Trex Company Inc

NYSE:TREX

Earnings Call Transcript 2020-Q3

[Operator]

[00:00:03] Good afternoon and welcome to the Trex Company third quarter Twenty twenty earnings conference call, all participants will be in a listen. Only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions, to ask a question. You may press star, then one on the telephone keypad to withdraw your question, please. Press star, then two. Please note this event is being recorded. I would like now to turn the conference over to Victoria Nakhla Investor Relations. Please go ahead.

[Viktoriia Nakhla, Investor Relations]

[00:00:37] Thank you, miss, and thank you all for joining us today with us from the class, Bryan Fairbanks, president and chief executive officer and then vice president and chief financial officer. Joining Brian and Dennis is builds up senior vice president, general counsel and secretary, as well as other members of trucks management. The company issued a press release today after market clothes containing financial results for the third quarter Twenty twenty 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 build the.

[Bill Gupp]

[00:01:24] Thank you, Victoria. 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 risk and uncertainties that could cause actual results to differ materially from those expressed in the forward looking statements for discussion of such risks and uncertainties. Please see our most recent form 10K informed Qs as well as our nineteen thirty three and other nineteen thirty four ACT filings with the S.E.C. and additionally, non-GAAP financial measures will be referenced in this call. A reconciliation of these measures to the comparable gap financial measure can be found in our earnings press release at truck stop time. The company expressly disclaims any obligation to update a revised 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 Brian Fairbanks.

[Bryan Fairbanks, President & Chief Executive Officer]

[00:02:33] Thank you, Bill. Good evening, everyone. Thank you for joining our earnings call to review Trex Company third quarter results and discuss our business outlook for the fourth quarter of Twenty twenty and into Twenty twenty one. This was another quarter of record revenue and earnings as we continue to navigate a very robust demand environment while progressing with a major capacity expansion program to ensure trucks can meet strong demand in the future. I want to take a moment to highlight a few specific areas that are pivotal to Texas success and thank all who helped us achieve that success. First, we have the strongest channel partners in the industry and we recognize that they are key to Texas growth. They have managed through the rapidly changing Twenty twenty pandemic environment exceedingly well. Also, many thanks to our sales team, who has tirelessly traveled to local markets to support Trex customers, contractors and retailers. Lastly, I must note the extraordinary dedication of our manufacturing and supply chain teams who have adjusted to the new safety protocols while making packaging and shipping our products, working to install new capacity, and providing training to the many new employees joining our team to support our production expansion. So I thank all members of the team for their dedication and extraordinary efforts in helping us achieve another successful quarter as we work safely through the current pandemic to service our customers.

[00:04:06] In the third quarter, residential product sales growth accelerated to 20 percent as we utilize capacity gains from incremental lines in existing facilities to address broad based demand. Robust demand for decking is not a new trend. Outdoor living has long represented one of the fastest growing categories within the repair and remodel sector. In our view, covid-19 is providing a tailwind for an already strong category. It has brought the useability, comfort and enjoyment of the home to the forefront of consumers minds to meet the current and expected future demand. We continue to execute on a capacity expansion which once completed, will increase truck stacking capacity by approximately 70 percent, as signaled in previous calls this quarter. We experienced increased labor cost as we recruit and train employees ahead of bringing the new production online. Thanks to our highly efficient operating model, we were able to offset these expenses in the third quarter to report a 13 percent increase in net income adjusted for the warranty charge and adjusted EBITDA margin of twenty nine point four percent to offset these additional costs. Longer term, we recently announced price increases on certain products set to take effect at the beginning of next year.

[00:05:31] Dennis will share more details on this in a moment. Trex commercial perform in line with our expectations in the third quarter, posting steady revenue results and a steady margin profile with new leadership in place and the engineering capabilities we have in-house, we see multiple opportunities to expand as part of our business and continue to innovate in the commercial whaling space. We entered this period of accelerating demand for residential products with our broadest range of decking and railing products. Consumer demand for a game changing enhanced product line continues to exceed expectations. This offering significantly expand our total addressable market by providing homeowners with an affordable high performance and eco friendly alternative to pressure treated wood. Decking, while enhanced, is off to a great start. It remains ample runway ahead of us as we pursue this market share conversion for years to come. With the success of enhanced product line and its appeal to the cost conscious consumer and the continued success of our premium select and transend decking and railing lines, we are seeing growth across our entire product portfolio.

