Trex : Q2 2021 Transcript

Trex Company, Inc.

Second Quarter 2021 Earnings Conference Call

Monday, August 02, 2021, 5:00 PM Eastern

CORPORATE PARTICIPANTS

Bryan Fairbanks - President, Chief Executive Officer

Dennis Schemm - Senior Vice President, Chief Financial Officer Bill Gupp - Senior Vice President, General Counsel and Secretary Viktoriia Nakhla - Investor Relations

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PRESENTATION

Operator

Good afternoon, and welcome to the Trex Company Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the "*" key followed by "0." After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press "*" then "1" on your telephone keypad, to withdraw your question, please press "*" then "2." Please note, that this event is being recorded.

I would now like to turn the conference over to Viktoriia Nakhla. Please go ahead.

Viktoriia Nakhla

Thank you all for joining us today. With us on the call are, Bryan Fairbanks, President and Chief Executive Officer, and Dennis Schemm, Senior Vice President and Chief Financial Officer. Joining Bryan and Dennis is Bill Gupp, Senior Vice President, General Counsel and Secretary as well as other members of Trex management. The company issued a press release today after market close containing financial results for the second quarter 2021. This release is available on the company's website. This conference call is also being webcast and will be available on the investor relations page of the company's website for 30 days.

I would now like to turn the call over to Bill Gupp. Bill…

Bill Gupp

Thank you, Viktoriia. Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward-looking statements within the meaning of Federal Securities Law. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.

For a discussion of such risks and uncertainties, please see our most recent Form 10-K and Form 10-Qs as well as our 1933 and other 1934 Act filings with the SEC. Additionally, non- GAAP financial measures will be referenced in this call. A reconciliation of these measures to the comparable GAAP financial measures 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.

Bryan Fairbanks

Thank you, Bill, and good evening, everyone. Thank you for joining us today to review Trex company's second quarter results, and year-to-date performance along with our business outlook. This was another very strong quarter with record revenues of $312 million led by 43% sales growth at Trex Residential. Demand remains robust across all Trex Residential outdoor living product lines in both the DIY and Pro channels.

The success of our $200 million capacity expansion program, which became fully operational one month ahead of schedule, has enabled us to take advantage of the appeal of Trex branded products and increased conversion from the large wood market. This expansion is the largest in the company's history and increases our production levels by 70% compared to 2019 yearend

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levels. However, labor constraints impacted to the extent to which we could utilize this capacity to meet the higher demand.

Our new Virginia plant is highly efficient and designed for maximum output with an emphasis on quality control and energy-efficient operations. With the capacity expansion plan largely behind us, we are pivoting our focus to cost reduction projects and continuous improvement opportunities to drive margin improvements. These efforts will be focused on automation, energy efficiency and raw material processing. One such cost reduction project is poised to reduce the processing cost of our plastics by generating higher productivity, and allowing for a wider use of low cost recycled material streams.

In addition, thanks to the tireless efforts of our engineering team and their continuous improvement mindset, we are pleased to announce that by the end of the year, we will install incremental decking capacity within the new Virginia facility that will further increase our production capability and improve our cost position. As a result of this initiative, Trex will have even more opportunity to pursue further growth, as we've been unable to fully realize due to capacity constraints.

We will be positioned to take advantage of the product development work being done by our R&D team, expand our international sales, and penetrate the new home construction market. While we continue to make significant strides with our additional capacity, we remain pleased with the continued success of our tiered product strategy, which supports consumer decision making by providing a range of product aesthetics, features and price points that have broad- based appeal and distinct competitive advantages over wood. The winning mix of products makes it easy for the consumer to choose Trex, and we see strong growth across all price points.

Like many other companies and industries during the second quarter, Trex experienced labor challenges and inflationary pressures from higher raw materials and logistics costs. As a result of the inflationary pressures, Trex took a mid single-digit price increase on most products effective August 1, with the full impact to be seen later in the third quarter. We deliberately chose the timing of our price increase to give ample notice to our channel partners in order to minimize the impact during the peak decking season. This action is example of the importance we place on our partnerships with distributors, dealers and contractors and doing right by them.

Dennis will provide more detail around our financial results and inflationary impacts, but I want to highlight that despite inflationary headwinds, EBITDA grew by 36% during the second quarter and produced a 29% increase in diluted earnings per share. While we focus on profitable company growth, expansion and continuous improvement, we continue to do so in a sustainable manner. Sustainability has always been a part of Trex's DNA since inception. Trex is and has always been one of North America's largest recyclers of plastic film.

In 2020, we up-cycled more than 900 million pounds of plastic film and reclaimed wood, most of which would otherwise be destined for landfills. At our plants, scrap boards are recycled back into the manufacturing process as well. Additionally, our ongoing efforts to improve energy and resource efficiency in our plants, helped reduce the company's energy use related to cooling by approximately 40% in 2020, and the addition of closed loop chilled water systems significantly reduced water usage.

For a more detailed description of our ongoing ESG efforts, I encourage you to review our third annual 2020 ESG report on our website, which includes our first disclosure of Scope 1 and 2

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annual carbon emissions, and establishes a baseline for future efforts to reduce carbon emissions. The report was issued at the end of June '21 and recaps a year of Building a Better Tomorrow Together, for our customers, employees, communities, investors and the environment.

