Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Trex Co Inc (TREX, Financial) reported a 6% increase in net sales for Q2 2024, reaching $376 million compared to $357 million in Q2 2023.
- The company achieved a 13% improvement in net income and an 11% growth in EBITDA, resulting in a 180-basis-point improvement in EBITDA margin.
- Trex Co Inc (TREX) saw double-digit sell-through growth in its premium products, indicating strong demand from high-end consumers.
- The company successfully launched new products, including the Trex Transcend Lineage decking and Trex Signature lines, which have been well-received in the market.
- Trex Co Inc (TREX) continues to invest in branding and product development, which is expected to drive future growth and market share gains.
Negative Points
- Sales of entry-level products were below expectations, reflecting softness in the lower-end consumer market.
- The company anticipates a reduction in pro channel inventories due to current economic uncertainty, impacting sales in the second half of 2024.
- Trex Co Inc (TREX) revised its full-year sales guidance downward by approximately $85 million at the midpoint, primarily due to anticipated channel inventory reductions and market softness.
- Gross margin is expected to slightly deteriorate in Q3 2024 compared to Q2 levels, reflecting ongoing pressures in the market.
- The company experienced a decrease in year-to-date operating cash flow, primarily due to an increase in accounts receivable and higher inventory levels.
Q & A Highlights
Q: Can we start with some additional color on how you're thinking about the sell-through in the second half given the channel de-stocking that sounds like it's now going to be coming through?
A: Bryan Fairbanks, President and CEO: We saw high single-digit sales in Q1, which declined to low single digits in Q2, especially in June and July. We project Q3 to have a low-single-digit decline and Q4 a high-single-digit decline, with a significant portion of this being serviced by inventory reduction in the channel.
Q: You've been pushing some of these new products despite the tougher operating environment. What is your willingness to continue to ramp these investments, and anything else that's coming through on the horizon in the near term?
A: Bryan Fairbanks, President and CEO: We believe it's a good time to target new markets and take more share from tertiary players in decking and railing. This strategy will not change.
Q: Your commentary on the third quarter gross margin seems optimistic given the revenue projection. Is there something else helping the numbers?
A: Brenda Lovcik, CFO: We expect only a slight deterioration from last year due to our continuous improvement programs and the ability to flex our temporary staff, which offsets some of the other weaknesses.
Q: Can you walk us through how the retail slowdown progressed during the quarter? Are you assuming the second half for retail is worse than what you saw in the second quarter?
A: Bryan Fairbanks, President and CEO: June and July are key months for retail, and we saw a decline in performance as these months progressed. Given the significant revenue from these months, we adjusted our full-year numbers accordingly.
Q: How are you thinking about the opportunity for share repurchases given the recent pullback in the stock?
A: Bryan Fairbanks, President and CEO: We have a program that allows us to purchase up to 10% of the float. We have been active in the market during opportunistic times in the past and will continue to do so.
Q: With regards to the line review and increased in-store stocking, what quarter is going to be mostly impacted by this, and how should we think about the order of magnitude of it?
A: Bryan Fairbanks, President and CEO: The changes will start in Q3, with two new colors replacing existing ones in about half the stores. The impact on revenue will be more significant next year.
Q: Can you talk about the growth and ramp of railing and fasteners versus what you had expected?
A: Bryan Fairbanks, President and CEO: We are seeing great growth, particularly with the Select T-Rail system, which has led to numerous dealer conversions from vinyl/PVC. The cable rail system and other new products are just hitting the market now.
Q: What indicators are you seeing that would point to the deceleration in sell-through continuing into the fourth quarter?
A: Bryan Fairbanks, President and CEO: We track various web metrics, and the performance in late June and July has correlated with these indicators, prompting us to adjust our full-year numbers.
Q: Are channel partners taking all products down equally, or are they keeping the high-end product stocking better than the low end?
A: Bryan Fairbanks, President and CEO: They are keeping the right levels of product based on what is selling, focusing on A SKUs and reducing stocks on B and C SKUs. The adjustment will be more even, with potentially less inventory for entry-level products.
Q: Can you provide more detail on the impact of new product rollouts on your inventory levels?
A: Brenda Lovcik, CFO: The majority of the higher inventory levels are due to new products, such as aluminum railing. We expect inventory to be higher at year-end to ensure we can service the market, especially given the demand uncertainty.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
