Okay. Are we ready? Good afternoon, everyone. I'm Sue Maklari. I'm the Housing Analyst here at Goldman Sachs, and I'm joined this afternoon by Prith Gandhi, the CFO of Trex, and Zach Lauer, the Chief Operating Officer. Thank you both for joining us.
Thanks for having us.
Of course. 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, anything in terms of sizes, sophistication, and any bifurcation between higher or lower-end consumers?
Yeah. When the year started and when we were looking at kind of setting up 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 some potential recovery in the back half. That was the underpinning of our overall guidance at the start of the year. As we went through 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 move composite decking into wood.
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. 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 are now kind of guiding to more of a mid-single-digit type full year. Some of it is driven by that. The other piece is, we have been talking to all of you about this pent-up demand in our markets. We have been saying it for three years. We are actually starting to, I think, see some of that come through finally. I think what is 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. A number of homeowners are sort of making the decision now to just say, "Look, we are just going to stay put in our home." Then they look at, okay, if I am going to be here for another five, 10 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? What is 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.
One of the things that came out from that is, yeah, as they have decided to stay put, one of the first places that rises up for investment is kind of the outdoor living space, because that allows them to enjoy their existing home more. They spend time outside with their family, friends, barbecues, all that stuff. The size and the dollar value of those projects is also lower than doing a full kitchen remodeling and what have you. Some of these things came out in that survey. Also, I think what is unique about the Trex brand is it pays back in kind of value. Homeowners, when they are selling their homes, they list the appliances they have, if they have the high-end appliances. If they have a Trex deck, you can be sure they list that in the listing as well.
I think some of that is starting to happen. It has only been a quarter, so we are not calling a trend as yet, but 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. This was deliberate, and we had CEO change earlier in the year. Adam's someone who's been sort of focused on this. Over the last three years, our low-end price point, our low-end products, which are Enhance and Basics, which typically sell against wood, we'd really seen no growth in those categories. 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 why composite versus wood, et cetera. We started to see those things actually kind of come into play in the second quarter early. April was a tough month. I hate to blame the weather, but it really was about that.
Starting in May, we really started to see good traction from those investments and that activity.
Yeah. The other thing that has come up in the last couple of 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. Just for those who are less familiar with Trex, we have 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 SBP, Specialty Building Products, which again, for those of you who don't know them, they are large within specialty building products distribution. They're one of the largest players. They're private equity-owned, growing very aggressively, both through acquisition as well as through greenfields and the like. They are very well-aligned with us in terms of their ambition for growth, their willingness to invest in leading brands, and move them forward. From those perspectives, that is very aligned with our vision.
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. We kind of shifted to have even third players in some markets and 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 is SBP, and then several strong regional players. We added some new names like BlueLinx and Coastal and the others that we were already with. That has been the reason for making the change. Strategically, we think this will enable us to grow faster, will enable us to kind of drive more of the contractor pull through that we see, and are in alignment with SBP.
With the change comes an opportunity too. There is 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. 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 are 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 destocking, 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, 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.
Scaling growth now is not going to be as capitally intensive for us because we bid off and built those shells there and will continue to benefit. Little Rock has allowed us also to make sure that 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 bimodal 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. We're excited about that, and we're excited about what that facility gives us for the future.
Yes. One of the targets that you've set out there is getting to $2 billion by 2030 of revenue, $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 acquisition coming in the future. That will help us get to there. When Little Rock is at full capacity, we have enough capacity to do about $1.8 billion - $2 billion of core product.
Yeah.
It is a big step for us.
Yeah.
In that space, too.
Prith, go ahead.
I was going to say, Prith, I don't know if you want to talk a little bit more about how the $2 billion.
Yeah. Round numbers, if you use our guidance, we say we end the year by $1.25 billion or thereabout. Roughly $750 million of growth over the next four years. We'd say about $500 million will come from organic growth.
$250 million from M&A. Just one thing on Zach's point. 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. The building we have really 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 million-$15 million. 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 300 basis points-400 basis points above that.
On top of that, we layer in the wood conversion story and some market share growth, and that's how you get to the mid to high single digits growth organically. That's sort of the algorithm. In terms of the M&A, we're generally focused on things that are close to core. Because, again, we want to drive value if we're going to use capital for acquisitions versus, 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 the way we can do that is either we're buying things where we can use our assets to make those products, so think things like pergolas, sheds, furniture, et cetera, that uses extrusion technology and uses the types of materials we use today in our manufacturing, and/or there's channel synergy, so we're selling through the same distribution, same dealers. Those things drive value. So when we're looking at M&A, we really have that lens, and then we look at it again and say, "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, that's the one sort of qualitative nuance that we always look at when we're looking at M&A.
Yeah. 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 in a macro, is that still a realistic goal? And what drives that expectation?
Yeah. So, again, this is getting to 50% over time. Today, we're at 25%. About 10 years ago, we were 16%, 17%. 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. 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. So, for really not so much more money, you get a lot more performance. You don't have to maintain things as much. You don't have the rotting and things that you have with wood.
That's really the big value proposition there around the performance characteristics of the product and its longevity. I think over time, the things we're working on, and Zach can talk about this, we work on productivity, we work on things to drive the cost down so we can keep that. Our goal is to try to bring the differential between pressure-treated wood and the lower end side of our products to as narrow as possible so that you can actually then convert the customer. I don't know, Zach, if you want to add in.
Yeah, certainly at Trex, we've had a strong history of driving productivity. It's part of our DNA. Our operating model hasn't changed, and that's been based on kind of seven key pillars that we focus on. Within there, we're just using industry-proven methodologies and tools within those pillars. For us, we're a heavy manufacturer, right? Over 90% about what we sell is made in our own factories.
