of the year. Due to these factors, we are revising our full year net sales and adjusted EBITDA margin guidance ranges. We now expect full year net sales to range from $1.15 billion to $1.16 billion, approximately flat with our reported sales in 2024. We also expect our full year adjusted EBITDA margin to range from 28% to 28.5%. This net sales guidance implies a Q4 sales range from $140 million to $150 million. The implied low double-digit Q4 adjusted EBITDA margin considers the impact on gross margin of reduced capacity utilization rates and continued spending on branding and marketing to accelerate future growth. Full year guidance for our other financial metrics include: SG&A expenses to be approximately 16.5% to 17% of net sales on an unadjusted basis; interest expense, less than $2 million; and depreciation in the range of $60 million to $65 million for the full year. We are projecting an effective tax rate of approximately 26%, and capital expenditures are projected to be approximately $210 million to $220 million for the full year as we continue the development of the Arkansas campus. The change is related to the timing of cash flows related to the completion of the project. With that, I will now turn the call back to Bryan for his closing remarks. Bryan?

Thanks, Prith. Our business landscape is changing. Recent merger and acquisition activity in both the pro channel and the home center has increased the importance of brand recognition and product differentiation in capturing end market demand. As the market leader with the largest network of contractors, dealers, distributors, and home centers, Trex is best positioned and fully committed to gaining a greater share of the industry's long-term growth opportunities. Operator, I'd now like to open the call to questions.

The first question today comes from Ryan Merkel with William Blair.

Bryan, I want to start off with sell-through. What was it in the third quarter? I know you said the fourth quarter, you're assuming the same. But also, what was the surprise in the quarter? Where was the slowdown? Was it the pro channel? Was it retail? Just any more color there? And also on cadence, it sounds like it slowed after July?

Yes. On a year-to-date basis, we saw a low single-digit sell-through. As we had our last earnings call, we did see that accelerate in June and July, giving us some confidence that that was going to continue as the year went on. Come August and September, we did not see that go on. And it wasn't channel dependent. It was really across all of the channels. Now we expect on a full year basis from a sell-through perspective to be low single digits on the year. While revenue will be flat with the prior year, we do expect to see some inventory come out of the channel, which will support that growth.

Okay. Got it. And then can you just clarify, why now that you're increasing the marketing spend and the SG&A? Is it the soft market? Is it new products? Is it rising competition? And I just want to clarify if you're guiding SG&A to 18% of sales in '26? It sounds like you are, but I just want to clarify.

Yes. We are guiding to 18%. And we feel that the marketing is extremely important, especially in a softer market to make sure that we are getting the Trex name in front of anyone who may be building a deck. We are also seeing more competitive spending from others out there in the marketplace. So backing away from that in a weaker market, we don't feel is the right thing to do. We've got some great messaging out there. We are starting to see improvements with that early indicator side of things. We just need a little bit better consumer confidence around that and a better feeling around repair and remodel. I think we'll start seeing some very attractive growth rates again.

The next question comes from Collin Verron with Deutsche Bank.

I guess just given the lower inventory in the channel in the fourth quarter and the weaker trends that you're seeing, like any kind of handle you can give around how you're thinking about early 2026 and the load-in ahead of decking season for next year, just given the softer demand that you guys are seeing as we exit this year?

I expect that we will see a robust Early Buy. I don't worry as much about Early Buy, per se. It's about getting that product stage for when the season turns on. I'm more concerned about the overall growth for the year. We've got our normal programs put together. We will get product staged out in the marketplace. We haven't laid out those targets as of yet. We'll give more detail in the end of the year call on that. But I expect the program to be similar to what we've seen in prior years.

Okay. Regarding SG&A spending, how quickly does that usually translate into an increase in demand in the past when you've experienced a slight decline in R&R and increased your spending? I'm curious about how soon you anticipate seeing a return on that investment.

I think the best way to look at it is from an overall industry perspective. We've got a repair and remodel industry that's going to be down, low-single digits. We expect our sell-through is going to perform up low single digits. So that spending that we're doing from a branding perspective as well as the industry that we're in, the conversion opportunity against wood does give us a better opportunity for payoff with that additional spending. I mentioned to the last question that came up, we are seeing a more competitive market environment from a spending perspective related to others that are out there advertising. We need to make sure that the Trex name is in front of buyers as they're looking to make that decision. So more than just about having the product everywhere that consumer is going to be buying, we want to make sure that they're walking in the door to make the purchase or they're sitting with their contractor, they've already made that Trex decision.