Dennis Schemm will now share details on our second quarter financial performance. Dennis…

Dennis Schemm

Thank you, Bryan. I'm pleased to highlight the drivers of our strong second quarter results and year-to-date performance, as well as our expectations for the third quarter and full year 2021. Consolidated sales were $312 million in the second quarter, compared to $221 million in the same quarter last year. The 41% increase was driven by substantial volume growth across all Trex Residential product lines. Trex Residential sales of $299 million outpaced sales of $209 million year-over-year by 43%, resulting from sustained broad-based demand and market share gains from wood. Trex Commercial Products contributed $13 million to consolidated sales in the second quarter of 2021.

Consolidated gross margin for the second quarter was 38%, after absorbing an approximately 400 basis point impact related to start-up costs and inflationary pressures on key raw materials and transportation, versus 41.9% in the prior year quarter. Gross margin was also impacted by increased depreciation expense of $5 million related to the capacity expansion program in Trex Residential and labor constraints. Labor constraints resulted in lower sales and margins by underutilizing expanded capacity. Cost savings initiatives increased production and the impact of the January price increase partially offset the unfavorable impacts.

Gross margins for Trex Residential and Trex Commercial were 38.7% and 21.6%, respectively, compared to 42.5% and 30.7%, respectively, in the year ago quarter. SG&A expenses were $36 million, an increase of 24% compared to $29 million in the prior year quarter. The primary drivers of the increase were personnel-related expenses, higher branding spending and a resumption of travel and entertainment expenses as COVID-related impacts eased.

As a percentage of net sales, however, SG&A decreased by 170 basis points to 11.5% in the second quarter compared to 13.2% in the prior year quarter, reflecting disciplined cost management and leverage in our operating model as we rapidly grew our sales. Despite the inflationary and start-up costs we incurred during the quarter, we delivered 30% growth in net income to $61 million or $0.53 per diluted share, up from the $47 million or $0.41 per diluted share in last year's second quarter.

The steady focus on our strategic initiatives and our increased production capacity resulted in a 36% growth in EBITDA to $92 million and an EBITDA margin of 29.4%. The continued strength of the repair and remodel sector, Trex's brand leadership and increased capacity drove our impressive year-to-date performance.

Consolidated net sales year-to-date increased 32% to $557 million compared to $421 million in the prior year period. Higher net sales were primarily driven by a 34% increase in Trex Residential sales to $532 million compared to $396 million in the same period last year.

Net income was $110 million or $0.95 per share compared to $90 million or $0.77 per diluted share year-to-date in 2020. EBITDA grew 29% to $163 million compared to $126 million, and EBITDA margin remained relatively stable at 29.2% compared to 30% for the same period in

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2020. Year-to-date capital expenditures were $95 million, with the majority supporting the capacity expansion program completed in May.

In addition, year-to-date, we repurchased 49 million of Trex outstanding common stock at an average price of $91 per share under the share buyback program. Trex has an approved buyback program for up to 8.3 million shares.

Looking ahead, we expect third quarter consolidated net sales to range from $320 million to $330 million, representing year-on-year growth of 40% at the midpoint and reflecting continued strong consumer demand from our channel partners. We expect continued inflationary pressures in the coming quarter as the tailwind from the August 1, 2021, price increase will not take effect until sometime in September, as we are fulfilling orders approximately 30 days later than expected because of labor constraints.

As we navigate these challenges, we anticipate incremental EBITDA margin will be at the low end of the range of 35% to 40% for the full year. We expect to return to more normalized EBITDA margins in the first quarter of 2022, as we are past the start-up phase of our capacity expansion, and as our price increase and strong cost reduction and continuous improvement initiatives take effect.

Our tax rate is anticipated to be approximately 25%. Depreciation will range from $35 million to $40 million, increasing throughout the remainder of the year. Full year spending on CAPEX is expected to be in the range of $130 million to $150 million, which includes the installation of additional decking production lines to further boost our capacity.

Now I will turn the call back to Bryan for his closing remarks.

Bryan Fairbanks

Thank you, Dennis. Our year-to-date performance places us firmly on track to achieve our stated expectation for strong double-digit growth in 2021, and the success of our capital expansion program along with the additional capacity investments position Trex for ongoing growth and enhanced value creation for our stakeholders.

Most importantly, I want to recognize the hard work and dedication of the entire Trex team as well as the continued support of our dealers, retailers, distributors and contractors who continue to be great partners and key to our growth. Trex's extraordinary success is due in large part to all of you.

Operator, we can now take questions.

QUESTION AND ANSWER

Operator

Thank you. And we will now begin the question-and-answer session. To ask a question, you may press "*" then "1" on your touchtone phone. If you are using a speakerphone, please pickup your handset before pressing the keys, to withdraw your question, please press "*" then "2." In the interest of time, we kindly ask you to please limit yourself to one question and one follow up.

Our first question today will come today will come from Jeff Stevenson with Loop Capital. Please go ahead.

Trex Company, Inc. Monday, August 02, 2021, 5:00 PM Eastern