Safety is a 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 workforce empowerment. That's kind of 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. When we think of automation in manufacturing, most people want to think about just what we're doing to take away 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.
We continue to modernize our manufacturing. When we think of innovation, only one part of that is product innovation. The other is process and material innovation.
Yeah.
As well.
Yeah. So it's really the reason we think we'll get to that 50% is the 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, a couple of things there. I think, 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 make it easier for end users to make the Trex choice.
We've created a new AI-enabled app on our website where so far we've just introduced it in a couple of areas. We're still in the testing mode. It's really for someone to build a deck visually and virtually using AI. Then, with the click of a button, they can sort of get connected to the local dealer or The 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. All those kinds of things, that matters because that saves them time. That allows them to kind of do jobs faster, gain more productivity. 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.
Yeah. 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, right? One of it is 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 capacity utilization increases, with every $100 million of revenue, we are able to generate about 100 basis points of margin. We have not given guidance on 2027, 2028, et cetera, so we will see 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 margins. 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 will be able to deliver on that.
Yeah. And railing is something that we have seen has really been part of the story recently in the last couple of years. Can you talk about the growth that you are seeing there? When does that perhaps get to a point where it is a more meaningful addition to the total business?
Yeah. Look, I think what we have said, we are about 7% market share in a category that is $3.5 billion-$4 billion in size.
That is roughly where it is today. It is growing double digits. We see that growth in the years to come. I think the last time we did 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 are on track to do that. We continue to see growth there because I think what not everyone appreciates is at 7% market share, we are the biggest player in this space. It is very fragmented, and we have a very broad portfolio in composite-based railing and metals, and what have you. That allows our railing products to be on lots of other people's decking boards. That is the thing that drives attachment, and that continues to increase. That is why we see that area to continue to grow in the foreseeable future.
Yeah. Okay. I guess that, Prith, I am 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?
For us, they are both extrusion technologies. They are just different types of extrusion material sets that we use. But because railing is a faster-growing part of our portfolio, it is a high focus for us to continue to improve the margin structure in that business.
What we have done well at Trex in that space and will continue to do as we talk about mergers and acquisitions, is to vertically integrate.
At Trex, when I first came there, we did not make our own shell for decking. We vertically integrated in that space. We did not make our own railing material. We vertically integrated into that space, into that compounding. We have recently made another acquisition in the railing space to take in another portion of that. We see the opportunities in railing there, both through vertical integration, but now that we own the components of making the material 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 have done in our history in decking and coming up with new materials in that space.
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 waste materials into your process. Can you talk about that and where you are in that journey?
Sure. Certainly, when we see 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. When we say that, 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'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. At Little Rock, I think you've also really focused on the recycling part and the raw materials. Can you talk about how that fits into it?
Yeah. 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 are really excellent for us. But those new processes have allowed us to enter into bringing in new materials into our deck boards that we haven't used in the past. 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. 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.
We can transfer materials pneumatically or convey them, where 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 polyethylene stream is attached to the recycling plant, and the recycling plant pumps directly over to the decking plant with no intervention.
Yeah.
Yeah, and then just one other. The location of Little Rock for. The filler in our products is wood, waste wood. It's a very good location to have access to waste wood. The freight in, et cetera, for all those materials is a lot lower in the Little Rock facility. 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. This is 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.
Right? 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. 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.
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 ship to the center part of the country.
Yeah. 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. Overall, we've been sort of working with a level-loaded production way of working. What we've seen over the last two, three years, with first the big surge in demand of COVID, then the destocking and all that, what we've seen is the channel has been carrying less inventory.
We've been carrying more. As a result, that's had some impact on working capital, but it's not significant. 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, I used to be at Beacon, right? So they'll go back to the 90-120 days of inventory heading into the busy season so that they don't miss sales. So both those things would help us with working capital. The other thing, we're looking at stuff, it's early days, in finance around technologies and AI and stuff to improve our payables and those types of things.
On the receivables side, it's hard to move, especially the retail centers, in terms of terms and so forth. So there's not a great amount of opportunity on the receivables side. But certainly, on the payables, we'll look at opportunities to 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 a big CapEx investment. What is normalized in there and?
Yeah, great question. So just again, for those who aren't as familiar with us. 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 2024 and 2025, we spent about $250 million in CapEx. This year, that's down to, call it, $100 million - $120 million. 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, think $50 million - $60 million a year in terms of where CapEx would be. Structurally, should be a significant increase in free cash flow.
Yeah. Okay. We've got a couple of 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 Trex 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, bigger picture, we're looking at more sort of bolt-on, smaller tuck-in types of acquisitions. So from a size perspective, think that. In terms of areas, we've talked about three areas. One being vertical integration. That doesn't drive the top line, but that drives cost improvements and margin enhancement and so forth. That's one area. Those are generally very small deals. Think less than $50 million typically in terms of transaction size. The next place is really the outdoor living area, right? So everything from our backdoor 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 with the capital.
I can either invest it in the business, that's always number one. Number two is I could buy back shares. Number three is doing M&A. For the M&A, it has to drive value relative to the share buybacks, because right now, relative to our long-term EBITDA multiple, we're trading at a significant discount. So it's a really high bar for the M&A to make it through. 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 totally different, then at least one of those things is not going to be true.
Depending on what you pay, then you're probably not going to deliver the 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. Certainly, the third piece is the building envelope.
That's trim, siding, and so forth. But that's further afield.
Yeah. How do you think about the optimal leverage for the business in all this?
Yeah, good question. I like to run the business 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. For a really strategic acquisition, could we stretch a little bit beyond that? Sure. But then the first priority would be to deleverage and come back between the one to two times. That's generally where I'm comfortable running the business in terms of leverage.
Yeah. Okay. Well, we're right at time, so we'll end it there. Perfect.
Okay, thanks, everyone.