[00:06:45] For more than a decade, Transend has set the bar for esthetics, performance and design within the industry and for homeowners who seek the best for their outdoor spaces. Proving this point, feedback from contractors continues to be positive. It indicates a healthy backlog of projects with no signs of abating. Since its inception, we've developed and nurtured long standing relationships with the top specialty material distributors, cross-channel dealers and DIY retailers, making tracks the most widely available and purchased brand throughout North America and increasingly around the world. These relationships are one of the fundamental fundamental elements that position trucks for inclusion on the recently announced Fortune magazine. 100 fastest growing companies, as we have done in the past, tracks will continue to earn the business from the best distributors, dealers and retailers by ensuring they grow alongside trucks. As we invest in our brand and deliver market leading products that meet the needs of homeowners seeking to improve their outdoor living spaces. The needs of our channel partners, customers and investors also includes a focus on sustainability. From inception, Trex has led the industry in the use of recycled raw materials and uses 95 percent recycled content in our decking product lines, as well as recycled content in our aluminum railing systems. In early October. We were honored with the Twenty twenty Sustainability Leadership Award by the Business Intelligence Group, recognizing our ongoing commitment to sustainability. Illustrated through a proprietary manufacturing process, commercial and community recycling programs and measurable positive environmental impacts are key to winning. This latest honor is the company's highly effective next Trex recycling program, which makes it easy for retailers, distributors and consumers to responsibly recycle plastic waste recently. Our next Trex recycling program reached a monumental milestone of one billion pounds of recycled material collected through participating partners. As we look forward to the fourth quarter and next year, our fourth quarter guidance points to year over year sales growth of 30 percent at the midpoint of guidance. And for Twenty twenty one, we expect strong double digit sales growth. I will now pass the call to Dennis and share to share more details on our financial performance.

[Dennis Schemm, Vice President & Chief Financial Officer]

[00:09:23] Thank you, Brian, and good afternoon. Consolidated net sales increased 19 percent to 32 million during the third quarter, led by 20 percent growth in net sales of trucks. Residential products that reflected robust and market demand across our residential product lines, trucks, commercial products contributed 13 million to consolidated net sales in the quarter, an 11 percent increase from the year ago quarter during the third quarter. We recognized a one time six point five dollars million charge to our warranty reserve for the legacy service flaking issue that affected a portion of the products manufactured at our Nevada plant prior to 2007. To put this amount in perspective, the average cash impact is less than 500000 per year through twenty thirty five. Consolidated gross margin in the third quarter was thirty six point seven percent, or thirty nine point five percent, after adjusting for the warranty charge compared to forty two point four percent for the twenty nineteen third quarter Trex residential products, gross margin was thirty seven point four percent, or forty point four percent, after adjusting for the warranty charge, compared to forty three point four percent in the year ago quarter. As we anticipated, our gross margin was impacted by hiring and training costs in advance of our capacity ramp up in Virginia, continued covid management costs and depreciation due to capital expansion expenditures partially offset by favorable material costs due to managing our enhanced profile to the lower wage target to offset these additional costs, we recently announced a mid single digit price increase on multiple products across our decking and rolling portfolio.

[00:11:12] Trex commercial performed in line with our expectations in the third quarter, posting steady revenue growth at eleven percent compared to the twenty nineteen third quarter, reflecting the underlying growth in the commercial segment. Gross margin at Trex commercial was twenty four point four percent, compared to twenty six point five percent in last year's third quarter. We continue to leverage our operational infrastructure, increasing Aschiana expense by only two percent to 28 million from twenty seven point four million in the third quarter of twenty nineteen, resulting in a two hundred basis point reduction in its DNA as a percentage of sales, we expect to continue to gain significant operating leverage, with Aschiana expenses growing at a slower rate than net sales. In addition, our effective tax rate in the third quarter was relatively unchanged at twenty five point three percent, compared to twenty four point seven percent in the year ago quarter, an increase of sixty basis points. Net income was forty three million for thirty seven cents per diluted share, up two percent and three percent respectively, from the forty two million or thirty six cents per diluted share reported in the third quarter of twenty nineteen, adjusted for the stock split that took effect September 14th.

