Trex Co Inc (TREX) September 14, 2026 Conference Transcript

Good afternoon, everyone. I'm Sue McCleary. I'm the housing analyst here at Goldman Sachs, and I'm joined this afternoon by Pris Gandhi, the CFO of Trex, and Zach Lauer, the chief operating officer. Thank you both for joining us.

Thanks for having us.

Of course. So let's start with the near term and just talking about conditions a bit. Can you talk about how you would characterize the state of the industry today and anything you're seeing in terms of just overall projects, you You know, anything in terms of sizes, sophistication, and any bifurcation between higher or lower-end consumers?

Yeah, so, you know, when the year started and when we were looking at kind of setting up, you know, what we thought 2026 was going to be like, at the start of the year, we thought it was going to be another slow year with, you know, some potential recovery in the back half. And so that was the underpinning of our overall guidance at the start of the year. I mean, as we went through, you know, the first quarter and then the second quarter in particular, we did start to see a shift in some of the demand. Some of this is deliberate kind of strategic moves made by us. One of the things that we sort of haven't focused on over the last three years is really that wood conversion part of our strategy, which is really core to our growth and our ability to, you know, move composite decking into wood. But we really focused our efforts there, and we started to see sort of some good, encouraging green shoots around that in Q2, which we talked about during earnings. And so that led to us overall kind of increasing our guidance for the full year. We started the year with sort of low single-digit type net sales growth for the full year. We're now kind of guiding to more of a mid-single-digit type full year. And some of it is driven by that. The other piece is I think we've been talking to all of you about there's pent-up demand in our markets and we've been saying it for three years. We're actually starting to, I think, see some of that come through finally. And I think what's driving that is essentially the persistence of high interest rates, persistence of inflation, persistence of high home prices. it's really causing people's ability to move to really sort of be very constrained. And a number of homeowners are sort of making the decision now to just say, look, we're just going to stay put in our home. And so then they look at, okay, if I'm going to be here for another five, ten years, where are the areas in the home where I want to make some investment either to improve the quality of my life or make investments in the projects that I've been deferring for these last two, three years because I thought I would move. And what's interesting is, and we did a survey about this about a month ago, we published the results in one of our press releases, so you can have a look at that. We surveyed about 2,000 homeowners across the country, different price points of homes and so forth. And one of the things that came out from that is, yeah, as they've decided to stay put, one of the first places that rises up for investment is the kind of the outdoor living space, because that allows them to enjoy their existing home more. Like, you know, they spend time outside with their family, friends, barbecues, all that stuff. So that's, and the size and the dollar value of those projects is also lower than like doing a full kitchen remodeling and what have you. So some of these things came out in that survey. And then also I think what's unique about the Trex brand is it pays back in kind of value. And so, you know, homeowners, when they're selling their homes, they list the appliances they have, if they have the high-end appliances. is if they have a Trex deck, you can be sure they list that in the listing as well. So I think some of that is starting to happen. It's only been a quarter, so we're not calling a trend as yet. We just remain cautiously optimistic for the rest of the year.

Yeah, one of the other things that you talked about in the second quarter is that you saw some traction in the sort of lower end price points on a relative basis. Can you talk about that a little?

Yeah, so this was deliberate. We had CEO change earlier in the year, and Adam's someone who's been sort of focused on this. Over the last few years, our low-end products, which are enhanced in basics, which typically sell against wood, we'd really see no growth in those categories. And so we really focused on driving growth there, and a lot of that was through promotional activity and sort of marketing efforts that we've also been talking about that we started ramping up about a year ago with focused campaigns around, you know, why composite versus wood, et cetera. And so we started to see those things actually kind of come into play in the second quarter early. April was a tough month. I mean, I hate to blame the weather, but it really was about that. And starting in May, we really started to see good traction from those investments and that activity.

The other thing that has come up in the last couple months is obviously the shift in distribution that you've announced. Can you talk a little bit about what drove that decision and maybe also how it aligns with the broader operating and strategic goals that you've outlined?