The next question comes from Susan Maklari with Goldman Sachs.

My first question is on the pricing side. Bryan, you had talked about realizing some low single-digit pricing in the past. I guess, given the environment that we're in, are you still expecting that to come through? Or can you talk a bit about price cost and how that is coming together?

We did take some pricing coming out of the second quarter. We also talked about not really realizing much of that pricing during the third quarter. We did have people buy ahead, and we went ahead and shipped that, of course, during the quarter itself. We saw a little bit come through in September, and then, of course, with lower revenue in the fourth quarter, you don't see too much impact for that.

Right. Okay. And then maybe turning back to brand. You obviously have a very well-established brand and something that is recognized by a lot of consumers. As you think about spending on the marketing and helping to drive that recognition, are there things that you're changing in your approach to your ad and marketing spend? And how are you able to leverage some of the investments you've made in the last couple of years around digital and data gathering to further that and make sure that that spend is really effective?

Yes. Jodi Lee, who is our Senior Vice President of Marketing, joined us, I guess, about 5, 6 months ago at this point, and we're already starting to see the benefits of some of the changes that she's making from a messaging perspective, how we're getting in front of those consumers. I expect as she gets a full year under her belt and we move into next year that we even have more engaging programs related to that marketing message. So I'm pretty excited about the things that are on the plate as we move forward.

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

Bryan, how do you feel about the conversion rate of wood to composite and your market share trends within the category today versus where it's been historically? Or maybe year-to-date versus where it's been historically?

Yes. Last quarter, we reported that through the end of 2024, there was 170 basis points of conversion from wood to composites. I don't have new data since that timeframe. We do have pieces of data that come in from the channel itself, and what we are seeing is that there is continued conversion that's out there. I wouldn't say it's probably fine enough that I could put a basis point of conversion on it. But the data would indicate that consumers are still trending towards those composite products. Our strategy with our Enhance Basics, which is really that wood alternative at about 2x the price of wood, and then our Enhance Naturals product, roughly 3x the price of wood, is giving that consumer the opportunity to see they can afford a Trex deck and be able to move up to a higher-end aesthetic with that Enhance Naturals. That continues to be an effective strategy.

Okay. As the conversion continues, I want to understand the increase in SG&A. You mentioned in the release that you're returning to pre-COVID levels. I have to look back to 2017 to see that SG&A was around 18% of sales, and your sales base is now twice that amount. Is the current spending level a catch-up due to past underinvestment, indicating a new opportunity, or should we consider it as a suitable long-term run rate?

During COVID, we significantly reduced our marketing efforts. Now, we're returning to a more typical marketing approach, which is based on two factors: first, the current challenging market conditions. We believe that combining marketing with our sales initiatives can create better opportunities for us in the market. As we progress and return to the growth levels that Trex usually experiences, I anticipate that we will identify some leverage opportunities within SG&A again.

The next question comes from Keith Hughes with Truist.

Sell-through is lower than you've anticipated, as you said, but it seems like a pretty drastic reduction in production and ordering from your customers. Are they anticipating business to continue to deteriorate going into next year?

We originally expected growth in the range of 5% to 7%, but now we anticipate it will be in low single-digit levels. This change is primarily noticeable in the fourth quarter of this year. I don't foresee anyone increasing inventories as we approach the year's end. It's also important to highlight that the channel has improved its inventory management. We offer a variety of SKUs across different decking colors and railing products, and our channel partners continue to enhance their supply chain efficiency each year. This is why we predict a reduction in inventory. Looking ahead to next year, we are coming off three years of declines in repair and remodel, and there is growing pent-up demand. Eventually, this demand will be released, and we will be ready to capitalize on it.

If sell-through remains constant, will you return to normal production in the first quarter?

We will finish our inventory approximately at the same level as last year, and there will be a slight increase in the new year. If market conditions improve, we will be able to introduce a couple more product lines without any issues.