[00:12:33] Adjusted for the warranty charge, net income was 48 million or 41 cents per diluted share, an increase of 13 percent and 14 percent, respectively, EBITDA was up five percent to sixty one million, while EBITDA margin was twenty six point six percent, compared to thirty point one percent. Exclusive of the warranty charge, EBITDA and EBITDA margin were sixty eight million and twenty nine point four percent respectively. We see EBITDA as a better indicator of our financial performance and we believe that over the long term we will continue to improve our operating leverage and expand our EBITDA margin. Summarizing our year to date results, consolidated net sales were 653 million, representing a 12 percent increase from 581 million in twenty nineteen Trex residential net sales increased 13 percent to six hundred fourteen million year. To date, net income was one hundred and thirty two million or one dollars and 14 cents per diluted share, up 21 percent and 23 percent respectively, from 109 million or 93 cents per diluted share. When adjusted for the stock split, EBITDA was up 23 percent to one hundred and eighty eight million, while EBITDA margin expanded and sixty basis points to twenty eight point eight percent.

[00:13:59] Adjusted for the warranty charge, net income was one hundred and thirty seven million or one dollar and 18 cents per diluted share, up 26 percent and 27 percent respectively. And EBITDA and EBITDA margin increased 28 percent to one hundred and ninety four million and three hundred and sixty basis points to twenty nine point eight percent respectively, related to the balance sheet and cash flow. As mentioned on previous calls, we are carrying higher than usual levels of accounts receivable, which are related to sales support and incentive programs provided to our channel partners. Receivables will return to a more normalized level by year end. We have had no issues nor foresee any issues with the collectability of our accounts receivables. Capital expenditures for the top for the Twenty twenty nine month period increased to one hundred million, compared to 37 million for the 2019 nine month period, primarily related to our ongoing capacity expansion. Three new production lines and our Nevada facility are fully operational, and the production lines at our new Virginia facility will start coming online in the first quarter of twenty one and continue to ramp up through the second quarter. We continue to fund all capital needs from cash flow and had no additional borrowings under our revolver at quarter end, providing Trex with an untapped three hundred million of available borrowing capacity.

[00:15:31] Given our confidence and underlying demand and the growth in outdoor living, the board of directors reinstated our share buyback program in twenty seventeen, the board of directors authorized up to eleven point six million share repurchases. 2.8 million shares have been repurchased today, totaling one hundred and three million at an average cost of thirty six dollars and sixty five cents per share. I will now provide additional insight regarding our guidance, we expect consolidated net sales for the fourth quarter to be in the range of 210 million to 220 million. We expect full year incremental gross margin to be at the lower end of the 45 percent to 50 percent range, excluding the warranty reserve but inclusive of additional covid related expenses, higher inflation and logistic costs associated with startup up. As we approach our Virginia facility coming online, we expect startup costs to persist into 2021 as we continue to ramp the facility full year consolidated Aschiana as a percentage of sales, is projected to improve by approximately 150 basis points over the prior year. Our tax rate is anticipated approximately 25 percent. We expect full year spending on capex spend to be in the range of 150 to 170 million for the full year. Working capital will normalize to historical levels. Now I'll turn the call back to Brian.

[Bryan Fairbanks, President & Chief Executive Officer]

[00:17:05] Thank you, Dennis Year-to-date results put trucks on track for another record year with 16 percent growth, including fourth quarter guidance at the midpoint. Even more importantly, we do not see the growth slowing and we expect to follow up with strong double digit sales growth in Twenty twenty one. This positive outlook reflects a combination of the strength of the outdoor living category, our brand leadership and our product lineup that allows us to compete effectively from the entry level to premium level decking and Israeli products. We continue to be excited about the significant conversion opportunity from wood to products. Operator, I'd now like to open the call to questions.

[Operator]

[00:17:48] We will now begin the question and answer session to ask a question. You may press star, then one on a telephone keypad. If you're using a speakerphone, please pick up your hands before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time we will post momentarily to assemble our roster. Our first question comes from Keith Hughes with Travis Securities. Please go ahead.

[Keith Hughes, SunTrust]

[00:18:18] Thank you. The guy that you've given for gross contribution margins year implies a step up from what you just reported to the fourth quarter, kind of the mid 30s, roughly in the fourth quarter. You should go into next year. Not roughly the kind of numbers we would see as you add this new capacity in or think it would dip down for a period as you adjust.

[Bryan Fairbank]

[00:18:42] As Dennis mentioned in his commentary, we will have startup costs that'll be hitting us, especially in the first half of the year. And then I expect in the later half of the year we'll see some of that cost improvement opportunities starting to come at us as we've got more engineering capability on that. It's important to really focus on the opportunity we have both at the gross margin line but also at the operating income. And from an EBITDA perspective, we've talked in the past with the launch of Enhance that it wouldn't carry the same brand load as the rest of the tracks product lines. And we've estimated that generally between five to six percent of sales. So that leverage of TNA over the long term is a very important value contributor to the company and brand.

