Trex Company, Inc. ($TREX)

All right. Why don't we get started? Good morning, everyone. This is the Trex presentation. I'm Ryan Merkel. I cover building products at William Blair. Before we begin, I need to remind you that a list of disclosures and conflicts of interest is available on our website. With us today is Adam Zambanini. He is the CEO of Trex. By way of background is the #1 manufacturer of composite decking and railing with roughly 50% market share in the industry. Composites look like real wood, but are more durable and require minimal maintenance Today, composite decking has about 25% market share with room to 50% to 60% long term. We think consumer education and new products are the way to increase the penetration. With that, let me turn it over to Adam.

Thanks, Ryan. Good morning. Before we get in the investment presentation, I'd like to introduce Lee Coker, Lee, who is kind of in the back, Lee is now our internal Investor Relations, Corporate Development person, brand-new for Trex, and has helped us construct this new Investor Relations presentation if you're interested in it. So some of the key messages, if you think about where we're headed, and I'm a little bit different in terms of the -- probably when you look at the last 3 CEOs, they're all CFOs, I've come really out of the front end of the business, the sales and marketing function and the #1 thing we need to do is we need to grow if you look at the last 4 years. And so leveraging the established brand, we're going to talk about the 5 imperatives here later on and the things that we're going to do. But brand building to me is really critical in driving consumer demand and also contractor demand. And some of the things that we can do, it goes back to what Ryan said, the opportunity around Trex. You still look at it. 75% of the marketplace is still wood. And then there's another untapped area that we just recently got into, which is PVC, which is another $0.5 billion market. So we're going to be going after what I consider is bringing new users in from the wood market and converting them over to Trex. And then on the high end of the market, some of the attributes that they have around PVC. When you look at the future of this category, I believe it boils down to material science. So delivering differentiated material science innovation. The reason I say that is when you start to look at cost of goods, upwards of 70% is materials. So when we think about material science, I think about it in 2 different ways. One, we can invent something that's going to close the gap to wood on the material science end to bring more people into Trex. And two, we can build differentiated products that can add more value to tracks to extract more margin over time. So when I look at this, there's plenty of opportunity to grow, and there's plenty of opportunity when you look at the margins. But you have to be really aligned with what we have to do from an R&D perspective. So I'm looking for really differentiated products moving forward. I don't believe that adding colors has anything to do with innovation. I believe that you have to have differentiated products wrapped around intellectual properties. My background is mechanical engineering. I've worked a lot on innovation. One of the things that I kind of worked on back in the day was Trex Transcend. And that really took the category from a product that was invented that needed to kind of up its game in low maintenance and it evolved the category to scratch stain fade mold resistance. So what we want to do is find Gen 2 of high-performance composites, and that's what we're on the cusp of here at Trex as we move forward over the next several years. We want to capitalize on the multiyear investments. So next year, in 2027, we're going to generate well over $200 million in free cash flow, and we'll talk to you a little bit about what we plan on doing with that. But there's plenty of opportunity. The capital infrastructure is built around Trex and the core categories in decking and railing. So we don't really need any core infrastructure for well over 10 to 15 years. So if you think about that, there's plenty of room for growth within the 4 walls at Trex. And then executing this long-term strategy, we've made these 5 imperatives really simple and it really aligns with where we want to take the company to add shareholder value. The mission and the vision little bit different than what we've had in the past, but I want to focus on the core values. For me, those are really important. So we talked a lot about how innovation is going to be really critical to where Trex is going. And when you think about the core values, my #1 core value is innovate with purpose, meaning when our R&D engineers walk into the 4 walls of Trex, when they open up the door and it says innovate with purpose, they have to generate something that's going to be meaningful, something differentiated. Two, obsess over the customer. The customer is why we exist. So whether it's the consumer, whether it's a contractor, I'm having my sales force that is completely aligned with obsessing over the customer or internally is whatever the stakeholders are. to make sure that we go out and exceed expectations in every single thing that we do. When you have an interaction with the Trex brand or you have an interaction with the Trex product, it should overwhelm you in terms of the amount of support that we offer for