The next question comes from Ketan Mamtora with BMO Capital.

Bryan, can you just remind us, some of the incremental cost that you had in the first half of '25 related to enhanced retooling, should we expect that to sort of reverse in 2026? And how much can you quantify that for us?

We didn't call that specifically out as a one-timer. It was under $5 million in the first half, the majority of it in the first quarter and then a much lesser piece of it in the second quarter. But no, I would not expect that to repeat next year.

And then any sort of early read into how CapEx would shake out for 2026, given that you are sort of almost at the end of the big Arkansas plant?

Yes. We still have $40 million, $50 million of Little Rock to go that will be in next year. And the other side of our cap spending will be down considerably as well. So we've talked about maintenance of business CapEx being in the 5% to 6%, but probably even the next few years because we have a new plant that it could be a little bit lower than that. We're probably looking around the $100 million range or so.

The next question comes from Tim Wojs with Baird.

Bryan, on the gross margin headwinds in 2026, the 250 basis points that you're talking about with D&A and just railing mix, are there any offsets to that we should think about? Because I guess if we have a couple of hundred basis points next year of margin compression, it does seem like it might be hard to actually generate gross profit growth or EBITDA growth. Just trying to kind of understand what might offset that mix to mix headwind.

We are facing some additional costs in the business, particularly due to higher labor costs and general inflation. Our continuous improvement program is currently helping to mitigate these issues. However, we are specifically highlighting the impact of depreciation, as we don’t have a solution for it next year. In the following year, once we start production in Little Rock and optimize our production footprint, we believe there will be an opportunity to counter this. Additionally, the mix of our products is affected by tariffs on new items, whether they involve aluminum or steel sourced domestically or imported. As a result, we are unable to fully capture the revenue needed to offset those tariffs against the current market conditions.

Okay. Understood. And then I guess as you think about the sell-through numbers this year, just to clarify that, the low single digits, does that include or exclude the double-digit growth that you're seeing in railing?

Includes.

The next question comes from Michael Rehaut with JPMorgan.

Thanks. Good afternoon, everyone. Just wanted to see if I could get a little more granular if possible, on the 3Q, 4Q, the 3Q miss versus guidance and 4Q reduction. In total, it's about $65 million plus or minus a little, $15 million in the third quarter. Just trying to get a sense when you think about that, how much is just due to the softer market backdrop relative to your prior expectations versus the reduction in inventory? And also just trying to understand maybe by price point, there was some differentiation in the market earlier in the year in terms of low end versus mid- to high end, and if you're seeing any differentiation in the second half?

Sure. Through the numbers that we already provided, we assumed a prior guidance, 5% to 7% growth, the same thing from a sell-through perspective. Now we're talking about a low single-digit growth. So let's call it roughly half of it, a little bit more is coming from the market weakness side of it, and the remainder is coming out of inventory within the channel. As it relates to the various product lines, if we look back the past couple of years, excluding 2025, we did see meaningful differences at the high end of the market versus the entry-level products. That has not been nearly as impactful. It's really just been kind of broad-based at this point, where there is one level of the product line that's overperforming or underperforming. We've just seen it kind of across the entire decking/railing side of the business. Now we did mention with the new product, railing is growing nicely. But again, from a decking perspective, there's really no major difference from a growth perspective, the high versus the low.

Okay. I appreciate that, Bryan. Also, I just wanted maybe a little clarification, if possible, around the 18% SG&A number for next year, if that's kind of a percentage that you would peg to any top line number? Or is it more of a comment on an absolute basis where you're trying to peg a certain dollar number, and that 18% could be higher or lower based on how revenues actually come out?

With the planning that we're working on at this point, we believe 18% is the number we have for everybody right now. However, that could change if we see a considerably stronger or weaker market.

Okay. So maybe asked another way, would that 18% reflect kind of like a low single-digit type top line growth, which if you're thinking maybe the market is flat and composite outperforms a little bit? Is that a reasonable way to think about it?

We'll provide further guidance on revenue during the end of the year call.

The next question comes from John Lovallo with UBS.

The first one is, any thoughts on your largest competitor gaining some business with Boise Cascade and if this at all changes your strategy with Boise?