[Keith Hughes, SunTrust]

[00:19:34] Do you mean advertising or like that? Correct. Correct, yes. OK. The other question I had the with the price increase coming, are you anticipating some of these sales that you're going to see in the fourth quarter, some of that kind of preload before the price increase? Or is it just that strong, wonderful thing for the channel about the desirability of your product?

[Bryan Fairbank]

[00:19:58] The demand continues to be strong in the channel, so we are selling at elevated levels through October, November. Eventually, weather will kick in and have to slow some of that demand down. We have more of a normalized early buy program set up and that will start in December and run through March and into early April of next year, where we start building some inventory back into the channel again.

[Keith Hughes, SunTrust]

[00:20:24] Ok, thank you.

[Operator]

[00:20:28] Our next question comes from Stanley Elliott with Stifel. Please go ahead.

[Stanley Elliott, Stifel Financial Corp]

[00:20:34] Hey, guys. Thank you all for taking the question. Of course, the share repurchase to have a plan, to have a plan in place, kind of. How should we think about when that could get kind of more involved moving into next year?

[Bryan Fairbank]

[00:20:49] Yeah, the plan will be in place, will file a 25 five one and, you know, historically. We've been very, very opportunistic on on buying back our stock, and I think you can see that from the success of our our buyback over the over the past years.

[Stanley Elliott, Stifel Financial Corp]

[00:21:08] And then lastly, guys, it feels like that you're talking to people on the channel. That demand is pretty good. Does it feel like to you that the rate limiting step right now is is really the contractors ability to put down the product?

[Bryan Fairbank]

[00:21:23] I think it's the contractors are clearly busy and they all have a track of backlog going into the winter months. And I expect that'll carry them right through as they move into next year. The DIY business and not necessarily just through that channel, but through all of our channels has been extremely strong. And that's where the timing of the launch of Enhance was pretty good from that perspective to make sure that we had products that would appeal specifically to that DIY consumer. So where you're seeing some shortages of contractors, you're tending to see the DIY side of the business picking up that additional demand.

[Stanley Elliott, Stifel Financial Corp]

[00:22:03] Great, guys, thank you very much. Thanks.

[Operator]

[00:22:07] Our next question comes from Ryan Merkel with William Blair. Please go ahead.

[Ryan Merke]

[00:22:13] Hey, guys, congratulations on the quarter. So I guess, first off, a follow up to Keith question. Your fourth quarter revenue guidance was much better than I was thinking. Can you just give us a sense for the contribution from sell through versus sell in?

[Bryan Fairbank]

[00:22:30] There's still a lot of sell through going on in the marketplace. Some of the channel checks that I read from the various analyst shows there are some back orders out there in the marketplace. Those will be filled and then there will be the start of some inventory build in the marketplace, mostly into December.

[Ryan Merke]

[00:22:50] And then secondly, you may not want to answer this directly, but what would gross margins have been this quarter, excluding the one time startup costs?

[Bryan Fairbank]

[00:22:59] I'm just trying to gauge earnings power once we lap because we've not provided an estimate of what those startup costs are. We may do that as we get through the the end of the year. We recognize that we will continue to have those costs moving into next year and we're not really going to be in a position to be breaking that out each quarter.

[Stanley Elliott, Stifel Financial Corp]

[00:23:21] Ok, fair enough. All right.

[Operator]

[00:23:25] Our next question comes from Phil Ing with Jefferies. Please go ahead.

[Phil Ng, Jefferies]

[00:23:30] Hey, guys. Appreciate the color for 21 and strong double digit growth. Sounds right, Brian. Is there a way to kind of put a finer ball on that? Is that, you know, high teens does have a to a. send a little more color on that double digit growth for Twenty twenty one?

[Bryan Fairbank]

[00:23:46] Yeah. So we're sitting here at the end of the third quarter and Twenty twenty, there's a lot of things that will happen with the economy, I expect, over the next 60 days. And as we get out through the end of the year, we will provide additional color on that revenue for Twenty twenty one is trying to give an idea of the strength that we expect to continue to see in the market. And the strategy of converting wood continues to be very relevant in this environment.

[Phil Ng, Jefferies]

[00:24:18] Got it. And it's from a fourth quarter standpoint. Certainly as you go into early twenty twenty, what are you, like, fully caught up from a supply standpoint? I know supply was a big governor for growth for big parts of the year. Are you pretty flush on that side of things at this point?