Yeah, good question. So, you know, just for those who are less familiar with Trek, so we've had a long-term partnership with Boise Cascade, and we made the decision to shift away from them and have an exclusive national relationship with SPP, specialty building products, which, again, for those of you who don't know them, they're a large, within specialty building products distribution. they're one of the largest players their private equity owned very you know growing very aggressively both to acquisition as well as to Greenfield and the like so they're very well aligned with us in terms of you know their ambition for growth their willingness to invest in leading brands and you know and move them forward and so from those perspectives that's very aligned with our vision and then the other thing we did with this change was we used to have a model where we had a strong national player used to be Boise cascade and then we had a handful of really strong regional players then we kind of shifted to have even third players in some markets and kind of the things got a little more complex with this move we also made the decision to go back to that model where we had one strong national distributor that's SPP and then several strong regional players so we added some new names like blue links and coastal and and you know and the others that we were already with and so that's that's been the reason for making the change strategically we think this will enable us to you know grow faster will enable us to kind of drive more of the contractor pull through that you know we we see and you know are in alignment with SPP. And then with the change comes an opportunity to, there's probably about $100 million of business from smaller brands that will be up for grabs over the next couple of years because of these moves. And we think we are very well placed to get that.

Yeah. Okay. One of the other parts of the growth story is Little Rock. And you have announced that you're going to get that to 50% capacity by year end. You sort of have pulled forward, I think, the ramp of that facility. Can you talk a little bit about that, Zach, and how that aligns with what's going on?

Yeah, certainly we're excited about that. We've had, with the market changes and the de-stocking, right, originally we had planned to launch decking in Little Rock back in 2025. With that slowdown, we pushed it out to 2027. But with what we've seen so far, we're excited that Now we're pulling it in, and we're ramping up that facility, and we have started to ramp up the decking capability there. We have been producing there for over a year on the recycling side, so to kind of, you know, we dipped our toe in there, started with the upstream processes, and now are into decking. But for as a business, we've all kind of felt that heavy depreciation. We built big shells there for the future, And so scaling growth now is not going to be as capitally intensive for us because we bit off and built those shells there and will continue to benefit. I mean, Little Rock has allowed us also to make sure that, you know, it gets the best innovation, it gets the latest technology that we have at Trex. And then we also gain efficiencies in Little Rock. There was many reasons we chose Little Rock, and we've talked about this in the past. but the nearness of raw materials for us. Also, it lowers our operating costs from the standpoint that when we only had binodal manufacturing, we are pulling recycling and recycled materials from across the country. Now those don't have to travel as far to get to manufacturing. So we're excited about that, and we're excited about what that facility gives us for the future.

Yes. And one of the targets that you've set out there is getting to $2 billion of revenue by 2030. Can you talk about the role of both new products and maybe also how production and Little Rock and your capacity there fits in with all of this as well?

Yeah, I think as we look out to 2030 and to $2 billion, we see that not only coming from organic growth, but also mergers and acquisitions coming in the future. That will help us get to there. But when Little Rock is at full capacity, we have enough capacity to do about $1.8 to $2 billion of core product. So it's a big step for us in that space, too. And I was going to say, Pritz, I don't know if you want to talk a little bit more about how, like, the $2 billion.

Yeah, so, I mean, what we, you know, so round numbers, if you use our guidance, you know, we say we end the year by $1.25 billion or thereabouts. So roughly $750 million of growth over the next four years, we'd say about $500 will come from organic growth, $250 from M&A. And, you know, and just one thing on Zach's point. So Little Rock is a really big facility. Again, for those who aren't as familiar with TREX here, our manufacturing process is a very modular process. So it's line by line. And so the building we have really doesn't, isn't filled with lines today. To get to $2 billion, we would add lines over time. But that is not a very massive capital intensive exercise. each line is in the order of 10 to 15 million dollars so just to clarify that point in terms of the growth look we see again generally our algorithm works as repair and remodel does whatever it does typically decking grows three to four hundred basis points above that and then on top of that we layer in the wood conversion story and some market share growth and that's how you get to the you know mid to high single digits growth organically so that's sort of the algorithm in terms of the M&A we're generally focused on things that are close you know close to core because again we want to drive value for use capital for acquisitions versus you know I could we're doing a lot of share buybacks we think that's a really good use of capital right now for the M&A to win in that game we have to drive real value and and the way we could do that is either we were buying things where we can use our assets to make those products of things things like pergolas sheds furniture etc that uses extrusion technology and uses the types of materials we use today in our manufacturing or and or there's channel synergy so we're selling through the same distribution same dealers those things drive value and so kind of when we're looking at M&A that we really have that lens and then we look at it again so okay if I look at this versus a buyback what's going to win the only other nuance here is that with M&A we get growth the share buybacks are great to drive the share price but you don't get growth and new capabilities that give you future options so so that's the one sort of qualitative nuance that we always look at when we're looking at them.

Yeah, and the other thing that you've talked about is composite decking overall getting to about half of the industry. In this kind of a housing environment and a macro, is that still a realistic goal, and what drives that expectation?