you. So it's going to be really important. On the outcome for me is you are accountable for your actions. So we will hold you accountable. You will have targets that you have to deliver. And those dates, those deadlines are extremely important. We will hold you accountable. Operate with excellence and efficiency in everything we do with safety wrapped around in everything that we do. So I think we've added a new Chief Operating Officer. He's been with me now for 10 years. I've seen this performance now. It hasn't been this good at Trex in about 5 or 6 years. So we're heading in the right direction in terms of operational efficiency, rates, yields and uptimes continue to climb. And so I think there's a lot of room to expand in terms of the 4 walls at they'Trex, not just outside of the additional capacity but if you go back to Trex's history, we always find ways to generate more utilization over time. So that will be 1 of the things. And then the other thing is win together, making sure that we work together as a team in order to execute these strategies. So to give you an idea of what Trex is, we're approximately $1.2 billion. We've been $1.1 billion, $1.2 billion in the last 3 or 4 years. highly profitable company, about 1,800 employees. We have located and headquartered in Winchester, Virginia. We have a plant out in firmly Nevada site. And we just started Little Rock as a greenfield. And the reason we started Little Rock was we ran out of space in Winchester. We ran out of space in Nevada. So we needed a place to expand. So we have 300 acres down there in Little Rock. Some interesting facts about why we chose that location because we started with 105 locations. We narrowed them down to 4, and we landed in Little Rock is we source a lot of raw materials out of that area. And those raw materials go from that little rock area, to Winchester or all the way out to Fernley, Nevada. The highest cost of raw materials these days is freight. So we will once again have the opportunity to streamline some of those freight costs and the raw materials that we're attaining but also the fastest-growing part of the United States for our categories in Southern United States. So when you think about where that facility is located, we can capitalize on that trend of the fastest-growing market, Southern Yellow Pine, we have a plant down there to go after Texas, Florida, Alabama, all those states down there to -- for potential growth. We're market-leading, decking, railing fastening, lighting, outdoor living lifestyle, all these products we have in there. Our fastest-growing category right now is railing. So railing is a very complex category. And when I think about railing today, it reminds me when I started Trex over 20 years ago. Trex used to have 20 different competitors in decking and now there's less than 5. And it's kind of the same point right now on railing where there might be 20 competitors on railing, most of there are regional players, and they're starting to be consolidation. So I won't be surprised in the next 5 years if we see this consolidated to somewhere down to 5% to 10%. So I think the market will be cut in half with the amount of players in railing. Trex is by far #1, and here's the opportunity. We only have 6% market share in the total railing market. So when you think about it, there's tons of space to grow. Along with the fasteners, every single time you walk into a retailer and you need to put a deck in, you need a $500 fastener pack. So fasteners always go along with the decking sale. And then, of course, the lighting and the other products that we have. The total TAM for the category is about $15 billion with decking being about $8 billion. Railing now is actually seeing some really good growth the last couple of years. It's upwards of $4 billion. And then adjacencies. So some of the adjacencies would be fasteners, fencing. Fencing is a category we're interested in to expanding further in over time. We actually do have a fencing product line today. We've been into it for the last 20 years. Over time, we've figured out ways to expand margins, and we do think that's a little bit different channel than how we sell today. But we do think we have the right channel partner. We do think we have the right product road map there, and we think we can capitalize on that adjacency. So some of the things to think about, this is a huge material conversion opportunity, as Ryan mentioned earlier, 25% of the total category is wood alternative. About 21% is wood plastic composite. About 4% is PVC. So there's a lot of things there. We have 40 million to 50 million existing homes that were built around the 1990s. They all need a deck replaced. Now realize if you just need the deck boards are placed, we use the same substructure. Sso we start to think about the total cost of the deck. If I build a $10,000 Trex deck and you actually hired a Trex Pro to build the deck, 2/3 of the cost is labor. So if you decided that you already had a deck that was there and the substructure is in good condition, you only need to replace the planks. It's actually very cost-effective as you put Trex. If you're building it from the ground up, a return on investment on Trexteckis about 7 years. There's also a lot of rising labor costs that are out there. So everything that we've done, we tried to make it more consumer-centric and also contractor friendly. So when you think about the railing that's