[Bryan Fairbank]

[00:24:34] It's mixed there. Certain areas, I'm sure that you'll talk to at the end of December and they'll be saying that there's there's more needed and there's other areas that will feel pretty good about their inventory position.

[Phil Ng, Jefferies]

[00:24:46] Got it. And just one last one for me. With the price increases that you guys have out there for Twenty twenty one and all the good work you're doing on the cost. Is that enough to kind of, you know, have your margins kind of flat on a year basis in the first half? And there's a lot of sort of cost to start the year. But on a EBITDA standpoint, like how should we think about the margin profile?

[Dennis Schemm, Vice President & Chief Financial Officer]

[00:25:07] I think when you look at EBITDA margins on a full year basis, we'll be looking to expand those EBITDA margins. We're not really going to get into splitting it out by half along the way, but there clearly will be more pressure on the first half and we'll see in the second half.

[Phil Ng, Jefferies]

[00:25:25] All right, thanks a lot. Really appreciate the color.

[Operator]

[00:25:26] Our next question comes from Tim Watches with Baird. Please go ahead.

[Tim Wojs, Baird]

[00:25:34] Hey, guys. Good afternoon and nice job and thanks. Maybe just first on the pricing commentary, is there any way to just maybe give us a little bit of context in terms of, you know, how much of your product portfolio is taking that mid single digit price increase? And, you know, maybe what the historical realization of of pricing has been.

[Bryan Fairbank]

[00:25:55] Historic realization on pricing has been 100 percent. It's not like some industries where price increases are put through and then they're revoked a month later along the way. So we have absolute confidence that the pricing that has been put into the market will stay in the marketplace. All that being said, that pricing communication is working its way through the marketplace right now. And I'd rather allow our sales team to have the time to make sure everybody understands all of the particulars of it before we get into details on it. It is on certain product lines. It's not the entire product lineup that we have. And we base that on the strategy of how can we continue to convert more of the wood marketplace. And then we also saw areas where there was opportunity at the premium end of the market to be able to recognize additional revenue. The key driver for taking the price increase, we do expect to see some inflationary pressures moving into next year, raw materials more so because of logistics cost and then the sheer volume that we're going to be needing next year. As everybody is aware, the majority of our materials, it's not something that is manufactured at a specific plant. We are buying our products, both wood and recycled plastic from all over the country, and we will have to expand our sourcing footprint.

[Tim Wojs, Baird]

[00:27:23] That's helpful. Thanks. And then maybe just a conceptual question. What is the right kind of long term growth rate for China? You know, I guess within hants coming in and, you know, in later marketing mode, you know, if you're doing 10 percent growth or 12 percent growth, I guess, what percentage of that do you need to reinvest in that TNA going forward?

[Bryan Fairbank]

[00:27:47] I'd like I'd like to be able to give you a rule of thumb to use the reality this year. Our skinny is definitely below where it would normally be because of lower medical expense, much lower travel and entertainment, and then also pulling back on branding during the second quarter of the year. I expect that we'll see all of those come back into play next year. Some level of leverage along the way, but probably not as extensive as you move out beyond that time frame, you start to see more leverage occurring again. But it will really depend upon where do we see the largest growth opportunities in our marketing team is extremely effective in understanding when they put a dollar to work, what's the return going to be for the company? And that's the way we make decisions on how we are going to be investing with TNA.

[Tim Wojs, Baird]

[00:28:41] Thanks for the questions and good luck on the rest of the year. Great, thanks.

[Operator]

[00:28:48] Our next question comes from Matthew Buli with Barclays. Please go ahead.

[Matthew Bouley, Barclays]

[00:28:53] Good afternoon. Thank you for taking the questions. I have a two parter on the price increase. I guess number one, if you can comment, is it a similar increase between retail and distribution customers? And and number two, I guess at a higher level, to what degree do you think pushing price perhaps impacts the penetration of composite decking versus wood that does it at all play into that consumer decision when they're comparing versus what? Thank you.

[Dennis Schemm, Vice President & Chief Financial Officer]

[00:29:23] I'll take the first question there. So all of our channel partners will receive the same price increase across those multiple products. And I'll shoot the question. Second question over to Bryan.

[Bryan Fairbank]

[00:29:36] Yeah, our strategy of converting increased amounts of wood to composite is fully intact. We will still have a product that is roughly two times the price of wood and then a move our product, our enhanced natural's, with a higher level of esthetics, retailing for about two dollars and fifty cents a linear foot.