Yeah, so, you know, again, this is getting to 50% over time. Today, we're, you know, 25%. About 10 years ago we were 16 17 percent so so over time I think number one it's the performance characteristics of the product you get a lot more for spending a little bit more money like if you look at the cost of putting up a deck and we have these things in our investor materials again for those who aren't as familiar the cost of materials in a decking job is about a third of the cost and the rest is labor and everything else and so for really not so much more money if you could you know you get a lot more performance you don't have to maintain things as much as much you don't have the rotting and things that you have with wood so that's really the big value proposition there on the performance characteristics of the product and it's its longevity and I think over time, the things we're working on, and Zach can talk about this, you know, we work on productivity, we work on things to drive the cost down, so we can keep that you know, our goal is to try to bring the differential between you know, pressure treated wood and the lower end side of our product, so as narrow as possible, so that you can actually then convert the cost to work, and I don't know, Zach, if you want to add anything.

Yeah, I mean, certainly at Trex, we've had a strong history of driving productivity, it's part of our DNA a you know our operating model hasn't changed and that's been based on kind of seven key pillars that we focus on and and within there we're just using industry proven methodologies and tools within those pillars and for us we're a heavy manufacturer right over ninety percent about what we sell is made in our own factories and so safety is a big you know big pillar for us quality maintenance certainly is as a heavy industrial manufacturer but people leadership is one of those pillars initiative management continuous improvement and you know workforce empowerment and that's that's kind of you know when you go into Trex facilities everybody kind of bleeds green because of our focus on our people from that perspective but we've also done a very good job within there of driving a lot of automation and when we think of automation, you know, and manufacturing. Most people want to think about just what we're doing to take away, like, you know, steps that maybe a human had done before, right, as labor gets more and more competitive. But we've spent a lot of time over the last seven years really in that machine learning generative AI space for us, which we think is going to continue to drive dividends for us as we move forward and so you know we continue to you know modernize our manufacturing and when we think of innovation only one part of that is product innovation the other is process and and material innovation as well and so yeah so it's really the reason we think we'll get to that 50% as a product performance and then bringing it to the consumer at a value that makes the conversion decision easy for them.

Yeah, no, absolutely. Can you also, within that, maybe talk a bit about the digital initiative that you also have going on? You've been really focused on digital and the marketing side of things.

Yeah, so, you know, a couple of things there. I think, you know, where we've, I mean, we're doing things on manufacturing that I'll let Zach speak to, but in terms of the customer-facing side of things, what we're trying to do is, you know make make it easy for end users easier for end users to make the trex choice so you know where we've created a new ai enabled app on our website where we've so far we've just introduced it in a couple of areas just we're still in the testing mode but it's really for someone to build a deck visually and virtually using ai and then you know with the click of a button they can sort of get connected to the local dealer or Home Depot or whatever and sort of look at the list of products they would need and then find the contractors in the area that they could work with. So we're doing things like that. We're also looking at doing things for the contractors themselves with apps and so forth that makes it, again, easy for them to do business with us, right? So they got a job and there's a bill of materials that they need. They can easily send the order to the dealer, get their rebate from Trex, like all those kinds of things, that matters because that saves them time, that allows them to kind of do jobs faster and gain more productivity. And so those are some of the things that we're looking at in terms of improving the digital experience, both for the end user but then also for our installers.

And then maybe with all this too, thinking a little bit about what it means for the path for margins, right? You've talked about $100 million of incremental revenue equating to 100 basis points of gross margin. Can you just talk a bit about the ability to deliver on that, the expected ramp, and the timing?

Yeah, so again, there's some assumptions in all that. One of it is kind of that's at the current product mix with the current manufacturing footprint and so forth. But again, I think under those circumstances, as our utilization increases, it's really about that. As our sort of capacity utilization increases, with every $100 million of revenue, we're able to generate about 100 basis points of margin. We haven't given guidance on 37, 28, et cetera. So, you know, we'll see kind of when that comes. But this year we have headwinds because of the depreciation from Little Rock, from the startup of Little Rock. And then we still have railing growing faster than decking, and railing has margins that are lower than our consolidated margin. So those are some of the things that have near-term headwinds. But over time, as we utilize the assets harder and drive more volume, we'll be able to deliver on that.

Yeah, and railing is something that we've seen and has really been part of the story recently in the last couple of years. Can you talk about the growth that you're seeing there, and when does that perhaps get to a point where it's a more meaningful addition to the total business?