No, it does not change our strategy with Boise. I think what you've seen with various distributor announcements just recently here is just normal end-of-the-year type movements as you see products coming into a location that really hadn't been carrying much, much in the way of decking. And then in other cases, locations that are moving over to Trex which are moving out of competitive products along the way. So I wouldn't read too much into that.

Okay. And then I know it's tough to tell in a short period of time, but do you get any sense that you're seeing share shifts among you and your largest competitors keeping the wood side out of the equation just on the composite side?

Our sales team is very active in the market, tracking what our contractors are doing, understanding overall market growth of where we are. We're not seeing indications of that at the ground level.

The next question comes from Trey Grooms with Stephens.

And kind of touching again, I know this has been discussed a lot, but the 18% SG&A next year, I think branding costs have historically run about 6% or so of sales, if memory serves me. And so is that roughly the way we should be thinking about branding spend as part of the kind of 18% SG&A mix? Or would it be higher here as you ramp?

Absolutely. This year, you've seen a higher branding spend. Next year, we expect that will be elevated again in a weak market background. We haven't provided a specific percentage on that, but we can do that in the next call. However, you can assume a good portion of that is related to marketing.

Could you help us understand how the increase in branding efforts might translate into driving more demand and how quickly this spending could lead to improved revenue for the company?

What we have seen is with the increased branding this year, we've seen the purchase indicators increase. We've not seen that turn into the level of sales growth that we're satisfied with. But it definitely shows there's consumer interest in doing decking projects in the marketplace. So we do need a little bit of an economic tailwind to start breaking some of these projects free. But backing off on marketing and waiting for those tailwinds to start is not going to be an effective strategy, especially when our competitors are out with very, very heavy marketing spend.

The next question comes from Jeffrey Stevenson with Loop Capital.

So Bryan, given the step down that you expect in 2026 CapEx expectations, could that give you some flexibility to increase other capital priorities such as share repurchases, given the higher expected free cash flow generation next year?

I think you're already seeing the first example of that, where we expect to be in the market to buy back $50 million of shares depending on market conditions. We have been somewhat reserved in participating in the marketplace due to significant capital flowing into Little Rock. However, over the longer term, we will generate a substantial amount of free cash flow. In years when we generate that cash flow, we often use it for buybacks. Therefore, there will still be opportunities for that. This is the first indication of the use of the increased free cash flow.

Got it. No, that makes sense. And I was wondering if you could give additional color on the recent expanded partnership with Weekes Forest products, which helps further strengthen your relationship with Snavely? Can you talk about how this strengthens your Midwest distribution footprint? And could there be additional opportunities to further expand partnerships with key distribution partners after the Boise announcement caught some investors by surprise?

We're really pleased with the relations to furthering of our relationship with Weekes. The Minneapolis marketplace is a significant marketplace, and we felt that they'd be a great addition. Beyond that, I'm not going to get into any of the other commercial agreements we may be working on.

The next question comes from Trevor Allinson with Wolfe Research.

First question related to your long-term EBITDA margin targets with the increased expectation for SG&A spending. You've called the new level of SG&A spend as being normalized. So should we think of the long-term EBITDA margin target still being around 34%? Or did the prior margin target assume a little less competition in the market and thus, the higher SG&A spend reduces your long-term target from that 34%?

That 34% assumed a much stronger underlying repair and remodel marketplace in a mid-single-digit type level. We haven't seen that in three years. Hopefully, we'll see it next year, but I would say the indicators aren't great; I'd be happy if we start to see growth back in repair and remodel as we get into next year. So it would be a real challenge to be able to achieve that level by our original target date. But we do need to see that underlying economic strength to be able to get to those kind of numbers.

Okay. Makes sense. And then second question on year-end inventory. I think we've been at or somewhat below normalized inventory exiting the year in the last few years. Can you talk about where you're expecting days of inventory in the channel to be, exiting 4Q this year versus more normalized levels?

Yes. We've talked in the past about week supply. Generally, end of the year tends to be a little bit higher just because you've got lower demand in that 6- to 8-week type range, then during the busy part of the season, you're going to be right around that 4-week range or so. So we think that that 6- to 8-week probably is on the lower end of that part of it. I'm not all that worried about it from an inventory perspective because it is a slower part of the season. And I expect our distributors as well as dealer partners will take advantage of the Early Buy opportunities that are presented.