[Matthew Bouley, Barclays]

[00:29:56] Okay, that's helpful. Second one, do you I guess, do you have any sense of what I guess wood decking has done, you know, through all this strong demand in the summer and early fall? I guess, you know, the real question is, do you think that composite decking share gain is actually accelerated this year versus, you know, what's historically been maybe that one to two hundred basis points of increased penetration in a given year? Really just has the underlying decking market been that strong as well, or have you actually accelerated that share gain? Thank you.

[Bryan Fairbank]

[00:30:30] Well, it's fair to say that the underlying decking market has been strong this year. Lumber aisles were empty in many, many cases. But what we do see is a continued recognition by consumers that there are affordable, high quality composite products available to them, and they're more often than not making that choice to go with Trex Composite. Products, we've seen organic search results coming to trucks, dotcom, that were just absolutely off off the charts, and that's because of the educational opportunities that we've been taking over the past couple of years. And we'll continue to do that as we go forward and continue to build that demand. There's a lot of business out there that still goes to wood, so we don't see any shortage of opportunities for us to go after to continue our growth trajectory.

[Matthew Bouley, Barclays]

[00:31:26] Thank you, Brian. Thanks. Thanks.

[Operator]

[00:31:30] Our next question comes from Alex Rinkel with B. Riley FBR. Please go ahead.

[Alex Rygiel, B. Riley FBR]

[00:31:37] Thank you, Brian. And apologize for sort of asking that last question in the same way. What do you think the organic growth rate in the composite market was in the third quarter or for the entire year organic growth rate?

[Bryan Fairbank]

[00:31:54] I think if we look at just the underlying growth of composites is going to be in the mid single digits. And then once you start adding the wood conversion opportunity, on top of that, you start to see that that difference in in growth for a long time before we were really targeting, going after the wood marketplace has tended to flow right in line with remodeling spending increases. And I think we're seeing a little bit of a divergence at this point. But I would still calculate the same way you go after remodeling, plus the wood conversion opportunity over time. I expect we will have significant international growth on top of that as well.

[Alex Rygiel, B. Riley FBR]

[00:32:41] And Dennis, coming back to your prepared remarks, what is the remaining balance on your authorization right now? Share repurchase authorization, one second on that.

[Dennis Schemm, Vice President & Chief Financial Officer]

[00:33:01] Well, I mean, so so bottom line is the board authorized eleven point six million shares. We've repurchased 2.8 million to to date on that.

[Alex Rygiel, B. Riley FBR]

[00:33:15] And that eleven point six Prita split or post the split.

[Dennis Schemm, Vice President & Chief Financial Officer]

[00:33:19] This is a post split number.

[Operator]

[00:33:23] Ok, our next question comes from Curt Ginga from D.A. Davidson. Please go ahead.

[Kurt Yinger, D.A. Davidson]

[00:33:32] Yeah, thanks and good evening, everyone. Starting off, could you just give a little bit more color, Brian, on where you stand with the new Winchester facility just in terms of overall construction, I guess, equipment being in place and hiring ahead of next year? Sure.

[Bryan Fairbank]

[00:33:52] As you'll recall, we announced this facility in July of last year. So we're about 16 months in to the building at this point. And it went from a just an open piece of land to having all four walls and a whole lot of equipment going into the building at this point. We continue to be on track with an expected start up in January of Twenty twenty and then we will ramp those lines as we've moved through the first two quarters of the year.

[Kurt Yinger, D.A. Davidson]

[00:34:28] Ok, that's helpful. And then for my second one, could you just update us on where you stand with the enhanced schallert? And I realize it's not a huge needle mover for you guys, but talk a little bit about what you're seeing in virgin polyethylene pricing freight and then any other inflationary pressures kind of on the horizon?

[Bryan Fairbank]

[00:34:50] Yeah, sure. We've largely removed the weight from our enhanced product line. There's a couple of lines that we're still working on getting the the final equipment in. But the vast majority of product going out today has the lower, lower weight in it. The second point was about gross margin pressures and so forth.

[Kurt Yinger, D.A. Davidson]

[00:35:10] And so, you know, as we're looking out here into fourth quarter, I mean, we're going to continue to see labor pressures as we continue to bring on people in advance of the start up. We've got inflation, as Brian talked about, on raw materials, as we're stretching out further to secure our our footprint for supply for these new lines. And I think it's another important point to make is about covid we are incurring more costs as we continue to keep our workforce safe. You know what? And that's basically what's taking us more to that lower end of the range of the 45 to 50 percent.