Yeah, so look, I think what we've said, we're about 7% market share in a category that's 3.5 to 4 billion in size. So that's roughly where it is today. It's growing double digits, and we see that growth in the years to come. I think when we did, the last time we did it in Investor Day, I think it was in 2023. I think we said we wanted to double the business by 2028 at that time. So we're on track to do that. And, you know, we continue to see growth there because I think what not everyone appreciates is we have the – at 7% market share, we're the biggest player in this state. It's very fragmented. And we have a very broad portfolio, you know, in composite base railing and metals and what have you. And that allows us, our railing products, to be on lots of other people's decking boards. And so that's the thing that drives attachment, and that continues to, you know, increase. And so that's why we see that area to continue to grow in the foreseeable future.

Yeah, okay. And I guess that put – I'm sorry, Zach. that also sort of lends us to how you think about the products or the processes that you can take internally over time. And what is the optimal sort of mix there? How do you think about that?

So, I mean, for us, they're both extrusion technologies. They're just different types of, you know, extrusion material sets that we use in. But because railing is a faster-growing part of our portfolio, it's a high focus for us to continue to improve the margin structure in that business. And, you know, what we've done well at Trex in that space and will continue to do as we talk about mergers and acquisitions is to vertically integrate. And, you know, at Trex, when I first came there, we didn't make our own shell, you know, for decking. We vertically integrated in that space. We didn't make our own railing material. We vertically integrated into that space, into, you know, that compounding. And we've recently made another acquisition in the railing space to take in another portion of that. And so we see the opportunities in railing there, both through vertical integration, but now that we own the components of making the materials sets that go into our railing, it pays dividends because now we control the recipe, we can innovate on the recipe, We can change the recipe based on different material costs of the commodities coming in, and we can continue to innovate off that, much like we've done in our history in decking and coming up with new materials in that space. So we see that stream continuing to build, and that's how we see us getting there in the railing space.

Yeah, one of the other things that you've been known for is integrating dirtier, more industrial sort of, I guess I would say, plastics and, you know, waste materials into your process. Can you talk about that and where you are in that process? Sure.

I mean, certainly when we see, you know, more and more people wanting to enter into the recycling space to not be as susceptible to changes in pricing and markets and those types of things. We've continued to innovate in the ability to clean those material streams and use dirtier and dirtier streams. And when we say that, you know, there's all sorts of contamination that can come in recycled material. Other plastics, paper, metals, well, we can't process metals, so those got to come out. But other plastics and other materials can be used in our feed stream, and we have the capability to do that. But we're also, we've always looked at the next generation of materials, and we're already using the next generation of materials in our decking of a waste stream that people aren't using today, and that's continuing to where we look so that we can always have that cost position opportunity.

Yeah, and at Little Rock, I think you've also, you know, really kind of focused on the recycling part and the raw materials. Can you talk about how that fits into it?

Yeah, so the nice thing that Little Rock has allowed us to do is to bring our latest and greatest technology on the recycling piece there and at rates that, you know, are really excellent for us. But those new processes have allowed us to enter into bringing into new materials into our deck boards that we haven't used in the past. So the technology that we've layered into Little Rock allows us to bring in not only more, I would say, more contaminated streams of polyethylene that are contaminated with other types of plastics, but it also allows us to bring in our next-gen material at higher rates than we've ever been able to at our older sites. So that helps us from that perspective there. The other thing is, it's one thing to build a site and bring in your latest technology, but the value stream we're allowed to create on Little Rock because we have over 300 contiguous acres, there's no material handling like we have amongst our other sites. So we can transfer materials pneumatically or convey them. We're in the past at our other sites because they're modular and they're spread all over as we've grown, we're trucking those materials in between sites. And in Little Rock we don't have to do that.

We've been able to create the value stream so the recycling plant, the poly ethylene stream is is attached to the recycling plant and the recycling plant pumps directly over to the decking plant you know with no intervention I mean the location of Little Rock for you know part of the filler and our products is would come you know we would it's a very good location to have access to waste wood so there's been a freight in etc for all those materials is a lot lower in the Little Rock facility. So that, again, back to the cost position is very helpful.

Yeah, it's impressive because I've seen your Virginia facilities, and they're very efficient. So this is very, very exciting. How over time do you think about balancing productions between the three locations that you have?