The next question comes from Anthony Pettinari with Citi.

You mentioned the mix in railing and Arkansas depreciation reducing the gross margin next year by 250 bps. I was just wondering if there's any kind of cadence for that in terms of the year-over-year headwind? Is it pretty weighted pretty evenly over the four quarters of the year because they can potentially kind of dissipate into the end of the year? Or is there any kind of cadence we should keep in mind when we model it out?

I mentioned the two-thirds, one-third split. The one-third is going to be pretty consistent by quarter. The two-thirds of it will build over the course of the year as we check out all of the lines that depreciation will turn on. So you'll start to see that late in Q1, building in Q2 and then into Q3.

Okay, that's helpful. I'm curious, when you speak with channel partners and contractors, do you notice any common themes regarding the end consumers and what might be causing this increased caution? Are there heightened concerns about job loss or tariffs? I'm interested in any qualitative insights that might explain the observed cautiousness from buyers.

Yes. I do hear all of those concerns more from just a general economic perspective of people stepping back, making sure that they have job security. When I talk to our contractors, the biggest thing that we hear back from their perspective is that it is a more competitive marketplace. And when they're out, and they have job opportunities, generally speaking of that consumer, where a couple of years ago, they might be getting one or two contractors coming in. Now, in many cases, they've got four coming in to give them bids. So people are really looking for the best deal that they can get on the projects. And I'm sure not all of them are coming to fruition if they don't get to the numbers they're expecting.

The next question comes from Phil Ng with Jefferies.

Bryan, in the past, you would provide an early look at EBITDA margins for the following year. Based on your framework for this year, which suggests an EBITDA margin of around 28% to 28.5%, you mentioned a few headwinds: an 80 basis point impact on gross margin due to mix and about 300 basis points on SG&A. Is this the correct way to view it? Should we consider these factors as the main drags for 2025? Are there any offsets we need to keep in mind? Volume leverage will likely be significant, and you're planning some downtime in the fourth quarter to reduce inventory. Can you help us understand what EBITDA margins might look like next year, at least in general terms?

Yes, I'd love to give you some additional detail on that. And you're right. Normally, we would provide some commentary on that during our third-quarter call. Given the difficulty in understanding where the consumer is, what things are going to look like for next year, we're not going to try to do that in this call. We will give definitely more detail as we get into the end of the year call.

I mean, I guess let me ask it differently. Do you have any offsets that we should be mindful that on the continuous improvement side that should kick in that you guys are looking to tackle?

I did mention earlier that we will have continuous improvement activities that will be underway. Those activities will offset other inflation, other costs that are coming into the business. We're calling out this 250 now because we don't have this 250 covered.

The next question comes from Kurt Yinger with D.A. Davidson.

Great. Just one question for me. On the railing side, I believe there were certain retail shelf space adds this year that have been beneficial. How do you think about the ability to sustain this year's momentum into 2026 as you potentially lap that? And is the Pro channel performance pretty comparable as we look between the two?

We typically observe that new product launches and gains in shelf space, whether in the Pro channel or retail, tend to strengthen over the initial couple of years. We are very satisfied with the performance of our new products this year. We anticipate significant opportunities as we utilize that shelf space and collaborate with contractors to shift them away from competing products. Therefore, we are confident that our strategy is appropriate as we move forward in the railing segment.

The next question comes from Matthew Bouley with Barclays.

On the comments that your competitors are out with heavy marketing spend, I'm wondering if that has had an impact on market share at the dealer or contractor level already? Or is it not yet, but you're seeing the marketing out there and you want to prevent the share shifts? Or perhaps your retail partners are asking for more marketing spend? Just kind of help us understand how that lay of the land is playing out.

As I mentioned to an earlier question, we've not seen those share shifts. We do keep a close look at from a ground-level perspective. But we also recognize that it is a very competitive marketplace. We've got aggressive competitors in the market. They're spending a lot on marketing, and dialing back, and we're starting to see those consumers come through and see the purchase indicators improving with it, we think would be the wrong way to go.

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 participating in today's call. We look forward to seeing you at upcoming conferences and meetings. Good evening.

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