out and the railing opportunity, it's a very complex system. You have a post top rail, bottom rail ballaster, caps, skirts, lighting, there's all kinds of things you can do in this category. Trex has preassembled all the recent railings that are available. So all you have to do on the railing is you have a post that has the 4 brackets on there. You have the panel, you drop the panel and 4 screws and you're done. So instead of taking 60 minutes to install a railing section, you can do it in under 10. So once again, we're trying to line up with every single trend. There's a trend towards green. There's a trend towards low maintenance. There's a trend towards less labor out there, Trex is lined up with every single trend that's out there. And that's what we're doing in shaping the future. Every 1% share away from wood is about $80 million plus in revenue to Trex. So if you just kind of know the foundation of Trex, we use recycled plastic film and reclaimed wood. This would all be going into the landfill today. Now the 1 thing about Trex versus their competitors out there is there's different grades of recycling and Trex is the first into this marketplace. So there's A grade, which is like your cleanest film that's out there, and then there's B and C grade, it's really dirty. We use the really dirty stuff that's out there in terms of how we recycle our products. And this has changed over time, like a lot of the reclaimed wood over time used to come from a hard wood manufacturers for flooring. However, if you think about it, that's moved to LVT. So now this might come from sawmills in that and it gets dried before it comes into the walls of Trex. We are the largest bag manufacturer in the bag recycler in the United States. So if you think about your plastic bags, you get the Walmart or Target or your grocery stores, that is a very small amount of the plastic film that we use. So the film that we mostly use upwards of 90% is the consumer stretch reps, you're Campbell Soup, your Kellogg's cornflakes and how that gets shrink wrapped on to the pallet. That's mostly what we use. So when you think about the sustainable competitive advantage, we have a deep materials know-how. And that's where I look at this as a big differentiator for Trex. We have proven innovation. We've been highly innovative over the years. We're always the market leader. -- what has got to be unique is the type of innovation moving forward because we can't be innovating things that the competition wants to knock off 6 to 12 months down the road. So we want an innovation road map that once again we have something that's highly differentiated, wrap the intellectual properties, and therefore, longer term, when you think about it, you can capitalize over the next 5, 10, 15, 20 years over time. We have a great relationship with installers and distributors. We have a unique go-to-market strategy. When you start to look at it, we sell through 2-step distribution. So we sell to, for example, a distributor would be like specialty building products that distributor sells to a retailer. It could be like builders first source and then they sell to a contractor and maybe a consumer. We also sell a limited amount of SKUs directly to the home center to Home Depot and Lowe's. We're 1 of the few brands in all the stores that are available at both home centers today. And we're very scalable nationwide, and we had a vertically recycling vertically integrated recycling footprint. So the 1 thing people just think we take the film in, we don't. So when you go out and you do accounts like Walmart, we'll corrugate in -- in the past, we've taken CDs in, we've taken pill bottles in, all these sorts of things, and we will sell them off into various forms to other people just in order so we can get the capabilities to get the shrink film. So some of the strategic priorities that we're working on to increase, first is created on breakable bond with consumers and contractors. So -- from that perspective, our marketing campaign, what's different is it's very targeted. So there's a marketing campaign about professional marine grade decking. That really resonates down in the Southeast part like Florida. There's a campaign around fire. If you're in the West Coast, the Palisades fire, you've been impacted on there. We have products for fire. There's a campaign around railing holistically. There's a campaign around heat mitigation technology. So 1 of the new top 5 concerns in the category over the last 5 years has been heat mitigation. So we've added that into more than 50% of our products. We're probably known for that in the marketplace today. So we're doing a lot in there, and we're starting to see the metrics pull through. We're starting to see some double-digit metrics on. We track website conversion, contractor leads, dealer leads samples, all these sorts of things internally to understand what sort of momentum we're building. On the high-performance innovation, I've kind of structurally changed that at Trex. We're only chasing the $100 million opportunities. It's not that we won't do some of the smaller opportunities, but I'm telling them that from our perspective, as we try to move the needle. We've taken 100 strategic priorities that were out there at Trex. We funneled those down to 20 underneath 5 imperatives. So I have my engineers working on less, more focused impactful products moving forward, and that is kind of something