[Bryan Fairbank]

[00:35:47] We've done quite a bit of hiring in advance of start up, especially at our Virginia facility, where many of the skilled trades and indirect heads, as well as training people who will be working directly on the lines. So that's coming along as planned at this point. Not to say it's without challenge. It is a very tight labor market. Probably a year ago, had we talked, I would have talked to you about risk with general labor. And that's something that we continue to see today.

[Kurt Yinger, D.A. Davidson]

[00:36:18] Ok, we appreciate all the details. Brian Dennison, good luck here in the fourth quarter. Thanks, Kurt.

[Operator]

[00:36:25] Our next question comes from Robyn Gardner with the Benchmark Company. Please go ahead.

[Reuben Garner, Benchmark Company]

[00:36:32] Thank you. Good evening, everyone. So I hate to harp on the pricing, but just a follow up question. Does I guess what how do you how do tricks pricing normally compare to your peers? And have you seen I know there was one out there at least that increased prices. Have you seen others do the same? Is there any risk that this puts you, you know, at a larger premium than you are to others? Are you competitively priced now and that puts you more in line?

[Bryan Fairbank]

[00:37:05] Well, Trex reviews our pricing on an annual basis. We understand where we are in the marketplace against the strategies that we've built over time. I can't really comment on what else everybody what everybody else is doing in the marketplace, but we feel as though that it sets up very well for our product lines.

[Reuben Garner, Benchmark Company]

[00:37:26] Ok, fair enough. And then on the right, you mentioned the international business or opportunity. How has your capacity constraint kind of impacted your growth opportunity there? And does the you know how much of the incremental capacity that you're adding, I guess, how much does that open you up to be able to maybe grow faster in other markets in the short term?

[Bryan Fairbank]

[00:37:52] It's definitely limited our growth opportunities in international markets. We've got some great partners in overseas marketplace. They'd love to have more more products. And as we move out into next year and we have that capacity, we'll be able to really put some rocket fuel back into that business again and drive growth there.

[Reuben Garner, Benchmark Company]

[00:38:15] Great. Thank you. Congrats on the quarter and good luck to the rest of the year, guys.

[Operator]

[00:38:18] Thanks. Our next question comes from Alex Moroka with Berenberg. Please go ahead.

[Alex Maroccia, Berenberg]

[00:38:26] Hey, guys, good evening and thanks for taking my questions. Cutting into twenty twenty one. Can you discuss your marketing strategy, especially since some of the competitors are getting more aggressive on brand visibility?

[Bryan Fairbank]

[00:38:38] Sure. We look out to Twenty twenty one. We built a strategy from a marketing perspective that targets consumers who are specifically in the market for decking products. And that could be a composite or wood. That's through our trucks. Starcom will likely use paid search, as we we do in the past, as well as other advertising venues that will hit that marketplace. But also we will rely heavily on deck Starcom. That's a wholly Trex owned website which appeals to buyers who are primarily looking at would start with. And then we'll use that website to try to bring more people into Trex and understanding that composited are affordable and in many cases be able to move them up to an esthetic, a better esthetic on their deck. So I expect that you'll continue to see more of what we have done in the past very successfully, as well as do things that our marketing team is working on now.

[Alex Maroccia, Berenberg]

[00:39:39] Ok, got it. And then historically, you've seen limited new construction exposure. However, given the strength in that market right now and the difficult labor environment for remodeling contractors, are you seeing any changes in new home builders propensity to build?

[Bryan Fairbank]

[00:39:54] I think the home builders right now are focused on building the home, plain and simple. It's a great opportunity for us over the longer term as the home builders get out of their own backlog along the way and get those homes built. But we definitely see an opportunity to improve the penetration of Trex decks on new home builds over the longer term.

[Alex Maroccia, Berenberg]

[00:40:19] Thank you.

[Operator]

[00:40:22] Our next question comes from Trey Grooms with Stephens. Please go ahead.

[Trey Grooms, Stephens]

[00:40:27] Hey, good afternoon. Thanks for taking my question. Hey, Brian. So I guess first off, and you may have touched on this, but I'm really trying to get just a better understanding of some of the costs related to the new capacity to start up costs and how to how we can kind of, you know, dissect what would be maybe one time related. True. Like, you know, ramping up costs and how much would be or how to think about, you know, maybe continuing costs that are more, you know, depreciation related and that type of thing once the once the capacity increase is fully implemented.