Yeah, I think one of the things that we've always tried to do and why we've kind of started and stopped on the Little Rock is we've always wanted to bring up Little Rock as the capacity was there, meaning that as our business grew, we would bring that capacity on with little impact to both the West Coast and the East Coast site. And so we plan to fill the growth in our business through the Little Rock site. What it will change over time is where our customers get their product from. And certainly through our productivity over the years, We've turned off and turned on lines and sites based on the volume because we know exactly how much it costs us to run each one of our production lines or our facilities. But over time, what you'll see as the business continues to build and grow organically, the places that get shipped to will change for our customer, which is a benefit to them, too, because they pay the outbound freight from that perspective. So it's good for them, but for us, we're just going to fill that site with our growth and then, you know, ship to the center part of the country.

How do you also think about the implications of all of these initiatives going on across the business in terms of the working capital and your ability to be any more efficient there?

Yeah, good question, Sue. So, you know, overall we've been sort of working with a level-loaded production, sort of a way of working. What we've seen over the last two, three years, you know, with sort of first the big surge in demand of COVID and the de-stocking and all that, what we've seen is the channel has been sort of carrying less inventory. We've been carrying more. As a result, that's, you know, had some impact on working capital, but it's not significant. And I think going forward, what we see is potentially if they stay lean in inventory and demand picks up, they're going to have to either do one of two things. Either turns are going to increase, which will help our working capital efficiency, or they're going to go back. You know, I used to be at Beacon, right? So they'll go back to sort of the 90 to 120 days of inventory heading into the kind of busy season so that they don't miss sales. So both those things would help us with working capital. The other thing, I mean, we're looking at stuff, it's early days in finance around, you know, sort of technologies and AI and stuff to, you know, improve our payables and those types of things. On the receivable side, it's hard to move, especially the retail centers, like in terms of terms and so forth. So there's not a great amount of opportunity on the receivable side, but certainly on the payables, we'll look at opportunities to kind of improve there and drive more cash flow that way.

Yeah, and maybe sticking with cash flow, can you talk also a bit about CapEx, right? We're coming off of sort of a big CapEx investment. What is normalized in there?

Yeah, great question. So, you know, just, again, for those who aren't as familiar with us, So last, you know, we took the last five years roughly to build out the Arkansas facility, total cost of capital around $500 million. Last two years is when we did the bulk of that spending, so 24 and 25, we spent about $250 million in CapEx. This year, that's down to, call it $100 to $120. and then next year we think and going forward our maintenance and productivity CapEx is about 5-6% of sales so that's what you should expect going forward so at our current sales I think $50-60 million a year in terms of where CapEx so structurally should be a significant increase in free cash flow Yeah.

Okay. We've got a couple minutes. Let's see if there's any questions from the audience. I have more, if not. Does anyone have a question? No? Okay. Well, one of the things that you mentioned is M&A. Can you talk about what an ideal M&A candidate looks like for tracks and how we should think about the upstream versus downstream opportunities?

Yeah, so I think we touched on some of these. There's three areas we're focused on. So one, you know, bigger picture, we're, you know, looking at more sort of bolt-on, you know, smaller tuck-in types of acquisitions. So from a size perspective, think that. In terms of areas, you know, we've talked about three areas, one being vertical integration. You know, that doesn't drive the top line, but that drives cost improvements and margin enhancement and so forth. So that's one area. Those are generally very small deals, you know, think less than $50 million typically in terms of transaction size. The next place is really sort of the outdoor living area, right? So everything from our back door to our fence, I think all of that is in scope because the Trex brand plays very well in that whole area. But then, as I said, the thing that I look at, I got a choice of the capital I can either invest in the business that's always number one number two is I could buy back shares number three is doing M&A and so for the M&A to drive it has to drive value relative to the share buybacks because right now relative to our long-term you know EBITDA multiple we're trading at a significant discount so it's a really high bar for the M&A to to make it through. And so in order for that to happen, back to the ideal profile, it's got to be something that we can either use our existing assets to make and or we can sell through our existing channels because that's how you'll drive the most value. If we're going to go into something like totally different, then at least one of those things is not going to be true. And then, okay, depending on what you pay, that you're probably not going to deliver the kind of right amount of ROI, especially when you look at it against share buyback. So that's how we're thinking about it. So those are really the ways we're looking at M&A. And certainly the third piece is the sort of building envelope, and that's trim, siding, and so forth. But that's further afield.

How do you think about the optimal leverage for the business in all this?

Yeah, good question. So, you know, we generally, you know, I like to run the business kind of between one and two times. At our size, I think, and given the seasonality and cyclicality in the business, I think that's a very safe and comfortable level. Now, for a really strategic acquisition, could we stretch a little bit beyond that? But then the first priority would be to deleverage and come back between the one to two times. So that's generally where I'm comfortable running the business in terms of leverage.

Well, we're right at time, so we'll end it there. Thank you.