that structurally changed at Trex. Now on the optimized channels for growth, we want more placements. We want more placements, not just the retailers, but in the pro channel. And so building out the sales force to make sure we're getting more placements on decking, railing faster fencing. That is something that we're working in within the organization. And then lower the cost of railing is really important. It's the fastest-growing part of our business. The railing gross margin profile is lower than the decking gross margin profile. So the idea is over the next 5 years, -- we want to take the railing gross margin profile to the same profile as decking. Now on this Little Rock facility, we told everybody we're going to start this up in the first half of 2027. We are already manufacturing pellets held to the first thing that we have to manufacture in order to get into decking production. So when you start to think about this facility here, it's on 300 acres. This is going to be, by far, our most efficient facility. So the way we've constructed it, now that we had the room, we were able to fundamentally put in the amount of cooling that we need to keep up with our rates. So 1 of the things is when Trex comes off, it comes out significantly faster than the competitor rates, but it's also significantly hotter in time. And so therefore, you need more cooling time, you need more room for that to occur. And therefore, you can run higher rates. And from this perspective, we built this building so that we can run even faster rates. This will be, by far, be our most efficient, lowest cost manufacturing facility in the fastest-growing part of the United States. So we're really excited to get this up and running. And this goes back to my point earlier, which is now that this $550 million investment is behind us. The only thing we're focused on is filling this thing up. So as we think about our strategic plan and we look at TSR, we need to put some revenue on the board, and this is where we're going to bring in more people from wood, more people from PVC and some of these other areas to grow and expand the company. This is just to kind of look at as we increase the capacity utilization. This is kind of give you a snapshot. When you go back from 2012 to 2018, we had a 45% increase in utilization and approximately a 10% expansion in gross margin. So you'll see it's very impactful that we drive more volume into the plants. It's not just a, "Hey, how much more pricing can we take in." It's a mixture between how much pricing we can take to the marketplace and how much volume we can bring in there. So that's 1 thing that really differentiates Trex. And then if you think about our historical use of cash, you'll see that's been really kind of a diverse, but organic reinvestment. There's been a lot about driving innovation. That's historically where Trex has been most of our buckets. We're going to be more aggressive on share repurchases moving forward. So we purchased $150 million in the first half of 2026. We also just had a $14 million shares authorized recently. So you're going to continue to see us be more aggressive in share buybacks. On the M&A side, this is probably another area as I introduced Lee, that there's going to be expansion at Trex as we want to become a $2 billion to $2.5 billion company. If you look 5 years from now, about 2/3 of the growth is going to be organic and about 1/3 of the growth is going to be through M&A. So need to have a little bit of M&A in there in order to achieve the $2 billion goal. And so from there, we're looking at 3 different areas. One is to expand margins. So through vertical integration, we'll do M&A. The second would be the backyard anywhere from the threshold of the backyard all the way out to the fence, any of those categories Trex could do. And then the third would be the envelope of the house, so that could be something like siding and trim. So those are the 3 different areas in terms of we're looking for targeted M&A. When you look at our full year guidance, it's about 3% growth for the full year. So the range is about 1% to 5%. When we think about the market today, our market, we're hearing pretty much from everybody, and the data that we're seeing at the retailers is flat to down. So we would be in terms of when you look at the expectations, we would be above market expectations. If you look at our Q2 guidance, it's 3.88% to 4.03%, about 3.96% at the midpoint. The 1 question I get a lot about is SG&A has changed structurally here. It changed several months ago. We raised SG&A to about 18%. This is going into, once again, the marketing program, some of the sales programs and some of the innovation that we just talked about. So kind of if you think about the investment thesis here, we're well positioned. There's a large addressable market even outside of this $15 billion TAM it's a $75 billion outdoor living market, which we reside in today. Remember that we also line up with every single trend that's out there. We have a category-defining brand. This is where people when they think about the category, they think about Trex more than anybody else. And we have a lot of opportunity through material conversion as you see that we can more than double the opportunity here. There's going to be a lot of free cash flow moving forward, and we're going to be returning capital to the shareholders is continues to be our #1 priority. Okay, Ryan?