[Bryan Fairbank]

[00:41:11] Yeah. You know, when I think about it right now, like the start up costs for real, you know, so we got to be testing these lines. We're going to be shaking them out. We're going to be working to perfect them, to get them to ramp up to full capacity. So that's going to be one aspect to think about going forward. Secondarily, you know, we're going to see higher costs. We're bringing on people, training them, developing them. We're all bringing these people on before those lines are ready. So that's unabsorbed. You know, that's absorbed labor. So that's hitting us as well, right, until those lines are all up and running by the end of the second quarter. So I think those would be, you know, the primary one timers that you would see. You know, depreciation, of course, is going to continue on. And we've got covid expenses right now that, you know, we've got to keep a watchful eye on because we have seen an uptick in overtime and personnel costs just to be, you know, being very precautionary, quarantining folks, et cetera. So that's another one timer that we're dealing with. Unfortunately, I do expect that will continue out probably at least through the first quarter, hopefully. Well, we'll see some solutions to that in the second quarter, but that may continue beyond the first quarter.

[Trey Grooms, Stephens]

[00:42:27] Okay, got it. All right. And then on International, I know there was a comment earlier. I don't think I've heard you sound so excited about International in a while. And I know there's been some headwinds recently there, you know, in in the different areas that you guys have been, you know, sitting product in the past. But where is that right now as a percent of total? I don't know if you can give that to me, but right now, as a percent of total. And then where do you see that going over the long term?

[Bryan Fairbank]

[00:43:00] The only headwind in that business is related to the capacity constraints that we have as an organization. So that's why I'm excited about it. We've got our customers. They're primed, ready to grow in those marketplaces. And as we bring that capacity up, we will expand. What we're shipping is less than 10 percent of. The business today expect over time it will grow to be larger than that, but as you can see, we've been growing the North American side of the business pretty quickly over the years, and I'm not sure exactly when it will get to that over 10 percent. But, yeah, you're right, we are excited about it and we've got good strategies in place to hit those marketplaces.

[Trey Grooms, Stephens]

[00:43:43] All right. That's it for me. Thanks for taking the questions and good luck. Thank you.

[Operator]

[00:43:50] Our next question comes from Seldin Clark with Deutsche Bank. Please go ahead.

[Seldon Clarke, Deutsche Bank]

[00:43:56] Hey, thanks for the question. Just one more on pricing. You've been fairly selective in the past, like the price increases. And I think, you know, generally they've been implemented in years where inflation was expected to be a little bit higher than normal. So, you know, some of the inflation you talked about in terms of free costs and raw materials is a little bit more unexpected. But, you know, this doesn't seem like something that you you seem to be anticipating earlier in the year. So just curious if your longer term approach to pricing is changing all, you know, based on either industry dynamics or the acceleration and awareness that you've seen over the last couple of months,

[Bryan Fairbank]

[00:44:39] We'll continue to look at our pricing line up on an annual basis and make a determination of where we are and the value of our products as it relates to the consumer and and make pricing decisions based off that, as well as understanding what inflationary impacts. So there's really multiple number of inputs is not just inflation that goes into pricing decisions, but that has been a primary driver with some of the last increases that we've taken.

[Seldon Clarke, Deutsche Bank]

[00:45:13] Okay. So no real change to previous strategy.

[Bryan Fairbank]

[00:45:17] No, OK.

[Seldon Clarke, Deutsche Bank]

[00:45:19] And then I understand you're bringing on another 70 percent of capacity with your current expansion. But could you just give us a sense of where you think total capacity in Twenty twenty one compares to Twenty twenty? I know you don't like to give a ton of granular detail there, but you know, you're expecting another year of double digit growth. So just curious how you're thinking about it trending from sort of a capacity utilization perspective as well. Just any sense that would be helpful?

[Bryan Fairbank]

[00:45:53] Well, you know, we did talk about like Nevada lines that came up. That was a much smaller percentage of the overall capacity expansion plan. Right. So I think in past comments, we said probably about 30 percent of that is going to be in Nevada. And the bulk of that will or the remainder of that would be in Virginia.

[Seldon Clarke, Deutsche Bank]

[00:46:17] Ok, that's helpful, I appreciate it. Thanks so.

[Operator]

[00:46:23] This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

[Bryan Fairbanks, President & Chief Executive Officer]

[00:46:30] Thanks, everybody, for joining us on the call this evening. We look forward to speaking with many of you in the coming weeks at various conferences. Thank you and good evening.

[Operator]

[00:46:42] The conference is now concluded. Thank you for attending today's presentation, you may now disconnect.