Yes. Perfect. Thanks, Adam. Maybe just start off with a question on the macro. You mentioned the market for Building Products flat to down. I think that's fair. What are you hearing from contractors in terms of bookings and backlogs now that we're in the season?

Yes. Great question. So when I start to compare this year to last year, there's some fundamentally different things. backlogs are a little bit stronger this year than they were last year. So from a contractor perspective, I think they're feeling a little bit more bullish from that perspective. Inventory of what we're seeing is pretty comparable year-over-year. And in some of the consolidation, there's been a lot of more national account consolidation example would be QXO or builders for source where they've been buying smaller entities, they're carrying a little bit less inventory. So when I start to think about it, our inventory distributor inventory is pretty comparable year-over-year. There's been some pricing given over the last year in both of those categories. Some of the retailers downstream have a little bit less inventory and some of the contractors have been a little bit more bullish. So when I think about it, it's still holding up right now.

And then talk about inflation that you're seeing? And do you have any price increases out there in the market?

Yes. So this year, we took a railing price increase January 1. We took a second railing price increase once again June 1. So on Monday, A lot of that is tied through PVC. We don't really sell much PVC. So there's a piece of that. There's another thing that's been hitting us is freight. So the #1 thing the issue the category has been dealing with right now is freight -- and they haven't done this really in a long time and some distributors haven't done it in their entire existence, but they're starting to give freight surcharges right now. So how we've been trying to combat the freight for a lot of our raw materials that are coming in stream is -- there's more recycled materials out in the marketplace today with the change in the administration. So therefore, we're trying to drive down our material costs to kind of make up for some of those freight costs over time. So hopefully, if those freight costs start to subside, just start to see some of the benefit of some of the raw material costs.

And then you mentioned the SG&A and a lot of that is the increase in marketing. Just talk about why the bigger marketing budget, where you're spending it? And are you seeing any kind of early returns from some of that investment?

Yes. So when I kind of look back on where Trex was. When I started at Trex, it was 22% to 26% was SG&A, somewhere in that range for many, many years. And then over time, as we start to go from $300 million to $1 billion, we started to really leverage it. When we -- we're coming upon COVID, it was about 18%. And then during COVID, we -- everybody in our industry started to become an order takers, right? We just -- we couldn't supply all the demand that was out there. And therefore, we were cutting back on marketing. And the reason was we didn't want to invest as much into the marketing, which was just going to be lost sales to somebody else that was out there. I think when I look back on that, probably as an area as we should have still been spending the money on the marketing. Because what that is, is you're kind of -- when you think about your long-term funnel, you're cutting some of that off because a deck is not an impulsive buyer. They're just going to go out and say, I need a deck tomorrow. The deck can take several years where people save up for this. So we didn't invest as much there. So during COVID, you started finding some quarters over 12%, 13%, 14% in SG&A, which is way too low for Trex. So we kind of reset that last year, knowing that we had to go out and reinvest we had competitors that were doing a lot on the marketing side. And so we reinvested there, and we got back to that 18% threshold, which is kind of where we were before we went into COVID. And then in addition, there were some rebates and discounts that were one-timers that went to the contractors and the retailers that allowed us to kind of level up to where we need to be competitively in the marketplace. And then the last portion went to the innovation. So some of this game-changing technology, some of that SG&A went into that as well.

And at the builder show, you had a bunch of new products. Why don't you talk about some of those, maybe the more exciting ones.

Yes. So there was a bunch of different things that we came. We keep expanding on the heat mitigation technology. So every one of our new products that we're going to be launching moving forward will have some form of heat mitigation technology in there. We have some new products that got placements at retail at Big Box, and so there were some new colors in our enhanced naturals product lineup. We offered some different railings that were out there in terms of now we have glass steel, lower cost aluminum and they're out there. One of the things you saw at the IBS show as you saw our products more submersible. We've always been submersible. We never marketed it. . So last year was the first time we started talking about marine grade decking, and that's just pure marketing. We didn't add 1 SKU at Trex. So there's been a lot around that. And then we also got into the new PVC product, which is called TreX refuge. There is a segment there. It's $0.5 billion that we see on PVC. There's some contractors in New England that's kind of where it started that are still into that PVC product line. And then you'll also see some of that PVC product line out West for some of the fire capabilities for flame spread that PVC has.

And then talk a little bit about the moat that you have because it's impressive. And also talk about the industry structure, which both those things are not reflected in the multiple today. I think we would agree.

Yes. So I mean you have the #1 brand in the industry. So the brand by far, has always been our most important asset. You also have the best distribution in the industry. We really have the #1 or number to distributor in all of North America. So when I think about it, we have a great business in Canada in addition to the United States, and we are the low-cost manufacturer. So those 3 things are really the moat around tax. If you go back to old school trucks, and this is -- I used to report to 1 of the founders, it used to be slight money slope and water used to be the 3 things when people would look at Trex. So and the reason they would say some of those things is a lot of times weren't in a flat surface, and it's not so high, you don't necessarily need to be railing or you don't have to build a deck there. So it's changed over time. But by far, the brand is the biggest asset. Distribution is very, very important, but evolving. So there's been a lot of consolidation on the distribution side. And then being the low-cost manufacturer, this is where we have to figure out how are we going to go after some of these new categories to help grow the company. And so that's where I think some innovation in combination with low-cost manufacturer will allow us to exploit some of these new opportunities against wood or against PVC over time. and then industry structure, and we recently had a company that is up for sales I'm talking about Yes. So -- and the industry is -- it's evolving there is really 5 companies now in this wood plastic composite arena that sells any form of volume in this category. And so 1 was owned by a company by the name of CRH, they were called MoistureShield. They were just bought by 1 of the other competitors there. So now we're down to 4 competitors in the category from -- and there's another company up for sale within our category as well. So this category could be going from 5 companies to 3 companies in a hurry as you look over this next 12 to 24 months. So when we think of that, we think there's a tremendous opportunity with just 2 or 3 players in this category for all of us to expand and all of us to do really well in terms of profitability and mix moving forward.

And then comment on the PVC product forever. Trex said they didn't really want to do that category. You've changed your mind there, what's going on there? .

Yes. So my mindset is a little bit differently. I'm competitive. And so I think that we should be competitive in every single segment that's out there. So you can't be the #1 in decking and decide you're just going to not compete in a category. That just to me, that's not being competitive. So -- when I look at any sort of categories that are out there, it could be through PVC or it could be through some innovation you have got to be in that segment because if not, you're seeding that segment to your competitor has 75% market share within 1 segment. And that's really unheard of. And that's also been a faster-growing category over time that we've kind of seeded. So it's just changing the mentality internally. It tracks to say we're not going to do that anymore. If that category exists, we're going to play in that category, and we want to be competitive.

And then talk about product innovation. That's obviously a huge focus for you, but just to give people a sense, is there a bunch of products in R&D and they'll be launched in sort of '27, '28, '29, just help us with that cadence .

Yes. So what I've told them is so game-changing innovation doesn't happen overnight. It does take time. But I've told everybody we're going to test some things next year. So you will see a regional launch from Trex next year on what I consider game-changing innovation. -- and then more national launches from the '28 through 2030 time frame. So going back to it, R&D instead of working on a 100 different programs is now working on 20 or less programs, much more focus -- there are 3 or 4 that what I think are impactful programs to the organization, we're on putting the majority of our R&D behind. So it's the whole speed to market thing, right? We're not going to do this in 5 years, we have to do this in 1 to 2 years, how can we get speed to market -- we put more people behind it. I'm giving them the resources that they need there, whether it's testing facilities, whether it's more resources and the technical ability through raw materials, whatever they need to be successful, that is also going into the SG&A number. . We're going to invest in our people because I believe our people pound for pound are the best, especially in material science. And I do think that, that is what's going to differentiate Trex significantly moving forward in a meaningful way.

And just in the last 2 minutes, just talk about railing, you mentioned it in your presentation, but what's the attach rate today and what should it be?

Yes. So as I mentioned, remember, railing is only 6% of the total market, so there's a ton of upside there. Attachment rates for Trex can be anywhere from 25% to the East Coast to Northeast. So when you get to the south, it could be 10% to 15%, West Coast can be 10% to 15%. Our best dealers in the United States that are aligned with Trex can be upwards of 55%. So there's a lot more room for the attachment rate. But not only is it an opportunity for us on our deck, but a lot of people use Trex railing on competitive composite decks. So if you think about the amount of maintenance that goes into a deck, the #1 thing that takes the maintenance on a deck is the rail. The #1 thing you look for on a deck when you look at a deck is the rail -- so as you look at that and you think about the competitive set, we're pretty far ahead of everybody and what we can do and expand this opportunity. And so when we think about railing longer term, we think that is 1 of the ones as we grow it really quickly, and we expand margins over time. It's going to be highly impactful to the organization.

All right. We're out of time. Thanks, everyone. Appreciate it. Thanks, Adam. .

Thank you.